Department of Health and Human Services 
 
Office of Inspector General 
 
Cost-Saver Handbook  
 
 
 
 
 
 
 
 
 
 
 
2003 
RED BOOK 
 
             
 
 
 
 
 
 
 
 
 
 
Janet Rehnquist 
Inspector General Office of Inspector General 
 
Under the authority of the Inspector General Act of 1978, as amended, we improve 
Department of Health and Human Services (HHS) programs and operations and protect 
them against fraud, waste, and abuse.  By conducting independent and objective audits, 
evaluations, and investigations, we provide timely, useful, and reliable information and 
advice to department officials, the administration, the Congress, and the public.  Our 
statutory mission is carried out by the following operating components: 
 
Office of Audit Services 
 
The OIG's Office of Audit Services (OAS) provides auditing services for the department, 
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.  These investigative efforts lead to criminal 
convictions, administrative sanctions, or civil monetary penalties.  The OI also oversees 
state Medicaid fraud control units, which investigate and prosecute fraud and patient 
abuse in the Medicaid program. 
 
Office of Counsel to the Inspector General 
 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIGs internal operations.  The OCIG imposes program exclusions and 
civil monetary penalties on health care providers and litigates those actions within the 
department.  The OCIG also represents OIG in the global settlement of cases arising 
under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops model compliance plans, renders advisory opinions on OIG sanctions to the 
health care community, and issues fraud alerts and other industry guidance.  Introduction  
 
Purpose of the Red Book 
 
The Red Book is a compendium of significant Office of Inspector General (OIG) cost-
saving recommendations that have not been fully implemented.  These recommendations 
may require one of three types of actions:  legislative, regulatory, or procedural (such as 
manual revisions).  Some complex issues involve two or all three types of actions.  
 
The Inspector General Act requires that the OIG's semiannual reports to the Congress 
include "an identification of each significant recommendation described in previous 
semiannual reports on which corrective action has not been completed."  Thus, 
appendices to each semiannual report list significant unimplemented recommendations.  
Because of the abbreviated nature of that list, however, we prepare the Red Book to 
further highlight the potentially significant impact of cost-saving recommendations. 
 
The savings estimates indicated for these unimplemented recommendations are updated 
from time to time to reflect more current information as it becomes available.  The 
estimates have varying levels of precision.  Full implementation of the recommendations 
in the 2003 edition of the Red Book could produce substantial savings to the Department 
of Health and Human Services (HHS).  We hope that this edition will prove useful to 
departmental decision-makers, the administration, and the Congress in their continuing 
efforts to contain costs and improve program efficiency at HHS. 
     
Department of Health and Human Services     
 
The HHS promotes the health and welfare of Americans and provides essential services 
to people of every age group.  The department's major operating divisions are briefly 
described below: 
 
  The Centers for Medicare and Medicaid Services (CMS) administers the 
Medicare and Medicaid programs, as well as the State Childrens Health 
Insurance Program (SCHIP).  These programs, which account for over 80 percent 
of the HHS budget, provide medical care coverage for the elderly, the disabled, 
the poor, and children whose families earn too much to qualify for Medicaid but 
too little to afford private coverage.   
 
 
The public health agencies include the National Institutes of Health, the Food and 
Drug Administration, the Centers for Disease Control and Prevention, the Health 
Resources and Services Administration, the Indian Health Service, the Agency for 
Toxic Substances and Disease Registry, the Agency for Healthcare Research and 
Quality, and the Substance Abuse and Mental Health Services Administration.  
They promote biomedical research and disease cure and prevention; ensure the 
safety and efficacy of marketed food, drugs, and medical devices; and conduct 
other activities designed to ensure the general health and safety of American 
citizens. 
Introduction     Page i   
The Administration for Children and Families provides federal direction and 
funding for state-administered programs designed to promote stability, economic 
security, responsibility, and self-support for the nation's families, including a 
variety of social service programs.  
 
 
The Administration on Aging (AoA) serves as an advocate for the elderly at the 
national level. 
 
Significant OIG Activities  
 
Over the years, OIG findings and recommendations have contributed to many significant 
reforms and substantial savings in departmental programs.  In fiscal year (FY) 2002, for 
example, policy and procedural changes resulting from audits, investigations, and 
inspections achieved more than $21 billion in savings.  Such changes included reforming 
Medicaid disproportionate share hospital payments, establishing a Medicare prospective 
payment system and consolidated billing for skilled nursing facilities, and restructuring 
Medicare home health payments.  
 
Organization of the Red Book 
     
The Red Book has two major sections.  Recommendations made since the last edition was 
published are included in the first section; previously published recommendations can be 
found in the second. 
 
For each recommendation, we summarize the current law, the reason that action is 
needed, the estimated savings that would result from taking the recommended action, the 
status of actions taken, and the report number and date.  In addition, the type of action 
needed (legislative, regulatory, or procedural) is indicated.  Recommendations for 
proposed legislation are removed from the Red Book once the law has been fully enacted.  
On regulatory and procedural issues, recommendations are removed when the action has 
been substantially completed. 
 
Each final report, including the full text of comments from the cognizant agency, is 
available upon request or on the Internet at http://oig.hhs.gov.  Each report also includes 
an appendix detailing OIGs methodology for estimating cost savings; we encourage the 
reader interested in a particular proposal to review the report. 
 
                   
Introduction     Page ii  Table of Contents 
 
Annual     
Savings   
(in Millions)  Page
 
New Recommendations 
   
Hospitals 
$1,100  Establish More Consistent Outpatient Surgery Rates That Reflect Only Necessary Costs  1
   
Durable Medical Equipment   
$98  Eliminate Semiannual Maintenance Payments for Capped Rental Equipment  2
$34  Adjust Reimbursement for Semi-Electric Hospital Beds  3
      
Medicare Managed Care 
TBD  Expedite the Phase-in of Risk Adjustment Factors  4
TBD  Monitor Managed Care Organizations Rate Proposals  5
      
Other Medicare Reimbursement 
$97  Recover Overpayments and Prevent Inappropriate Medicare Part B Payments for Nail 
Debridement and Related Services  6
 
Administration on Aging 
$91  Use Voluntary Contributions To Expand Services for the Elderly  7
   
Previous Recommendations 
 
Hospitals 
$820  Continue Mandated Reductions in Hospital Capital Costs  8
$249  More Accurately Reflect Base-Year Costs in Prospective Payment Systems Capital  
Cost Rates  9
TBD  Collect Overpayments for Prospective Payment System Transfers Incorrectly Reported 
as Discharges  10
TBD  Reduce the Prospective Payment System Adjustment Factor for Indirect Medical 
Education Costs  11
$157  Revise Graduate Medical Education Payment Methodology  12
TBD  Deny Medicare Reimbursement for Patients Who Receive Substandard Medical Care  13
$340  Modify Payment Policy for Medicare Bad Debts  14
$22  More Closely Monitor Same-Day Hospital Readmissions  15
TBD  More Closely Monitor 1-Day Inpatient Hospital Stays  16
$61  Prevent Overpayments Under Medicares Postacute Care Transfer Policy  17
   
Table of Contents    Page iii      Annual     
Savings   
(in Millions)  Page
 
$84  Recover Overpayments and Expand the Diagnosis-Related Group Payment Window  18
TBD  Adjust Base-Year Costs in the Prospective Payment System for Hospital Outpatient 
Department Services  19
$15  Preclude Payment for Mutually Exclusive Procedure Codes for Hospital Outpatient 
Services  20
$48  Apply a 190-Day Lifetime Limit and a 60-Day Annual Limit on Medicare Inpatient 
Psychiatric Care   21
TBD  Eliminate Provider-Based Designations or Improve Management and Oversight  22
$1,559  Require Medicare Coverage of All State and Local Government Employees or Make 
Medicare the Secondary Payer  23
End Stage Renal Disease 
$22  Reduce Medicare End Stage Renal Disease Payment Rates  24
$94  Reduce the Epogen Reimbursement Rate  25
$90  Ensure That Claims for Ambulance Services for End Stage Renal Disease Beneficiaries 
Meet Coverage Guidelines  26
$15  Modify Payment System for Ambulance Services for End Stage Renal Disease 
Beneficiaries  27
Durable Medical Equipment 
$91  Identify Medical Equipment/Supply Claims Lacking Valid, Active Unique Physician 
Identification Numbers  28
$7  Prevent Medicare Losses Resulting From Early Payments for Medical Equipment  29
$12  Prevent Inappropriate Medicare Part B Payments for Medical Equipment in Skilled 
Nursing Facilities  30
$40  Limit Medicare Part B Reimbursement for Hospital Beds  31
$1  Revise Guidelines for Coding Orthotic Body Jackets  32
$1  Reduce Allowed Charges for Orthotic Body Jackets  33
$43  Improve Billing Practices for Medicare Orthotics  34
$7  Improve Guidelines for Therapeutic Footwear  35
$79  Eliminate Inappropriate Billing for Blood Glucose Test Strips  36
$65  Examine Payment Method for Parenteral Nutrition  37
$28  Reduce and Control Enteral Nutrition Equipment Costs  38
$15  Reduce Medicare Part B Payments for Enteral Nutrition at Home  39
$263  Improve Medical Reviews for Home Oxygen Therapy  40
$19  Stop Inappropriate Payments for Hyperbaric Oxygen Therapy  41
$12  Reclassify Respiratory Assist Devices With a Back-Up Rate  42
 
Medicare Managed Care 
$3,500  Modify Payments to Managed Care Organizations  43
TBD  Pay Managed Care Organizations Only Reasonable Administrative Costs  44
TBD  Place a Ceiling on Administrative Costs Included in Managed Care Organizations Rate 
Proposals  45
Table of Contents    Page iv      Annual     
Savings   
(in Millions)  Page
 
$150  Monitor Investment Income Earned by Risk-Based Managed Care Organizations  46
TBD  Monitor Payments for End Stage Renal Disease Beneficiaries in Managed Care Plans  47
Other Medicare Reimbursement 
$130  Expand National List of Chemistry Panel Tests  48
$1,130  Change the Way Medicare Pays for Clinical Laboratory Tests  49
$13  Prevent Inappropriate Medicare Payments for Clinical Laboratory Tests  50
TBD  Adjust Home Health Agency Prospective Payments  51
TBD  Require Physician Examination Before Ordering Home Health Services  52
TBD  Ensure Validity of Medicare Hospice Enrollments  53
$1,000+  Adjust Base-Year Costs in the Prospective Payment System for Skilled Nursing 
Facilities  54
$48  Eliminate Overpayments Under Consolidated Billing by Skilled Nursing Facilities  55
$676  Ensure Appropriateness of Medicare Payments for Mental Health Services  56
$1  Prevent Overpayments of Rural Health Clinic Claims  57
$97  Conduct Medical Reviews of Part B Therapy Services  58
$1,900  Revise Medicare Prescription Drug Payment Methods  59
$104  Ensure the Medical Necessity of Ambulance Claims  60
$78  Stop Inappropriate Payments for Chiropractic Maintenance Treatments  61
$30  Establish Utilization Parameter for Chiropractic Treatments  62
$9  Discontinue Use of a Separate Carrier To Process Medicare Claims for Railroad 
Retirement Beneficiaries  63
$40  Improve Medicare Secondary Payer Safeguards  64
TBD  Expand Medicare Secondary Payer Provisions for End Stage Renal Disease Benefits  65
$21  Eliminate Medicare Payments for Services After Death  66
Medicaid Reimbursement 
TBD  Eliminate or Reduce Transition Periods for Compliance With New Medicaid Upper 
Payment Limits  67
$50  Delay or Repeal the Increase in Medicaid Disproportionate Share Hospital Payments  68
$1,080  Require That Medicaid Reimbursement for Brand Name Drugs Be More in Line With 
Acquisition Costs  69
$7  Limit Medicaid Reimbursement for Higher Priced Generic Drugs to That for Lower 
Priced Brand Name Drugs  70
$470  Require That Medicaid Reimbursement for Generic Drugs Be More in Line With 
Acquisition Costs  71
$140  Review Medicaid Reimbursement Methodology for HIV/AIDS Drugs  72
TBD  Establish Connection Between the Calculation of Medicaid Drug Rebates and Drug 
Reimbursement  73
$123  Implement an Indexed Best Price Calculation in the Medicaid Drug Rebate Program  74
$185  Review Cost Effectiveness of Pay and Chase Methods for Medicaid Pharmacy Third-
Party Liability Recoveries  75
   
   
Table of Contents    Page v      Annual     
Savings   
(in Millions)  Page
 
Indian Health Service 
$8  Require Hospitals To Accept Medicare Rates in the Contract Health Services Program  76
 
National Institutes of Health 
$1  Propose Changes to Office of Management and Budget Circular A-21 Regarding 
Recharge Centers  77
 
Table of Contents    Page vi       
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Recommendations 
   
Hospitals 
 
Establish More Consistent Outpatient Surgery Rates  
That Reflect Only Necessary Costs  
 
Current Law:  The Medicare program covers hospital outpatient department services 
under the Medicare Supplemental Medical Insurance Program.  Medicare reimbursement 
for services in these settings varies and has evolved over time. 
 
Hospital outpatient departments were historically reimbursed for services using a facility 
fee based on the lesser of costs or charges.  In 1980, recognizing that some surgical 
procedures provided on an inpatient basis could be safely performed in less intensive and 
less costly settings, the Congress added coverage for services provided in ambulatory 
surgical centers (ASCs).  In 2000, CMS implemented an outpatient prospective payment 
system for hospital outpatient services.   
 
Proposal (TLegislative):  The CMS should (1) seek authority to set rates that are 
consistent across sites and reflect only the costs necessary for the efficient delivery of 
health services and (2) remove the procedure codes that meet its criteria for removal from 
the ASC list of covered procedures. 
 
Reason for Action:  Our review of 424 ASC-approved procedure codes showed that 
Medicare paid an estimated $1.1 billion more for services provided in settings with 
higher reimbursement in 2001.  For similar procedures, CMS could have saved an 
estimated $1 billion if the lower ASC rate had been used instead of the outpatient 
department rate.  Likewise, CMS could have saved $100 million if the lower outpatient 
department rate had been used instead of the ASC rate.  Additionally, if CMS had 
removed 72 procedure codes meeting the criteria for removal from the ASC list, it could 
have saved almost $8 million. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$1,100  $1,100  $1,100  $1,100  $1,100 
 
Status:  The CMS agreed to consider seeking authority to set rates that are consistent 
across sites as it develops its legislative program.  The agency has also issued a notice of 
proposed rulemaking which would remove certain procedure codes from the ASC list of 
covered procedures.  This rule has not yet been finalized.    
 
Report:   
A-14-89-00221 (final report, 3/91) 
A-14-98-00400 (final report, 11/98) 
OEI-09-88-01003 (final report, 5/89) 
OEI-05-00-00340 (final report, 1/03) 
New Recommendations--Centers for Medicare and Medicaid Services  Page 1   
Durable Medical Equipment 
 
Eliminate Semiannual Maintenance Payments for 
Capped Rental Equipment 
 
Current Law:  Medicare Part B covers certain durable medical equipment (DME) 
under the capped rental category.  Payments for capped rental equipment are made 
monthly and may not exceed 15 months of rental.  After the rental period, Medicare will 
pay for either continuing maintenance or repair of these items.   
     
Proposal (TLegislative):  The CMS should eliminate the semiannual maintenance 
payment allowed for capped rental equipment and pay for repairs only when needed.  The 
CMS also should consider whether eliminating the 15-month rental option is a viable 
solution.  By requiring any continual rentals to be converted to a purchase after the 13th 
month of rental, the need for the semiannual maintenance payment would be 
automatically eliminated.   
 
Reason for Action:  Medicare=s current policy of paying for maintenance and servicing 
of capped rental equipment is not cost effective.  Medicare pays substantially more in 
maintenance payments for rented items than it does for actual repairs on purchased 
equipment.  Medicare beneficiaries are receiving little or no routine maintenance on their 
rented equipment.   
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$98  $98  $98  $98  $98 
 
Status:  The CMS concurred with our recommendation and agreed to consider a 
legislative initiative to eliminate the 15-month rental option. 
 
    Report: 
    OEI-03-00-00410 (final report, 6/02)              
   
New Recommendations--Centers for Medicare and Medicaid Services  Page 2   
Adjust Reimbursement for Semi-Electric Hospital Beds 
 
Current Law:  Section 1834 of Title XVIII of the Social Security Act contains special 
payment rules for six categories of DME. 
 
