Department of Health & Human Services
Office of Inspector General
Cost-Saver Handbook
THE 1999
RED
BOOK
June Gibbs Brown
Inspector General O I G
FFICE OF  NSPECTOR  ENERAL
Under the authority of the IG Act, we improve HHS programs and operations and protect them against fraud,
waste, and abuse.  By conducting independent and objective audits, evaluations, and investigations, we provide
timely, useful, and reliable information and advice to Department officials, the Administration, the Congress,
and the public.  Our statutory mission is carried out by the following operating components:
Office of Audit Services
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by conducting audits
with its own audit resources or by overseeing audit work done by others.  Audits examine the performance of
HHS programs and/or its grantees and contractors in carrying out their respective responsibilities and are
intended to provide independent assessments of HHS programs and operations in order to reduce waste, abuse,
and mismanagement and to promote economy and efficiency throughout the Department.
Office of Evaluation and Inspections
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and program
evaluations (called inspections) that focus on issues of concern to the Department, the Congress, and the
public.  The findings and recommendations contained in the inspections reports generate rapid, accurate, and
up-to-date information on the efficiency, vulnerability, and effectiveness of departmental programs.
Office of Investigations
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative investigations of
allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment by providers. 
The investigative efforts of OI lead to criminal convictions, administrative sanctions, or civil monetary
penalties.  The OI also oversees State Medicaid fraud control units which investigate and prosecute fraud and
patient abuse in the Medicaid program.
Office of Counsel to the Inspector General
The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG, rendering
advice and opinions on HHS programs and operations and providing all legal support in OIGs internal
operations.  The OCIG imposes program exclusions and civil monetary penalties on health care providers and
litigates those actions within the Department.  The OCIG also represents OIG in the global settlement of cases
arising under the Civil False Claims Act, develops and monitors corporate integrity agreements, develops
model compliance plans, renders advisory opinions on OIG sanctions to the health care community, and issues
fraud alerts and other industry guidance. Introduction to the Red Book
Purpose The Red Book is a compendium of significant Office of Inspector General
(OIG) cost-saving recommendations that have not been fully implemented. 
of the
These recommendations may require one of three types of actions: legislative,
Red Book
regulatory, or other administrative (such as manual revisions).  Some complex
issues involve two or all three types of actions. 
The Inspector General Act requires that the OIG's semiannual reports to the
Congress include "an identification of each significant recommendation
described in previous semiannual reports on which corrective action has not
been completed."  Thus, appendices to each semiannual report list significant
unimplemented recommendations.  Because of the abbreviated nature of this
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 data as it becomes
available.  The estimates have varying levels of precision.  Full implementation
of the recommendations in this 1999 edition of the Red Book could produce
substantial savings to the Department. 
The Department of Health and Human Services (HHS) promotes the health
Department
and welfare of Americans and provides essential services to people of every
of Health
age group.   Eighty-four percent of the HHS budget provides medical care
and Human  coverage for the elderly, the disabled, and the poor.  The balance of the
Services  programs support research into the causes of disease, promote preventive
health measures, support the provision of health and social services, and
combat alcoholism and drug abuse.  
The Department's operating agencies are briefly described below:
! The Health Care Financing Administration (HCFA) administers the
Medicare and Medicaid programs.
! The Public Health Service (PHS) 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 Health Care
Policy and Research, and the Substance Abuse and Mental Health
Services Administration.  They promote biomedical research and 
Introduction Page 1 The 1999 Red Book disease cure and prevention; ensure the safety and efficacy of marketed
food, drugs, and medical devices; measure the impact of 
toxic waste sites on health; and conduct other activities designed to
ensure the general health and safety of American citizens.
! The Administration for Children and Families (ACF) 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
for American children and families, Native Americans, and the
developmentally disabled.
  
! The  Administration on Aging (AoA) serves as an advocate for older
persons at the national level.
! General departmental management (GDM) includes such staff division
activities as financial management and grant and contract
administration.
Organization The following sections of the Red Book separately address the OIGs
recommendations to each of the agencies listed above.  Most of these
of the 
recommendations stem from final reports.  Recommendations from draft
Red Book
reports represent the OIGs tentative position and are subject to change when
the final versions of the reports are issued.
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 other
administrative) is indicated.  Recommendations for proposed legislation are
removed from the Red Book once the law has been fully enacted.  On
regulatory and other administrative 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.  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.
We hope that this 1999 edition of the Red Book will prove to be a useful asset
for departmental decision-makers, the Administration, and the Congress in
their continuing efforts to contain costs and improve program efficiency at
HHS. 
Introduction Page 2 The 1999 Red Book                
Table of Contents:
Health Care Financing Administration
Annual Savings Page
(in millions)*
HEALTH CARE FINANCING ADMINISTRATION 1
Hospitals
Over $1 billion Require Medicare Coverage of All State and Local Government
Employees or Make Medicare the Secondary Payer 2
$820 Continue Mandated Reductions in Hospital Capital Costs 3
$249 More Accurately Reflect Base-Year Costs in Prospective Payment
Systems Capital Cost Rates 4
TBD Reduce the Prospective Payment System Adjustment Factor for
Indirect Medical Education Costs 5
$157 Revise Graduate Medical Education Payment Methodology 6
TBD Deny Medicare Reimbursement for Patients Who Receive
Substandard Medical Care 7
TBD Modify Payment Policy for Medicare Bad Debts 8
$210 Limit Prospective Payment System Reimbursement for Hospital
Admissions Not Requiring an Overnight Stay 9
$22 More Closely Monitor Same-Day Hospital Readmissions 10
$84 Recover Overpayments and Expand the Diagnosis Related Group
Payment Window 11
$90 Reduce Medicare Payments for Hospital Outpatient Services 12
TBD Adjust Base-Year Costs in the Prospective Payment System
for Hospital Outpatient Department Services 13
$48 Apply 190-Day Lifetime Limit for Medicare Inpatient Psychiatric Care
and a 60-Day Annual Limit 14
$4 Preclude Improper Payments to Hospitals for Hospice Beneficiaries 15
*These estimated savings have varying levels of precision.  Further, the actual savings to be achieved
are dependent on the specific legislative, regulatory, or administrative action taken.  However, the
estimates listed provide a general indication of the magnitude of savings possible.
Health Care Financing Administration Page i  The 1999 Red Book Annual Savings
(in millions) Page
Physicians
$138 Selectively Contract for Coronary Artery Bypass Graft Surgery 16
$130 Expand National List of Chemistry Panel Tests 17
$126 Encourage Physicians to Use Paperless Claims 18
$90 Modify Medicare Incentive Payments in Health Professional
Shortage Areas 19
End Stage Renal Disease
$22 Reduce Medicare End Stage Renal Disease Payment Rates 20
$94 Reduce the Epogen Reimbursement Rate 21
$90 Ensure That Claims for Ambulance Services for End Stage Renal
Disease Beneficiaries Meet Coverage Guidelines 22
$15 Modify Payment Practices of Ambulance Services for Medicare
End Stage Renal Disease Beneficiaries 23
$21 Collect Overpayments from Health Maintenance Organizations for
Misclassified End Stage Renal Disease Beneficiaries 24
Durable Medical Equipment
$40 Limit Medicare Part B Reimbursement for Hospital Beds 25
$12 Reduce Payments for Pressure Support Surfaces 26
$8 Improve Billing Practices for Medicare Orthotics 27
$65 Examine Payment Method for Parenteral Nutrition 28
$28 Reduce and Control Enteral Nutrition Equipment Costs 29
$15 Reduce Medicare Part B Payments for Enteral Nutrition at Home 30
$130 Minimize Payments for Portable Imaging Services 31
Other Medicare Reimbursement
$5 billion Adjust Managed Care Capitation Rates for Unrecovered 
Improper Payments 32
$1 billion Change Method of Allocating Administrative Costs in Adjusted 
Community Rate Proposals 33
Health Care Financing Administration Page ii  The 1999 Red Book Annual Savings Page
(in millions)
$22      Identify Medicare Overpayments for Beneficiaries Incorrectly
 Classified as Institutionalized 34
Over $1 billion Change the Way Medicare Pays for Clinical Laboratory Tests 35
$47 Prevent Inappropriate Medicare Payments for Clinical Laboratory Tests 36
Over $2 billion Roll Reimbursement for Laboratory Services into Charge for
Physician Office Visits 37
TBD Require Physician Examination Before Ordering Home Health Services 38
TBD Ensure Validity of Medicare Hospice Enrollments 39
TBD Adjust Base-Year Costs in the Prospective Payment System
for Skilled Nursing Facilities 40
$260 Strengthen Controls Over Partial Hospitalization Programs at
 Community Mental Health Centers 41
$1 billion Revise Medicare Prescription Drug Payment Methods 42
$12 Remove High-Priced Generic Drugs from Medicare
Payment Methodology 43
$242 Establish Fee Schedule for Medicare Ambulance Payments 44
$47 Allow Payment for Nonemergency Advanced Life Support Ambulance
Services Only When Medically Necessary 45
$104 Ensure the Medical Necessity of Ambulance Claims 46
$78 Stop Inappropriate Payments for Chiropractic Maintenance Treatments 47
TBD Provide Explicit Guidelines on Allowability of Institutional General
and Administrative and Fringe Benefit Costs 48
$9 Discontinue Use of a Separate Carrier to Process Medicare Claims
for Railroad Retirement Beneficiaries 49
TBD Raise the Medicare Entitlement Age to 67 50
$291 Subject Funds Placed in Flexible Benefit Plans to Hospital
Insurance Tax 51
TBD Improve Medicare Secondary Payer Safeguards 52
TBD Expand Medicare Secondary Payer Provisions for End Stage Renal
Disease Benefits 53
Health Care Financing Administration Page iii  The 1999 Red Book Annual Savings
(in millions)  Page
Medicaid Reimbursement
Over $4 billion      Modify Formula for the Medicaid Program 54
TBD          Promote Medicaid Cost Sharing 55
$3 Close Loopholes That Shelter Third Party Liability Settlements
and Awards 56
TBD Establish Connection Between the Calculation of Medicaid Drug
Rebates and Drug Reimbursement 57
$123 Implement an Indexed Best Price Calculation in the Medicaid
Drug Rebate Program 58
$17 Install Edits to Preclude Improper Medicaid Reimbursement for
Clinical Laboratory Services 59
$683 Control Medicaid Payments to Institutions for Mentally
Retarded People 60
Health Care Financing Administration Page iv The 1999 Red Book Table of Contents:
Public Health Service Agencies
Annual
Savings
(in millions)* Page
PUBLIC HEALTH SERVICE AGENCIES 61
$189 Institute and Collect User Fees for Food Safety Inspections 62
$8 Require Hospitals to Accept Medicare Rates in the Indian Health Service's
   Contract Health Services Program 63
$2 Propose Changes to Office of Management and Budget Circular A-21 
   Regarding Recharge Centers 64
* These estimated savings have varying levels of precision.  Further, the actual savings to be achieved
are dependent on the specific legislative, regulatory, or administrative action taken.  However, the
estimates listed provide a general indication of the magnitude of savings possible.
Public Health Service Agencies Page v  The 1999 Red Book Table of Contents:
Administration for Children and Families
Annual
Savings
(in millions)* Page
ADMINISTRATION FOR CHILDREN AND FAMILIES 65
$11 Refer Foster Care Cases to Child Support Enforcement Agencies 66
$11 Increase the Number of Noncustodial Parents Providing Their Children's 
Medical Support and Reduce Medicaid Costs 67
$3 Obtain Government Reimbursement for Head Start Grantees
Unallowable Charges 68
* These estimated savings have varying levels of precision.  Further, the actual savings to be achieved
are dependent on the specific legislative, regulatory, or administrative action taken.  However, the
estimates listed provide a general indication of the magnitude of savings possible.
Administration for Children and Families Page vi The 1999 Red Book Table of Contents:
General Departmental Management
Annual Page
Savings
(in millions)*
GENERAL DEPARTMENTAL MANAGEMENT 69
$236 Improve Funding System for Welfare Administrative Costs 70
$22 Properly Allocate Training Costs Under Federally Supported Programs 71
* These estimated savings have varying levels of precision.  Further, the actual savings to be achieved
are dependent on the specific legislative, regulatory, or administrative action taken.  However, the
estimates listed provide a general indication of the magnitude of savings possible.
General Departmental Management Page vii The 1999 Red Book HEALTH CARE FINANCING
ADMINISTRATION Health Care Financing Administration
Overview
The Health Care Financing Administration (HCFA) is responsible for
administering the Medicare and Medicaid programs.  Medicare Part A provides
hospital and other institutional insurance for persons age 65 or older and for
certain disabled persons, including those with end stage renal disease, and is
financed by payroll tax deductions through the Federal Hospital Insurance Trust
Fund.  Medicare Part B (Supplementary Medical Insurance), which is financed
by participants and general revenues, is an optional program which covers most
of the costs of medically necessary physician and other services.
The Medicaid program provides grants to States for medical care for
approximately 35 million low-income people.  Eligibility for Medicaid is, in
general, based on a person's eligibility for cash assistance programs.  State
expenditures for medical assistance are matched by the Federal Government
using a formula that measures per capita income in each State relative to the
national average.  The newly created Federal/State Childrens Health Insurance
Program (CHIP) expands health coverage to uninsured children whose families
earn too much to qualify for Medicaid but too little to afford private coverage. 
Significant 
OIG
Over the years, Office of Inspector General (OIG) findings and
Activities recommendations have contributed to many significant reforms in the Medicare
program.  Such reforms include implementation of the prospective payment
system for inpatient hospital services and a fee schedule for physician services;
the Clinical Laboratory Improvement Amendments of 1988; regional
consolidation of claims processing for durable medical equipment; and new
payment methodologies for graduate medical education.
The unimplemented OIG recommendations in this Red Book that relate to
HCFA activities could produce significant annual savings and recoveries to the
Department.  The OIG has identified a number of important Medicare policy
issues, such as adjusting managed care capitation rates to account for
unrecovered improper payments, revising prescription drug payment methods,
and reducing reimbursement for hospital capital costs.  Regarding Medicaid, the
OIG has recommended modifying the formula that determines the Federal share
of costs, promoting Medicaid cost sharing, and controlling Medicaid payments
to institutions for mentally retarded people.
Health Care Financing Administration Page 1 The 1999 Red Book R M C A S L
EQUIRE  EDICARE  OVERAGE OF  LL  TATE AND  OCAL
G E M M
OVERNMENT  MPLOYEES OR  AKE  EDICARE
S P
THE  ECONDARY  AYER
Current Law:
The Consolidated Omnibus Budget Reconciliation Act of 1985 established Medicare Part A coverage and payment of
hospital insurance contributions for new State and local government employees hired after March 31, 1986.  However,
employees hired before April 1, 1986, are not covered by Medicare Part A unless the government entity has voluntarily
agreed to cover groups of its employees under the full Old-Age, Survivors and Disability Insurance program.
Proposal:
Medicare coverage and hospital insurance contributions should be required for all State and local employees, including
those hired before April 1, 1986.  If this proposal is not enacted, HCFA should seek legislation making Medicare the
secondary payer for retirees from exempt State and local agencies.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Retirees from exempt agencies paid significantly lower taxes than nonexempt retirees.  We estimated that over a 9-year
period (1982-1990), Medicare would have spent about $16.9 billion in benefits for these retirees.  However, only an
estimated $2.7 billion of taxes, with interest, would have been collected, leaving a shortfall of $14.2 billion to be
subsidized by other taxpayers.  Most of these retirees qualify for Medicare through other covered employment or as a
spouse of a covered worker.  Those insured through other employment contributed far less for their coverage than other
retirees, yet their hospital benefit protection is the same.  Furthermore, exempt government agencies that did not pay the
employer's share of hospital insurance contributions will have the windfall advantage of Medicare as the primary payer of
health costs for retirees over age 65.  Both conditions unfairly drain the hospital insurance trust fund and are inequitable
to employees and employers who must contribute.
Savings (in millions):
  FY 1    FY 2    FY 3    FY 4    FY 5 
$1,559 $1,552 $1,521 $1,490 $1,451
Status:
Although HCFA included a proposal to mandate Medicare coverage for all State and local government employees in the
FY 1990 budget submission, no legislative proposal was included in the President's current budget.  Also, HCFA did not
agree with our recommendation to make Medicare the secondary payer, noting, among other things, that this would
eventually be more costly for the exempt agencies than mandated coverage. 
