Department of Health & Human Services
Office of Inspector General
Cost-Saver Handbook
THE 1996
RED
BOOK
June Gibbs Brown
Inspector General OFFICE OF INSPECTOR GENERAL
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as
amended, is to protect the integrity of the Department of Health and Human Services' (HHS)
programs as well as the health and welfare of beneficiaries served by those programs.  This statutory
mission is carried out through a nationwide network of audits, investigations, and inspections
conducted by the following operating components.
OFFICE OF AUDIT SERVICES
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by conducting audits
with its own audit resources or by overseeing audit work done by others.  Audits examine the performance of
HHS programs and/or its grantees and contractors in carrying out their respective responsibilities, and are
intended to provide independent assessments of HHS programs and operations in order to reduce waste, abuse
and mismanagement and to promote economy and efficiency throughout the Department.
OFFICE OF EVALUATION AND INSPECTIONS
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and program
evaluations (called inspections) that focus on issues of concern to the Department, the Congress, and the
public.  The findings and recommendations contained in the inspections reports generate rapid, accurate, and
up-to-date information on the efficiency, vulnerability, and effectiveness of departmental programs.
OFFICE OF INVESTIGATIONS
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative investigations of
allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment by providers. 
The investigative efforts of OI lead to criminal convictions, administrative sanctions, or civil money penalties. 
The OI also oversees State Medicaid fraud control units which investigate and prosecute fraud and patient
abuse in the Medicaid program.
OFFICE OF ENFORCEMENT AND COMPLIANCE
The Office of Enforcement and Compliance (OEC) is responsible for the imposition of mandatory program
exclusions, as well as certain permissive program exclusions and civil money penalty and assessment actions
not handled by the Office of Litigation Coordination.  It develops models for corporate integrity and
compliance programs, monitors ongoing compliance agreements and promotes industry awareness of corporate
compliance agreements developed by the OIG.
OFFICE OF LITIGATION COORDINATION 
The Office of Litigation Coordination (OLC) is responsible for the coordination and disposition of all 
qui tam and other False Claims Act matters, and other criminal, civil and administrative matters not handled
by the Office of Enforcement and Compliance.  Activities include all voluntary disclosure actions; liaison with
the Health Care Financing Administration and outside entities in global settlement negotiations; and the
development of standards governing use of permissive exclusion authority in cases involving the Department
of Justice. INTRODUCTION
The Red Book
What is the Red Book?
Recommendations from draft reports represent
the tentative position of the OIG and are subject
The Red Book is a compendium of significant
to change when the final versions of the reports
Office of Inspector General (OIG) monetary
are issued.  
recommendations that have not been
substantially implemented.  These
Included for each of our proposals are current
recommendations may require one of three types
law, reason for action, resultant savings and
of actions:  legislative, regulatory, or 
status of actions taken.
administrative actions, such as changes to
manual issuances.  Some complex issues can
Full implementation of the recommendations
involve two or all three types of actions. 
contained in this 1996 edition of the Red Book
could produce over $23 billion in annual
The Inspector General Act requires that the
savings to the Department.
OIG's semiannual reports to the Congress include
"an identification of each significant
Over the past 5 years, over $37 billion in savings,
recommendation described in previous
settlements, fines, restitutions and receivables
semiannual reports on which corrective action
have resulted from OIG activities and
has not been completed."  Thus, the OIG
implementation of OIG recommendations.
highlights significant recommendations in each
semiannual report.  Because of the abbreviated
The HHS Organization
nature of this list and the potentially significant
impact of the OIG's recommendations, however,
we prepare the Red Book to highlight even The Department of Health and Human Services
further our most significant monetary issues. (HHS) is the Federal Government's principal
agency for promoting the health and welfare of
Not only does the  Red Book amplify our OIG Americans and providing essential human
reporting requirements for unimplemented services to persons of every age group.  The
recommendations, but it brings together in one HHS is comprised of the Health Care Financing
document significant cost-saving Administration (HCFA), Public Health Service
recommendations for review by Department and (PHS) agencies, the Administration for Children
Office of Management and Budget (OMB) and Families (ACF), the Administration on
officials, and the Congress. Aging (AOA)--as well as general departmental
management (GDM).  The OIG's findings and
Recommendations for proposed legislation recommendations relating to these operating
remain in the Red Book until the law has been divisions and GDM are highlighted in separate
enacted.  On administrative issues, sections of this  Red Book.  
recommendations are removed when the action
has been substantially completed.   The Department touches every aspect of life for
each American citizen.  Eighty-five (85) percent
of the HHS budget provides medical care
coverage for the elderly, disabled, and the poor. 
Introduction The 1996 Red Book INTRODUCTION
The balance of the programs support research The ACF provides Federal direction and
into the causes of disease, promote preventive funding for State-administered programs
health measures, support the provision of health designed to promote stability, economic
and social services, and combat alcoholism and security, responsibility and self-support
drug abuse.   for the Nation's families, and includes a
variety of programs that provide social
The purpose of each of the Department's services to American children and
operating divisions is: families, Native Americans and the
Nation's developmentally disabled.  
The HCFA administers the Medicare and
Medicaid programs. The AoA serves as an advocate for older
persons at the national level.
The PHS agencies promote biomedical
research, disease cure and prevention; We believe that this 1996 edition of the  Red
ensure the safety and efficacy of Book will prove to be a useful asset for
marketed food, drugs and medical departmental decision-makers, the
devices; measure the impact of toxic Administration and the Congress in their
waste sites on health; and conduct other continuing efforts to contain costs and improve
activities designed to ensure the general program efficiency at HHS.
health and safety of American citizens.
SUMMARY AT A GLANCE
OVERALL HCFA PHS AGENCIES ACF GDM
Red Book Items 61 49 5 5 2
Type of Action
Recommended
Administrative 14 11 3 0 0
Legislative 42 33 2 5 2
Regulatory 5 5 0 0 0
Total Number 61 49 5 5 2
Savings By Type
of Action
Administrative $     647 $     610 $37 $      0 $    0
Legislative $22,509 $19,912 $54 $1,635 $908
Regulatory $     487 $     487 $  0 $      0 $    0
Total in Millions
of Dollars $23,643 $21,009 $91 $1,635 $908
Introduction The 1996 Red Book LL
TABLE OF CONTENTS
Annual
Savings
(in millions)
(cid:147) Introduction - Health Care Financing Administration............ 1
A. Medicare Reimbursement
(cid:147) Address Excessive Utilization and Inappropriate Variation in Reimbursement
Among Home Health Agencies ......................................... 2 $500
(cid:147) Assess Payment for Oxygen Concentrators................................ 3  200
(cid:147) Limit Medicare Part B Reimbursement for Hospital Beds .................... 4       6
(cid:147) Revise Medicare Prescription Drug Payment Methods ....................... 5    144
(cid:147) Reduce Medicare Part B Payment for Enteral Nutrition at Home ............... 6      15
(cid:147) Eliminate Separate Enteral Nutrient Payments in Nursing Homes .............. 7   174
(cid:147) Minimize Incorrect Payments for Durable Medical Equipment
Billed During Skilled Nursing Facility Stays............................... 8      19
(cid:147) Limit Payments for Non-Professional Services in 
Skilled Nursing Facilities to Part A ...................................... 9  TBD
(cid:147) Stop Inappropriate Payments for Wound Care Supplies ..................... 10      85
(cid:147) Allow Payment for Nonemergency Advanced Life Support 
Ambulance Services Only When Medically Necessary ...................... 11      47
(cid:147) Apply 190-Day Lifetime Limit for Medicare Inpatient 
Psychiatric Care and a 60-Day Annual Limit ............................. 12      48
(cid:147) Provide Explicit Guidelines on Allowability of Institutional 
General and Administrative and Fringe Benefit Cost ....................... 13  TBD
(cid:147) Increase Fair Hearing Threshold ....................................... 14        6
(cid:147) Discontinue Use of a Separate Carrier to Process Medicare
Claims for Railroad Retirement Beneficiaries ............................. 15       9
More than
(cid:147) Raise the Medicare Entitlement Age to 67 ............................... 16 $4 billion
Health Care Financing Administration i  The 1996 Red Book LL
TABLE OF CONTENTS
Annual
Savings
(in millions)
B. Medicare Secondary Payer
(cid:147) Medicare Secondary Payer ............................................ 17 TBD
(cid:147) Expand Medicare Secondary Payer Provisions for
End Stage Renal Disease Benefits ...................................... 18 503
(cid:147) Require Medicare Coverage of All State and Local Government More than
Employees or Make Medicare the Secondary Payer ........................ 19 $1 billion
C. Hospitals
(cid:147) Continue Mandated Reductions in Hospital Capital Costs ................... 20 820
(cid:147) More Accurately Reflect Base Year Costs in Prospective Payment System's Capital
Cost Rates ........................................................ 21 249
(cid:147) Reduce the Prospective Payment System Adjustment Factor
for Indirect Medical Education Costs ................................... 22 900
(cid:147) Revise Graduate Medical Education Payment Methodology ................. 23 157
(cid:147) Deny Medicare Reimbursement for Patients Who Receive 
Substandard Medical Care ............................................ 24 110
(cid:147) Modify Payment Policy for Medicare Bad Debts .......................... 25 488
(cid:147) Limit Prospective Payment System Reimbursement for
Hospital Admissions Not Requiring an Overnight Stay ..................... 26 210
(cid:147) Recover Overpayments and Expand the Diagnosis Related
Group Payment Window ............................................. 27   84
(cid:147) Reduce Medicare Payments for Hospital Outpatient Services ................ 28   90
(cid:147) Preclude Improper Payments to Hospitals for Hospice Beneficiaries ........... 29     4
(cid:147) Terminate Medicare Disproportionate Share Adjustments ................... 30 410
Health Care Financing Administration ii  The 1996 Red Book LL
TABLE OF CONTENTS
Annual
Savings
(in millions)
D. Physicians' Reimbursement
(cid:147) Roll Reimbursement for Laboratory Services Into More than
Charge for Physician Office Visits ..................................... 31 $2 billion
(cid:147) Expand National List of Chemistry Panel Tests ........................... 32 130
(cid:147) Take Steps to Prevent Inappropriate Payments for 
Physical Therapy in Physicians' Offices ................................. 33   47
(cid:147) Encourage Physicians to Use Paperless Claims ........................... 34 126
(cid:147) Review Medicare Incentive Payments in Health 
Professional Shortage Areas .......................................... 35   91
E. End Stage Renal Disease
(cid:147) Further Reduce Medicare's End Stage Renal Disease Rates .................. 36   22
(cid:147) Preclude Improper End Stage Renal Disease Payments to Health 
Maintenance Organizations ........................................... 37   51
(cid:147) Ensure that Claims for Ambulance Services for  End Stage
Renal Disease Beneficiaries Meet Coverage Guidelines ..................... 38   66
(cid:147) Modify Payment Practices of Ambulance Services for Medicare
End Stage Renal Disease Beneficiaries .................................. 39   15
F. Procedures and Use of Technology
More than
(cid:147) Change the Way Medicare Pays for Clinical Laboratory Tests ............... 40 $1 billion
(cid:147) Selectively Contract for Coronary Artery Bypass Graft Surgery .............. 41 544
Health Care Financing Administration iii  The 1996 Red Book LL
TABLE OF CONTENTS
Annual
Savings
(in millions)
G. Medicaid Reimbursement
More than
(cid:147) Modify Formula for the Medicaid Program............................... 42 $4 billion
(cid:147) Promote Medicaid Cost Sharing ....................................... 43 $122
(cid:147) Support Medicaid Payments of Premiums for Employer 
Group Health Insurance .............................................. 44     35
(cid:147) Close Loopholes That Shelter Third Party Liability 
Settlements and Awards .............................................. 45       3
(cid:147) Encourage Use of Generic Drugs in Medicaid Program ..................... 46     49
(cid:147) Implement an Indexed Best Price Calculation in the
Medicaid Drug Rebate Program ....................................... 47   123
(cid:147) Reduce Nonemergency Use of Emergency Rooms By 
Medicaid Recipients ................................................. 48     81
(cid:147) Install Edits to Preclude Improper Medicaid Reimbursement for
Clinical Laboratory Services .......................................... 49     14
(cid:147) Control Medicaid Payments to Institutions for
Mentally Retarded People ............................................ 50   683
Health Care Financing Administration iv  The 1996 Red Book LL
TABLE OF CONTENTS
ANNUAL
SAVINGS
(in millions)
(cid:147) Introduction - Public Health Service Agencies .............. 51
Food and Drug Administration
(cid:147) Institute and Collect User Fees for Food Safety Inspections.............. 52 $44 
Health Resources and Services Administration
(cid:147) Cap Medical Malpractice Coverage to Community
and Migrant Health Centers ....................................... 53  10
Indian Health Service
(cid:147) Improve Indian Health Service's Billings and Collections
from Private Health Insurance Companies ........................... 54  28
National Institutes of Health
(cid:147) Develop and Consistently Bill University Recharge Center Costs ......... 55   3
(cid:147) Limit Graduate Student Compensation to That Paid for Similar Work ..... 56   6
Public Health Service Agencies v  The 1996 Red Book LL
TABLE OF CONTENTS
ANNUAL
SAVINGS
(in millions)
(cid:147) Introduction - Administration for Children and Families .... 57
A. Aid to Families with Dependent Children
(cid:147) Modify Formula for the AFDC, Foster Care and    Over
Adoption Assistance Programs .................................... 58 $1 billion
(cid:147) Review Rising Costs in the Emergency Assistance Program ............. 59       TBD
B. Child Support Enforcement
(cid:147) Reduce Child Support Incentive Payments and Base Them on      
States' Performance ............................................. 60         $277   
C. Foster Care
(cid:147) Refer Foster Care Cases to Child Support Enforcement Agencies ......... 61            11  
(cid:147) Limit Federal Participation in States' Costs for Administering
the Foster Care Program ......................................... 62        247
Administration for Children and Families vi  The 1996 Red Book LL
TABLE OF CONTENTS
ANNUAL
SAVINGS
(in millions)
(cid:147) Intoduction - General Departmental Management........... 63
A. Administrative Costs
(cid:147) Simplify Administrative/Indirect Cost Allocation Systems .............. 64    $660
(cid:147) Improve Funding System for Welfare Administrative Costs ............. 65        248  
General Departmental Management vii  The 1996 Red Book HEALTH CARE FINANCING
ADMINISTRATION HEALTH CARE FINANCING ADMINISTRATION
Overview The Health Care Financing Administration (HCFA) is responsible for
administering the Medicare and Medicaid programs.
Medicare Part A provides hospital and other institutional insurance for persons 
age 65 or older and for certain disabled
persons including those with end stage
Introduction
renal disease, and is financed by payroll
tax deductions through the Federal
Hospital Insurance Trust Fund.  Medicare
Part B (Supplementary Medical Insurance) is an optional program which covers
most of the costs of medically necessary physician and other services, and is
financed by participants and general revenues.
The Medicaid program provides grants to States for medical care for
approximately 37 million low-income people.  Eligibility for Medicaid is, in
general, based on a person's eligibility for cash assistance programs, typically
Aid to Families with Dependent Children or Supplemental Security Income.  State
expenditures for medical assistance are matched by the Federal Government using
a formula that measures per capita income in each State relative to the national
average.    
Significant Over the years, OIG findings and recommendations have contributed to many
OIG significant reforms in the Medicare program.  Such reforms include
implementation of the prospective payment system (PPS) for inpatient hospital
Activities
services and a fee schedule for physician services; the Clinical Laboratory
Improvement Amendments of 1988; regional consolidation of claims processing
for durable medical equipment (DME); and new payment methodologies for
graduate medical education.  The unimplemented OIG recommendations
contained in this Red Book that relate to HCFA activities could produce billions of
dollars in annual savings and recoveries to the Department.  The OIG has
identified a number of significant Medicare policy issues such as addressing
excessive utilization and reimbursement variation among home health agencies,
adjustments to graduate medical education costs and reductions in reimbursement
for hospital capital costs.  Regarding Medicaid, the OIG has recommended
promoting Medicaid cost sharing, encouraging use of generic drugs and
controlling Medicaid payments to institutions for mentally retarded people.
