Department of Health and Human Services 
 
Office of Inspector General 
 
Cost-Saver Handbook  
 
 
 
 
 
 
 
 
 
 
 
2004 
RED BOOK 
 
             
 
 
 
 
 
 
 
 
 
 
  Office of Inspector General 
 
Under the authority of the Inspector General Act of 1978, as amended, we improve 
Department of Health and Human Services (HHS) programs and operations and protect 
them against fraud, waste, and abuse.  By conducting independent and objective audits, 
evaluations, and investigations, we provide timely, useful, and reliable information and 
advice to Department officials, the administration, the Congress, and the public.  Our 
statutory mission is carried out by the following operating components. 
 
Office of Audit Services 
 
OIGs 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 
 
OIGs Office of Evaluation and Inspections (OEI) conducts short-term management and 
program evaluations (called inspections) that focus on issues of concern to the 
Department, the Congress, and the public.  The findings and recommendations contained 
in the inspections reports generate rapid, accurate, and up-to-date information on the 
efficiency, vulnerability, and effectiveness of departmental programs.  OEI also oversees 
State Medicaid fraud control units, which investigate and prosecute fraud and patient 
abuse in the Medicaid program. 
 
Office of Investigations 
 
OIGs Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers.  These investigative efforts lead to criminal 
convictions, administrative sanctions, or civil monetary penalties.   
 
Office of Counsel to the Inspector General 
 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIGs internal operations.  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 model compliance plans, renders advisory opinions on OIG sanctions to the 
health care community, and issues fraud alerts and other industry guidance.  Introduction  
 
Purpose of the Red Book 
 
The Red Book is a compendium of significant Office of Inspector General (OIG) cost-
saving recommendations that have not been fully implemented.  These recommendations 
may require one of three types of actions:  legislative, regulatory, or procedural (such as 
manual revisions).  Some complex issues involve two or all three types of actions.  
 
The Inspector General Act requires that the OIGs semiannual reports to the Congress 
include an identification of each significant recommendation described in previous 
semiannual reports on which corrective action has not been completed.  Thus, 
appendices to each semiannual report list significant unimplemented recommendations.  
Because of the abbreviated nature of that list, however, we prepare the Red Book to 
further highlight the potentially significant impact of cost-saving recommendations. 
 
The savings estimates indicated for these unimplemented recommendations are updated 
from time to time to reflect more current information as it becomes available.  The 
estimates have varying levels of precision.  Full implementation of the recommendations 
in the 2004 edition of the Red Book could produce substantial savings to the Department 
of Health and Human Services (HHS).  We hope that this edition will prove useful to 
departmental decisionmakers, the administration, and the 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 and 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 the elderly, the disabled, the poor, 
and children whose families earn too much to qualify for Medicaid but too little to 
afford private coverage.   
 
  The public health agencies include the National Institutes of Health, the Food and 
Drug Administration, the Centers for Disease Control and Prevention, the Health 
Resources and Services Administration, the Indian Health Service, the Agency for 
Toxic Substances and Disease Registry, the Agency for Healthcare Research and 
Quality, and the Substance Abuse and Mental Health Services Administration.  
They promote biomedical research and disease cure and prevention; ensure the 
safety and efficacy of marketed food, drugs, and medical devices; and conduct 
Introduction     Page i  other activities designed to ensure the general health and safety of American 
citizens. 
 
  The Administration for Children and Families provides Federal direction and 
funding for State-administered programs designed to promote stability, economic 
security, responsibility, and self-support for the nation's families, including a 
variety of social service programs.  
 
  The Administration on Aging 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, OIG findings and recommendations have contributed to many significant 
reforms and substantial savings in departmental programs.  In fiscal year (FY) 2003, for 
example, policy and procedural changes resulting from audits, investigations, and 
inspections achieved almost $23 billion in savings.  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. 
 
For each recommendation, we summarize the current law, the reason that action is 
needed, the estimated savings that would result from taking the recommended action, the 
status of actions taken, and the report number and date.  In addition, the type of action 
needed (legislative, regulatory, or procedural) is indicated.  Recommendations for 
proposed legislation are removed from the Red Book once the law has been fully enacted.  
On regulatory and procedural issues, recommendations are removed when the action has 
been substantially completed. 
 
Each final report, including the full text of comments from the cognizant agency, is 
available upon request or on the Internet at http://oig.hhs.gov.  Each report also includes 
an appendix detailing OIGs methodology for estimating cost savings; we encourage the 
reader interested in a particular proposal to review the report. 
 
                   
Introduction     Page ii  Table of Contents 
 
Annual     
Savings   
(in Millions)  Page
 
New Recommendations 
     
End Stage Renal Disease 
$12  Limit Payment Under Method II for Continuous Ambulatory Peritoneal Dialysis to 
Method I Rates  1
   
Durable Medical Equipment   
$224  Reduce Medicare Part B Payments for Power Wheelchairs  2
$178  Improve Compliance With Medicare Coverage Criteria for Power Wheelchairs  3
$82  Reduce Medicare Part B Payments for Enteral Nutrition at Home  4
      
Other Medicare Reimbursement 
$4  Encourage Least Costly Alternative Policies for Lupron Reimbursement  5
$35  Reduce Medicare Payments to Ambulatory Surgical Centers for Intraocular Lenses  6
$23  Identify and Collect Overpayments for Home Health Services Preceded by a Hospital 
Discharge  7
      
Medicaid Reimbursement 
TBD  Declare That Medicaid Payments Returned by Public Providers Are Refunds  8
TBD  Establish Definitive Guidance on Calculating Upper Payment Limits and Use 
         Facility-Specific Limits Based on Actual Costs  9
$126  Review Medicaid Reimbursement for Mental Health Drugs  10
$37  Encourage States to Collect Rebates on Physician-Administered Drugs, Especially 
Single-Source Drugs  11
TBD  Address and Resolve Excessive Medicaid Disproportionate Share Hospital Payments  12
TBD  Ensure Compliance With Regulations on Medicaid School-Based Health Services  13
 
Health Resources and Services Administration 
TBD  Eliminate Excessive Costs in the 340B Drug Discount Program  14
 
Previous Recommendations 
 
Hospitals 
TBD  Continue Mandated Reductions in Hospital Capital Costs  15
TBD  More Accurately Reflect Base-Year Costs in Prospective Payment Systems Capital  
Cost Rates  16
TBD  Collect Overpayments for Prospective Payment System Transfers Incorrectly Reported 
as Discharges  17
Table of Contents    Page iii      Annual     
Savings   
(in Millions)  Page
 
TBD  Reduce the Prospective Payment System Adjustment Factor for Indirect Medical 
Education Costs  18
$157  Revise Graduate Medical Education Payment Methodology  19
$340  Modify Payment Policy for Medicare Hospital Bad Debts  20
$61  Prevent Overpayments Under Medicares Postacute Care Transfer Policy  21
$84  Recover Overpayments and Expand the Diagnosis-Related Group Payment Window  22
TBD  Adjust Base-Year Costs in the Prospective Payment System for Hospital Outpatient 
Department Services  23
$1,100  Establish More Consistent Outpatient Surgery Rates That Reflect Only Necessary Costs  24
TBD  Apply a 190-Day Lifetime Limit and a 60-Day Annual Limit on Medicare Inpatient 
Psychiatric Care   25
TBD  Eliminate Provider-Based Designations or Improve Management and Oversight  26
End Stage Renal Disease 
$22  Reduce Medicare End Stage Renal Disease Payment Rates  27
$94  Reduce the Epogen Reimbursement Rate  28
$90  Ensure That Claims for Ambulance Services for End Stage Renal Disease Beneficiaries 
Meet Coverage Guidelines  29
$15  Modify Payment System for Ambulance Services for End Stage Renal Disease 
Beneficiaries  30
Durable Medical Equipment 
$91  Identify Medical Equipment/Supply Claims Lacking Valid, Active Unique Physician 
Identification Numbers  31
$7  Prevent Medicare Losses Resulting From Early Payments for Medical Equipment  32
$12  Prevent Inappropriate Medicare Part B Payments for Medical Equipment in Skilled 
Nursing Facilities  33
$98  Eliminate Semiannual Maintenance Payments for Capped Rental Equipment  34
$34  Adjust Reimbursement for Semielectric Hospital Beds  35
$43  Improve Billing Practices for Medicare Orthotics  36
$7  Improve Guidelines for Therapeutic Footwear  37
$79  Eliminate Inappropriate Billing for Blood Glucose Test Strips  38
$65  Examine Payment Method for Parenteral Nutrition  39
$28  Reduce and Control Enteral Nutrition Equipment Costs  40
$15  Reduce Medicare Part B Payments for Enteral Nutrition at Home  41
$263  Improve Medical Reviews for Home Oxygen Therapy  42
$19  Stop Inappropriate Payments for Hyperbaric Oxygen Therapy  43
$12  Reclassify Respiratory Assist Devices With a Back-Up Rate  44
 
Medicare Managed Care 
$3,500  Modify Payments to Managed Care Organizations  45
TBD  Monitor Managed Care Organizations Rate Proposals  46
TBD  Place a Ceiling on Administrative Costs Included in Managed Care Organizations  
Rate Proposals  47
TBD  Pay Managed Care Organizations Only Reasonable Administrative Costs  48
Table of Contents    Page iv      Annual     
Savings   
(in Millions)  Page
 
$150  Monitor Investment Income Earned by Risk-Based Managed Care Organizations  49
 
Other Medicare Reimbursement 
$1,130  Change the Way Medicare Pays for Clinical Laboratory Tests  50
TBD  Adjust Home Health Agency Prospective Payments  51
TBD  Require Physician Examination Before Ordering Home Health Services  52
$1,000+  Adjust Base-Year Costs in the Prospective Payment System for Skilled Nursing 
Facilities  53
$48  Eliminate Overpayments Under Consolidated Billing by Skilled Nursing Facilities  54
$676  Ensure Appropriateness of Medicare Payments for Mental Health Services  55
$97  Conduct Medical Reviews of Part B Therapy Services  56
$104  Ensure the Medical Necessity of Ambulance Claims  57
$186  Stop Inappropriate Payments for Chiropractic Maintenance Treatments  58
$97  Recover Overpayments and Prevent Inappropriate Medicare Part B Payments for Nail 
Debridement and Related Services  59
TBD  Expand Medicare Secondary Payer Provisions for End Stage Renal Disease Benefits  60
Medicaid Reimbursement 
TBD  Eliminate or Reduce Transition Periods for Compliance With New Medicaid Upper 
Payment Limits  61
TBD  Delay or Repeal the Increase in Medicaid Disproportionate Share Hospital Payments  62
$1,080  Require That Medicaid Reimbursement for Brand Name Drugs Be More in Line With 
Acquisition Costs  63
$470  Require That Medicaid Reimbursement for Generic Drugs Be More in Line With 
Acquisition Costs  64
$144  Review Medicaid Reimbursement Methodology for HIV/AIDS Drugs  65
TBD  Establish Connection Between the Calculation of Medicaid Drug Rebates and Drug 
Reimbursement  66
$123  Implement an Indexed Best Price Calculation in the Medicaid Drug Rebate Program  67
$185  Review Cost Effectiveness of Pay and Chase Methods for Medicaid Pharmacy Third-
Party Liability Recoveries  68
 
Administration on Aging 
$91  Use Voluntary Contributions To Expand Services for the Elderly  69
 
National Institutes of Health 
$2  Propose Changes to Office of Management and Budget Circular A-21 Regarding 
Recharge Centers  70
 
Table of Contents    Page v       
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New 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 (or the composite rate), 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 (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 the 
composite rate 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)                  
 
       
 
New RecommendationsCenters for Medicare & Medicaid Services  Page 1  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 15 months.  Beneficiaries have the 
option of purchasing a power wheelchair within the first month of use.   
 
