office of inspector general
r e D   B o o K
2005  
Office of Inspector General 
 
The mission of the Office of Inspector General (OIG), as mandated by Public  
Law 95-452, as amended, is to protect the integrity of the Department of Health and 
Human Services (HHS) programs, as well as the health and welfare of beneficiaries 
served by those programs.  This statutory mission is carried out through a nationwide 
network of audits, investigations, and inspections conducted by the following operating 
components: 
 
Office of Audit Services  
 
The 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 Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 
the Department, Congress, and the public with timely, useful, and reliable information on 
significant issues.  Specifically, these evaluations focus on preventing fraud, waste, or 
abuse and promoting economy, efficiency, and effectiveness in departmental programs.  
To promote impact, the reports also present practical recommendations for improving 
program operations. 
 
Office of Investigations 
 
The 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, civil False Claims Act recoveries, administrative sanctions, or civil monetary 
penalties.   
 
Office of Counsel to the Inspector General 
 
The Office of Counsel to the Inspector General (OCIG) provides legal services to OIG, 
rendering advice and opinions on HHS programs and operations and providing all legal 
support in OIGs internal operations.  OCIG imposes program exclusions and civil 
monetary penalties on health care providers and litigates those actions within the 
Department.  OCIG also represents OIG in the global settlement of cases arising under 
the civil False Claims Act, develops and monitors corporate integrity agreements, 
develops compliance program guidance, 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 OIGs semiannual reports to Congress 
include an identification of each significant recommendation described in previous 
semiannual reports on which corrective action has not been completed.  Thus, 
appendixes 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 
to reflect more current information as it becomes available.  The estimates have varying 
levels of precision.  Full implementation of the recommendations in the 2006 edition of 
the Red Book could produce substantial savings to the Department of Health and Human 
Services (HHS).  We hope this edition will prove useful to departmental decisionmakers, 
the Administration, and Congress in their continuing efforts to contain costs and improve 
program efficiency at HHS. 
     
   
Department of Health and Human Services 
 
HHS promotes the health and welfare of Americans and provides essential services to 
people of every age group.  The Departments major operating divisions are briefly 
described below: 
 
  The Centers for Medicare & Medicaid Services (CMS) administers the Medicare 
and Medicaid programs, as well as the State Childrens Health Insurance Program 
(SCHIP) and the new Medicare Part D and Medicare Advantage programs.  These 
programs, which account for over 80 percent of the HHS budget, provide medical 
care coverage for senior citizens, people who have disabilities or who are 
economically disadvantaged, 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 
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, including a variety of social service 
programs, designed to promote stability, economic security, responsibility, and 
self-support for the nations families.  
 
  The Administration on Aging awards grants to States for establishing 
comprehensive community-based systems that, through services such as 
congregate and home-delivered meals and in-home care and family caregiver 
support, assist in maintaining the dignity and quality of life of older 
Americans and their families. 
 
Significant OIG Activities  
 
Over the years, our findings and recommendations have contributed to many significant 
reforms and substantial savings in departmental programs.  For fiscal year (FY) 2005, we 
reported savings and expected recoveries of nearly $35.4 billion.  Such changes included 
capping the Medicaid upper payment limit, 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 section. 
 
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 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://www.oig.hhs.gov.  Each report also 
includes an appendix detailing our methodology for estimating cost savings.  We 
encourage the reader interested in a particular proposal to review the associated report. 
Introduction     Page ii   
 
Table of Contents 
 
New Recommendations 
 
Medicare Reimbursement................................................................................................1 
Stop Inappropriate Payments for Chiropractic Treatments...........................................1 
 
Medicaid Reimbursement - Centers for Medicare & Medicaid Services....................2 
CMS Oversight of Cost-Avoidance Waivers................................................................2
Applying the National Correct Coding Initiative to Medicaid Services.......................3
 
Medicaid Reimbursement - Administration for Children and Families 
Ability of Noncustodial Parents To Contribute Towards Their Childrens SCHIP 
   Costs...........................................................................................................................4 
Ability of Noncustodial Parents To Contribute Towards Their Childrens  
   Medicaid Costs...........................................................................................................5 
 
Medicaid Drug Reimbursement......................................................................................6 
Omission of Drugs From the Federal Upper Limit List in 2001...................................6 
Addition of Qualified Drugs to the Medicaid Federal Upper Limit List......................7 
Variation in State Medicaid Drug Prices......................................................................8 
Reemphasize to States the Requirements of the Medicaid Drug Rebate Program  
   with Regard to Accurate and Reliable Information and the Billing and  
   Collecting of Rebates.................................................................................................9
 
Previous Recommendations 
 
End Stage Renal Disease.................................................................................................11
Limit Payment Under Method II for Continuous Ambulatory Peritoneal  
   Dialysis to Method I Rates.......................................................................................11 
Reduce Medicare End Stage Renal Disease Payment Rates.......................................12 
Reduce the Epogen Reimbursement Rate...................................................................13 
 
Durable Medical Equipment..........................................................................................14 
Reduce Medicare Part B Payments for Power Wheelchairs.......................................14 
Improve Compliance With Medicare Coverage Criteria for Power Wheelchairs......15 
Reduce Medicare Part B Payments for Enteral Nutrition at Home............................16 
Identify Medical Equipment/Supply Claims Lacking Valid, Active Unique  
   Physician Identification Numbers............................................................................17 
Table of Contents    Page iii 
   
Prevent Medicare Losses Resulting From Early Payments for Medical  
   Equipment................................................................................................................18 
Prevent Inappropriate Medicare Part B Payments for Medical Equipment  
   in Skilled Nursing Facilities.....................................................................................19 
Eliminate Semiannual Maintenance Payments for Capped Rental Equipment..........20 
Adjust Reimbursement for Semielectric Hospital Beds.............................................21 
 
Medicare Managed Care................................................................................................22 
Modify Payments to Managed Care Organizations....................................................22 
Monitor Managed Care Organizations Rate Proposals..............................................23 
Place a Ceiling on Administrative Costs Included in Managed Care  
   Organizations Rate Proposals.................................................................................24 
 
Other Medicare Reimbursement...................................................................................25 
Encourage Least Costly Alternative Policies for Lupron Reimbursement.................25 
Reduce Medicare Payments to Ambulatory Surgical Centers for Intraocular  
   Lenses.......................................................................................................................26 
Identify and Collect Overpayments for Home Health Services Preceded by a  
   Hospital Discharge...................................................................................................27 
Change the Way Medicare Pays for Clinical Laboratory Tests..................................28 
Adjust Home Health Agency Prospective Payments..................................................29 
Require Physician Examination Before Ordering Home Health Services..................30 
Adjust Base-Year Costs in the Prospective Payment System for Skilled Nursing 
   Facilities...................................................................................................................31 
Eliminate Overpayments Under Consolidated Billing by Skilled Nursing  
   Facilities...................................................................................................................32 
Ensure Appropriateness of Medicare Payments for Mental Health Services.............33 
Conduct Medical Reviews of Part B Therapy Services..............................................34 
Ensure the Medical Necessity of Ambulance Claims.................................................35 
Recover Overpayments and Prevent Inappropriate Medicare Part B Payments  
   for Nail Debridement and Related Services.............................................................36 
 
Medicaid Reimbursement..............................................................................................37 
Declare That Medicaid Payments Returned by Public Providers Are Refunds..........37 
Establish Definitive Guidance on Calculating Upper Payment Limits and Use  
   Facility-Specific Limits Based on Actual Costs......................................................38 
Address and Resolve Excessive Medicaid Disproportionate Share Hospital  
   Payments..................................................................................................................39 
Ensure Compliance With Requirements for Medicaid School-Based Health  
   Services....................................................................................................................40 
Eliminate or Reduce Transition Periods for Compliance With Revised Medicaid 
   Upper Payment Limits.............................................................................................41 
Table of Contents    Page iv   
Require That Medicaid Reimbursement for Brand Name Drugs Be More in  
   Line With Acquisition Costs....................................................................................42 
Require That Medicaid Reimbursement for Generic Drugs Be More in Line  
   With Acquisition Costs............................................................................................43 
Establish Connection Between the Calculation of Medicaid Drug Rebates  
   and Drug Reimbursement........................................................................................44 
Implement an Indexed Best Price Calculation in the Medicaid Drug Rebate  
   Program....................................................................................................................45 
Review Cost Effectiveness of Pay and Chase Methods for Medicaid Pharmacy  
   Third-Party Liability Recoveries..............................................................................46 
 
Hospitals...........................................................................................................................47 
Continue Mandated Reductions in Hospital Capital Costs.........................................47 
More Accurately Reflect Base-Year Costs in Prospective Payment Systems  
   Capital Cost Rates....................................................................................................48 
Collect Overpayments for Prospective Payment System Transfers Incorrectly  
   Reported as Discharges............................................................................................49 
Reduce the Prospective Payment System Adjustment Factor for Indirect Medical 
   Education Costs........................................................................................................50 
Revise Graduate Medical Education Payment Methodology.....................................51 
Modify Payment Policy for Medicare Hospital Bad Debts........................................52 
Prevent Overpayments Under Medicares Postacute Care Transfer Policy................53 
Recover Overpayments and Expand the Diagnosis-Related Group Payment  
   Window....................................................................................................................54 
Adjust Base-Year Costs in the Prospective Payment System for Hospital  
   Outpatient Department Services..............................................................................55 
Establish More Consistent Outpatient Surgery Rates That Reflect Only  
   Necessary Costs.......................................................................................................56 
Apply a 190-Day Lifetime Limit and a 60-Day Annual Limit on Medicare  
   Inpatient Psychiatric Care........................................................................................57 
 
Administration on Aging................................................................................................58 
Use Voluntary Contributions To Expand Services for the Elderly.............................58 
Table of Contents    Page v   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Recommendations
 
   
Medicare Reimbursement 
 
Stop Inappropriate Payments for Chiropractic 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 
required that subluxations be demonstrated by an x-ray or physical examination.  In addition to 
these specific provisions, sections 1862(a)(1)(A) and 1988(e) of the Social Security Act require 
that all services billed to Medicare, including chiropractic manipulations, be medically necessary 
and supported by documentation. 
 