       Health Care Financing Administration Page 1 The 1996 Red Book ADDRESS EXCESSIVE UTILIZATION AND INAPPROPRIATE
VARIATION IN REIMBURSEMENT AMONG 
HOME HEALTH AGENCIES
Current Law:
Section 1861 of Title XVIII of the Social Security Act authorizes Medicare Part A payment for home health care
services.  Under the home health benefit, providers are reimbursed for the cost of each visit up to limits established
by the Department.
Proposal:
The HCFA should:  (1) intensify its efforts to scrutinize claims submitted by high cost agencies; (2) explore ways in
which to prevent unscrupulous agencies from engaging in abusive practices (strategies might include use of
Explanations of Medical Benefits (EOMBs), requiring greater participation by physicians in detecting and reporting
unscrupulous behaviors, and developing of more stringent standards for participation in the Medicare home health
program); and  (3) consider legislation to restructure the benefit to prevent fraud, waste and abuse.  The HCFA may
wish to limit cost per beneficiary or adopt policies used by other payers, such as setting limits on benefits; moving
more intensive and special needs patients to targeted programs; employing case managers; and involving beneficiaries
in their own care through EOMBs and copayments.
We support HCFA's longer term efforts to improve the home health benefit, which include the development of
outcome measures to assess the performance of individual home health agencies and establishment of a prospective
payment system for this benefit.
Legislative Regulatory Other Administrative
Reason for Action :
Audits and investigations have identified medically unecessary care and inappropriate fraudulent billing by specific
home health agencies (HHAs).  Other OIG studies describe extreme variations and broad patterns of billing by
HHAs, which raise questions about the appropriateness of some billings.  We therefore believe it is necessary to place
systematic controls on the home health benefit to prevent abuse. 
Savings (in millions) :
FY 1 FY 2 FY 3 FY 4 FY 5
$500 $1,100 $1,400 $2,100 $2,800
Status:
The HCFA concurred with the recommendations and, among other actions, has advanced a legislative proposal as
part of the President's FY 1997 budget.
Report:
A-04-95-01103--Final report--March 1996; A-04-95-01104--Final report--June 1996; 
A-04-95-01103--Final report--May 1996; OEI-04-93-00262--Final report--September 1995;
OEI-04-93-00260--Final report--July 1995; OEI-12-94-00180--Final report--May 1995; 
OEI-02-94-00170--Final report--June 1995; A-04-94-02087--Final report--June 1995;
A-04-94-02078--Final report--November 1994
Health Care Financing Administration Page 2 The 1996 Red Book ASSESS PAYMENT FOR
OXYGEN CONCENTRATORS
Current Law:
Section 1861(S)(6) of the Social Security Act prescribes coverage of durable medical equipment (DME) including
home oxygen equipment and supplies under Medicare.  Medicare covers home oxygen care for beneficiaries who
suffer from significant hypoxemia (a deficiency in the amount of oxygen in the blood).
Proposal:
The HCFA should reduce payment coverage for oxygen concentrators.
Legislative Regulatory Other Administrative
Reason for Action :
Our work in the area indicated that (1) the Department of Veterans Affairs pays substantially less for oxygen
concentrators; and (2) widely varying levels of service are provided to Medicare beneficiaries.
Savings (in millions) :
FY 1 FY 2 FY 3 FY 4 FY 5
$200 $230 $240 $260 $280
Status:
The HCFA has begun work to assess whether payment policies for oxygen concentrators are reasonable.
Report:
OEI-03-91-01710--Final report--November 1994
OEI-03-91-00711--Management advisory report--August 1991
Health Care Financing Administration Page 3 The 1996 Red Book LIMIT MEDICARE PART B
REIMBURSEMENT
FOR HOSPITAL BEDS
Current Law:
Medicare Part B allows for the reimbursement of a hospital bed used by a Medicare beneficiary in the home when the
bed is prescribed by a physician.  Monthly rental payments are made according to a fee schedule established by the
Omnibus Budget Reconciliation Act of 1987.  Medicare payments are capped at 120 percent of the allowed fee
schedule amount over a maximum period of 15 months.    
Proposal:
The HCFA should develop a new approach for reimbursing suppliers for hospital beds used by Medicare beneficiaries
at home.  A new reimbursement methodology should reflect a hospital bed's useful life and the number of times a bed
can customarily be rented over that period.  
Legislative Regulatory Other Administrative
Reason for Action :
A review of the use of hospital beds by a sample of beneficiaries in Texas during 1989 disclosed that the current
Medicare reimbursement policy allows the supplier of a bed to recover the bed's wholesale cost within approximately
4 months.  The majority of rentals in our sample were for periods of less than 6 months.  Since the useful life of a
hospital bed is 5 years, we estimated that a supplier can recover the wholesale cost of a bed as many as 7.5 times over
the life of the bed.  
Savings (in millions) :
FY 1 FY 2 FY 3 FY 4 FY 5
$6.2 $6.2 $6.2 $6.2 $6.2
Status:
Although a past budget of the President contained a proposal that authorized competitive bidding for durable medical
equipment, no legislative proposal was included in the President's current budget.  The HCFA awarded a
demonstration project on this subject in 1996.  The project is expected to run in at least 3 sites for 2 cycles of 2 years
each beginning in January 1997.
Report:
A-06-91-00080--Final report--May 1993
Health Care Financing Administration Page 4 The 1996 Red Book REVISE MEDICARE PRESCRIPTION
DRUG PAYMENT METHODS
Current Law:
Medicare covers prescription drugs under Part B for certain medical disorders, such as end stage renal disease and
cancer, and when necessary for the effective use of durable medical equipment (DME).  Reimbursement is based on
the lower of an estimated acquisition cost or a national average wholesale price (AWP).  Payment for drugs under the
Medicaid program varies among the States, but generally includes use of a discounted acquisition cost, as well as a
federally mandated manufacturers' rebate program.
Proposal:
The HCFA should reexamine its Medicare drug reimbursement methodologies with a goal of reducing payments as
appropriate.
Legislative Regulatory Other Administrative
Reason for Action :
In a review of payments for three nebulizer drugs for 1994, we found that Medicare and its recipients could have
saved substantial amounts by using a discounted AWP reimbursement formula similar to many Medicaid States.  By
using a manufacturers' rebate program similar to Medicaid, Medicare would realize additional savings.
Savings (in millions) :
FY 1 FY 2 FY 3 FY 4 FY 5
 
     
Discounted AWP  $1441 $1441 $144 1 $144 1 $144 1
       
Manufacturers' rebate  $122 2 $122 2 $122 2 $122 2 $122 2
1 Savings based on applying a formula of AWP minus 10 percent to Medicare's 1994 total drug allowance.
2 Savings based on applying a manufacturer rebate similar to that obtained by the Medicaid program to 1994
payments for 17 high volume prescription drugs in the Medicare program.
 
Status:
The HCFA has agreed with our recommendation to examine Medicare reimbursement methodologies to reduce
payments.  The HCFA is currently in the process of transferring the drug pricing function from the existing multiple
contractor pricing model to a single in-house component and expects to reach a decision in 1996 on whether to
proceed with a legislative proposal to develop a revision to their current regulations.
Report:
 OEI-03-94-00390--Final report--March 1996
 OEI-03-95-00420--Final report--May 1996
Health Care Financing Administration Page 5 The 1996 Red Book REDUCE MEDICARE PART B PAYMENT
FOR ENTERAL NUTRITION AT HOME
Current Law:
Enteral nutrition therapy is covered under Medicare Part B as a prosthetic benefit, limited to patients unable to eat normally
who require enteral therapy as their primary source of nutrition.  While the majority of payments are for patients in nursing
homes, some patients receive enteral therapy as part of home care.
Proposal:
Reduce payments through competitive acquisition strategies for patients receiving enteral nutrition at home.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Payments for enteral nutrition therapy are excessive because reimbursement rates are high and competitive acquisition
strategies are not fully used.  In our review of other payers of enteral nutrition, we found that payers who negotiated prices,
taking advantage of discounts and other competitive acquisition strategies, reimbursed from 17 to 48 percent less than
Medicare.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Enteral Payments for 
Non-nursing Home Residents $15  $15 $ 15 $ 15 $ 15
The savings is based on a 17 percent savings through use of competitive acquisition strategies applied to 34 percent (non-
nursing home residents) of the total enteral nutrient expenditure of $330 million in 1994.
 
Status:
The HCFA concurs that Medicare is paying too much for enteral nutrients and supports the recommendation to reduce
payments for enteral therapy administered at home under Part B.  A plan for a DME competitive bid demonstration that
includes enteral nutrition is underway.  Payment changes are likely to be implemented at the same time changes are made in
Part B coverage for enteral nutrients for nursing home patients (see page 7).
Report:
L
OEI-03-94-00021--Final report--April 1996
Health Care Financing Administration Page 6 The 1996 Red Book ELIMINATE SEPARATE ENTERAL NUTRIENT PAYMENTS
IN NURSING HOMES
Current Law:
Suppliers may bill Medicare Part B for enteral nutrients delivered to patients in nursing homes, or may furnish such services
under arrangements with nursing homes in which the nursing home claims the cost of the service.
Proposal:
The HCFA should eliminate separate payments for enteral nutrients for beneficiaries in nursing homes.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Medicare allowed $218 million for enteral nutrition in 1994 for beneficiaries in nursing homes.  As food, it also duplicates
payments already being made to the nursing home.  In addition, reimbursement for nutrients exceeds purchase price
commonly available to nursing homes by over 40 percent, because separate payment does not take advantage of nursing
homes purchasing power.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Medicare $174 $174  $174  $174  $174
(Proposal may result in slight cost-shifting to Medicare Part A and Medicaid.)
Status:
The HCFA concurred with our recommendation.  The HCFA believes excluding enteral nutrients from Part B
reimbursement when the patient resides in a nursing home will control overutilization.  It is considering alternative payment
mechanisms and enhanced control of utilization to contain costs while it examines a legislative remedy.
Report:
L
OEI-06-92-00861--Final report--March 1996
Health Care Financing Administration Page 7 The 1996 Red Book MINIMIZE INCORRECT PAYMENTS FOR
DURABLE MEDICAL EQUIPMENT 
BILLED DURING SKILLED NURSING FACILITY STAYS
Current Law:
Federal law states that durable medical equipment (DME) may only be billed to Part B of the Medicare program if the
equipment is provided in the beneficiary's residence.  Title VIII, Section 1861(n) further specifies that a skilled nursing
facility (SNF) cannot be considered a residence.  Thus, DME billed to Part B during a beneficiary stay in a SNF is
incorrectly paid.
Proposal:
We recommend that HCFA take action in the following areas to minimize the opportunity for incorrect DME payments:
!
improve the place of service coding system;
!
improve the supplier knowledge of beneficiary location; 
!
review the DME regional carriers' processes; and
!
improve processes for identifying SNFs for DME reimbursement purposes.
Legislative Regulatory Other Administrative
TT
Reason for Action:
We found that approximately $8.9 million in 1991 and $10.8 million in 1992 was incorrectly allowed for DME billed during
Part A SNF stays.  Medicare allowed $35 million for DME in all nursing homes in 1992.  The inability of the suppliers and
carriers to accurately determine the beneficiary's location during a SNF stay leads to incorrectly paid DME claims.
Savings (in millions):
     FY 1 FY 2 FY 3 FY 4 FY 5
     $19    $19    $19    $19    $19  
Status:
The HCFA concurred with our recommendations to correct incorrect payments to SNFs for DME, and is currently
developing a corrective action plan.  
Report:
L
OEI-06-92-00860--Final report--October 1994 
OEI-06-92-00862--Final report--March 1996 
OEI-06-92-00865--Final report--March 1996
Health Care Financing Administration Page 8 The 1996 Red Book LIMIT PAYMENTS FOR NON-PROFESSIONAL SERVICES
IN SKILLED NURSING FACILITIES TO PART A
Current Law:
The Medicare program provides coverage under Part A for stays, of up to 100 days, in a skilled nursing facility (SNF).  The
intent of this benefit is to shorten hospital stays while still providing coverage for a patient who requires regular nursing and
professional intervention.  Section 1861(h) of the Social Security Act specifies the covered SNF services provided to an
individual in a Part A skilled nursing stay.  
Proposal:
Given the current policy allowing Part B payment for Part A covered services, and the additional financial costs of this
activity, we suggest that:
!
HCFA develop a legislative proposal to prohibit entities other than the SNF from seeking coverage on
behalf of persons in Part A covered SNF stays for enteral nutrition, incontinence care, and surgical
dressings and limit Medicare coverage of these services to Part A.
!
HCFA clarify 42 CFR 483.35 (Dietary Services) to specifically include parenteral and enteral nutrition.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our findings indicate that current Medicare policies may inappropriately allow billing of non-professional services to Part B
during Medicare covered SNF stays.  In 1992, under Part B $102 million was allowed for items such as incontinence
supplies, dressings and enteral nutrition on behalf of patients in SNFs.  Paying for these services and supplies under Part A
could save Medicare money and reduce improper incentives for providers.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
Status:
The HCFA concurred with the first recommendation and the President's FY 1997 budget contains a provision to require
consolidated billing beginning in FY 1997.  The HCFA also believes that it would be prudent to clarify the 42 CFR 483.35
(Dietary Services) to include parenteral and enteral nutrition.
Report:
L
OEI-06-92-00864--Final report--June 1995
OEI-03-94-00770--Final report--December 1994
OEI-03-94-00772--Final report--December 1994
Health Care Financing Administration Page 9 The 1996 Red Book STOP INAPPROPRIATE PAYMENTS
FOR WOUND CARE SUPPLIES
Current Law:
Medicare reimburses wound care supplies which are protective covers or fillers that treat openings on the body caused by
surgical procedures, wounds, ulcers, or burns under Part A payments to nursing homes and home health agencies.  Medicare
Part B reimburses these supplies through payments to suppliers.
Proposal:
Bundle Medicare payments for wound care supplies into the per diem rate paid to nursing facilities under Medicare and
Medicaid.  As an interim measure, HCFA should target medical review of these supplies and monitor payment levels.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Our report found that questionable payments for wound care supplies may account for as much as two-thirds
of the $98 million in Medicare allowances from June 1994 through February 1995.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$85  $85  $85  $85  $85 
Status:
The HCFA concurred with the recommendations.  The HCFA has taken a number of specific actions to target program
integrity resources to those areas most vulnerable to abuse.  The HCFA is considering proposals to require consolidated
billing of services, including wound care supplies, for Medicare payments to nursing homes.  The HCFA believes that this
may serve as an incentive for nursing homes to more closely monitor the use of wound care supplies.
Report:
L
OEI-03-94-00790--Final report--October 1995
OEI-03-94-00791--Final report--October 1995
OEI-03-94-00792--Final report--October 1995
Health Care Financing Administration Page 10 The 1996 Red Book ALLOW PAYMENT FOR NONEMERGENCY
ADVANCED LIFE SUPPORT AMBULANCE SERVICES
ONLY WHEN MEDICALLY NECESSARY
Current Law:
The Social Security Act, section 1861(s)(7), provides for coverage of ambulance service when medically necessary.  The
limitations for coverage of ambulance services are specified in 42 CFR 410.40, and include the requirement that the services
be medically necessary, specifically that other means of transportation would endanger the beneficiary's health.  However,
HCFA does not make a coverage distinction between advanced life support (ALS) and basic life support (BLS) services
which results in payments being based on the type of transportation furnished and not the level of service required by the
beneficiary.  Effective March 1, 1982, HCFA allowed separate reimbursement rates for BLS and ALS ambulances.  