Report:
A-09-88-00072 (Final report, Feb. 1989)
Health Care Financing Administration Page 2 The 1999 Red Book C M R
ONTINUE  ANDATED  EDUCTIONS IN
H C C
OSPITAL  APITAL  OSTS
Current Law:
On October 1, 1991, HCFA began a 10-year transition period for paying hospital capital costs under a prospective
payment system.  Final regulations were promulgated August 30, 1991 (56FR43358).  The rates are based on historical
costs, less a mandated reduction of 7.4 percent under the Omnibus Budget Reconciliation Act of 1993.
Proposal:
The HCFA 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.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Hospital capital costs soared during the first 5 years of the prospective payment system (PPS), despite low bed
occupancy.  The Medicare system of reimbursing capital costs on a pass-through basis (i.e., reimbursed outside of
diagnosis related group) was a major reason for this increase.  Paying capital costs prospectively, as required by recently
implemented regulations, should assist in curbing escalating costs.  However, the PPS rates are based on historical costs
that are inflated because (1) excess capacity in the hospital industry has caused more capital costs to be incurred than
economically necessary and (2) inappropriate elements, such as charges for depreciation on federally funded assets, are
included in the historical costs.
Savings (in millions):
FY 1 FY 2  FY 3  FY 4  FY 5
$820 $950  $1,140 $1,450 $1,840
Status:
The HCFA did not agree with our recommendation.  Although the Balanced Budget Act of 1997 reduced capital
payments, it did not include the effect of excess bed capacity and other elements included in the base-year historical costs.
Report:
A-09-91-00070 (Final report, Apr. 1992)
A-14-93-00380 (Final report, Apr. 1993)
Health Care Financing Administration Page 3 The 1999 Red Book M A R B -Y C
ORE  CCURATELY  EFLECT  ASE EAR  OSTS IN
P P S '
ROSPECTIVE  AYMENT  YSTEM S
C C R
APITAL  OST  ATES
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 PPS.  A PPS pays for care using a predetermined specific rate for each discharge. 
Public Law 100-203 required the Secretary of Health and Human Services to establish a PPS for capital costs for cost
reporting periods beginning in FY 1992.  
Proposal:
The HCFA should (1) consider reducing payment rates by 7.5 percent to more accurately reflect costs of the base year
used for the capital cost PPS and (2) continue to monitor the most current data and make any necessary further
adjustments to the base rate.
Legislative Regulatory Other Administrative
 TT
Reason for Action:
While HCFA took care to devise and implement an equitable PPS for capital costs, some future cost items had to be
estimated.  A few years later, when actual data was available, we compared HCFA's estimates with the actual data and
found, in some cases, that the estimates were too high.  A 7.5 percent reduction would correct all forecasting estimates
that HCFA had to make in arriving at an anticipated rate to implement the capital cost PPS.  The total effect of
overpayments in relation to cost used as the basis for the capital cost PPS will gradually increase from 1996 until the
capital cost PPS is fully implemented in 2002.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$249 $284 $319 $354 $388
Status:
The HCFA agreed that the capital rate reflected an overestimation of base-year costs, and the Balanced Budget Act of
1997 provided for a reduction in capital payments for 1998-2002.  However, we believe HCFA should continue to
monitor current data since additional reductions may be warranted in the future.
Report:
A-07-95-01127 (Final report, Aug. 1995)
Health Care Financing Administration Page 4 The 1999 Red Book R P P
EDUCE THE  ROSPECTIVE  AYMENT 
S A F I
YSTEM  DJUSTMENT  ACTOR FOR  NDIRECT
M E C
EDICAL  DUCATION  OSTS
Current Law:
Since the inception of Medicare's PPS, indirect medical education payments have been paid only to teaching hospitals. 
These payments are designed to alleviate an anticipated adverse effect that PPS would have on teaching hospitals.  The
indirect medical education adjustment factor was determined by HCFA and the Congress.  Using historical data, HCFA
compared costs per case in teaching and nonteaching hospitals using regression analysis and determined that operating
costs in hospitals with teaching programs increased approximately 5.79 percent for every 0.1 resident physician per
hospital bed compared with hospitals without teaching programs.  Under a congressional mandate, HCFA was required to
double the adjustment factor under PPS--increasing it to 11.59 percent.  
The Consolidated Omnibus Budget Reconciliation Act of 1985 reduced the 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:
The indirect medical education adjustment factor should be reduced to the level supported by HCFA's empirical data, and
further studies should be made to determine whether different adjustment factors are warranted for different types of
teaching hospitals.  
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our extensive analytical work shows that teaching hospitals continue to earn substantial profits.  In addition, a
Prospective Payment Assessment Commission report found that the indirect medical education adjustment substantially
overlaps with the disproportionate share adjustment at teaching hospitals and that these payments are a major source of
revenue for some hospitals.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA agreed with our recommendation.  In addition, the Balanced Budget Act of 1997 gradually reduces the indirect
medical education adjustment factor from 7.7 percent in FY 1997 to 5.5 percent in 2001 and thereafter.  We believe the
factor should be further reduced to eliminate any overlap with the disproportionate share adjustment.
Report:
A-07-88-00111 (Final report, Sept. 1989)
Health Care Financing Administration Page 5 The 1999 Red Book R G M E
EVISE  RADUATE  EDICAL  DUCATION
P M
AYMENT  ETHODOLOGY
Current Law:
Section 9202 of the Consolidated Omnibus Budget Reconciliation Act of 1985 and section 9314 of the Omnibus Budget
Reconciliation Act of 1986 changed the way Medicare reimburses hospitals for the cost of direct graduate medical
education.  Under the revised methodology, these costs are reimbursed on a "hospital specific" prospective payment basis,
which is retroactive to cost reporting periods beginning on or after July 1, 1985.
Proposal:
The HCFA should (1) revise the regulations to remove from a hospital's allowable graduate medical education base- year
costs any cost center with little or no Medicare utilization and (2) submit a legislative proposal to compute Medicare's
percentage of participation under the former more comprehensive system.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
The HCFA estimated that the revised graduate medical education methodology would result in substantial Medicare
savings.  Our review indicated that Medicare costs under this methodology may 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 the graduate medical education reimbursement.  Second, the Medicare patient load
percentage used to compute Medicare's share of these costs is based on inpatient data only and is higher than Medicare's
overall share of graduate medical education costs as determined under the previous method, which also included ancillary
and outpatient data.
Savings (in millions):
  FY 1   FY 2   FY 3  FY 4  FY 5 
Factor 1 $ 39.2 $ 39.2 $ 39.2 $ 39.2 $ 39.2
Factor 2  125.6  125.6  125.6  125.6  125.6
Combined *  157.3  157.3  157.3  157.3  157.3
* Note:  When the two proposed changes are handled as one combined calculation, the savings are less than those from
calculating the effect of the changes separately.
Status:
The HCFA did not concur with our recommendations.  Although the Balanced Budget Act of 1997 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, Apr. 1994)
Health Care Financing Administration Page 6 The 1999 Red Book D M R
ENY  EDICARE  EIMBURSEMENT
P W R
FOR  ATIENTS  HO  ECEIVE
S M C
UBSTANDARD  EDICAL  ARE
Current Law:
Under Medicare, hospitals receive a pre-established payment for each discharge based on an assigned diagnosis related
group (DRG).  Each DRG results in an associated payment that represents an average cost for patients having similar
diagnoses.  The Congress established peer review organizations to protect the integrity of the prospective payment system
and to maintain the quality of care.  The Consolidated Omnibus Budget Reconciliation Act of 1985 authorized these
organizations to deny Medicare reimbursement for patients receiving substandard medical care, defined as medical care
clearly failing to meet professionally recognized standards.
Proposal:
The HCFA should increase efforts to identify and address poor quality care in hospitals by issuing regulations to
implement the provisions of the 1985 act.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Of the patients sampled, 6.6 percent received poor quality of care.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
In 1989, HCFA issued a notice of proposed rulemaking to authorize the peer review organizations to deny Medicare
reimbursement for patients who received substandard medical care.  The HCFA has not yet issued a final regulation. 
Report:
OEI-09-88-00870 (Final report, July 1989)
Health Care Financing Administration Page 7 The 1999 Red Book M P P
ODIFY  AYMENT  OLICY
M B D
FOR  EDICARE  AD  EBTS
Current Law:
Under Medicare's prospective payment system, hospitals are reimbursed for inpatient services rendered to Medicare
beneficiaries by a fixed payment amount based on a diagnosis related group.  However, bad debts related to unpaid
deductible and coinsurance amounts are reimbursed separately as pass-through (i.e., reimbursed outside of DRG) items
under reasonable cost principles.
Proposal:
We presented an analysis of four options for HCFA to consider, including the elimination of a separate payment for bad
debts, the offset of Medicare bad debts against beneficiary Social Security payments, the limitation of bad debt payments
to prospective payment system hospitals which are profitable, and the inclusion of a bad debt factor in the DRG rates. 
The HCFA should seek legislative authority to further modify bad debt policies.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review of HCFA's Hospital Cost Report Information System showed that total Medicare bad debts increased from
$159 million during the second year of PPS (FY 1985) to $398 million during the fifth year of PPS (FY 1988).  During
this same period, hospitals continued to earn significant profits.  Also, hospital bad debt collection efforts have often been
less than adequate since there is little incentive for a hospital to collect the unpaid deductible and coinsurance amounts
when Medicare pays these amounts.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
Agreeing with our recommendation to include a bad debt factor in the DRG rates, HCFA said that our report should assist
the Congress in understanding the rapid growth in hospital bad debts.  The Balanced Budget Act of 1997 provided for
some reduction of bad debt payments to providers.  The Presidents current budget proposes to reduce the percentage
(from 55 percent to 45 percent) that Medicare pays hospitals for bad debts and to extend this policy to providers beyond
hospitals.  However, additional legislative changes are needed to implement the modifications we recommended.
Report:
A-14-90-00339 (Final report, June 1990)
Health Care Financing Administration Page 8 The 1999 Red Book L P P S
IMIT  ROSPECTIVE  AYMENT  YSTEM
R H A
EIMBURSEMENT FOR  OSPITAL  DMISSIONS
N R O S
OT  EQUIRING AN  VERNIGHT  TAY
Current Law:
Under the prospective payment system, hospitals are reimbursed for each admission when the patient is discharged based
on established rates which are grouped into diagnosis related groups.  Current Medicare instructions provide that an
admission occurs when it is expected that the patient will occupy a bed and remain overnight.  This applies even if the
person is later discharged or transferred to another hospital without actually using a hospital bed overnight.
Proposal:
The HCFA should seek legislation to pay for covered services related to 1-day admissions without an overnight stay as
outpatient services which are paid on the basis of the lower of the actual costs or the customary charges in a locality.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Based on Medicare records for 1989, our follow-up review (A-05-92-00006) revealed that the volume of 1-day
admissions on a national basis had increased approximately 150 percent over 1985 levels and that Medicare had paid for
179,500 admissions that did not require overnight stays.  Many of these cases related to observations after emergency or
outpatient services, to surgeries later canceled, or to acute care stays of doubtful necessity.  In many cases, documentation
revealed that few, if any, services were provided while the patient was an inpatient.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$210 $210 $210 $210 $210
Status:
The HCFA proposed to implement our recommendation through administrative remedies which would designate whether
specific services are to be covered and paid for as inpatient or outpatient services.   No proposal was included in the
President's current budget.
Report:
A-05-89-00055 (Final report, July 1989) 
A-05-92-00006 (Final report, Jan. 1992)
Health Care Financing Administration Page 9 The 1999 Red Book M C M S -D
ORE  LOSELY  ONITOR  AME AY
H R
OSPITAL  EADMISSIONS  
Current Law:
The Social Security Amendments of 1983 provided for establishing a prospective payment system for Medicare payment
of inpatient hospital services.  Under this system, hospitals are paid a predetermined rate for each patient discharge.  In the
past, peer review organizations reviewed a HCFA-generated sample of hospital readmission claims to determine whether
patients were prematurely discharged from the first confinement, thus causing a readmission.  These reviews were
discontinued in 1993. 
Proposal:
The HCFA should work with the OIG in reviewing hospital readmissions to identify overpayments, to monitor the quality
of hospital care, and to profile aberrant hospital providers, ensuring corrective action plans are instituted and appropriate
referrals are made to the OIG.  The HCFA should also reinstate hospital readmission reviews by peer review
organizations.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Hospital readmissions to the same prospective payment system hospital on the same day of discharge are vulnerable to
improper payments and may be indicative of problems with quality of care, such as premature hospital discharges.  Other
problems include separate claims for one continuous stay, medically unnecessary readmissions for services that could have
been provided in a less acute setting, and diagnosis related group upcoding.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $22  $22  $22  $22  $22
Status:
During our review, HCFA informally agreed to further work with the OIG to better monitor quality of care and
overpayment issues associated with hospital readmissions.  The HCFA also said that under their next contracts, peer
review organizations would monitor discharge behavior and take appropriate action.
Report:
A-01-98-00504 (Draft report, Nov. 1998)
Health Care Financing Administration Page 10 The 1999 Red Book R O E
ECOVER  VERPAYMENTS AND  XPAND THE 
D R G P W
IAGNOSIS  ELATED  ROUP  AYMENT  INDOW
Current Law:
Under the prospective payment system, 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.  Currently, separate payments for nonphysician outpatient services (such as diagnostic tests and laboratory
tests) rendered within 72 hours of the day of an inpatient admission are not permitted under the Omnibus Budget
Reconciliation Act of 1990, section 4003.
Proposal:
The HCFA should propose legislation to expand the DRG payment window to at least 7 days immediately prior to the day
of admission.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review identified about $83.5 million in admission-related nonphysician outpatient services rendered 4 to 7 days
immediately before an inpatient admission.  The fiscal intermediaries cited clerical errors and insufficient or nonexistent
edits for improper payments, and the hospitals cited clerical errors and misinterpretation of the regulations.
Savings (in millions):
 FY 1 FY 2 FY 3 FY 4 FY 5
$83.5 $83.5 $83.5 $83.5 $83.5
Status:
The HCFA agreed to recover the improper billings and to refund the beneficiaries' coinsurance and deductible.  Collection
of the overpayment is being handled by settlement agreements with the hospitals through the Department of Justice
working with HCFA and the OIG.  The HCFA did not concur with the recommendation to further expand the payment
window.  No legislative proposal was included in the President's current budget.
Report:
A-01-92-00521 (Final report, July 1994)
Health Care Financing Administration Page 11 The 1999 Red Book R M P
EDUCE  EDICARE  AYMENTS FOR
H O S
  OSPITAL  UTPATIENT  ERVICES
Current Law:
To bring payments for services in hospital outpatient departments more in line with the payments for services in an
ambulatory service center, the Omnibus Budget Reconciliation Act of 1990, section 4151, reduced Medicare payments for
hospital outpatient services by (1) adjusting the payment formula to 58 percent of the ambulatory service center rates and
42 percent of the hospital's outpatient costs and (2) lowering hospital payments made on a reasonable cost basis by 5.8
percent.  The Omnibus Budget Reconciliation Act of 1993 extended the 5.8 percent reduction in payments for hospital
outpatient department services from FY 1996 through 1998.
Proposal:
Legislation is needed to reduce the current payments for services in outpatient departments to bring them more in line with
ambulatory service center approved payments.  We recommended paying outpatient departments the ambulatory service
center approved rate or adjusting hospital payments by a uniform percentage.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our study of hospital outpatient surgeries showed that the current blended rate to hospitals in the aggregate is greater than
the payment rate for ambulatory service center approved services.  We analyzed over 2 million hospital outpatient bills
containing ambulatory center approved surgeries from 5,421 hospitals.  The disparity between Medicare payments to
outpatient departments and the centers for similar services still exists.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$90 $107 $126 $147 $175
Status:
The HCFA acknowledged that our report would be helpful in developing a legislative proposal to bring about greater
parity of payments for services performed in an outpatient setting and those performed in ambulatory service centers.  
Included in the Balanced Budget Act of 1997 was the requirement to develop a prospective payment system for hospital
outpatient services for FY 1999, as well as provisions to eliminate a formula-driven overpayment.  However, the
outpatient PPS has been delayed due to resource demands associated with Year 2000 system conversions. 
Report:
A-14-98-00400 (Final report, Nov. 1998)
A-14-89-00221 (Final report, Mar. 1991)
OEI-09-88-01003 (Final report, May 1989)
Health Care Financing Administration Page 12 The 1999 Red Book A B -Y C
DJUST  ASE EAR  OSTS IN THE
P P S
  ROSPECTIVE  AYMENT  YSTEM FOR 
H O D S
OSPITAL  UTPATIENT  EPARTMENT  ERVICES
Current Law:
The Balanced Budget Act of 1997 required HCFA to develop a prospective payment system for hospital outpatient
department services.  The Act required HCFA to use 1996 hospital claim data and the most recent available cost report
data to develop the rates.