Proposal (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 will consider using its inherent reasonableness authority when it develops, 
in accordance with statute and regulations, written procedures for conducting these 
reviews to reduce the reimbursement amount for K0011 power wheelchairs.  
Additionally, CMS is working with a coding panel to develop a new set of codes that best 
describes the wheelchairs on the market and published new codes for wheelchair 
cushions in July 2004. 
 
Report: 
OEI-03-03-00460 (final report, 4/04) 
                                    
New RecommendationsCenters for Medicare & Medicaid Services  Page 2  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 (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 generally concurred with our recommendations and is taking steps to 
improve compliance with Medicares coverage criteria for power wheelchairs.  CMS is 
requiring the durable medical equipment regional carriers to develop and implement 
consistent medical review strategies.  In addition, CMS has prepared an educational 
brochure that provides physicians and suppliers with information regarding coverage 
policy.  A similar brochure, prepared for beneficiaries, contains information regarding 
Medicare and durable medical equipment regional carriers coverage policy.    
 
Report: 
OEI-03-03-00600 (final report, 3/04) 
New RecommendationsCenters for Medicare & Medicaid Services  Page 3   
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 (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 concurs 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. 
 
Report: 
OEI-03-02-00700 (final report, 2/04) 
New RecommendationsCenters for Medicare & Medicaid Services  Page 4  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 new Medicare Prescription Drug and 
Improvement and Modernization Act of 2003 will implement 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 new law, 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 (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 they do not generally influence the application of local medical 
review policies in specific circumstances.   
 
Report: 
OEI-03-03-00250 (final report, 1/04) 
 
       
New RecommendationsCenters for Medicare & Medicaid Services  Page 5   
Reduce Medicare Payments to Ambulatory Surgical Centers for 
Intraocular Lenses  
 
Current Law:  Section 1833(i)(2)(A)(iii) of the Social Security Act requires Medicare 
payments to ambulatory surgical centers for intraocular lenses to be reasonable and 
related to the cost of the lens. 
 
Proposal (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.  Soft acrylic lenses averaged a cost of $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) 
New RecommendationsCenters for Medicare & Medicaid Services  Page 6  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 (Procedural):  CMS should require that its regional home health 
intermediaries (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.  CMS issued 
instructions dated October 23, 2003 to the regional home health intermediaries to 
implement, by April 1, 2004, prepayment edits to identify prior hospital discharges that 
were not identified by the home health agencies.  The same instruction outlines a process 
for postpayment recoveries for FYs 2002 and after. 
 
Report: 
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) 
 
New RecommendationsCenters for Medicare & Medicaid Services  Page 7  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 83 
percent, depending on the States per capita income. 
 
Proposal (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. 
 
Reason for Action:  We believe that the return to the State of Medicaid payments 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 
 
*CMSs April 2004 testimony before the House Energy and Commerce Committee 
indicated that an estimated $23 billion in Medicaid savings over 10 years was possible by 
declaring these returned funds as credits. 
 
Status:  In its initial response to our report, CMS indicated that this proposal required 
further review.  As noted above, CMSs congressional testimony indicated that it now 
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. 
  
 
Report:   
A-03-00-00216 (final report, 9/01) 
New RecommendationsCenters for Medicare & Medicaid Services  Page 8   
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 (Legislative,  Regulatory,  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.  It agreed that it should 
provide more guidance on calculating the upper payment limit.  CMS did not agree, at 
this time, to limit the upper payment limit calculation to a facility-specific value based on 
Medicaid costs.  CMS wished to allow States additional flexibility to better respond to 
the unique challenges of maintaining access to services but agreed to reconsider this if 
States continued to manipulate Federal Medicaid funding.  
 
Report:   
A-03-00-00216 (final report, 9/01) 
New RecommendationsCenters for Medicare & Medicaid Services  Page 9   
Review Medicaid Reimbursement for Mental Health Drugs 
 
Current Law:  Title XIX of the Social Security Act established Medicaid as a jointly 
funded, Federal-State health insurance program.  Medicaid plays a fundamental role in 
the provision of prescription drugs to over 42 million low-income and disabled 
beneficiaries, spending an estimated $20 billion in 2001.  Expenditures for drugs used for 
the treatment of mental disorders are among the fastest-rising costs for Medicaid, 
representing an estimated 20 percent, or $4 billion, of Medicaids total drug payment.  
Title XIX requires States to provide methods and procedures to assure that payments are 
consistent with efficiency, economy, and quality of care.  CMS exercises this control in 
two ways:  by placing aggregate limits on pharmacy reimbursements and collecting 
statutorily defined manufacturer rebates.  In addition, Section 340B of the Public Health 
Service Act authorizes a Federal discount program for outpatient drugs purchased by 
certain Federal grantees and public hospitals.  The formula for determining the 
discounted drug prices is based on the Medicaid drug rebate amount. 
 
Proposal (Regulatory, Procedural):  CMS should review the current 
reimbursement methodology and work with States to find a method that more accurately 
estimates pharmacy acquisition cost.  
 
Reason for Action:  Medicaid pays up to 29 percent more than other Federal 
Government drug discount programs for 25 mental health drugs we reviewed.  Medicaid 
would have saved $47 million if it had been able to pay prices equivalent to the Federal 
Supply Schedule prices and $126 million if it had paid prices equal to the Big 4 
(Department of Defense, Veterans Administration, Public Health Services, and United 
States Coast Guard) prices.  In comparison to the Federal ceiling prices and those of the 
340B Drug Discount Program, Medicaid would have saved $116 and $66 million, 
respectively, for the 25 drugs.   
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
 $126  $129  $132  $136  $140 
 
Status:  Some unknown portion of the costs for these drugs will be addressed by the 
implementation of the Medicare Prescription Drug, Improvement and Modernization Act 
of 2003 for those beneficiaries who are dually eligible for Medicare and Medicaid.  It is 
unclear at this time what action CMS may take in regards to the cost of these drugs.   
 
Report:   
OEI-05-02-00080 (final report, 8/03) 
New RecommendationsCenters for Medicare & Medicaid Services  Page 10  Encourage States to Collect Rebates on Physician-Administered 
Drugs, Especially Single-Source Drugs 
 
Current Law:  Under section 1927 of the Social Security Act, State Medicaid agencies 
receive manufacturer rebates for drugs under the Medicaid Drug Rebate Program.  In 
order to receive rebates, States identify the drugs by national drug codes and provide unit 
and payment information to the manufacturer.  If States do not require the use of national 
drug codes for physician-administered drugs, identifying drugs is difficult.   
 
A single-source drug is a brand-name drug that is manufactured under a patent and has no 
competing products.  Single-source drugs are more likely to have only one national drug 
code and are more easily matched to a procedure code than multiple-source drugs. 
 
Proposal (Procedural):  CMS should continue to encourage States to collect rebates 
on physician-administered drugs, especially single-source drugs. 
 
Reason for Action:  Medicaid could have saved an additional $37 million on rebates 
for physician-administered drugs in 2001.  Single-source drugs represented $30 million 
of these potential savings.   States should either use national drug codes instead of 
procedure codes, or use crosswalks to link procedure codes to national drug codes for 
single-source drugs.  
 
Savings (in Millions): 
FY1    FY2    FY3    FY4    FY5
$37    $37    $37    $37    $37 
 
Status:  CMS agrees that States should be encouraged to collect rebates on physician-
administered drugs.  Specifically, CMS has developed a crosswalk for States to use to 
convert procedure codes to national drug codes for rebate identification purposes.   
 
Report: 
OEI-03-02-00660 (final report, 4/04) 
New RecommendationsCenters for Medicare & Medicaid Services  Page 11  Address and Resolve Excessive Medicaid Disproportionate Share 
Hospital Payments 
 
Current Law:  Section 13621 of the Omnibus Budget Reconciliation Act of 1993 
amended section 1923 of the Social Security Act to limit disproportionate share hospital 
(DSH) payments to the hospitals cost of incurred uncompensated care.  Costs of 
uncompensated care were limited to the costs of medical services provided to Medicaid 
and uninsured patients less payments received for those patients excluding Medicaid 
DSH payments. 
 
Proposal (Regulatory, Procedural):  States should work with CMS to address and 
resolve DSH payments made in excess of hospitals actual incurred uncompensated care 
costs.  Also, consistency is needed in State plans with regard to compliance with Federal 
laws and regulations and what constitute allowable costs to be included in the calculation 
of DSH limits.   
 
Reason for Action:  Audits in 10 States found that while DSH payments were generally 
in accordance with State plans, DSH payments exceeded the hospital-specific limits.  All 
10 States had problems administering their DSH programs.  CMS did not provide 
comprehensive guidance to the States for use in developing State plans and establishing 
controls over the DSH programs.  To date, $336 million (Federal share) has been 
recommended for recovery from the States.  We also recommended that the States work 
with CMS to address and resolve an additional $522 million Federal share in DSH 
payments made in excess of hospital specific limits.   
 
Savings (in Millions): 
FY 1    FY 2    FY 3    FY 4    FY 5
TBD    TBD    TBD    TBD    TBD 
 
Status: 
CMS has begun action in individual States to recover overpayments.  It is currently 
developing a regulation on the Medicaid DSH program.  We will provide CMS with a 
summary report on our work in this area with additional recommendations on only 
paying actual costs of uncompensated care. 
 
