Department of Health & Human Services 
Office of Inspector General 
Cost-Saver Handbook 
THE 2001 
RED 
BOOK  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 
of the (OIG) cost-saving recommendations that have not been fully implemented. 
   
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 2001 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.  Over 80 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, Medicaid, and State Childrens Health Insurance 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 Healthcare 
Research and Quality, and the Substance Abuse and Mental Health 
Services Administration. They promote biomedical research and 
Introduction  Page 1  The 2001 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 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 
of the recommendations to each of the agencies listed above. Most of these 
   
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 2001 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 2001 Red Book  Table of Contents: 
   
Health Care Financing Administration
       
Annual  Page 
Savings 
(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 
$340  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 
$15  Preclude Payment for Mutually Exclusive Procedure Codes for Hospital 
Outpatient Services  14 
$48  Apply 190-Day Lifetime Limit for Medicare Inpatient Psychiatric Care 
and a 60-Day Annual Limit  15 
*These estimated savings have varying levels of precision. Further, the actual savings to be achieved 
depend 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 2001 Red Book
 Annual 
Savings 
(in millions)  Page 
$4  Preclude Improper Payments to Hospitals for Hospice Beneficiaries  16 
TBD  Eliminate Provider-Based Designations or Improve Management 
and Oversight  17 
Physicians
 
$138  Selectively Contract for Coronary Artery Bypass Graft Surgery  18 
$130  Expand National List of Chemistry Panel Tests  19 
$126  Encourage Physicians to Use Paperless Claims  20 
$90  Modify Medicare Incentive Payments in Health Professional 
Shortage Areas  21 
End Stage Renal Disease
       
$22  Reduce Medicare End Stage Renal Disease Payment Rates  22 
$94  Reduce the Epogen Reimbursement Rate  23 
$90  Ensure That Claims for Ambulance Services for End Stage Renal 
Disease Beneficiaries Meet Coverage Guidelines  24 
$15  Modify Payment Practices of Ambulance Services for Medicare 
End Stage Renal Disease Beneficiaries  25 
Durable Medical Equipment
     
$40  Limit Medicare Part B Reimbursement for Hospital Beds  26 
$7  Prevent Medicare Losses Resulting From Early Payments for 
Medical Equipment  27 
$12  Reduce Payments for Pressure Support Surfaces  28 
$1  Revise Medicare Guidelines for Coding Orthotic Body Jackets  29 
$1  Reduce Allowed Charges for Orthotic Body Jackets  30 
$43  Improve Billing Practices for Medicare Orthotics  31 
$7  Improve Guidelines for Therapeutic Footwear  32 
$79  Eliminate Inappropriate Billing for Blood Glucose Test Strips  33 
$65  Examine Payment Method for Parenteral Nutrition  34 
$28  Reduce and Control Enteral Nutrition Equipment Costs  35 
$15  Reduce Medicare Part B Payments for Enteral Nutrition at Home  36 
Health Care Financing Administration  Page ii  The 2001 Red Book
 Annual 
Savings 
(in millions)  Page 
$130  Minimize Payments for Portable Imaging Services  37 
$263  Improve Medical Reviews for Home Oxygen Therapy  38 
$19  Stop Inappropriate Payments for Hyperbaric Oxygen Therapy  39 
Medicare Managed Care
     
Over $3 billion  Modify Payments to Managed Care Organizations  40 
$2 billion  Adjust Managed Care Capitation Rates for Unrecovered 
Improper Payments  41 
Over $1 billion  Correct Overstated Managed Care Capitation Rates  42 
TBD  Pay Managed Care Organizations Only Reasonable Administrative 
Costs  43 
$500  Place a Ceiling on Administrative Costs Included in Managed Care 
Organizations Rate Proposals  44 
$150  Monitor Investment Income Earned by Risk-Based Managed Care 
Organizations  45 
TBD  Monitor Payments for End Stage Renal Disease Beneficiaries in 
Managed Care Plans  46 
$3  Prevent Payments to Managed Care Plans for Deceased Beneficiaries  47 
Other Medicare Reimbursement
     