Proposal:
The HCFA should modify its Medicare policy to allow payment for nonemergency ALS services only when the ALS level of
service is medically necessary, and instruct carriers to institute controls to ensure that payment is based on the medical need
of the beneficiary and closely monitor carrier compliance.  
Legislative Regulatory Other Administrative
T
Reason for Action:
From Calendar Years (CY) 1986 to 1989, the number of trips by Medicare beneficiaries in ALS ambulances increased by
131 percent while the number of trips in BLS ambulances increased by only 14 percent.  We found that 18 percent of a
sample of 400 claims in CY 1989 were for services not medically necessary at the ALS level and where BLS services were
available in the same city or town.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$47 $47   $47   $47   $47  
Status:
The HCFA agreed with the OIG recommendations.  In late 1995 the HCFA prepared a draft regulation that would shift the
policy focus away from the type of vehicle used and towards the medical condition of the beneficiary.  No final regulation
has been issued to date.
Report:
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  A-01-91-00513--Final report--October 1992
Health Care Financing Administration Page 11 The 1996 Red Book APPLY 190-DAY LIFETIME LIMIT FOR MEDICARE 
INPATIENT PSYCHIATRIC CARE AND A
60-DAY ANNUAL LIMIT
Current Law:
Medicare limits inpatient care in psychiatric hospitals to 190 days during a beneficiary's lifetime.  At the time of the passage
of Medicare, inpatient psychiatric care was rendered, for the most part, in State psychiatric hospitals.  Congress apparently
believed that long-term care of the mentally ill was generally a State responsibility.  The delivery of inpatient psychiatric
care have expanded beyond the psychiatric hospitals to general hospitals with distinct psychiatric units.  The 190-day limit
was not extended to these more costly general hospital units.  
Proposal:
Develop new limits to deal with the high cost and changing patterns of utilization of inpatient psychiatric services.  Apply a
60-day annual and a 190-day lifetime limit to all psychiatric care regardless of the place of service.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our study concluded that the Medicare lifetime limit on psychiatric hospital care is no longer effective because of changed
patterns of inpatient psychiatric care.  Our review found that over 82 percent of the $1.36 billion in program payments for
inpatient psychiatric care is being paid to general hospitals--where the lifetime limit does not apply.  We found that an
annual limit on care, which has congressional precedence in a Department of Defense health care program, may be more
acceptable than a lifetime limit.  We believe a 60-day annual limit on inpatient psychiatric services will produce significant
savings over the current uneven application of the Medicare lifetime limit.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$47.6 $47.6 $47.6 $47.6 $47.6
Status:
The HCFA considered a proposal recommending that the 190-day lifetime limit for psychiatric admissions be extended to
general hospitals.  However, such a proposal was not included as part of the President's current budget.  
Report:
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A-06-86-62045--Final report--February 1988
Health Care Financing Administration Page 12 The 1996 Red Book PROVIDE EXPLICIT GUIDELINES ON ALLOWABILITY OF  
INSTITUTIONAL GENERAL AND
ADMINISTRATIVE AND FRINGE BENEFIT COSTS 
Current Law:
The HCFA guidelines--Provider Reimbursement Manual (PRM), section 2100--establish the general principle that
payments to a provider must be covered under Medicare.  The PRM, sections 2102.1, 2102.2, and 2103 expands this
principle by explaining factors that affect the allowability of costs such as the reasonableness of cost, their relationship to
patient care and the prudent buyer concept.
Proposal:
Revise the PRM to provide explicit guidelines on the allowability of certain general and administrative (G&A) and fringe
benefit (FB) costs. 
Legislative Regulatory Other Administrative
TT
Reason for Action:
We reviewed G&A and FB costs at 19 selected hospitals and 2 home offices nationwide in response to a request from the
House of Representatives, Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce.  For
16 of the 19 hospitals reviewed, we noted that Medicare participated in approximately $50.7 million of costs that were either
unallowable, unreasonable, or not allocable to the Medicare program.  Although Medicare's share amounted to
approximately $2.1 million, the bulk of the costs were passed on to other health care consumers.  We also identified $3.5
million of costs which we have labeled as "costs for concern" because of their tenuous relationship to patient care.  We
believe that many of the unallowable costs that we identified resulted from the providers' lack of adequate internal controls. 
However, there are other unallowable costs that we have identified, as well as the "costs for concern" that appear to have
resulted from different interpretations of the guidelines contained in HCFA's PRM, which is the principal guideline used by
providers to charge costs to the Medicare program.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA has published changes to the PRM to clarify the allowability of several of the cost categories identified in our
report.  The HCFA has not yet clarified the remaining cost categories noted in our report.
Report:
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A-03-92-00017--Final report--August 1994
..
Health Care Financing Administration Page 13 The 1996 Red Book INCREASE
FAIR HEARING THRESHOLD
Current Law:
Section 1842(b)(3)(C) of the Social Security Act, which became effective in FY 1973, imposed a threshold of $100 before
an individual qualifies for a fair hearing.  A fair hearing is an impartial review of a disputed Medicare claims decision by a
carrier employee or subcontractor.
Proposal:
The HCFA should pursue a legislative initiative to increase the fair hearing threshold.
Legislative Regulatory Other Administrative
TT
Reason for Action:
The $100 threshold for a fair hearing has not been changed in the past 21 years and is low compared to various inflation
indices.  Accordingly, the threshold is no longer achieving its intended purpose of precluding hearings for negligible dollar
amounts.  The effect has been a skyrocketing workload.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$225 Threshold $3.8 $3.7 $3.6 $3.5 $3.4   
    or                                                                                              
$400 Threshold  $6.0 $5.8 $5.7 $5.5 $5.3   
Status:
Proposed legislation to increase the $100 threshold amount for a fair hearing and the thresholds for subsequent levels of
appeal was approved by the Department in 1991.  However, the proposal has not been submitted to the Congress in
subsequent years.
Report:
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OEI-07-89-01680--Final report--December 1991
Health Care Financing Administration Page 14 The 1996 Red Book DISCONTINUE USE OF A SEPARATE CARRIER
TO PROCESS MEDICARE CLAIMS FOR
RAILROAD RETIREMENT BENEFICIARIES
Current Law:
From the inception of the Medicare supplementary medical insurance program (Part B), claims for Railroad Retirement
beneficiaries have been processed by a single carrier.  This carrier, The Travelers Insurance Company, has a contract with
the Railroad Retirement Board (RRB) to process Medicare Part B claims for Railroad Retirement beneficiaries.  All other
Medicare carriers contract with HCFA to process claims.  The authority for this unique contracting arrangement is Section
1842(g) of the Social Security Act, as amended.
Proposal:
Discontinue the use of a separate carrier to process Medicare claims for Railroad Retirement beneficiaries.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Since 1979, the General Accounting Office, the Grace Commission and HCFA have recommended that the Railroad
Retirement beneficiaries be placed under the HCFA carrier system.  In following up on these recommendations, we found
that cost savings of $9.1 million could be achieved by implementing the proposal.  In addition, we concluded that provider
billings would be simplified since the providers of service would no longer need to separate and submit RRB claims for
payment to the Travelers and other Medicare claims to a different carrier.  A further benefit is that beneficiaries would have
the assurance that their claims will be processed timely and not routed to the wrong carrier for payment, as has sometimes
happened in the past.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$9.1 $9.1 $9.1 $9.1 $9.1
Status:
While HCFA has supported legislation in the past, there is currently no legislative proposal before the Congress.
Report:
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A-14-90-02528--Final report--December 1990
Health Care Financing Administration Page 15 The 1996 Red Book RAISE THE MEDICARE ENTITLEMENT AGE TO 67
Current Law:
The Social Security Act and related laws established a number of Federal programs, including Social Security Retirement
Insurance benefits and the Medicare program.  The Medicare program pays for medical expenses of persons age 65 or older
and for the disabled.  Historically, Social Security and Medicare have been closely linked.  Both established age 65 as their
entitlement age.  The Social Security Amendments of 1983 increased the age of entitlement for Social Security unreduced
benefits from age 65 to age 67 over the transition period 2003 to 2027.  This was done as one of several methods to
strengthen the solvency of the Social Security Trust Fund.  However, the age of entitlement for Medicare has remained
unchanged.
Proposal:
Gradually increase the Medicare entitlement age to 67, following the same schedule for the increase in the age of entitlement
to unreduced Social Security benefits.
Legislative Regulatory Other Administrative
TT
Reason for Action:
We analyzed the projected Medicare Hospital Insurance Trust Fund savings that would result if the Medicare entitlement age
were gradually raised to age 67 following the same schedule as the Social Security program.  We found that:  the Hospital
Insurance Trust Fund would save three quarters of a trillion dollars over a 30-year period beginning in the year 2003; the
Medicare Supplementary Medical Insurance program would also save significant amounts and since the impact of raising the
entitlement age on future Medicare beneficiaries is not known, potential negative consequences can be reduced by providing
substantial advanced notice of the change.  The proposal could help alleviate the Federal deficit and deal with the projected
solvency of the trust fund.
Savings:
Potential savings of approximately $60 billion per year in the years immediately after the entitlement age reaches 67 in
2027.  In today's terms this amounts to between $4.7 and $14.6 billion per year, depending on the measure used.  Savings
would first be realized in 2003 and would increase each year until 2027.
Status:
The HCFA currently has no plans to pursue this change.
Report:
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OEI-07-91-01600--Report issued--November 1992
Health Care Financing Administration Page 16 The 1996 Red Book MEDICARE SECONDARY PAYER
Current Law:
Medicare is the secondary payer (MSP) to certain group health plans (GHPs) in instances where medical services were
rendered to Medicare-entitled employees or to the Medicare-entitled spouses and other family members of employees. 
Medicare is also the secondary payer in situations involving coverage under Worker's Compensation; black lung benefits;
automobile and nonautomobile, no fault; or liability insurance; and Department of Veterans Affairs programs.  The HCFA
provides administrative funds to Medicare contractors to monitor and collect incorrect primary benefits paid on behalf of
Medicare beneficiaries.
Proposal:
The HCFA should: (1) ensure that contractor resources are sufficient and instruct contractors to recover improper primary
payments from insurance companies other than the Blue Cross and Blue Shield insurance companies; 
(2) implement financial management systems to ensure all overpayments (receivables) are accurately recorded; 
(3) develop detailed procedures to properly handle employers that refuse to provide other health insurance coverage
information; and (4) resubmit the justification of a legislative proposal, which would require insurance companies,
underwriters, and third-party administrators to periodically submit GHP coverage data directly to HCFA.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Although agreement was reached to relieve all Blue Cross and Blue Shield plans of past due MSP overpayments and there is
a 3-year future plan to identify MSP situations, it only applies to the Blue Cross and Blue Shield plans and not to all other
insurance companies.  Additional measures continue to be needed to help in the collection of accurate and timely information
on other primary payers.  This will help to reduce future Medicare overpayments which result from unidentified MSP cases
and help the recovery process for overpayments.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The legislative proposal was not included in the President's current budget.  The HCFA is pursuing the recommended
administrative actions through improved processes to identify and recover overpayments related to MSP, as well as
improved information systems to guard against making improper Medicare payments where the Blue Cross and Blue Shield
plans are primary payers.  However, we continue to recommend that safeguards are needed to guard against improper
payments where insurance companies other than the Blues are primary payers.  
Report:
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A-09-89-00100--Final management advisory report--March 1990
OEI-07-90-00760--Final report--August 1991
OEI-03-90-00763--Management advisory report--November 1991
A-09-91-00103--Final report--August 1992
A-14-94-00391--Final report--December 1993
A-14-94-00392--Final report--March 1994
Health Care Financing Administration Page 17 The 1996 Red Book EXPAND MEDICARE SECONDARY PAYER
PROVISIONS FOR
END STAGE RENAL DISEASE BENEFITS
Current Law:
The Omnibus Budget Reconciliation Act of 1981 changed the status of Medicare from primary to secondary payer for
beneficiaries with end-stage renal disease (ESRD) for the first 12 months of health benefits.  Effective February 1, 1990,
Medicare become secondary payer for the first 18 months of Medicare entitlement.  After October 1, 1998, Medicare will
again be the secondary payer for the first 12 months.
Proposal:
Extend the Medicare secondary payer (MSP) provision to include ESRD beneficiaries without a time limitation.  
Legislative Regulatory Other Administrative
TT
Reason for Action:
The proposed change for ESRD beneficiaries would make MSP provisions consistent with legislation passed by Congress
for aged and disabled beneficiaries, which does not restrict the period of time that Medicare is the secondary payer.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$503     $549 $600 $654 $712
Status:
The President's past budget contained a proposal to extend the MSP provision for individuals with ESRD to 24 months. 
Notwithstanding this proposal, OIG continues to advocate that when Medicare eligibility is due solely to ESRD, the GHP
would remain primary until such time as the beneficiary became entitled to Medicare for old age or disability.  At that point
Medicare would become the primary payer.
Report:
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A-10-86-62016--Final report--December 1987
Health Care Financing Administration Page 18 The 1996 Red Book REQUIRE MEDICARE COVERAGE OF ALL STATE AND LOCAL
GOVERNMENT EMPLOYEES OR MAKE MEDICARE
THE SECONDARY PAYER
Current Law:
The Consolidated Omnibus Budget Reconciliation Act of 1985 established Medicare Part A coverage and payment of
hospital insurance contributions for new State and local government employees hired after March 31, 1986.  However,
employees hired prior to April 1, 1986 are not covered by Medicare Part A unless the government entity has voluntarily
agreed to cover groups of its employees under the full Old-Age, Survivors and Disability Insurance (OASDI) program.
Proposal:
Require Medicare coverage and hospital insurance contributions for all State and local employees, including those hired
prior to April 1, 1986.  If this proposal is not enacted, seek legislation making Medicare the secondary payor for retirees for
exempt State and local agencies.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Retirees from exempt agencies pay significantly less taxes when they qualified for Medicare coverage.  We estimate that
over a 9-year period (1982-1990) Medicare will have spent about $16.9 billion in benefits for these retirees.  However, only
an estimated $2.7 billion of taxes, with interest, will have been collected, leaving a shortfall of $14.2 billion to be subsidized
by other taxpayers.  Most of these retirees qualify for Medicare through other covered employment or as a spouse of a
covered worker.  Those insured through other employment contributed far less for their coverage than other retirees yet their
hospital benefit protection is the same.  Furthermore, exempt government agencies which had not paid the employer's share
of hospital insurance contributions will have the windfall advantage of Medicare as the primary payor of health costs for
retirees over age 65.  Both conditions unfairly drain the health insurance trust fund and are inequitable to employees and
employers who must contribute.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$1,559 $1,552 $1,521 $1,490 $1,451
Status:
Although a past budget of the President contained a proposal to include under Medicare all State and local government
employees hired before April 1, 1986, no legislative proposal was included in the President's current budget.
Report:
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A-09-88-00072--Final report--February 1989
Health Care Financing Administration Page 19 The 1996 Red Book CONTINUE MANDATED REDUCTIONS IN
HOSPITAL CAPITAL COSTS
Current Law:
Beginning October 1, 1991, HCFA began a 10-year transition period for paying hospital capital costs under a prospective
payment system.  Final regulations were promulgated August 30, 1991 (56FR43358).  The rates are based on historical
costs, less a mandated reduction of 7.4 percent (OBRA 1993).    