Report: 
A-06-00-00058 (final report, 6/01)    A-03-01-00222 (final report, 4/03) 
A-06-00-00026 (final report, 6/01)    A-03-01-00226 (final report, 5/03) 
A-07-01-02089 (final report, 5/02)    A-09-02-00054 (final report, 5/03) 
A-07-01-02093 (final report 8/02)    A-09-02-00071 (final report, 5/03) 
A-09-01-00098 (final report, 9/02)    A-05-01-00058 (draft report, 6/03) 
A-09-01-00085 (final report, 9/02)    A-05-01-00059 (draft report, 7/03)   
A-10-01-00001 (final report, 10/02)    A-05-01-00099 (draft report, 7/03) 
A-04-01-02006 (draft report, 1/03)    A-05-01-00102 (draft report, 7/03) 
A-06-01-00041 (final report, 2/03)    A-05-01-00087 (final report, 3/04) 
A-03-01-00221 (final report, 4/03)     
               
         
New RecommendationsCenters for Medicare & Medicaid Services  Page 12  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.  The Social 
Security Act also permits Federal financial participation in the administrative costs of 
Medicaid activities performed in schools. 
 
Proposal (Procedural):  CMS should recover the overpayment identified during our 
audits of school-based claims.  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:  OIGs reviews of 13 States found large Medicaid overpayments 
for school-based health services and administrative claims.  We estimated that one State 
improperly claimed $172.6 million in Federal Medicaid funds for services that did not 
meet Federal and State requirements.  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.  In the other State reviews, Federal overpayments 
totaled an estimated $65.6 million.  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 action in individual States to recover overpayments.   
We will provide CMS with a summary report on our work in this area with additional 
recommendations on only paying for actual Medicaid school-based services. 
 
Report: 
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-10-01-00006 (final report, 8/02)    A-02-03-01008 (draft report, 7/03) 
A-06-01-00077 (final report, 10/02)  A-10-02-00008 (final report, 7/03)   
A-02-02-01018 (final report, 12/02)  A-05-02-00049 (final report, 12/03) 
A-03-01-00224 (final report, 3/03)  A-06-02-00037 (final report, 1/04) 
A-04-01-00005 (draft report, 3/03)  A-01-02-00014 (final report, 2/04) 
A-05-02-00023 (final report, 3/03)  A-02-02-01030 (final report, 2/04) 
A-02-02-01022 (final report, 4/03)  A-07-02-02099 (final report, 2/04) 
A-06-01-00083 (final report, 4/03)  A-01-03-00010 (draft report, 3/04)
New RecommendationsCenters for Medicare & Medicaid Services  Page 13   
 
Health Resources and Services Administration 
 
Eliminate Excessive Costs in the 340B Drug Discount Program 
 
Current Law:  Section 340B of the Public Health Service Act (the PHS Act) created 
the 340B Drug Discount Program to lower drug prices for more than 10,500 entities, 
including community health centers, public hospitals, and various Federal grantees.  
Pharmaceutical manufacturers calculate the 340B discount using a specified formula and 
must sell their products at or below this price to continue to receive reimbursement from 
the Medicaid program.  The Health Resources and Services Administrations (HRSA) 
Office of Pharmacy Affairs administers the program for the 10,500 enrolled entities, 
which were estimated to spend $3.4 billion on drugs in 2003. 
 
Proposal (Regulatory, Procedural, Legislative):  HRSA should take four steps 
to strengthen its administration of the 340B Drug Discount program:  spot check entity-
level transactions; seek legislative authority to establish penalties for violations of the 
PHS Act; provide covered entities with pricing data to approximate the discount they are 
entitled to; and verify CMSs 340B ceiling price against the manufacturers' calculation of 
the ceiling price. 
 
Reason for Action:  Despite the requirements of the PHS Act, 31 percent of the 
sampled prices exceeded the 340B discount price.  For the month of September 2002, 
340B entities spent an estimated $269 million and were overcharged $41.1 million.  
These amounts are estimated reductions in grantee expenditures for drug purchases.  The 
grantees will have these amounts available for any of the services they provide.  Federal 
outlays will not be reduced by these amounts. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD*  TBD*  TBD*  TBD*  TBD* 
 
*  The cost savings estimates identified in the Reason for Action represent savings to 
federally-supported covered entities.  Though there will be associated indirect savings to 
HHS as well, we cannot and have not attempted to quantify such savings. 
 
Status:  HRSA indicates that plans have been formulated to address many of the 
shortcomings noted by the OIGs final reports.  At this time, these plans are being 
reviewed within the Department.  HRSA also states that the Office of Pharmacy Affairs 
is working with the OIG, the Justice Department, and CMS to develop plans to strengthen 
the integrity of the 340B Program.   
 
Report: 
OEI-05-02-00070 (final report, 6/04)
New RecommendationsHealth Resources and Services Administration  Page 14   
       
   
   
   
   
   
   
   
   
   
   
   
     
   
 
Previous Recommendations 
   
Hospitals 
 
Continue Mandated Reductions in Hospital Capital Costs 
 
Current Law:  In October 1991, CMS began a 10-year transition period for paying 
inpatient hospital capital-related costs under a prospective payment system.  The rates are 
based on historical costs, less a mandated reduction of 7.4 percent under the Omnibus 
Budget Reconciliation Act of 1993. 
     
Proposal (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 the Congress. 
 
Reason for Action:  Hospital capital costs soared during the first 5 years of the 
prospective payment system for inpatient hospital costs, despite low bed occupancy.  The 
Medicare system of reimbursing capital costs on a pass-through basis (i.e., reimbursed 
outside the diagnosis-related group (DRG)) was a major reason for this increase.  Paying 
capital costs prospectively, as required by regulation, should assist in curbing escalating 
costs.  However, the prospective rates are based on historical costs that are inflated 
because (1) excess capacity in the hospital industry has caused more capital costs to be 
incurred than economically necessary and (2) inappropriate elements, such as charges for 
depreciation on federally funded assets, are included in the historical costs.   
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS does not agree with our recommendation.  CMS believes that section 
1886(g)(1)(B)(iv) of the 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 saving 
$630 million from FY 2001 through FY 2005. 
 
    Report: 
A-09-91-00070 (final report, 4/92) 
A-14-93-00380 (final report, 4/93) 
                 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 15     
 
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 (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 RecommendationsCenters for Medicare & Medicaid Services  Page 16     
 
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 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 412(b)(2) from the definition of a transfer. 
 
Proposal (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, OIG and CMS have been concerned about 
hospitals incorrect reporting of prospective payment system transfers as discharges and 
fiscal intermediaries failure to detect and correct these errors.  Previous OIG and joint 
OIG/CMS efforts in this area resulted in over $219 million in recoveries. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
                   
Status:  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 
January 27, 2004, 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 OIG 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 RecommendationsCenters for Medicare & Medicaid Services  Page 17     
 
Reduce the Prospective Payment System Adjustment Factor  
for Indirect Medical Education Costs 
 
Current Law:  Since the inception of the Medicare prospective payment system, 
indirect medical education payments have been paid only to teaching hospitals to address 
the presumably higher costs incurred by these hospitals.  CMS and the Congress 
determined the indirect medical education adjustment factor.  Using historical data and 
regression analysis, CMS compared costs per case in teaching and nonteaching hospitals 
and determined that operating costs in hospitals with teaching programs increased 
approximately 5.79 percent for every 0.1 resident physician per hospital bed compared 
with hospitals without teaching programs.  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 (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 indirect medical education adjustment substantially overlapped with 
the disproportionate share adjustment at teaching hospitals and that these payments were 
a major source of revenue for some hospitals. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS agreed with our recommendation.  In addition, the Balanced Budget Act 
of 1997, as amended by the Balanced Budget Refinement Act of 1999, reduced the 
indirect medical education adjustment factor from 7.7 percent in FY 1997 to 5.5 percent 
in 2002 and thereafter.  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 further review this area 
by analyzing the effect the reduction in the number of beds in hospitals has had in the 
payment of indirect medical education payments. 
 
    Report: 
    A-07-88-00111 (final report, 9/89) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 18     
 
Revise Graduate Medical Education Payment Methodology 
 
Current Law:  Section 9202 of the Consolidated Omnibus Budget Reconciliation Act 
of 1985 and section 9314 of the Omnibus Budget Reconciliation Act of 1986 changed the 
way Medicare reimburses hospitals for the direct costs of graduate medical education.  
Under the revised methodology, costs are reimbursed on a hospital-specific prospective 
payment basis, which is based on a hospitals graduate medical education costs per 
resident in the cost reporting period that began during Federal FY 1984. 
     
Proposal (Legislative, Regulatory):  CMS should (1) revise the regulations to 
remove from a hospital's allowable graduate medical education base-year costs any cost 
center with little or no Medicare utilization and (2) submit a legislative proposal to 
compute 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 RecommendationsCenters for Medicare & Medicaid Services  Page 19     
 
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 (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 to include a bad debt factor in the DRG 
rates.  In responding to our report, CMS agreed with the recommendation to include a 
bad debt factor in the DRG rates.  The Balanced Budget Act of 1997 provided for some 
reduction of bad debt payments to providers.  The Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act 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 RecommendationsCenters for Medicare & Medicaid Services  Page 20     
  
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 (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 for the initial 2-year period of the postacute 
care transfer policy, the Medicare program paid approximately $116 million in excessive 
payments to prospective payment system hospitals as a result of these erroneously coded 
discharges.  Our reviews indicated that the Common Working File had no controls or 
edits in place to prevent excessive payments to such hospitals for erroneously coded 
qualified discharges that are followed by postacute care. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$61  $61  $61  $61  $61 
 
Status:  CMS concurred with our recommendations.  Edits were recently implemented.  
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.   
 
    Report: 
A-04-00-01210 (final report, 12/00) 
A-04-00-02162 (final report, 2/01) 
A-04-00-01220 (final report, 10/01) 
A-04-02-07005 (final report, 4/03) 
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 21     
 
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 (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 did not concur with the recommendation and has not pursued a legislative 
proposal. 
 
    Report: 
    A-01-92-00521 (final report, 7/94) 
    A-01-02-00503 (final report, 8/03) 
 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 22     
 
Adjust Base-Year Costs in the Prospective Payment System for 
Hospital Outpatient Department Services 
 
Current Law:  The Balanced Budget Act of 1997 required CMS to develop a 
prospective payment system for hospital outpatient department services.  The Act 
required CMS to use 1996 hospital claim data and the most recent available cost report 
data to develop the rates. 
     