Proposal (TRegulatory):  The CMS should issue a final rule on the application of its 
inherent reasonableness authority so that this authority can be used to adjust the fee 
schedule amounts for procedure code E0260 pertaining to semi-electric hospital beds. 
 
Reason for Action:  Our review disclosed that Medicare Part B fee schedule amounts 
for semi-electric hospital beds remain high.  Code E0260 fee schedule amounts were 
excessive when compared with combinations of other fee schedule amounts, such as code 
E0294 plus either E0305 or E0310 for a semi-electric hospital bed with a mattress plus 
side rails.  We estimated that using the alternative code combinations could save 
approximately $34.3 million per year, consisting of $25.9 million for monthly rental 
payments and $8.4 million for maintenance and servicing fees. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$34.3  $34.3  $34.3  $34.3  $34.3 
 
Status:  The CMS issued a new version of an interim final rule on inherent 
reasonableness on December 13, 2002.  However, the rule noted that the Congress placed 
significant importance on a 15 percent criterion and stated, A payment amount will 
not be considered excessive or grossly deficient if the overall payment adjustment is less 
than 15 percent. 
 
Report: 
A-09-01-00109 (final report, 12/02) 
                                    
 
       
New Recommendations--Centers for Medicare and Medicaid Services  Page 3     
Medicare Managed Care 
 
Expedite the Phase-in of Risk Adjustment Factors  
 
Current Law:  The Balanced Budget Act of 1997 required that CMS implement, by 
January 1, 2000, a risk adjustment methodology to account for variations in per capita 
costs based on the health of individual enrollees.  The methodology involves basing 
payments to Medicare+Choice organizations (MCOs) on the health of enrollees in the 
preceding year.  From 2000 through 2003, 10 percent of the payments would be based on 
the risk adjustment.  This phase-in would continue until 2007, when 100 percent of the 
payments would be risk adjusted.   
     
Proposal (TLegislative):  The CMS should seek legislation to expedite the phase-in of 
full risk adjustment factors before 2007. 
  
Reason for Action:  Our review of beneficiaries residing in nursing homes disclosed 
that the aggregate amount of Medicare payments to MCOs appeared reasonable for the 
beneficiary population.  For individual MCOs, however, we noted a wide disparity 
between the Medicare payments and the cost of medical care provided to enrolled 
beneficiaries.  A number of the MCOs in our review were significantly overpaid or 
underpaid for the medical services provided to the sampled beneficiaries.  This disparity 
was mitigated when Medicare payments were recomputed based on the full risk 
adjustment factors. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS did not concur with our recommendation to hasten the phase-in.  The 
agency believed that because our review evaluated a relatively small number of 
institutionalized beneficiaries, the impact on MCO payments may also be small. 
 
Report:  
A-05-00-00015 (final report, 7/02) 
     
New Recommendations--Centers for Medicare and Medicaid Services  Page 4         
Monitor Managed Care Organizations Rate Proposals  
 
Current Law:  To participate in the Medicare+Choice program, each MCO must 
submit an adjusted community rate proposal to CMS before the contract period begins.  
The proposal is integral to pricing an MCOs benefit package, computing excess amounts 
(if any) in Medicare capitation payments, and determining additional and supplemental 
benefits or premiums that could be charged to Medicare enrollees.   
 
Proposal (TProcedural):  The CMS should monitor adjusted community rate 
proposals to ensure the accuracy of the data, work with MCOs in addressing the 
deficiencies noted in annual audits of the proposals, ensure that MCOs have accounting 
systems and procedures in place to properly prepare their proposals, and initiate the 
return of funds for those plans that overcharged their enrollees. 
 
Reason for Action:  Our reviews of 186 rate proposals submitted by 55 MCOs found 
that: 
 
  49 percent were not prepared in accordance with CMS instructions; 
 
  66 percent contained errors that affected at least one of the three components 
of an adjusted community rate; and 
 
  36 percent overstated the beneficiary premium/cost-sharing amounts, and/or 
the MCO should have offered additional benefits had the amounts for direct 
medical care, administration, average payment rate, and copayments been 
properly calculated. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS generally concurred with the recommendations.  However, CMS had 
concerns with the methodology that it thought we had used in calculating the impact on 
Medicare beneficiaries from overcharges and/or forfeited additional benefits.  
 
Report: 
A-09-01-00051 (final report, 7/02) 
New Recommendations--Centers for Medicare and Medicaid Services  Page 5   
Other Medicare Reimbursement 
 
Recover Overpayments and Prevent Inappropriate Medicare Part B 
Payments for Nail Debridement and Related Services 
 
Current Law:  Podiatry services, including nail debridement, performed within the 
scope of applicable state licenses are generally reimbursable under the Medicare 
program. 
     
Proposal (TProcedural):  The CMS should (1) require Medicare carriers to recoup the 
overpayments found in our sample and to carefully scrutinize payments for nail 
debridement services through medical reviews, (2) require podiatrists to adequately 
document the medical necessity of all nail debridement services, and (3) require the CMS 
regional offices and carriers to educate podiatrists on Medicare payment policies for nail 
debridement claims. 
 
Reason for Action:  Based on our medical review of calendar year 2000 claims, we 
estimated that $51.2 million was inappropriately paid for nail debridement services.  Over 
half of these nail debridement claims contained related podiatry services.  When a nail 
debridement service is determined to be inappropriate, all podiatry payments for related 
services are also inappropriate.  Medicare paid $45.6 million for such related services. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$96.8  $96.8  $96.8  $96.8  $96.8 
 
Status:  The CMS concurred with our recommendations.  The agency planned to 
continue to maximize the effectiveness of its medical review strategy, collect the 
overpayments identified in our sample, and educate podiatrists on Medicare policy for 
paying nail debridement claims. 
 
    Report: 
    OEI-04-99-00460 (final report, 6/02) 
New Recommendations--Centers for Medicare and Medicaid Services  Page 6   
Administration on Aging 
 
Use Voluntary Contributions To Expand Services for the Elderly 
 
  Current Law:  Current AoA regulations permit states to use voluntary contributions to 
meet cost-sharing or matching grant requirements.  This use of contributions is contrary 
to the Older Americans Act, which requires that voluntary contributions be used to 
increase services for the elderly. 
 
Proposal (TRegulatory):  The AoA should revise its regulations in accordance with 
the Older Americans Act.  
 
Reason for Action:  According to their financial status reports, 28 states and the 
District of Columbia erroneously used $90.8 million in voluntary contributions in  
FY 1996 and $64.6 million in the first 6 months of FY 1999 to meet matching 
requirements of their grant agreements.   
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$90.8  $90.8  $90.8  $90.8  $90.8 
 
Status:  The AoA agreed with the recommendation; officials informed us that this issue 
was under review by the Office of General Counsel and that new regulations were being 
developed. 
 
Report:  
A-12-00-00002 (final report, 2/01) 
 
                                    
 
       
New RecommendationsAdministration on Aging    Page 7                             
   
   
   
   
   
   
   
   
   
   
   
   
   
   
 
Previous Recommendations 
   
Hospitals 
 
Continue Mandated Reductions in Hospital Capital Costs 
 
Current Law:  In October 1991, CMS began a 10-year transition period for paying 
inpatient hospital capital-related costs under a prospective payment system.  The rates are 
based on historical costs, less a mandated reduction of 7.4 percent under the Omnibus 
Budget Reconciliation Act of 1993. 
     
Proposal (TLegislative):  The CMS should (1) seek legislative authority to continue 
mandated reductions in capital payments beyond FY 1995 and (2) determine the extent 
that capital payment reductions are needed to fully account for hospitals' excess bed 
capacity and report the percentage of reduction to the Congress. 
 
Reason for Action:  Hospital capital costs soared during the first 5 years of the 
prospective payment system for inpatient hospital costs, despite low bed occupancy.  The 
Medicare system of reimbursing capital costs on a pass-through basis (i.e., reimbursed 
outside the diagnosis-related group (DRG)) was a major reason for this increase.  Paying 
capital costs prospectively, as required by regulation, should assist in curbing escalating 
costs.  However, the prospective 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  $1,140  $1,450  $1,840 
 
Status:  The CMS did not agree with our recommendation.  Although the Balanced 
Budget Act of 1997 reduced capital payments, it did not include the effect of excess bed 
capacity and other elements included in the base-year historical costs.  The Presidents 
FY 2001 budget proposed reducing capital payments and saving $630 million from  
FY 2001 through FY 2005. 
 
    Report: 
A-09-91-00070 (final report, 4/92) 
A-14-93-00380 (final report, 4/93) 
                 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 8   
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.  The system 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 prospective payment system for capital costs for cost reporting periods 
beginning in FY 1992. 
     
Proposal (TLegislative):  The CMS should (1) consider seeking legislation to reduce 
payment rates by 7.5 percent to more accurately reflect costs of the base year used for the 
capital cost prospective payment system and (2) continue to monitor the most current 
data and make any necessary further adjustments to the base rate. 
 
Reason for Action:  While CMS took care to devise and implement an equitable 
prospective payment system for capital costs, some future cost items had to be estimated.  
A few years later, when actual data were available, we compared CMS's estimates with 
the actual data and found, in some cases, that the estimates were too high.  A 7.5-percent 
reduction would correct all forecasting estimates that CMS had to make in arriving at an 
anticipated rate to implement the capital cost prospective payment system.  The total 
effect of overpayments in relation to costs used as the basis for this system gradually 
increased from 1996 until the system was fully implemented in 2002.   
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$249  $284  $319  $354  $388 
 
Status:  The CMS agreed that the capital rate reflected an overestimation of base-year 
costs, and the Balanced Budget Act of 1997 provided for a reduction in capital payments 
for 1998-2002.  However, we believe that CMS should continue to monitor current data 
since additional reductions may be warranted in the future. 
 
    Report: 
    A-07-95-01127 (final report, 8/95)               
       
       
       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 9   
Collect Overpayments for Prospective Payment System Transfers 
Incorrectly Reported as Discharges 
 
Current Law:  In implementing the Medicare Part A prospective payment system, 
CMS issued 42 CFR 412.4, which sets forth the basic rules for patient transfers.  Section 
412.4(b) states that a discharge of a hospital inpatient is considered to be a transfer if the 
discharge is made from a hospital to another hospital that is paid under the prospective 
payment system or that is excluded from the payment system because of participation in 
an approved statewide cost control program.  In addition, section 412.4 indicated that a 
discharge from one inpatient area to another inpatient area of a prospective payment 
system hospital constitutes a transfer. 
 
Proposal (TProcedural):  The CMS should issue instructions to and work with fiscal 
intermediaries to collect the $163.9 million in potential overpayments identified for the 
period January 1, 1992, to June 30, 2000.  The CMS should also issue clarifying 
instructions to intermediaries and hospitals regarding prospective payment system 
transfers. 
 
Reason for Action:  For a number of years, OIG and CMS have been concerned about 
hospitals incorrect reporting of prospective payment system transfers as discharges and 
fiscal intermediaries failure to detect and correct these errors.  Previous OIG and joint 
OIG/CMS efforts in this area resulted in over $219 million in recoveries. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
                   
Status:  The CMS concurred with our recommendation to collect potential 
overpayments but stated that it would initially limit the recovery effort to the last 4 years 
to comply with the cost report reopening period designated in 42 CFR 405.750.  In 
September 2001, CMS advised the intermediaries to recover overpayments on the claims 
we identified that were 4 years old or less from the date of initial determination (bill 
processing date).  Medicare regulations allow CMS to reopen claims up to 4 years after 
the date of initial determination upon establishment of good cause and at any time when 
the payment decision involves fraud or similar fault.  The CMS and OIG are conducting 
further reviews to determine whether any of the cases that occurred more than 4 years 
ago merit reopening under the regulations.  As we provide the information, the 
intermediaries are beginning to recover overpayments.   
 
Report: 
A-06-00-00041 (final report, 11/01)   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 10   
Reduce the Prospective Payment System Adjustment Factor  
for Indirect Medical Education Costs 
 
Current Law:  Since the inception of the Medicare prospective payment system, 
indirect medical education payments have been paid only to teaching hospitals to address 
the presumably higher costs incurred by these hospitals.  The CMS and the Congress 
determined the indirect medical education adjustment factor.  Using historical data and 
regression analysis, CMS compared costs per case in teaching and nonteaching hospitals 
and determined that operating costs in hospitals with teaching programs increased 
approximately 5.79 percent for every 0.1 resident physician per hospital bed compared 
with hospitals without teaching programs.  Under a congressional mandate, CMS was 
required to double the adjustment factor under the prospective payment system--
increasing it to 11.59 percent.   
     
The Consolidated Omnibus Budget Reconciliation Act of 1985 reduced the indirect 
medical education 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 adjustment by reducing it to 
approximately 7.7 percent for each 0.1 in the ratio of interns and residents to beds.    
 
Proposal (TLegislative):  The indirect medical education adjustment factor should be 
reduced to the level supported by CMS empirical data, and further studies should be 
made to determine whether different adjustment factors are warranted for different types 
of teaching hospitals.   
 
Reason for Action:  Our extensive analytical work showed that teaching hospitals 
earned substantial profits.  In addition, a Prospective Payment Assessment Commission 
report found that the indirect medical education adjustment substantially overlapped with 
the disproportionate share adjustment at teaching hospitals and that these payments were 
a major source of revenue for some hospitals. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS agreed with our recommendation.  In addition, the Balanced Budget 
Act of 1997, as amended by the Balanced Budget Refinement Act of 1999, reduced the 
indirect medical education adjustment factor from 7.7 percent in FY 1997 to 5.5 percent 
in 2002 and thereafter.  We believe that the factor should be further reduced to eliminate 
any overlap with the disproportionate share adjustment. 
 
    Report: 
    A-07-88-00111 (final report, 9/89) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 11   
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 direct costs of graduate medical education.  
Under the revised methodology, costs are reimbursed on a "hospital specific" prospective 
payment basis, which is based on a hospitals graduate medical education costs per 
resident in the cost reporting period that began during federal FY 1984. 
     
Proposal (TLegislative, TRegulatory):  The CMS should (1) revise the regulations to 
remove from a hospital's allowable graduate medical education base-year costs any cost 
center with little or no Medicare utilization and (2) submit a legislative proposal to 
compute Medicare's percentage of participation under the former, more comprehensive 
system. 
 
Reason for Action:  The CMS estimated that the revised graduate medical education 
methodology would result in substantial Medicare savings.  Our review indicated that 
Medicare costs under this methodology could actually increase because of two factors.  
First, the revised system allows hospital cost centers with little or no Medicare patient 
utilization to receive increased importance in the calculation of graduate medical 
education reimbursement.  Second, the Medicare patient load percentage used to compute 
Medicare's share of these costs is based on inpatient data only and is higher than 
Medicare's overall share of graduate medical education 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 
 
*When the two proposed changes are handled as one combined calculation, the savings 
are less than those from calculating the effect of the changes separately. 
 
Status:  The CMS did not concur with our recommendations.  Although the Balanced 
Budget Act of 1997 and the Balanced Budget Refinement Act of 1999 contained 
provisions to slow the growth in Medicare spending on graduate medical education, we 
continue to believe that our recommendations should be implemented and that further 
savings can be achieved. 
 
    Report: 
    A-06-92-00020 (final report, 4/94) 
             
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 12   
Deny Medicare Reimbursement for Patients Who Receive  
Substandard Medical Care 
 
Current Law:  Under Medicare, hospitals receive a pre-established payment for each 
discharge based on an assigned DRG.  Each DRG results in an associated payment that 
represents an average cost for patients having similar diagnoses.  The Congress 
established quality improvement organizations to protect the integrity of the prospective 
payment system and to maintain the quality of care.  The Consolidated Omnibus Budget 
Reconciliation Act of 1985 authorized these organizations to deny Medicare 
reimbursement for patients who receive substandard medical care, defined as medical 
care clearly failing to meet professionally recognized standards. 
     
Proposal (TRegulatory):  The CMS should increase efforts to identify and address 
poor quality of care in hospitals by issuing regulations to implement the provisions of the 
1985 act. 
 
    Reason for Action:  Of the patients sampled, 6.6 percent received poor quality of care. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  In 1989, CMS issued a notice of proposed rulemaking to authorize the quality 
improvement organizations to deny Medicare reimbursement for patients who received 
substandard medical care.  The CMS has not yet issued a final regulation. 
 