Proposal ( TProcedural):  CMS should ensure that chiropractic services comply with Medicare 
coverage criteria and require that its carriers educate chiropractors on Medicare Carriers Manual 
requirements for supporting documentation. 
  
Reason for Action:  Sixty-seven percent of chiropractic services provided to Medicare 
beneficiaries in 2001 did not meet Medicare coverage criteria and documentation requirements, 
potentially costing the program and its beneficiaries approximately $285 million.  Specifically, 
we found that the majority of inappropriately paid services were maintenance treatments 
($186 million unallowed payments). 
 
Savings (in Millions):  
FY 1 FY 2 FY 3 FY 4 FY 5
$285  TBD  TBD  TBD  TBD 
 
Status:  CMS agreed with our findings and recommendations.  CMS has clarified its 
chiropractic coverage criteria and indicated that most carriers are taking steps to reduce 
chiropractic error rates, including targeted educational efforts and service specific medical 
reviews.  In addition, as of October 1, 2004, CMS has required that chiropractors use the AT 
modifier to indicate that a service is not maintenance; only claims to which the modifier is 
attached are payable. 
 
Reports: 
OEI-06-97-00480 (final report, 9/98) 
OEI-04-97-00490 (final report, 11/98) 
OEI-09-02-00530 (final report, 5/05)
New Recommendations  Centers for Medicare & Medicaid Services  Page 1   
Medicaid Reimbursement 
 
CMS Oversight of Cost-Avoidance Waivers 
 
Current Law:  Medicaid is required to be the payer of last resort when a beneficiary has 
coverage under a third-party source such as Medicare, State workers compensation, or 
private health insurance.  Millions of Medicaid beneficiaries have additional health 
insurance through such third-party payers.  Pursuant to 42 CFR  433.145, when 
Medicaid beneficiaries have a right to payment for medical care from insurance or 
another third party source, Medicaid has a legal right to payment from these sources.  
Consequently, Medicaid agencies should avoid costs by denying claims from providers 
who can then bill a liable party.  However, Federal regulations (42 CFR  433.138) allow 
CMS to grant cost-avoidance waivers enabling State Medicaid agencies to pay-and-
chase by paying providers upfront 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 ((cid:62)Regulatory, (cid:62)Procedural, (cid:62)Legislative):  CMS should improve its oversight 
waivers of the cost-avoidance waiver process and require States to track the amount of 
money they attempt to recover from third parties.  
 
Reason for Action:  In 14 States with cost-avoidance waivers we identified $307 million 
in outstanding payments potentially owed by liable third parties in Federal fiscal year 
2000.  This amount is considered to be an outstanding debt because the Medicaid 
program has paid out money, yet the dollars associated with these claims have not been 
not recovered by the State nor validly denied by the third party. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$307  $307  $307  $307  $307 
 
Status:  CMS agreed that the agency should improve its oversight of the cost-avoidance 
waiver process.  CMS also expressed belief that the implementation of the Health 
Insurance Portability and Accountability Act (HIPAA) electronic billing standards has 
enabled providers to bill liable third parties more easily, thereby reducing Medicaid third 
party recovery activities.  CMS is continuing to promote States increased and 
appropriate use of cost avoidance, and will, in the future, reassess the impact of HIPAA 
electronic billing on third party recoveries.  The Presidents FY 2007 Budget proposes to 
discontinue all waivers that permit pay and chase of pharmacy claims. 
 
Report: 
OEI-03-00-00031 (final report, 2/04)
New Recommendations  Centers for Medicare & Medicaid Services  Page 2   
 
Applying the National Correct Coding Initiative to Medicaid Services 
 
Current Law:  CMS implemented the National Correct Coding Initiative (NCCI) in 
January 1996 to promote correct coding of health care services by providers and to 
prevent Medicare payment for improperly coded services.  Although use of NCCI edits is 
mandatory in the Medicare program, State Medicaid agencies are not currently required 
to use these edits in processing their claims. 
 
Proposal ( TProcedural):  CMS should encourage States to explore the use of Medicare 
CCI edits within their Medicaid programs. 
  
Reason for Action:  We found that most State agencies do not use the Medicare NCCI 
edits.  Only seven States use all or some of these coding edits.  Thirty-nine Medicaid 
agencies paid $54 million in 2001 for services that would have been denied based on 
NCCI edits.  Using these edits would promote correct coding by providers and reduce 
Medicaid expenditures for services that the edits would deny. 
   
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
     $54       $54       $54       $54      $54 
 
Status:  CMS concurred with our recommendation.  As of January 2006, CMS has 
discussed NCCI with both the CMS Regional Office Medicaid analysts and the State 
Systems Technical Advisory Group and has asked the States to review the Medicare 
NCCI edits against their own policies and adopt those edits that apply, unless State edits 
are in conflict or exceed those developed by CMS for Medicare.  In addition, CMS will 
provide the States with the Medicare NCCI Web site and 2004 OIG report.  CMSs 
Regional Offices will follow up with the States during their on-going discussions 
throughout 2006.  Finally, CMS will highlight the value of the NCCI at the next annual 
Medicaid Management Information System conference. 
 
Report: 
OEI-03-02-00790 (final report, 10/04)
New Recommendations  Centers for Medicare & Medicaid Services  Page 3   
Ability of Noncustodial Parents To Contribute Towards Their Childrens 
SCHIP Costs 
 
Current Law:  Current regulations require the State Title IV-D agency to petition the court 
or administrative authority, unless the custodial parent and children have satisfactory health 
insurance other than Medicaid, to include health insurance that is available to the 
noncustodial parent at reasonable cost in new or modified orders for support.  The Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996 directs the Title IV-D 
agency to notify an employer of a noncustodial parents medical support obligation and 
directly enroll his or her children if a health plan is available.  Title XXI of the Social 
Security Act, which authorizes the State Childrens Health Insurance Program (SCHIP), is 
silent with regard to collecting SCHIP costs from noncustodial parents who have a medical 
support order.  
 
Proposal ( (cid:62)Procedural):  CMS should (1) issue program guidance to advise States of 
their authorities under Federal law to collect SCHIP costs from noncustodial parents; and 
(2) determine whether additional Federal funds are needed to assist States in interfacing their 
Title IV-D and SCHIP databases and implementing a process to collect SCHIP costs from 
noncustodial parents and, as appropriate, provide such funds. 
 
Reason for Action:  States have an opportunity to enroll uninsured Title IV-D children in 
SCHIP and provide a means for noncustodial parents to fulfill their medical support 
obligations.  Unlike Federal Medicaid laws, SCHIP laws are silent with regard to an 
assignment of rights that would allow States to recover childrens medical expenses from 
their noncustodial parents.  While some States have already taken steps to collect SCHIP 
costs from noncustodial parents, others have questioned their authority to do so. Also, some 
States expressed concern about the costs of interfacing their Title IV-D and SCHIP databases 
and implementing administrative and policy changes to recover SCHIP costs from 
noncustodial parents.  According to these States, they may not achieve the full savings that 
we identified without additional Federal funds and/or incentive payments. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$14*  TBD*  TBD*  TBD*  TBD* 
 
*The FY1 estimate is based on our review of eight States.  We did not quantify savings for future years. 
 
Status:   CMS alerted States of their option to pursue the Federal and State shares of SCHIP 
costs.  CMS provided this information to States through the CMS SCHIP Technical Advisory 
Group and through its Regional Offices.  As an additional effort to ensure that States are 
knowledgeable about their authorities under Federal law to collect SCHIP cost from non-
custodial parents, CMS participated in the Medical Support Collaboration Regional meetings 
sponsored by ACF during 2005.  These meetings brought together Directors from Child 
Support Enforcement, Child Welfare, Medicaid, and SCHIP from each State along with 
Federal, Central and Regional Office representatives to collaborate on ways to increase 
medical support for children.   
 
Report:   
A-01-03-02502 (final report, 5/05) 
New Recommendations  Administration for Children and Families  Page 4   
Ability of Noncustodial Parents To Contribute Towards Their Childrens 
Medicaid Costs 
 
Current Law:  Current regulations require the State Title IV-D agency to petition the court 
or administrative authority, unless the custodial parent and children have satisfactory health 
insurance other than Medicaid, to include health insurance that is available to the 
noncustodial parent at reasonable cost in new or modified orders for support.  In addition, 
State Medicaid agencies are required to take reasonable cost-effective measures to determine 
the legal liability of third parties, including noncustodial parents, to pay for Medicaid 
services.  Finally, section 1912(b) of the Social Security Act allows States to recover 
Medicaid costs from individuals. 
 
Proposal ( (cid:62)Procedural, (cid:62)Legislative):  ACF and CMS should (1) provide specific 
guidance to States on collecting Medicaid costs from noncustodial parents who have the 
financial ability to pay or who do not have affordable employer-sponsored health coverage 
available, (2) clarify third-party liability regulations to assist State Medicaid agencies in 
coordinating with State Title IV-D agencies to collect Medicaid costs from noncustodial 
parents with medical support orders, and (3) seek legislation that would allow States to 
accumulate medical support payments to offset Medicaid fee-for-service costs for a 
reasonable period. 
 