Proposal (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 claim and cost data 
that CMS used in the prospective payment rate calculations.  Our prior audit work 
identified substantial unallowable costs in hospitals Medicare cost reports and several 
areas of payment improprieties in Medicare reimbursement for outpatient department 
services.  Since the prospective payment fee schedules and expenditure ceiling are based 
on prior Medicare outpatient reimbursement, we believe that the rates may be inflated 
and that hospitals will realize windfall profits at Medicares expense. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  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 RecommendationsCenters for Medicare & Medicaid Services  Page 23     
 
Establish More Consistent Outpatient Surgery Rates  
That Reflect Only Necessary Costs  
 
Current Law:  The Medicare program covers hospital outpatient department services 
under the Medicare Supplemental Medical Insurance Program.  Medicare reimbursement 
for services in these settings varies and has evolved over time.  Hospital outpatient 
departments were historically reimbursed for services using a facility fee based on the 
lesser of costs or charges.  In 1980, recognizing that some surgical procedures provided 
on an inpatient basis could be safely performed in less intensive and less costly settings, 
the Congress added coverage for services provided in ambulatory surgical centers 
(ASCs).  In 2000, CMS implemented an outpatient prospective payment system for 
hospital outpatient services.   
 
Proposal (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 ambulatory surgical centers between January 2006 and January 2008.  
In a 2003 final rule, CMS removed from the list of approved ASC procedures 7 of the 72 
codes that OIG cited as meeting the criteria for removal.  As part of its biennial review of 
the ASC list, CMS is developing a proposed notice to update the list in 2005, and is 
considering the remaining codes recommended for deletion by OIG as part of this review.  
The proposed notice to update the ASC list is scheduled for publication in fall 2004.    
 
Report:   
A-14-89-00221 (final report, 3/91)      OEI-09-88-01003 (final report, 5/89) 
A-14-98-00400 (final report, 11/98)      OEI-05-00-00340 (final report, 1/03) 
 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 24     
 
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.  The Congress 
apparently believed that long-term care of the mentally ill was generally a State 
responsibility.  The delivery of inpatient psychiatric care has since expanded beyond 
psychiatric hospitals to general hospitals with distinct psychiatric units.  The 190-day 
limit was not extended to these more costly general hospital units.   
     
Proposal (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 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 during FY 2005. 
 
    Report: 
    A-06-86-62045 (final report, 2/88) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 25     
 
Eliminate Provider-Based Designations or Improve  
Management and Oversight 
 
Current Law:  Hospitals often purchase a variety of other medical entities, such as 
physician practices, nursing facilities, and home health agencies.  Under Medicare, 
hospitals may account for medical entities they own either as freestanding or as part of 
the hospital.  If a hospital accounts for an entity as part of the hospital, it is referred to as 
a provider-based arrangement.  This arrangement requires approval from CMS.  
Provider-based status increases costs for Medicare and its beneficiaries. 
     
Proposal (Legislative, Procedural):  CMS should eliminate provider-based 
designations for hospital-owned physician practices and other entities.  Otherwise, CMS 
should (1) seek legislation to impose penalties when hospitals fail to report ownership of 
other entities or bill for these entities inappropriately; (2) improve the data systems used 
to identify and track provider-based designations and clarify policies and procedures for 
tracking, approving, and evaluating provider-based status; and (3) require that all 
hospitals claiming provider-based status reapply. 
 
Reason for Action:  Our inspections found that hospitals purchased entities such as 
physician practices and billed for these entities as provider-based without CMS approval.  
CMS regional offices and fiscal intermediaries did not consistently follow CMS 
processes for review and approval of provider-based status and were frequently unaware 
of hospital practices in purchasing and billing for other entities.  At issue is whether the 
site, or ownership of the site where the service is rendered, should dictate a higher 
payment by Medicare and the beneficiary. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS published a final rule in August 2002, establishing strict criteria for 
obtaining provider-based status.  Subsequently, the mandatory requirement for provider-
based determinations was replaced with a voluntary attestation process.  Providers are no 
longer required to apply for and receive a provider-based determination for their facilities 
prior to billing for services in those facilities as provider-based. 
 
    Report: 
OEI-05-98-00110 (final report, 9/99) 
OEI-04-97-00090 (final report, 8/00) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 26     
End Stage Renal Disease 
 
Reduce Medicare End Stage Renal Disease Payment Rates 
 
Current Law:  The Omnibus Budget Reconciliation Act of 1981 established a 
prospective payment system for outpatient dialysis treatments under 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 (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 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 mgmt. advisory report, 7/90)
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 27     
 
                       
Reduce the Epogen Reimbursement Rate 
 
Current Law:  Section 1881(b)(11)(B) of the Social Security Act provided that the 
Secretary of HHS may set an appropriate reimbursement level for the drug Epogen  
beginning January 1, 1995. 
     
Proposal (Legislative, 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.  MMA directs CMS to use the results of an OIG 
study on separately billable end state renal disease drug payments and costs to set the 
2005 Composite Payment Rate.  Section 623 of MMA requires that beginning January 1, 
2005, payment for Epogen (as well as other end stage renal disease drugs) will be based 
on acquisition costs. 
 
 
    Report: 
    A-01-97-00509 (final report, 11/97) 
                 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 28     
 
Ensure That Claims for Ambulance Services for End Stage Renal 
Disease Beneficiaries Meet Coverage Guidelines 
 
Current Law:  The Medicare Part B benefit for ambulance service has very strict 
limits, as explained by CMS in the Medicare carrier manual, section 2120.  The transport 
is not covered if it fails to meet the medical necessity requirement, even if it meets other 
requirements. 
     
Proposal (Procedural):  CMS should ensure that claims meet Medicare coverage 
guidelines. 
 
Reason for Action:  Seventy percent of transports involving dialysis in our sample did 
not meet Medicare guidelines for medical necessity because beneficiaries did not have 
conditions that contraindicated use of another type of transport on the date of ambulance 
service.  These claims represented an estimated $65.7 million in 1993.  Almost two-thirds 
of the beneficiaries (63 percent) were clearly not bed-confined. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$90  $99  $100  $101  $102 
 
Status:  CMS concurred with our recommendation.  In January 1999, CMS issued a 
regulation that addressed ambulance payment issues and required physician certification 
of nonemergency transports.  However, payments for this group of beneficiaries are 
particularly problematic; we plan to conduct additional analytical work on this topic. 
 
    Report: 
    OEI-03-90-02130 (final report, 8/94) 
                       
       
       
       
 
       
 
                       
       
       
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 29     
 
Modify Payment System for Ambulance Services for  
End Stage Renal Disease Beneficiaries 
 
Current Law:  Medicare Part B covers ambulance services under certain conditions.  
Ambulance transport must be reasonable and medically necessary.  Ambulance company 
services and charges are represented by alphanumeric codes, which the Medicare 
program uses to analyze utilization and payments.  Persons with ESRD are entitled to 
Medicare coverage under the 1972 amendments to the Social Security Act. 
     
Proposal (Legislative, Regulatory):  CMS should ensure appropriate payment for 
services rendered and may consider using one or more of the following strategies:  (1) 
establish a payment schedule for ambulance transport to maintenance dialysis, and set the 
fee lower than that paid for unscheduled, emergency transports; (2) negotiate preferred 
provider agreements with ambulance companies to provide scheduled transportation for 
ESRD beneficiaries; (3) use competitive bidding to establish a price for scheduled 
transports for ESRD beneficiaries or to select companies that agree to provide such 
services; (4) establish a rebate program for companies that routinely transport ESRD 
beneficiaries; and (5) provide an add-on to the composite rate that Medicare pays dialysis 
facilities, and allow the facilities to negotiate agreements with ambulance companies. 
 
Reason for Action:  The payment system does not take into account the routine, 
predictable nature of scheduled ambulance transports, nor does it take advantage of the 
lower costs associated with high-volume scheduled transports. 
 
Savings (in Millions): 
  FY 1 FY 2 FY 3 FY 4 FY 5
Lower estimate  $ 4.9  $ 6.0  $ 7.3  $ 8.9  $10.9 
Upper estimate   14.7   18.0   22.0   26.8    32.7 
 
Status:  CMS established codes for scheduled transport and required uniform use of 
national ambulance codes.  In June 1997, CMS issued a notice of proposed rulemaking 
which would require physician certification of nonemergency transports.  The Balanced 
Budget Act of 1997 authorized the establishment of a fee schedule for ambulance 
services which links payments to the type of services provided.  In 1999, CMS clarified 
coverage rules for nonemergency transport, and in February 2002, CMS published a final 
rule establishing a fee schedule for ambulance services.  The Medicare Prescription Drug, 
Improvement and Modernization Act of 2003 increased Medicare payment rates for trips 
originating in a rural area. 
 
    Report: 
    OEI-03-90-02131 (final report, 3/94)  
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 30     
Durable Medical Equipment 
   
Identify Medical Equipment/Supply Claims Lacking Valid, Active 
Unique Physician Identification Numbers 
 
Current Law:  The Consolidated Omnibus Budget Reconciliation Act of 1985 required 
CMS to establish unique physician identification numbers for all physicians who provide 
services to Medicare beneficiaries.  Medicare requires that medical equipment and 
supplies be ordered by a physician or another qualified practitioner.  
     
Proposal (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 RecommendationsCenters for Medicare & Medicaid Services  Page 31     
 
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 (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 RecommendationsCenters for Medicare & Medicaid Services  Page 32     
 
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 (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 did not concur with our recommendation to install postpayment edits and 
stated that it would be impractical for the regional carriers to perform postpayment 
reviews to identify these situations.  CMS has developed prepayment edits, which were 
expected to be implemented in April 2002.  We are currently reviewing this issue to 
determine if the conditions have been corrected. 
 
    Report: 
    A-01-00-00509 (final report, 7/01)       
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 33     
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 (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 RecommendationsCenters for Medicare & Medicaid Services  Page 34     
 
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 (Regulatory):  CMS should issue a final rule on the application of its 
inherent reasonableness authority so that this authority can be used to adjust the fee 
schedule amounts for procedure code E0260 pertaining to 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 OIGs recommendations but is waiting to initiate inherent 
reasonableness reviews until written procedures for conducting these reviews are 
developed.  In accordance with the Medicare Prescription Drug, Improvement and 
Modernization Act of 2003, the Medicare fee schedule amounts for hospital beds will be 
reduced by the percentage difference between the 2002 Medicare fee schedule amounts 
and the median price paid under the Federal Employee Health Benefit plans in 2002.  The 
percentage reduction takes effect in January 2005.    
 