Proposal:
That HCFA seek legislative authority to continue mandated reductions in capital payments beyond FY 1995.  The HCFA
should determine the extent that capital payment reductions that are needed to fully account for hospitals' excess bed
capacity and report the percentage of reduction to the Congress.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Hospital capital costs soared during the first 5 years of the prospective payment system (PPS), despite low bed occupancy. 
The Medicare system of reimbursing capital costs on a pass-through basis (i.e., reimbursed outside of diagnosis related
group) was a major reason for capital expenditures increasing even though there was excess hospital capacity.
Paying capital costs prospectively, as required by recently implemented regulations, should assist in curbing escalating costs. 
However, the PPS rates are based on historical costs that are inflated because:  (1) excess capacity in the hospital industry
has caused more capital costs to be incurred than economically necessary and (2) inappropriate elements such as charges for
depreciation on federally funded assets are included in the historical costs.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$820 $950  $1140 $1450 $1840
Status:
The HCFA is seeking public comment on reducing prospective capital rates.
Report:
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A-09-91-00070--Final report--April 1992
A-14-93-00380--Final report-April 1993
Health Care Financing Administration Page 20 The 1996 Red Book MORE ACCURATELY REFLECT BASE YEAR COSTS IN
PROSPECTIVE PAYMENT SYSTEM'S
CAPITAL COST RATES
Current Law:
Under section 1886(d) of the Social Security Act, the Medicare program pays for the operating costs attributable to hospital
inpatient services under a prospective payment system (PPS).  A PPS pays for care using a predetermined specific rate for
each discharge.  Public Law 100-203 required the Secretary of Health and Human Services to establish a PPS for capital
costs for cost reporting periods beginning in FY 1992.  
Proposal:
The HCFA should: (1) consider reducing payment rates by 7.5 percent to more accurately reflect costs of the base year used
for the capital cost PPS and (2) continue to monitor the most current data (i.e., closing of unsettled cost reports for 36
percent of hospitals) and make any necessary further adjustments to the base rate.
Legislative Regulatory Other Administrative
 TT
Reason for Action:
While HCFA took great pains to devise and implement an equitable PPS for capital costs, information now available
indicates that HCFA's 1992 estimated base year rate is 7.5 percent higher than current actual costs.  A 7.5 percent reduction
would also correct all forecasting estimates that HCFA had to make in arriving at an anticipated rate to implement the
capital costs PPS.  The total effect of overpayments in relation to cost used as the basis for the capital cost PPS will
gradually increase from 1996 until the capital cost PPS is fully implemented in 2002.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$249 $284 $319 $354 $388
Status:
In response to our report, HCFA officials stated that they agreed with our analysis that the Federal capital rate reflects a
known over-estimation of base year costs.  The HCFA also stated that comments from individual hospitals and hospital
associations were uniformly opposed to making any of the possible rate reductions that we discussed in the proposed rule. 
However, the Prospective Payment Assessment Commission (ProPAC) acknowledged that there are legitimate issues about
the appropriate level of the rates in light of the current data.  The HCFA does not intend to adopt any of the possible
approaches at this time, in anticipation of congressional action to realize savings in this area.
Report:
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A-07-95-01127--Final report--August 1995
Health Care Financing Administration Page 21 The 1996 Red Book REDUCE THE PROSPECTIVE PAYMENT 
SYSTEM ADJUSTMENT FACTOR FOR INDIRECT
MEDICAL EDUCATION COSTS
Current Law:
Since the inception of Medicare's prospective payment system (PPS), indirect medical education (IME) payments have been
paid only to teaching hospitals.  The IME payments are designed to alleviate an anticipated adverse effect that PPS would
have on teaching hospitals.  The IME adjustment factor was determined by HCFA and Congress.  Using historical data,
HCFA compared costs per case in teaching and nonteaching hospitals using regression analysis and determined that
operating costs in hospitals with teaching programs increased approximately 5.79 percent for every 0.1 resident physician
per hospital bed as compared to hospitals without teaching programs.  Under a congressional mandate, HCFA was required
to double the adjustment factor under PPS--increasing it to 11.59 percent.  
The Consolidated Omnibus Budget Reconciliation Act of 1985 reduced the IME adjustment factor from 11.59 percent to 8.1
percent for discharges occurring on or after May 1, 1986 and before October 1, 1988.  The Omnibus Budget Reconciliation
Act of 1987 further modified the IME adjustment by reducing it to approximately 7.7 percent for each 0.1 in the ratio of
interns and residents to beds. 
Proposal:
Reduce the IME adjustment factor to the level supported by HCFA's empirical data.  Initiate further studies to determine
whether different adjustment factors are warranted for different types of teaching hospitals.  
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our extensive analytical work showed that teaching hospitals were making excessive profits.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$900 $900 $900 $900 $900
Status:
The President's FY 1997 budget reduces the IME adjustment factor to 6 percent in FY 1999 and thereafter.  Our savings
estimate has been modified to reflect the President's proposal.
Report:
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A-07-88-00111--Final report--September 1989
Health Care Financing Administration Page 22 The 1996 Red Book REVISE GRADUATE MEDICAL EDUCATION
PAYMENT METHODOLOGY
Current Law:
Section 9202 of the Consolidated Omnibus Budget Reconciliation Act of 1985 and Section 9314 of the Omnibus Budget
Reconciliation Act of 1986 changed the way Medicare reimburses hospitals for the cost of direct graduate medical education
(GME).  Under the new methodology, GME costs are reimbursed on a "hospital specific" prospective payment basis, which
is retroactive to cost reporting periods beginning on or after July 1, 1985.
Proposal:
Revise the regulations to remove from a hospital's allowable GME base year costs any cost center with little or no Medicare
utilization.  Submit a legislative proposal to compute Medicare's percentage of participation under the former more
comprehensive system.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
The HCFA has estimated that the new GME regulations will result in substantial Medicare savings.  Results of our review
indicate that Medicare GME costs under the new reimbursement method may actually increase because of two factors in the
new payment methodology.  First, the new system allows hospital cost centers with little or no Medicare patient utilization to
be given increased importance in the calculation of the GME reimbursement.  Second, the Medicare patient load percentage
used in the new system to compute Medicare's share of GME costs is based on inpatient data only and is higher than
Medicare's overall share of GME costs as determined under the previous method which also included ancillary and
outpatient data.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Factor (1) $  39.2 $  39.2 $  39.2 $  39.2 $  39.2
Factor (2) $125.6 $125.6 $125.6 $125.6 $125.6
Combined * $157.3 $157.3 $157.3 $157.3 $157.3
* Note:  When the two proposed changes are handled as one combined calculation, the savings are less than calculating
the effect of the changes separately.
Status:
The President's FY 1997 budget contains proposals to slow the growth in Medicare spending on GME.
Report:
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A-06-92-00020--Final report--April 1994
Health Care Financing Administration Page 23 The 1996 Red Book DENY MEDICARE REIMBURSEMENT
FOR PATIENTS WHO RECEIVE
SUBSTANDARD MEDICAL CARE
Current Law:
Under Medicare, hospitals receive a pre-established payment for each discharge based upon an assigned diagnosis related
group (DRG).  Each DRG results in an associated payment that represents an average cost for patients having similar
diagnoses.  Congress established the peer review organizations (PROs) to protect the integrity of the prospective payment
system (PPS) and to maintain the quality of care.  The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
gave PROs the authority to deny Medicare reimbursement for patients receiving substandard medical care defined as
medical care clearly failing to meet professionally recognized standards.
Proposal:
Increase efforts to identify and address poor quality care in hospitals by issuing regulations to implement the COBRA 1985
provisions.
Legislative Regulatory Other Administrative
TT
Reason for Action:
We found that 6.6 percent of the patients sampled received poor quality of care.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$110 $110 $110 $110 $45.3
Status:
The HCFA issued a notice of proposed rulemaking to give the PROs the authority to deny Medicare reimbursement for
patients who received substandard medical care.  The HCFA has not yet issued a final regulation. 
Report:
L
OEI-09-88-00870--Final report--July 1989
Health Care Financing Administration Page 24 The 1996 Red Book MODIFY PAYMENT POLICY
FOR MEDICARE BAD DEBTS
Current Law:
Under Medicare's prospective payment system (PPS) hospitals are reimbursed for inpatient services rendered to Medicare
beneficiaries by a fixed payment amount based on a diagnosis related group (DRG).  However, bad debts related to unpaid
deductible and coinsurance amounts are reimbursed separately as pass-through (i.e., reimbursed outside of DRG) items
under reasonable cost principles.
Proposal:
Seek legislative authority to modify bad debt payment policy.  We presented an analysis of four options to HCFA. These
included:  the elimination of a separate payment for bad debts; the offset of Medicare bad debts against beneficiary Social
Security payments; the limitation of bad debt payments to PPS hospitals which are profitable; and the inclusion of a bad
debt factor in the DRG rates.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review of HCFA's Hospital Cost Report Information System showed that total Medicare bad debts increased from $159
million during the second year of PPS (FY 1985) to $398 million during the fifth year of PPS (FY 1988).  During this same
period, hospitals continued to earn significant profits.  Our audits also showed that hospital bad debt collection efforts have
often been less than adequate since there is little incentive for a hospital to collect the unpaid deductible and coinsurance
amounts when Medicare pays these amounts.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$487.7 $487.7 $487.7 $487.7 $487.7
Status:
This proposal was not included in the President's current budget.
Report:
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A-14-90-00339--Final report--June 1990
Health Care Financing Administration Page 25 The 1996 Red Book LIMIT PROSPECTIVE PAYMENT SYSTEM
REIMBURSEMENT FOR HOSPITAL ADMISSIONS
NOT REQUIRING AN OVERNIGHT STAY
Current Law:
Under the prospective payment system (PPS), hospitals are reimbursed for each admission when the patient is discharged
based on established rates which are grouped into diagnosis related groups (DRG).  Current Medicare instructions provide
that an admission occurs when it is expected that the patient will occupy a bed and remain overnight.  This applies even if
the person is later discharged or transferred to another hospital without actually using a hospital bed overnight.
Proposal:
Seek legislation to pay for covered services related to 1-day admissions without an overnight stay, as outpatient services
which are paid on the basis of the lower of the actual costs or the customary charges in a locality.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Based on Medicare records for 1989, our follow-up review revealed that the Medicare program paid for 179,500 admissions
which did not require an overnight stay.  Many of these cases related to observations after emergency or outpatient services,
to surgeries later canceled or to acute care stays of doubtful necessity.  In many cases, documentation revealed that few, if
any, services were provided during the period the patient was an inpatient.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$210 $210 $210 $210 $210
Status:
Our follow-up report (A-05-92-00006) indicated that problems still exist with inappropriate admissions and that the volume
of 1-day admissions on a national basis had increased approximately 150 percent over 1985 levels.
The HCFA proposes to implement our recommendation through administrative remedies that would designate whether
specific services are to be covered and paid for as inpatient or outpatient services.   No proposal was included in the
President's current budget.
Report:
L
A-05-89-00055--Final report--July 1989 
A-05-92-00006--Final report--January 1992
       
Health Care Financing Administration Page 26 The 1996 Red Book RECOVER OVERPAYMENTS AND EXPAND THE 
DIAGNOSIS RELATED GROUP PAYMENT WINDOW
Current Law:
Under the prospective payment system (PPS), Medicare fiscal intermediaries (FI) reimburse hospitals a predetermined
amount for inpatient services furnished to Medicare beneficiaries depending on the illness and its classification under a
diagnosis related group (DRG).  Currently, separate payments for nonphysician outpatient services (such as diagnostic tests
and laboratory tests) rendered within 72 hours of the day of an inpatient admission are not permitted (OBRA of 1990,
section 4003).
Proposal:
 The HCFA should propose legislation to expand the DRG payment window to at least 7 days immediately prior to the day
of admission.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review identified about $83.5 million in admission related nonphysician outpatient services rendered 4 to 7 days
immediately before an inpatient admission.  The FIs cited clerical errors and insufficient or nonexistent edits for improper
payments, and the hospitals cited clerical errors and misinterpretation of the regulations.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$83.5 $83.5 $83.5 $83.5 $83.5
Status:
The HCFA agreed to recover the improper billings and to refund the beneficiaries' coinsurance and deductible.  Collection of
the overpayment is being handled by settlement agreements with the hospitals through the Department of Justice working
with HCFA and the OIG.  The HCFA did not concur with the recommendation to further expand the payment window.  No
legislative proposal was included in the President's current budget.
Report:
L
A-01-92-00521--Final report--July 1994
Health Care Financing Administration Page 27 The 1996 Red Book REDUCE MEDICARE PAYMENTS
FOR HOSPITAL
OUTPATIENT SERVICES
Current Law:
To bring payments for services in hospital outpatient departments more in line with the payments for services performed in
an ambulatory service center (ASC) the Omnibus Budget Reconciliation Act (OBRA) of 1990, Section 4151, reduced
Medicare payments for hospital outpatient services by (1) adjusting the payment formula to 58 percent of the ASC rates and
42 percent of the hospital's outpatient costs, and (2) lowered hospital payments made on a reasonable cost basis by 5.8
percent.  The OBRA 1993 contains a provision to extend the current 5.8 percent reduction in payments for hospital
outpatient department services from FYs 1996 through 1998.
Proposal:
Enact legislation to reduce the current payments for services in outpatient departments to bring them more in line with ASC
approved payments.  We recommended paying outpatient departments the ASC approved rate or adjust hospital payments
by a uniform percentage.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our study of hospital outpatient surgeries showed that the current blended rate to hospitals in the aggregate is greater than
the payment rate for ASC approved services.  We analyzed over 2 million hospital outpatient bills containing ASC approved
surgeries from 5,421 hospitals.  The disparity between Medicare payments to outpatient departments and ASCs for similar
services still exists.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$90 $107 $126 $147 $175
Status:
The HCFA sent a report to Congress on developing a prospective payment system (PPS) for hospital outpatient services.  In
addition, the President's FY 1997 budget contains a proposal to:  (1) eliminate a formula-driven overpayment which allows
Medicare to fully deduct beneficiary coinsurance payments received by the hospital before the program makes its payments;
and (2) establish a budget neutral PPS for outpatient department services starting in 2002.
Report:
L
A-14-89-00221--Final report--March 1991
OEI-09-88-01003--Final report--May 1989
Health Care Financing Administration Page 28 The 1996 Red Book PRECLUDE IMPROPER PAYMENTS TO HOSPITALS
FOR HOSPICE BENEFICIARIES
Current Law:
When a beneficiary elects hospice care, the Medicare program reimburses the hospice a fixed rate for each day of care.  The
hospice then assumes fiscal responsibility for all Medicare Part A services related to the beneficiary's terminal illness.  A
separate Medicare payment to the hospital is not allowable; instead the hospital should bill the hospice and the hospice then
receives a higher daily rate for the number of days the hospice beneficiary is hospitalized.
Proposal:
The HCFA should instruct its FIs to recover improper payments from hospitals noted in our review and to review related
medical records for the potential inappropriate payments we identified.                                                                                        
                        
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review showed that over $21 million in overpayments should be recovered for Calendar Years 1988-1992.  In addition,
more effective edits of hospital/hospice claims could result in annual savings of approximately $4 million over the next 5
years.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$4 $4 $4 $4 $4
Status:
The HCFA agreed to recover the overpayments identified and instruct its FIs to review the claims we identified as potential
overpayments.  We are currently performing additional work assessing the effectiveness of HCFA's common working file
edits in regard to hospice/hospital payments.