Reason for Action:  States can reduce State and Federal Medicaid costs by increasing the 
number of noncustodial parents who provide medical support for their children.  While 
Federal regulations authorize States to recover Medicaid costs from third-party payers: 
(1) Title IV-D regulations do not provide specific guidance for collecting Medicaid costs 
from noncustodial parents who have the financial ability to pay and who do not have 
affordable employer-sponsored health coverage available; (2) Medicaid third-party liability 
regulations do not address how State Medicaid agencies should coordinate with State Title 
IV-D; and (3) Medicaid regulations do not address how the States should establish and 
administer Medicaid fee-for-service recoveries. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$99*  TBD*  TBD*  TBD*  TBD* 
 
*The FY1 estimate is based on our review of eight States.  We did not quantify savings for future years. 
 
Status:  In 2005, CMS provided guidance to States on the collection of Medicaid costs from 
available noncustodial employer-sponsored health care coverage through a series of meetings 
sponsored by ACF.  State Directors from Child Support Enforcement, Child Welfare, 
Medicaid, SCHIP and Federal representatives met to discuss ways to increase medical 
support for children. Follow up meetings are scheduled for 2006.  The Presidents FY 2007 
Budget proposes an amendment relating to payment of third party claims involving medical 
child support.  The Budget would extend to 90 days (from 30) before a State is required to 
make payment on these claims and seek reimbursement from responsible noncustodial 
parents. 
  
Report:  
A-01-03-02501 (final report, 6/05)
New Recommendations  Administration for Children and Families  Page 5   
Medicaid Drug Reimbursement 
 
Omission of Drugs From the Federal Upper Limit List in 2001 
 
Current Law:  Pursuant to 42 CFR  447.332, CMS is authorized to establish Federal 
upper limits (FUL) to limit the amount Medicaid can reimburse for multiple-source 
drugs.  These reimbursement limits were established to ensure that Medicaid acts as a 
prudent payer by taking advantage of current market prices for multiple-source drugs.  
Regulations set the FUL amount at 150 percent of the published price for the least costly 
therapeutically-equivalent product that can be purchased in quantities of 100 tablets or 
capsules plus a reasonable dispensing fee.  If the drug product is not available in 
quantities of 100 or if the drug is a liquid, then the FUL amount should be based on a 
commonly listed size. 
 
Proposal (TProcedural):  CMS should take steps to ensure that all drugs meeting the 
criteria set forth in Federal laws and regulations are included on the FUL list.  
 
Reason for Action:  Ninety drug products that met the established criteria were not 
included on the Federal upper limit list in 2001.  If 55 of these drug products had been 
included on the Federal upper limit list, the Medicaid program could have saved about  
$123 million in 2001. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS did not concur with our findings stating that our work did not follow the 
same procedures CMS uses when establishing the FUL, and included drugs for which a 
FUL is irrelevant (i.e., the FUL exceeds the average wholesale price).  Effective 
January 1, 2007, the Deficit Reduction Act of 2005 sets the FUL on Medicaid drug 
payment at 250 percent of the lowest Average Manufacturers Price (AMP) for a generic 
version of a drug and changes the criteria for drugs added to the FUL.  The FY 2007 
Presidents Budget proposes to limit reimbursement for multiple source drugs to 150 
percent of AMP.  CMS will still need to ensure that qualified drugs are added to the FUL 
in a timely manner. 
 
Report: 
OEI-03-02-00670 (final report, 2/04) 
New Recommendations  Centers for Medicare & Medicaid Services  Page 6   
Addition of Qualified Drugs to the Medicaid Federal Upper Limit List 
 
  Current Law:  Pursuant to 42 CFR  447.332, CMS is required to establish Federal 
upper limits in order to reduce the amount that Medicaid reimburses for multiple-source 
drugs.  These regulations instruct CMS to include a drug on the Federal upper limit list if 
the Food and Drug Administration (FDA) rates at least three versions of the drug as 
therapeutically equivalent, and the drug has at least three suppliers listed in national 
compendia.  The Deficit Reduction Act provides that Federal upper limits apply to 
multiple source drugs for which the FDA has rated two or more products to be 
therapeutically and pharmaceutically equivalent. 
 
Proposal (TProcedural):  CMS should establish an administrative procedure and 
schedule to govern the determination and publication of Federal upper limits.  
 
Reason for Action:  CMS does not consistently add qualified drugs to the Federal 
upper limit list in a timely manner.  Of the 252 first-time generic drugs approved between 
January 2001 and December 2003, 109 products met the statutory and regulatory criteria 
for inclusion.  However, only 25 were actually added.  It is estimated that Medicaid lost 
$167 million between 2001 and 2003 because qualified drugs were not added to the 
Federal upper limit list in a timely manner.  
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$167  $167  $167  $167  $167 
 
Status:  CMS concurred with the intent of our recommendation and has taken steps to 
support this objective.  However, CMS did not concur with our methodology in 
performing this review and savings estimates.  Effective January 1, 2007, the Deficit 
Reduction Act will change the criteria for dugs added to the FUL.  However, CMS will 
still need to ensure that qualified drugs are added to the FUL in a timely manner. 
 
Report: 
OEI-03-04-00320 (final report, 12/04) 
New Recommendations  Centers for Medicare & Medicaid Services  Page 7   
Variation in State Medicaid Drug Prices 
 
  Current Law:  Under section 1902(a)(30)(A) of the Social Security Act, CMS has the 
authority to establish methods and procedures to assure that Medicaid payments are 
consistent with efficiency, economy, quality of care and sufficient provider participation.  
As part of those efforts, CMS sets upper payment limits for services available under the 
Medicaid program, including maximum drug reimbursement limits.  These upper 
payment limits are designed to ensure that Medicaid acts as a prudent purchaser of drugs.  
Within these parameters, each State determines its own pharmacy reimbursement 
formula(s).  
 
Proposal (TProcedural):  CMS should share additional drug pricing information with 
States, conduct further research on the factors that affect States drug prices, and annually 
review States reimbursement data to target technical assistance to higher paying States. 
 
Reason for Action:  We found that the highest paying States unit reimbursement price 
ranged from 12 to 4,073 percent more per drug than the lowest paying State for 28 drugs. 
Medicaid could have saved an estimated $86.7 million in fiscal year 2001 if all States had 
reimbursed at the same price as the lowest paying State for each of the 28 drugs.  States 
drug prices are derived from multiple factors and vary even among States with the same 
pharmacy reimbursement formula. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$86.7  $86.7  $86.7  $86.7  $86.7 
 
Status:  CMS did not concur with the report due to concerns about data.  For example, 
CMS had concerns about the magnitude of the price variation and that the prices paid by 
the highest paying States for certain drugs are above the Federal upper payment limits. 
 
Report:  
OEI-05-02-00681 (final report, 9/04) 
New Recommendations  Centers for Medicare & Medicaid Services  Page 8   
Reemphasize to States the Requirements of the Medicaid Drug Rebate 
Program with Regard to Accurate and Reliable Information and the Billing 
and Collecting of Rebates 
 
Current Law:  The Omnibus Budget Reconciliation Act of 1990 established the 
Medicaid drug rebate program to allow Medicaid to receive pricing benefits 
commensurate with its position as a high-volume purchaser of prescription drugs.  
Section 1927 of the Social Security Act requires drug manufacturers to enter a rebate 
agreement with CMS to participate in the Medicaid program.  The manufacturer must 
submit a listing to CMS of all covered outpatient drugs and report quarterly its average 
manufacturer price and best price for each drug.  Federal regulations (45 CFR  
74.21(b)(3)) require that financial management systems provide for effective control and 
accountability for all funds, property, and other assets. 
 
Proposal (TProcedural):  CMS should reemphasize the requirement that States submit 
accurate and reliable information on their quarterly Medicaid drug rebate reports and 
emphasize to States their need to place a priority on their billing and collecting of drug 
rebates.  
 
Reason for Action:  In 45 of 49 States and the District of Columbia, our audits 
identified weaknesses in accountability and internal controls over their drug rebate 
programs.  As a result, States lacked adequate assurance that all drug rebates due the 
States were properly recorded, and/or collected.  Additionally, CMS did not have reliable 
information to properly monitor the drug rebate program. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS agreed with the recommendations.  The recommendations were addressed 
by State Medical Director Letter SMDL #05-005, dated December 22, 2005, which 
specifically references the accuracy of data on the HCFA-64 (Quarterly Medicaid 
Statement of Expenditures for the Medical Assistance Program). 
 
Report: 
A-06-03-00048 (final report, 7/06) 
New Recommendations  Centers for Medicare & Medicaid Services  Page 9   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Previous Recommendations
 
   
End Stage Renal Disease 
 
Limit Payment Under Method II for Continuous Ambulatory Peritoneal 
Dialysis to Method I Rates 
 
Current Law:  Section 1881(b)(7) of the Social Security Act limits payment under any 
method other than the composite rate (referred to as Method I) to no more than 130 percent 
of hospital-based dialysis facility rates for continuous cycling peritoneal dialysis.  Under 
Method I, dialysis facilities receive a set payment for each dialysis treatment and related 
supplies.  Alternately, under Method II a beneficiary may elect to receive all dialysis 
supplies from a durable medical equipment supplier to perform self-dialysis.  At 42 CFR  
414.330(c)(2), payment limits for continuous cycling peritoneal dialysis under Method II 
are established at 130 percent of the national median amount for hospital-based facilities.  
 
Proposal ((cid:62)Regulatory):  CMS should change the regulation to limit payment for Method 
II continuous cycling peritoneal dialysis kits to no more than Method I.  
 
Reason for Action:  Medicare pays for hemodialysis and continuous ambulatory 
peritoneal dialysis at the same rate, whether payment is made to a dialysis facility under 
Method I or to a durable medical equipment supplier under Method II.  Continuous cycling 
peritoneal dialysis is paid at this same rate when payment is made to a dialysis facility, but 
durable medical equipment suppliers may bill up to 130 percent of this rate.   
 