Proposal:
The HCFA, 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 to the fee schedules and expenditure ceiling.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
We are concerned about the reliability of the claim and cost data HCFA 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 reimbursements for outpatient department services.  Since the  prospective payment fee
schedules and expenditure ceiling are based on prior Medicare outpatient reimbursements, we believe that the rates may be
inflated and that hospitals will realize windfall profits at Medicares expense.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA agreed with our recommendations and stated in its proposed rule that further work will be done to examine the
base-year costs.  The HCFA agreed to adjust the rates, if appropriate, through legislative or regulatory change after this
work is completed.
Report:
A-14-98-00400 (Final report, Nov. 1998)
Health Care Financing Administration Page 13 The 1999 Red Book A 190-D L L M
PPLY  AY  IFETIME  IMIT FOR  EDICARE 
I P C
NPATIENT  SYCHIATRIC  ARE AND A
60-D A L
AY  NNUAL  IMIT
Current Law:
Medicare limits inpatient care in psychiatric hospitals to 190 days during a beneficiary's lifetime.  When Medicare was 
passed, 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 expanded beyond the psychiatric hospitals to general hospitals with distinct psychiatric units.  The 190-day limit
was not extended to these more costly general hospital units.  
Proposal:
The HCFA 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.
Legislative Regulatory Other Administrative
TT
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 being paid to
general hospitals--where the lifetime limit does not apply.  An annual limit on care, which has congressional precedence in
a Department of Defense health care program, may be more acceptable than a lifetime limit.  We believe a 60-day annual
limit on inpatient psychiatric services will produce significant savings over the current uneven application of the Medicare
lifetime limit.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$47.6 $47.6 $47.6 $47.6 $47.6
Status:
The HCFA considered a proposal recommending that the 190-day lifetime limit for psychiatric admissions be extended to
general hospitals.  However, such a proposal was not included as part of the President's current budget.  
Report:
A-06-86-62045 (Final report, Feb. 1988)
Health Care Financing Administration Page 14 The 1999 Red Book P I P H
RECLUDE  MPROPER  AYMENTS TO  OSPITALS
H B
FOR  OSPICE  ENEFICIARIES
Current Law:
When a beneficiary elects hospice care, the Medicare program reimburses the hospice a fixed rate for each day of care. 
The hospice then assumes fiscal responsibility for all Medicare Part A services, including hospital services, related to the
beneficiary's terminal illness.  A separate Medicare payment to the hospital is not allowable; instead the hospital should
bill the hospice, and the hospice then receives a higher daily rate for the number of days the hospice beneficiary is
hospitalized.
Proposal:
The HCFA should instruct its fiscal intermediaries to recover improper payments from hospitals noted in our review and
to review related medical records for the potential inappropriate payments we identified.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our review showed that over $21 million in overpayments should be recovered for Calendar Years 1988-1992.  In
addition, more effective edits of hospital/hospice claims could result in annual savings of approximately $4 million over
the next 5 years.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
  $4   $4   $4   $4   $4
Status:
The HCFA agreed to recover the overpayments identified and to instruct its fiscal intermediaries to review the claims we
identified as potential overpayments. 
Report:
A-02-93-01029 (Final report, June 1995)
Health Care Financing Administration Page 15 The 1999 Red Book S C
ELECTIVELY  ONTRACT FOR
C A B G S
ORONARY  RTERY  YPASS  RAFT  URGERY
Current Law:
Medicare pays for coronary artery bypass graft (CABG) surgery costs incurred for physician, hospital, and other
services.  Payment for hospitals is based on diagnosis related group rates, and payment for physician services is based on
the applicable fee schedule.
Proposal:
The HCFA should negotiate all-inclusive package payment prices with selected surgeons and medical centers for
providing CABG surgery to Medicare beneficiaries.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Medicare paid over $1.5 billion in 1985 for CABG surgery (DRG codes 106 and 107) performed on about 63,000
beneficiaries.  We found that hospitals and surgical teams performing more than 200 of these surgeries a year had better
outcomes in terms of mortality rates, lengths of stay, and charges.  The reasonable charge allowances for physicians are
often inconsistent and inequitable.  Similarly, both inconsistent carrier controls/payment guidelines and the revised HCFA
procedure coding system have increased Medicare costs for this surgery.  Current legislation does not allow the
negotiation of preferred provider and fixed-price packages for bypass surgery for Medicare patients, despite the fact that
these practices save the private sector millions of dollars each year.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$138 $138 $138 $138 $138
Status:
The HCFA conducted a 5-year demonstration project which ended in December 1998.  The Administration sought
legislation to give HCFA the authority to use selective contracting for CABG surgery and other procedures during the
Balanced Budget Act deliberations.  However, it was not approved.  The Presidents current budget again requests this
authority. 
Report:
OEI-09-89-00076 (Final report, Aug. 1987)
Health Care Financing Administration Page 16 The 1999 Red Book E N L
XPAND  ATIONAL  IST
C P T
OF  HEMISTRY  ANEL  ESTS
Current Law:
Chemistry tests are clinical laboratory services requested by physicians in order to diagnose and treat patients.  Chemistry
tests that are commonly performed on automated laboratory equipment are referred to as panel tests and are required by
HCFA to be grouped together for payment purposes.  In addition, HCFA requires that other chemistry tests available in a
carrier's service area and commonly performed on automated laboratory equipment be reimbursed as panel tests.
Proposal:
The HCFA should update its guidelines by expanding the national list of chemistry panel tests to include 10 tests
identified by our audit. 
Legislative Regulatory Other Administrative
TT
Reason for Action:
Based on claims information and responses to questionnaires by hospital and independent laboratories related to 18 tests
identified for review, 10 are available in all carrier service areas and are commonly performed on automated equipment. 
These 10 tests should be paid as panel tests.  However, HCFA's guidelines specifying chemistry tests that should be
paneled by all carriers have not been updated promptly to add tests as technology has advanced.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$130 $130 $130 $130 $130
Status:
The HCFA agreed with 8 of the 10 tests recommended for addition to the list and added 6 of these tests to its carrier
manual.  The HCFA will periodically review applicable tests and related equipment.  Also, although a legislative change
was included in the Presidents 1997 budget, the Congress decided (through the Balanced Budget Act of 1997) to achieve
savings through other means, including freezing laboratory payments through 2002 and reducing the national cap to 74
percent of the median of all fee schedules.  A legislative proposal to add tests was not included in the Presidents current
budget.
Report:
A-01-93-00521 (Final report, Jan. 1995)
Health Care Financing Administration Page 17 The 1999 Red Book E P
NCOURAGE  HYSICIANS
U P C
TO  SE  APERLESS  LAIMS
Current Law:
Physicians may submit claims to Medicare in either paper or electronic form.  In calendar year 1994, 73 percent of all
physician claims were submitted electronically, and 59 percent of Medicare physicians used only paper.  An approach for
fostering standardization of electronic data interchange raised the rate of electronic media claims for assigned physicians
to 80.6 percent in November 1998.
Proposal:
The HCFA should: 
! Lead a target outreach effort to encourage voluntary conversion to paperless Medicare claim filing by physicians
who submit claims on paper and who have a moderate to high level of interest in making the switch.  This effort
should be coordinated with efforts to promote further use of electronic data interchange by providers under the
administrative simplification provisions of the Health Insurance Portability and Accountability Act.  
! Begin to plan now for the policy changes that will be necessary to achieve an almost completely paperless
environment for processing Medicare claims.  These policy changes can include targeting a date when all physicians
will be mandated to submit paperless claims, targeting a date when paperless claims submission will become a
condition for Medicare participating physician status, or continuing to accept paper claims but imposing a filing fee
to cover the incremental cost of doing so.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Changes in the marketplace afford HCFA an excellent opportunity to further extend electronic billing.  Approximately 65
percent of physicians who submitted Medicare claims only on paper indicate a high or moderate level of interest in
switching to paperless claims.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$126 $126 $126 $126 $126  
Status:
The HCFA concurred with our recommendations.  The President's current budget proposes to allow an assessment of a $1
fee on any claim not submitted electronically.
Report:
OEI-01-94-00230 (Final report, May 1996)
A-05-94-00039 (Final report, May 1996)
Health Care Financing Administration Page 18 The 1999 Red Book M M I P
ODIFY  EDICARE  NCENTIVE  AYMENTS
H P S A
 IN  EALTH  ROFESSIONAL  HORTAGE  REAS
Current Law:
Since 1989, physicians who treat Medicare patients in HHS-defined health professional shortage areas have been entitled
to bonus payments that were designed to improve patient access to care.  The current law calls for a 10 percent bonus.
Proposal:
The HCFA should seek to (1) eliminate the Medicare incentive payments entirely, (2) modify the Medicare incentive
payment program to target it more effectively to primary care, or (3) channel funds from the Medicare incentive payment
program to new or existing mechanisms for improving access to primary care.
Legislative Regulatory Other Administrative
TT
Reason for Action:
A substantial amount of the Medicare incentive money has gone to physicians who provide little or no primary care. 
Also, among primary care physicians, Medicare incentive payments apparently have little effect on practice location
decisions.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $90  $90  $90  $90  $90
Status:
The HCFA concurred with our recommendation and had previously advanced legislation to provide larger bonuses for
primary care services and to eliminate certain bonuses in urban areas.  However, this proposal was not included in the
President's current budget, and HCFA has no immediate plans to pursue legislation for this initiative.  The U.S. General
Accounting Office recently made a recommendation similar to ours based on its review of definitions of health
professional shortage areas.
Report:
OEI-01-93-00050 (Final report, June 1994)
Health Care Financing Administration Page 19 The 1999 Red Book R M E S R D
EDUCE  EDICARE  ND  TAGE  ENAL  ISEASE
P R
AYMENT  ATES
Current Law:
The Omnibus Budget Reconciliation Act of 1981 established a prospective payment system for outpatient dialysis
treatments under Medicare's end stage renal disease (ESRD) program.  To reimburse facilities for these treatments,
HCFA 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:
The HCFA should reduce the payment rates for outpatient dialysis treatments to reflect current efficiencies and economies
in the marketplace.
Legislative Regulatory Other Administrative
TT
Reason for Action:
The HCFA, with our assistance, accumulated 1985 and 1988 cost data to update the composite rates.  The 1985 data
showed a median cost, including home dialysis costs, of $108.19 per treatment.  Even after considering the effect of home
dialysis services, 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 is earning $36 per treatment,
a 29 percent profit margin for each treatment in 1988.  We believe that both the 1985 and 1988 audited data justify a
decrease in the payment rate.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$22* $22* $22* $22* $22*
*This savings estimate represents program savings of $22 million for each dollar reduction in the composite rate.
Status:
The HCFA agreed that the composite payment rates should reflect the costs of outpatient dialysis treatment in efficiently
operated facilities.  While the Omnibus Budget Reconciliation Act of 1990 prohibited HCFA from changing these rates, it
mandated a study to determine the costs, services, and profits associated with various modalities of dialysis treatments.  A
March 1996 study by the Prospective Payment Assessment Commission recommended an increase in the current rates,
but HCFA did not believe an across-the-board increase was warranted.  The HCFA officials said they would continue to
monitor facilities costs and other factors (including volume, effects of a new wage index, quality of care, and industry
growth and profitability) to determine if a payment rate increase would be appropriate.  Toward this end, the Balanced
Budget Act of 1997 required the Secretary to audit the cost reports of each renal dialysis provider at least once every 3
years.  The HCFA does not believe that these audits will produce a recommendation to decrease composite payment rates
and estimates that the audits may reduce the average facilities costs by less than 5 percent.   The HCFA planned to begin
these audits in FY 1999.
Report:
A-14-90-00215 (Final management advisory report, July 1990)
Health Care Financing Administration Page 20 The 1999 Red Book R E R R
EDUCE THE  POGEN  EIMBURSEMENT  ATE
Current Law:
Section 1881 (b)(11)(B) of the Social Security Act provides that the Secretary of HHS may set an appropriate
reimbursement level for the drug Epogen beginning January 1, 1995.
Proposal:
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.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
The current Epogen reimbursement rate of $10 per 1,000 units administered exceeds the current purchase cost by
approximately $1.  Of 105 providers randomly selected for review, 95 paid less than $9 per 1,000 units of Epogen.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $94  $94  $94  $94  $94
Status:
The HCFA is developing a regulation to reduce the reimbursement rate as recommended.  The Presidents current budget
proposes to reduce Medicares reimbursement for Epogen by $1.
Report:
A-01-97-00509 (Final report, Nov. 1997)
Health Care Financing Administration Page 21 The 1999 Red Book E T C A S
NSURE  HAT  LAIMS FOR  MBULANCE  ERVICES
E S R D B
FOR  ND  TAGE  ENAL  ISEASE  ENEFICIARIES
M C G
EET  OVERAGE  UIDELINES
Current Law:
The Medicare Part B benefit for ambulance service has very strict limits, as explained by HCFA in the Medicare Carriers
Manual, section 2120.  The transport is not covered if it fails to meet the medical necessity requirement, even if it meets
other requirements.
Proposal:
The HCFA should ensure that claims meet Medicare coverage guidelines.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Seventy percent of transports involving dialysis in our sample did not meet Medicare's guidelines for medical necessity
because on the date of ambulance service, beneficiaries did not have conditions that contraindicated use of another type of
transport.  These claims represented an estimated $65.7 million in 1993.  Almost two-thirds of the beneficiaries (63
percent) were clearly not bed-confined. 
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $90  $99 $100 $101 $102
Status:
The HCFA concurred with our recommendation.  The HCFA issued a regulation January 25, 1999, which addressed
ambulance payment issues and required physician certification of nonemergency transports.  However, payments for this
group of beneficiaries are particularly problemetic; we plan to conduct additional analytical work on this topic.
Report:
OEI-03-90-02130 (Final report, Aug. 1994)
Health Care Financing Administration Page 22 The 1999 Red Book M P P
ODIFY  AYMENT  RACTICES OF
A S M
MBULANCE  ERVICES FOR  EDICARE
E S R D B
ND  TAGE  ENAL  ISEASE  ENEFICIARIES
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:
The HCFA 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
Medicare pays dialysis facilities, and allow the facilities to negotiate agreements with ambulance companies.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
The payment system does not take into account the routine, predictable nature of scheduled ambulance transports, nor
does it take advantage of the lower costs associated with high-volume scheduled transports.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Lower estimate$ 4.9 $ 6.0 $ 7.3 $ 8.9 $10.9
Upper estimate  14.7  18.0  22.0  26.8   32.7
Status:
The HCFA has established codes for scheduled transport and has required uniform use of national ambulance codes but
has not modified the payment method.  The Balanced Budget Act of 1997 authorized the establishment of a prospective
payment system which links payments to the type of services provided, effective January 1, 2000.  
Report:
OEI-03-90-02131 (Final report, Mar. 1994)
Health Care Financing Administration Page 23 The 1999 Red Book C O
OLLECT  VERPAYMENTS FROM
H M O
  EALTH  AINTENANCE  RGANIZATIONS FOR
M E S R D B
  ISCLASSIFIED  ND  TAGE  ENAL  ISEASE  ENEFICIARIES
Current Law:
Health maintenance organizations (HMOs) receive a monthly list of Medicare beneficiaries who have been classified as
having end stage renal disease (ESRD).   Monthly payment rates to HMOs for these beneficiaries are about 7 to 10 times
higher than the rates for other Medicare beneficiaries.  There are no statutory, regulatory, or manual provisions that
specify time limits for the recovery of overpayments from risk-based HMOs.  In contrast, Medicare's fee-for-service
program imposes a 3-year statute of limitations on overpayment collections.
Proposal:
The HCFA should issue clear guidelines for the recovery of overpayments from HMOs.  Also, HCFA should recover all
overpayments occurring at least since 1992 that were made to HMOs on behalf of misclassified ESRD beneficiaries.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Because of weaknesses in HCFA's systems, some beneficiaries were misclassified as having ESRD.  The HMOs knew, or
should have known, that the misclassified beneficiaries were not receiving ESRD services which they were being paid to
provide.  It would be logical to collect the overpayments from HMOs on the same basis as overpayments are collected
from providers in the Medicare fee-for-service program, that is, for up to 3 years.  Since plans were formally notified in
February 1995 of HCFA system weaknesses and the resulting overpayments, we believe collections should be made
retroactively to 1992.