$21  Eliminate Medicare Payments for Services After Death  48 
Over $1 billion  Change the Way Medicare Pays for Clinical Laboratory Tests  49 
$47  Prevent Inappropriate Medicare Payments for Clinical Laboratory Tests  50 
$12  Eliminate Vulnerabilities to Medicare of Independent Diagnostic 
Testing Facilities  51 
TBD  Require Physician Examination Before Ordering Home Health Services  52 
TBD  Ensure Validity of Medicare Hospice Enrollments  53 
TBD  Adjust Base-Year Costs in the Prospective Payment System 
for Skilled Nursing Facilities  54 
TBD  Eliminate Overpayments Under Consolidated Billing by 
Skilled Nursing Facilities  55 
Over $1 billion  Adequately Fund Medical Reviews of Therapy Services  56 
Health Care Financing Administration  Page iii  The 2001 Red Book
 Annual 
Savings 
in millions  Page 
$260  Strengthen Controls Over Partial Hospitalization Programs at 
Community Mental Health Centers  57 
$1 billion  Revise Medicare Prescription Drug Payment Methods  58 
$242  Establish Fee Schedule for Medicare Ambulance Payments  59 
$47  Allow Payment for Nonemergency Advanced Life Support Ambulance 
Services Only When Medically Necessary  60 
$104  Ensure the Medical Necessity of Ambulance Claims  61 
$78  Stop Inappropriate Payments for Chiropractic Maintenance Treatments  62 
$30  Establish Utilization Parameters for Chiropractic Treatments  63 
TBD  Provide Explicit Guidelines on Allowability of Institutional General 
and Administrative and Fringe Benefit Costs  64 
$9  Discontinue Use of a Separate Carrier to Process Medicare Claims 
for Railroad Retirement Beneficiaries  65 
TBD  Raise the Medicare Entitlement Age to 67  66 
$40  Improve Medicare Secondary Payer Safeguards  67 
TBD  Expand Medicare Secondary Payer Provisions for End Stage Renal 
Disease Benefits  68 
Medicaid Reimbursement
   
Over $4 billion  Modify the Formula for the Medicaid Program  69 
$7  Limit Medicaid Reimbursement for Higher Priced Generic Drugs 
to the Amount Reimbursed for Lower Priced Brand Name Drugs  70 
TBD  Establish Connection Between the Calculation of Medicaid Drug 
Rebates and Drug Reimbursement  71 
$123  Implement an Indexed Best Price Calculation in the Medicaid 
Drug Rebate Program  72 
$18  Install Edits to Preclude Improper Medicaid Reimbursement for 
Clinical Laboratory Services  73 
$683  Control Medicaid Payments to Institutions for Mentally 
Retarded People  74 
Health Care Financing Administration  Page iv  The 2001 Red Book
 Table of Contents: 
Public Health Service Agencies
       
Annual 
Savings 
(in millions)*  Page 
PUBLIC HEALTH SERVICE AGENCIES  75 
$8  Require Hospitals to Accept Medicare Rates in the Indian Health Service's 
Contract Health Services Program  76 
$2  Propose Changes to Office of Management and Budget Circular A-21 
Regarding Recharge Centers  77 
* Theseestimatedsavingshavevaryinglevelsofprecision. Further, the actualsavingstobeachieved
dependonthe specificlegislative, regulatory, oradministrativeactiontaken. However, the estimates
listed providea generalindicationofthe magnitudeofsavingspossible. 
Public Health Service Agencies  Page v  The 2001 Red Book
 Table of Contents: 
Administration for Children and Families
         