    Report: 
    OEI-09-88-00870 (final report, 7/89) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 13   
Modify Payment Policy for Medicare Bad Debts 
 
Current Law:  Under Medicare's inpatient hospital prospective payment system, 
hospitals are reimbursed for inpatient services rendered to Medicare beneficiaries by a 
fixed payment amount based on a DRG.  However, bad debts related to unpaid Medicare 
deductible and coinsurance amounts are reimbursed separately as pass-through items 
(i.e., reimbursed outside the DRG) under reasonable cost principles. 
     
Proposal (TLegislative):  We presented four options for CMS to consider, including 
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 
prospective payment system hospitals that are profitable in Medicare operations, and the 
inclusion of a bad debt factor in the DRG rates.  The CMS should seek legislative 
authority to further modify bad debt policies. 
 
Reason for Action:  The CMS records showed that total Medicare bad debts increased 
from $366 million in FY 1993 to almost $574 million in FY 1997.  During this same 
period, hospitals continued to earn significant profits.  Although regulations provide that 
hospitals must be able to establish that they made reasonable bad debt collection efforts, 
such efforts have often been less than adequate; hospitals have little incentive to 
aggressively 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 
$340  $485  $485  $485  $485 
     
    *Amounts total the savings shown in the Presidents FY 2001 budget. 
 
Status:  In responding to our report, CMS agreed with the recommendation to include a 
bad debt factor in the DRG rates.  The Balanced Budget Act of 1997 provided for some 
reduction of bad debt payments to providers.  The Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act (BIPA) of 2000 subsequently increased bad 
debt reimbursement.  Currently, Medicare pays 70 percent of allowable bad debts.  
Additional legislative changes are required to implement the modifications we 
recommended. 
 
    Report: 
    A-14-90-00339 (final report, 6/90) 
                       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 14   
More Closely Monitor Same-Day Hospital Readmissions   
 
Current Law:  The Social Security Amendments of 1983 provided for establishing a 
prospective payment system for Medicare payment of the operating costs of inpatient 
hospital services.  Under this system, hospitals are paid a predetermined rate for each 
patient discharge.  In the past, quality improvement organizations regularly reviewed a 
CMS-generated sample of hospital readmission claims to determine whether patients 
were prematurely discharged from the first confinement, thus causing a readmission.  
These regular reviews were discontinued in 1993, but the quality improvement 
organizations continue to make retrospective reviews of premature discharges in other 
contexts. 
     
Proposal (TProcedural):  The CMS should work with OIG in reviewing hospital 
readmissions to identify overpayments, monitor the quality of hospital care, profile 
aberrant hospital providers, and ensure that corrective action plans are instituted and 
appropriate referrals are made to the OIG.  The CMS should also reinstate hospital 
readmission reviews by quality improvement organizations. 
 
Reason for Action:  Hospital readmissions to the same prospective payment system 
hospital on the same day of discharge are vulnerable to improper payments and may be 
indicative of problems with quality of care, such as premature hospital discharges.  Other 
problems include separate claims for one continuous stay, medically unnecessary 
readmissions for services that could have been provided in a less acute setting, and DRG 
upcoding.   
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$22  $22  $22  $22  $22 
 
Status:  The CMS agreed to further work with OIG to better monitor quality-of-care and 
overpayment issues associated with hospital readmissions.  At CMSs request, OIG 
provided CMS with further analysis of the patterns of readmissions. 
 
    Report: 
A-01-98-00504 (final report, 5/99) 
A-14-99-00401 (final report, 2/00) 
                       
       
       
 
                       
       
           
             
           
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 15   
More Closely Monitor 1-Day Inpatient Hospital Stays 
 
Current Law:  Under the prospective payment system, hospitals are reimbursed for 
each admission when the patient is discharged based on established rates which are 
grouped into DRGs.  Hospitals generally receive the full DRG payment for each 
discharge regardless of the beneficiarys length of stay in the hospital. 
 
Proposal (TProcedural):  The CMS should expand its initiative, which began in a 
limited number of states, to conduct 1-day inpatient hospital stay reviews on a nationwide 
basis. 
 
Reason for Action:  The number of 1-day inpatient stays has increased significantly 
over the past several years.  Such stays, many of which are observational, are vulnerable 
to billing errors.  There is concern that the number of 1-day inpatient stays may continue 
to increase since the new hospital outpatient prospective payment system does not 
reimburse separately for observational stays; as a result, hospitals could inappropriately 
code these stays as inpatient stays. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  Recognizing that 1-day inpatient stays may represent a current problem, CMS 
agreed to instruct the quality improvement organizations to include these stays in their 
analysis. 
 
    Report: 
A-05-89-00055 (final report, 7/89)  
A-05-92-00006 (final report, 1/92) 
A-03-00-00007 (final report, 4/01) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 16   
Prevent Overpayments Under Medicares  
Postacute Care Transfer Policy 
 
Current Law:  The Balanced Budget Act of 1997 required implementation of a transfer 
policy to reduce inpatient payment rates when prospective payment system hospitals 
discharge beneficiaries in specified DRGs to certain postacute care settings.   
     
Proposal (TProcedural):  The CMS should establish edits in the Common Working 
File to compare beneficiary inpatient claims potentially subject to the postacute care 
transfer policy with subsequent postacute claims. 
 
Reason for Action:  We estimated that for the initial 2-year period of the postacute 
care transfer policy, the Medicare program paid approximately $116 million in excessive 
payments to prospective payment system hospitals as a result of these erroneously coded 
discharges.  Our reviews indicated that the Common Working File had no controls or 
edits in place to prevent excessive payments to such hospitals for erroneously coded 
qualified discharges that are followed by postacute care. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$61  $61  $61  $61  $61 
 
Status:  The CMS concurred with our recommendations.  Until the edits are in place, we 
will continue our work to identify additional overpayments. 
 
    Report: 
A-04-00-01210 (final report, 12/00) 
A-04-00-02162 (final report, 2/01) 
A-04-00-01220 (final report, 10/01) 
A-04-02-07005 (final report, 4/03) 
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 17   
Recover Overpayments and Expand the Diagnosis-Related Group 
Payment Window 
 
Current Law:  Under the prospective payment system for inpatient hospital services, 
Medicare fiscal intermediaries reimburse hospitals a predetermined amount for inpatient 
services furnished to Medicare beneficiaries depending on the illness and its 
classification under a DRG.  Currently, separate payments for nonphysician outpatient 
services (such as diagnostic tests and laboratory tests) provided to a patient during the  
3 days immediately preceding the patients admission are not permitted under the 
Omnibus Budget Reconciliation Act of 1990, section 4003.  
     
Proposal (TLegislative):  The CMS should propose legislation to expand the DRG 
payment window to at least 7 days immediately before the day of admission. 
 
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.  Since the intent of the prospective payment system has always been to 
include related services under one prospective payment, it would seem appropriate that 
the DRG payment window encompass a longer period. 
 
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 CMS did not concur with the recommendation and has not pursued a 
legislative proposal. 
 
    Report: 
    A-01-92-00521 (final report, 7/94) 
 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 18   
Adjust Base-Year Costs in the Prospective Payment System for 
Hospital Outpatient Department Services 
 
Current Law:  The Balanced Budget Act of 1997 required CMS to develop a 
prospective payment system for hospital outpatient department services.  The act required 
CMS to use 1996 hospital claim data and the most recent available cost report data to 
develop the rates. 
     
Proposal (TLegislative):  The CMS, in conjunction with OIG, should further examine 
the extent to which the base-period costs used in the prospective payment rate 
calculations included unallowable costs and improper payments.  If this work reveals that 
excessive unallowable costs and improper payments were included in the calculations, 
appropriate adjustments should be made. 
 
Reason for Action:  We are concerned about the reliability of the claim and cost data 
that CMS used in the prospective payment rate calculations.  Our prior audit work 
identified substantial unallowable costs in hospitals Medicare cost reports and several 
areas of payment improprieties in Medicare reimbursement for outpatient department 
services.  Since the prospective payment fee schedules and expenditure ceiling are based 
on prior Medicare outpatient reimbursement, we believe that the rates may be inflated 
and that hospitals will realize windfall profits at Medicares expense. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS agreed with our recommendations and stated that further work should 
be done to examine the adequacy of base-year costs. 
 
    Report: 
    A-14-98-00400 (final report, 11/98) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 19   
Preclude Payment for Mutually Exclusive Procedure Codes for 
Hospital Outpatient Services 
 
Current Law:  The CMS requires Medicare carriers to implement edits for mutually 
exclusive procedure codes in their claim processing systems.  Mutually exclusive 
procedure codes represent medical services that cannot reasonably be performed in the 
same session to the same patient by the same provider.  When the edits identify pairs of 
mutually exclusive codes, the procedure with the lowest work-relative value unit is 
allowed and the matching procedure is denied. 
     
Proposal (TProcedural):  The CMS should instruct fiscal intermediaries to implement 
edits to preclude payment for Medicare Part B mutually exclusive procedure codes and 
notify hospitals that Medicare Part B will no longer pay for mutually exclusive procedure 
codes related to radiology and pathology/laboratory services. 
 
Reason for Action:  While CMS established edits to preclude payment for certain 
Medicare Part B mutually exclusive services provided in doctors offices or clinics, 
payment was not prevented for the same types of services provided in hospital outpatient 
departments.  Of particular dollar significance was payment for mutually exclusive 
radiology and pathology/laboratory services.  Unlike Medicare carriers, fiscal 
intermediaries were not provided written instructions to implement edits that would 
preclude payment of mutually exclusive procedure codes to hospital outpatient 
departments. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$14.55  $14.55  $14.55  $14.55  $14.55 
 
Status:  The CMS agreed to instruct fiscal intermediaries to implement edits addressing 
mutually exclusive procedure codes.  The edits for hospital outpatient services were 
implemented as a component of the correct coding initiative edits when the new 
outpatient prospective payment system was implemented, effective August 1, 2000.  The 
CMS also agreed to notify hospitals that Medicare Part B would no longer pay for 
mutually exclusive procedure codes related to radiology and pathology/laboratory 
services. 
 
    Report: 
    A-01-98-00507 (final report, 5/99) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 20   
Apply a 190-Day Lifetime Limit and a 60-Day Annual Limit on 
Medicare Inpatient Psychiatric Care  
 
Current Law:  Medicare limits inpatient care in psychiatric hospitals to 190 days 
during a beneficiary's lifetime.  When Medicare was established, inpatient psychiatric 
care was rendered, for the most part, in state psychiatric hospitals.  The Congress 
apparently believed that long-term care of the mentally ill was generally a state 
responsibility.  The delivery of inpatient psychiatric care has since expanded beyond 
psychiatric hospitals to general hospitals with distinct psychiatric units.  The 190-day 
limit was not extended to these more costly general hospital units.   
     
Proposal (TLegislative):  The CMS should develop new limits to deal with the high 
cost and changing patterns of utilization of inpatient psychiatric services.  A 60-day 
annual and a 190-day lifetime limit should be applied to all psychiatric care regardless of 
the place of service. 
 
Reason for Action:  The Medicare lifetime limit on psychiatric hospital care is no 
longer effective because of changed patterns of inpatient psychiatric care.  Over  
82 percent of the $1.36 billion in program payments for inpatient psychiatric care is paid 
to general hospitals--where the lifetime limit does not apply.  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 that 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 CMS agreed with our findings but stated that further analysis would be 
required before any legislative changes could be supported.   
 
    Report: 
    A-06-86-62045 (final report, 2/88) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 21   
Eliminate Provider-Based Designations or Improve  
Management and Oversight 
 
Current Law:  Hospitals often purchase a variety of other medical entities, such as 
physician practices, nursing facilities, and home health agencies.  Under Medicare, 
hospitals may account for medical entities they own either as freestanding or as part of 
the hospital.  If a hospital accounts for an entity as part of the hospital, it is referred to as 
a provider-based arrangement.  This arrangement requires approval from CMS.  
Provider-based status increases costs for Medicare and its beneficiaries. 
     
Proposal (TLegislative, TProcedural):  The CMS should eliminate provider-based 
designations for hospital-owned physician practices and other entities.  Otherwise, CMS 
should (1) seek legislation to impose penalties when hospitals fail to report ownership of 
other entities or bill for these entities inappropriately; (2) improve the data systems used 
to identify and track provider-based designations and clarify policies and procedures for 
tracking, approving, and evaluating provider-based status; and (3) require that all 
hospitals claiming provider-based status reapply. 
 
Reason for Action:  Our inspections found that hospitals purchased entities such as 
physician practices and billed for these entities as provider-based without CMS approval.  
The CMS regional offices and fiscal intermediaries did not consistently follow CMS 
processes for review and approval of provider-based status and were frequently unaware 
of hospital practices in purchasing and billing for other entities.  At issue is whether the 
site, or ownership of the site where the service is rendered, should dictate a higher 
payment by Medicare and the beneficiary. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS published a final rule establishing strict criteria for obtaining 
provider-based status.  The metholology for determining such status is undergoing 
clarification, and a provider-based questionnaire is being developed.  All provider-based 
physician practices will be required to obtain provider-based designations from the CMS 
regional offices.  As part of its proposed provider revalidation effort, CMS is considering 
collecting information on physician practices being billed as provider-based 
arrangements. 
 
    Report: 
OEI-05-98-00110 (final report, 9/99) 
OEI-04-97-00090 (final report, 8/00) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 22   
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 before 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 program or unless, with some exceptions, 
they were covered under a qualified retirement system offered by their employers.  (See 
the Omnibus Budget Reconciliation Act of 1990.) 
     
Proposal (TLegislative):  Medicare coverage and hospital insurance contributions 
should be required for all state and local employees, including those hired before April 1, 
1986.  If this proposal is not enacted, CMS should seek legislation making Medicare the 
secondary payer for retirees from exempt state and local agencies. 
 
Reason for Action:  Retirees from exempt agencies paid significantly lower taxes than 
nonexempt retirees.  We estimated that over a 9-year period (1982-1990), Medicare 
would have spent about $16.9 billion in benefits for these retirees.  However, only an 
estimated $2.7 billion of taxes, with interest, would 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 that did not pay the employer's share of hospital insurance 
contributions will have the windfall advantage of Medicare as the primary payer of health 
costs for retirees over age 65.  Both conditions unfairly drain the hospital 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:  In responding to our report, CMS agreed with the recommendation to mandate 
Medicare coverage for all state and local government employees.  However, the proposal 
was not included in the President's FY 2003 budget.  The CMS did not agree with our 
recommendation to make Medicare the secondary payer, noting, among other things, that 
this would eventually be more costly for the exempt agencies than mandated coverage. 
 
    Report: 
    A-09-88-00072 (final report, 2/89) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 23   
End Stage Renal Disease 
 
Reduce Medicare End Stage Renal Disease Payment Rates 
 
Current Law:  The Omnibus Budget Reconciliation Act of 1981 established a 
prospective payment system for outpatient dialysis treatments under Medicare's end stage 
renal disease (ESRD) program.  To reimburse facilities for these treatments, CMS pays a 
composite rate per treatment based on audited median costs.  In FY 1989, payments 
averaged $125.05 per treatment for freestanding facilities and $129.11 for hospitals.    
     
Proposal (TLegislative):  The CMS should reduce the payment rates for outpatient 
dialysis treatments to reflect current efficiencies and economies in the marketplace. 
 
Reason for Action:  Both 1985 and 1988 audited data justify a decrease in the payment 
rate.  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, the in-facility 
costs 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 showed that its costs decreased from $117 per treatment in 1980 to 
$89 in 1988.  Due to the prominence of this chain, these audited costs have a significant 
impact on the median cost of dialysis treatments.  We estimated that this chain was 
earning $36 per treatment, a 29-percent profit margin for each treatment in 1988. 
 
Savings (in Millions):* 
FY 1  FY 2  FY 3  FY 4  FY 5 
$22  $22  $22  $22  $22 
     
*This estimate represents program savings of $22 million for each dollar reduction in the 
composite rate. 
 
Status:  The CMS agreed that the composite payment rates should reflect the costs of 
outpatient dialysis treatment in efficiently operated facilities, and the Balanced Budget 
Act of 1997 required the Secretary to audit the cost reports of each dialysis provider at 
least once every 3 years.  The Balanced Budget Refinement Act of 1999 increased each 
composite rate payment for dialysis services furnished during 2000 by 1.2 percent above 
the payment for services provided on December 31, 1999.  The BIPA of 2000 increased 
the payment rate for services provided in 2001 by 2.4 percent and required the Secretary 
to develop a composite rate that includes, to the maximum extent feasible, payment for 
clinical diagnostic laboratory tests and drugs that are routinely used in dialysis treatments 
but are currently separately billable by dialysis facilities.   
 