Savings (in millions):
 FY 1 FY 2 FY 3 FY 4 FY 5
$20.5
Status:
The HCFA agreed to clarify its policies for collecting overpayments from HMOs.  However, it collected overpayments
retroactively only to March 1995 for the majority of misclassified beneficiaries and retroactively to October 1993 for the
remaining beneficiaries who were misclassified as having ESRD before enrollment in the HMO.  Due to this limited
recovery schedule, HCFA has not collected $20.5 million in overpayments which occurred since 1992.  The HCFA
disagreed with our recommendation to collect the overpayments retroactively to 1992.
Report:
A-14-96-00203 (Final report, June 1997) 
Health Care Financing Administration Page 24 The 1999 Red Book L M P B R
IMIT  EDICARE  ART    EIMBURSEMENT
H B
FOR  OSPITAL  EDS
Current Law:
Medicare Part B covers the rental of medically necessary hospital beds used in the home when prescribed by a physician. 
Monthly rental payments are made according to a fee schedule established by the Omnibus Budget Reconciliation Act of
1987.  Medicare payments are capped at 120 percent of the allowed fee schedule amount over a maximum 15-month
period.    
Proposal:
The HCFA should take immediate steps to reduce Medicare payments for hospital beds used in the home.  This should
include the elimination of the higher reimbursement rate currently paid during the first 3 months of rental.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Our reviews found that Medicare payments for hospital beds used in the home were substantially higher than rates paid by
other payers.  In addition, Medicare was the only payer we sampled that pays a higher reimbursement rate for the initial
rental months.  Based on work we did in Texas in 1989, we also estimate that suppliers can recover the wholesale cost of
a bed within 4 months and as many as 7.5 times over the useful life of the bed.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Inherent reasonable  $40  $40  $40  $40  $40
 reduction
Elimination of  $15  $15  $15  $15  $15
 higher rate
Note:  These savings are not additive.
Status:
The HCFA concurred with our recommendations and is considering options to determine the best approach to achieve a
fair price for hospital beds.  The agency is examining payment allowances and methodologies at other payers and is
reviewing data to determine if Medicare payments are excessive.
Report:
OEI-07-96-00221 (Final report, Nov. 1998)
OEI-07-96-00222 (Final report, Nov. 1998)
A-06-91-00080 (Final report, May 1993)
Health Care Financing Administration Page 25 The 1999 Red Book R P P S S
EDUCE  AYMENTS FOR  RESSURE  UPPORT  URFACES
Current Law:
Federal law states that durable medical equipment provided in the beneficiary's residence may be billed only to Medicare
Part B.  This equipment includes pressure-reducing support surfaces used for the care of decubitus ulcers or pressure
sores.  The HCFA processes equipment claims through four regional carriers called durable medical equipment regional
carriers.  Effective January 1, 1996, new regional carrier guidelines were developed to control medically unnecessary
Medicare reimbursement for support surfaces.
Proposal:
The HCFA should require periodic review and renewal of the certificate of medical necessity for beneficiaries' use of
group 2 support surface equipment.
Legislative Regulatory Other Administrative
TT
Reason for Action:
While the 1996 guidelines appear to be having a positive impact on controlling Medicare costs for support surfaces,
inappropriate payments are still noted.  In 1996, 29 percent of beneficiaries sampled used support surfaces that were
medically unnecessary, compared with 47 percent in 1995.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $12  $12  $12  $12  $12
Status:
The HCFA did not agree with our recommendation and expressed concern about the timeliness and costs associated with
using a certificate of medical necessity for group 2 equipment.
Report:
OEI-02-95-00370 (Final report, June 1997)
Health Care Financing Administration Page 26 The 1999 Red Book I B P M O
MPROVE  ILLING  RACTICES FOR  EDICARE  RTHOTICS
Current Law:
Section 1834(h) of the Social Security Act provides for payment of orthotics and prosthetics as described in section
1861(s)(9).  The HCFA regulations define orthotic devices as leg, arm, back, and neck braces and artificial legs, arms,
and eyes, including replacements if required because of a change in the beneficiary's physical condition.  Orthotic devices,
which are mainly covered under Medicare Part B, must be reasonable and necessary for the diagnosis or treatment of an
illness or injury or to improve a malformed body member.  
Proposal:
The HCFA, in concert with the durable medical equipment regional carriers, should:
! Develop guidelines that better define orthotic devices, distinguishing among such categories of devices as custom-
made and off-the-shelf;
! Develop policies for orthotic codes, giving priority to upper limb devices, which we have identified as most
problematic;
! Develop screens for billing many orthotic devices on the same day or within a short time frame and pay special
attention to billing for orthotics in nursing facilities;
! Work with the American Orthotic and Prosthetic Association to develop a table of devices that should not be used
together; and 
! Consider stricter standards for who is allowed to bill for orthotics, such as requiring professional credentials for
orthotic suppliers.
Legislative Regulatory Other Administrative
TT
Reason for Action:
The OIGs medical record review, performed in concert with the Medicare peer review organizations, found that at least
19 percent of the orthotic devices covered in our study were medically unnecessary.  Also, 68 percent of the orthotic
billings for patients in nursing facilities were questionable, and the medical equipment carriers have no policy for the 
majority of the orthotic billing codes.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$7.9 $7.9 $7.9 $7.9 $7.9
Status:
The HCFA concurred with our recommendations and has revised its national codes to distinguish among categories of
devices.  We plan to conduct additional analytical work related to this topic.
Report:
OEI-02-95-00380 (Final report, Oct. 1997)
Health Care Financing Administration Page 27 The 1999 Red Book E P M P N
XAMINE  AYMENT  ETHOD FOR  ARENTERAL  UTRITION
Current Law:
Parenteral nutrition, a liquid solution provided intravenously through use of an indwelling catheter and infusion pump, is
covered under Medicare's Part B prosthetic device provision.  Medicare uses the reasonable charge methodology to
determine allowances for 23 parenteral nutrition procedure codes.
Proposal:
The HCFA should examine other payment methods that could lead to more cost-effective reimbursement for parenteral
nutrition solutions.  We suggest three alternative payment methods: (1) inherent reasonableness, (2) acquisition cost, and
(3) competitive bidding.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
For four parenteral nutrition codes, Medicare pays an average of 45 percent more than Medicaid agencies and 78 percent
more than Medicare risk health maintenance organizations.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $65  $65  $65  $65  $65
Status:
The Balanced Budget Act of 1997 enacted several provisions that would address our recommendation.  Section 4316
authorizes HCFA to make "inherent reasonableness" adjustments up to 15 percent for all Part B services other than
physician services.  Also, section 4319 authorizes up to five competitive bidding demonstrations.  The HCFA has
convened a workgroup to focus on ways to reduce costs for parenteral nutrition.
Report:
OEI-03-96-00230 (Final report, July 1997)
Health Care Financing Administration Page 28 The 1999 Red Book R C
EDUCE AND  ONTROL
E N E C
  NTERAL  UTRITION  QUIPMENT  OSTS
Current Law:
Enteral nutrition therapy, commonly called tube feeding, provides nourishment to patients who cannot swallow because of
severe or permanent medical problems.  This therapy, covered under Medicare Part B as a prosthetic benefit, is limited to
patients unable to eat normally who require enteral therapy as their primary source of nutrition.  The durable medical
equipment regional carriers were created by Federal regulation in 1993 to establish medical policy and guidelines for the
review of durable medical equipment claims.   
Proposal:
The durable medical equipment 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.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Eighty percent of the beneficiaries sampled met Medicare criteria for enteral nutrition therapy in 1995.  However,
vulnerabilities were identified with the use of special enteral formulas and the pump delivery method.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $28  $28  $28  $28  $28
Status:
The HCFA agreed with our recommendation.  Also, the Balanced Budget Act of 1997 contained several reforms related to
reimbursement for beneficiaries in nursing homes, including a mandatory prospective payment system for Part A covered
stays and consolidated billing for beneficiaries not in Part A covered stays.  
Report:
OEI-03-94-00022 (Final report, June 1997)
Health Care Financing Administration Page 29 The 1999 Red Book R M P B P
EDUCE  EDICARE  ART    AYMENTS
E N H
FOR  NTERAL  UTRITION AT  OME
Current Law:
Enteral nutrition therapy is covered under Medicare Part B as a prosthetic benefit, limited to patients unable to eat
normally who require enteral therapy as their primary source of nutrition.  While the majority of payments are for patients
in nursing homes, some patients receive enteral therapy as part of home care.
Proposal:
The HCFA should reduce payments through competitive acquisition strategies for patients receiving enteral nutrition at
home.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Payments for enteral nutrition therapy are excessive because reimbursement rates are high and competitive acquisition
strategies are not fully used.  In our review of other payers of enteral nutrition, we found that payers who negotiated
prices, taking advantage of discounts and other competitive acquisition strategies, reimbursed from 17 to 48 percent less
than Medicare.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Enteral payments for 
non-nursing-home residents  $15  $15  $15  $15  $15
Status:
The HCFA concurs that Medicare is paying too much for enteral nutrients and supports the recommendation to reduce
payments for enteral therapy administered at home under Part B.  Included in section 4552(a) of the Balanced Budget Act
of 1997 is a provision to freeze Medicare payments for parenteral and enteral nutrition, equipment, and supplies for 1998
through 2002.  The durable medical equipment regional carriers have proposed additional payment reductions through
their use of their inherent reasonableness authority.
Report:
OEI-03-94-00021 (Final report, Apr. 1996)
Health Care Financing Administration Page 30 The 1999 Red Book M P
INIMIZE  AYMENTS FOR
P I S
ORTABLE  MAGING  ERVICES
Current Law:
Nursing homes arrange for ancillary services (such as x-rays) for patients who require them.  In some instances, firms
known as portable imaging suppliers provide x-ray and electrocardiogram services in nursing homes.  Imaging services
consist of several components--technical, professional, transportation, and setup--depending on the type of service and
where and by whom it is rendered.
Proposal:
The HCFA should seek legislation, as appropriate, to ensure that historically inflated payments are not built into the
prospective payment system that will reimburse care provided under a Part A covered stay.  Additionally, under Part B,
payments for transportation should be limited to the national median (and prorated when multiple patients are seen), and
payments for x-ray setup should be eliminated.  The HCFA also should enforce the requirement that physicians justify the
need for portable services.
Legislative Regulatory Other Administrative
TT TT TT
Reason for Action:
Medicare pays more than twice as much for imaging services when they are billed under arrangement than when payment
is limited to the fee schedule.  Also, the amounts Medicare carriers allow for transportation of portable x-ray equipment
vary widely, and some are excessive.  Additionally, there is no statutory requirement for HCFA to allow setup charges for
portable x-rays, and these appear unjustified.  Finally, our review of the medical records of nursing home residents
receiving portable x-ray services showed that 31 percent of the records lacked a physician order for the portable service
and that 53 percent lacked documentation that the patient was not ambulatory.
Savings (in millions):
  FY 1   FY 2   FY 3   FY 4   FY 5
Inflated Part A payments $ 28.3 $ 30.0 $ 31.9 $ 33.9 $ 36.0
Transport and x-ray setup    37.5    38.6    39.9    41.4    43.0
Justification for portable
  service    63.7    68.6    73.9    79.6    85.8
    Total $129.5 $137.2 $145.7 $154.9 $164.8
Status:
The HCFA did not agree with our recommendations.
Report:
OEI-09-95-00090 (Final report, Nov. 1998)
OEI-09-95-00091 (Final report, Nov. 1998)
Health Care Financing Administration Page 31 The 1999 Red Book A M C C R
DJUST  ANAGED  ARE  APITATION  ATES FOR
U I P
  NRECOVERED   MPROPER  AYMENTS
Current Law:
The Balanced Budget Act of 1997 revised the Medicare payment calculation methodology for managed care organizations
effective January 1998.  The new methodology is still linked to Medicare fee-for-service expenditures.  The calculation
uses as a base the 1997 county-specific capitation rates, which were based on 95 percent of the average cost of treating
the beneficiary in the fee-for-service program.  As such, 95 percent of any improper fee-for-service payments are included
in the capitation rates.
Proposal:
The HCFA should pursue legislation that will allow modifications to managed care capitation rates, including an
adjustment for the estimated unrecovered improper payments included in the rate calculations.  The legislation should
recognize the offsetting effect of any payments subsequently found to be proper or subsequently paid to the fee-for-service
providers based on the provider appeals process. 
Legislative Regulatory Other Administrative
TT
Reason for Action:
Our audits of HCFA's financial statements estimated that the Medicare fee-for-service program improperly paid providers
$23.2 billion, or 14 percent of total expenditures, in FY 1996 and $20.3 billion, or 11 percent of total expenditures, in FY
1997.  Adjusting the managed care capitation payments to the lower limit of estimated improper payments would result in
savings of at least 7 percent. 
Savings (in millions):
  FY 1   FY 2   FY 3   FY 4   FY 5
$5,000 $6,000 $7,000 $8,000 $9,000
Status:
The HCFA agreed that Medicare managed care payments have been overstated and should be reduced.  However, HCFA
did not agree that it would be appropriate at this time to seek legislation as we recommended.  Given the overall payment
reduction to managed care organizations based on the Balanced Budget Act of 1997, HCFA questioned the merits of
pursuing a second reduction based on a projection of audit findings that may change substantially from year to year.  
Report:
A-14-97-00206 (Final report, Sept. 1998)
Health Care Financing Administration Page 32 The 1999 Red Book C M A A C
HANGE  ETHOD OF  LLOCATING  DMINISTRATIVE  OSTS 
A C R P
IN  DJUSTED  OMMUNITY  ATE  ROPOSALS 
Current Law:
Each risk-based health maintenance organization (HMO) is required to submit an adjusted community rate proposal to
HCFA before the beginning of the contract period.  Through this process, HMOs present 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 plan's medical and administrative costs for the upcoming year and must be supported by the individual HMO's
operating experiences relating to utilization and expenses.  If the estimate is lower than the average Medicare payment
rate, the plan must return the excess to Medicare enrollees as additional benefits or reduced premiums.
Proposal:
The HCFA should (1) require HMOs to allocate administrative costs on their adjusted community rate proposals using a
more realistic allocation method, such as the ratio of Medicare enrollees in the HMO to the total HMO enrollment, and (2)
introduce legislation to return the resulting savings to the Medicare trust fund.
Legislative Regulatory Other Administrative
TT TT TT
Reason for Action:
The adjusted community rate process enables plans to exploit the use of medical utilization factors when computing their
anticipated administrative costs.  As a result, HMOs overestimated their anticipated need for such costs.  The HMOs used
these excess amounts to finance a portion of the additional benefits offered to Medicare beneficiaries.  Even allowing for
funding of these additional benefits, we estimate that the HMOs' administrative needs were overstated by 5 percent of total
Medicare payments during 1994-96.
Savings (in millions):
  FY 1   FY 2   FY 3   FY 4   FY 5
$1,000 $1,000 $1,000 $1,000 $1,000
Status:
The HCFA agreed that the criteria governing the computation of administrative costs almost certainly resulted in
overstated costs.  As part of the Medicare+Choice program, a new format to be used for adjusted community rate 
proposals is expected to more accurately reflect administrative costs and should result in the allocation of lower costs to
Medicare enrollees.  However, HCFA did not concur with our recommendation to introduce legislation to recover the
excessive amount presently being paid for administration.  The HCFA officials believed that the congressional intent of the
changes brought about by the Balanced Budget Act of 1997 was to pass on all savings to the beneficiaries.  In addition,
they stated that some HMOs are reducing benefits because of reduced Medicare capitation payments.  The officials
believed that it may be appropriate to reassess our recommendation in the future once they have had an opportunity to
fully assess the impact of the payment changes and adjusted community rate audits mandated by the Act.
Report:
A-14-97-00202 (Final report, July 1998)
Health Care Financing Administration Page 33 The 1999 Red Book I M O B
DENTIFY  EDICARE  VERPAYMENTS FOR  ENEFICIARIES
I C I
NCORRECTLY  LASSIFIED AS  NSTITUTIONALIZED
Current Law:
Under risk-based contracts, HMOs receive Medicare payments for services to enrollees on a prospective per capita basis. 
A higher capitation rate is paid for enrollees who are classified as institutionalized.  The HMO Provider Manual requires
that HMOs submit to HCFA a monthly list of the beneficiaries who meet institutional status requirements.  These
requirements are met if a beneficiary was a resident of a skilled nursing facility (Medicare), a nursing facility (Medicaid),
an intermediate care facility for the mentally retarded, a psychiatric hospital or unit, a rehabilitation hospital or unit, a
long-term-care hospital, or a swing-bed hospital for a minimum of 30 consecutive days immediately prior to the first day
of the current reporting month. 