Savings (in Millions): 
  FY 1 FY 2 FY 3 FY 4 FY 5
  $12.2  $12.2  $12.2  $12.2  $12.2 
 
Status:  CMS does not concur with this recommendation, believing that Congress 
intended that durable equipment suppliers should have a higher payment limit.  CMS has 
eliminated billing for kits under Method II and requires suppliers to itemize supplies, which 
are reimbursed based on reasonable charges up to a monthly payment limit. 
 
Report: 
OEI-07-01-00570 (final report, 5/03)  
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 11   
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 Medicares 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 ((cid:62)Legislative):  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 
based on 1988 data. 
 
Status:  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 of Health and Human Services 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 Benefits Improvement and Protection Act 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.  The Medicare Prescription 
Drug, Improvement and Modernization Act of 2003, title VI, section 623, increased the 
composite rate by 1.6 percent for 2005, restored the composite rate exception for 
pediatric facilities, and required the Secretary to establish a basic case-mix adjusted 
prospective payment system for dialysis services. 
 
Report: 
A-14-90-00215 (final management advisory report, 7/90) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 12   
Reduce the Epogen Reimbursement Rate 
 
Current Law:  Section 1881(b)(11)(B) of the Social Security Act provided that the 
Secretary of the Department of Health and Human Services may set an appropriate 
reimbursement level for the drug Epogen beginning January 1, 1995. 
     
Proposal ((cid:62)Legislative, (cid:62)Regulatory):  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:   CMS agreed and the Benefits Improvement and Protection Act of 2000 
required the Secretary to develop a composite rate that includes, to the extent feasible, 
payment for laboratory tests and drugs that are routinely used in dialysis treatments but 
are now separately billable.  The Medicare Prescription Drug, Improvement, and 
Modernization Act (MMA) of 2003 requires the Secretary to establish a case-mix 
adjusted Composite Rate for 2005 and conduct a demonstration of a bundled case-mix 
adjusted prospective payment system.  The MMA directs CMS to use the results of one 
of our studies on separately billable end state renal disease drug payments and costs to set 
the 2005 Composite Payment Rate.  Section 623 of the MMA requires that beginning 
January1, 2005, payment for Epogen (as well as other end stage renal disease drugs) will 
be based on acquisition costs.  Effective January 1, 2006, Epogen will be based on 
average sales price plus 6 percent. 
 
Report:  
A-01-97-00509 (final report, 11/97) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 13   
Durable Medical Equipment 
 
Reduce Medicare Part B Payments for Power Wheelchairs 
 
Current Law:  Medicare Part B classifies certain items of durable medical equipment, 
such as power wheelchairs, as capped rental items.  Medicare pays for the rental of these 
items for a period of continuous use not to exceed 13 months.  Beneficiaries have the 
option of purchasing a power wheelchair within the first month of use.   
 
Proposal ((cid:62)Regulatory):  CMS should create a new coding system for K0011 power 
wheelchairs (standard-weight frame motorized/power wheelchairs with programmable 
control parameters for speed adjustment, tremor dampening, acceleration control, and 
braking) that accounts for the variety in models and prices for power wheelchairs and/or 
determine whether an inherent reasonableness review for K0011 power wheelchairs is 
appropriate. 
 
Reason for Action:  We compared Medicares CY 2003 median fee schedule amount 
for K0011 power wheelchairs to the median price available to the general public, the 
median wholesaler price, and the median price negotiated by suppliers with 
manufacturers and distributors.  The Medicare reimbursement amount for K0011 power 
wheelchairs exceeded the median prices from the three sources reviewed by 37 to 
242 percent.  While there was a wide range in price, 94 percent of the prices were less 
than the Medicare reimbursement amount.  
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$224  $224  $224  $224  $224 
 
Status:  CMS has changed much of the infrastructure related to power wheelchair 
coverage and payment including:  issuing a new National Coverage Determination which 
replaces the historical bed or chair confined standards, eliminating the Certificate of 
Medical Necessity, proposing a new coding system for power wheelchairs that outlines 
the particular features of the specific equipment supplied, implementing MMA provisions 
that expand the types of health professionals who may order certain types of power 
mobility devices, requiring a face-to-face examination of the patient, and moving toward 
a competitive bidding system for suppliers.  CMS has been working with local DME 
contractors on preparing educational materials for physicians and suppliers related to 
changes concerning coverage and reimbursement.  CMS also indicated that it will work 
with the DME contractors to carefully monitor billing trends to identify extraordinary 
situations where further intervention is warranted to ensure that claims are submitted 
accurately and that coverage decisions are appropriate. 
 
Report: 
OEI-03-03-00460 (final report, 4/04) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 14   
Improve Compliance With Medicare Coverage Criteria for Power 
Wheelchairs 
 
Current Law:  Medicare Part B classifies certain items of durable medical equipment, 
such as power wheelchairs, as capped rental items.  Medicare pays for the rental of these 
items for a period of continuous use not to exceed 15 months.  Beneficiaries have the 
option of purchasing a power wheelchair within the first month of use.   
 
Proposal ((cid:62)Regulatory):  CMS should improve compliance with Medicares coverage 
criteria for power wheelchairs by (1) requiring durable medical equipment regional 
carriers to revise current coverage policies for power wheelchairs to include specific 
information about the medical conditions for which Medicare will cover this item, 
(2) conducting frequent reviews of claims for K0011 power wheelchairs (standard-weight 
frame motorized/power wheelchairs with programmable control parameters for speed 
adjustment, tremor dampening, acceleration control, and braking), and (3) educating 
ordering physicians and beneficiaries about power wheelchair coverage criteria.   
 
Reason for Action:  We found that most claims for K0011 wheelchairs reviewed did 
not meet Medicares coverage criteria.  We also identified a number of other problems 
with Medicare claims for K0011 power wheelchairs, including missing and incomplete 
supporting documentation and equipment that was not used by Medicare beneficiaries. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$178  $178  $178  $178  $178 
 
Status:  CMS has changed much of the infrastructure related to power wheelchair 
coverage and payment including:  issuing a new National Coverage Determination 
replacing the historical bed or chair confined standards, eliminating the Certificate of 
Medical Necessity, proposing a new coding system for power wheelchairs that outlines 
the particular features of the specific equipment supplied, implementing MMA provisions 
that expand the types of health professionals who may order certain types of power 
mobility devices, requiring a face-to-face examination of the patient, and moving toward 
a competitive bidding system for suppliers.  CMS has been working with local DME 
contractors on preparing educational materials for physicians and suppliers related to 
changes concerning coverage and reimbursement.  CMS also indicated that it will work 
with the DME contractors to carefully monitor billing trends to identify extraordinary 
situations where further intervention is warranted to ensure that claims are submitted 
accurately and that coverage decisions are appropriate. 
 
Report: 
OEI-03-03-00600 (final report, 3/04) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 15   
Reduce Medicare Part B Payments for Enteral Nutrition at Home 
 
Current Law:  Medicare covers enteral nutrition therapy, commonly called tube feeding, 
for beneficiaries who cannot swallow due to a permanent medical problem or an 
impairment of long and indefinite duration.  Medicare Part B coverage of enteral nutrition 
therapy is provided under the prosthetic device benefit for beneficiaries residing at home, 
or in a nursing facility when the stay is not covered by Medicare Part A.   
 
Medicare groups enteral nutrition formula products into seven classes based on their 
composition.  Products falling within these classes are identified by one of seven 
Healthcare Common Procedure Codes for reimbursement purposes.  A wide variety of 
enteral nutrition formulas are grouped under Category I (code B4150). 
 
Proposal ((cid:62)Regulatory):  CMS should consider using the inherent reasonableness 
authority to reduce the Medicare reimbursement amount for Category I enteral nutrition 
formulas.  
 
Reason for Action:  We compared the amount Medicare reimburses for Category I 
enteral nutrition formulas to prices available to the supplier community.  We found that the 
amount Medicare reimburses for Category I formulas exceeded median contract prices 
available to suppliers from the sources we reviewed by 70 to 115 percent. 
 
Savings (in Millions): 
  FY 1 FY 2 FY 3 FY 4 FY 5
  $82  $82  $82  $82  $82 
 
Status:  CMS concurred with our recommendation, but must wait to initiate inherent 
reasonableness reviews until written procedures for conducting these reviews are 
developed according to statute and regulation.  In accordance with the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003, competitive acquisition 
of enteral nutrition will be phased in beginning in 2007. 
 
Reports: 
OEI-03-94-00021 (final report, 4/96) 
OEI-03-02-00700 (final report, 2/04) 
 
 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 16   
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 ((cid:62)Procedural):  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:  CMS concurred with our recommendation and implemented an edit to reject 
claims listing a deceased physicians identification number.  CMS decided not to 
implement edits for inactive and invalid physician identification numbers.  Instead, the 
agency initiated provider education efforts and issued two program memorandums.  
 
Report: 
OEI-03-01-00110 (final report, 11/01)  
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 17   
Prevent Medicare Losses Resulting From Early Payments for Medical 
Equipment 
 
Current Law:  Medicare covers durable medical equipment (DME), prosthetics, 
orthotics, and supplies under Medicare Part B.  Medicare allowed approximately 
$6 billion for these claims in 1998.   
     
Proposal ((cid:62)Regulatory):  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:  CMS did not concur with our recommendation and stated that delaying payment 
of DME, prosthetics, orthotics, and supply claims until the end of the service period 
would not be a desirable practice.   
 
    Report:  
    OEI-03-99-00620 (final report, 6/00)  
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 18   
Prevent Inappropriate Medicare Part B Payments for Medical Equipment in 
Skilled Nursing Facilities 
 
Current Law:  Federal law prohibits Medicare Part B durable medical equipment 
(DME) payments on behalf of beneficiaries who are in a skilled nursing facility in a 
qualifying Medicare Part A stay. 
     