Annual 
Savings 
(in millions)*  Page 
ADMINISTRATION FOR CHILDREN AND FAMILIES  78 
$78  Recover Unallowable Foster Care Maintenance Payments and 
Administrative Costs  79 
$4  Obtain Government Reimbursement for Head Start Grantees 
Unallowable Charges  80 
$261  Recover Costs Claimed Under the Emergency Assistance Program  81 
$0.1  Recover Unallowable Office of Community Services Discretionary Grant 
Charges  82 
* Theseestimatedsavingshavevaryinglevelsofprecision. Further, the actualsavingstobeachieved
dependonthe specificlegislative, regulatory, oradministrativeactiontaken. However, the estimates
listed providea generalindicationofthe magnitudeofsavingspossible. 
Administration for Children and Families  Page vi  The 2001 Red Book
 Table of Contents: 
General Departmental Management
     
Annual  Page 
Savings 
(in millions)* 
GENERAL DEPARTMENTAL MANAGEMENT  83 
$276  Improve Funding System for Welfare Administrative Costs  84 
* Theseestimatedsavingshavevaryinglevelsofprecision. Further, the actualsavingstobe
achieveddependonthe specificlegislative, regulatory, oradministrativeactiontaken. 
However, the estimateslisted providea generalindicationofthe magnitudeofsavingspossible. 
General Departmental Management  Page vii  The 2001 Red Book
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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 or unless, 
with some exceptions, they were covered under a qualified retirement system offered by their employers. (See the 
Omnibus Budget Reconciliation Act of 1990.) 
Proposal: 
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 
TTTT 
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 FY 2001 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 2001 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 inpatient hospital capital-related 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 
TTTT 
Reason for Action: 
Hospital capital costs soared during the first 5 years of the prospective payment system (PPS) for inpatient hospital 
costs, 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 regulation, 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 (BBA) of 1997 reduced capital 
payments, it did not include the effect of excess bed capacity and other elements included in the base-year historical 
costs. The Presidents FY 2001 budget would reduce capital payments and save $630 million in FY 2001 through 
FY 2005. 
Report: 
A-09-91-00070 (Final report, Apr. 1992) 
A-14-93-00380 (Final report, Apr. 1993) 
Health Care Financing Administration  Page 3  The 2001 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 
TTTT 
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 2001 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 address the presumably higher costs incurred by 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 
TTTT 
Reason for Action: 
Our extensive analytical work showed that teaching hospitals earned substantial profits. In addition, a Prospective 
Payment Assessment Commission report found that the indirect medical education adjustment substantially 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 (as amended by the 
Balanced Budget Refinement Act of 1999) reduces the indirect medical education adjustment factor from 7.7 percent in 
FY 1997 to 5.5 percent in 2002 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 2001 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 direct cost of graduate 
medical education. Under the revised methodology, 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 
TTTT 
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 and the Balanced 
Budget Refinement Act of 1999 contained provisions to slow the growth in Medicare spending on graduate medical 
education, we continue to believe that our recommendations should be implemented and that further savings can be 
achieved. 
Report: 
A-06-92-00020 (Final report, Apr. 1994) 
Health Care Financing Administration  Page 6  The 2001 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 
TTTT 
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 2001 Red Book  M P P
ODIFY AYMENT OLICY
     