Report: 
A-09-01-00109 (final report, 12/02) 
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 35     
     
Improve Billing Practices for Medicare Orthotics 
 
Current Law:  Medicare pays for prosthetics and orthotics, defined by regulation as 
leg, arm, back, and neck braces and artificial legs, arms, and eyes, including replacements 
if required because of a change in the beneficiarys physical condition.  Orthotic devices, 
which are mainly covered under Medicare Part B, must be reasonable and necessary for 
the diagnosis or treatment of an illness or injury or to improve the functioning of a 
malformed body member.   
     
Proposal (Procedural):  CMS should improve Medicare billing for orthotics, 
including development of standards required for suppliers of custom molded/fabricated 
devices. 
 
Reason for Action:  Our recent review found continued inappropriate Medicare 
reimbursement for orthotics at significant levels.  Thirty percent of beneficiaries had one 
or more miscoded devices.  We also found that qualifications of orthotic suppliers varied; 
noncertified suppliers in our sample were the most likely to provide inappropriate 
devices. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$43  $43  $43  $43  $43 
 
Status:  CMS generally concurred with our original recommendations.  The agency is 
working on a proposed rule regarding orthotics and intends to put in place standards for 
custom orthotics. 
 
    Report: 
OEI-02-95-00380 (final report, 10/97) 
OEI-02-99-00120 (final report, 3/00) 
OEI-02-99-00121 (final report, 3/00) 
               
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 36     
 
Improve Guidelines for Therapeutic Footwear 
 
Current Law:  The Medicare Part B benefit covers therapeutic footwear for 
beneficiaries with diabetes and one or more of six qualifying conditions.  A doctor of 
medicine or a doctor of osteopathy who is treating the beneficiarys systemic  
diabetic condition under a comprehensive plan of care must certify the need for 
therapeutic footwear. 
     
Proposal (Procedural):  CMS should make Medicare coverage guidelines more 
explicit and improve documentation requirements for therapeutic footwear.  CMS should 
also ensure that the therapeutic footwear benefit contains quality assurance safeguards. 
 
Reason for Action:  We found that documentation for 57 percent of therapeutic shoe 
claims included in our sample was missing or inadequate.  We also found that because 
Medicare guidelines do not clearly define qualifications of nonphysician entities that 
furnish therapeutic footwear, quality assurance was problematic.  Because less than 1 in 
50 Medicare-aged diabetics received shoes in 1996, the potential for growth in the shoe 
program is enormous. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$7  $7  $7  $7  $7 
 
Status:  CMS concurred with our recommendations and released a program 
memorandum in November 2001 requiring suppliers to indicate actual, accurate start 
and end dates on claim forms.  CMS is working on a proposed rule to establish 
standards for suppliers of therapeutic shoes.  
 
    Report: 
    OEI-03-97-00300 (final report, 8/98) 
                       
   
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 37     
 
Eliminate Inappropriate Billing for Blood Glucose Test Strips 
 
Current Law:  Medicare covers home blood glucose monitors and test strips for 
beneficiaries who must periodically test their blood sugar levels as part of their diabetes 
management, regardless of insulin usage. 
     
Proposal (Procedural):  CMS should (1) eliminate the inappropriate billings 
identified in our review by alerting suppliers to the importance of properly completing 
documentation to support claims for test strips and (2) require suppliers to indicate actual, 
accurate start and end dates on claim forms. 
 
Reason for Action:  We found that Medicare allowed $79 million for blood glucose 
test strips based on claims with missing or flawed documentation. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$79  $79  $79  $79  $79 
 
Status:  CMS concurred with our recommendations and released a program 
memorandum in November 2001 requiring providers to fill in start and end dates for 
glucose test strips. 
 
    Report: 
    OEI-03-98-00230 (final report, 6/00) 
                       
   
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 38     
 
Examine Payment Method for Parenteral Nutrition 
 
Current Law:  Parenteral nutrition, a liquid solution provided intravenously through 
use of an indwelling catheter and infusion pump, is covered under Medicares Part B 
prosthetic device provision.  Medicare uses the reasonable charge methodology to 
determine allowances for 23 parenteral nutrition procedure codes. 
     
Proposal (Legislative, Procedural):  CMS should examine other payment methods 
that could lead to more cost-effective reimbursement for parenteral nutrition solutions.  
We suggest consideration of three alternative payment methods:  inherent reasonableness, 
acquisition cost, and competitive bidding. 
 
Reason for Action:  For four parenteral nutrition codes, Medicare paid an average of 
45 percent more than Medicaid agencies and 78 percent more than Medicare risk health 
maintenance organizations. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$65  $65  $65  $65  $65 
 
Status:  CMS concurred with our recommendations and is considering options to 
determine the best approach to reduce and control costs for parenteral nutrition.  CMS is 
also working on developing written procedures for conducting inherent reasonableness 
reviews.  In accordance with the Medicare Prescription Drug, Improvement and 
Modernization Act of 2003, competitive acquisition of enteral nutrition durable medical 
equipment and off-the-shelf orthotics will be phased in beginning in 2007.   
 
    Report: 
    OEI-03-96-00230 (final report, 7/97) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 39     
 
Reduce and Control Enteral Nutrition Equipment Costs 
     
Current Law:  Enteral nutrition therapy, commonly called tube feeding, provides 
nourishment to patients who cannot swallow because of severe or permanent medical 
problems.  This therapy, covered under Medicare Part B, is limited to patients unable to 
eat normally who require enteral therapy as their primary source of nutrition.  Durable 
medical equipment (DME) regional carriers establish medical policy and guidelines for 
the review of DME claims.    
     
Proposal (Procedural):  DME regional carriers should consider selecting claims for 
special formulas, pump equipment, and/or pump supply kits when they determine target 
areas for focused medical reviews.  Enteral nutrition therapy provided in nursing homes 
also should be covered under the nursing home daily rate. 
 
Reason for Action:  Eighty percent of the beneficiaries sampled met Medicare criteria 
for enteral nutrition therapy in 1995.  However, we identified vulnerabilities in the use of 
special enteral formulas and the pump delivery method.   
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$28  $28  $28  $28  $28 
 
Status:  CMS agreed with our recommendation.  Medicare Part B coverage of enteral 
nutrition therapy continues to be provided for beneficiaries residing in a nursing facility 
when the stay is not covered by Medicare Part A. 
 
    Report: 
    OEI-03-94-00022 (final report, 6/97) 
             
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 40     
 
Reduce Medicare Part B Payments for Enteral Nutrition at Home 
 
Current Law:  Enteral nutrition therapy provides nourishment to patients who cannot 
swallow because of severe or permanent medical problems.  This therapy, covered under 
Medicare Part B, is limited to patients who are unable to eat normally and require enteral 
therapy as their primary source of nutrition.  While the majority of payments are for 
patients in nursing homes, some patients receive enteral therapy as part of home care. 
     
Proposal (Legislative, Procedural):  CMS should reduce payments through 
competitive acquisition strategies for patients receiving enteral nutrition at home. 
 
Reason for Action:  Payments for enteral nutrition therapy are excessive because 
reimbursement rates are high and competitive acquisition strategies are not fully used.  In 
our review of other payers of enteral nutrition, we found that payers who negotiated 
prices, taking advantage of discounts and other competitive acquisition strategies, 
reimbursed from 17 to 48 percent less than Medicare. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$15  $15  $15  $15  $15 
 
Status:  CMS concurred that Medicare paid too much for enteral nutrients and supported 
the recommendation to reduce payments for enteral therapy administered at home.  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.   
 
    Report: 
    OEI-03-94-00021 (final report, 4/96) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 41     
 
Improve Medical Reviews for Home Oxygen Therapy 
 
Current Law:  Medicare covers home oxygen therapy for beneficiaries diagnosed with 
significant hypoxemia (a deficiency in the amount of oxygen in the blood).  A physician-
signed certificate of medical necessity is required for payment.  The Balanced Budget Act 
of 1997 mandated that the Secretary establish specific service standards for oxygen and 
oxygen equipment as soon as practicable.  Home oxygen therapy accounts for the largest 
portion of Medicare durable medical equipment (DME) payments. 
     
Proposal (Regulatory):  CMS should target oxygen equipment claims for focused 
medical review and ensure that edits are in place at DME regional carriers to identify 
incomplete certificates of medical necessity.  Further, CMS should establish specific 
service standards for home oxygen equipment as mandated by the Balanced Budget Act 
of 1997. 
 
Reason for Action:  Nearly one-quarter of oxygen certificates of medical necessity 
included in our study were inaccurate or incomplete.  We estimate that the resultant cost 
to Medicare in 1996 was $263 million.  We also found that while all beneficiaries in our 
sample used their stationary oxygen equipment, 13 percent never used their portable 
systems, which resulted in a cost to Medicare of about $9.7 million in 1996. 
 
Savings (in Millions): 
      FY 1 FY 2 FY 3 FY 4 FY 5
Certificates  $263.0  $263.0  $263.0  $263.0  $263.0 
Portable systems        9.7        9.7        9.7        9.7        9.7 
     
Status:  CMS concurred with our recommendations and formed a regulation team to 
develop proposed standards for suppliers of home oxygen equipment.  The Medicare 
Prescription Drug, Improvement and Modernization Act of 2003 authorized CMS to 
reduce reimbursement for oxygen and oxygen equipment in 2005. 
 
    Report: 
    OEI-03-96-00090 (final report, 8/99) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 42     
 
Stop Inappropriate Payments for Hyperbaric Oxygen Therapy 
     
Current Law:  Hyperbaric oxygen therapy (HBO2) was originally developed for the 
treatment of decompression sickness, but its primary use in the United States is for 
wound care.  The CMS Coverage Instruction Manual, section 35-10, establishes 15 
conditions for which hyperbaric therapy is reimbursable. 
     
Proposal (Procedural):  CMS should (1) initiate its national coverage decision 
process for HBO2, (2) strengthen policy guidance by clarifying existing language and 
incorporating new guidance on issues such as physician attendance and documentation, 
and (3) improve oversight of this therapy by requiring contractors to implement 
appropriate edits and medical review standards. 
 