Report:
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A-02-93-01029--Final report--June 1995
Health Care Financing Administration Page 29 The 1996 Red Book TERMINATE MEDICARE
DISPROPORTIONATE SHARE ADJUSTMENTS
Current Law:
Since May 1986, Medicare's Prospective Payment System (PPS) has included an adjustment that provides additional
payments to hospitals that serve a disproportionately large share of low-income patients.  This "disproportionate share
adjustment" can be justified in at least two ways.  First, it compensates hospitals for higher costs that may be associated with
treating low-income patients.  Second, it increases revenues, thereby reducing financial distress for hospitals with large
shares of low-income Medicare and Medicaid patients.  Some of these hospitals treat many other low-income patients who
lack insurance and are unable to pay for their care.  Both justifications are consistent with the goal of ensuring ongoing
access to care for low-income Medicare beneficiaries and for all beneficiaries who reside in areas with substantial low-
income populations.  In order to qualify for the disproportionate share (DS) adjustment payment, a PPS provider had to meet
one of two basic criteria-one based on the hospital's location and bed size and the other based on revenue from State and
local governments.
The Omnibus Budget Reconciliation Act of 1987 included amendments to the Social Security Act which resulted in
increased DS adjustment payments to PPS hospitals.  Specifically, the amendments provided for:  (1) eliminating the 15
percent limit on DS adjustment payments to large urban hospitals; (2) increasing from 15 to 25 percent the DS adjustment
payments to hospitals qualifying on the basis of net inpatient care revenues received from State and local governments for
indigent patients; and (3) extending the expiration date of the DS adjustment.
Proposal:
Terminate DS adjustment payments without redistribution of the funds to PPS hospitals.
Legislative Regulatory Other Administrative
TT
Reason for Action:
We used HCFA's Hospital Costs Report Information System to compare DS adjustment hospitals to non-DS adjustment
hospitals.  We found that there was no significant difference between DS adjustment eligible hospitals and non-DS
adjustment hospitals in terms of Medicare profit margins, costs per discharge, and durations of patient hospitalization.
In our opinion, these comparisons indicate that DS adjustment payments are unnecessary.  Payments under PPS adequately
compensate hospitals for services provided to Medicare patients, including low income patients.  We are recommending that
DS adjustment payments be reduced if not eliminated.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$410 $1,410 $3,940 $5,420 $6,070
Status:
Although the President's past budgets contained proposals to phase down Medicare disproportionate share payments, no
legislative proposal was included in the President's current budget.
Report:
L
A-04-87-00111--Final report--September 1989
Health Care Financing Administration Page 30 The 1996 Red Book ROLL REIMBURSEMENT FOR LABORATORY
SERVICES INTO CHARGE FOR
PHYSICIAN OFFICE VISITS
Current Law:
Medicare pays the full amount of all clinical laboratory services provided in outpatient and office settings based on fee
schedules.
Proposal:
The HCFA should study the feasibility of rolling the reimbursement for laboratory services into the recognized charge for
physician office visits (which are subject to beneficiary co-payment) and propose legislation within 2 years.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Clinical laboratory claims account for 25 percent of the line items in Medicare bills.  Numerous initiatives to limit
inappropriate growth have been enacted into law in recent years.  Most involve limiting the amount paid for each laboratory
service.  These initiatives have failed to limit overall spending, however, because they did not reduce the number of tests
prescribed.  The OIG proposal would eliminate incentives for inappropriate lab tests while still allowing sufficient funds to
pay for needed services:  Unnecessary tests would decrease as a result of the incentive to control costs; beneficiary
coinsurance and deductible provisions would again come into play; and administrative savings would result from the
reduction in number of claims processed.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Roll-In $   700 $1,500 $2,700 $4,100 $6,000
Co-Payment   1,130   1,240   1,370   1,520   1,690
Admin. Savings      210      210      210      210      210
TOTAL $2,040 $2,950 $4,280 $5,830 $7,900
Status:
The HCFA does not concur with our recommendation but is studying alternative ways to limit laboratory services.
Report:
L
OEI-05-89-89150--Monograph--October 1990
OEI-05-89-89151--Management advisory report--July 1991
Health Care Financing Administration Page 31 The 1996 Red Book EXPAND NATIONAL LIST
OF CHEMISTRY PANEL TESTS
Current Law:
Chemistry tests are clinical laboratory services requested by physicians in order to diagnose and treat patients.  Chemistry
tests which are commonly performed on automated laboratory equipment are referred to as panel tests and are required by
HCFA to be grouped together for payment purposes.  In addition, HCFA requires that other chemistry tests available in a
carrier's service area and commonly performed on automated laboratory equipment be reimbursed as panel tests.
Proposal:
The HCFA should update its guidelines by expanding the national list of chemistry panel tests to include 10 chemistry tests
identified by the OIG audit.  The HCFA should also establish a process whereby advances in technology and laboratory
practices are periodically reviewed to update the national panel test list.                                                                                       
                         
Legislative Regulatory Other Administrative
TT
Reason for Action:
Based upon claims information and responses to questionnaires by hospital and independent laboratories related to 18 tests
identified for review, 10 are available in all carrier service areas and are commonly performed on automated equipment. 
These 10 tests should be paid as panel tests.  However, HCFA's guidelines which specify chemistry tests that should be
paneled by all carriers have not been updated timely to add tests as technology has advanced.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$130 $130 $130 $130 $130
Status:
The HCFA agreed with 8 of the 10 tests recommended for addition to the list.  In November 1995, HCFA updated its carrier
manual adding three of the tests recommended in the OIG report.   The HCFA has also issued carrier manual instructions
that require all tests in an automated profile to be medically necessary.
Report:
L
A-01-93-00521--Final report--January 1995
Health Care Financing Administration Page 32 The 1996 Red Book TAKE STEPS TO PREVENT INAPPROPRIATE PAYMENTS FOR
PHYSICAL THERAPY IN PHYSICIANS' OFFICES
Current Law:
Medicare has detailed coverage guidelines for physical therapy which apply to all outpatient settings, except physicians'
offices.  While no specific coverage requirements exist regarding physical therapy in physicians' offices, the services like all
others, must be reasonable and necessary and not just for palliation.  As in any other area in Medicare, in the absence of
HCFA national policy, local carriers establish their own policies.
Proposal:
The HCFA should take appropriate steps to prevent inappropriate payments for physical therapy in physicians' offices.  The
HCFA can use the following approaches to achieve this goal:  
!
conduct focused medical review;
!
provide physician education activities; and
!
apply its existing physical therapy coverage guidelines for other settings to physicians' offices.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our findings indicate that 78 percent of procedures which were reimbursed as physical therapy in physicians' offices do not
represent true physical therapy services.  Forty-seven million dollars was inappropriately paid in 1991.  Two-thirds of the
carriers have no policies concerning physical therapy in physicians' offices.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$47 $47 $47 $47 $47
Status:
Currently, model guidelines are being drafted for possible use in reviewing claims for physical therapy or related services
billed by physicians under the physician "incident to" benefit.
Report:
L
OEI-02-90-00590--Final report--March 1994
Health Care Financing Administration Page 33 The 1996 Red Book ENCOURAGE PHYSICIANS
TO USE PAPERLESS CLAIMS
Current Law:
Physicians may submit claims to Medicare in either paper or electronic form.  Seventy-three percent of all physician
claims are currently submitted electronically, and 59 percent of Medicare physicians use only paper.
Proposal:
The HCFA should: 
lead a target outreach effort to encourage voluntary conversion to paperless Medicare claim filing by
physicians who submit claims on paper and who have a moderate to high level of interest in making
the switch.
begin to plan now for the policy changes that will become necessary to achieve an almost completely
paperless environment for processing Medicare claims.  These policy changes can include:  targeting
a date when all physicians will be mandated to submit paperless claims, targeting a date when
paperless claims submission will become a condition for Medicare participating physician status, or
continuing to accept paper claims but imposing a filing fee to cover the incremental cost of doing so.
Legislative Regulatory Other Administrative
Reason for Action :
We found that approximately 65 percent of physicians who now submit Medicare claims only on paper indicate a
high or moderate level of interest in switching to paperless claims.
Savings (in millions) :
FY 1 FY 2 FY 3 FY 4 FY 5
$126 $126 $126 $126 $126  
Status:
The HCFA concurred with our recommendations.  However, with respect to the policy options suggested, HCFA
believes that mandating paperless claims is impractical.
Report:
OEI-01-94-00230--Final report--May 1996
A-05-94-00039--Final report--May 1996
Health Care Financing Administration Page 34 The 1996 Red Book REVIEW MEDICARE INCENTIVE 
PAYMENTS IN
HEALTH PROFESSIONAL SHORTAGE AREAS
Current Law:
Since 1989, physicians who treat Medicare patients in HHS defined health professional shortage (HPSA) areas have
been entitled to bonus payments that were designed to improve patient access to care.  The current law calls for a 10
percent bonus.
Proposal:
The HCFA should seek to (1) eliminate the Medicare incentive payments entirely, (2) modify the Medicare incentive
payment program to target it more effectively to primary care, or (3) channel funds from the Medicare incentive
payment program to new or existing mechanisms to improving access to primary care.
Legislative Regulatory Other Administrative
Reason for Action :
A substantial amount of the Medicare incentive money has gone to physicians who provide little or no primary care. 
Also, among primary care physicians, Medicare incentive payments apparently have little effect on practice location
decisions.
Savings (in millions) :
FY 1 FY 2 FY 3 FY 4 FY 5
$90.6 $120.8 $161 $214.6 $286
Status:
The HCFA concurred with our recommendation.  The HCFA had previously advanced legislation to provide larger
bonuses for primary care services and eliminate certain bonuses in urban areas.  The HPSA modification is not in the
President's current budget, and HCFA has no immediate plans to pursue legislation for this initiative.  The United
States General Accounting Office has recently made a similar recommendation to ours, based on its review of HPSA
definitions.
Report:
OEI-01-93-00050--Final report--June 1994
Health Care Financing Administration Page 35 The 1996 Red Book FURTHER REDUCE MEDICARE'S 
END STAGE RENAL DISEASE RATES
Current Law:
The Omnibus Budget Reconciliation Act (OBRA) 1981 established a prospective payment system for outpatient dialysis
treatments.  Under this system, HCFA implemented a composite rate per treatment to reimburse for both freestanding and
hospital based facilities.
Proposal:
Reduce the payment rates for outpatient dialysis treatments to reflect current efficiencies and economies in the marketplace.
Legislative Regulatory Other Administrative
TT
Reason for Action:
In FY 1989, payments under Medicare's end stage renal disease (ESRD) program totaled $2 billion for dialysis treatments. 
These payments were made to 1,164 freestanding facilities and 666 hospital based facilities.  The FY 1989 HCFA data
shows that dialysis payments averaged $125.05 per treatment for freestanding facilities and $129.11 for hospitals.   
The HCFA, with our assistance, has accumulated cost data for 1985 and 1988 to update the composite rates.  The 1985 data
showed a median cost, including home dialysis costs, of $108.19 per treatment.  Even after considering the effect of home
dialysis services included in 1985 data, the in-facility costs have decreased from 1980 to 1985 without a corresponding
reduction in the prospective rates.  In addition, our audit of the 1988 home office costs of a major chain of freestanding
facilities shows that its costs have decreased from $117 per treatment in 1980 to $89 in 1988.  Due to the prominence of this
chain, their audited costs have a significant impact on the median cost of providing a dialysis treatment.  We estimated that,
this chain is earning $36 per treatment, a 29 percent profit margin for each treatment in 1988.  We believe that both the
1985 and 1988 audited data justifies a decrease in the payment rate.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$22* $22* $22* $22* $22*
*This savings estimate represents program savings of $22 million for each dollar reduction in the composite rate.
Status:
The HCFA agreed that ESRD facilities have become more efficient in their operations and that the composite payment 
rate should reflect the costs of outpatient maintenance dialysis treatment in an efficiently operated facility.  While 
OBRA 1990 prohibited HCFA from changing the ESRD composite rates, it mandated a study to determine the costs,
services and profits associated with various modalities of dialysis treatments.  The study undertaken by the Prospective
Payment Assessment Commission (ProPAC) was presented to Congress in March 1996 and recommended an 
across-the-board increase to the current rates.  The HCFA notes ProPAC's recommendation but expressed concern 
about such an increase for all renal facilities.
Report:
L
A-14-90-00215--Final report--March 1991
Health Care Financing Administration Page 36 The 1996 Red Book PRECLUDE IMPROPER END STAGERENAL DISEASE
 
PAYMENTS TO
HEALTHMAINTENANCEORGANIZATIONS
   
Current Law:
Regulations define end stage renal disease (ESRD) and specify when Medicare entitlement based on ESRD ends.  Medicare
beneficiaries who have been medically diagnosed as having ESRD are prohibited from enrolling in a health maintenance
organization (HMO) or a competitive medical plan (CMP).  An exception exists for individuals who have ESRD and are
commercial members of the HMO/CMP immediately prior to Medicare enrollment in the same plan.  An HMO/CMP with a
Medicare risk contract receives an additional $3,000 monthly capitation payment for beneficiaries classified as having
ESRD.
Proposal:
The HCFA should advise all risk-based HMOs/CMPs that ESRD capitation rates are only effective for beneficiaries who
currently are diagnosed as having ESRD; identify and recover all payments to HMOs/CMPs for beneficiaries misclassified
as having ESRD including the $35.7 million in overpayments identified through February 1995; and make systemic and
procedural changes to prevent future overpayments.                                                             
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review showed that between October 1990 and February 1995 approximately $35.7 million in overpayments has been
made to HMOs/CMPs on behalf of Medicare beneficiaries inappropriately identified as having ESRD.  Our review also
indicated that overpayments to the HMOs/CMPs were continuing.  These inappropriate classifications were caused by
systems weaknesses at HCFA.  We found that when an HMO/CMP attempts to enroll a beneficiary who has an active ESRD
indicator, the enrollment is (appropriately) automatically denied.  However, if a plan advises HCFA that the beneficiary no
longer meets the ESRD definition, HCFA staff enrolls the beneficiary but HCFA's systems do not recognize ESRD
termination.  This results in the HMO/CMP erroneously receiving the higher ESRD capitation payment.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$50.7 $54 $15 $15 $15
Status:
The HCFA agreed with our findings and recommendations.  The systems changes are scheduled to be implemented in
August 1996 along with the recoupment of improper payments.
Report:
L
A-04-94-01090--Final report--February 1996
Health Care Financing Administration Page 37 The 1996 Red Book ENSURE THAT CLAIMS FOR AMBULANCE SERVICES
FOR END STAGE RENAL DISEASE BENEFICIARIES
MEET COVERAGE GUIDELINES
Current Law:
The Medicare Part B benefit for ambulance service has very strict limits.  These are explained by HCFA in the Medicare
Carriers Manual, Section 2120.  The transport is not covered if it fails to meet the medical necessity requirement, even if it
meets other requirements.
Proposal:
The HCFA should ensure that claims meet Medicare coverage guidelines.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Seventy percent of transports involving dialysis in our sample did not meet Medicare's guidelines for medical necessity. 
These claims represent an estimated $65.7 million in 1993.  Claims did not meet Medicare guidelines because on the date of
ambulance services, beneficiaries did not have conditions that contraindicated use of another type of transport.  Almost two-
thirds of the beneficiaries (63 percent) were clearly not bed-confined.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$65.7 $80.2 $97.9 $119.4 $145.7
Status:
The HCFA prepared a draft regulation in late 1995 that would shift the policy focus away from the type of vehicle used and
towards the medical condition of the beneficary.  No final regulation has been issued to date.
Report:
L
OEI-03-90-02130--Final report--August 1994
Health Care Financing Administration Page 38 The 1996 Red Book MODIFY PAYMENT PRACTICES OF
AMBULANCE SERVICES FOR MEDICARE
END STAGE RENAL DISEASE BENEFICIARIES
Current Law:
Medicare Part B covers ambulances services under certain conditions.  Medicare prohibits coverage for ambulance
transportation unless the beneficiary is normally bed-confined and has to be transported by stretcher.  Ambulance company
services and charges are represented by alphanumeric codes which the Medicare program uses to analyze utilization and
payments.  Persons with end stage renal disease (ESRD) are entitled to Medicare coverage under the 1972 amendments to
the Social Security Act.