M B D
FOR EDICARE AD EBTS
       
Current Law: 
Under Medicare's inpatient hospital prospective payment system, hospitals are reimbursed for inpatient services 
rendered to Medicare beneficiaries by a fixed payment amount based on a 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 
TTTT 
Reason for Action: 
The HCFA's records showed that total Medicare bad debts increased from $366 million in FY 1993 to almost 
$574 million in FY 1997. During this same period, hospitals continued to earn significant profits. 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 
$340  $485  $485  $485  $485 
*Amounts total the savings shown in the Presidents FY 2001 budget. 
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 FY 2001 budget proposes to reduce 
the percentage (from 55 percent to 45 percent) that Medicare pays hospitals for bad debts. 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 2001 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. 
Legislative  Regulatory  Other Administrative 
TTTT 
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 FY 2001 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 2001 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 the operating costs of inpatient hospital services. Under this system, hospitals are paid a predetermined rate 
for each patient discharge. In the past, peer review organizations (PRO) regularly 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 regular reviews were discontinued in 1993, but the PROs continue to make 
retrospective reviews of premature discharges in other contexts. 
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 
TTTT 
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: 
The HCFA agreed to further work with the OIG to better monitor quality of care and overpayment issues associated 
with hospital readmissions. At HCFAs request, the OIG also provided HCFA with further analysis of the patterns of 
readmissions. 
Report: 
A-01-98-00504 (Final report, May 1999)
A-14-99-00401 (Final report, Feb. 2000) 
Health Care Financing Administration  Page 10  The 2001 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 for inpatient hospital services, Medicare fiscal intermediaries reimburse 
hospitals a predetermined amount for inpatient services furnished to Medicare beneficiaries depending on the illness 
and its classification under a diagnosis related group. Currently, separate payments for nonphysician outpatient
services (such as diagnostic tests and laboratory tests) provided to the patient during the 3 days immediately preceding
the patients 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 
TTTT 
Reason for Action: 
Our review identified about $83.5 million in admission-related nonphysician outpatient services rendered 4 to 7 days
immediately before an inpatient admission. Since the intent of the PPS has always been to include related services 
under one prospective payment, it would seem appropriate that the DRG payment window encompass a longer period. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$83.5  $83.5  $83.5  $83.5  $83.5 
Status: 
The HCFA did not concur with the recommendation to further expand the payment window. No legislative proposal 
was included in the President's FY 2001 budget. 
Report: 
A-01-92-00521 (Final report, July 1994) 
Health Care Financing Administration  Page 11  The 2001 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 surgical 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 surgical 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. The prospective payment system for these 
services became effective on August 1, 2000. 
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 
TTTT 
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 surgical 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 surgical centers. 
Included in the Balanced Budget Act of 1997 was the requirement to develop a prospective payment system for hospital
outpatient services, as well as provisions to eliminate a formula-driven overpayment. We are assessing the prospective 
payment systems initial implementation procedures. 
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 2001 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. 
Legislative  Regulatory  Other Administrative 
TTTT 
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 that further work should be done to examine the adequacy of 
base-year costs. 
Report: 
A-14-98-00400 (Final report, Nov. 1998) 
Health Care Financing Administration  Page 13  The 2001 Red Book  P P M E P
RECLUDE AYMENT FOR UTUALLY XCLUSIVE ROCEDURE
           
C H O S
ODES FOR OSPITAL UTPATIENT ERVICES
         
Current Law: 
The HCFA requires Medicare carriers to implement edits for mutually exclusive procedure codes in their claim 
processing systems. Mutually exclusive procedure codes represent medical services that cannot reasonably be 
performed in the same session, to the same patient, and by the same provider. When the edits identify pairs of mutually
exclusive codes, the procedure with the lowest work relative value unit is allowed and the matching procedure is denied. 
Proposal: 
The HCFA should instruct fiscal intermediaries (FIs) to implement edits to preclude payment for Medicare Part B 
mutually exclusive procedure codes as well as notify hospital providers that Medicare Part B will no longer pay for 
mutually exclusive procedure codes related to radiology and pathology/laboratory services. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
While HCFA established edits to preclude payment for certain Medicare Part B mutually exclusive services provided in 
doctors offices or clinics, payment for the same type of services was not prevented when provided in a hospital
outpatient department. Of particular dollar significance was payment for mutually exclusive radiology and 
pathology/laboratory services. Unlike Medicare carriers, the FIs were not provided written instructions to implement
edits that would preclude payment of mutually exclusive procedure codes to hospital outpatient departments. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$14.55  $14.55  $14.55  $14.55  $14.55 
Status: 
The HCFA agreed to instruct FIs to implement edits addressing mutually exclusive procedure codes. The edits for 
hospital outpatient services will be implemented as a component of the correct coding initiative edits when the new 
outpatient prospective payment system is implemented, effective August 1, 2000. The HCFA also agreed to notify
hospitals that Medicare Part B would no longer pay for mutually exclusive procedure codes related to radiology and 
pathology/laboratory services. 
Report: 
A-01-98-00507 (Final report, May 1999) 
Health Care Financing Administration  Page 14  The 2001 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 
TTTT 
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 agreed with our findings but stated that further analysis would be required before any legislative changes
could be supported. 
Report: 
A-06-86-62045 (Final report, Feb. 1988) 
Health Care Financing Administration  Page 15  The 2001 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 
TTTT 
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 16  The 2001 Red Book  E P -B D
LIMINATE ROVIDER ASED ESIGNATIONS OR
       