Proposal ((cid:62)Procedural):  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:  CMS concurred with our recommendation and has developed a Common 
Working File record that identifies those beneficiaries who are admitted to SNFs and 
denies payment for DME during SNF stays. 
 
    Report: 
    A-01-00-00509 (final report, 7/01) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 19   
Eliminate Semiannual Maintenance Payments for Capped Rental Equipment 
 
Current Law:  Medicare Part B covers certain durable medical equipment (DME) 
under the capped rental category.  Beneficiary payments for capped rental equipment are 
made monthly and may not exceed 15 months of rental.  After the rental period ends, 
Medicare contractors may request reasonable payments from Medicare beneficiaries for 
either continuing maintenance or repair of these items.   
     
Proposal ((cid:62)Legislative):  CMS should eliminate the semiannual maintenance payment 
allowed for capped rental equipment and pay for repairs only when needed.  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:  Medicares 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:  CMS concurred with our recommendation and has included in their FY 2005 
budget a legislative proposal to eliminate the 15-month rental option for capped rental 
equipment by requiring that continuous rentals be converted to purchases after 
13 months. 
 
    Report: 
OEI-03-00-00410 (final report, 6/02) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 20   
Adjust Reimbursement for Semielectric Hospital Beds 
 
Current Law:  Section 1834 of Title XVIII of the Social Security Act contains special 
payment rules for six categories of durable medical equipment (DME). 
 
Proposal ((cid:62)Regulatory):  CMS should issue a final rule on the application of its 
inherent reasonableness authority so that it can be used to adjust the fee schedule amounts 
for procedure code E0260 pertaining to semielectric hospital beds. 
 
Reason for Action:  Our review disclosed that Medicare Part B fee schedule amounts 
for semielectric 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 semielectric 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:  CMS concurred with our recommendations but is waiting to initiate inherent 
reasonableness reviews pending development of written procedures for conducting these 
reviews.  In accordance with the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003, the Medicare fee schedule amounts for semielectric hospital 
beds were reduced by an average of 13.5 percent effective January 1, 2005. 
 
Report: 
A-09-01-00109 (final report, 12/02) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 21   
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 
payments to reflect beneficiaries health status.  The Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 redesignated the M+C program as 
Medicare Advantage and increased payments, including a provision to the payments to 
Medicare outlays in fee-for-service sector. 
     
Proposal ((cid:62)Legislative):  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 
Medicare Advantage Organization (MAO) data, we concluded that MAOs receive more 
than adequate funds to deliver the Medicare package of covered services.  The basis used 
to calculate monthly capitation payments to MAOs was flawed, resulting in higher-than-
necessary payments; Medicare payments funded excessive administrative costs; and 
MAOs 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:  Subsequent legislation to the BBA of 1997 increased payments to MAOs.  
However, we still have concerns that the Federal payment to MAOs is excessive because 
the 1997 base rate was flawed.  We will be updating our work to examine MAO 
payments as a result of all legislative changes. 
 
    Report: 
    A-14-00-00212 (final report, 9/00) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 22   
Monitor Managed Care Organizations Rate Proposals  
 
Current Law:  To participate in the Medicare Advantage program, each managed care 
organization must submit a bid proposal to CMS before the contract period begins.  The 
proposal is integral to pricing a Medicare Advantage organizations (MAO) 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 ((cid:62)Procedural):  CMS should monitor the proposals to ensure the accuracy of 
the data, work with MAOs to address the deficiencies noted in annual audits of the 
proposals, ensure that MAOs have accounting systems and procedures in place to 
properly prepare their proposals, and initiate the return of funds for plans that 
overcharged their enrollees. 
 
Reason for Action:  Our reviews of 186 proposals submitted by 55 MAOs for calendar 
year 2000 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 
  36 percent overstated the beneficiary premium/cost-sharing amounts, and/or 
the MAO 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:  CMS generally concurred with the recommendations.  However, CMS had 
concerns with the methodology we used in calculating the impact on Medicare 
beneficiaries from overcharges and/or forfeited additional benefits.  Under provisions of 
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, if the 
monthly Medicare payments amount exceeds the monthly bid amount, 75 percent of the 
resultant savings will be given to the beneficiary in the form of additional benefits and/or 
reduced premiums with the remaining 25 percent retained by the Federal Government.  
Thus, the accuracy of the underlying cost assumptions in the bid proposals will affect 
Federal funds. 
 
Report: 
A-09-01-00051 (final report, 7/02) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 23   
Place a Ceiling on Administrative Costs Included in Managed Care 
Organizations Rate Proposals 
 
Current Law:  Each Medicare Advantage organanization (MAO) is required to submit 
a bid 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. 
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 ((cid:62)Legislative, (cid:62)Procedural):  CMS should institute a reasonable ceiling on the 
administrative costs permitted in an MAO proposal.   
 
Reason for Action:  As a percentage of the total rate proposed, the administrative rate 
varied widely among MAOs reviewed, regardless of the type of MAO (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.  In addition, our reviews of the administrative costs 
included in the 1997 proposals submitted by nine MAOs found that $66.3 million of the 
actual administrative costs incurred would have been recommended for disallowance had 
they been required to follow Medicares general principle of paying only reasonable 
costs.  In a subsequent review of 10 MAOs proposals for 2000, we found that $97.1 
million in base-year administrative costs would have been recommended for 
disallowance had the MAOs 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:  We will be updating our work to examine administrative costs under provisions 
of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.  CMS 
did not agree with our recommendation to institute a ceiling on the administrative costs 
included in MAO proposals.  
 
    Reports: 
    A-14-98-00210 (final report, 1/00) 
    A-03-98-00046 (final report, 1/00) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 24   
Other Medicare Reimbursement  
 
Encourage Least Costly Alternative Policies for Lupron Reimbursement 
 
Current Law:  Medicare Part B does not currently pay for over-the-counter or most 
outpatient prescription drugs, although the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) implemented a new prescription drug benefit.  At 
the time of the study, Medicare reimbursed for Lupron at 95 percent of the average 
wholesale price, but under the MMA, as of January 2004, the reimbursement decreased to  
81 percent of average wholesale price.  Carriers have discretion to use a least costly 
alternative policy when reimbursing for drugs.  This policy requires that carriers not 
cover the additional cost of a more expensive product if a clinically comparable product 
costs less. 
 
Proposal ((cid:62)Procedural):  CMS should recommend that all Medicare carriers apply a 
least costly alternative policy to Lupron.   
 
Reason for Action:  Our review of 2002 drug claims identified $40 million in potential 
savings if 10 carriers not now using a least costly alternative implemented such a policy.   
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$4  $4  $4  $4  $4 
 
Status:  CMS partially concurred, agreeing to facilitate communication between carriers 
that have adopted a least costly alternative policy and those that have not.  However, 
CMS also stated that it does not generally influence the application of local medical 
review policies in specific circumstances.   
 
Report: 
OEI-03-03-00250 (final report, 1/04) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 25   
Reduce Medicare Payments to Ambulatory Surgical Centers for Intraocular 
Lenses  
 
Current Law:  Section 1833(i)(2)(A)(iii) of the Social Security Act requires that 
Medicare payments to ambulatory surgical centers for intraocular lenses be reasonable 
and related to the cost of the lens. 
 
Proposal ((cid:62)Regulatory):  CMS should reduce Medicare payments to ambulatory 
surgical centers for intraocular lenses in a manner that takes into account the different 
types and cost of the lenses.  
 
Reason for Action:  Payment is currently set at $150 per lens for all types of lenses 
except for certain new technology intraocular lenses.  We found that while the average 
cost of a lens was $90.30, this varied significantly by the type of material used to make 
the lens.  The cost of soft acrylic lenses averaged $124.77, silicone lenses averaged 
$69.37, and polymethyl methacrylate averaged $39.10.  
 
Savings (in Millions): 
FY 1    FY 2    FY 3    FY 4    FY 5
$34.8    $34.8    $34.8    $34.8    $34.8 
 
Status:  The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
requires CMS to implement a revised payment system for ambulatory surgical centers 
between January 2006 and January 2008.  CMS will consider our recommendation when 
devising that payment system. 
 
Report: 
OEI-06-02-00710 (final report, 3/04) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 26   
Identify and Collect Overpayments for Home Health Services Preceded by a 
Hospital Discharge 
 
Current Law:  Under Medicare regulations, home health agencies are eligible for a 
higher payment for services provided to beneficiaries who were not discharged from an 
inpatient hospital within 14 days of receiving home health services. 
 
Proposal ((cid:62)Procedural):  CMS should require its regional home health intermediaries  
to (1) recover the overpayments identified by OIG, (2) identify and collect overpayments 
made following the period of OIGs review, and (3) educate home health agencies to 
ensure that they accurately code prior beneficiary discharge data on the patient 
assessment forms. 
 
Reason for Action:  Our reports to each of the regional intermediaries estimated that, 
in FY 2001, nearly $23 million in overpayments were made because home health 
agencies did not properly code prior hospital discharges on the beneficiaries assessment 
forms. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$23  $23  $23  $23  $23 
 
Status:  The regional home health intermediaries generally agreed with our 
recommendations.  CMS has instructed them to collect the overpayments.  In April 2004, 
CMS implemented prepayment edits and postpayment claims data analysis to prevent and 
detect overpayments.  We are continuing our work to identify additional overpayments 
that occurred prior to the implementation of the edits. 
 
Reports: 
A-01-03-00500 (final report, 7/03) 
A-04-03-00018 (final report, 2/04) 
A-09-03-00042 (final report, 2/04) 
A-07-03-04021 (final report, 3/04) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 27   
Change the Way Medicare Pays for Clinical Laboratory Tests 
 
Current Law:  Medicare pays for most clinical laboratory tests 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 Benefits 
Improvement and Protection Act 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.  The Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) mandated that the annual adjustment to the clinical 
laboratory fee schedule for 2004 through 2008 shall be 0 percent. 
 