Reason for Action:  Our inspection found substantial inappropriate payments in the 
$49.9 million allowed for outpatient hospital and physician charges for HBO2 in  
1997-98.  Inappropriate payments were made for treatments that either were not in 
compliance with CMS guidelines or did not have sufficient documentation to support 
reimbursement, treatments deemed to be excessive, and treatments that lacked 
appropriate testing or monitoring.  Inappropriate payments resulted from abuse of or 
confusion over the current coverage policy, treating physicians medical opinions that  
did not align with CMS guidelines, inconsistent application of coverage criteria, 
inadequate documentation, and a failure by contractors to implement appropriate edits 
and medical review standards. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$19.1  $19.1  $19.1  $19.1  $19.1 
 
Status:  CMS generally concurred with our recommendations.  A national coverage 
decision for hyperbaric oxygen therapy, providing details on documentation and 
supervision requirements, was issued in April 2003.  Additionally, CMS is currently 
addressing physician guidelines for hyperbaric oxygen and indicates that it intends to 
tighten its coverage policy and update its claims processing instructions accordingly.  
CMS indicated that it will also provide guidance to contractors on specific editing to 
further ensure appropriate payment. 
 
    Report: 
    OEI-06-99-00090 (final report, 10/00) 
                       
     
       
                 
     
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 43     
 
Reclassify Respiratory Assist Devices With a Back-Up Rate 
 
Current Law:  Medicare Part B covers durable medical equipment (DME) provided in 
a beneficiarys residence when deemed medically necessary by a physician.  This 
equipment includes respiratory assist devices with a back-up rate, a feature to detect 
when a patient has stopped or delayed breathing.  The Omnibus Budget Reconciliation 
Act of 1993 amended the Social Security Act to exclude ventilators that are either 
continuous airway pressure devices or intermittent assist devices with continuous airway 
pressure devices from the frequent and substantial servicing payment category.   
     
Proposal (Regulatory):  CMS should reclassify bilevel respiratory assist devices with 
a back-up rate from the frequent and substantial servicing category to the capped 
rental category under the durable medical device benefit. 
 
Reason for Action:  The current Medicare payment for bilevel respiratory assist 
devices with a back-up rate is inappropriate because the equipment requires only routine 
maintenance and patient monitoring. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$11.5  $11.5  $11.5  $11.5  $11.5 
 
  Status:  CMS concurred with our recommendation and published a proposed rule in 
August 2003 clarifying that bilevel respiratory assist devices with back-up rate be paid as 
capped rental items. 
 
    Report: 
    OEI-07-99-00440 (final report, 6/01) 
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 44     
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 
managed care organization (MCO) payments to reflect beneficiaries health status. 
     
Proposal (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 
MCO data, we concluded that MCOs receive more than an adequate amount of funds to 
deliver the Medicare package of covered services.  The basis used to calculate monthly 
capitation payments to MCOs was flawed, resulting in higher-than-necessary payments; 
Medicare payments funded excessive administrative costs; and MCOs did not account for 
investment income earned on Medicare funds. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$3,500  $3,500  $3,500  $3,500  $3,500 
 
Status:  Although CMS initially agreed that Medicare+Choice payments were adequate 
to fund the Medicare package of covered services, the agency now believes that payments 
to MCOs, particularly those in minimum update counties, are not adequate.  Agency 
officials stated that they would move toward full implementation of a risk adjustment 
methodology incorporating diagnosis data from physician services and hospital outpatient 
services.  Subsequently, the Benefits Improvement and Protection Act of 2000 increased 
payments to MCOs.  In addition, implementation of the risk adjustment methodology was 
extended over a longer period.  Medicare Prescription Drug, Improvement and 
Modernization Act of 2003 increased payments to MCOs, including a provision to tie 
payments to Medicare outlays in fee-for-service sector.  We will be updating our work to 
examine MCO payments as a result of all legislative changes. 
 
    Report: 
    A-14-00-00212 (final report, 9/00) 
             
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 45     
 
     
Monitor Managed Care Organizations Rate Proposals  
 
Current Law:  To participate in the Medicare+Choice program, each managed care 
organization (MCO) must submit an adjusted community rate proposal to CMS before 
the contract period begins.  The proposal is integral to pricing an MCOs benefit package, 
computing excess amounts (if any) in Medicare capitation payments, and determining 
additional and supplemental benefits or premiums that could be charged to Medicare 
enrollees.   
 
Proposal (Procedural):  CMS should monitor adjusted community rate proposals to 
ensure the accuracy of the data, work with MCOs to address the deficiencies noted in 
annual audits of the proposals, ensure that MCOs have accounting systems and 
procedures in place to properly prepare their proposals, and initiate the return of funds for 
plans that overcharged their enrollees. 
 
Reason for Action:  Our reviews of 186 rate proposals submitted by 55 MCOs found 
that: 
 
  49 percent were not prepared in accordance with CMS instructions 
 
  66 percent contained errors that affected at least one of the three components 
of an adjusted community rate 
 
  36 percent overstated the beneficiary premium/cost-sharing amounts, and/or 
the MCO should have offered additional benefits had the amounts for direct 
medical care, administration, average payment rate, and copayments been 
properly calculated 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS generally concurred with the recommendations.  However, CMS had 
concerns with the methodology it thought we had used in calculating the impact on 
Medicare beneficiaries from overcharges and/or forfeited additional benefits. The 
Medicare Prescription Drug, Improvement and Modernization Act of 2003 will replace 
the rate proposals with plan bids starting in 2006.  If the monthly Medicare payment 
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 RecommendationsCenters for Medicare & Medicaid Services  Page 46     
 
Place a Ceiling on Administrative Costs Included in Managed Care 
Organizations Rate Proposals 
 
Current Law:  Each risk-based managed care organization (MCO) is required to 
submit an adjusted community rate proposal to CMS before the beginning of the contract 
period.  Administrative costs, which are one component of the proposal, include costs 
associated with facilities, marketing, taxes, depreciation, reinsurance, interest, and other 
nonmedical compensation.   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 (Legislative, Procedural):  CMS should institute a reasonable ceiling on 
the administrative costs permitted in an MCO proposal.  We suggest an administrative 
rate ceiling of 15 percent of total revenue requirements, which was MCOs average rate 
during our review period (1996 to 1999). 
 
Reason for Action:  As a percentage of the total rate proposed, the administrative rate 
varied widely among MCOs reviewed, regardless of the type of MCO (individual 
practice association, group, or staff) or the tax status (profit or nonprofit).  For the 1999 
rate proposals, the amount allocated for administrative purposes ranged from a high of  
32 percent to a low of 3 percent.  Using 1998 data, if a 15-percent ceiling had been 
applied to the MCOs we reviewed, an additional $1 billion could have been passed on to 
the beneficiaries in the form of additional benefits or reduced payments (e.g., deductibles 
and/or coinsurance). 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  Although CMS agreed that it should more thoroughly analyze rate proposals, it 
did not agree with our recommendation to institute a ceiling on the administrative costs 
included in an MCO rate proposal.  During our review period, administrative costs 
included amounts for additional revenues (i.e., profits).  Effective contract year 2000, 
administrative costs exclude amounts for additional revenues.  Therefore, the 15-percent 
ceiling would be more than reasonable.  
 
Under provisions of the Medicare Prescription Drug, Improvement and Modernization 
Act of 2003, the proposals will be replaced by plan bids starting in the year 2006.  The 
legislation gives the Secretary authority to negotiate the monthly bid amount similar to 
the Federal Employee Health Benefit program.  This program limits administrative costs 
to a negotiated amount and employs the Federal Acquisition Regulations in determining 
allowable/reasonable coststhe same criteria used in our review. 
 
    Report: 
    A-14-98-00210 (final report, 1/00) 
 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 47     
 
Pay Managed Care Organizations Only Reasonable  
Administrative Costs 
 
Current Law:  Following a CMS-prescribed methodology, each risk-based managed 
care organization (MCO) is required to submit an adjusted community rate proposal 
before the beginning of the contract period.  Through this process, MCOs present to CMS 
their estimate of the funds needed to provide the Medicare package of covered services to 
enrolled beneficiaries.  The estimated funds are calculated to cover the plans medical 
and administrative costs for the upcoming year.  Administrative costs include marketing, 
taxes, depreciation, reinsurance, interest, and other nonmedical compensation. 
     
Proposal (Legislative, Procedural):  CMS should pursue legislation to require 
risk-based MCOs, when estimating administrative costs, to follow Medicares general 
principle of paying only reasonable costs.  CMS should also publish the administrative 
cost rates of all MCOs participating in the Medicare program. 
 
Reason for Action:  Our review of the administrative costs included in the 1997 
proposals submitted by nine MCOs found that $66.3 million of the actual administrative 
costs incurred would have been recommended for disallowance had the MCOs been 
required to follow Medicares general principle of paying only reasonable costs.  Since 
no statutory or regulatory authority governs allowability of costs included in the rate 
proposal, the MCOs were not required to adhere to this principle. 
 
Conducted at CMSs request, our subsequent review included 10 MCOs adjusted 
community rate proposals for 2000.  We found that $97.1 million in base-year 
administrative costs would have been recommended for disallowance had the MCOs 
been required to follow Medicares general principle of paying only reasonable costs. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS did not agree with our recommendations.  Agency officials stated that the 
revised rate proposals require MCOs to report administrative costs actually incurred for 
Medicare plans.  However, we believe that the revised proposals do not address the 
reasonableness of costs.  Under provisions of the Medicare Prescription Drug, 
Improvement and Modernization Act of 2003, the proposals will be replaced by plan 
bids starting in the year 2006.  The legislation gives the Secretary authority to negotiate 
the monthly bid amount similar to the Federal Employee Health Benefit program.  This 
program limits administrative costs to a negotiated amount and employs the Federal 
Acquisition Regulations in determining allowable/reasonable coststhe same criteria 
used in our review.  
 
    Report: 
    A-03-98-00046 (final report, 1/00)           
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 48     
         
Monitor Investment Income Earned by Risk-Based  
Managed Care Organizations 
 
Current Law:  Under the Medicare+Choice program, Medicare pays predetermined per 
capita payments to managed care organizations (MCOs) by the first of every month.  In 
exchange for these capitation payments, MCOs are required to provide all Medicare-
covered services to their members. 
     
Proposal (Legislative):  CMS should pursue legislation to either (1) adjust the timing 
of Medicare prepayments to MCOs to maximize the Health Insurance Trust Funds 
earnings while minimizing MCOs opportunities to earn investment income on Medicare 
funds or (2) adjust MCO payment rates to recognize the impact of investment income on 
the total funding available to MCOs for servicing their Medicare enrollees.  Until such 
legislation is enacted, CMS should develop policies on tracking, estimating, and reporting 
investment income to ensure that investment income funds are used for program purposes 
and for the benefit of Medicare enrollees. 
 