Proposal:
The HCFA should strengthen its onsite review procedures to better identify HMOs that are unable to accurately verify and
report the institutional status of enrolled beneficiaries, use the strengthened procedures on the next round of site visits to
identify HMOs that have incorrectly reported beneficiaries as institutionalized, and conduct detailed audits to identify and
recover overpayments.
Legislative Regulatory Other Administrative
TT
Reason for Action:
At 8 statistically selected HMOs, 137 of 800 sampled beneficiaries (17 percent) did not meet institutional status
requirements for months reported to HCFA.  The majority of the Medicare overpayments identified resulted from
inadequate HMO internal controls in two areas: (1) verification of beneficiaries institutional status and (2) reporting of
institutionalized beneficiaries to HCFA. 
Savings (in millions):
 FY 1 FY 2 FY 3 FY 4 FY 5
$22.2
Status:
We are waiting HCFA's comments on our draft report.
Report:
A-05-98-00046 (Draft report, Nov. 1998)
Health Care Financing Administration Page 34 The 1999 Red Book C W M P
HANGE THE  AY  EDICARE  AYS FOR
C L T
LINICAL  ABORATORY  ESTS
Current Law:
The amount the Medicare program pays for most clinical lab tests is based on fee schedules.  These fee schedules,
effective July 1, 1984, were established by each carrier at 60 percent of the Medicare prevailing rate (the rate most
frequently used by all suppliers).  The Congress took action in the Omnibus Budget Reconciliation Act of 1990 to pay
comparable prices by limiting the annual fee schedule increase to 2 percent for 1991, 1992, and 1993 and by reducing the
national cap to 88 percent of the median of all fee schedules.  The Omnibus Budget Reconciliation Act of 1993 further
reduced the national Medicare fee cap to 80 percent of the median of carrier prices in 1995 and to 76 percent in 1996. 
The law also called for no cost-of-living increases for 1994 and 1995.
Proposal:
The HCFA should (1) develop a methodology and legislative proposal to pay for tests ordered as custom panels at
substantially less than the full price for individual tests and (2) study reinstating the beneficiary coinsurance and
deductible provisions for laboratory services as a means of controlling utilization.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
The Omnibus Budget Reconciliation Act of 1993, if fully implemented, should reduce the higher profit rates from
Medicare billings.  However, although prices on individual tests are being reduced by legislation, panels are still generally
being billed as individual tests to Medicare.  Medicare policies are not sufficient to control the billing of profile tests
because there is no requirement that the tests ordered as a panel by the physician be billed only as a panel.  The HCFA's
guidelines do not address the problem of panels as a marketing mechanism of the laboratory industry or the problem of
industry billing for the contents of the panels individually.  In our opinion, these conditions have contributed to the
significant increase in the use of laboratory services.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Panel TBD TBD TBD TBD TBD
Co-payment* $1,130 $1,240 $1,370 $1,520 $1,690
*Co-payment savings are also included in our proposal to roll reimbursement for laboratory services into the charge
for physician office visits. 
Status:
The HCFA concurred with our first recommendation but not our second.  The agency recently added that it is encouraging
the individual ordering of tests to help control utilization and is therefore discouraging the creation of laboratory or
physician specific customized panels.  The Balanced Budget Act of 1997 reduced Medicare fee schedule payments by
lowering the cap to 74 percent of the median for payment amounts beginning in 1998.  Also, there will be no inflation
update between 1998 and 2002.  In addition, the Presidents current budget proposes to reduce the fee schedule ceiling
from 74 to 72 percent.
Report:
A-09-89-00031 (Final report, Jan. 1990)
A-09-93-00056 (Follow-up report, Jan. 1996)
Health Care Financing Administration Page 35 The 1999 Red Book P I M P
REVENT  NAPPROPRIATE  EDICARE  AYMENTS FOR 
C L T
LINICAL  ABORATORY  ESTS
Current Law:
Clinical laboratory services performed by independent laboratories, physicians, and hospital outpatient department
laboratories include chemistry, hematology, and urinalysis tests.  The Medicare carrier and fiscal intermediary manuals
refer to tests that can be and are frequently performed together on automated multichannel equipment as panels.  Carriers
are directed to pay the lesser panel amount if the sum of the payment allowance for the separately billed tests exceeds the
payment allowance for the panel that includes these tests.  For claims submitted by hospital outpatient department
laboratories, fiscal intermediaries are required to apply the carrier fee schedule and to follow the practices in effect for the
carrier's locality.
Proposal:
The HCFA should direct carriers and intermediaries to (1) implement procedures and controls to ensure that clinical
laboratory tests are appropriately grouped together and not duplicated for payment purposes and (2) recover potential
overpayments from providers.  The HCFA should also consider eliminating separate reimbursement for additional indices
on the basis that they are a byproduct of analyses performed on automated equipment.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Medicare carriers and fiscal intermediaries did not always have adequate controls to detect and prevent inappropriate
payments for laboratory tests.  Contrary to applicable laws, regulations, and Medicare reimbursement policies, carriers
and intermediaries reimbursed providers for claims involving (1) unbundled and/or duplicate chemistry, hematology, and
urinalysis tests that should have been grouped together and paid at a lesser amount and (2) additional indices that were
not ordered, received, or needed by a physician.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $47  $47  $47  $47  $47
Status:
The HCFA concurred with all recommendations.  The HCFA also agreed to institute new coding procedures and will
remove codes for additional indices from Medicare fee schedules.
Report:
A-01-96-00509 (Final report, Nov. 1997)
A-01-96-00527 (Final report, Nov. 1998)
Health Care Financing Administration Page 36 The 1999 Red Book R R
OLL  EIMBURSEMENT FOR
L S C
  ABORATORY  ERVICES INTO  HARGE
P O V
 FOR  HYSICIAN  FFICE  ISITS
Current Law:
Medicare pays the full amount of all clinical laboratory services provided in outpatient and office settings based on fee
schedules.
Proposal:
The HCFA should propose legislation to roll the reimbursement for laboratory services into the fee schedule amount for
physician office visits (which are subject to beneficiary co-payment).
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Clinical laboratory claims account for 25 percent of the line items in Medicare bills.  Numerous initiatives to limit
inappropriate growth have been enacted into law in recent years.  Most involve limiting the amount paid for each
laboratory service.  These initiatives have failed to limit overall spending, however, because they did not reduce the
number of tests prescribed.  Our proposal would eliminate incentives for inappropriate lab tests while still allowing
sufficient funds to pay for needed services; unnecessary tests would decrease as a result of the incentive to control costs;
beneficiary coinsurance and deductible provisions would again come into play; and administrative savings would result
from the reduction in the number of claims processed.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
Roll-in $   700 $1,500 $2,700 $4,100 $6,000
Co-payment*   1,130   1,240   1,370   1,520   1,690
Admin. savings      210      210      210      210      210
   Total $2,040 $2,950 $4,280 $5,830 $7,900
*Co-payment savings are also included in our proposal to change the way Medicare pays for clinical laboratory tests.
Status:
The HCFA does not concur with our recommendation but is studying alternative ways to limit laboratory services.  The
Balanced Budget Act of 1997 freezes fee schedule payments for 1998 through 2002 and requires the Secretary to adopt
national coverage and administrative policies for lab tests through negotiated rulemaking.  
Report:
OEI-05-89-89150 (Monograph, Oct. 1990)
OEI-05-89-89151 (Management advisory report, July 1991)
Health Care Financing Administration Page 37 The 1999 Red Book R P E B O
EQUIRE  HYSICIAN  XAMINATION  EFORE  RDERING 
H H S
OME  EALTH  ERVICES
Current Law:
Section 1861 of Title XVIII of the Social Security Act authorizes Medicare Part A payment for home health care services. 
Under the home health benefit, providers are reimbursed for the cost of each visit up to limits established by the
Department.
Proposal:
The HCFA should revise Medicare regulations to require the physician to examine the patient before ordering home health
services.  As discussed in the Status section, other OIG recommendations to correct abusive and wasteful practices are
being addressed. 
Legislative Regulatory Other Administrative
TT
Reason for Action:
Audits and investigations have identified medically unnecessary care and inappropriate 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 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 Congress and the Administration included provisions to restructure home health benefits in the Balanced
Budget Act of 1997, HCFA still needs to revise Medicare regulations to require that physicians examine Medicare patients
before ordering home health services.  While agreeing in principle, HCFA said it would continue to examine both coverage
rules and conditions of participation to develop the discipline necessary for ensuring proper certification.
Report:  
A-04-95-01103 (Final report, Mar. 1996) A-04-95-01104 (Final report, June 1996) 
OEI-04-93-00262 (Final report, Sept. 1995) OEI-04-93-00260 (Final report, July 1995) 
OEI-12-94-00180 (Final report, May 1995) OEI-02-94-00170 (Final report, June 1995)
A-04-94-02087 (Final report, June 1995) A-04-94-02078 (Final report, Nov. 1994)
A-04-96-02121 (Final report, July 1997) A-04-97-01166 (Draft report, Oct. 1998)
A-04-97-01169 (Draft report, Oct. 1998)  A-04-97-01170 (Draft report, Oct. 1998) 
Health Care Financing Administration Page 38 The 1999 Red Book E V
NSURE  ALIDITY OF 
M H E
EDICARE  OSPICE  NROLLMENTS
Current Law:
Hospice care is a treatment approach which recognizes that the impending death of an individual warrants a change in
focus from curative to palliative care (such as pain control and symptom management).  To qualify for Medicare hospice
benefits, which began in 1983, a patient must be entitled to Medicare Part A and be certified as terminally ill, which is
defined as having a life expectancy of 6 months or less if the illness runs its normal course.
Proposal:
The HCFA should strengthen its controls over the hospice program, such as by reinforcing the 6-month terminal prognosis
requirement; holding hospice physicians more accountable for certifications of terminal prognosis; strengthening claims
processing controls; and prohibiting hospices from paying nursing facilities more for "room and board" than the hospices
receive from State Medicaid agencies on behalf of dually eligible beneficiaries.  The HCFA should also seek legislation to
change the payment methodology for dually eligible nursing facility residents; to  restructure the use of benefit periods;
and to establish a more meaningful cap on hospice payments.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Our audits of 12 large hospices identified a substantial number of ineligible enrollments.  Working with OIG, physicians
from Medicare peer review organizations reviewed the medical files of 2,109 long-term beneficiaries in hospice care over
210 days and concluded that 1,373 beneficiaries were ineligible because they were not terminally ill.  Also, analysis of the
HCFA data base for hospice beneficiaries showed evidence of many long-term beneficiaries in other hospices across the
country.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The Balanced Budget Act of 1997 modified the hospice benefit but did not address the above recommendations.  The
HCFA generally concurred with our recommendations and plans to develop a corrective action plan.
Report:
A-05-96-00023 (Final report, Nov. 1997)
OEI-05-95-00250 (Final report, Sept. 1997)
OEI-05-95-00251 (Final report, Nov. 1997)
Health Care Financing Administration Page 39 The 1999 Red Book A B -Y C
DJUST  ASE EAR  OSTS IN THE 
P P S
ROSPECTIVE  AYMENT  YSTEM FOR 
S N F
KILLED  URSING  ACILITIES
Current Law:
The Balanced Budget Act of 1997 required HCFA to develop a prospective payment system for skilled nursing facilities
effective for cost reporting periods beginning July 1, 1998. 
Proposal:
The HCFA should determine the costs of unnecessary services and other improper payments and eliminate them from the
prospective payment system rates for skilled nursing facilities. 
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
To develop the prospective payment system rates, HCFA used cost reports for reporting periods beginning in FY 1995. 
However, HCFA 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.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA agreed with our recommendation and indicated in its interim final rule implementing the prospective payment
system that HCFA and the OIG would further examine the extent to which the base-year cost data used to develop the
rates included costs that were inappropriately allowed.  The HCFA agreed to adjust the rates downward, if appropriate,
through legislative or regulatory change once this study is completed.
Report:
A-14-98-00350 (Final report, July 1998)
Health Care Financing Administration Page 40 The 1999 Red Book S C O
TRENGTHEN  ONTROLS  VER 
P H P
ARTIAL  OSPITALIZATION  ROGRAMS
C M H C
AT  OMMUNITY  ENTAL  EALTH  ENTERS
Current Law:
The Omnibus Budget Reconciliation Act of 1990 authorized Medicare coverage and payment for partial hospitalization
program services provided by community mental health centers.  The services must be reasonable and necessary for the
diagnosis and active treatment of an individuals mental condition in order to prevent a relapse or hospitalization. 
Proposal:
Among other things, HCFA should either develop conditions of participation for community mental health centers or
conduct onsite surveys during the provider enrollment process; instruct fiscal intermediaries to perform a detailed medical
review of the first claim submitted for each new beneficiary receiving partial hospitalization services from a center; take
strong action against those centers that did not meet HCFA's qualification requirements; institute overpayment recovery
actions; develop a plan to review all claims for centers across the Nation; and evaluate the propriety of allowing the
centers to provide the partial hospitalization benefit.
Legislative Regulatory Other Administrative
TT TT TT
Reason for Action:
Significant problems were found during joint HCFA-OIG reviews of 14 centers in Florida and Pennsylvania, a broader
review of centers in five States with high Medicare expenditures for partial hospitalization services, and a 9-State center
enrollment initiative by HCFA.   Center certification requirements were not always met, beneficiaries were ineligible for
the services, services were not reasonable and necessary and/or were recreational and diversionary in nature rather than
therapeutic, and provider cost reports contained unallowable and nonreimbursable costs.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$260 TBD TBD TBD TBD
Status:
The HCFA concurred with our recommendations and developed a 10-point initiative to address both immediate and long-
term actions.  Among other things, HCFAs initiative includes the termination of egregious centers, intensified medical
reviews, overpayment collections, and proposal of various legislative actions.  The Presidents current budget proposes to
establish more stringent standards for community mental health centers.
Report:
A-04-98-02145 (Final report, Oct. 1998)
A-04-98-02146 (Final report, Oct. 1998)
Health Care Financing Administration Page 41 The 1999 Red Book R M P
EVISE  EDICARE  RESCRIPTION
D P M
RUG  AYMENT  ETHODS
Current Law:
Medicare Part B covers prescription drugs incident to a physicians services for drugs that cannot be self-administered,
for certain medical disorders, such as end stage renal disease and cancer, and when necessary for the effective use of
durable medical equipment.  Reimbursement is based on the lower of estimated actual charges or a national average
wholesale price (AWP) less 5 percent.  Payment for drugs under the Medicaid program varies among the States but
generally includes use of a discounted acquisition cost, as well as a federally mandated manufacturers rebate program.
Proposal:
The HCFA should reexamine its Medicare drug reimbursement methodologies with a goal of reducing payments as
appropriate.
Legislative Regulatory Other Administrative
TT TT TT
Reason for Action:
Findings of several OIG reports provide evidence that Medicare and its beneficiaries are making excessive payments for
prescription drugs.  The published average wholesale prices currently used by Medicare-contracted carriers to determine
reimbursement bear little or no resemblance to actual wholesale prices available to the physician and supplier
communities that bill for these drugs.  We believe that the 5 percent reduction in AWP mandated by the Balanced Budget
Act is not enough and that further options to reduce reimbursement should be considered.  We also found that Medicare
and its beneficiaries could have saved $1 billion in 1998 if the allowed amounts for 34 drugs had been equal to prices
obtained by the Department of Veterans Affairs.
Savings (in millions):*
  FY 1   FY 2   FY 3   FY 4   FY 5
$1,000 $1,000 $1,000 $1,000 $1,000
*Includes beneficiary copayment amounts.  
Status:
The HCFA concurred with our recommendation.  The Presidents FY 2000 budget proposes to further reduce outpatient
drugs by reimbursing these items at 83 percent of AWP.  
Report:
OEI-03-97-00293 (Final report, Nov. 1998)
OEI-03-97-00292 (Final report, Aug. 1998)
OEI-03-97-00390 (Final report, July 1997)
OEI-03-95-00420 (Final report, May 1996)  
OEI-03-94-00390 (Final report, Mar. 1996)
Health Care Financing Administration Page 42 The 1999 Red Book R H -P G D
EMOVE  IGH RICED  ENERIC  RUGS FROM 
M P M
EDICARE  AYMENT  ETHODOLOGY
Current Law:
Medicare Part B covers prescription drugs incident to a physicians services for drugs that cannot be self-administered,
for certain medical disorders such as end stage renal disease and cancer, and when necessary for the effective use of
durable medical equipment.  On January 1, 1998, as a result of the Balanced Budget Act of 1997, Medicare Part B began
reimbursing prescription drugs at 95 percent of average wholesale price.