    Report: 
    A-14-90-00215 (final mgmt. advisory report, 7/90) 
                       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 24   
Reduce the Epogen Reimbursement Rate 
 
Current Law:  Section 1881(b)(11)(B) of the Social Security Act provided that the 
Secretary of HHS may set an appropriate reimbursement level for the drug Epogen  
beginning January 1, 1995. 
     
Proposal (TLegislative, TRegulatory):  The Secretary should consider reducing the 
current Medicare reimbursement rate for Epogen from $10 to $9 per 1,000 units 
administered.  This reduction would result in savings to Medicare of approximately  
$94 million and to its beneficiaries of approximately $24 million per year. 
 
Reason for Action:  The current Epogen reimbursement rate of $10 per 1,000 units 
administered exceeds the current purchase cost by approximately $1.  Of 105 providers 
randomly selected for review, 95 paid less than $9 per 1,000 units of Epogen. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$94  $94  $94  $94  $94 
 
Status:  The BIPA of 2000 increased the payment rate for services provided in 2001 by 
2.4 percent and required the Secretary to develop a composite rate that includes, to the 
maximum extent feasible, payment for clinical diagnostic laboratory tests and drugs 
(including Epogen) that are routinely used in dialysis treatments but are currently 
separately billable by dialysis facilities. 
 
    Report: 
    A-01-97-00509 (final report, 11/97) 
                 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 25   
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, as explained by CMS in the Medicare carrier manual, section 2120.  The transport 
is not covered if it fails to meet the medical necessity requirement, even if it meets other 
requirements. 
     
Proposal (TProcedural):  The CMS should ensure that claims meet Medicare 
coverage guidelines. 
 
Reason for Action:  Seventy percent of transports involving dialysis in our sample did 
not meet Medicare guidelines for medical necessity because beneficiaries did not have 
conditions that contraindicated use of another type of transport on the date of ambulance 
service.  These claims represented an estimated $65.7 million in 1993.  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 
$90  $99  $100  $101  $102 
 
Status:  The CMS concurred with our recommendation.  In January 1999, CMS issued a 
regulation that addressed ambulance payment issues and required physician certification 
of nonemergency transports.  However, payments for this group of beneficiaries are 
particularly problematic; we plan to conduct additional analytical work on this topic. 
 
    Report: 
    OEI-03-90-02130 (final report, 8/94) 
                       
       
       
       
 
       
 
                       
       
       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 26   
Modify Payment System for Ambulance Services for  
End Stage Renal Disease Beneficiaries 
 
Current Law:  Medicare Part B covers ambulance services under certain conditions.  
Ambulance transport must be reasonable and medically necessary.  Ambulance company 
services and charges are represented by alphanumeric codes, which the Medicare 
program uses to analyze utilization and payments.  Persons with ESRD are entitled to 
Medicare coverage under the 1972 amendments to the Social Security Act. 
     
Proposal (TLegislative, TRegulatory):  The CMS should ensure appropriate 
payment for services rendered and may consider using one or more of the following 
strategies:  (1) establish a payment schedule for ambulance transport to maintenance 
dialysis, and set the fee lower than that paid for unscheduled, emergency transports; 
(2) negotiate preferred provider agreements with ambulance companies to provide 
scheduled transportation for ESRD beneficiaries; (3) use competitive bidding to establish 
a price for scheduled transports for ESRD beneficiaries or to select companies that 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 that 
Medicare pays dialysis facilities, and allow the facilities to negotiate agreements with 
ambulance companies. 
 
Reason for Action:  The payment system does not take into account the routine, 
predictable nature of scheduled ambulance transports, nor does it 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 
 
Status:  The CMS established codes for scheduled transport and required uniform use of 
national ambulance codes but did not modify the payment method.  In June 1997, CMS 
issued a notice of proposed rulemaking which would require physician certification of 
nonemergency transports.  The Balanced Budget Act of 1997 authorized the 
establishment of a fee schedule for ambulance services which links payments to the type 
of services provided. 
 
    Report: 
    OEI-03-90-02131 (final report, 3/94)  
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 27    
Durable Medical Equipment 
   
Identify Medical Equipment/Supply Claims Lacking Valid, Active 
Unique Physician Identification Numbers 
 
Current Law:  The Consolidated Omnibus Budget Reconciliation Act of 1985 required 
CMS to establish unique physician identification numbers for all physicians who provide 
services to Medicare beneficiaries.  Medicare requires that medical equipment and 
supplies be ordered by a physician or another qualified practitioner.  
     
Proposal (TProcedural):  The CMS should create edits to identify medical equipment 
and supply claims that do not have a valid and active physician identification number 
listed for the ordering physician. 
 
Reason for Action:  Our review of 1999 claims identified $32 million in Medicare 
payments for claims with invalid unique identification numbers listed for the ordering 
physicians.  Another $59 million was paid for claims with inactive identification 
numbers.  A small number of suppliers accounted for a substantial portion of these 
claims. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$91  $91  $91  $91  $91 
 
Status:  The CMS concurred with our recommendation.  The agency planned to 
implement an edit to reject claims listing a deceased physicians identification number 
beginning in April 2002 and to later expand this edit to include all inactive and invalid 
physician identification numbers.   
 
    Report: 
    OEI-03-01-00110 (final report, 11/01) 
                           
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 28   
Prevent Medicare Losses Resulting From Early Payments  
for Medical Equipment 
 
Current Law:  Medicare covers DME, prosthetics, orthotics, and supplies under 
Medicare Part B.  Medicare allowed approximately $6 billion for these claims in 1998.   
     
Proposal (TRegulatory):  The CMS should not pay for DME, prosthetics, orthotics, 
and supply claims before the service period has been completed. 
 
Reason for Action:  We found that Medicare could have earned an additional  
$7.2 million in interest on 1998 payments for claims that were billed before the end of  
the service period.  Four of seven insurers surveyed did not pay for services before the 
service period was completed. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$7.2  $7.2  $7.2  $7.2  $7.2 
 
    Status:  The CMS did not concur with our recommendation. 
 
    Report:  
    OEI-03-99-00620 (final report, 6/00) 
                       
       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 29   
Prevent Inappropriate Medicare Part B Payments for  
Medical Equipment in Skilled Nursing Facilities 
 
Current Law:  Federal law prohibits Medicare Part B DME payments on behalf of 
beneficiaries who are in a skilled nursing facility in a qualifying Medicare Part A stay. 
     
Proposal (TProcedural):  The CMS should work with the DME regional carriers to 
implement edits to prevent inappropriate Medicare Part B DME payments for 
beneficiaries who are residents of skilled nursing facilities. 
 
Reason for Action:  Our review identified approximately $35 million in inappropriate 
Medicare Part B payments for calendar years 1996 through 1998. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$11.7  $11.7  $11.7  $11.7  $11.7 
 
Status:  The CMS did not concur with our recommendation to install postpayment edits 
and stated that it would be impractical for the regional carriers to perform postpayment 
reviews to identify these situations.  The CMS has developed prepayment edits, which 
were expected to be implemented in April 2002. 
 
    Report: 
    A-01-00-00509 (final report, 7/01)               
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 30   
Limit Medicare Part B Reimbursement for Hospital Beds 
 
Current Law:  Medicare Part B covers the rental of medically necessary hospital beds 
used in the home when 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 15-month period.     
     
Proposal (TLegislative, TProcedural):  The CMS should take immediate steps to 
reduce Medicare payments for hospital beds used in the home.  This should include the 
elimination of the higher reimbursement rate currently paid during the first 3 months of 
rental. 
 
Reason for Action:  Our reviews found that Medicare payments for hospital beds used 
in the home were substantially higher than rates paid by other payers.  In addition, 
Medicare was the only payer we sampled that paid a higher reimbursement rate for the 
initial rental months.  Based on work we did in Texas in 1989, we also estimate that 
suppliers can recover the wholesale cost of a bed within 4 months and as many as 7.5 
times over the useful life of the bed. 
 
Savings (in Millions):* 
      FY 1  FY 2  FY 3  FY 4  FY 5 
Inherent reasonable                    
reduction  $40  $40  $40  $40  $40 
Elimination of higher rate    15    15    15    15    15 
     
*These savings are not additive.     
 
Status:  The CMS concurred with our recommendations and is considering options to 
determine the best approach to achieve a fair price for hospital beds.  The agency is 
examining payment allowances and methodologies at other payers and is reviewing data 
to determine if Medicare payments are excessive.  However, the Balanced Budget 
Refinement Act of 1999 imposed a moratorium on the application of the inherent 
reasonableness authority.  Thus, while the moratorium is in place, CMS may not act on a 
determination that payments are excessive.  The BIPA of 2000 increased payments for 
DME by 3.7 percent for 2001. 
 
    Report: 
A-06-91-00080 (final report, 5/93) 
OEI-07-96-00221 (final report, 11/98) 
OEI-07-96-00222 (final report, 11/98) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 31   
Revise Guidelines for Coding Orthotic Body Jackets 
     
Current Law:  Body jackets are spinal orthotic devices that are covered by Medicare 
when prescribed by a physician.  Code L0430 is defined as a custom-fitted, one-piece, 
molded plastic body jacket with interface material and an anterior or posterior opening.    
     
Proposal (TProcedural):  The CMS should review and revise the Medicare coding 
guidelines for orthotic jackets and require suppliers to include more information on their 
Medicare claims.  Specifically, CMS should use a product classification list to define 
exactly which products should be billed under code L0430. 
 
Reason for Action:  We found that suppliers upcoded 42 percent of L0430 body jacket 
claims in 1996.  Lack of uniformity and standardization in the Medicare guidelines may 
account for some upcoding. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$0.8  $0.8  $0.8  $0.8  $0.8 
 
Status:  The CMS agreed that a product classification list is an effective tool to define 
exactly which products should be billed under code L0430 but did not agree with our 
recommendation to revise Medicare coding guidelines. 
 
    Report: 
    OEI-04-97-00390 (final report, 9/99) 
 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 32   
Reduce Allowed Charges for Orthotic Body Jackets 
 
Current Law:  Body jackets are spinal orthotic devices that are covered by Medicare 
when prescribed by a physician.  Code L0430 is defined as a custom-fitted, one-piece, 
molded plastic body jacket with interface material and an anterior or posterior opening.    
     
Proposal (TProcedural):  The CMS should determine the appropriateness of 
Medicare-allowed charges for orthotic body jackets and adjust Medicare reimbursement 
accordingly.   
 
Reason for Action:  We found that Medicare often paid more for orthotic body jackets 
than did Medicaid or Tricare, the health care program for active duty and retired 
members of the uniformed services, their families, and survivors.  We also found that 
Medicare reimbursement rates greatly exceeded the prices that suppliers paid for orthotic 
body jackets.   
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$0.22-0.77  $0.22-0.77  $0.22-0.77  $0.22-0.77  $0.22-0.77 
 
Status:  The CMS agreed to review Medicare-allowed amounts for orthotic body jackets 
after publication of new final regulations on inherent reasonableness. 
 
    Report: 
    OEI-04-97-00391 (final report, 3/00) 
       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 33   
Improve Billing Practices for Medicare Orthotics 
 
Current Law:  Medicare pays for prosthetics and orthotics, defined by regulation as 
leg, arm, back, and neck braces and artificial legs, arms, and eyes, including replacements 
if required because of a change in the beneficiary's physical condition.  Orthotic devices, 
which are mainly covered under Medicare Part B, must be reasonable and necessary for 
the diagnosis or treatment of an illness or injury or to improve the functioning of a 
malformed body member.   
     
Proposal (TProcedural):  The CMS should improve Medicare billing for orthotics, 
including development of standards required for suppliers of custom molded/fabricated 
devices. 
 
Reason for Action:  Our recent review found continued inappropriate Medicare 
reimbursement for orthotics at significant levels.  Thirty percent of beneficiaries had one 
or more miscoded devices.  We also found that qualifications of orthotic suppliers varied; 
noncertified suppliers in our sample were the most likely to provide inappropriate 
devices. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$43  $43  $43  $43  $43 
 
Status:  The CMS generally concurred with our original recommendations.  The agency 
is working on a proposed rule regarding orthotics and intends to put in place standards for 
custom orthotics. 
 
    Report: 
OEI-02-95-00380 (final report, 10/97) 
OEI-02-99-00120 (final report, 3/00) 
OEI-02-99-00121 (final report, 3/00) 
               
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 34   
Improve Guidelines for Therapeutic Footwear 
 
Current Law:  The Medicare Part B benefit covers therapeutic footwear for 
beneficiaries with diabetes and one or more of six qualifying conditions.  A doctor of 
medicine or a doctor of osteopathy who is treating the beneficiarys systemic  
diabetic condition under a comprehensive plan of care must certify the need for 
therapeutic footwear. 
     
Proposal (TProcedural):  The CMS should make Medicare coverage guidelines more 
explicit and improve documentation requirements for therapeutic footwear.  The CMS 
should also ensure that the therapeutic footwear benefit contains quality assurance 
safeguards. 
 
Reason for Action:  We found that documentation for 57 percent of therapeutic shoe 
claims included in our sample was missing or inadequate.  We also found that because 
Medicare guidelines do not clearly define qualifications of nonphysician entities that 
furnish therapeutic footwear, quality assurance was problematic.  Because less than 1 in 
50 Medicare-aged diabetics received shoes in 1996, the potential for growth in the shoe 
program is enormous. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$7  $7  $7  $7  $7 
 
Status:  The CMS concurred with our recommendations and released a program 
memorandum in November 2001 requiring suppliers to indicate actual, accurate start 
and end dates on claim forms.  The computer edits to ensure compliance with this new 
requirement were expected to be implemented in April 2002.   
 
    Report: 
    OEI-03-97-00300 (final report, 8/98) 
                       
   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 35   
Eliminate Inappropriate Billing for Blood Glucose Test Strips 
 
Current Law:  Medicare covers home blood glucose monitors and test strips for 
beneficiaries who must periodically test their blood sugar levels as part of their diabetes 
management, regardless of insulin usage. 
     
Proposal (TProcedural):  The CMS should (1) eliminate the inappropriate billings 
identified in our review by alerting suppliers to the importance of properly completing 
documentation to support claims for test strips and (2) require suppliers to indicate actual, 
accurate start and end dates on claim forms. 
 
Reason for Action:  We found that Medicare allowed $79 million for blood glucose 
test strips based on claims with missing or flawed documentation. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$79  $79  $79  $79  $79 
 
    Status:  The CMS concurred with our recommendations. 
 
    Report: 
    OEI-03-98-00230 (final report, 6/00) 
                       
   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 36   
Examine Payment Method for Parenteral Nutrition 
 
Current Law:  Parenteral nutrition, a liquid solution provided intravenously through 
use of an indwelling catheter and infusion pump, is covered under Medicare's Part B 
prosthetic device provision.  Medicare uses the reasonable charge methodology to 
determine allowances for 23 parenteral nutrition procedure codes. 
     
Proposal (TLegislative, TProcedural):  The CMS should examine other payment 
methods that could lead to more cost-effective reimbursement for parenteral nutrition 
solutions.  We suggest consideration of three alternative payment methods:  (1) inherent 
reasonableness, (2) acquisition cost, and (3) competitive bidding. 
 
Reason for Action:  For four parenteral nutrition codes, Medicare paid an average of 
45 percent more than Medicaid agencies and 78 percent more than Medicare risk health 
maintenance organizations. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$65  $65  $65  $65  $65 
 
Status:  The Balanced Budget Act of 1997 enacted several provisions that addressed our 
recommendation.  Section 4316 authorized CMS to make inherent reasonableness 
adjustments up to 15 percent for all Part B services other than physician services.  
However, the Balanced Budget Refinement Act of 1999 imposed a moratorium on the 
application of this authority.  While the moratorium is in place, CMS may neither make a 
determination that payments are excessive nor establish new rates.  Also, section 4319 of 
the 1997 act authorized up to five competitive bidding demonstrations.  The CMS 
convened a workgroup to focus on ways to reduce costs for parenteral nutrition.  While 
there was a statutory freeze on payment updates for 2001 and 2002, the Presidents  
FY 2001 budget proposed reducing the payment updates for parenteral and enteral items 
from 2003 through 2005. 
 