Reason for Action:  Presently, MCOs with risk contracts are not required to account 
for investment income, which is earned from the time MCOs receive payment from CMS 
until these funds are disbursed to providers.  We found that MCOs earned in excess of 
$100 million a year on current-year Medicare funding during 1996 and 1997 and 
continued to earn significant amounts of investment income in 1998.  On average, plans 
earned an estimated 5-percent return from short-term investments of Medicare 
prepayment funding.  As a result, we are concerned that MCOs were effectively funded  
at a greater amount (approximately 0.4 percent more) than the 95 percent of Medicare 
fee-for-service costs used as a basis for calculating MCO payment rates. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$150  $150  $150  $150  $150 
 
Status:  CMS agreed that its policies should hold MCOs accountable for investment 
income earned on current Medicare funds and should ensure that such income is used to 
benefit Medicare enrollees.  However, CMS did not intend to pursue immediate 
legislative changes. 
 
Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the 
MCOs will negotiate their Medicare contracts using plan bids starting in the year 2006.  
The legislation gives the Secretary authority to negotiate the monthly bid amount similar 
to the Federal Employee Health Benefit program.  Interest earned by plans participating 
in the program is considered when setting the annual rates. 
 
    Report: 
    A-02-98-01005 (final report, 8/00) 
 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 49     
Other Medicare Reimbursement 
   
 
 
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 mandated that the annual adjustment 
to the clinical laboratory fee schedule for 2004 through 2008 shall be 0 percent. 
     
Proposal (Legislative, 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
Panel  TBD  TBD  TBD  TBD  TBD 
Copayment  $1,130  $1,240  $1,370  $1,960  $2,130 
         
Status:   CMS has taken corrective actions to reduce payments for laboratory services.  
A proposal to reduce payment updates from 2003 through 2005 was included in the 
Presidents FY 2001 budget, as well as a proposal to reinstate laboratory cost sharing.  
Neither of these proposals was enacted.  In addition, the Balanced Budget Act of 1997 
required the Secretary to request that the Institute of Medicine conduct a study of Part B 
laboratory test payments.  CMS may use the results to develop new payment 
methodologies.  CMS now requires that automated multi-channel tests be billed 
individually and are bundled by the FI and carrier to determine payment amounts. 
 
    Report: 
A-09-89-00031 (final report, 1/90)    A-09-93-00056 (follow-up report, 1/96) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 50     
   
     
Adjust Home Health Agency Prospective Payments 
 
Current Law:  The Balanced Budget Act of 1997, as amended, required CMS to 
develop a prospective payment system for home health agencies.  This system was 
implemented on October 1, 2000. 
     
Proposal (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.  The CMS believes that several factors nullify any need for 
further payment rate changes, including the payment reduction, effective FY 2003, 
imposed by the Congress. 
 
    Report: 
    A-04-99-01194 (final report, 11/99)   
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 51     
 
Require Physician Examination Before Ordering  
Home Health Services 
 
Current Law:  Section 1861 of Title XVIII of the Social Security Act authorized 
Medicare Part A payments for home health services.  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 (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 OIG 
studies describe extreme variations and broad patterns of billing by these agencies, which 
raise questions about the appropriateness of some billings.  We therefore believe that it is 
necessary to place systematic controls on the home health benefit to prevent abuse. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  Although the Balanced Budget Act of 1997 included provisions to restructure 
home health benefits, CMS still needs to revise regulations to require that physicians 
examine Medicare patients before ordering home health services.  After the laws 
enactment, our four-State review found that unallowable services continued to be 
provided because of inadequate physician involvement.  While agreeing in principle, 
CMS said that it would continue to examine both coverage rules and conditions of 
participation to develop the discipline necessary for ensuring proper certification.  CMS 
also provided additional payments for physician care plan oversight and education for 
physicians and beneficiaries. 
 
    Report: 
A-04-94-02078 (final report, 2/95)    A-04-97-01169 (final report, 4/99)  
A-04-94-02087 (final report, 6/95)    A-04-97-01170 (final report, 4/99)  
A-04-95-01103 (final report, 3/96)    A-02-97-01034 (final report, 9/99) 
A-04-95-01106 (final report, 3/96)    A-04-98-01184 (final report, 9/99) 
A-04-95-01104 (final report, 6/96)     A-04-99-01194 (final report, 11/99) 
A-04-95-01105 (final report, 9/96)    A-04-99-01195 (final report, 3/01) 
A-04-95-01107 (final report, 9/96)    OEI-12-94-00180 (final report, 5/95) 
A-03-95-00011 (final report, 11/96)    OEI-02-94-00170 (final report, 6/95) 
A-04-96-02121 (final report, 7/97)    OEI-04-93-00260 (final report, 7/95)  
A-02-97-01026 (final report, 9/97)    OEI-04-93-00262 (final report, 9/95) 
A-04-97-01166 (final report, 4/99) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 52     
 
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 (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. 
 
    Report: 
A-14-98-00350 (final report, 7/98) 
A-06-99-00058 (final report, 12/99) 
OEI-09-97-00122 (final report, 11/00) 
             
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 53     
 
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 (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 review identified $47.6 million in potentially improper Medicare 
payments during calendar year 1999 for services that were subject to consolidated billing. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$47.6  $47.6  $47.6  $47.6  $47.6 
 
Status:  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. 
  
    Report: 
A-01-99-00531 (final report, 3/00) 
A-01-00-00538 (final report, 6/01) 
                       
 
       
         
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 54     
 
Ensure Appropriateness of Medicare Payments for  
Mental Health Services 
             
Current Law:  Section 1862(a)(1)(A) of the Social Security Act requires all services, 
including mental health, to be reasonable and necessary for the diagnosis or treatment of 
an illness or injury. 
 
Proposal (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.  We currently are reviewing this 
area to determine if substantial errors are still present. 
 
Report: 
A-04-98-02145 (final report, 10/98)  OEI-02-99-00140 (final report, 1/01) 
A-01-99-00507 (final report, 3/00)  OEI-03-99-00130 (final report, 5/01) 
A-01-99-00530 (final report, 12/00) 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 55     
 
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 (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 in 1998, 1999, and 2000.  It will perform a significant 
number of focused medical reviews of therapy claims in skilled nursing facilities and 
other therapy settings. 
 
    Report: 
OEI-09-97-00122 (final report, 8/99) 
OEI-09-99-00550 (final report, 11/00) 
OEI-09-99-00560 (final report, 8/01)                
       
       
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 56     
 
Ensure the Medical Necessity of Ambulance Claims 
 
Current Law:  CMS regulations state that Medicare covers ambulance services only if 
other forms of transportation are contraindicated by the beneficiarys condition.  The 
Balanced Budget Act of 1997 mandated that CMS work with the industry to establish a 
negotiated fee schedule for ambulance payments effective January 1, 2000. 
     
Proposal (Procedural):  CMS should develop a prepayment edit to verify the medical 
necessity of ambulance claims that are not associated with hospital or nursing home 
admissions or emergency room care.  This proposal would provide a solution for one 
group of ambulance services until CMS and the industry can better address issues of 
medical necessity, including clear and consistent definitions. 
 
Reason for Action:  Two-thirds of ambulance services that did not result in hospital or 
nursing home admissions or emergency room care on the same date were medically 
unnecessary.  We estimate that Medicare allows approximately $104 million each year 
for these medically unnecessary services. 
 
Savings (in Millions):* 
FY 1 FY 2 FY 3 FY 4 FY 5
$104  $104  $104  $104  $104 
     
*Savings may depend on the timing and nature of the fee schedule mandated by the 
Balanced Budget Act. 
     
Status:   The Medicare Prescription Drug, Improvement and Modernization Act of 2003 
made several changes in payment for ambulance services.  CMS is currently updating its 
work to examine medical necessity of both emergency and nonemergency transports.   
 
    Report: 
    OEI-09-95-00412 (final report, 12/98)             
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 57     
 
Stop Inappropriate Payments for Chiropractic  
Maintenance Treatments 
     
Current Law:  In 1972, section 273 of the Social Security Amendments (P.L. 92-603) 
expanded the definition of physician under Medicare Part B to include chiropractors.  
Currently, the only Medicare reimbursable chiropractic treatment is manual manipulation 
of the spine to correct a subluxation.  Effective January 1, 2000, the Balanced Budget Act 
of 1997 eliminated the requirement for an x ray to demonstrate subluxation of the spine; a 
subluxation may now be demonstrated by an x ray or by physical examination.  The Act 
also required the development of utilization guidelines for chiropractic services and 
treatment. 
     
Proposal (Procedural):  CMS should develop system edits to detect and prevent 
unauthorized payments for chiropractic maintenance treatments.  Examples include  
(1) requiring chiropractic physicians to use modifiers to distinguish the categories of  
spinal joint problems and (2) requiring all Medicare contractors to implement system 
utilization frequency edits to identify beneficiaries receiving consecutive months of 
minimal therapy. 
 
Reason for Action:  We found that Medicare, Medicaid, and private insurers rely, in 
varying degrees, on utilization caps, x rays, physician referrals, copayments, and 
prepayment and postpayment reviews to control utilization of chiropractic benefits.   
Copayments are the most widely used utilization controls, but these and other controls 
did not detect or prevent unauthorized Medicare maintenance treatments.  We concluded 
that 759,400 Medicare beneficiaries received 2.9 million probable chiropractic 
maintenance treatments at a cost to the Medicare program of almost $69 million in 1996. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$186  $186  $186  $186  $186 
 
Status:  CMS plans to move forward with its efforts to require that all contractors 
establish systems utilization frequency edits and that chiropractic physicians use 
modifiers distinguishing the categories of spinal joint problems.  In the interim, in some 
instances, contractors are reviewing chiropractic claims on a postpayment basis and are 
detecting maintenance therapy through data analysis. 
 
    Report: 
OEI-06-97-00480 (final report, 9/98) 
OEI-04-97-00490 (final report, 11/98)             
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 58     
 
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 (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 the CMS 
regional offices and carriers to educate podiatrists on Medicare payment policies for nail 
debridement claims. 
 
Reason for Action:  Based on our medical review of calendar year 2000 claims, we 
estimated that $51.2 million was inappropriately paid for nail debridement services.  Over 
half of these nail debridement claims contained related podiatry services.  When a nail 
debridement service is determined to be inappropriate, all podiatry payments for related 
services are also inappropriate.  Medicare paid $45.6 million for such related services. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$96.8  $96.8  $96.8  $96.8  $96.8 
 
Status:  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 in order to educate 
podiatrists on Medicare policy for paying nail debridement claims.   
 