I M O
MPROVE ANAGEMENT AND VERSIGHT
       
Current Law: 
Hospitals often purchase a variety of other medical entities, such as physician practices, nursing facilities, and home 
health agencies. Under Medicare, hospitals may account for medical entities they own as either freestanding or as part
of the hospital. If a hospital accounts for an entity as part of the hospital, it is referred to as a provider-based 
arrangement. This arrangement requires approval from HCFA. Provider-based status increases costs for Medicare and 
its beneficiaries. 
Proposal: 
The HCFA should eliminate provider-based designations for hospital-owned physician practices and other entities. 
Otherwise, HCFA should (1) seek legislation to impose penalties when hospitals fail to report ownership of other 
entities or bill for these entities inappropriately; (2) improve the data systems used to identify and track provider-based 
designations and clarify policies and procedures for tracking, approving, and evaluating provider-based status; and (3)
require that all hospitals claiming provider-based status reapply. 
Legislative  Regulatory  Other Administrative 
TTTT TTTT 
Reason for Action: 
Our inspections found that hospitals purchased entities such as physician practices and billed for these entities as 
provider-based without HCFAs approval. The HCFA regional offices and fiscal intermediaries did not consistently
follow HCFA processes for review and approval of provider-based status and were frequently unaware of hospital
practices in purchasing and billing for other entities. At issue is whether the site, or ownership of the site where the 
service is rendered, should dictate a higher payment by Medicare and the beneficiary. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
Status: 
The HCFA published a final rule establishing strict criteria for obtaining provider-based status. The metholology for 
determining such status is undergoing clarification, and a provider-based questionnaire is being developed. All 
provider-based physician practices will be required to obtain a provider-based designation from the HCFA regional
office. The HCFA is considering collecting information on physician practices, which are being billed as provider-
based, as part of its proposed provider revalidation effort. 
Report: 
OEI-05-98-00110 (Final report, Sept. 1999)
OEI-04-97-00090 (Final report, Aug. 2000) 
Health Care Financing Administration  Page 17  The 2001 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 
TTTT 
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 FY 2001 budget again requests
this authority. 
Report: 
OEI-09-89-00076 (Final report, Aug. 1987) 
Health Care Financing Administration  Page 18  The 2001 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 
TTTT 
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 reduce laboratory payments for four tests 
is included in the Presidents FY 2001 budget. 
Report: 
A-01-93-00521 (Final report, Jan. 1995) 
Health Care Financing Administration  Page 19  The 2001 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 81.3 percent in April 1999. 
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 
TTTT TTTT 
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 FY 2001 budget proposes to allow an assessment of 
a $1 fee on each claim not submitted electronically. Also, as part of implementing the Health Insurance Portability and 
Accountability Act, significant outreach activity to providers will be conducted. The HCFA anticipates that the acts 
standards will eventually raise physician participation in electronic media claims. 
Report: 
OEI-01-94-00230 (Final report, May 1996)
A-05-94-00039 (Final report, May 1996) 
Health Care Financing Administration  Page 20  The 2001 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 
TTTT 
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. The Presidents FY 2001 budget would eliminate 
the bonus payments for non-primary-care physicians in urban areas. 
Report: 
OEI-01-93-00050 (Final report, June 1994) 
Health Care Financing Administration  Page 21  The 2001 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 
TTTT 
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 
was 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. Section 222 of the BBA of 1999 
increased each composite rate payment for dialysis services furnished during 2000 by 1.2 percent above the payment
for services provided on December 31, 1999, and for services during 2001 by 1.2 percent above the payment for 
services provided on December 31, 2000. 
Report: 
A-14-90-00215 (Final management advisory report, July 1990) 
Health Care Financing Administration  Page 22  The 2001 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 
TTTT TTTT 
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 Presidents FY 2001 budget proposes to reduce Medicares reimbursement for Epogen. 
Report: 
A-01-97-00509 (Final report, Nov. 1997) 
Health Care Financing Administration  Page 23  The 2001 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 
TTTT 
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 problematic; we plan to conduct additional analytical work on this topic. 
Report: 
OEI-03-90-02130 (Final report, Aug. 1994) 
Health Care Financing Administration  Page 24  The 2001 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 
TTTT  TTTT 
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. In June 1997, HCFA issued a notice of proposed rulemaking which would 
require physician certification of nonemergency transports. The Balanced Budget Act of 1997 authorized the 
establishment of a fee schedule for ambulance services which links payments to the type of services provided. 
Report: 
OEI-03-90-02131 (Final report, Mar. 1994) 
Health Care Financing Administration  Page 25  The 2001 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 
TTTT  TTTT 
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. However, the Balanced Budget Refinement Act of 
1999 imposed a moratorium on the application of HCFAs inherent reasonableness authority. Thus, while the 
moratorium is in place, HCFA may not act on a determination that costs are excessive. The Presidents FY 2001 
budget includes a proposal to reduce durable medical equipment payment updates from 2003 through 2005. 
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 26  The 2001 Red Book  P M L R
REVENT EDICARE OSSES ESULTING
       