Proposal:
The HCFA should not include higher-priced generic drugs in the median calculations to determine Medicare allowances or
propose limiting the allowances to brand-name prices when higher-priced generic drugs are involved.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Currently, Medicare determines reimbursement for multiple-source drugs at 95 percent of the median AWP for all generic
versions of the drug.  A recent OIG study found that Medicare and its beneficiaries could have saved
$5 million to $12 million for four drugs in 1997 had reimbursement not been based on higher-priced generic drugs.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $12  $12  $12  $12  $12
Status:
The HCFA concurred with our recommendation.  The HCFA has issued a notice of proposed rulemaking to provide that
payment for multiple source drugs is established at the lower of the median of the generic AWPs or the lowest AWP of the
brand name forms of the drug.
Report:
OEI-03-97-00510 (Final report, July 1998)
Health Care Financing Administration Page 43 The 1999 Red Book E F S
STABLISH  EE  CHEDULE FOR
M A P
  EDICARE  MBULANCE  AYMENTS
Current Law:
Medicare pays for medically necessary ambulance services when the use of other methods of transportation would
endanger the patient's health.  Two levels of service, advanced and basic life support, are covered by Medicare. 
Reimbursement is based on the type of vehicle and personnel used (advanced or basic life support) and the service status
(emergency or nonemergency).
Proposal:
The HCFA should establish new guidelines for ambulance payments:
! Work with the ambulance industry to develop clearer guidelines on what is and is not included in the base rate and
what mileage is intended to cover.
! Eliminate separate payments for oxygen, supplies, injectables, and other services, such as electrocardiograms.  These
items should be included in the base rate.
! Limit the number of procedure codes available to ambulance suppliers for billing.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Medicare payments for ambulance services appear to lack common sense and are vulnerable to fraud and abuse.  For
example, in 26 States, Medicare pays more for routine, nonemergency basic life support than it does for advanced life
support emergency transportation.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$242 $242 $242 $242 $242
Status:
The Balanced Budget Act of 1997 mandated the establishment of a fee schedule for Medicare ambulance transportation.
Although the law calls for negotiated rulemaking, there is a provision that would allow Medicare to incorporate some
savings into the fee schedule.  The HCFA is currently analyzing this issue.  However, we believe that additional savings
beyond those contemplated in legislation are possible.
Report:
OEI-05-95-00300 (Final report, Nov. 1997)
Health Care Financing Administration Page 44 The 1999 Red Book A P N
LLOW  AYMENT FOR  ONEMERGENCY
A L S A S
DVANCED  IFE  UPPORT  MBULANCE  ERVICES
O W M N
NLY  HEN  EDICALLY  ECESSARY
Current Law:
The Social Security Act, section 1861(s)(7), provides for coverage of ambulance service when medically necessary.  The
limitations for this coverage, as specified in 42 CFR 410.40, include the requirement that the services be medically
necessary, specifically that other means of transportation would endanger the beneficiary's health.  However, because 
HCFA does not make a coverage distinction between advanced life support and basic life support services, payments are
based on the type of transportation furnished and not the level of service required by the beneficiary.  Effective March 1,
1982, HCFA allowed separate reimbursement rates for advanced and basic life support ambulances.  
Proposal:
The HCFA should modify its Medicare policy to allow payment for nonemergency advanced life support services only
when that level of service is medically necessary, instruct carriers to institute controls to ensure that payment is based on
the medical need of the beneficiary, and closely monitor carrier compliance.  
Legislative Regulatory Other Administrative
T
Reason for Action:
For Calendar Years (CY) 1986 to 1989, the number of trips by Medicare beneficiaries in advanced life support
ambulances increased by 131 percent, while the number of trips in basic life support ambulances increased by only 14
percent.   Of a sample of 400 claims in CY 1989, 18 percent were for services not medically necessary at the advanced
level and were reimbursed at the advanced level even though basic life support services were available in the same city or
town.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $47  $47    $47    $47    $47
Status:
The HCFA is in the process of issuing a final regulation which addresses the coverage of ambulance services and vehicle
and staff requirements.  The agency intends to address advanced and basic life support services as part of the negotiated
rulemaking process on the ambulance fee schedule which began in January 1999.
Report:
   A-01-91-00513 (Final report, Oct. 1992)
   A-01-94-00528 (Final report, June 1995)
Health Care Financing Administration Page 45 The 1999 Red Book E M N
NSURE THE  EDICAL  ECESSITY OF
A C
  MBULANCE  LAIMS
Current Law:
The HCFA regulations state that Medicare covers ambulance services only if other forms of transportation would
endanger the beneficiarys health.  The Balanced Budget Act of 1997 mandates that HCFA work with the industry to
establish a negotiated fee schedule for ambulance payments effective January 1, 2000.
Proposal:
The HCFA 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 HCFA and the industry can better address issues of medical necessity, including clear and
consistent definitions.
Legislative Regulatory Other Administrative
TT
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:
In commenting on our draft report, HCFA concurred with the need for medical review of these types of ambulance claims. 
However, because of resource demands associated with Year 2000 system conversions, HCFA does not believe it can
implement such an edit before the major overhaul of ambulance payment policies required by the Balanced Budget Act. 
Instead, HCFA intends to ask its carriers to review their ambulance data and decide whether edits accompanied by local
medical review policies or focused medical review of potential aberrant providers are appropriate.
Report:
OEI-09-95-00412 (Final report, Dec. 1998)
Health Care Financing Administration Page 46 The 1999 Red Book S I P
TOP  NAPPROPRIATE  AYMENTS FOR
C M T
  HIROPRACTIC  AINTENANCE  REATMENTS
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 demonstrated by an x-ray.  The Balanced Budget Act of 1997 required
HCFA to establish new utilization guidelines for Medicare chiropractic care by January 1, 2000.  It also eliminated the x-
ray requirement.
Proposal:
The HCFA 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.
Legislative Regulatory Other Administrative
TT
Reason for Action:
We found that Medicare, Medicaid, and private insurers rely, in varying degrees, on utilization caps, x-rays, physician
referrals, copayments, and pre- and post-reviews to control utilization of chiropractic benefits.  Utilization copayments are
the most widely used, but these and other controls did not detect or prevent unauthorized Medicare maintenance
treatments.  We concluded that in 1996, 759,400 Medicare beneficiaries received 2,888,900 probable chiropractic
maintenance treatments at a cost to the Medicare program of $68,882,100.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $78  $78  $78  $78  $78
Status:
The HCFA concurred with our recommendations and is developing utilization guidelines as specified in the Balanced
Budget Act of 1997.  Once the guidelines are developed, HCFA will develop modifiers and edits as necessary.
Report:
OEI-04-97-00490 (Final report, Nov. 1998)
OEI-06-97-00480 (Final report, Sept. 1998)
Health Care Financing Administration Page 47 The 1999 Red Book P E G A
ROVIDE  XPLICIT  UIDELINES ON  LLOWABILITY OF  
I G
NSTITUTIONAL  ENERAL AND
A F B C
DMINISTRATIVE AND  RINGE  ENEFIT  OSTS 
Current Law:
The HCFA guidelines--Provider Reimbursement Manual, section 2100--establish the general principle that payments to a
provider must be covered under Medicare.  Sections 2102.1, 2102.2, and 2103 of the manual expand this principle by
explaining factors that affect the allowability of costs, such as the reasonableness of costs, their relationship to patient
care, and the prudent buyer concept.
Proposal:
The HCFA should revise the Provider Reimbursement Manual to provide explicit guidelines on the allowability of certain
general and administrative and fringe benefit costs. 
Legislative Regulatory Other Administrative
TT
Reason for Action:
We reviewed general and administrative and fringe benefit costs at 19 selected providers and 2 home offices nationwide in
response to a request from the Subcommittee on Oversight and Investigations, House Committee on Energy and
Commerce.  For 16 of the 19 providers reviewed, Medicare participated in approximately $50.7 million of costs that were
unallowable, unreasonable, or not allocable to the Medicare program.  Although Medicare's share amounted to
approximately $2.1 million, the bulk of the costs were passed on to other health care consumers.  Also, $3.5 million of
costs are "costs for concern" because of their tenuous relationship to patient care.  We believe that many of the
unallowable costs resulted from the providers' lack of adequate internal controls.  However, other unallowable costs, as
well as the "costs for concern," appear to have resulted from different interpretations of the guidelines in HCFA's Provider
Reimbursement Manual, which is the principal guideline used by providers to charge costs to the Medicare program.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA has published changes to the Provider Reimbursement Manual to clarify the allowability of several of the cost
categories identified in our report.  In addition, the Balanced Budget Act of 1997 prohibited payments for such items as
entertainment, gifts, and donations.  The HCFA should clarify the remaining cost categories noted in our report.
Report:
A-03-92-00017 (Final report, Aug. 1994)
Health Care Financing Administration Page 48 The 1999 Red Book D U S C
ISCONTINUE  SE OF A  EPARATE  ARRIER
P M C
TO  ROCESS  EDICARE  LAIMS FOR
R R B
AILROAD  ETIREMENT  ENEFICIARIES
Current Law:
From the inception of the Medicare supplementary medical insurance program (Part B), claims for Railroad Retirement
beneficiaries have been processed by a single carrier.  This carrier, The Travelers Insurance Company, has a contract
with the Railroad Retirement Board to process Medicare Part B claims for Railroad Retirement beneficiaries.  All other
Medicare carriers contract with HCFA to process claims.  The authority for this unique contracting arrangement is
section 1842(g) of the Social Security Act, as amended.
Proposal:
The HCFA should discontinue the use of a separate carrier to process Medicare claims for Railroad Retirement
beneficiaries.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Since 1979, the General Accounting Office, the Grace Commission, and HCFA have recommended that Railroad
Retirement beneficiaries be placed under the HCFA carrier system.  In following up on these recommendations, we found
that cost savings of $9.1 million could be achieved by implementing the proposal.  In addition, provider billings would be
simplified since the service providers would no longer need to separate and submit Railroad Retirement claims for
payment to Travelers and other Medicare claims to a different carrier.  A further benefit is that beneficiaries would be
assured that their claims would be processed timely and not routed to the wrong carrier for payment, as has sometimes
happened in the past.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$9.1 $9.1 $9.1 $9.1 $9.1
Status:
While HCFA has supported legislation in the past, there is currently no legislative proposal before the Congress.
Report:
A-14-90-02528 (Final report, Dec. 1990)
Health Care Financing Administration Page 49 The 1999 Red Book R M E A 67
AISE THE  EDICARE  NTITLEMENT  GE TO 
Current Law:
The Social Security Act and related laws established a number of Federal programs, including Social Security Retirement
Insurance benefits and the Medicare program.  Historically, Social Security and Medicare have been closely linked.  Both
established age 65 as their entitlement age.  The Social Security Amendments of 1983 increased the age of entitlement for
Social Security unreduced benefits from age 65 to age 67 over the transition period 2003 to 2027.  This was done as one
of several methods to strengthen the solvency of the Social Security Trust Fund.  However, the age of entitlement for
Medicare has remained unchanged.
Proposal:
The HCFA should gradually increase the Medicare entitlement age to 67, following the same schedule for the increase in
the age of entitlement to unreduced Social Security benefits.
Legislative Regulatory Other Administrative
TT
Reason for Action:
If the Medicare entitlement age were gradually raised to age 67 following the same schedule as the Social Security
program, the Medicare Hospital Insurance Trust Fund would save three quarters of a trillion dollars over a 30-year period
beginning in the year 2003.  The Medicare Supplementary Medical Insurance program would also save significant
amounts, and since the impact of raising the entitlement age on future Medicare beneficiaries is not known, potential
negative consequences could be reduced by providing substantial advance notice of the change.  The proposal could help
alleviate the Federal deficit and deal with the projected solvency of the trust fund.
Savings (in millions):*
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
*Savings, which would be substantial, would first be realized in 2003, increasing each year until 2027 when the
entitlement age reaches 67.
Status:
The HCFA currently has no plans to pursue this change.  Although a bill to raise the entitlement age to 67 was introduced
in the 105th Congress, it was not enacted.
Report:
OEI-07-91-01600 ( Final report, Nov. 1992)
Health Care Financing Administration Page 50 The 1999 Red Book S F P F B P
UBJECT  UNDS  LACED IN  LEXIBLE  ENEFIT  LANS 
H I T
TO  OSPITAL  NSURANCE  AX
Current Law:
Flexible benefit plans are employer-employee arrangements in which the employee elects a reduced salary and receives
payment in the form of fringe benefits.  The fringe benefits selected instead of salary are exempt from Medicare, Social
Security, and Federal income taxes.  These plans are authorized by section 125 of the Internal Revenue Code.
Proposal:
The value of the amounts placed in flexible benefit plans should be included in the definition of wages for the Hospital
Insurance portion of the Federal Insurance Contributions Act tax.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Flexible benefit plans deprive the financially unstable Medicare Hospital Insurance trust fund of needed revenue.  Also,
the tax break provided by these plans is discriminatory as it is not available to all workers and may indirectly contribute to
the rapid rise of health care costs.  An exemption from Medicare taxes seems particularly inappropriate because the costs
of Medicare benefits provided to individuals already far exceed taxes paid to the Medicare trust fund.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$291 $354 $421 $489 $555
Status:
The HCFA agreed with our recommendation and has submitted a legislative proposal to subject flexible benefit plans to
the Hospital Insurance tax.  However, the proposal was not included in the President's current budget.
Report:
A-05-93-00066 (Final report, Aug. 1994)
Health Care Financing Administration Page 51 The 1999 Red Book I M S P S
MPROVE  EDICARE  ECONDARY  AYER  AFEGUARDS
Current Law:
Medicare is the secondary payer (MSP) to certain group health plans in instances where medical services were rendered to
Medicare-entitled employees or to the Medicare-entitled spouses and other family members of employees.  Medicare is
also the secondary payer in situations involving coverage under Worker's Compensation; black lung benefits; automobile
and nonautomobile, no fault, or liability insurance; and Department of Veterans Affairs programs.  The HCFA provides
administrative funds to Medicare contractors to monitor and collect incorrect primary benefits paid on behalf of Medicare
beneficiaries.
Proposal:
The HCFA should (1) ensure that contractor resources are sufficient and instruct contractors to recover improper primary
payments from insurance companies, (2) implement financial management systems to ensure all overpayments
(receivables) are accurately recorded, (3) develop detailed procedures to properly handle employers that refuse to provide
other health insurance coverage information, and (4) resubmit the justification of a legislative proposal that would require
insurance companies, underwriters, and third-party administrators to periodically submit private insurance coverage data
directly to HCFA.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Measures are needed to collect accurate and timely information on primary payers.  This will help to reduce future
Medicare overpayments that result from unidentified MSP cases and improve the recovery process for overpayments.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA is pursuing the recommended administrative actions through improved processes to identify and recover
overpayments related to MSP, as well as improved information systems to guard against making improper Medicare
payments.  However, safeguards are still needed to guard against improper payments until the new information systems
are implemented.  The Presidents current budget proposes a requirement for private insurance companies to provide
Medicare secondary payer information.
Report:
A-09-89-00100 (Final management advisory report, Mar. 1990)
OEI-07-90-00760 (Final report, Aug. 1991)
OEI-03-90-00763 (Management advisory report, Nov. 1991)
A-09-91-00103 (Final report, Aug. 1992)
A-14-94-00391 (Final report, Dec. 1993)
A-14-94-00392 (Final report, Mar. 1994)
Health Care Financing Administration Page 52 The 1999 Red Book E M S P P
XPAND  EDICARE  ECONDARY  AYER  ROVISIONS
E S R D B
 FOR  ND  TAGE  ENAL  ISEASE  ENEFITS
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 for the first 12 months of health benefits.  Effective February 1, 1990, Medicare
became secondary payer for the first 18 months of Medicare entitlement.  After October 1, 1998, Medicare again became
the secondary payer for the first 12 months.
Proposal:
The Medicare secondary payer provision should be extended to include ESRD beneficiaries without a time limitation.  
Legislative Regulatory Other Administrative
TT
Reason for Action:
The proposed change for ESRD beneficiaries would make MSP provisions consistent with legislation passed by the
Congress for aged and disabled beneficiaries, which does not restrict the period of time that Medicare is the secondary
payer.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA was concerned that an indefinite secondary payer provision might encourage insurers to drop uneconomical
services, namely facility dialysis and transplantation.  The HCFA favored indefinitely extending the MSP provision for all
other services and included this proposal in an earlier budget submission.  Although the Balanced Budget Act of 1997
extended MSP policies for individuals with ESRD to 30 months, 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 for
old age or disability.  At that point, Medicare would become the primary payer.