    Report: 
    OEI-03-96-00230 (final report, 7/97) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 37   
Reduce and Control Enteral Nutrition Equipment Costs 
     
Current Law:  Enteral nutrition therapy, commonly called tube feeding, provides 
nourishment to patients who cannot swallow because of severe or permanent medical 
problems.  This therapy, covered under Medicare Part B as a prosthetic benefit, is limited 
to patients unable to eat normally who require enteral therapy as their primary source of 
nutrition.  The DME regional carriers establish medical policy and guidelines for the 
review of DME claims.    
     
Proposal (TProcedural):  The DME regional carriers should consider selecting claims 
for special formulas, pump equipment, and/or pump supply kits when they determine 
target areas for focused medical reviews. 
 
Reason for Action:  Eighty percent of the beneficiaries sampled met Medicare criteria 
for enteral nutrition therapy in 1995.  However, we identified vulnerabilities in the use of 
special enteral formulas and the pump delivery method.   
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$28  $28  $28  $28  $28 
 
Status:  The CMS agreed with our recommendation.  The Balanced Budget Refinement 
Act of 1999 imposed a moratorium on the application of the inherent reasonableness 
adjustments authorized by the Balanced Budget Act of 1997.  While the moratorium is in 
place, CMS may neither make a determination that payments are excessive nor establish 
new rates.  In addition, there was a statutory freeze on payment updates for 2001 and 
2002. 
 
    Report: 
    OEI-03-94-00022 (final report, 6/97) 
             
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 38   
Reduce Medicare Part B Payments 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 (TLegislative, TProcedural):  The CMS should reduce payments through 
competitive acquisition strategies for patients receiving enteral nutrition at home. 
 
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 
$15  $15  $15  $15  $15 
 
Status:  The CMS concurred that Medicare paid too much for enteral nutrients and 
supported the recommendation to reduce payments for enteral therapy administered at 
home.  Included in section 4552(a) of the Balanced Budget Act of 1997 was a provision 
to freeze Medicare payments for parenteral and enteral nutrition, equipment, and supplies 
for 1998 through 2002.  The DME regional carriers proposed additional payment 
reductions through their inherent reasonableness authority.  The Presidents FY 2001 
budget proposed reducing the payment updates for parenteral and enteral items from 
2003 through 2005. 
 
    Report: 
    OEI-03-94-00021 (final report, 4/96) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 39   
Improve Medical Reviews for Home Oxygen Therapy 
 
Current Law:  Medicare covers home oxygen therapy for beneficiaries diagnosed with 
significant hypoxemia (a deficiency in the amount of oxygen in the blood).  A physician-
signed certificate of medical necessity is required for payment.  The Balanced Budget Act 
of 1997 mandated that the Secretary establish specific service standards for oxygen 
equipment as soon as practicable.  Home oxygen therapy accounts for the largest portion 
of Medicare DME payments. 
     
Proposal (TRegulatory):  The CMS should target oxygen equipment claims for 
focused medical review and ensure that edits are in place at DME regional carriers to 
identify incomplete certificates of medical necessity.  Further, CMS should establish 
specific service standards for home oxygen equipment as mandated by the Balanced 
Budget Act of 1997. 
 
Reason for Action:  Nearly one-quarter of oxygen certificates of medical necessity 
included in our study were inaccurate or incomplete.  We estimate that the resultant cost 
to Medicare in 1996 was $263 million.  We also found that while all beneficiaries in our 
sample used their stationary oxygen equipment, 13 percent never used their portable 
systems, which resulted in a cost to Medicare of about $9.7 million in 1996. 
 
Savings (in Millions): 
      FY 1  FY 2  FY 3  FY 4  FY 5 
Certificates  $263.0  $263.0  $263.0  $263.0  $263.0 
Portable systems        9.7        9.7        9.7        9.7        9.7 
     
Status:  The CMS concurred with our recommendations and formed a regulation team to 
develop proposed standards for suppliers of home oxygen equipment. 
 
    Report: 
    OEI-03-96-00090 (final report, 8/99) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 40   
Stop Inappropriate Payments for Hyperbaric Oxygen Therapy 
     
Current Law:  Hyperbaric oxygen therapy (HBO2) was originally developed for the 
treatment of decompression sickness, but its primary use in the United States is for 
wound care.  The CMS Coverage Instruction Manual, section 35-10, establishes 14 
conditions for which hyperbaric therapy is reimbursable. 
     
Proposal (TProcedural):  The CMS should (1) initiate its national coverage decision 
process for HBO2, (2) strengthen policy guidance by clarifying existing language and 
incorporating new guidance on issues such as physician attendance and documentation, 
and (3) improve oversight of this therapy by requiring contractors to implement 
appropriate edits and medical review standards. 
 
Reason for Action:  Our inspection found substantial inappropriate payments in the 
$49.9 million allowed for outpatient hospital and physician charges for HBO2 in  
1997-98.  Inappropriate payments were made for treatments that either were not in 
compliance with CMS guidelines or did not have sufficient documentation to support 
reimbursement, treatments deemed to be excessive, and treatments that lacked 
appropriate testing or monitoring.  Inappropriate payments resulted from abuse of or 
confusion over the current coverage policy, treating physicians medical opinions that  
did not align with CMS guidelines, inconsistent application of coverage criteria, 
inadequate documentation, and a failure by contractors to implement appropriate edits 
and medical review standards. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$19.1  $19.1  $19.1  $19.1  $19.1 
 
Status:  The CMS generally concurred with our recommendations and reported several 
ongoing efforts to address our concerns. 
 
    Report: 
    OEI-06-99-00090 (final report, 10/00) 
                       
       
 
                       
       
 
                       
       
           
       
     
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 41   
Reclassify Respiratory Assist Devices With a Back-Up Rate 
 
Current Law:  Medicare Part B covers DME provided in a beneficiarys residence 
when deemed medically necessary by a physician.  This equipment includes respiratory 
assist devices with a back-up rate, a feature to detect when a patient has stopped or 
delayed breathing.  The Omnibus Budget Reconciliation Act of 1993 amended the Social 
Security Act to exclude ventilators that are either continuous airway pressure devices or 
intermittent assist devices with continuous airway pressure devices from the frequent 
and substantial servicing payment category.   
     
Proposal (TRegulatory):  The CMS should reclassify bilevel respiratory assist devices 
with a back-up rate from the frequent and substantial servicing category to the capped 
rental category under the durable medical device benefit. 
 
Reason for Action:  The current Medicare payment for bilevel respiratory assist 
devices with a back-up rate is inappropriate because the equipment requires only routine 
maintenance and patient monitoring. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$11.5  $11.5  $11.5  $11.5  $11.5 
 
    Status:  The CMS concurred with our recommendation. 
 
    Report: 
    OEI-07-99-00440 (final report, 6/01) 
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 42   
Medicare Managed Care 
 
Modify Payments to Managed Care Organizations 
     
Current Law:  The Balanced Budget Act of 1997 established the Medicare+Choice 
program with the primary goal of providing a wider range of health plan choices to 
Medicare beneficiaries.  The act also modified the payment methodology under the 
program to correct excess payments, reduce geographic variations in payments, and align 
MCO payments to reflect beneficiaries health status. 
     
Proposal (TLegislative):  The CMS should modify monthly capitation rates to a level 
fully supported by empirical data. 
 
Reason for Action:  Based on numerous OIG reviews, studies by other agencies, and 
MCO data, we concluded that MCOs receive more than an adequate amount of funds to 
deliver the Medicare package of covered services.  The basis used to calculate monthly 
capitation payments to MCOs was flawed, resulting in higher-than-necessary payments; 
Medicare payments funded excessive administrative costs; and MCOs did not account for 
investment income earned on Medicare funds. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$3,500  $3,500  $3,500  $3,500  $3,500 
 
Status:  Although CMS initially agreed that Medicare+Choice payments were adequate 
to fund the Medicare package of covered services, the agency now believes that payments 
to MCOs, particularly those in minimum update counties, are not adequate.  Agency 
officials stated that they would move toward full implementation of a risk adjustment 
methodology incorporating diagnosis data from physician services and hospital outpatient 
services.  Subsequently, the BIPA of 2000 increased payments to MCOs.  In addition, 
implementation of the risk adjustment methodology was extended over a longer period. 
 
    Report: 
    A-14-00-00212 (final report, 9/00) 
             
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 43   
Pay Managed Care Organizations Only Reasonable  
Administrative Costs 
 
Current Law:  Following a CMS-prescribed methodology, each risk-based MCO is 
required to submit an adjusted community rate proposal before the beginning of the 
contract period.  Through this process, MCOs present to CMS their estimate of the funds 
needed to provide the Medicare package of covered services to enrolled beneficiaries.  
The estimated funds are calculated to cover the plans medical and administrative costs 
for the upcoming year.  Administrative costs include marketing, taxes, depreciation, 
reinsurance, interest, and other nonmedical compensation. 
     
Proposal (TLegislative, TProcedural):  The CMS should pursue legislation to 
require risk-based MCOs, when estimating administrative costs, to follow Medicares 
general principle of paying only reasonable costs.  The CMS should also publish the 
administrative cost rates of all MCOs participating in the Medicare program. 
 
Reason for Action:  Our review of the administrative costs included in the 1997 
proposals submitted by nine MCOs found that $66.3 million of the actual administrative 
costs incurred would have been recommended for disallowance had the MCOs been 
required to follow Medicares general principle of paying only reasonable costs.  Since 
no statutory or regulatory authority governs allowability of costs included in the rate 
proposal, the MCOs were not required to adhere to this principle. 
 
Conducted at CMSs request, our subsequent review included 10 MCOs adjusted 
community rate proposals for 2000.  We found that $97.1 million in base-year 
administrative costs would have been recommended for disallowance had the MCOs 
been required to follow Medicares general principle of paying only reasonable costs. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS did not agree with our recommendations.  Agency officials stated that 
the revised rate proposals require MCOs to report administrative costs actually incurred 
for Medicare plans.  However, we believe that the revised proposals do not address the 
reasonableness of costs. 
 
    Report: 
    A-03-98-00046 (final report, 1/00) 
             
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 44   
Place a Ceiling on Administrative Costs Included in Managed Care 
Organizations Rate Proposals 
 
Current Law:  Each risk-based MCO is required to submit an adjusted community rate 
proposal to CMS before the beginning of the contract period.  Administrative costs, 
which are one component of the proposal, include costs associated with facilities, 
marketing, taxes, depreciation, reinsurance, interest, and other nonmedical compensation.  
The CMS does not require a reasonable percentage or ceiling on the administrative cost 
rate proposed as it does in other areas of the Medicare program. 
     
Proposal (TLegislative, TProcedural):  The CMS should institute a reasonable 
ceiling on the administrative costs permitted in an MCO proposal.  We suggest an 
administrative rate ceiling of 15 percent of total revenue requirements, which was MCOs 
average rate during our review period (1996 to 1999). 
 
Reason for Action:  As a percentage of the total rate proposed, the administrative rate 
varied widely among MCOs reviewed, regardless of the type of MCO (individual 
practice association, group, or staff) or the tax status (profit or nonprofit).  For the 1999 
rate proposals, the amount allocated for administrative purposes ranged from a high of  
32 percent to a low of 3 percent.  Using 1998 data, if a 15-percent ceiling had been 
applied to the MCOs we reviewed, an additional $1 billion could have been passed on to 
the beneficiaries in the form of additional benefits or reduced payments (e.g., deductibles 
and/or coinsurance). 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  Although CMS agreed that it should more thoroughly analyze rate proposals, it 
did not agree with our recommendation to institute a ceiling on the administrative costs 
included in an MCO rate proposal.  During our review period, administrative costs 
included amounts for additional revenues (i.e., profits).  Effective contract year 2000, 
administrative costs exclude amounts for additional revenues.  Therefore, the 15-percent 
ceiling would be more than reasonable. 
 
    Report: 
    A-14-98-00210 (final report, 1/00) 
             
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 45   
Monitor Investment Income Earned by Risk-Based  
Managed Care Organizations 
 
Current Law:  Under the Medicare+Choice program, Medicare pays predetermined per 
capita payments to MCOs by the first of every month.  In exchange for these capitation 
payments, MCOs are required to provide all Medicare-covered services to their members. 
     
Proposal (TLegislative):  The CMS should pursue legislation to either (1) adjust the 
timing of Medicare prepayments to MCOs to maximize the Health Insurance Trust 
Funds earnings while minimizing MCOs opportunities to earn investment income on 
Medicare funds or (2) adjust MCO payment rates to recognize the impact of investment 
income on the total funding available to MCOs for servicing their Medicare enrollees.  
Until such legislation is enacted, CMS should develop policies on tracking, estimating, 
and reporting investment income to ensure that investment income funds are used for 
program purposes and for the benefit of Medicare enrollees. 
 
Reason for Action:  Presently, MCOs with risk contracts are not required to account 
for investment income, which is earned from the time MCOs receive payment from CMS 
until these funds are disbursed to providers.  We found that MCOs earned in excess of 
$100 million a year on current-year Medicare funding during 1996 and 1997 and 
continued to earn significant amounts of investment income in 1998.  On average, plans 
earned an estimated 5-percent return from short-term investments of Medicare 
prepayment funding.  As a result, we are concerned that MCOs were effectively funded  
at a greater amount (approximately 0.4 percent more) than the 95 percent of Medicare 
fee-for-service costs used as a basis for calculating MCO payment rates. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$150  $150  $150  $150  $150 
 
Status:  The CMS agreed that its policies should hold MCOs accountable for investment 
income earned on current Medicare funds and should ensure that such income is used to 
benefit Medicare enrollees.  However, CMS did not intend to pursue immediate 
legislative changes. 
 
    Report: 
    A-02-98-01005 (final report, 8/00) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 46   
Monitor Payments for End Stage Renal Disease Beneficiaries  
in Managed Care Plans 
 
Current Law:  Under the Medicare managed care risk program, CMS contracts with 
MCOs to provide comprehensive health services to enrolled beneficiaries on a 
prepayment, capitated basis.  For each enrolled beneficiary, CMS authorizes a fixed 
monthly payment which is adjusted by a set of risk factors, such as the beneficiarys age 
and gender.  An enhanced payment is made for certain high-cost categories of 
beneficiaries, such as those having ESRD.  The monthly payment for an ESRD 
beneficiary (average of $3,393 per month) is approximately seven times greater than the 
regular non-ESRD payment rate (average of $460 per month). 
     
Proposal (TProcedural):  The CMS should make procedural and systems changes to 
prevent further erroneous misclassifications of ESRD status and instruct all ESRD 
networks to verify the status of beneficiaries and to submit census data on a timely basis. 
 
Reason for Action:  Our review of beneficiary Medicare records and information 
obtained from the CMS Renal Beneficiary and Utilization System found that 18 percent 
of the beneficiaries reviewed were ESRD-misclassified during 1997, resulting in 
$112,486 in gross payment errors.  We believe that these errors occurred because CMS 
received incomplete data from ESRD networks concerning the eligibility status of ESRD 
beneficiaries.  As a result, we are concerned that these errors could affect the risk-
adjusted payments that were implemented in January 2000 by a revision in the Balanced 
Budget Act of 1997. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS agreed with all of our recommendations.  Currently, CMS has 
information management projects underway that are focused on improved business 
processes within the ESRD program and better data management. 
 
    Report: 
    A-14-98-00211 (final report, 7/00) 
             
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 47   
Other Medicare Reimbursement 
     
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 that are commonly performed on 
automated laboratory equipment are referred to as panel tests and are required by CMS to 
be grouped together for payment purposes.  In addition, CMS 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 (TProcedural):  The CMS should update its guidelines by expanding the 
national list of chemistry panel tests to include 10 tests identified by our audit. 
 
Reason for Action:  Based on claims 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, CMS guidelines on chemistry tests that 
should be paneled by all carriers have not been updated promptly 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 CMS agreed with 8 of the 10 tests recommended for addition to the list and 
added 6 of these tests to the Medicare carrier manual.  The CMS will periodically review 
applicable tests and related equipment.  Also, although a legislative change was included 
in the Presidents 1997 budget, the Congress decided (through the Balanced Budget Act 
of 1997) to achieve savings through other means, including freezing laboratory payments 
through 2002 and reducing the national cap to 74 percent of the median of all fee 
schedules.  A legislative proposal to reduce laboratory payments for four tests was 
included in the Presidents FY 2001 budget but was not enacted. 
 