F E P M E
ROM ARLY AYMENTS FOR EDICAL QUIPMENT
           
Current Law: 
Medicare covers durable medical equipment, prosthetics, orthotics, and supplies under Medicare Part B. Medicare 
allowed approximately $6 billion for these claims in 1998. 
Proposal: 
We recommend that HCFA not pay for durable medical equipment, prosthetics, orthotics, and supply claims before the 
service period has been completed. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
We found that Medicare could have earned an additional $7.2 million in interest on 1998 payments for claims that were 
billed before the end of the service period. Four of seven insurers surveyed did not pay for services before the service 
period was completed. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$7.2  $7.2  $7.2  $7.2  $7.2 
Status: 
The HCFA did not concur with our recommendation. 
Report: 
OEI-03-99-00620 (Final report, June 2000) 
Health Care Financing Administration  Page 27  The 2001 Red Book  R P P S S
EDUCE AYMENTS FOR RESSURE UPPORT URFACES
           
Current Law: 
Durable medical equipment provided in a beneficiary's residence is generally billed 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 
TTTT 
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 28  The 2001 Red Book  R M G C
EVISE EDICARE UIDELINES FOR ODING
         
O B J
RTHOTIC ODY ACKETS
     
Current Law: 
Body jackets are spinal orthotic devices that are covered by Medicare when prescribed by a physician. Code L0430 is 
defined as a custom-fitted, one-piece molded plastic body jacket with interface material and an anterior or posterior
opening. 
Proposal: 
The HCFA should review and revise the Medicare coding guidelines for orthotic jackets and require suppliers to include 
more information on their Medicare claims. Specifically, HCFA should use a product classification listing to define 
exactly which products should be billed under code L0430. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
We found that suppliers upcoded 42 percent of 1996 L0430 body jacket claims. Lack of uniformity and standardization 
in the Medicare guidelines may account for some upcoding. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$0.8  $0.8  $0.8  $0.8  $0.8 
Status: 
The HCFA agreed that a product classification list is an effective tool to define exactly which products should be billed 
under code L0430 but did not agree with our recommendation to revise Medicare coding guidelines. 
Report: 
OEI-04-97-00390 (Final report, Sept. 1999) 
Health Care Financing Administration  Page 29  The 2001 Red Book  R A C O B J
EDUCE LLOWED HARGES FOR RTHOTIC ODY ACKETS
             