Proposal ((cid:62)Legislative, (cid:62)Procedural):  We have continually recommended that CMS  
(1) review payment levels for laboratory services and (2) reinstate 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, 
we continue to believe that payments for laboratory services need to be evaluated.  In 
addition, our previous work indicated that these conditions have contributed to the significant 
increase in the use of laboratory services.  And, because of the potential for overutilization 
and the fact that beneficiaries are not always aware of the tests being performed, we believe 
that CMS should reconsider our recommendation to study the reinstatement of beneficiary 
coinsurance and deductible provisions for laboratory services. 
 
Savings (in Millions):     
     FY 1 FY 2 FY 3 FY 4 FY 5
Copayment  $1,130  $1,240  $1,370  $1,960  $2,130 
Fee Schedule Adjustment  TBD  TBD  TBD  TBD  TBD 
   
 
This savings estimate would result from the copayment; the saving estimate for fee schedule adjustments 
has yet to be determined. 
 
Status:   CMS has taken corrective actions to reduce payments for laboratory services.  A 
proposal to reduce payment updates from FY 2003 through 2005 was included in the 
Presidents FY 2001 budget, as well as was 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.  As of result of the Institute of Medicines recommendations, the 
MMA mandated that CMS conduct a demonstration that applies competitive bidding to 
clinical laboratory services.  The initial report was due to Congress by December 31, 2005.  
The MMA also set the laboratory fee schedule updates at 0 percent for 2004 through 2008. 
 
    Reports: 
A-09-89-00031 (final report, 1/90) 
A-09-93-00056 (follow-up report, 1/96)     
 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 28   
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 ((cid:62)Legislative):  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.  CMS believes that several factors nullify any need for 
further payment rate changes, including the Congressionally-imposed payment reduction, 
which was effective FY 2003. 
 
Report: 
A-04-99-01194 (final report, 11/99) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 29   
Require Physician Examination Before Ordering Home Health Services 
 
Current Law:  Section 1861 of the Social Security Act authorized Medicare Part A 
payments for home health services.  Home health services are a covered Medicare 
service.  Prior to the implementation of the prospective payment system for home health 
services on October 1, 2000, providers were paid on a cost basis subject to limits 
established by the Department.  Home health agencies are now reimbursed under a 
prospective payment system. 
     
Proposal ((cid:62)Regulatory):  CMS should revise Medicare regulations 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 of 
our 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.  CMS 
also provided additional payments for physician care plan oversight and education for 
physicians and beneficiaries. 
 
    Reports: 
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 & Medicaid Services  Page 30   
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 ((cid:62)Legislative):  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:  CMS initially agreed with our recommendation but no additional analysis has 
been done. 
 
    Reports: 
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 & Medicaid Services  Page 31   
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 ((cid:62)Procedural):  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 serviceonce to the nursing facility under the 
Part A prospective payment and again to the outside supplier under Part B.  Our 
subsequent nationwide reviews identified $149 million in potentially improper Medicare 
payments during calendar years 1999 and 2000 for services that were subject to 
consolidated billing. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$74.5  $74.5  $74.5  $74.5  $74.5 
 
Status:  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.  We currently are reviewing this area to determine if substantial errors are 
still present. 
  
    Reports: 
A-01-99-00531 (final report, 3/00) 
A-01-00-00538 (final report, 6/01) 
A-01-02-00513 (final report, 5/04) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 32   
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 services, to be reasonable and necessary for the diagnosis or 
treatment of an illness or injury. 
 
Proposal ((cid:62)Procedural):  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. 
 
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.  Reviews are ongoing at 
additional Community Mental Health Centers and at fiscal intermediaries.  We currently 
are reviewing this area to determine if substantial errors are still present. 
 
Reports: 
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 & Medicaid Services  Page 33   
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 patients condition. 
     
Proposal ((cid:62)Procedural):  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:  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.  The Therapy Review Program confirms that therapy 
services were often billed incorrectly.  Contractors have continued to use data analysis 
tools and techniques to identify potential improper payments.  The November 2005 
Comprehensive Error Rate Testing (CERT) report continued to indicate that physical 
therapists, occupational therapists, and physical medicine specialists continue to bill 
improperly.  Contractors will use CERT findings to continue to refine their medical 
review and education interventions to target providers and provider types posing risks to 
the Medicare program. 
 
    Reports: 
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 & Medicaid Services  Page 34   
Ensure the Medical Necessity of Ambulance Claims 
 
Current Law:  Medicare covers and pays for emergency and nonemergency ambulance 
transports when a beneficiarys medical condition, at the time of transport, is such that 
other means for transportation, such as taxi, private care, wheelchair van, or other type of 
vehicle, would jeopardize the beneficiarys health.  Ambulance transport must be 
reasonable and medically necessary. 
     
Proposal ((cid:62)Procedural):  CMS should implement program integrity activities designed 
to reduce improper payments for ambulance transports at greatest risk of error. 
 
Reason for Action:  We conducted this study as a followup to previous work that 
identified high payment error rates for ambulance transports.  This study indicated that 
25 percent of ambulance transports did not meet Medicares program requirements, 
resulting in an estimated $402 million of improper payments. 
 
Savings (in Millions):* 
FY 1 FY 2 FY 3 FY 4 FY 5
$402  $402  $402  $402  $402 
     
Status:  CMS concurred with our recommendation.  CMS indicated that it will advise all 
contractors to consider implementing prepayment edits for trips with an origin or 
destination modifier for a dialysis facility, as well as nonemergency transports to and 
from a hospital, nursing home, or physicians office.  In addition, CMS will encourage 
contractors to consider obtaining documentation for ambulance supplier and third party 
providers to determine that ambulance transports meet program requirements on post-
payment review and educating supplier and third party providers who initiate ambulance 
transports about the appropriate use of Medicares nonemergency ambulance transport 
benefit. 
  
    Reports: 
    OEI-09-95-00412 (final report, 12/98) 
OEI-05-02-00590 (final report, 1/06) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 35   
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 ((cid:62)Procedural):  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 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:  CMS concurred with our recommendations.  The agency planned to continue to 
maximize the effectiveness of its medical review strategy and collect the overpayments 
identified in our sample.  CMS prepared a provider education article to educate 
podiatrists on Medicare policy for paying nail debridement claims.   
 
    Report: 
    OEI-04-99-00460 (final report, 6/02) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 36   
Medicaid Reimbursement 
 
Declare That Medicaid Payments Returned by Public Providers Are Refunds 
 
Current Law:  Since the inception of the Medicaid program, the Federal Government 
and the States have shared in its costs.  States pay medical providers who furnish care and 
services to Medicaid-eligible individuals.  The Federal Government pays the States its 
share of these medical assistance payments according to a defined formula, which yields 
the Federal medical assistance percentage.  This percentage ranges from 50 percent to 
76 percent, depending on the States per capita income.   
 
Proposal ((cid:62)Legislative):  CMS should propose legislation to require that Medicaid 
payments returned by public providers to the State are declared a refund to be used to 
offset or credit the Federal financial participation generated by the original payment. 
Congress did not act on the Presidents FY 2006 legislative proposal that would have 
accomplished this goal. 
 
Reason for Action:  We believe that Medicaid payments returned to the State by public 
providers, often through the use of intergovernmental transfers, is indicative that the 
States did not incur health care expenditures for which Federal matching funds were 
claimed.  Currently, the States have developed financial mechanisms involving 
intergovernmental transfers to obtain Federal funds without committing their share of the 
required matching funds. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
 TBD  TBD  TBD  TBD  TBD 
 
Status:  In April 2004, CMS testified before the House Energy and Commerce 
Committee and indicated that it supports declaring these returned funds as credits or 
refunds to offset the original State payment.  The Federal share would then be calculated 
based on the net Medicaid payment retained by the provider.  The Presidents FY 2007 
Budget proposes an administrative change that builds on past CMS efforts to curb 
questionable financing practices by (1) recovering Federal funds that are diverted from 
government providers and retained by the State and (2) capping payments to government 
providers to no more than the cost of furnishing services to Medicaid beneficiaries. 
 
Report:   
A-03-00-00216 (final report, 9/01) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 37   
Establish Definitive Guidance on Calculating Upper Payment Limits and Use 
Facility-Specific Limits Based on Actual Costs 
 
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 limitsone 
each for private, State, and non-State government-owned facilities.  The regulations 
stipulate that aggregate State payments for each class of service (for example, inpatient 
hospital services) may not exceed a reasonable estimate of the amount the State would 
have paid under Medicare payment principles. 
 
Proposal ((cid:62)Legislative,  (cid:62)Regulatory,  (cid:62)Procedural):  CMS should provide States with 
definitive guidance on calculating the upper payment limit so that a uniform standard is 
applied to all States.  This guidance could possibly be provided to States through a letter 
to the Medicaid Directors.  We also believe that States should use facility-specific upper 
payment limits that are based on actual cost report data. 
 
Reason for Action:  Our audits have shown that States applied various methods to 
compute the Medicare upper payment limit.  In some cases, they used routine cost limits; 
other States used various prospective payment system values.  Allowing States this 
flexibility in complying with Medicaid payment principles has resulted in significant 
differences in the calculation of the State funding pools used in applying the upper 
payment limit provisions. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
 TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS partially concurred with our recommendations.  CMS agreed that it should 
provide more guidance to the States on calculating the upper payment limit.  In addition, 
the Presidents FY 2006 budget proposed a legislative change that would limit 
reimbursement levels to government providers to no more than the cost of providing 
services.  
 