Report:
A-10-86-62016 (Final report, Dec. 1987)
Health Care Financing Administration Page 53 The 1999 Red Book M F M P
ODIFY  ORMULA FOR THE  EDICAID  ROGRAM
Current Law:
The Federal Medical Assistance Percentage prescribed in the Social Security Act determines the Federal share of costs for
the Medicaid and various other programs.
Proposal:
The HCFA should consult with the Congress on modifications to the Federal Medical Assistance Percentage formula
which would result in distributions of Federal funds that more closely reflect per-capita-income relationships. 
Legislative Regulatory Other Administrative
TT
Reason for Action:
The  Federal Medical Assistance Percentage formula does not fully reflect the congressional objective of distributing
Federal funds according to a State's ability to share in program costs, as measured by State per capita income.  Due to
two provisions, higher income States receive significant additional Federal funds beyond amounts the formula would
provide if it were based solely on per-capita-income relationships.  Changes to these provisions, namely (1) eliminating
the program growth incentive of the formula and (2) lowering the current minimum floor to 45 percent (from 50 percent),
would result in distributions of Federal funds that more closely reflect per-capita-income relationships.  If the formula
were changed, higher income States (such as New York and California) would receive a reduced Federal share in program
expenditures, while lower income States (such as Mississippi and Arkansas) would receive a greater Federal share.  If a
cost-of-living factor were added to the formula, it would help ensure that any reductions in Federal sharing would be more
equitable.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
$4,100 $4,100 $4,100 $4,100 $4,100
Status:
The HCFA did not agree with our recommendation, and no legislative proposal was included in the President's current
budget.
Report:
A-06-89-00041 (Final report, Aug. 1991)
Health Care Financing Administration Page 54 The 1999 Red Book P M C S
ROMOTE  EDICAID  OST  HARING
Current Law:
Section 1902(a)(14) of the Social Security Act provides that Medicaid may impose "enrollment fees, premiums, or similar
charges, and deductions, cost sharing, or similar charges."  Children, health maintenance organization enrollees,
pregnancy services, emergency services, and hospice services provided to residents of nursing facilities or medical
institutions are exempt from cost sharing.
Proposal:
The HCFA should promote the development of effective cost sharing programs by:
! Allowing States to experiment with cost sharing programs that target new populations and reflect more substantial
cost sharing amounts,
! Recommending changes to Federal requirements allowing for greater State flexibility in determining exempted
populations and services and allowing for higher recipient cost sharing amounts, and/or
! Promoting the use of cost sharing in States that do not currently have programs.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Cost sharing programs, which save money, were used by 27 States in their Medicaid programs at the time of our study. 
States without cost sharing could have saved between $167 and $335 million annually (of which the Federal share would
be $99 to $198 million) by applying cost sharing to just four services: inpatient hospital, outpatient hospital, physician
visits, and prescription drugs.  States with cost sharing did not report significant impacts on utilization of services or
access to care and have not experienced excessive administrative, recipient, or provider burdens.  Federal requirements
may hinder States from designing even more effective cost sharing programs.
Savings (in millions):*
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
*The amount of savings will depend on specific actions taken by each State.
Status:
The HCFA provided States with program and administrative flexibility through waivers for Medicaid programs. 
However, HCFA has no current plans for providing information on States cost-sharing experiences.
Report:
OEI-03-91-01800 (Final report, July 1993)
Health Care Financing Administration Page 55 The 1999 Red Book C L T S
LOSE  OOPHOLES  HAT  HELTER
T P L S A
HIRD  ARTY  IABILITY  ETTLEMENTS AND  WARDS
Current Law:
Some Medicaid recipients who receive settlements and awards from liable third parties as a result of accidents are able to
shelter the assets in irrevocable trusts and retain their eligibility for Medicaid.  With these trusts, they are also able to
prevent Medicaid from being repaid for medical services related to injuries sustained in the accidents.
Proposal:
The HCFA should develop (1) legislative proposals to close the loopholes in the Omnibus Budget Reconciliation Act of
1993 and (2) guidelines to assist States in strengthening Medicaid's right to recover when trusts are established by third
parties. 
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Our national survey of the 51 Medicaid agencies disclosed that in 36 agencies, Medicaid and Supplemental Security
Income recipients used trusts to shelter assets.  Although we were unable to determine the financial impact of these trust
funds on Medicaid nationally, we concluded that the impact on Medicaid from 25 such trusts in California was
significant.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
  $3   $3   $3   $3   $3
Status:
The HCFA agreed that the exception in the law contains loopholes.  It indicated that recommendations could be made to
the Congress to amend the exception limiting the use of trust funds to certain well-defined necessities (e.g., health care
that is not covered by Medicaid).  The HCFA also agreed to take appropriate action to strengthen Medicaid's right to
recover from trusts established from third party settlements.  In June 1996, HCFA issued guidelines which set forth
advice on ways in which States can better recover Medicaid expenditures from established third party settlements,
especially for the disabled population.
Report:
A-09-93-00033 (Final report, Oct. 1994)
Health Care Financing Administration Page 56 The 1999 Red Book E C B C
STABLISH  ONNECTION  ETWEEN THE  ALCULATION OF
M D R D R
EDICAID  RUG  EBATES AND  RUG  EIMBURSEMENT
Current Law:
The Omnibus Budget Reconciliation Act of 1990 authorized States to collect rebates from drug manufacturers for drug
purchases made under the Medicaid program.  Rebates are calculated using average manufacturer price (AMP), the
manufacturer's best price, and other factors.  In contrast, most States reimburse pharmacies for Medicaid prescription
drugs based on the average wholesale price (AWP) of the drug.  
Proposal:
The HCFA should seek legislation that would require drug manufacturers participating in the Medicaid outpatient
prescription drug program to pay Medicaid drug rebates based on AWP or study other viable alternatives to the current
program of using AMP to calculate the rebates.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Requiring manufacturers to pay Medicaid drug rebates based on AWP would (1) eliminate inconsistencies in the present
methods used by drug manufacturers to calculate AMP, (2) establish a much-needed connection between the calculation of
Medicaid drug rebates and the calculation of Medicaid's 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 which
had the greatest amount of Medicaid reimbursements in Calendar Years 1994-96.
Status:
The HCFA disagreed with the recommendation to submit a legislative proposal to the Congress, believing that such
legislation was not feasible at the time.  However, HCFA stated that changing AMP to AWP would reduce the
administrative burden involved in the AMP calculations and planned a comprehensive study of AWP.
Report:
A-06-97-00052 (Final report, May 1998)
Health Care Financing Administration Page 57 The 1999 Red Book I I B P C
MPLEMENT AN  NDEXED  EST  RICE  ALCULATION
M D R P
IN THE  EDICAID  RUG  EBATE  ROGRAM
Current Law:
The Omnibus Budget Reconciliation Act of 1990 authorized States to collect rebates from drug manufacturers for drug
purchases made under the Medicaid program.  Rebates are calculated using average manufacturer price (AMP), the
manufacturer's best price, and other factors.  To discourage drug manufacturers from raising AMP amounts, the basic
rebate amount is increased by the amount AMP increases over and above the consumer price index for all urban
consumers.  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:
The best price calculation in the Medicaid drug rebate program should be indexed.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Drug manufacturers have consistently increased best prices in excess of the consumer price index for all urban consumers
since the inception of the Medicaid drug rebate program.  To determine the potential effect that increases in best price
(beyond the rate of inflation) had on rebates, we calculated the difference in rebates that would have resulted from using
an indexed best price.  We estimate that drug rebates would have increased by about $123 million for the 406 drug
products included in our review.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$123 $123 $123 $123 $123
Status:
We are continuing to monitor the Medicaid 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, Oct. 1995)
Health Care Financing Administration Page 58 The 1999 Red Book I E P I
NSTALL  DITS TO  RECLUDE  MPROPER
M R
EDICAID  EIMBURSEMENT
C L S
FOR  LINICAL  ABORATORY  ERVICES
Current Law:
Clinical diagnostic laboratory tests performed in a physician's office, by an independent laboratory, or by a hospital
laboratory for its outpatients are reimbursed on the basis of fee schedules.  Medicaid reimbursement for these tests may
not exceed the amount that Medicare recognizes, and each Medicare carrier in a State is to provide its fee schedule to the
State agency.  For purposes of the fee schedule, clinical diagnostic laboratory services include laboratory tests listed in
codes 80002 - 89399 of the Current Procedural Terminology Manual.  Effective for services rendered on or after 
July 1, 1984, Federal matching funds are not available for any amount over the amount recognized by Medicare for such
tests.
Proposal:
The State agencies should (1) install edits to detect and prevent payments that exceed the Medicare limits and billings that
contain duplicative tests, (2) recover overpayments for clinical laboratory services identified in each of the reviews, and
(3) make adjustments for the Federal share of the amounts recovered by the State agencies.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Overall, our reviews disclose that State agencies are reimbursing providers for laboratory services that exceed the
Medicare limits or are duplicated for payment purposes.  These overpayments are occurring because the State agencies do
not have adequate computer edits in place to prevent the payment of unbundled or duplicated claims for chemistry,
hematology, or urinalysis tests.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $17  $17  $17  $17  $17
Status:
The HCFA wrote to all State Medicaid directors on January 15, 1997, alerting them to the OIG review, encouraging them
to use Medicares bundling policies, and urging them to install appropriate payment edits in their claim processing
systems.
Report:
A-01-95-00005 (Final report, Jan. 1996) A-05-95-00062 (Final report, Dec. 1996)
A-01-95-00006 (Final report, June 1996) A-05-96-00019 (Final report, Mar. 1996)
A-01-96-00001 (Final report, Feb. 1996) A-06-95-00078 (Final report, Nov. 1995)
A-02-95-01009 (Final report, Mar. 1997) A-06-95-00100 (Final report, July 1996)
A-03-96-00200 (Final report, Aug. 1996) A-06-96-00002 (Final report, July 1996)
A-03-96-00202 (Final report, Nov. 1996) A-06-96-00031 (Final report, Dec. 1995)
A-03-96-00203 (Final report, Mar. 1997) A-07-95-01139 (Final report, Sept. 1995)
A-04-95-01108 (Final report, Dec. 1995) A-07-95-01147 (Final report, Oct. 1995)  
A-04-95-01109 (Final report, Apr. 1996) A-07-95-01138 (Final report, Mar. 1996)
A-04-95-01113 (Final report, Feb. 1996) A-09-95-00072 (Final report, May 1996)
A-05-95-00035 (Final report, Feb. 1996) A-10-95-00002 (Final report, Mar. 1996)
Health Care Financing Administration Page 59 The 1999 Red Book C M P
ONTROL  EDICAID  AYMENTS TO
I
NSTITUTIONS FOR
M R P
ENTALLY  ETARDED  EOPLE
Current Law:
Federal Medicaid rules for reimbursing States for intermediate care facilities/mentally retarded are not tailored to the 
operations of these institutions.  "Reasonable costs" and "efficiently and economically operated facility" are not defined in
regulations.  Each State has considerable discretion in defining these terms and in setting payment methodology.
Proposal:
The HCFA should reduce excessive spending of Medicaid funds for intermediate care facilities/mentally retarded by one
or more of the following:
! Take administrative action to control reimbursement by encouraging States to adopt controls.
! Seek legislation to control reimbursement, such as through mandatory cost controls, Federal per capita limits, flat per
capita payments, case-mix reimbursements, or a national ceiling for reimbursements.
! Seek comprehensive legislation to restructure Medicaid reimbursement for both intermediate care facilities/mentally
retarded and home and community-based waiver service for developmentally disabled people via global budgeting,
block grants, or financial incentive programs.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Medicaid reimbursement rates for large intermediate care facilities/mentally retarded are more than five times greater in
some States than in others.  The  average Medicaid reimbursement in 1991 for large facilities ranged among States from
$27,000 to $158,000 per resident.  This variation was unrelated to the patients' severity of illness, quality of service,
facility characteristics, or resident demographics.  A lack of effective controls results in excessive spending.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$683 $683 $683 $683 $683
Status:
The HCFA sent copies of our report to State Medicaid Directors but did not concur with our recommendation.  The
HCFA believes Medicaid statutory provisions allow States to establish their own payment systems.  This flexibility
allows for the variations found among States in their payment rates and the methods and standards used in determining
these rates.  The Balanced Budget Act of 1997 required the Secretary to conduct a study on the effect of the States rate-
setting methods on access to, and quality of, services provided to beneficiaries.
Report:
OEI-09-91-01010 (Final report, June 1993)
Health Care Financing Administration Page 60 The 1999 Red Book PUBLIC HEALTH SERVICE
AGENCIES Public Health Service Agencies
Overview The activities conducted and supported by the Public Health Service (PHS)
operating divisions represent this country's primary defense against acute
and chronic diseases and disabilities.  These programs provide the
foundation for the Nation's efforts in promoting and enhancing the
continued good health of the American people.  
These independent operating divisions include the  National Institutes of
Health (NIH), to advance our knowledge through research; the Food and
Drug Administration (FDA), to ensure the safety and efficacy of marketed
drugs, biological products, and medical devices; the Centers for Disease
Control and Prevention (CDC), to combat preventable diseases and protect
the public health; the Health Resources and Services Administration
(HRSA), to support the development, distribution, and management of
health care personnel, other health resources, and services; the Indian
Health Service (IHS), to improve the health status of Native Americans; the
Agency for Toxic Substances and Disease Registry (ATSDR), to address
issues related to Superfund toxic waste sites; the Agency for Health Care
Policy and Research (AHCPR), to enhance the quality and appropriateness
of health care services and access to services through scientific research and
the promotion of improvements in clinical practice and in the organization,
financing, and delivery of services; and the Substance Abuse and Mental
Health Services Administration (SAMHSA), to assist States in refining and
expanding treatment and prevention services.
Significant The Office of Inspector General (OIG) concentrates on such issues as
biomedical research, substance abuse, acquired immune deficiency
OIG
syndrome, and food and drug safety.  Significant unimplemented monetary
Activities
recommendations identified by the OIG relate to instituting and collecting
user fees for FDA activities and changing Office of Management and
Budget Circular A-21 to effect more productive use of Federal research
dollars at the Nation's colleges and universities.
Public Health Service Agencies Page 61  The 1999 Red Book I C
NSTITUTE AND  OLLECT
U F F S I
SER  EES FOR  OOD  AFETY  NSPECTIONS
Current Law:
The Food and Drug Administration currently imposes user fees for several activities, including color certification and
reconditioning of products.  In 1993, the FDA began collecting user fees for activities covered by the Prescription Drug
User Fee Act.  In the absence of specific authorizing legislation, the FDA is precluded by statute from imposing user fees
to cover additional functions.
Proposal:
User fees should be extended to various functions performed by FDA, possibly including premarket review and approvals
for devices, inspections of manufacturing facilities, and food processors and establishments.
Legislative Regulatory Other Administrative
TT
Reason for Action:
User fees, if properly instituted, represent a legitimate method to recover regulatory costs.  They provide FDA with
additional revenue that when tied to performance goals, as with the Prescription Drug User Fee Act of 1992, significantly
improves FDAs ability to protect the publics health.  Such additive user fees also benefit manufacturers when these
additional resources are used to make regulatory functions more efficient and predictable and provide increased
opportunity for manufacturers to participate in the regulatory process.  User fees properly reflect the value of discrete
benefits enjoyed by manufacturers from FDAs regulatory activities, such as increased consumer confidence in industrys
products and protection from unfair competition.  Such fees would be consistent with fee systems in other Federal
regulatory environments, such as the Environmental Protection Agency, the Federal Communications Commission, the
Federal Energy Regulatory Commission, and the Nuclear Regulatory Commission.
The imposition of additive user fees for major regulatory functions will provide FDA with increased revenue for needed
expansion of services and program improvements expanding FDAs ability to protect the publics health, improve agency
tracking of resources, and increase agency accountability for the costs of regulation.  
Savings (in millions):
 FY 1  FY 2  FY 3  FY 4  FY 5
$189.3 $195.0 $195.0 $195.0 $195.0
Status:
The total estimated collections for all user fees for FY 1998 were $152.5 million ($5.8 million from certification, $132.3
million from Prescription Drug User Fee activities, and $14.4 million from the Mammography Quality Standards Act.) 
The Presidents FY 1999 budget request included a provision to assess additional user fees that would mostly replace
existing base operations for foods, human drugs, biologics, animal drugs, and devices.  However, FDAs FY 1999
appropriation did not include this provision.  New legislation is required to authorize additional user fees.