    Report: 
    A-01-93-00521 (final report, 1/95) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 48   
Change the Way Medicare Pays for Clinical Laboratory Tests 
     
Current Law:  The amount that Medicare pays for most clinical laboratory tests is 
based on fee schedules.  These schedules, effective July 1, 1984, generally were 
established by each carrier at 60 percent of the Medicare prevailing charge (the charge 
most frequently used by all suppliers).  The Balanced Budget Act of 1997 reduced fee 
schedule payments by lowering the cap to 74 percent of the median for payment amounts 
beginning in 1998, but the BIPA of 2000 raised the fee schedule amounts to 100 percent 
of the median for new tests performed on or after January 1, 2001.  Also, no inflation 
update was permitted between 1998 and 2002.   
     
Proposal (TLegislative, TProcedural):  The CMS should (1) develop a methodology 
and legislative proposal to pay for tests ordered as custom panels at substantially less than 
the full price for individual tests and (2) study reinstating the beneficiary coinsurance and 
deductible provisions for laboratory services as a means of controlling utilization. 
 
Reason for Action:  Although prices on individual tests are being reduced by 
legislation, panels are still generally being billed as individual tests.  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 CMS 
guidelines do not address the problem of panels as a marketing mechanism of the 
laboratory industry or the problem of industry billing for the contents of the panels 
individually.  In our opinion, these conditions have contributed to the significant increase 
in the use of laboratory services. 
 
Savings (in Millions):     
      FY 1  FY 2  FY 3  FY 4  FY 5 
Panel  TBD  TBD  TBD  TBD  TBD 
Copayment  $1,130  $1,240  $1,370  $1,520  $1,690 
         
Status:  The CMS initially concurred with our first recommendation but not our second.  
A proposal to reduce payment updates from 2003 through 2005 was included in the 
Presidents FY 2001 budget, as well as a proposal to reinstate laboratory cost sharing.  
Neither of these proposals was enacted.  In addition, the Balanced Budget Act of 1997 
required the Secretary to request that the Institute of Medicine conduct a study of Part B 
laboratory test payments; CMS may use the results to develop new payment 
methodologies. 
 
    Report: 
A-09-89-00031 (final report, 1/90)       
A-09-93-00056 (follow-up report, 1/96)             
   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 49   
Prevent Inappropriate Medicare Payments for  
Clinical Laboratory Tests 
 
Current Law:  Clinical laboratory services performed by independent laboratories, 
physicians, and hospital outpatient department laboratories include chemistry, 
hematology, and urinalysis tests.  The Medicare carrier and fiscal intermediary manuals 
refer to tests that can be and are frequently performed together on automated 
multichannel equipment as panels.  Carriers are directed to pay the lesser panel amount if 
the sum of the payment allowance for the separately billed tests exceeds the payment 
allowance for the panel that includes these tests.  For claims submitted by hospital 
outpatient department laboratories, fiscal intermediaries are required to apply the carrier 
fee schedule and to follow the practices in effect for the carrier's locality. 
     
Proposal (TProcedural):  The CMS should direct carriers and intermediaries to  
(1) implement procedures and controls to ensure that clinical laboratory tests are 
appropriately grouped together and not duplicated for payment purposes and (2) recover 
potential overpayments from providers.  The CMS should also consider eliminating 
separate reimbursement for additional indices on the basis that they are a byproduct of 
analyses performed on automated equipment. 
 
Reason for Action:  Medicare carriers and fiscal intermediaries did not always have 
adequate controls to detect and prevent inappropriate payments for laboratory tests.  
Contrary to applicable laws, regulations, and Medicare reimbursement policies, carriers 
and intermediaries reimbursed providers for claims involving (1) unbundled and/or 
duplicate chemistry, hematology, and urinalysis tests that should have been grouped 
together and paid at a lesser amount and (2) additional indices that were not ordered, 
received, or needed by a physician. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$12.5  $12.5  $12.5  $12.5  $12.5 
 
Status:  The CMS concurred with all recommendations.  The CMS also agreed to 
institute new coding procedures and will remove codes for additional indices from 
Medicare fee schedules.  As of 1999, two codes for indices had been removed from the 
physicians current procedural terminology. 
 
    Report: 
A-01-96-00509 (final report, 11/97) 
A-01-96-00527 (final report, 11/98) 
A-01-99-00522 (final report, 10/00) 
               
     
 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 50           
Adjust Home Health Agency Prospective Payments 
 
Current Law:  The Balanced Budget Act of 1997, as amended, required CMS to 
develop a prospective payment system for home health agencies.  This system was 
implemented on October 1, 2000. 
     
Proposal (TLegislative):  The CMS should adjust for the costs of unnecessary services 
and other improper payments and eliminate them from the prospective payment system 
rates for home health agencies. 
 
Reason for Action:  In developing the prospective payment system rates, CMS used 
cost reports to develop base rates.  However, CMS did not make a downward adjustment 
for substantial unallowable costs claimed by home health agencies, which we identified 
in prior audits.  As a result, we are concerned that the rates are inflated and that home 
health agencies will be overpaid. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  While recognizing that the issue merits further review, CMS disagreed with our 
recommendation because it believes that actions have already been taken to ensure 
accurate and fair payments.  The CMS believes that several factors nullify any need for 
further payment rate changes, including the payment reduction, effective FY 2003, 
imposed by the Congress. 
 
    Report: 
    A-04-99-01194 (final report, 11/99)   
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 51   
Require Physician Examination Before Ordering  
Home Health Services 
 
Current Law:  Section 1861 of Title XVIII of the Social Security Act authorized 
Medicare Part A payments for home health services.  Before October 1, 2000, when the 
prospective payment system for home health services was implemented, providers were 
reimbursed for the cost of each visit up to limits established by the department.  Home 
health agencies are now reimbursed under the prospective payment system. 
     
Proposal (TRegulatory):  Medicare regulations should be revised to require that 
physicians examine patients before ordering home health care.  As discussed under 
Status, other recommendations to correct abusive and wasteful practices are being 
addressed. 
 
Reason for Action:  Audits and investigations have identified medically unnecessary 
care and inappropriate or fraudulent billing by specific home health agencies.  Other OIG 
studies describe extreme variations and broad patterns of billing by these agencies, which 
raise questions about the appropriateness of some billings.  We therefore believe that 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 
TBD  TBD  TBD  TBD  TBD 
 
Status:  Although the Balanced Budget Act of 1997 included provisions to restructure 
home health benefits, CMS still needs to revise regulations to require that physicians 
examine Medicare patients before ordering home health services.  After the laws 
enactment, our four-state review found that unallowable services continued to be 
provided because of inadequate physician involvement.  While agreeing in principle, 
CMS said that it would continue to examine both coverage rules and conditions of 
participation to develop the discipline necessary for ensuring proper certification.  The 
CMS also provided additional payments for physician care plan oversight and education 
for physicians and beneficiaries. 
 
    Report: 
A-04-94-02078 (final report, 2/95)    A-04-97-01169 (final report, 4/99)  
A-04-94-02087 (final report, 6/95)    A-04-97-01170 (final report, 4/99)  
A-04-95-01103 (final report, 3/96)    A-02-97-01034 (final report, 9/99) 
A-04-95-01106 (final report, 3/96)    A-04-98-01184 (final report, 9/99) 
A-04-95-01104 (final report, 6/96)     A-04-99-01194 (final report, 11/99) 
A-04-95-01105 (final report, 9/96)    A-04-99-01195 (final report, 3/01) 
A-04-95-01107 (final report, 9/96)    OEI-12-94-00180 (final report, 5/95) 
A-03-95-00011 (final report, 11/96)    OEI-02-94-00170 (final report, 6/95) 
A-04-96-02121 (final report, 7/97)    OEI-04-93-00260 (final report, 7/95)  
A-02-97-01026 (final report, 9/97)    OEI-04-93-00262 (final report, 9/95) 
A-04-97-01166 (final report, 4/99) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 52   
Ensure Validity of Medicare Hospice Enrollments 
 
Current Law:  Hospice care is a treatment approach which recognizes that the 
impending death of an individual warrants a change in focus from therapeutic to 
palliative care (such as pain control and symptom management).  To qualify for Medicare 
hospice benefits, which began in 1983, a patient must be entitled to Medicare Part A and 
be certified as terminally ill, which is defined as having a life expectancy of 6 months or 
less if the illness runs its normal course. 
     
Proposal (TLegislative, TProcedural):  The CMS should strengthen its controls over 
the hospice program, such as by reinforcing the 6-month terminal prognosis requirement, 
holding hospice physicians more accountable for certifications of terminal prognosis, 
strengthening claim processing controls, and prohibiting hospices from paying nursing 
facilities more for "room and board" than the hospices receive from state Medicaid 
agencies on behalf of dually eligible beneficiaries.  The CMS should also seek legislation 
to change the payment methodology for dually eligible nursing facility residents, to 
restructure the use of benefit periods, and to establish a more meaningful cap on hospice 
payments. 
 
Reason for Action:  Our audits of 12 large hospices identified a substantial number of 
ineligible enrollments.  Working with OIG, physicians from Medicare quality 
improvement organizations reviewed the medical files of 2,109 beneficiaries in hospice 
care over 210 days and concluded that 1,373 beneficiaries were ineligible because they 
were not terminally ill.  Also, analysis of the CMS database for hospice beneficiaries 
showed evidence of many long-term beneficiaries in other hospices across the country. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The Balanced Budget Act of 1997 modified the hospice benefit but did not 
address the above recommendations.  The CMS has increased its scrutiny of hospice 
claims by subjecting an increased number of claims to medical review.  Also, the BIPA 
of 2000 clarified that certification of terminal illness is to be based on the physicians 
clinical judgment, and CMS informed providers of this clarification.  No changes have 
been proposed to modify the payment methodology for dually eligible nursing facility 
residents.  The Presidents FY 2001 budget proposed civil monetary penalties for false 
certification of the need for hospice care.  
 
    Report: 
A-05-96-00023 (final report, 11/97) 
OEI-05-95-00250 (final report, 9/97) 
OEI-05-95-00251 (final report, 11/97) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 53   
Adjust Base-Year Costs in the Prospective Payment System for  
Skilled Nursing Facilities 
 
Current Law:  The Balanced Budget Act of 1997 required CMS to develop a 
prospective payment system for skilled nursing facilities effective for cost reporting 
periods beginning July 1, 1998. 
     
Proposal (TLegislative):  The CMS should determine the costs of unnecessary 
services and other improper payments and eliminate them from the prospective payment 
system rates for skilled nursing facilities. 
 
Reason for Action:  To develop the prospective payment system rates, CMS used cost 
reports for reporting periods beginning in FY 1995.  However, CMS did not make a 
downward adjustment for substantial unallowable costs claimed by nursing facilities, 
which we identified in prior audits.  As a result, we are concerned that the rates are 
inflated and that nursing facilities will be overpaid.  Also, we found that improper 
Medicare payments for physical and occupational therapy in skilled nursing facilities 
totaled more than $1 billion in 1998.  The cost of unnecessary and undocumented 
therapy, as well as the markup on occupational therapy, was not identified before 
implementation of the prospective payment system. 
 
Savings (in Millions):     
      FY 1  FY 2  FY 3  FY 4  FY 5 
Physical and occupational 
therapy  $1,000+  $1,000+  $1,000+  $1,000+  $1,000+ 
All other  TBD  TBD  TBD  TBD  TBD 
     
Status:  The CMS agreed with our recommendation and indicated in its interim final 
rule implementing the prospective payment system that OIG, in conjunction with CMS, 
proposed to further examine the extent to which the base-year cost data used to develop 
the rates included costs that were inappropriately allowed.  We subsequently advised 
CMS of the significant problems found during our review of infusion therapy services 
provided by some suppliers to skilled nursing facilities and recommended that CMS 
consider our findings when updating or refining the payment rates.  The CMS concurred. 
 
    Report: 
A-14-98-00350 (final report, 7/98) 
A-06-99-00058 (final report, 12/99) 
OEI-09-97-00122 (final report, 11/00) 
             
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 54   
Eliminate Overpayments Under Consolidated Billing by  
Skilled Nursing Facilities 
 
Current Law:  The Balanced Budget Act of 1997 required implementation of a 
prospective payment system for skilled nursing facilities, as well as consolidated billing 
by these facilities.  Under the prospective payment system, a skilled nursing facility is 
reimbursed a prospective payment for all covered skilled nursing services rendered to its 
residents in a Part A stay, and outside providers and suppliers must bill the facility for 
services rendered.  Under consolidated billing, the facility is responsible for billing all 
covered skilled nursing services, including services provided under arrangement with 
outside parties. 
     
Proposal (TProcedural):  The CMS should establish payment edits in its Common 
Working File and Medicare contractors claim processing systems to ensure compliance 
with consolidated billing requirements. 
 
Reason for Action:  For over one-third of the claims examined in our pilot review, we 
found that Medicare contractors made separate Part B payments to outside suppliers for 
services that were subject to consolidated billing.  These services were included in the 
prospective payments that Medicare made to the skilled nursing facilities.  As a result, the 
Medicare program paid twice for the same service--once to the nursing facility under the 
Part A prospective payment and again to the outside supplier under Part B.  Our 
subsequent nationwide review identified $47.6 million in potentially improper Medicare 
payments during calendar year 1999 for services that were subject to consolidated billing. 
 
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 CMS concurred with our recommendation and implemented edits in 2002.  
We are continuing our work to test the effectiveness of the edits and to identify any 
additional overpayments. 
  
    Report: 
A-01-99-00531 (final report, 3/00) 
A-01-00-00538 (final report, 6/01) 
                       
 
       
         
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 55   
Ensure Appropriateness of Medicare Payments for  
Mental Health Services 
             
Current Law:  Section 1862(a)(1)(A) of the Social Security Act requires all services, 
including mental health, to be reasonable and necessary for the diagnosis or treatment of 
an illness or injury. 
 
Proposal (TProcedural):  The CMS should ensure that mental health services are 
medically necessary, reasonable, accurately billed, and ordered by an authorized 
practitioner by using a comprehensive program of targeted medical reviews, provider 
education, improved documentation requirements, and increased surveillance of mental 
health services. 
 
Reason for Action:  Claim error rates have exceeded 34 percent, suggesting 
widespread problems across a variety of provider types and care settings.  Billing abuses 
involving beneficiaries who are unable to benefit from psychotherapy demonstrate a 
special need for enhanced program and beneficiary protections.  Also, beneficiaries with 
mental illness sometimes do not receive all the services that they need, so that both 
underutilization and overutilization problems exist.  
 
Partial hospitalization services, which may be provided by both hospitals and 
community mental health centers, have been particularly troublesome.  These intensive 
services are designed to reduce the need for hospitalization of beneficiaries with serious 
mental illness.  Payment error rates for partial hospitalization in community mental health 
centers have been estimated as high as 92 percent.  A number of these centers were 
terminated from the program after CMS determined that they did not meet certification 
requirements.  Reviews of outpatient psychiatric services provided by both acute care and 
specialty psychiatric hospitals also revealed high payment error rates, particularly relating 
to partial hospitalization services. 
 
Savings (in millions):* 
FY 1  FY 2  FY 3  FY 4  FY 5 
$676  $676  $676  $676  $676 
 
*Includes $224 million for acute hospital outpatient services, $180 million for partial 
hospitalization in community mental health centers, $57 million for psychiatric hospital 
outpatient services, $30 million for nursing home services, and $185 million for other 
mental health services. 
 
Status:  Concurring with the individual reports, CMS has initiated some efforts, 
particularly regarding community mental health centers. 
 
Report: 
A-04-98-02145 (final report, 10/98)  OEI-02-99-00140 (final report, 1/01) 
A-01-99-00507 (final report, 3/00)  OEI-03-99-00130 (final report, 5/01) 
A-01-99-00530 (final report, 12/00) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 56   
Prevent Overpayments of Rural Health Clinic Claims 
 
Current Law:  The Rural Health Clinics Act of 1977 was intended to address an 
inadequate supply of physicians who serve Medicare and Medicaid beneficiaries in rural 
areas.  The act expanded reimbursement in the rural health clinic setting to include 
services provided by nonphysician practitioners.  Fiscal intermediaries reimburse clinics 
a prospective amount per patient encounter based on the clinics actual costs. 
     
Proposal (TProcedural):  The CMS should design and implement Common Working 
File edits to detect claims containing Part B services that were paid as, or as part of, rural 
health clinic encounter claims.   
 