Report:   
A-03-00-00216 (final report, 9/01) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 38   
Address and Resolve Excessive Medicaid Disproportionate Share Hospital 
Payments 
 
Current Law:  Section 1923 of the Social Security Act (the Act), as amended by the 
Omnibus Budget Reconciliation Act of 1993, requires that States make Medicaid 
disproportionate share hospital (DSH) payments to hospitals that serve disproportionate 
numbers of low-income patients with special needs.  Section 1923(g) of the Act limits these 
payments to a hospitals uncompensated care costs, which are the annual costs incurred to 
provide services to Medicaid and uninsured patients less payments received for those 
patients. 
 
Proposal ((cid:62)Regulatory, (cid:62)Procedural):  CMS should ensure resolution of the monetary 
recommendations to individual States regarding DSH payments that exceeded the hospital-
specific limits. CMS should establish regulations requiring States to (1) implement 
procedures to ensure that future DSH payments are adjusted to actual incurred costs,  
(2) incorporate these procedures into their approved State plans, and (3) include only 
allowable costs as uncompensated care costs in their DSH calculations.  CMS should 
strengthen its review and approval of State plans to ensure consistency with Federal 
requirements and use results of audits conducted under the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 in its review process. 
 
Reason for Action:  Nine of the ten States reviewed did not comply with the hospital 
specific DSH limits imposed by section 1923(g) of the Act.  As a result, payments exceeded 
the hospital-specific limits by about $1.6 billion ($902 million Federal share).  About $679 
million of the total $902 million in payments were based on historical costs.  States did not 
later adjust the payments using actual costs.  States also made excess payments because they 
included unallowable costs in their calculations of hospital-specific limits.  About $151 
million of the unallowable costs consisted of costs for institutions for the treatment of mental 
diseases and nonhospital services, and about $72 million was for various unallowable costs 
such as bad debts, miscalculations, and other accounting errors.  In addition, three States 
required hospitals to return DSH payments totaling approximately $3.6 billion through 
intergovernmental transfers. 
 
Savings (in Millions): 
FY 1    FY 2    FY 3    FY 4    FY 5
TBD    TBD    TBD    TBD    TBD 
 
Status: 
CMS is recovering overpayments from individual States and developing a DSH program 
regulation.  The Presidents FY 2007 Budget proposes an administrative change to limit 
Federal reimbursement to government providers to no more than cost. 
 
Reports: 
A-06-00-00058 (final report, 6/01)    A-03-01-00226 (final report, 5/03) 
A-06-00-00026 (final report, 6/01)    A-09-02-00054 (final report, 5/03) 
A-07-01-02089 (final report, 5/02)    A-09-02-00071 (final report, 5/03) 
A-07-01-02093 (final report, 8/02)    A-05-01-00087 (final report, 3/04)  
A-09-01-00098 (final report, 9/02)    A-04-01-02006 (final report, 6/04) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 39   
Ensure Compliance With Requirements for Medicaid School-Based Health 
Services 
 
Current Law:  Section 1903(c) of the Social Security Act was amended in 1988 to allow 
Medicaid payment of covered services for children under the Individuals with Disabilities 
Education Act.  The Act requires States to provide appropriate special education and related 
services to children with disabilities or special needs.   
 
Proposal ((cid:62)Procedural):  CMS should recover the overpayments identified during our 
audits of school-based claims in individual states.  In addition, States should disseminate 
CMS guidance and other information to the local education agencies in a timely manner, 
monitor local education agencies to ensure compliance with Federal and State requirements, 
and assist the local education agencies in developing written policies and procedures that 
require service providers to document all health services and to retain those records for 
review.  States should refund overpayments to the Federal Government. 
 
Reason for Action:  Our reviews identified Medicaid overpayments for school-based 
health services.  The Federal share of the overpayments totaled an estimated $800 million.  
Many of the services claimed lacked a referral by an appropriate medical professional or 
were not provided by or under the direction of a qualified speech-language pathologist.  
These unallowable claims generally occurred because States did not provide sufficient 
guidance to and oversight of local education agencies, and rates were not developed in 
accordance with applicable Federal cost allocation requirements or CMS program guidelines.   
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS has begun taking action in individual States to recover overpayments.  CMS 
has recently undertaken a significant effort to bring State plans into compliance with Federal 
law, regulations, and policy in the coverage areas that pertain to Medicaid services delivered 
in school settings. The Presidents FY 2007 Budget proposes to prohibit Federal Medicaid 
reimbursement for school-based administrative or transportation costs. 
 
Reports: 
A-04-00-02161 (final report, 11/01)    A-01-02-00006 (final report, 5/03) 
A-10-01-00011 (final report, 5/02)  A-01-02-00009 (final report, 7/03) 
A-01-01-00006 (final report, 5/02)  A-02-03-01008 (draft report, 7/03) 
A-10-01-00006 (final report, 8/02)    A-10-02-00008 (final report, 7/03) 
A-06-01-00077 (final report, 10/02)  A-05-02-00049 (final report, 12/03) 
A-02-02-01018 (final report, 12/02)  A-06-02-00037 (final report, 1/04) 
A-03-01-00224 (final report, 3/03)  A-01-02-00014 (final report, 2/04) 
A-04-01-00005 (draft report, 3/03)  A-02-02-01030 (final report, 2/04) 
A-05-02-00023 (final report, 3/03)  A-07-02-02099 (final report, 2/04) 
A-02-02-01022 (final report, 4/03)  A-06-01-00083 (final report, 4/03) 
A-01-02-00016 (final report, 9/04)  A-01-03-00004 (final report, 1/05) 
A-01-04-00004 (final report, 1/05)  A-07-03-00154 (final report, 4/05) 
A-02-02-01029 (final report, 6/05)  A-05-02-00050 (final report, 8/05) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 40   
Eliminate or Reduce Transition Periods for Compliance With Revised 
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 limitsone 
each for private, State, and non-State government-owned 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 ((cid:62)Legislative, (cid:62)Regulatory, (cid:62)Procedural):  CMS should seek authority to 
eliminate or reduce the 8-year transition period included in the revised 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:  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.  CMS anticipates no further action on our 
recommendation.  Five States remain with transition periods through September 1, 2008.  
 
    Report: 
    A-03-00-00216 (final report, 9/01) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 41   
Require That Medicaid Reimbursement for Brand Name Drugs Be More in 
Line With Acquisition Costs 
 
Current Law:  Most States use average wholesale price (AWP) minus a percentage 
discount, which varies by State, as a basis for reimbursing pharmacies for drug 
prescriptions. 
 
Proposal ((cid:62)Legislative, (cid:62)Procedural):  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.  We recommended a four-tier 
approach to reimbursement as follows:  single-source innovator drugs, multiple-source 
innovator drugs without Federal upper payment limits (FUL), multiple-source 
noninnovator drugs without Federal upper payment limits and multiple-source drugs with 
Federal upper limits. 
 
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:  CMS concurred with our recommendation and is working with States to review 
their estimates of acquisition costs in light of our findings.  In addition, the Presidents 
FY 2006 budget proposed a legislative change that would limit the Federal 
reimbursement to States for Medicaid pharmacy payments to the amount the State would 
have paid, in the aggregate, for covered outpatient drugs based on the manufacturers 
average sales price.  We will continue to monitor the pricing of Medicaid drug 
reimbursements for brand name drugs.   
 
. 
 
    Reports: 
    A-06-00-00023 (final report, 8/01) 
    A-06-02-00041 (final report, 9/02) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 42   
Require That Medicaid Reimbursement for Generic Drugs Be More in Line 
With Acquisition Costs 
     
Current Law:  Most States use average wholesale price (AWP) minus a percentage 
discount, which varies by State, as a basis for reimbursing pharmacies for drug 
prescriptions. 
 
Proposal ((cid:62)Legislative, (cid:62)Procedural):  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.  We recommended a four-tier approach to 
reimbursement as follows:  single-source innovator drugs, multiple-source innovator 
drugs without Federal upper payment limits (FUL), multiple-source noninnovator drugs 
without Federal upper payment limits and multiple-source drugs with Federal upper 
limits.  
 
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:  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.  In addition, the Presidents 
FY 2006 budget proposed a legislative change that would limit the Federal 
reimbursement to States for Medicaid pharmacy payments to the amount the State would 
have paid, in the aggregate, for covered outpatient drugs based on the manufacturers 
average sales price.  We will continue to monitor the pricing of Medicaid drug 
reimbursements for generic drugs. 
 
The Deficit Reduction Act of 2005 (DRA) changes the Medicaid reimbursement rate for 
drugs to make payments more accurate.  For generic drugs the Federal Government will 
set a FUL on Medicaid drug payment that is equal to 250 percent of the lowest average 
manufacturers price (AMP) for a generic version of a drug.  According to the DRA, 
AMP has been redefined as the average price at which manufacturers sell their drugs to 
wholesalers. 
 
The FY 2007 Presidents Budget proposes to build on the DRA changes to the FUL for 
multiple source drugs.  The Budget proposes to limit reimbursement for multiple source 
drugs to 150 percent of AMP. 
 
    Reports:   
    A-06-01-00053 (final report, 3/02)    A-06-02-00041 (final report, 9/02) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 43   
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 
manufacturers best price, and other factors.  In contrast, most States reimburse 
pharmacies for Medicaid prescription drugs based on the average wholesale price of the 
drug.    
 
Proposal ((cid:62)Legislative, (cid:62)Procedural):  CMS should seek legislation that would require 
drug manufacturers participating in the Medicaid outpatient prescription drug program to 
pay Medicaid drug rebates using the same basis as reimbursements made to pharmacies 
or study other viable alternatives to the current program of using AMP to calculate 
rebates. 
 
Reason for Action:  Requiring manufacturers to pay Medicaid drug rebates using the 
same basis as reimbursements made to pharmacies 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:  CMS agreed to pursue a change in the Medicaid drug rebate program similar to 
that recommended.  No changes have yet been made.  However, committees in both the 
Senate and House have proposed language establishing a better connection.  In addition, 
the Presidents FY 2007 Budget proposes to eliminate best price and revise the rebate 
percentage, in a budget neutral manner, to help offset the cost. 
 