Report:
OEI-12-90-02020 (Final report, July 1990)
OEI-05-90-01070 (Final report, Aug. 1991)
Food and Drug Administration Page 62 The 1999 Red Book R H A M R
EQUIRE  OSPITALS TO  CCEPT  EDICARE  ATES
I H S 
 IN THE  NDIAN  EALTH  ERVICE S 
C H S P
ONTRACT  EALTH  ERVICES  ROGRAM
Current Law:
In administering its Contract Health Services program--a private sector health care purchasing program--the Indian Health
Service relies on voluntary procurement activities with hospitals to obtain favorable rates for inpatient care.  The law
requiring hospitals to accept Medicare rates as payment in full applies to other Federal agencies with similar programs but
not to IHS.  
Proposal:
The IHS should revise its legislative proposal to incorporate the updated savings figures presented in our report and 
should identify elements to be included in the implementing regulations.  Also, IHS should continue to pursue the most
favorable rates at hospitals that have previously offered less than Medicare rates and should strategically identify and
pursue other opportunities where lower rates may be negotiated.
Legislative Regulatory Other Administrative
TT TT TT
Reason for Action:
As a Federal purchaser of inpatient health care from the private sector, IHS should receive rates commensurate with those
received by other Federal agencies that engage in similar purchases.  However, IHS paid as much as $8.2 million more
than Medicare rates for services provided in FY 1995 because there is no law requiring providers to offer Medicare or
lower rates and because the agency has not been fully successful in its efforts to obtain favorable rates through contracts
and other procurement mechanisms.  If the favorable Medicare rates were legislatively required, the dollars saved could be
applied to the backlog of patient services than cannot be accommodated in the Contract Health Services program.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$8.2   *   *   *   *
*Recurring, undetermined savings would result with the legislative change.
Status:
The IHS fully concurred with our recommendations and is (1) revising its legislative proposal for submission in the FY
2000 legislative cycle, (2) identifying elements to be developed in its implementing regulations, and (3) continuing its
efforts to obtain discounted rates throughout its service area.
Report:
A-15-97-50001 (Final report, Jan. 1999)
Indian Health Service Page 63 The 1999 Red Book P C
ROPOSE  HANGES TO 
O M B C A-21
FFICE OF  ANAGEMENT AND  UDGET  IRCULAR   
R R C
EGARDING  ECHARGE  ENTERS
Current Law:
The 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:
The Assistant Secretary for Management and Budget should propose changes to OMB Circular A-21 to improve
guidance on the financial management of recharge centers.  The revision should include criteria for (1) establishing,
monitoring, and adjusting billing rates to eliminate accumulated surpluses and deficits, (2) preventing the use of recharge
funds for unrelated purposes and excluding unallowable costs from the calculation of recharge rates, (3) ensuring that
Federal projects are billed equitably, and (4) excluding recharge costs from the recalculation of facilities and
administrative cost rates.
Legislative Regulatory Other Administrative
TT
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 facilities 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 with the circular change.
Status:
The Deputy Assistant Secretary for Grants and Acquisition Management concurred with our recommendations.  In
addition, the Council on Government Relations generally agreed and stated that the proposed criteria should be included
in the Compliance Supplement to OMB Circular A-133, which provides guidance to independent auditors in conducting
compliance audits of educational institutions.
Report:
A-09-96-04003 (Final report, Mar. 1997)
National Institutes of Health Page 64 The 1999 Red Book ADMINISTRATION FOR CHILDREN
AND FAMILIES Administration for Children and Families
Overview The Administration for Children and Families (ACF) provides Federal direction
and funding for State, local, and private organizations as well as for State-
administered programs designed to promote stability, economic security,
responsibility, and self-support for the Nation's families.  It also oversees a
variety of programs that provide social services to the Nation's children, youth,
and families; persons with developmental disabilities; and Native Americans.
To reduce dependency on welfare programs, the Personal Responsibility and
Work Opportunity Act of 1996 eliminated the Aid to Families with Dependent
Children, Emergency Assistance, and Job Opportunities and Basic Skills
Training programs as of FY 1997 and created the Temporary Assistance for
Needy Families (TANF) block grant.  The ACF oversees TANF, as well as the
Child Support Enforcement program, which provides grants to States to
enforce obligations of absent parents and to establish and enforce child support
orders, and the Head Start program, which provides comprehensive health,
educational, nutritional, social, and other services primarily to economically
disadvantaged preschool children and their families.  Also, the Foster Care and
Adoption Assistance program provides grants to States to assist with the cost
of foster care and special needs adoptions, as well as maintenance,
administrative, and staff training costs.  Other programs include Community
Services and the Child Welfare program.
Significant
The Office of Inspector General (OIG) reviews the cost effectiveness of ACF
OIG 
social services and assistance programs, including determining whether
Activities authorized services are provided to recipients at the lowest costs.  These
reviews have identified opportunities to improve the delivery of program
services, such as by requiring States to develop criteria and implement
procedures for ensuring that appropriate foster care cases are referred to State
child support enforcement agencies and increasing the number of noncustodial
parents who provide their children's medical support.
Administration for Children and Families Page 65 The 1999 Red Book R F C C
EFER  OSTER  ARE  ASES 
C S E A
TO  HILD  UPPORT  NFORCEMENT  GENCIES
Current Law:
Section 11 of the 1984 Child Support Amendment Act requires States to secure and enforce child support collections on
behalf of children receiving foster care maintenance payments under Title IV-E of the Social Security Act "where
appropriate."
Proposal:
As a condition of receiving Federal matching funds for foster care administration under Title IV-E, the ACF should
require States to develop criteria and implement procedures for ensuring that foster care agencies refer appropriate cases
to State child support agencies.  We believe this would increase child support collections on behalf of foster care children,
thus offsetting tax dollars spent for their care and maintenance.
Legislative Regulatory Other Administrative
TT TT
Reason for Action:
Collections were being made on behalf of only 5.9 percent of foster care children in our sample.  Few foster care cases are
referred to child support agencies for possible collections.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $11        $11  $11  $11  $11
Status:
Over the last several years, ACF has redesigned its program monitoring system for all child welfare services.  Also,
section 105 of Public Law 105-89 amended section 453 of the Social Security Act and requires the Federal Parent
Locator Service to be made available to child welfare agencies for the purpose of locating individuals who have or may
have parental rights with respect to a child.  The Children's Bureau and the Office of Child Support Enforcement plan to
discuss how best to implement these provisions.  While ACF is willing to implement a strategy to address our
recommendation in light of this new process, it did not agree with our estimate of potential savings. 
Report:
OEI-04-91-00530 (Final report, May 1992)
Administration for Children and Families Page 66 The 1999 Red Book I N N P
NCREASE THE  UMBER OF  ONCUSTODIAL  ARENTS
P T C ' M S
  ROVIDING  HEIR  HILDREN S  EDICAL  UPPORT 
R M C
AND  EDUCE  EDICAID  OSTS
Current Law:
The Omnibus Reconciliation Act of 1993 requires State IV-D agencies to establish medical support orders for children
when the noncustiodial parents have access to medical coverage.  The Personal Responsibility and Work Opportunity
Reconciliation Act of 1996 provides States with the authority to directly enroll children in noncustodial parents' health
plans.  The Congress subsequently passed the Child Support Performance and Incentive Act of 1998, P.L. 105-200,
which requires State child support agencies to use a National Medical Support Notice as a means of enforcement of the
health care coverage provisions in a child support order.
Proposal:
States have the opportunity to increase the number of noncustodial parents providing medical support for their children
and to reduce Medicaid costs by either (1) requiring noncustodial parents to pay for all or part of the Medicaid premiums
or (2) establishing health insurance plans for children with premiums paid by noncustodial parents.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Significant numbers of children under Connecticut's child support enforcement program did not receive medical support
from their noncustodial parents.  Medical support orders are not always enforceable, especially when health insurance is
not provided by employers or the cost is unreasonable for noncustodial parents. 
Savings (in millions):*
 FY 1  FY 2  FY 3  FY 4  FY 5
$11.4 $11.4 $11.4 $11.4 $11.4
*Savings to the Medicaid program in Connecticut only; nationwide savings not projected.  Additional savings could be
realized if a similar approach were applied to the newly created Federal/State Children's Health Insurance Program.
Status:
The ACFs Office of Child Support Enforcement (OCSE) is working to increase the number of noncustodial parents
providing their childrens medical support and reducing Medicaid costs.  In H.R. 3130, the Congress mandated the
Departments of Health and Human Services and Labor to establish a joint Medical Child Support Working Group to
examine a number of important impediments to effective enforcement of medical child support and report its
recommendations to the Congress.  OCSE anticipates that implementation of the working groups recommendations will
help to improve medical child support enforcement.  The OIG report is part of the groups deliberations.
Report:
A-01-97-02506 (Final report, June 1998)
Administration for Children and Families Page 67 The 1999 Red Book O G R
BTAIN  OVERNMENT  EIMBURSEMENT FOR 
H S G  U C
EAD  TART  RANTEES   NALLOWABLE  HARGES
Current Law:
Under Title 45 of the Code of Federal Regulations, non-Federal matching and cost sharing contributions must be verifiable
and allowable under the applicable cost principles, and the granting agency must preapprove certain changes in the budget
and in the grant award proposal.  In addition, compensatory time payments are allowed if they follow the grantee's own
policy for such payments.
Proposal:
The Federal Government should be reimbursed for ineligible expenditures.
Legislative Regulatory Other Administrative
TT
Reason for Action:
Grantees claimed unallowable costs, including (1) noncompliance with budget provisions and deviations from grant award
proposals ($1,532,072), (2) irregularities in financial accounting ($409,805), (3) noncompliance with preapproval
requirements for construction ($351,895), (4) lack of support for labor charges ($237,563), (5) unrecorded liabilities
($216,746), (6) unsupported non-Federal matching funds ($190,840), (7) payments for compensatory time ($30,186), and
(8) travel ($4,100).
Savings (in millions):
  FY 1  FY 2  FY 3  FY 4  FY 5
   $3
Status:
Some grantees did not agree with our findings and recommendations.  The ACF is using our findings and
recommendations as part of its monitoring activity.
Report:
A-02-95-02005 (Final report, Sept. 1995)
A-04-96-00107 (Final report, May 1997)
A-06-96-00062 (Final report, Aug. 1996)
A-06-96-00063 (Final report, Aug. 1996)
A-08-96-01024 (Final report, Feb. 1997)
A-10-96-00007 (Final report, Mar. 1997)
A-12-96-00017 (Final report, July 1996)
Administration for Children and Families Page 68 The 1999 Red Book GENERAL DEPARTMENTAL
MANAGEMENT General Departmental Management
Overview The Office of Inspector Generals (OIG) departmental management and
Governmentwide oversight role includes reviews of payroll activities,
accounting transactions, implementation of the Federal Managers
Financial Integrity Act and the Prompt Pay Act, financial management
audits under the Chief Financial Officers Act, grant and contract issues,
the Departments Working Capital Fund, conflict resolution, and
adherence to employee standards of conduct.  The OIG also
participates in interagency efforts through the Presidents Council on
Integrity and Efficiency and the Presidents Council on Management
Improvement to prevent losses to and abuses of Federal programs.
A related major responsibility flows from Office of Management and
Budget (OMB) Circular A-133, which designates HHS as cognizant
agency to audit the majority of the Federal funds awarded to major
research schools, State and local government cost allocation plans, and
separate indirect cost plans of State agencies and local governments. 
Also, OIG oversees the work of nonfederal auditors of Federal money
at some 6,700 entities, such as community health centers and Head
Start grantees, as well as at State and local governments, colleges and
universities, and other nonprofit organizations.  In addition, OIG is
responsible for auditing the Departments financial statements beginning
with the FY 1996 statements.
The OIGs work in departmental management and Governmentwide
oversight focuses principally on financial statement audits, financial
Significant management and managers accountability for resources entrusted,
standards of conduct and ethics, and Governmentwide audit oversight,
OIG
including recommending necessary revisions to OMB guidance.  The
Activities 
OIG also reviews the adequacy of States systems to control the growth
of administrative/indirect costs claimed for Federal financial
participation.
General Departmental Management Page 69  The 1999 Red Book I F S
MPROVE  UNDING  YSTEM FOR
W A C
ELFARE  DMINISTRATIVE  OSTS
Current Law:
The Federal Government pays for half of the administrative costs for most types of administrative activities in the
Medicaid program.  States have considerable latitude in defining their administrative costs.  Costs need only be considered
"reasonable and necessary" as outlined in OMB Circular A-87, Cost Principles for State and Local Governments.  In
1996, the Congress enacted the Temporary Assistance to Needy Families (TANF) block grant which provides grants to
States to provide cash to low-income individuals.  Since administrative costs are included in this grant, Federal
reimbursement for these costs is limited.  No such limits apply to the Medicaid program, however.
Proposal:
One of the following options should be used to fund administrative costs in the Medicaid program:
! Reduction in Medicaid special match rates to 50 percent. 
! Block grant.  Set a base amount, then provide inflationary increases each year.
! Standard cost per recipient.  Fund States based on a standard per recipient allocation amount.
! Cost per recipient cap.  Impose a cap on Federal reimbursement of the cost per recipient.
Legislative Regulatory Other Administrative
TT
Reason for Action:
The current method for reimbursing States for welfare administrative costs is unwieldy, inefficient, and unpredictable.  In
addition, there is considerable unexplained disparity in administrative costs among States and significant risk of an
increase in administrative costs overall.  With the new limits imposed on Federal funding of TANF administrative costs,
States have incentives to use accounting techniques to shift administrative costs to the Medicaid program in order to
receive Federal reimbursement for these costs.
Savings (in millions):
Options FY 1 FY 2 FY 3 FY 4 FY 5
Reduced special match $236 $273 $315 $362 $  415
Block grant   114   376   671   993  1,352
Standard cost per recipient     32     93   135   195     259
Capped cost per recipient     52     58     66     95       84
Status:
Medicaid administrative costs continue to be paid as they have in the past. 
Report:
OEI-05-91-01080 (Final report, Jan. 1995)
General Departmental Management Page 70  The 1999 Red Book P A T C U
ROPERLY  LLOCATE  RAINING  OSTS  NDER
F S P
EDERALLY  UPPORTED  ROGRAMS
Current Law:
The Federal Government reimburses States for a portion of the training costs for such programs as the Medicaid, Foster
Care, Food Stamp, and Temporary Assistance for Needy Families programs.  Under OMB Circular A-87 and various
regulations, these costs are required to be allocated to the benefitting State programs and adequately documented.
Proposal:
The States must ensure that training costs are allocated to all benefitting programs, appropriate allocation rates are
applied, and unallowable third-party contributions are not claimed.  
Legislative Regulatory Other Administrative
TT
Reason for Action:
The State agencies (1) charged training costs directly to the Federal programs instead of allocating appropriate portions of
the cost to the State-funded programs, which also benefit from the training; (2) claimed administrative costs at the
enhanced rate of 75 percent rather than the allowable rate of 50 percent; (3) provided insufficient documentation to
support costs claimed at the enhanced rate; (4) included duplicate claims; (5) used unallowable third-party contributions to
meet matching requirements; (6) claimed costs in excess of the actual costs; and (7) claimed unallowable costs for
facilities, equipment, and other miscellaneous items.
Savings (in millions):
 FY 1 FY 2 FY 3 FY 4 FY 5
$22.2
Status:
Both the National Association of State Budget Officers (NASBO) and the National Governors Association (NGA)
rejected the concept of a single administrative block grant based on concerns that either the Department or the Congress
could impose additional administrative requirements, such as caseload per worker quotas, without providing additional
funding.  In 1997 HHS issued the Assistant Secretary for Management & Budget (ASMB) C-10 which has government-
wide effect.  This document, required by OMB, provided implementing material for the A-87 cost principles, standardized
many cost accounting practices, closed a number of loopholes that worked to the detriment of the Federal Government,
and provided guidance in the documentation of costs such as time and effort reporting and working capital reserves.  The
ASMB will organize a working group of representatives from all the agencies to develop acceptable practices and
monitoring plans and will explore the possibility of improving the OMB Circular A-133 compliance supplement.
Report:
A-05-96-00043 (Final report, June 1997)
A-07-97-01028 (Final report, Aug. 1997)
A-09-96-00066 (Final report, Sept. 1997)
A-10-96-00004 (Final report, Sept. 1997)
General Departmental Management Page 71  The 1999 Red Book I A
NTERNET  DDRESS
The 1999 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://www.hhs.gov/progorg/oig