Current Law: 
Body jackets are spinal orthotic devices that are covered by Medicare when prescribed by a physician. Code L0430 is 
defined as a custom-fitted, one-piece molded, plastic body jacket with interface material and an anterior or posterior
opening. 
Proposal: 
The HCFA should determine the appropriateness of Medicare-allowed charges for orthotic body jackets and adjust
Medicare reimbursement accordingly. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
We found that Medicare often paid more for orthotic body jackets than did Medicaid or Tricare (the health care 
program for active duty and retired members of the uniformed services, their families, and survivors). We also found 
that Medicare reimbursement rates greatly exceeded the prices that suppliers paid for orthotic body jackets. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
                   $0.22-$0.77  $0.22-$0.77  $0.22-$0.77  $0.22-$0.77  $0.22-$0.77 
Status: 
The HCFA agreed to review Medicare-allowed amounts for orthotic body jackets once new final regulations on inherent 
reasonableness have been published. 
Report: 
OEI-04-97-00391 (Final report, Mar. 2000) 
Health Care Financing Administration  Page 30  The 2001 Red Book  I B P M O
MPROVE ILLING RACTICES FOR EDICARE RTHOTICS
           
Current Law: 
Medicare pays for orthotic devices which are defined by regulation as leg, arm, back, and neck braces and artificial legs, 
arms, and eyes, including replacements if required because of a change in the beneficiary's physical condition. Orthotic 
devices, which are mainly covered under Medicare Part B, must be reasonable and necessary for the diagnosis or 
treatment of an illness or injury or to improve the functioning of a malformed body member. 
Proposal: 
The HCFA should improve Medicare billing for orthotics, including development of standards required for suppliers of 
custom molded/fabricated devices. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
Our recent review found continued inappropriate Medicare reimbursement for orthotics at significant levels. Thirty 
percent of beneficiaries have one or more miscoded devices. We also found that qualifications of orthotic suppliers 
vary, with noncertified suppliers in our sample the most likely to provide inappropriate devices. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$43  $43  $43  $43  $43 
Status: 
Although HCFA concurred with our original recommendations, problems continue. 
Report: 
OEI-02-95-00380 (Final report, Oct. 1997)
OEI-02-99-00120 (Final report, Mar. 2000)
OEI-02-99-00121 (Final report, Mar. 2000) 
Health Care Financing Administration  Page 31  The 2001 Red Book  I G T F
MPROVE UIDELINES FOR HERAPEUTIC OOTWEAR
         
Current Law: 
The Medicare Part B benefit covers therapeutic footwear for beneficiaries with diabetes and one or more of six 
qualifying conditions. A doctor of medicine or a doctor of osteopathy who is treating the beneficiarys systemic
diabetic condition under a comprehensive plan of care must certify the need for therapeutic footwear. 
Proposal: 
The HCFA should make Medicare coverage guidelines more explicit and improve documentation requirements for 
therapeutic footwear. The HCFA should also ensure that the therapeutic footwear benefit contains quality assurance 
safeguards. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
We found that the documentation for 57 percent of therapeutic shoe claims included in our sample was missing or 
inadequate. We also found that because Medicare guidelines do not clearly define qualifications of nonphysician
entities who furnish therapeutic footwear, quality assurance was problematic. We note the potential for enormous 
growth in the shoe program, with less than 1 in 50 Medicare-aged diabetics receiving shoes in 1996. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$7  $7  $7 $7  $7 
Status: 
The HCFA concurred with our recommendations but indicated that implementation and related monitoring would be 
difficult given resource constraints. 
Report: 
OEI-03-97-00300 (Final report, Aug. 1998) 
Health Care Financing Administration  Page 32  The 2001 Red Book  E I B
LIMINATE NAPPROPRIATE ILLING FOR
       