Proposal:
The HCFA should ensure fairer payment for services rendered and may consider combining two or more of the following
strategies:  (1) establish a payment schedule for ambulance transport to maintenance dialysis, and set the fee lower than what
is paid for unscheduled, emergency transports; (2) negotiate preferred provider agreements with ambulance companies to
provide scheduled transportation for ESRD beneficiaries; (3) undertake competitive bidding to establish a price for
scheduled transports for ESRD beneficiaries or to select companies who agree to provide such services; (4) establish a
rebate program for companies that routinely transport ESRD beneficiaries; and (5) provide an add-on to the composite rate
Medicare pays dialysis facilities and allow the facility to negotiate agreements with ambulance companies.
Legislative Regulatory Other Administrative
TT
Reason for Action:
The payment system does not take into account the routine, predictable nature of scheduled ambulance transports.  The
payment system does not take advantage of the lower costs associated with high volume scheduled transports.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Lower Estimate $4.9 $6.0 $7.3 $8.9 $10.9
Upper Estimate$14.7 $18.0 $22.0 $26.8 $32.7
Note:  These savings figures are in addition to and assume full implementation of recommendations from our report,
OEI-03-90-02130, which recommends elimination of payments for dialysis transport which do not meet Medicare
guidelines.
Status:
The HCFA has established codes for scheduled transport and has required uniform use of national ambulance codes, but no
related payment changes have been made.  The HCFA prepared a draft regulation in late 1995 that would shift policy focus
away from the type of vehicle used and towards the medical condition of the beneficiary.  No final regulation has been issued
to date.
Report:
L
OEI-03-90-02131--Final report--March 1994
Health Care Financing Administration Page 39 The 1996 Red Book CHANGE THE WAY MEDICARE 
PAYS FOR
CLINICAL LABORATORY TESTS
Current Law:
The amount the Medicare program pays for most clinical lab tests is based on fee schedules.  These fee schedules, effective
July 1, 1984, were established by each carrier at 60 percent of the Medicare prevailing rate (the rate most frequently used by
all suppliers).  The Congress took action in the Omnibus Budget Reconciliation Act (OBRA) of 1990 to pay comparable
prices by limiting the annual fee schedule increase to 2 percent for 1991, 1992 and 1993 and reducing the national cap to 88
percent of the median of all the fee schedules.  The OBRA 1993 will further reduce the national Medicare fee cap to 80
percent of the median of carrier prices in 1995 and to 76 percent in 1996.  The law also calls for no cost-of-living increases
for 1994 and 1995.
Proposal:
Require laboratories to identify and bill panels (groups of related tests) at reduced rates whenever they are ordered and study
reinstating the beneficiary coinsurance and deductible provisions for laboratory services as a means of controlling
utilization.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
The OBRA 1993, if fully implemented, should reduce the higher profit rates from Medicare billings.  However, the OIG
found that although prices on individual tests are being reduced by legislation, panels are still generally being billed as
individual tests to Medicare.  Medicare policies are not sufficient to control the billing of profile tests because there is no
requirement that the tests ordered as a panel by the physician be billed only as a panel.  The HCFA's guidelines do not
address the problem of panels as a marketing mechanism of the laboratory industry nor the problem of the industry billing
the contents of the panels individually.  In the OIG's opinion, these conditions have contributed to the significant increase in
the utilization of laboratory services.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Co-Payment $1,130 $1,240 $1,370 $1,520 $1,690
Profiles   TBD   TBD   TBD   TBD   TBD
Status:
Although the President's past budget included a proposal to reinstitute coinsurance for clinical laboratory services, no
legislative proposal was included in the President's current budget.  The OBRA of 1993, however, will reduce Medicare fees
for clinical laboratory tests to 76 percent of the national average in 1996.  In addition, HCFA is profiling physicians'
ordering and referring patterns as part of its focused medical review efforts.
Report:
L
A-09-89-00031--Final report--January 1990
A-09-93-00056--Follow-up report--January 1996
Health Care Financing Administration Page 40 The 1996 Red Book SELECTIVELY CONTRACT FOR
CORONARY ARTERY BYPASS GRAFT SURGERY
Current Law:
Medicare pays for coronary artery bypass graft (CABG) surgery costs incurred for physician, hospital, and other services. 
Payment for hospitals is based on diagnosis related group (DRG) rates and for physician and other services on reasonable
charge determinations.
Proposal:
The HCFA should negotiate all-inclusive package payment prices with selected surgeons and medical centers for providing
CABG surgery to Medicare beneficiaries.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Medicare paid over $1.5 billion in 1985 for CABG (DRG codes 106 and 107) surgery performed on about 63,000
beneficiaries.  We found that hospitals and surgical teams performing more than 200 CABG surgeries per year had better
outcomes in terms of mortality rates, lengths of stay and charges.  The reasonable charge allowances for physicians are often
inconsistent and inequitable.  Similarly, both inconsistent carrier controls/payment guidelines and the revised HCFA
procedure coding system have increased the costs to Medicare of CABG surgery.  Current legislation does not allow the
negotiation of preferred provider and fixed-price packages for CABG surgery for Medicare patients, despite the fact that
these practices now save the private sector millions of dollars each year in CABG surgery costs.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$543.9 $543.9 $543.9 $543.9 $543.9
Status:
The HCFA conducted a demonstration and a final report was issued in January 1996.  The HCFA is in the process of
implementing the recommendation through the Centers of Excellence.
Report:
L
OAI-09-89-00076--Final report--August 1987
Health Care Financing Administration Page 41 The 1996 Red Book MODIFY FORMULA FOR THE MEDICAID PROGRAM
Current Law:
The Federal Medical Assistance Percentage (FMAP) prescribed in the Social Security Act, determines the Federal share of
costs for the Medicaid and various other programs.
Proposal:
The HCFA should consult with the Congress on modifications to the FMAP formula which would result in distributions of
Federal funds that more closely reflect per-capita-income relationships.  (See a similar proposal for family assistance
programs located in the Administration for Children and Families chapter of this Red Book.)
Legislative Regulatory Other Administrative
TT
Reason for Action:
The FMAP formula does not fully reflect the congressional objective of distributing Federal funds according to a State's
ability to share in program costs, as measured by State per-capita-income.  Two provisions result in higher-income States
receiving significant additional Federal funds beyond amounts the formula would provide if it were based solely on per-
capita-income relationships.  Changes to these provisions, namely (i) eliminating the program growth incentive of the FMAP
and (ii) lowering the current minimum floor to 45 percent (from 50 percent), would result in distributions of Federal funds
that more closely reflect per-capita-income relationships.  If the formula were changed, higher income States (such as New
York and California) would receive a reduced Federal share in program expenditures, while lower income States (such as
Mississippi and Arkansas) would receive a greater Federal share.  Higher income States could offset the Federal share
reduction by reducing their comparatively greater program benefits.  However, if a cost-of-living factor were added to the
formula, it would help insure that any reductions in Federal sharing would be more equitable.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$4,100 $4,100 $4,100 $4,100 $4,100
Status:
No legislative proposal was included in the President's current budget.
Report:
L
A-06-89-00041--Final report--August 1991
Health Care Financing Administration Page 42 The 1996 Red Book PROMOTE MEDICAID COST SHARING
Current Law:
Section 1902(a)(14) of the Social Security Act provides that Medicaid may impose "enrollment fees," premiums, or similar
charges, and deductions, cost sharing, or similar charges."  Children, HMO enrollees, pregnancy services, emergency
services, and hospice services provided to residents of nursing facilities or medical institutions are exempt from cost sharing.
Proposal:
The HCFA should promote the development of effective cost sharing programs by:
!
allowing States to experiment with cost sharing programs that target new populations and reflect more
substantial cost sharing amounts, and/or
!
recommending changes to Federal requirements allowing for greater State flexibility in determining
exempted populations and services, and allowing for higher recipient cost sharing amounts.
!
promoting the use of cost sharing in States that do not currently have programs.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
We found 27 States use cost sharing in their Medicaid programs.  Cost sharing programs save money.  States without cost
sharing could save between $167 and $335 million annually (of which the Federal share would be $99 to $198 million) by
applying cost sharing to just four services - inpatient hospital, outpatient hospital, physician visits, and prescription drugs. 
States with cost sharing do not report significant impacts on utilization of services or access to care.  Cost sharing States
have not experienced excessive administrative, recipient, or provider burdens.  Federal requirements may hinder States from
designing even more effective cost sharing programs.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$121.7 $135.9 $151.8 $169.6 $189.5
Status:
The HCFA provided States with program and administrative flexibility through waivers for Medicaid programs and if a
State asks for help, will assist it by soliciting information from States who currently impose cost sharing and would share
those experiences.
Report:
L
OEI-03-91-01800--Final report--July 1993
Health Care Financing Administration Page 43 The 1996 Red Book SUPPORT MEDICAID PAYMENTS OF PREMIUMS
FOR EMPLOYER GROUP HEALTH INSURANCE
Current Law:
Effective January 1, 1991, section 1906 of the Social Security Act mandated State Medicaid agencies, when cost effective,
to pay premiums for employer group health plan (EGHP) insurance for Medicaid-eligible individuals.
Proposal:
The HCFA should: 
!
continue to strongly support States implementing Section 1906 of the Social Security Act.  They can do
so by transferring technology from States that have developed systems and procedures for 1906 programs
to States without such systems and procedures.
!
propose legislation that allows States to pay EGHP deductibles and coinsurance using Medicaid fee
schedules rather than EGHP fee schedules.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
We found that:
!
most States have not purchased EGHP insurance for Medicaid-eligible individuals.
!
compliance with current legislation could reduce potential savings resulting from EGHP insurance.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$34.7 $37.6 $40.8 $44.3 $48.1
Status:
The HCFA agreed with our first recommendation and continues to work with regional offices and States to promote
implementation by conducting numerous workshops and having discussions with technical advisory groups.  The HCFA
deferred commenting on our second recommendation because of legislative proposals being considered at that time.
Report:
L
OEI-04-91-01050--Final report--May 1994
Health Care Financing Administration Page 44 The 1996 Red Book CLOSE LOOPHOLES THAT SHELTER
THIRD PARTY LIABILITY SETTLEMENTS AND AWARDS
Current Law:
Some Medicaid recipients who receive settlements and awards from liable third parties as a result of accidents are able to
shelter the assets in irrevocable trusts and retain their eligibility for Medicaid.  With these trusts, they are also able to
prevent Medicaid from being repaid for medical services related to injuries sustained in the accidents.
Proposal:
We recommend that HCFA develop:  (1) legislative proposals to close the loopholes in the Omnibus Budget Reconciliation
Act of 1993; and (2) guidelines to assist States in strengthening Medicaid's right to recover when trusts are established by
third parties. 
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Our national survey of the 51 Medicaid agencies disclosed that in 36 agencies trusts were used by Medicaid and
Supplemental Security Income recipients to shelter assets.  Although we were unable to determine the financial impact of
these trust funds on Medicaid nationally, we concluded that the impact on Medicaid from 25 such trusts studied in California
was significant.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$3 $3 $3 $3 $3
Status:
The HCFA agreed that the exception in the law contains loopholes.  It indicated that recommendations could be made to
Congress to amend the exception limiting the use of trust funds to certain well-defined necessities (e.g. health care that is not
covered by Medicaid).  The HCFA also agreed to take appropriate action to strengthen Medicaid's right to recover from
trusts established from third party settlements.
Report:
L
A-09-93-00033 -- Final report -- October 1994
Health Care Financing Administration Page 45 The 1996 Red Book ENCOURAGE USE OF GENERIC DRUGS
IN MEDICAID PROGRAM
Current Law:
Under Medicaid, reimbursement for drugs is generally based upon ingredient costs plus a reasonable pharmacy dispensing
fee.  Effective October 29, 1987, Federal regulations limited the amount which Medicaid reimbursed for drugs with
available generic drugs to a Federal upper limit price (FULP).  However, FULP limits do not apply to drug purchases where
prescribing physicians certify in their handwriting on the prescription form that a specific brand is medically necessary.
Proposal:
The HCFA should identify and alert States to methods which would encourage the use of lower priced generic drug products
in the Medicaid program.  The HCFA should also take a more active role to encourage States to use generic drugs and
provide stronger incentives for States to adopt policies that encourage use of generic drugs and monitor the States' efforts to
encourage the use of lower priced generic drugs and formally assess those activities.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review showed that annual cost savings to the Medicaid program could be as much as $46 million for only 37 high
volume dispensed brand name drugs, if the reimbursement for those drugs was limited to the amounts set by HCFA for
equivalent generic drugs.  The cost savings would become even greater in the future as the Federal patents on exclusive drug
manufacturing of 60 important highly used drugs with more than $10 billion in sales will expire by 1995.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$49 $49 $49 $49 $49
Status:
The HCFA has provided a copy of our report to States and encouraged them to use lower priced generic products.  On
February 2, 1996, States were requested to provide a description of any policies adopted by States that encourage use of
equivalent generic drugs.  This information will be included in the 1995 State drug utilization review annual report due to
regional offices by June 30, 1996.
Report:
L
A-06-93-00008--Final report--July 1994
Health Care Financing Administration Page 46 The 1996 Red Book IMPLEMENT AN INDEXED BEST PRICE CALCULATION
IN THE MEDICAID DRUG REBATE PROGRAM
Current Law:
The Omnibus Budget Reconciliation Act of 1990 (OBRA '90) authorized States to collect rebates from drug manufacturers
for drug purchases made under the Medicaid program.  Rebates are calculated using average manufacturer price (AMP), the
manufacturer's best price among other factors.  To discourage drug manufacturers from raising AMP amounts, the basic
rebate amount is increased by the amount AMP increases over and above the consumer price index for all urban consumers
(CPI-U).  However, no similar indexing of best price is made, even though best price is part of the basic rebate calculation
for brand name drugs.
Proposal:
Best price calculation in the Medicaid drug rebate program should be indexed.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Drug manufacturers have consistently increased best prices in excess of the CPI-U since the inception of the Medicaid drug
rebate program.  To determine the potential effect that increases in best price (beyond the rate of inflation) had on rebates,
we calculated the difference in rebates that would have resulted from using an indexed best price.  We estimate that drug
rebates would have increased by about $123 million for the 406 drug products included in our review.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$123 $123 $123 $123 $123
Status:
We are continuing our review of the Medicaid drug rebate program.
Report:
L
 A-06-94-00039--Final report--October 1995
Health Care Financing Administration Page 47 The 1996 Red Book REDUCE NONEMERGENCY
USE OF EMERGENCY ROOMS
BY MEDICAID RECIPIENTS
Current Law:
States attempting to control nonemergency use of emergency rooms must consider several Federal requirements.  Medicaid
recipients must have the right to freedom of choice of a health care provider as stated in Section 1902 (a)(23) of the Social
Security Act.  Before recipients are restricted in choices of providers a waiver under section 1915(b) must be obtained.
Proposal:
The HCFA should encourage States to develop initiatives to review and reduce nonemergency use of emergency rooms by
Medicaid recipients and assist them through data analysis instructions, expedited review of waiver applications for managed
care, and dissemination of effective emergency room control practices.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Seventeen Medicaid directors and managers in nine different States were interviewed about the programs/procedures they
have established to control nonemergency use of emergency rooms.  In addition, utilization and charge data were obtained
from HCFA, the States, and the Medicaid Statistical Information System.  From this we found that:  heavy nonemergency
use of emergency rooms by Medicaid recipients is a continuing problem; substantial Medicaid savings could be realized by
redirecting nonemergency visits to more appropriate and less costly care sites; and States have developed controls to
improve access to and continuity of care as well as to reduce costs of which managed care/pre-paid programs are the most
successful.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$80.5  $103.8 $133.9 $172.7 $222.8
Status:
The HCFA indicated it was concerned that it may not have sufficient resources to encourage States to develop initiatives to
review and reduce nonemergency use of emergency rooms, or disseminate annual reports on effective practices, but will
assist States with expediting the review of State applications for waivers to implement their efforts to control emergency
rooms.