    Report: 
    A-06-97-00052 (final report, 5/98) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 44   
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 average manufacturer price (AMP), the 
manufacturers 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 ((cid:62)Legislative):  CMS should pursue legislation to index the best price 
calculation in the Medicaid drug rebate program 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:  CMS disagreed with this recommendation.  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.  We have issued rebate reports to 
each State Medicaid agency as it relates to the States internal control.   
 
    Report: 
    A-06-94-00039 (final report, 10/95) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 45   
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 ((cid:62)Procedural):  CMS should determine whether States cost-avoidance 
waivers for pharmacy claims are meeting the cost-effectiveness criterion.  CMS can 
ascertain cost effectiveness by requiring States to track dollars that they pay and chase 
and the amounts that they recover.  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:  CMS agreed with the recommendation and has worked to improve its oversight 
of the cost avoidance waiver process.  This was discussed with CMSs Regional Offices 
in February 2005 to assess whether States are appropriately paying and chasing claims.  
In addition, CMS provided training for staff to ensure that appropriate cost avoidance 
waiver criteria are being applied in granting any such waivers.  Also, CMS is currently 
planning to survey and update State progress in cost avoiding several major claim types.  
The Presidents FY 2007 Budget proposes to discontinue all waivers that permit pay and 
chase of pharmacy claims. 
 
    Reports: 
    OEI-03-00-00030 (final report, 8/01) 
   
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 46   
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 ((cid:62)Legislative):  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 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 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
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS does not agree with our recommendation.  CMS believes that section 
1886(g)(1)(B)(iv) of the Social Security Act, which states that the Secretary may provide 
for an adjustment for occupancy rate, is only intended to provide for an adjustment to 
capital prospective payment system payments based on a hospitals current occupancy 
rate.  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 savings $630 million from FY 2001 through FY 2005. 
 
Reports: 
A-09-91-00070 (final report, 4/92) 
A-14-93-00380 (final report, 4/93) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 47   
More Accurately Reflect Base-Year Costs in Prospective Payment Systems 
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 ((cid:62)Legislative):  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 CMSs 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
TBD  TBD  TBD  TBD  TBD 
 
Status:  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.  CMS is continuing to monitor current capital payment and cost data to 
determine whether additional adjustments are warranted. 
 
Report: 
A-07-95-01127 (final report, 8/95) 
 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 48   
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(b)(2) indicated 
that a discharge from one inpatient area to another inpatient area of a prospective 
payment system hospital constitutes a transfer.  In its final rule on inpatient prospective 
payment system (IPPS) dated August 1, 2003, CMS expanded the transfer policy to 
include all patients who are admitted to another IPPS hospital on the same day they are 
transferred from an IPPS hospital.  CMS also deleted section 412.4(b)(2) from the 
definition of a transfer. 
 
Proposal ((cid:62)Procedural):  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.  CMS should also issue clarifying instructions to 
intermediaries and hospitals regarding prospective payment system transfers. 
 
Reason for Action:  For a number of years, CMS has shared our concern 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:  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).  As of 
February 14, 2005, 37 intermediaries reported recoveries totaling $23.3 million.   
 
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.  CMS and our office are conducting further 
reviews to determine whether any of the cases that occurred more than 4 years ago merit 
reopening under the regulations.   
 
Report: 
A-06-00-00041 (final report, 11/01) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 49   
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 (IME) payments have been paid only to teaching hospitals to 
address the presumably higher costs incurred by these hospitals.  CMS and 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.  A congressional mandate required CMS to 
double the adjustment factor under the prospective payment system 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 ((cid:62)Legislative):  CMS should continue to pursue legislation to reduce the 
indirect medical education adjustment factor 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 IME 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:  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 IME 
adjustment factor from 7.7 percent in FY 1997 to 5.5 percent in 2002 and thereafter.  
Section 502 of the Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 increased the IME adjustment factor to 6 percent during the second half of FY 
2004, to 5.79 percent in FY 2005, and to 5.58 percent in FY 2006, before reducing the 
factor to 5.38 percent in FY 2007 and returning to 5.5 percent in FY 2008 and thereafter.  
We believe the factor should be further reduced to eliminate any overlap with the 
disproportionate share adjustment.  We plan to review this area further by analyzing the 
effect the reduction in the number of beds in hospitals has had in the payment of IME 
payments. 
 
Report:  
A-07-88-00111 (final report, 9/89) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 50   
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 fiscal year 1984. 
 
Proposal ((cid:62)Legislative, (cid:62)Regulatory):  CMS should (1) revise the regulations to 
remove from a hospitals allowable graduate medical education base-year costs any cost 
center with little or no Medicare utilization and (2) submit a legislative proposal to 
compute Medicares percentage of participation under the former, more comprehensive 
system. 
 
Reason for Action:  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 
Medicares share of these costs is based on inpatient data only and is higher than 
Medicares 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:  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 & Medicaid Services  Page 51   
Modify Payment Policy for Medicare Hospital Bad Debts 
 
Current Law:  Under Medicares inpatient hospital prospective payment system, 
hospitals are reimbursed for inpatient services rendered to Medicare beneficiaries by a 
fixed payment amount based on a diagnosis-related group (DRG).  However, bad debts 
related to unpaid Medicare deductible and coinsurance amounts are reimbursed 
separately as pass-through items (i.e., reimbursed outside the DRG) under reasonable cost 
principles, subject to a 30 percent reduction.  Other provider types are entitled to have 
their bad debts reimbursed at this rate as well. 
 
Proposal ((cid:62)Legislative):  CMS should consider options, including the elimination of a 
separate payment for bad debts, 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.  CMS should seek legislative authority to further 
modify bad debt policies. 
 
Reason for Action:  CMS records showed that total Medicare hospital 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:  CMS does not agree with our proposal.  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 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 & Medicaid Services  Page 52   
Prevent Overpayments Under Medicares Postacute Care Transfer Policy 
 
Current Law:  The Balanced Budget Act of 1997 required implementation of a transfer 
policy to treat discharges of beneficiaries in specified diagnosis-related groups to certain 
postacute care settings as transfers for purposes of computing payments to prospective 
payment system hospitals.  
 
Proposal ((cid:62)Procedural):  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 between fiscal years 1999 and 2002, the 
Medicare program paid approximately $188.4 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
$47.1  $47.1  $47.1  $47.1  $47.1 
 
Status:  CMS concurred with our recommendations.  Subsequent to our audit period, 
CMS implemented edits.  We will continue our work to identify additional overpayments 
that occurred prior to the implementation of the edits and to ensure that the edits are 
working properly.   
 
Reports: 
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) 
A-04-04-03000 (final report, 4/05) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 53   
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 diagnosis-related group (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 ((cid:62)Legislative):  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.  A subsequent review identified $37 million in preadmission services 
provided to patients for 10 selected DRGs 4 to 14 days prior to 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): 
Diagnostic services provided:  
  FY 1 FY 2 FY 3 FY 4 FY 5
  4-7 days   $83.5  $83.5  $83.5  $83.5  $83.5 
  4-14 days*     37.0        37.0        37.0        37.0        37.0 
 
*For 10 selected DRGs. 
 
Status:  CMS concurred with our recommendation; however, CMS noted that some 
additional factors would have to be considered before a legislative change could be 
advanced. 
 
Reports: 
A-01-92-00521 (final report, 7/94) 
A-01-02-00503 (final report, 8/03) 
 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 54   
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 claims data and the most recent available cost report 
data to develop the rates. 
 
Proposal ((cid:62)Legislative):  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 claims 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.  Because 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:  CMS agreed with our recommendations but no additional analysis has been 
done to examine the adequacy of base-year costs. 
 
Report: 
A-14-98-00400 (final report, 11/98) 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 55   
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, 
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 ((cid:62)Legislative):  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:  CMS agrees to consider seeking authority to set rates that are consistent across 
sites as it develops its legislative program.  The Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 requires CMS to implement a revised 
payment system for ASCs between January 2006 and January 2008. 
  
CMS published the Medicare Program; Updated ASC List of Covered Procedures (IFC) 
on May 4, 2005.  Several of the procedures recommended to be deleted were retained 
because commenters identified circumstances that clinically required the procedures to be 
performed in a facility setting rather than a physicians office. 
 
Reports:   
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) 
 
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 56   
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 beneficiarys lifetime.  When Medicare was established, inpatient psychiatric 
care was rendered, for the most part, in State psychiatric hospitals.  Congress apparently 
believed that long-term care of people with mental illness 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 ((cid:62)Legislative):  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 hospitalswhere the lifetime limit does not apply.  An annual limit on care, 
which has congressional precedence in a legislatively enacted 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
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS initially agreed with our findings but stated that further analysis would be 
required before any legislative changes could be supported.  No action has been taken on 
this recommendation.  We will consider reviewing this issue when claims data for the 
new inpatient psychiatric prospective payment system is available. 
 
    Report: 
    A-06-86-62045 (final report, 2/88)
Previous Recommendations  Centers for Medicare & Medicaid Services  Page 57   
Administration on Aging 
 
Use Voluntary Contributions To Expand Services for the Elderly 
 
  Current Law:  Current Administration on Aging (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 ((cid:62)Regulatory):  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  
fiscal year (FY) 1996. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$90.8  $90.8  $90.8  $90.8  $90.8 
 
Status:  AoA agreed with our recommendation and will review its regulations in 
response to the outcome of the pending reauthorization of the Older Americans Act. 
 
Report:  
A-12-00-00002 (final report, 2/01)
Previous Recommendations  Administration on Aging  Page 58   
 
 
 
 
            INTERNET ADDRESS 
 
 
 
 
The 2005 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/