Reason for Action:  For 13 selected states, our review identified claims containing 
potential Medicare overpayments totaling about $2.8 million. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$0.93  $0.93  $0.93  $0.93  $0.93 
 
Status:  The CMS did not concur with our recommendation, stating that it would impose 
an undue hardship to mandate the same extensive cost reporting requirements imposed on 
hospitals and other health care facilities participating in the Medicare program. 
 
    Report: 
    A-07-00-00108 (final report, 10/01) 
       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 57   
Conduct Medical Reviews of Part B Therapy Services 
 
Current Law:  Medicare coverage guidelines state that therapy must be reasonable, 
necessary, specific, and an effective treatment for the patient's condition. 
     
Proposal (TProcedural):  The CMS should instruct fiscal intermediaries to conduct 
focused medical reviews of therapy payments and encourage them to educate providers 
about documentation requirements.  Additionally, CMS should consider options when 
developing a new reimbursement system for Part B therapy, such as a system based on an 
episode of therapy and prior authorization for therapy that exceeds a separate monetary 
cap for each type of therapy. 
 
Reason for Action:  We found that 14 percent of sampled physical, occupational, and 
speech therapy services in 1999 were not medically necessary and that approximately  
10 percent were not adequately supported by documentation.  We estimated that 
Medicare allowed $97 million for unnecessary, undocumented, and inadequately 
documented therapy. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$97  $97  $97  $97  $97 
 
Status:  The CMS instructed its contractors to concentrate their efforts on random 
reviews of all claims and planned to use the results of those reviews to focus additional 
efforts.  The Balanced Budget Refinement Act of 1999 required the Secretary to conduct 
focused medical reviews of therapy services during 2000 and 2001.  Using Medicare 
Integrity Program funds, CMS awarded a contract for the Therapy Review Program, a 
study of the utilization of therapy services in 1998, 1999, and 2000.  It will perform a 
significant number of focused medical reviews of therapy claims in skilled nursing 
facilities and other therapy settings. 
 
    Report: 
OEI-09-97-00122 (final report, 8/99) 
OEI-09-99-00550 (final report, 11/00) 
OEI-09-99-00560 (final report, 8/01)                
       
       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 58   
Revise Medicare Prescription Drug Payment Methods 
 
Current Law:  Medicare Part B covers prescription drugs incident to a physicians 
services for drugs that cannot be self-administered; for certain medical disorders, such as 
ESRD and cancer; and when necessary for the effective use of DME.  Reimbursement is 
based on the lower of estimated actual charges or a national average wholesale price 
(AWP) less 5 percent. 
     
Proposal (TLegislative, TRegulatory, TProcedural):  The CMS should reduce 
excessive Medicare drug reimbursement amounts. 
 
Reason for Action:  Several OIG reports demonstrate that Medicare and its 
beneficiaries are making excessive payments for prescription drugs.  The published 
AWPs currently used by Medicare carriers to determine reimbursement bear little or no 
resemblance to actual wholesale prices available to the physician and supplier 
communities that bill for these drugs.  Our most recent analysis found that Medicare and 
its beneficiaries could have saved $1.9 billion a year if 24 drugs had been reimbursed at 
amounts available to the Department of Veterans Affairs.  We also found that Medicare 
carriers did not establish consistent reimbursement amounts for certain drugs. 
 
Savings (in Millions):* 
FY 1  FY 2  FY 3  FY 4  FY 5 
$1,900  $1,900  $1,900  $1,900  $1,900 
 
    *Includes beneficiary copayment amounts. 
     
Status:  The CMS concurred with our recommendation.  The agency has attempted 
administrative remedies to lower payments for albuterol sulfate by using inherent 
reasonableness, but the Congress suspended use of this authority pending the issuance of 
federal rulemaking.  The CMS also announced plans to lower prices for certain drugs 
using newly available AWPs developed for Medicaid as a result of Department of Justice 
investigations.  However, legislation passed on December 21, 2000, requires the General 
Accounting Office to complete a comprehensive drug pricing study before CMS can 
begin using these new data. 
 
    Report: 
OEI-03-94-00390 (final report, 3/96)   OEI-03-97-00293 (final report, 11/98)   
OEI-03-95-00420 (final report, 5/96)    OEI-03-00-00310 (final report, 1/01) 
OEI-03-97-00390 (final report, 7/97)   OEI-03-01-00410 (final report, 3/02)  
OEI-03-97-00292 (final report, 8/98)   OEI-03-01-00411 (final report, 3/02) 
   
 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 59   
Ensure the Medical Necessity of Ambulance Claims 
 
Current Law:  The CMS regulations state that Medicare covers ambulance services 
only if other forms of transportation are contraindicated by the beneficiarys condition.  
The Balanced Budget Act of 1997 mandated that CMS work with the industry to 
establish a negotiated fee schedule for ambulance payments effective January 1, 2000. 
     
Proposal (TProcedural):  The CMS should develop a prepayment edit to verify the 
medical necessity of ambulance claims that are not associated with hospital or nursing 
home admissions or emergency room care.  This proposal would provide a solution for 
one group of ambulance services until CMS and the industry can better address issues of 
medical necessity, including clear and consistent definitions. 
 
Reason for Action:  Two-thirds of ambulance services that did not result in hospital or 
nursing home admissions or emergency room care on the same date were medically 
unnecessary.  We estimate that Medicare allows approximately $104 million each year 
for these medically unnecessary services. 
 
Savings (in Millions):* 
FY 1  FY 2  FY 3  FY 4  FY 5 
$104  $104  $104  $104  $104 
     
*Savings may depend on the timing and nature of the fee schedule mandated by the 
Balanced Budget Act. 
     
Status:  The CMS has completed negotiated rulemaking on development of the 
Medicare ambulance fee schedule and is in the process of proposing regulations.  The fee 
schedule was to take effect in April 2002.  The CMS contracted for a study related to 
nonemergency ambulance transportation and is currently reviewing the results to 
determine the appropriate actions to take in light of the new fee schedule and the codes 
associated with the schedule.  As the new codes are established, CMS intends to explore 
appropriate edits. 
 
    Report: 
    OEI-09-95-00412 (final report, 12/98)             
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 60   
Stop Inappropriate Payments for Chiropractic  
Maintenance Treatments 
     
Current Law:  In 1972, section 273 of the Social Security Amendments (P.L. 92-603) 
expanded the definition of "physician" under Medicare Part B to include chiropractors.  
Currently, the only Medicare reimbursable chiropractic treatment is manual manipulation 
of the spine to correct a subluxation.  Effective January 1, 2000, the Balanced Budget Act 
of 1997 eliminated the requirement for an x ray to demonstrate subluxation of the spine; a 
subluxation may now be demonstrated by an x ray or by physical examination.  The act 
also required the development of utilization guidelines for chiropractic services and 
treatment. 
     
Proposal (TProcedural):  The CMS should develop system edits to detect and prevent 
unauthorized payments for chiropractic maintenance treatments.  Examples include  
(1) requiring chiropractic physicians to use modifiers to distinguish the categories of  
spinal joint problems and (2) requiring all Medicare contractors to implement system 
utilization frequency edits to identify beneficiaries receiving consecutive months of 
minimal therapy. 
 
Reason for Action:  We found that Medicare, Medicaid, and private insurers rely, in 
varying degrees, on utilization caps, x rays, physician referrals, copayments, and 
prepayment and postpayment reviews to control utilization of chiropractic benefits.   
Copayments are the most widely used utilization controls, but these and other controls 
did not detect or prevent unauthorized Medicare maintenance treatments.  We concluded 
that 759,400 Medicare beneficiaries received 2.9 million probable chiropractic 
maintenance treatments at a cost to the Medicare program of almost $69 million in 1996. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$78  $78  $78  $78  $78 
 
Status:  Now that Y2K issues have been resolved, CMS plans to move forward with its 
efforts to require that all contractors establish systems utilization frequency edits and that 
chiropractic physicians use modifiers distinguishing the categories of spinal joint 
problems.  In the interim, in some instances, contractors are reviewing chiropractic 
claims on a postpayment basis and are detecting maintenance therapy through data 
analysis. 
 
    Report: 
OEI-06-97-00480 (final report, 9/98) 
OEI-04-97-00490 (final report, 11/98)             
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 61   
Establish Utilization Parameter for Chiropractic Treatments 
 
Current Law:  The Balanced Budget Act of 1997 required CMS to establish new 
utilization guidelines for Medicare chiropractic care.  The CMS currently allows each 
carrier to establish its own utilization review parameter for chiropractic treatments. 
     
Proposal (TProcedural):  The CMS should require carriers to use 12 services as a 
maximum review parameter.  This parameter does not mean that payments for services 
above 12 should be disallowed, but rather it should trigger a more intensive review of 
claims to ensure that the billed services are necessary and covered.  Once this parameter 
is implemented, CMS should collect data on the cost of administering it, related edits and 
frequency screens, and medical reviews with a view to finding the best mix of these 
controls and recalibrating them after 1 or 2 years of experience. 
 
Reason for Action:  We found that Medicare savings would be higher with a cap of 12 
rather than 18 treatments per year.  This is the number most commonly used by Medicare 
carriers; 29 of the 55 carriers already have chiropractic utilization parameters set at 12 
treatments per year.  Therefore, implementing a utilization parameter of 12 will result in 
the least administrative change for carriers overall. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$30.2  $32.3  $34.5  $36.9  $39.4 
 
Status:  The CMS is currently developing utilization guidelines as specified in the 
Balanced Budget Act of 1997.  It is using the information in our report to help determine 
the most appropriate utilization screen. 
 
    Report: 
    OEI-04-97-00496 (final report, 11/99)             
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 62   
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, currently Palmetto Government Benefits Administrators, has 
a contract with the Railroad Retirement Board to process Medicare Part B claims for 
Railroad Retirement beneficiaries.  All other Medicare carriers contract with CMS to 
process claims.  The authority for this unique contracting arrangement is section 1842(g) 
of the Social Security Act, as amended. 
     
Proposal (TLegislative):  The CMS should discontinue the use of a separate carrier to 
process Medicare claims for Railroad Retirement beneficiaries. 
 
Reason for Action:  Since 1979, the General Accounting Office, the Grace 
Commission, and CMS have recommended that Railroad Retirement beneficiaries be 
placed under the CMS 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, provider billings would be simplified since the service providers would no 
longer need to separate and submit Railroad Retirement claims for payment to the 
Railroad Retirement Boards carrier and other Medicare claims to a different carrier.  A 
further benefit is that beneficiaries would be assured that their claims would 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:  The Presidents FY 2003 budget did not include such a proposal. 
 
    Report: 
    A-14-90-02528 (final report, 12/90)               
   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 63  Improve Medicare Secondary Payer Safeguards 
 
Current Law:  Medicare is the secondary payer to certain group health plans when 
medical services were rendered to Medicare-entitled employees or to the Medicare-
entitled family members of employees.  Medicare is also the secondary payer in cases  
involving coverage under Worker's Compensation; black lung benefits; automobile and 
nonautomobile, no fault, or liability insurance; and Department of Veterans Affairs 
programs.  The CMS provides administrative funds to Medicare contractors to monitor 
and collect incorrect primary benefits paid on behalf of Medicare beneficiaries. 
     
Proposal (TLegislative, TProcedural):  The CMS should (1) ensure that contractor 
resources are sufficient and instruct contractors to recover improper primary payments 
from insurance companies; (2) implement financial management systems to ensure that 
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 justification of a legislative proposal to require insurance 
companies, underwriters, and third-party administrators to periodically submit private 
insurance coverage data directly to CMS. 
 
Reason for Action:  Measures are needed to collect accurate and timely information on 
primary payers.  This will help to reduce future Medicare overpayments resulting from 
unidentified Medicare secondary payer cases and improve the overpayment recovery 
process. 
 
Savings (in Millions):* 
FY 1  FY 2  FY 3  FY 4  FY 5 
$40  $190  $190  $190  $190 
 
    *Amounts total the savings shown in the Presidents FY 2001 budget. 
 
Status:  The CMS is pursuing the recommended administrative actions by improving 
processes to identify and recover Medicare secondary payer overpayments.  In this 
regard, a coordination-of-benefits contract has been awarded.  The Presidents  
FY 2001 budget proposed a requirement that insurance companies provide Medicare 
secondary payer information.  The CMS is negotiating data-sharing agreements with 
several state workers compensation boards and has signed or is negotiating voluntary 
agreements to exchange eligibility information with employers, insurers, and others.  The 
Healthcare Integrated General Ledger Accounting System, which is being developed, is 
expected to improve the accounting of Medicare secondary payer overpayments. 
 
    Report: 
A-09-89-00100 (mgmt. advisory report, 3/90)  A-02-98-01036 (final report, 7/00) 
A-09-91-00103 (final report, 8/92)           OEI-07-90-00760 (final report, 8/91) 
A-14-94-00391 (final report, 12/93) 
A-14-94-00392 (final report, 3/94)     
OEI-07-90-00763 (mgmt. advisory report, 11/91) 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 64   
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 ESRD for the first  
12 months of Medicare eligibility or entitlement.  Effective November 5, 1990, Medicare 
became secondary payer for the first 18 months of Medicare entitlement.  The Balanced 
Budget Act of 1997 made Medicare the secondary payer for the first 30 months of 
Medicare eligibility. 
     
Proposal (TLegislative):  The Medicare secondary payer provision should be extended 
to include ESRD beneficiaries without a time limitation.   
 
Reason for Action:  The proposed change for ESRD beneficiaries would make 
Medicare secondary payer provisions consistent with legislation passed by the Congress 
for aged and disabled beneficiaries, which does not restrict the period that Medicare is the 
secondary payer. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS was concerned that an indefinite secondary payer provision might 
encourage insurers to drop uneconomical services, namely facility dialysis and 
transplantation.  We continue to advocate that when Medicare eligibility is due solely to 
ESRD, the group health plan should remain primary until the beneficiary becomes 
entitled to Medicare based on age or disability and is not currently employed.  At that 
point, Medicare would become the primary payer. 
 
    Report: 
    A-10-86-62016 (final report, 12/87)               
   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 65   
Eliminate Medicare Payments for Services After Death 
 
Current Law:  Medicares Common Working File host sites receive daily updated 
beneficiary information, including date of death, from the CMS enrollment database, 
which receives daily data from the Social Security Administration and the Railroad 
Retirement Board.  In addition, the Common Working File receives some date-of-death 
information directly from institutional claims submitted by intermediaries. 
     
Proposal (TProcedural):  The CMS should require Medicare contractors to conduct 
annual postpayment reviews to identify and recover payments for services after death. 
 
Reason for Action:  Medicare paid $20.6 million in 1997 for services that started after 
beneficiaries deaths.  Further, we found that Medicare did not have uniform postpayment 
procedures to identify and recover payments for deceased beneficiaries.   
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$20.6  $20.6  $20.6  $20.6  $20.6 
 
Status:  The CMS concurred with our recommendations and took a number of actions to 
correct the deficiencies identified in the report.  In addition to providing special funding 
for contractors to identify and recover improper payments, CMS planned to issue 
instructions for FY 2001, requiring all Medicare contractors to perform these reviews. 
 
    Report: 
    OEI-03-99-00200 (final report, 3/00) 
               
 
       
 
       
 
     
       
 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 66   
Medicaid Reimbursement   
 
Eliminate or Reduce Transition Periods for Compliance With  
New Medicaid Upper Payment Limits 
 
Current Law:  In a final rule published in January 2001, CMS revised the Medicaid 
upper payment limit regulations to provide for three separate aggregate upper limits--one 
each for private, state, and nonstate government facilities.  The rule included 5- and       
8-year transition periods for states with approved rate enhancement state plan 
amendments.  The applicable transition period depended on the effective date of these 
amendments. 
     
Proposal (TLegislative, TRegulatory, TProcedural):  The CMS should seek 
authority to eliminate or reduce the 5- and 8-year transition periods included in the new 
upper payment limit regulations. 
 
Reason for Action:  We believe that the transition periods included in the regulations 
are longer than needed for states to adjust their financial operations in response to the 
new upper payment limits. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
 
Status:  The CMS did not concur with our recommendation.  According to CMS, the 
transition periods were established pursuant to either notice-and-comment rulemaking or 
legislation, and offering new proposals at this time would undermine the consensus 
reached through those processes.  The CMS anticipates no further action on our 
recommendation.   
 
    Report: 
    A-03-00-00216 (final report, 9/01) 
                       
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 67   
Delay or Repeal the Increase in Medicaid Disproportionate Share 
Hospital Payments 
 
Current Law:  The BIPA of 2000 modified the disproportionate share hospital (DSH) 
payment limit applicable to public hospitals in all states.  Beginning on the first day of 
the state FY that begins after September 30, 2002, and continuing for 2 years, the DSH 
limit will increase from 100 percent to 175 percent of uncompensated care costs. 
     