Report:
L
OEI-06-90-00180--Final report--March 1992
Health Care Financing Administration Page 48 The 1996 Red Book INSTALL EDITS TO PRECLUDE IMPROPER
MEDICAID REIMBURSEMENT
FOR CLINICAL LABORATORY SERVICES
Current Law:
Clinical diagnostic laboratory tests performed in a physician's office, by an independent laboratory, or by a hospital
laboratory for its outpatients are reimbursed on the basis of fee schedules.  Medicaid reimbursement for clinical laboratory
tests may not exceed the amount that Medicare recognizes for such tests and each Medicare carrier in a respective State will
provide its fee schedule to the State agency.  For purposes of the fee schedule, clinical diagnostic laboratory services
includes laboratory tests, listed in codes 80002 - 89399 of the Current Procedural Terminology Manual.  Effective for
services rendered on or after July 1, 1984, Federal matching funds are not available for any amount over the amount
recognized by Medicare for such tests.
Proposal:
The respective State agencies should install edits to detect and prevent payments that exceed the Medicare limits  and
billings which contained duplicative tests, recover overpayments for clinical laboratory services identified in each of the
reviews, and make adjustments for the Federal share of the amounts recovered by the State agencies.                                        
                    
Legislative Regulatory Other Administrative
TT
Reason for Action:
Overall, these reviews disclose that State agencies are reimbursing providers for laboratory services which exceed the
Medicare limits or were duplicated for payments purposes.  In addition, it was determined that these overpayments are
occurring because the State agencies do not have adequate computer edits in place to prevent the payment of unbundled or
duplicated claims for chemistry, hematology, or urinalysis tests.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$14 $14 $14 $14 $14
Status:
The HCFA is evaluating our results.
Report:
L
A-01-95-00005--Final report--January 1996  A-06-96-00031--Final report--December 1995
A-01-96-00001--Final report--February 1996 A-06-95-00078--Final report--November 1995
A-04-95-01108--Final report--December 1995 A-07-95-01139--Final report--September 1995
A-04-95-01109--Final report--April 1996 A-07-95-01147--Final report--October 1995
A-04-95-01113--Final report--February 1996 A-07-95-01138--Final report--March1996
A-05-95-00035--Final report--February 1996 A-09-95-00072--Final report--May 1996
A-05-96-00019--Final report--March 1996 A-10-95-00002--Final report--March 1996
Health Care Financing Administration Page 49 The 1996 Red Book CONTROL MEDICAID PAYMENTS TO
INSTITUTIONS FOR
MENTALLY RETARDED PEOPLE
Current Law:
Federal Medicaid rules for reimbursing States for the intermediate care facilities/mentally retarded (ICF/MR) are not tailored
to ICF/MR operations.  "Reasonable costs" or "efficiently and economically operated facility" are not defined in regulation. 
Each State has considerable discretion in defining these terms and setting ICF/MR payment methodology.
Proposal:
The HCFA should take action to reduce excessive spending of Medicaid funds for ICF/MRs by one or more of the
following:
!
take administrative action to control ICF/MR reimbursement by encouraging States to adopt  controls;
!
seek legislation to control ICF/MR reimbursement, such as mandatory cost controls, Federal per  capita
limits, flat per capita payment, case-mix reimbursement, or national ceiling for ICF/MR  reimbursements;
and
!
seek comprehensive legislation to restructure Medicaid reimbursement for both ICF/MR and  home and
community-based waiver service for developmentally disabled people via global  budgeting, block grants,
or financial incentive programs.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Medicaid reimbursement rates for large ICF/MRs are more than five times greater in some States than in others.  Average
Medicaid reimbursement in 1991 for large ICF/MRs ranged among States from $27,000 to $158,000 per resident.  This
variation was unrelated to the patients' severity of illness, quality of service, facility characteristics, or resident
demographics.  Lack of effective controls results in excessive spending.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$683 $683 $683 $683 $683
Status:
The HCFA nonconcurred with our recommendation.  The HCFA believes Medicaid statutory provisions allow States to
establish their own payment systems.  This flexibility allows for the variations found among States in their payment rates
and the methods and standards used in determining these rates.  The HCFA sent copies of our report to State Medicaid
Directors for their use.
Report:
L
OEI-09-91-01010--Final report--June 1993
Health Care Financing Administration Page 50 The 1996 Red Book PUBLIC HEALTH SERVICE
AGENCIES PUBLIC HEALTH SERVICE AGENCIES
Overview The activities conducted and supported by the Public Health Service (PHS)
operating divisions represent this country's primary defense against acute and
chronic diseases and disabilities.  These programs provide the foundation for the
Nation's efforts in promoting and enhancing the continued good health of the
American people.  
These currently independent operating divisions within the Department include: 
National Institutes of Health (NIH), to advance our knowledge through research;
Food and Drug Administration (FDA), to
assure the safety and efficacy of
Introduction
marketed drugs, biological products and
medical devices;  Centers for Disease
Control and Prevention (CDC), to combat
preventable diseases and protect the public health; Health Resources and Services
Administration (HRSA), to support the development, distribution and management
of health care personnel, other health resources and services; Indian Health
Service (IHS), to improve the health status of Native Americans; Agency for Toxic
Substances and Disease Registry (ATSDR), to address issues related to Superfund
toxic waste sites; the Agency for Health Care Policy and Research (AHCPR), to
enhance the quality and appropriateness of health care services and access to
services through scientific research and the promotion of improvements in clinical
practice, and in the organization, financing and delivery of services; and the
Substance Abuse and Mental Health Services Administration (SAMHSA), to assist
States in refining and expanding treatment and prevention services.
Significant The Office of Inspector General (OIG) concentrates on such issues as biomedical
OIG research, substance abuse, acquired immune deficiency syndrome and medical
effectiveness.  Significant unimplemented monetary recommendations identified
Activities
by the OIG regarding policy issues relate to instituting and collecting user fees for
FDA activities; and changes to OMB Circular A-21 to effect more productive use
of Federal research dollars at the Nation's colleges and universities.
       Public Health Service Agencies Page 51 The 1996 Red Book INSTITUTE AND COLLECT
USER FEES FOR FOOD SAFETY INSPECTIONS
Current Law:
The Food and Drug Administration (FDA) currently imposes user fees for several activities, including color certification and
reconditioning of products.  The FDA began collecting fees in 1993 for activities covered by the Prescription Drug User Fee
Act.
In the absence of specific authorizing legislation, the FDA is precluded by statute from imposing user fees to cover
additional functions.
Proposal:
Extend user fees to fund inspections of food processors and establishments.
Legislative Regulatory Other Administrative
TT
Reason for Action:
The OIG believes that user fees, if properly instituted, represent a legitimate method to recover regulatory costs.  Such fees
would be consistent with fee systems in other Federal regulatory environments, such as the Environmental Protection
Agency, the Federal Communications Commission, the Federal Energy Regulatory Commission, and the Nuclear Regulatory
Commission.  In addition, user fees would properly reflect the value of discrete benefits enjoyed by manufacturers from
FDA's regulatory activities, such as increased consumer confidence in industry's products and protection from unfair
competition.
The imposition of user fees for major FDA regulatory functions will not only shift the economic burden of FDA's functions
to users but will have the potential added benefits of increasing revenue for needed expansion of services, improving agency
tracking of resources, and increasing agency accountability for the costs of regulation.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$44.4  $44.4  $44.4  $44.4  $44.4 
Status:
The estimated cost for performing domestic food safety inspections, plus overhead, for FY 1996 was $44.4 million.  The
President's current budget did not request user fees for food safety inspections.
Report:
L
OEI-05-90-01070--Final report--August 1991
Food and Drug Administration Page 52 The 1996 Red Book CAP MEDICAL MALPRACTICE
COVERAGE TO
COMMUNITY AND MIGRANT HEALTH CENTERS
Current Law:
The Federal Tort Claims Act (FTCA) provides unlimited medical malpractice coverage to Community and Migrant Health
Centers (C/MHC).   Under FTCA, the Government consents to be sued for claims resulting from any personal injury caused
by the negligence of employees who were acting within the scope of their employment.  The Federally Supported Health
Centers Assistance Act of 1992 (the Act), Public Law 102-501, extended FTCA coverage to C/MHC medical personnel for
a 3-year demonstration period beginning January 1, 1993.  The Act, slated to expire 
December 31, 1995, was recently extended indefinitely.
Proposal:
Health Resources and Services Administration (HRSA) consider seeking a legislative change to limit malpractice
settlements or judgements involving C/MHCs to $1 million.                                                                          
         
Legislative Regulatory Other Administrative
T
Reason for Action:
We found that GAO reported in 1993,  malpractice insurance with unlimited dollar coverage, such as FTCA currently
provides, will generally cost about 50 percent more than coverage limited to $1 million per claim.  GAO also reported about
57 percent of policies C/MHCs purchased from private insurers during Calendar Year (CY) 1991 provided coverage up to
$1 million per claim.  Our actuarial consultant advised us that for this same period, the average limit purchased at that time
by C/MHCs was $850,000.  The actuarial consultants estimated the Federal Government would incur $30.6 million more
over a 3-year period to provide unlimited dollar coverage compared to providing coverage with a limit of $1 million per
claim. 
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$10 $10 $10 $10 $10
Status:
The HRSA agreed to consider a legislative proposal to amend FTCA to include the $1 million limitation.
Report:
L
  A-04-95-05018--Final report--March 1996
Health Resources and Services Administration Page 53 The 1996 Red Book IMPROVE INDIAN HEALTH SERVICE'S
BILLINGS AND COLLECTIONS
FROM PRIVATE HEALTH INSURANCE COMPANIES
Current Law:
The Indian Health Service (IHS) funds health care to American Indians and Alaska Natives through appropriations by
Congress and collections from third party resources.  Public Law 100-713, the Indian Health Care Amendments of 1988,
authorizes the IHS to bill third parties, including private insurance companies, for both inpatient and outpatient services. 
According to IHS, reimbursements received from private insurance companies for patients in IHS operated facilities are
used to implement IHS business offices and purchase medical supplies and equipment.  
Proposal:
The IHS should establish the necessary internal controls, assign adequate resources to its business offices, and provide
additional training to business office staff to ensure that underbillings of approximately $7 million per quarter are
properly filed and collected.
Legislative Regulatory Other Administrative
T
Reason for Action:
We found that IHS had not established the controls necessary to ensure that the amounts billed to private insurance
companies were accurate and all covered services were billed.  As a result, for the 3-month period tested, we calculated
that IHS underbilled private insurers by approximately $7 million.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$28 $28 $28 $28 $28
Status:
The IHS fully concurred with our recommendations and delineated IHS actions to address them.  Specifically, IHS is in
the process of, or has plans for: (1) implementing an automated system to achieve the necessary internal controls; 
(2) allocating resources to improve methods for billings and collections; (3) meeting the training needs of business office
staff; (4) implementing fee schedules on a timely basis; (5) ensuring adequate accounting and medical records are
maintained for each patient; (6) providing adequate resources to carry out claims follow-up; and (7) improving policies
and procedures for follow-up of unpaid claims. 
Report:
L
  A-06-93-00080--Final report--June 1995
Indian Health Service Page 54 The 1996 Red Book DEVELOP AND CONSISTENTLY 
BILL UNIVERSITY
RECHARGE CENTER COSTS
Current Law:
The Office of Management and Budget (OMB) Circular A-21, "Cost Principles for Educational Institutions," requires
billing rates for specialized service funds (recharge centers) to be based on actual costs, designed to recover the aggregate
cost of a good or service, and reviewed periodically.
Proposal:
Universities should improve their oversight of recharge centers and should:  (1) develop and implement policies and
procedures for the operation of recharge centers that are consistent with OMB Circular A-21; (2) establish and maintain
adequate accounting and recordkeeping procedures for recharge center; and (3) analyze and adjust billing rates to eliminate
deficit and surplus funds.
The Department should work with OMB to revise Circular A-21 to ensure that criteria related to the financial operation of
recharge centers is clear.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review showed that 11 of 12 universities did not maintain adequate accounting systems and records to allow for:  (a) the
development of billing rates based on actual costs; or (b) the identification of surplus or deficit fund balances.  These
weaknesses in the internal control structure resulted in some recharge centers:  (1) accumulating surplus and deficit fund
balances that were not adjusted for in subsequent billing rates; (2) including duplicate or unallowable costs in billing rates;
(3) including recharge center costs in the calculation of indirect cost rates;  (4) using recharge center funds for unrelated
purposes; and/or (5) billing some users at reduced rates.  These weaknesses caused billing rates to be overstated, resulting in
overcharges of $3.2 million to the Federal Government.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$3.2 * * * *
* Recurring savings would result with circular change.
Status:
The Assistant Secretary for Management and Budget concurred with our recommendations and has recommended to OMB
that Circular A-21 be revised to provide more definitive guidance on the financial operations of recharge centers.   However,
such a change was not included in the recent Circular revision.
Report:
L
A-09-92-04020--Final report--January 1994
National Institutes of Health Page 55 The 1996 Red Book LIMIT GRADUATE STUDENT COMPENSATION
TO THAT PAID FOR SIMILAR WORK
Current Law:
The OMB Circular A-21, " Cost Principles for Educational Institutions ", requires that tuition remission (the
forgiveness by the institution of all or a portion of the tuition costs of the student) and other forms of compensation
charged to federally sponsored research to be reasonable. 
Proposal:
The Assistant Secretary for Management and Budget (ASMB) should work with OMB to revise Circular A-21 to
stipulate a reasonableness standard for graduate student compensation based on assigned responsibilities and not to
exceed compensation paid to other individuals of similar experience for similar work.
Legislative Regulatory Other Administrative
Reason for Action :
Although OMB Circular A-21 requires that tuition remission and other forms of compensation charged to federally
sponsored research be reasonable, it provides unclear guidance, relying on the concepts of the prudent person and
arm's length bargaining, in defining "reasonableness."  In the absence of a consistent standard, OIG used the salaries
of postdoctoral research assistants and equivalent positions as a "fair and reasonable benchmark" for measuring the
reasonableness of compensation packages provided to graduate students at four universities.
Based on a statistical sample, the OIG found that three of the four universities it audited charged a total of $5.7
million in unreasonable graduate student compensation to federally sponsored research projects.
Savings (in millions) :
FY 1 FY 2 FY 3 FY 4 FY 5
$5.7 * * * *
* Recurring savings would result with circular change.
Status:
The ASMB endorsed the OIG recommendation, concluding that a prudent person would not provide greater
compensation to individuals who are less qualified by education and practical experience than others performing
similar work, and doubting whether the other three universities engaged in arm's-length transactions.  Recommended
changes, however, were  not included in the recent Circular revision. 
Report:
A-01-94-04002--Final report--October 1994
National Institutes of Health Page 56 The 1996 Red Book ADMINISTRATION FOR CHILDREN
AND FAMILIES ADMINISTRATION FOR CHILDREN AND FAMILIES
Overview The Administration for Children and Families (ACF) provides Federal direction
and funding for State, local and private organizations as well as for State-
administered programs designed to promote stability, economic security,
responsibility and self-support for the Nation's families.  It also oversees a variety
of programs that provide social services to the Nation's children, youth and
families, persons with developmental disabilities and Native Americans.