    Report: 
    OEI-04-99-00460 (final report, 6/02)  
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 59     
 
Expand Medicare Secondary Payer Provisions for  
End Stage Renal Disease Benefits 
 
Current Law:  The Omnibus Budget Reconciliation Act of 1981 changed the status of 
Medicare from primary to secondary payer for beneficiaries with end stage renal disease 
(ESRD) for the first 12 months of Medicare eligibility or entitlement.  Effective 
November 5, 1990, Medicare became secondary payer for the first 18 months of 
Medicare entitlement.  The Balanced Budget Act of 1997 made Medicare the secondary 
payer for the first 30 months of Medicare eligibility. 
     
Proposal (Legislative):  CMS should pursue legislation to extend the Medicare 
secondary payer provision to include ESRD beneficiaries without a time limitation.   
 
Reason for Action:  The proposed change for ESRD beneficiaries would make 
Medicare secondary payer provisions consistent with legislation passed by the Congress 
for aged and disabled beneficiaries, which does not restrict the period that Medicare is the 
secondary payer. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  CMS was concerned that an indefinite secondary payer provision might 
encourage insurers to drop uneconomical services, namely facility dialysis and 
transplantation.  We continue to advocate that when Medicare eligibility is due solely to 
ESRD, the group health plan should remain primary until the beneficiary becomes 
entitled to Medicare based on age or disability and is not currently employed.  At that 
point, Medicare would become the primary payer. 
 
    Report: 
    A-10-86-62016 (final report, 12/87)               
   
 
               
 
       
 
       
 
     
       
 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 60     
Medicaid Reimbursement   
 
Eliminate or Reduce Transition Periods for Compliance With  
New Medicaid Upper Payment Limits 
 
Current Law:  In a final rule published in January 2001, CMS revised the Medicaid 
upper payment limit regulations to provide for three separate aggregate upper 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 (Legislative, Regulatory, Procedural):  CMS should seek authority to 
eliminate or reduce the 5- and 8-year transition periods included in the new upper 
payment limit regulations. 
 
Reason for Action:  We believe that the transition periods included in the regulations 
are longer than needed for States to adjust their financial operations in response to the 
new upper payment limits. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  TBD  TBD  TBD 
 
Status:  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.   
 
    Report: 
    A-03-00-00216 (final report, 9/01) 
                       
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 61     
 
Delay or Repeal the Increase in Medicaid Disproportionate Share 
Hospital Payments 
 
Current Law:  The Benefits Improvement and Protection Act of 2000 modified the 
disproportionate share hospital (DSH) payment limit applicable to public hospitals in all 
States.  Beginning on the first day of the State FY that begins after September 30, 2002, 
and continuing for 2 years, the DSH limit will increase from 100 percent to 175 percent 
of uncompensated care costs. 
     
Proposal (Legislative, Procedural):  CMS should consider seeking legislative 
reform to ensure that DSH funds remain at the hospitals to provide care to vulnerable 
populations, rather than being returned to the States through intergovernmental transfers.   
OIG also believes that any Medicaid payment returned by a provider to the State should 
be treated as a credit applicable to the Medicaid program.  CMS should also perform any 
other studies of the DSH program that it deems appropriate to evaluate the 
reasonableness of DSH reimbursement. 
 
Reason for Action:  Based on audits in four States, we believe that DSH payments are 
not always retained and used by public hospitals and that the DSH funds received are not 
always calculated correctly.  We are concerned that by raising the limit to 175 percent, 
additional DSH funds may not actually be retained by public hospitals or the amount of 
incorrect DSH payments may increase.  Even after the increase to 175 percent ends after 
State FY 2004, problems with DSH funds not remaining at the providers will continue. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
TBD  TBD  -  -  - 
 
Status:  CMS initially concurred with our recommendations.  However, when 
commenting on the final report, CMS stated that the Presidents FY 2003 budget did not 
seek a change in DSH legislation.  The Presidents FY 2004 and FY 2005 budgets also 
did not seek a change in DSH legislation. 
 
    Report: 
    A-06-01-00069 (final report, 12/01) 
                       
   
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 62     
 
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 (Legislative, 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, all drugs without 
Federal upper payment limits, multiple-source 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.  However, legislation may be 
needed to implement the four-tiered approach that we have recommended, which could 
bring about substantial savings nationwide.  We will continue to monitor the pricing of 
Medicaid drug reimbursements for brand name drugs. 
 
    Report: 
    A-06-00-00023 (final report, 8/01) 
    A-06-02-00041 (final report, 9/02) 
 
     
           
       
                   
   
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 63     
 
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 (Legislative, 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, all drugs without Federal 
upper payment limits, multiple-source 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.  However, legislation may be 
needed to implement the four-tiered approach that we have recommended, which could 
bring about substantial savings nationwide.  We will continue to monitor the pricing of 
Medicaid drug reimbursements for generic drugs. 
 
    Report:   
    A-06-01-00053 (final report, 3/02) 
A-06-02-00041 (final report, 9/02) 
 
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 64     
 
Review Medicaid Reimbursement Methodology for HIV/AIDS Drugs 
 
Current Law:  Title XIX of the Social Security Act established Medicaid as a jointly 
funded, Federal-State health insurance program to provide medical services to low-
income persons.  Medicaid, the largest source of public coverage for prescription drugs, 
provides prescription drug benefits for almost half of the 335,000 persons living with 
HIV/AIDS who receive regular care.  In FY 1999, Medicaid spent $617 million for 
antiretroviral drugs to treat HIV/AIDS. 
     
Proposal (Procedural):  CMS should review the current reimbursement methodology 
and work with States to more accurately estimate pharmacy acquisition costs for 16 
HIV/AIDS antiretroviral drugs examined in our report and initiate a review of Medicaid 
rebates for them. 
 
Reason for Action:  Medicaid pays up to 33 percent more than other Federal 
Government drug discount programs for 16 HIV/AIDS antiretroviral drugs.  Medicaid 
could have saved $102 million in Federal/State funds ($54 million Federal share) in  
FY 2000 if the 10 States we surveyed had purchased these antiretrovirals at the Federal 
ceiling price used by the Department of Veterans Affairs, the Department of Defense, the 
Coast Guard, and certain public health agencies.  The program could have saved  
$140 million ($73 million Federal share) if all States payments for HIV/AIDS 
antiretroviral drugs had been limited by these Federal ceiling prices. 
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$144  $148  $152  $156  $160 
 
Status:  Some unknown portion of the costs for these drugs will be addressed by the 
implementation of the Medicare Prescription Drug, Improvement and Modernization Act 
of 2003 for those beneficiaries who are dually eligible for Medicare and Medicaid.  It is 
unclear at this time what action CMS may take in regards to the cost of these drugs. 
 
    Report: 
    OEI-05-99-00611 (final report, 7/01)              
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 65     
 
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 (AWP) 
of the drug.    
     
Proposal (Legislative, 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.  However, no changes have yet been made. 
 
    Report: 
    A-06-97-00052 (final report, 5/98)               
   
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 66     
 
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 (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 continues to disagree with the 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. 
 
    Report: 
    A-06-94-00039 (final report, 10/95)                 
       
 
       
       
 
           
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 67     
 
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 (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 that States cost-avoidance waivers should be reexamined.  The 
agency is directing the regional offices to reevaluate the waivers and determine if States 
are paying and chasing claims without waivers.  In addition, CMS is working with States 
that currently cost-avoid pharmacy claims and with the National Association of Chain 
Drug Stores in developing guidance to assist States in implementing cost avoidance.   
 
    Report: 
    OEI-03-00-00030 (final report, 8/01) 
     
Previous RecommendationsCenters for Medicare & Medicaid Services  Page 68     
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 (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  
FY 1996 and $64.6 million in the first 6 months of FY 1999 to meet matching 
requirements of their grant agreements.   
 
Savings (in Millions): 
FY 1 FY 2 FY 3 FY 4 FY 5
$90.8  $90.8  $90.8  $90.8  $90.8 
 
Status:  AoA indicated that it has undertaken a comprehensive review of all regulations 
in response to the most recent reauthorization of the Older Americans Act.  This review 
and redrafting process continues to be under development. 
 
Report:  
A-12-00-00002 (final report, 2/01) 
 
Previous RecommendationsAdministration on Aging  Page 69   
 
National Institutes of Health 
 
Propose Changes to Office of Management and Budget Circular  
A-21 Regarding Recharge Centers 
 
Current Law:  Office of Management and Budget (OMB) Circular A-21, Cost 
Principles for Educational Institutions, requires that billing rates for specialized service 
funds (recharge centers) be based on actual costs, designed to recover the aggregate cost 
of goods or services, and reviewed periodically. 
     
Proposal (Procedural):  The Assistant Secretary for Administration and 
Management should propose changes to OMB Circular A-21 to improve guidance on the 
financial management of recharge centers.  The revision should include criteria for  
establishing, monitoring, and adjusting billing rates to eliminate accumulated surpluses 
and deficits; preventing the use of recharge funds for unrelated purposes and excluding 
unallowable costs from the calculation of recharge rates; ensuring that Federal projects 
are billed equitably; and excluding recharge costs from the recalculation of facility and 
administrative cost rates. 
 
Reason for Action:  At 15 universities, 21 of the 87 recharge centers (1) accumulated 
surplus fund balances and deficits that were not used in the computation of subsequent 
billing rates, (2) overstated billing rates by transferring funds from center accounts or 
including unallowable costs in rate calculations, (3) billed users inequitably, and (4) used 
recharge center fund balances (surpluses or deficits) inappropriately to calculate facility 
and administrative cost rates.  These practices resulted in overcharges to the Federal 
Government of $1.9 million during FYs 1995 and 1996. 
 
Savings (in Millions): 
FYs 1 & 2 FY 3 FY 4 FY 5
$1.9  *  *  * 
 
*Recurring, undetermined savings would result from the circular change. 
 
Status:  The Department concurred with our recommendations and is working with 
OMB on a revision to A-21.  The proposed revision, which was published in the Federal 
Register in August 2002, would require that adjustments to a recharge centers billing 
rate take into account overrecoveries/underrecoveries from previous periods.  Rate 
adjustments would be required at least every 2 years.  The final rule is expected to be 
issued in FY 2004.    
 
Report:   
A-09-96-04003 (final report, 3/97) 
Previous RecommendationsNational Institutes of Health  Page 70   
 
 
 
 
            INTERNET ADDRESS 
 
 
 
 
The 2004 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/