Proposal (TLegislative, TProcedural):  The CMS should seek legislation to at least 
delay, if not repeal, the implementation of the increased DSH limit until the need for and 
use of DSH funds for the actual direct care of uninsured patients can be sufficiently 
reviewed.  If the new limit is implemented, CMS should consider seeking legislative 
reform to ensure that DSH funds remain at the hospitals to provide care to vulnerable 
populations, rather than being returned to the states through intergovernmental transfers.   
The OIG also believes that any Medicaid payment returned by a provider to the state 
should be treated as a credit applicable to the Medicaid program.  The CMS should also 
perform any other studies of the DSH program that it deems appropriate to evaluate the 
reasonableness of DSH reimbursement. 
 
Reason for Action:  Based on audits in four states, we believe that DSH payments are 
not always retained and used by public hospitals and that the DSH funds received are not 
always calculated correctly.  We are concerned that by raising the limit to 175 percent, 
additional DSH funds may not actually be retained by public hospitals or the amount of 
incorrect DSH payments may increase. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$50  $190  $140  -  - 
 
Status:  The CMS initially concurred with our recommendations.  However, when 
commenting on the final report, CMS stated that the Presidents FY 2003 budget did not 
seek a change in DSH legislation. 
 
    Report: 
    A-06-01-00069 (final report, 12/01) 
                       
   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 68   
Require That Medicaid Reimbursement for Brand Name Drugs 
Be More in Line With Acquisition Costs 
 
Current Law:  Most states use AWP minus a percentage discount, which varies by 
state, as a basis for reimbursing pharmacies for drug prescriptions. 
     
Proposal (TLegislative, TProcedural):  The CMS should encourage the states to 
bring pharmacy reimbursement more in line with the actual acquisition cost of brand 
name drugs being realized by pharmacies in their states.  For example, we recommended 
a four-tier approach to reimbursement. 
 
Reason for Action:  The discount below AWP averaged 10.31 percent nationally in 
1999.  We believe that this is not a sufficient discount to ensure that a reasonable price is 
paid for drugs.  Our review, based on calendar year 1999 data, estimated that the actual 
acquisition cost for brand name drugs was an average of 21.84 percent below AWP, an 
increase of 19.3 percent over our previous estimate based on calendar year 1994 data. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$1,080  $1,080  $1,080  $1,080  $1,080 
 
Status:  The CMS concurred with our recommendation and is working with states to 
review their estimates of acquisition costs in light of our findings.  However, legislation 
may be needed to bring about substantial savings nationwide.   
 
    Report: 
    A-06-00-00023 (final report, 8/01) 
    A-06-02-00041 (final report, 9/02) 
 
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 69   
Limit Medicaid Reimbursement for Higher Priced Generic Drugs to 
That for Lower Priced Brand Name Drugs 
 
Current Law:  Each state Medicaid agency has the authority to develop its own 
reimbursement methodology for prescription drugs, subject to upper limits set by CMS.  
For the most part, state Medicaid agencies use either a discounted AWP or 
estimated/wholesale acquisition costs as the basis for calculating reimbursement for 
individual prescription drugs.  
     
Proposal (TRegulatory, TProcedural):  The CMS should limit Medicaid 
reimbursement for higher priced generic drugs to the amount reimbursed (prior to rebate) 
for lower priced brand name drugs or appropriately priced generic drugs. 
 
Reason for Action:  Currently, Medicaid reimburses certain generic prescription drugs 
at a higher level than lower priced brand name drugs.  We found that one Medicaid 
agency would have saved half a million dollars for just eight drugs in 1996 if 
reimbursement had been limited to the lower priced brand name drugs.  We estimate that 
the Medicaid program, as a whole, would have saved $7 million in 1996 for these eight 
drugs. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$7  $7  $7  $7  $7 
 
Status:  The CMS did not concur with our recommendation.  The agency agreed that 
high-priced drugs could adversely affect Medicaid reimbursement but believed that states 
already had the authority to institute programs to ensure appropriate prescription drug 
payments.  However, we found that the current authorities provided to states did not 
prevent Medicaid from paying more for generic versions of drugs than for brand name 
products. 
 
    Report: 
    OEI-03-97-00510 (final report, 7/98)                
       
                   
   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 70   
Require That Medicaid Reimbursement for Generic Drugs  
Be More in Line With Acquisition Costs 
     
Current Law:  Most states use AWP minus a percentage discount, which varies by 
state, as a basis for reimbursing pharmacies for drug prescriptions. 
     
Proposal (TLegislative, TProcedural):  The CMS should encourage the states to 
bring pharmacy reimbursement more in line with the actual acquisition cost of generic 
drugs being realized by pharmacies in their states.  For example, we recommended a 
four-tier approach to reimbursement.  
 
Reason for Action:  The discount below AWP averaged 10.31 percent nationally in 
1999.  We believe that this is not a sufficient discount to ensure that a reasonable price is 
paid for drugs.  Our review, based on calendar year 1999 data, estimated that the actual 
acquisition cost for generic drugs was an average of 65.93 percent below AWP, an 
increase of over 55 percent from our previous estimate based on calendar year 1994 data. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$470  $470  $470  $470  $470 
 
Status:  The CMS concurred with our recommendation.  The agency is working with 
states to strongly encourage them to review their estimates of acquisition costs and will 
follow up to ensure that they take our findings into account.  However, legislation may be 
needed to bring about substantial savings nationwide. 
 
    Report:   
    A-06-01-00053 (final report, 3/02) 
A-06-02-00041 (final report, 9/02) 
 
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 71   
Review Medicaid Reimbursement Methodology for HIV/AIDS Drugs 
 
Current Law:  Title XIX of the Social Security Act established Medicaid as a jointly 
funded, federal-state health insurance program to provide medical services to low-income 
persons.  Medicaid, the largest source of public coverage for prescription drugs, provides 
prescription drug benefits for almost half of the 335,000 persons living with HIV/AIDS 
who receive regular care.  In FY 1999, Medicaid spent $617 million for antiretroviral 
drugs to treat HIV/AIDS. 
     
Proposal (TLegislative, TProcedural):  The CMS should review the current 
reimbursement methodology and work with states to more accurately estimate pharmacy 
acquisition costs for 16 HIV/AIDS antiretroviral drugs examined in our report and initiate 
a review of Medicaid rebates for them. 
 
Reason for Action:  Medicaid pays up to 33 percent more than other Federal 
Government drug discount programs for 16 HIV/AIDS antiretroviral drugs.  Medicaid 
could have saved $102 million in federal/state funds ($54 million federal share) in  
FY 2000 if the 10 states we surveyed had purchased these antiretrovirals at the federal 
ceiling price used by the Department of Veterans Affairs, the Department of Defense, the 
Coast Guard, and certain public health agencies.  The program could have saved  
$140 million ($73 million federal share) if all states payments for HIV/AIDS 
antiretroviral drugs had been limited by these federal ceiling prices. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$140  $140  $140  $140  $140 
 
Status:  The CMS no longer believes that the recommended change is necessary.  The 
agency believes that reimbursement changes will occur through revised AWPs, based on 
the Presidents budget proposal for a legislative change that would base the Medicaid 
drug rebate on the difference between AWP and the best price for a drug. 
 
    Report: 
    OEI-05-99-00611 (final report, 7/01)              
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 72   
Establish Connection Between the Calculation of Medicaid  
Drug Rebates and Drug Reimbursement 
 
Current Law:  The Omnibus Budget Reconciliation Act of 1990 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, and other factors.  In contrast, most states reimburse 
pharmacies for Medicaid prescription drugs based on the AWP of the drug.    
     
Proposal (TLegislative, TProcedural):  The CMS should seek legislation that would 
require drug manufacturers participating in the Medicaid outpatient prescription drug 
program to pay Medicaid drug rebates based on AWP or study other viable alternatives to 
the current program of using AMP to calculate the rebates. 
 
Reason for Action:  Requiring manufacturers to pay Medicaid drug rebates based on 
AWP would (1) eliminate inconsistencies in the present methods used by drug 
manufacturers to calculate AMP; (2) establish a much-needed connection between the 
calculation of Medicaid drug rebates and the calculation of Medicaid reimbursement for 
drugs at the pharmacy level; and (3) reduce the burden of administering the Medicaid 
drug rebate program at the federal, state, and manufacturer levels. 
 
Savings (in Millions):* 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
     
*The legislative change would have resulted in about $1.15 billion in added rebates for 
100 brand name drugs that had the greatest amount of Medicaid reimbursement in  
1994-96. 
 
Status:  The CMS agreed to pursue a change in the Medicaid drug rebate program 
similar to that recommended.  The Presidents FY 2003 budget proposed a legislative 
change that would base the Medicaid drug rebate on the difference between AWP and the 
best price for a drug. 
 
    Report: 
    A-06-97-00052 (final report, 5/98)               
   
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 73   
Implement an Indexed Best Price Calculation in the  
Medicaid Drug Rebate Program 
 
Current Law:  The Omnibus Budget Reconciliation Act of 1990 authorized states to 
collect rebates from drug manufacturers for drug purchases made under the Medicaid 
program.  Rebates are calculated using AMP, the manufacturer's best price, and other 
factors.  To discourage drug manufacturers from raising AMP amounts, the basic rebate 
amount is increased by the amount that AMP increases over and above the consumer 
price index for all urban consumers.  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 (TLegislative):  The best price calculation in the Medicaid drug rebate 
program should be indexed to the consumer price index-urban. 
 
Reason for Action:  Since the inception of the Medicaid drug rebate program, drug 
manufacturers have consistently increased best prices in excess of the consumer price 
index for all urban consumers.  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 drugs included in our review. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$123  $123  $123  $123  $123 
 
Status:  The CMS continues to disagree with the recommendation.  The agency believes 
that savings will be achieved through the Presidents budget proposal for a legislative 
change that would base the Medicaid drug rebate on the difference between AWP and the 
best price for a drug.  We are continuing to monitor the drug rebate program; audits will 
continue to focus on enhancing the collection of rebates and providing potential savings 
to the rebate program. 
 
    Report: 
    A-06-94-00039 (final report, 10/95)                 
       
 
       
       
 
           
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 74   
Review Cost Effectiveness of Pay and Chase Methods for  
Medicaid Pharmacy Third-Party Liability Recoveries 
 
Current Law:  Medicaid provides a pharmacy benefit to over 32 million beneficiaries, 
many of whom have other forms of health insurance.  In accordance with 42 CFR 
433.145, when Medicaid beneficiaries have third-party insurance, Medicaid has a legal 
right to payment from these sources.  Consequently, Medicaid agencies must avoid costs 
by denying these claims from providers, who can then bill the liable third party.  
However, if CMS grants a cost-avoidance waiver, the Medicaid agency may pay and 
chase by paying providers up front and then seeking reimbursement from the liable third 
party.  In these cases, the state must demonstrate that paying and chasing for third-party 
liability is more cost effective than cost avoidance.   
     
Proposal (TProcedural):  The CMS should determine whether states cost-avoidance 
waivers for pharmacy claims are meeting the cost-effectiveness criterion.  The CMS can 
ascertain cost effectiveness by requiring states to track dollars that they pay and chase 
and the amounts that they recover.  The CMS should also review states policies to 
determine if states are paying and chasing pharmacy claims without waivers.    
 
Reason for Action:  Thirty-two states were at risk of losing over 80 percent  
($367 million) of the Medicaid pharmacy payments that they tried to recover from third 
parties through the pay-and-chase approach.  However, the cost-avoidance approach 
prevented $185 million from being at risk in 17 other states.  These findings suggest that 
the pay-and-chase method is not cost effective. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$185  $185  $185  $185  $185 
 
Status:  The CMS agreed that states cost-avoidance waivers should be reexamined.  
The agency is directing the regional offices to reevaluate the waivers and determine if 
states are paying and chasing claims without waivers.  In addition, CMS is working with 
states that currently cost-avoid pharmacy claims and with the National Association of 
Chain Drug Stores in developing guidance to assist states in implementing cost 
avoidance.   
 
    Report: 
    OEI-03-00-00030 (final report, 8/01) 
     
Previous Recommendations--Centers for Medicare and Medicaid Services  Page 75   
Indian Health Service 
 
Require Hospitals To Accept Medicare Rates in the 
Contract Health Services Program 
 
Current Law:  In administering its Contract Health Services program--a private sector 
health care purchasing programthe Indian Health Service (IHS) relies on voluntary 
procurement activities with hospitals to obtain favorable rates for inpatient care.  
Although the law requiring hospitals to accept Medicare rates as payment in full applies 
to other federal agencies with similar programs, it does not apply to IHS.   
     
Proposal (TLegislative, TRegulatory, TProcedural):  The IHS should revise its 
legislative proposal to incorporate the updated savings figures presented in our report and  
should identify elements to be included in the implementing regulations.  Also, IHS 
should continue to pursue the most favorable rates at hospitals that have previously 
offered less than Medicare rates and should strategically identify and pursue other 
opportunities where lower rates may be negotiated. 
 
Reason for Action:  As a federal purchaser of inpatient health care from the private 
sector, IHS should receive rates commensurate with those received by other federal 
agencies that engage in similar purchases.  However, IHS paid as much as $8.2 million 
more than Medicare rates for services provided in FY 1995 because there is no law 
requiring providers to offer Medicare or lower rates and because the agency has not been 
fully successful in its efforts to obtain favorable rates through contracts and other 
procurement mechanisms.  If the favorable Medicare rates were legislatively required, the 
dollars saved could be applied to the backlog of patient services that cannot be 
accommodated in the Contract Health Services program. 
 
Savings (in Millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$8.2  *  *  *  * 
     
    *Recurring, undetermined savings would result from the legislative change. 
 
Status:  The IHS fully concurred with our recommendations.  However, this item was 
not included in the Presidents FY 2003 budget. 
 
    Report: 
    A-15-97-50001 (final report, 1/99)
Previous Recommendations--Indian Health Service    Page 76   
National Institutes of Health 
 
Propose Changes to Office of Management and Budget Circular  
A-21 Regarding Recharge Centers 
 
Current Law:  Office of Management and Budget (OMB) Circular A-21, "Cost Principles for 
Educational Institutions," requires that billing rates for specialized service funds (recharge centers) 
be based on actual costs, designed to recover the aggregate cost of goods or services, and reviewed 
periodically. 
     
Proposal (TProcedural):  The Assistant Secretary for Administration and Management should 
propose changes to OMB Circular A-21 to improve guidance on the financial management of 
recharge centers.  The revision should include criteria for  
establishing, monitoring, and adjusting billing rates to eliminate accumulated surpluses and deficits; 
preventing the use of recharge funds for unrelated purposes and excluding unallowable costs from 
the calculation of recharge rates; ensuring that federal projects are billed equitably; and excluding 
recharge costs from the recalculation of facility and administrative cost rates. 
 
Reason for Action:  At 15 universities, 21 of the 87 recharge centers (1) accumulated surplus 
fund balances and deficits that were not used in the computation of subsequent billing rates, (2) 
overstated billing rates by transferring funds from center accounts or including unallowable costs in 
rate calculations, (3) billed users inequitably, and (4) used recharge center fund balances (surpluses 
or deficits) inappropriately to calculate facility and administrative cost rates.  These practices 
resulted in overcharges to the Federal Government of $1.9 million during FYs 1995 and 1996. 
 
Savings (in Millions): 
FYs 1 & 2  FY 3  FY 4  FY 5 
$1.9  *  *  * 
 
    *Recurring, undetermined savings would result from the circular change. 
 
Status:  The department concurred with our recommendations and is working with OMB on a 
revision to A-21.  The proposed revision, which was published in the Federal Register in August 
2002, would require that adjustments to a recharge centers billing rate take into account 
overrecoveries/underrecoveries from previous periods.  Rate adjustments would be required at least 
every 2 years.  The final rule is expected to be issued in FY 2003.    
 
    Report:   
    A-09-96-04003 (final report, 3/97) 
Previous RecommendationsNational Institutes of Health  Page 77   
 
 
 
 
            INTERNET ADDRESS 
 
 
 
 
The 2003 Red Book and other OIG materials, including final reports issued and OIG 
program exclusions, may be accessed on the Internet at the following address: 
 
 
http://oig.hhs.gov/