Major types of family support payments to States encompass:  Aid to Families
with Dependent Children (AFDC), a cooperative program among Federal, State
and local governments; the Child
Support Enforcement (CSE) program,
Introduction
which provides grants to States to
enforce obligations of absent parents and
for establishing and enforcing child
support orders.  The Head Start program provides comprehensive health,
educational, nutritional, social and other services primarily to preschool children
and their families who are economically disadvantaged.  The Foster Care and
Adoption Assistance program provides grants to States to assist with the cost of
foster care and special needs adoptions, maintenance, administrative costs and
training for staff.  Other programs include Community Services, Job Opportunities
and Basic Skills Training (JOBS), and the State Legalization Impact Assistance
Grants program.
Significant The OIG reviews the cost-effectiveness of the ACF social services and assistance
OIG programs, including determining whether authorized services are provided to
recipients at lowest costs.  We identified opportunities to improve the delivery of
Activities
program services, such as: modifying the Federal Medical Assistance Percentage
formula, which would result in a more equitable distribution of federal funds
among States; requiring States to develop criteria and implement procedures for
assuring that appropriate foster care cases are referred to State child support
enforcement agencies; basing child support incentive payments on the States
demonstrated ability to meet Federal requirements and performance objectives;
and limiting Federal participation in foster care administrative costs.
       Administration for Children and Families Page 57 The 1996 Red Book MODIFY FORMULA FOR THE AFDC, 
FOSTER CARE AND
ADOPTION ASSISTANCE PROGRAMS
Current Law:
The Federal Medical Assistance Percentage (FMAP) prescribed in the Social Security Act, determines the Federal share of
costs for the Medicaid, Aid to Families with Dependent Children (AFDC), Foster Care and Adoption Assistance programs. 
In addition, four additional programs will use the FMAP as the Federal matching rate for specific types of costs.  These
programs are Job Opportunities and Basic Skills, Child Care and Supportive Services, Transitional Child Care and At-Risk
Child Care. 
Proposal:
The Administration for Children and Families (ACF) should consult with the Congress on modifications to the FMAP
formula which would result in distributions of Federal funds that more closely reflect per-capita-income relationships.  (See
a similar proposal for the Medicaid program located in the HCFA chapter of this Red Book.)
Legislative Regulatory Other Administrative
TT
Reason for Action:
The FMAP formula does not fully reflect the congressional objective of distributing Federal funds according to a State's
ability to share in program costs, as measured by State per-capita-income.  Two provisions result in higher-income States
receiving significant additional Federal funds beyond amounts the formula would provide if it were based solely on per-
capita-income relationships.  Changes to these provisions, namely (i) eliminating the program growth incentive of the FMAP
and (ii) lowering the current minimum floor to 45 percent (from 50 percent), would result in distributions of Federal funds
that more closely reflect per-capita-income relationships.  If the formula were changed, higher income States (such as New
York and California which had average monthly AFDC expenditures per person in poverty in Fiscal Year (FY) 1987 of
$809) would receive a reduced Federal share in program expenditures, while lower income States (such as Mississippi and
Arkansas which had average monthly AFDC expenditures per person in poverty in FY 1987 of $170) would receive a
greater Federal share.  Higher income States could offset the Federal share reduction by reducing their comparatively greater
program benefits.  However, if a cost-of-living factor were added to the formula, it would help insure that any reductions in
Federal sharing would be equitable. 
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$1,100 $1,100 $1,100 $1,100 $1,100
Status:
This proposal was not included in the President's current budget.
Report:
L
 A-06-90-00056--Final report--July 1991
Administration for Children and Families Page 58 The 1996 Red Book REVIEW RISING COSTS IN THE
EMERGENCY ASSISTANCE
PROGRAM
Current Law:
The Emergency Assistance (EA) Program is an optional supplement to the Aid to Families with Dependent Children
Program.  It is a States discretion whether or not to implement the EA Program.  The purpose of the EA Program is
to provide temporary financial assistance and supportive services to eligible families experiencing an emergency. 
House and Senate Committee reports cited several instances of emergencies which include a childs deprivation of
food, housing, utilities, and necessary parental support.
Proposal:
The ACF should: (1) support legislation that would either cap the Federal share of EA expenditures or include the
Program as part of a block grant; (2)  revise or rescind its current policies allowing the shifting of costs to the EA
program especially where such costs have been borne traditionally by the States.  In this regard, the eligibility period
should be limited; and (3) issue policy guidelines requiring States to reimburse hospital care at amounts less than total
charges.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
We found that ACF approved State plan amendments which enabled States to maximize Federal revenue by obtaining EA
funding for services traditionally State funded.  As a result, the States shift in categorical costs represented a significant
portion of the 400 percent increase in EA Program from 1991 to 1994.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
In response to our draft report, the ACF agreed that there is an urgent need to control the rapid escalation of EA
expenditures.  Further, ACF agreed with our recommendations to support capping EA expenditures.  The ACF stated it fully
intends to take action to address inappropriate State practices.  As such, on September 12, 1995, ACF issued Action
Transmittal ACF-AT-95-9 which discontinues Federal financial participation under the EA Program for costs of providing
benefits and services to children involved in the juvenile system.   
Report:
L
A-01-95-02503--Final report--October 1995
Administration for Children and Families Page 59 The 1996 Red Book REDUCE CHILD SUPPORT INCENTIVE 
PAYMENTS AND BASE THEM ON
STATES' PERFORMANCE
Current Law:
The Child Support Enforcement (CSE) program provides States with a Federal cost share of 66 percent for CSE 
administrative costs.  States also receive incentives of 6 to 10 percent of collections from absent parents based on a ratio of
collections to costs.  Additionally, States receive credit for their share of collections recovered for Aid to Families with
Dependent Children (AFDC) families.
Proposal:
Base incentive payments on the States' demonstrated ability to meet Federal CSE requirements and performance objectives. 
Also, consider OIG recommended options to reduce financial incentives realized by States that would result in a more
equitable cost sharing with the Federal Government.  These options are:  (1) limiting incentives to a break-even point where
a State's share of AFDC collections plus incentives equal the State's share of CSE costs; 
(2) eliminating incentives to poor performing States; and (3) reducing the Federal share of administrative costs.  Require
that States use incentive payments for CSE purposes.
Legislative Regulatory Other Administrative
TT
Reason for Action:
During our review at nine selected States, we noted that incentive payments were used primarily to fund the State or local
jurisdictions' share of CSE costs rather than expanding the coverage of the program.  Also, a portion of incentive payments
either were deposited in State and local general funds for unrestricted non-CSE uses or provided funding for the State or
local share of public assistance costs.  (The law currently does not restrict how these incentive payments can be used.) 
Further, in FY 1992, States realized net incentive-related revenue estimated at $463 million.  On the other hand, the Federal
Government not only did not realize any net revenue in terms of its share of AFDC collections, but actually paid out a net of
$626 million.  As stated previously, there was little evidence that incentives improved or expanded State CSE programs. 
Moreover, the legislative intent of having States increasingly share in the costs to motivate cost efficiencies has not been
accomplished.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$277 $277 $277 $277 $277
Status:
This proposal was not included in the President's current budget.
Report:
L
A-09-91-00034--Final report--April 1992
A-09-91-00147--Final report--September 1992 
Administration for Children and Families Page 60 The 1996 Red Book REFER FOSTER CARE CASES 
TO CHILD SUPPORT ENFORCEMENT AGENCIES
Current Law:
Section 11 of the 1984 Child Support Amendment Act requires States to secure and enforce child support collections on
behalf of children receiving foster care maintenance payments under Title IV-E of the Social Security Act "where
appropriate".
Proposal:
As a condition of receiving Federal matching funds for foster care administration under Title IV-E, the ACF should require
States to develop criteria and implement procedures for assuring that foster care agencies refer appropriate cases to State
child support agencies.  We believe this would increase child support collections on behalf of foster care children, thus
offsetting tax dollars spent for their care and maintenance.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Collections are being made on behalf of only 5.9 percent of foster care children in our sample.  Few foster care cases are
referred to child support agencies for possible collections.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$11        $11 $11  $11  $11
Status:
The ACF is in the process of implementing a strategy to address our recommendation.  Specifically, ACF plans to add to the
Program Review Instrument of Foster Care (the Instrument) a series of items dealing with State procedures and practices for
identification of appropriate foster care cases, referral to child support agencies, follow-up and coordination between Foster
Care and child support agencies, and accurate accounting for and crediting of collections.  The Instrument will also require
reviewers to determine whether a memorandum of understanding exists between the State agencies, and if so how well it is
implemented.  If no such agreement is in place, the Instrument will probe whether one would be useful for a particular State. 
The ACF did not agree with our estimate of potential savings.
Report:
L
OEI-04-91-00530--Final report--May 1992
Administration for Children and Families Page 61 The 1996 Red Book LIMIT FEDERAL PARTICIPATION IN
STATES' COSTS FOR ADMINISTERING 
THE FOSTER CARE PROGRAM
Current Law:
Title IV-E of the Social Security Act makes Federal funding available to States for costs incurred in providing care and
maintenance to children eligible for Foster Care.  It also authorizes Federal participation in related administrative and
training costs.  Placement activities are included in administrative costs.
Proposal:
Limit Federal participation in Foster Care administrative costs through one of the following actions:  (1) limit future
increases in administrative costs to no more than 10 percent per year, (2) fund administrative activities via a single block
grant with future increases based on the consumer price index, (3) limit administrative costs to a percentage of maintenance
payments, or (4) restrict, through legislation, the filing period for retroactive claims, namely require States to file claims for
Federal participation within 1 year after the calendar quarter in which the expenditure was made.  Costs for child placement
services should be separated from traditional overhead costs so they can be effectively monitored.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Legislative action is required to control increases in Foster Care administrative costs.  Current "open-ended" legislation has
allowed administrative costs to increase from $400 million in FY 1988 to an estimated $1.2 billion in FY 1994 -
approximately a 200 percent increase.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$247 $306 $364 $415 $461
Status:
This proposal was not included in the President's current budget.
Report:
L
A-07-90-00274--Final report--August 1990
Administration for Children and Families Page 62 The 1996 Red Book GENERAL DEPARTMENTAL
MANAGEMENT GENERAL DEPARTMENTAL  MANAGEMENT
Overview The Office of Inspector General's (OIG) departmental management and
Governmentwide oversight role includes reviews of payroll activities, accounting
transactions, implementation of the Federal Managers' Financial Integrity Act
and the Prompt Pay Act, financial management audits under the Chief Financial
Officers (CFO) Act, grants and contracts, the Department's Working Capital
Fund, conflict resolution and adherence to employee standards of conduct.  The
OIG also participates in interagency efforts through the President's Council on
Integrity and Efficiency and the President's Council on Management
Improvement to prevent losses to and abuses of Federal programs.
The OIG has oversight responsibility for these staff division activities at the
departmental level.  A related major responsibility flows from the Office of
Management and Budget's (OMB's)
designation of HHS as cognizant
Introduction
agency to audit the majority of the
Federal funds awarded to the major
research schools, 104 State and local
government cost allocation plans, and separate indirect cost plans of about 1,000
State agencies and local governments.  In addition, OIG oversees the work of
nonfederal auditors of Federal money at some 6,700 entities, such as community
health centers and Head Start grantees, as well as at State and local governments,
colleges and universities, and other nonprofit organizations.
Significant The OIG's work in departmental management and Governmentwide oversight
OIG focuses principally on financial management and managers' accountability for
resources entrusted, standards of conduct and ethics, and Governmentwide audit
Activities
oversight, including recommending necessary revisions to OMB guidance.  The
OIG also reviews the adequacy of States' system(s) to control the growth of
administrative/indirect costs claimed for Federal financial participation.
       General Departmental Management Page 63 The 1996 Red Book SIMPLIFY
ADMINISTRATIVE/INDIRECT COST
ALLOCATION SYSTEMS
Current Law:
The Office of Management and Budget (OMB) Circular A-87,  Cost Principles for State and Local Governments,
establishes requirements that State and local governments must follow in preparing and submitting cost allocation
plans for Federal approval.  State and local governments must adhere to the plans when claiming
administrative/indirect costs for Federal financial participation.  
Proposal:
Simplify the process for charging administrative/indirect costs to Federal programs through reform of the cost
allocation plans.  We have identified a range of options, some of which require legislative actions, to reform the cost
allocation system.  Options for reform include:  (1) use of block grant awards; (2) a flat percentage rate for
administrative/indirect costs; and (3) negotiation of a nonadjustable rate for a predetermined number of years.  
Legislative Regulatory Other Administrative
Reason for Action :
State cost allocation plans annually allocate an estimated $20 billion of administrative/indirect costs to Federal
programs.  We concluded from a review of 105 statewide cost allocation plans (35 States, plans for each of 3 years)
that the system for allocating costs to Federal programs has degenerated into a highly technical accounting and
allocation maze.  The Federal, State and local governmental communities have struggled to work within a
burdensome system instituted over 20 years ago that seeks to equitably share administrative/indirect costs.  Prior
reform efforts concentrated on individual programs and/or cost principles instead of the system or process and thus
were not entirely successful.
Savings (in millions) :
FY 1 FY 2 FY 3 FY 4 FY 5
* * * * *
* Estimated savings resulting from reform of cost allocation plan process.  The report of the National Performance
Review (NPR), "Creating a Government That Works Better and Costs Less" estimates a 5-year savings of $3.3 billion
by reducing intergovernmental administrative costs.
Status:
Some of our recommendations are cited in the NPR report that calls for reform of the cost allocation process.  The
OMB's  revision of Circular A-87 addressed those recommendations.  However, further reform is needed to address
the bulk of administrative/indirect costs charged to Federal Government.
Report:
A-12-92-00014--Final report--September 1993
General Departmental Management Page 64 The 1996 Red Book IMPROVE FUNDING SYSTEM FOR
WELFARE ADMINISTRATIVE COSTS
Current Law:
The Federal Government pays for half of the administrative costs for most types of administrative activities in the
Aid to Families with Dependent Children (AFDC), Food Stamp and Medicaid programs.  States have considerable
latitude in defining their administrative costs.  Costs need only be considered "reasonable and necessary" as outlined
in OMB Circular A-87, "Cost Principles for State and Local Governments."
Proposal:
Examine the following alternative options for funding administrative costs in the AFDC, Food Stamp, and Medicaid
programs:
Reduce Medicaid special match rates to 50 percent .  This option has already been enacted for the
AFDC and Food Stamp programs.
Block Grant.  Combine the administrative costs of all three programs at a base year level, then
provide inflationary increases each year.
Standard Cost Per Recipient .  Fund States based on a standard per recipient allocation amount.
Cost Per Recipient Cap .  Impose a cap on Federal reimbursement of the cost per recipient.
Legislative Regulatory Other Administrative
Reason for Action :
The current method for reimbursing States for welfare administrative costs is unwieldy, inefficient, and
unpredictable.  In addition, there is considerable unexplained disparity in administrative costs among States and
significant risk of increase in administrative costs overall.
Savings (in millions) :
Options FY 1 FY 2 FY 3 FY 4 FY 5
Reduce Special Match $236 $273 $   315 $   362 $   415
Block Grant $248 $817 $1,458 $2,159 $2,940
Standard Cost Per Recipient $  69 $180 $   293 $   423 $   562
Capped Cost Per Recipient $113 $127 $   144 $   162 $   182
Status:
Enhanced matching rates have been reduced to 50 percent in the AFDC and Food Stamp programs; however, not in
the Medicaid program.
Report:
OEI-05-91-01080--Final report--January 1995
General Departmental Management Page 65 The 1996 Red Book Internet Address
The 1996 Red Book and other OIG materials may
be accessed on the Internet at the following address:
http://www.sbaonline.sba.gov/ignet/internal/hhs/hhs.html