B G T S
LOOD LUCOSE EST TRIPS
       
Current Law: 
Medicare covers home blood glucose monitors and test strips for beneficiaries who must periodically test their blood 
sugar levels as part of their diabetes management, regardless of insulin usage. 
Proposal: 
The HCFA should (1) eliminate the inappropriate billings identified in our review by alerting suppliers to the 
importance of properly completing documentation to support claims for test strips and (2) require suppliers to indicate 
actual, accurate start and end dates on claim forms. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
We found that Medicare allowed $79 million for blood glucose test strips based on claims with missing or flawed 
documentation. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$79  $79  $79  $79  $79 
Status: 
The HCFA concurred with our recommendations. 
Report: 
OEI-03-98-00230 (Final report, June 2000) 
Health Care Financing Administration  Page 33  The 2001 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 
TTTT TTTT 
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. The Administrations FY 2001 budget 
proposes reducing the payment updates for parenteral and enteral items from 2003 through 2005. 
Report: 
OEI-03-96-00230 (Final report, July 1997) 
Health Care Financing Administration  Page 34  The 2001 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 
TTTT TTTT 
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. The Administrations FY 2001 
budget proposes reducing the payment updates for parenteral and enteral items from 2003 through 2005. 
Report: 
OEI-03-94-00022 (Final report, June 1997) 
Health Care Financing Administration  Page 35  The 2001 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 
TTTT 
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. The Administrations FY 2001 budget proposes reducing
the payment updates for parenteral and enteral items from 2003 through 2005. 
Report: 
OEI-03-94-00021 (Final report, Apr. 1996) 
Health Care Financing Administration  Page 36  The 2001 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. Before the 
prospective payment system for skilled nursing facilities was implemented, imaging services consisted of several 
components--technical, professional, transportation, and setup--depending on the type of service and where and by
whom it was 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 
TTTT  TTTT TTTT 
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 37  The 2001 Red Book  I M R H O T
MPROVE EDICAL EVIEWS FOR OME XYGEN HERAPY
             
Current Law: 
Medicare covers home oxygen therapy for beneficiaries diagnosed with significant hypoxemia (a deficiency in the 
amount of oxygen in the blood). A physician-signed certificate of medical necessity is required for payment. The 
Balanced Budget Act of 1997 mandated that the Secretary establish specific service standards for oxygen equipment as 
soon as practicable. Home oxygen therapy, for which over $2 billion was paid in 1997, accounts for the largest portion
of Medicare payments for durable medical equipment. 
Proposal: 
The HCFA should target oxygen equipment claims for focused medical review and ensure that edits are in place at 
durable medical equipment regional carriers to identify incomplete certificates of medical necessity. Further, HCFA 
should work quickly to establish specific service standards for home oxygen equipment as mandated by the BBA. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
Nearly one-quarter of oxygen certificates of medical necessity included in our study were inaccurate or incomplete. We 
estimate that the resultant cost to Medicare in 1996 was $263 million. We also found that while all beneficiaries in our 
sample used their stationary oxygen equipment, 13 percent of them never used their portable systems, which resulted in 
a cost to Medicare of about $9.7 million in 1996. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
Certificates  $263.0  $263.0  $263.0  $263.0  $263.0 
Portable systems  9.7  9.7  9.7  9.7  9.7 
Status: 
The HCFA concurred with our recommendations and formed a regulation team to develop proposed standards for 
suppliers of home oxygen equipment. 
Report: 
OEI-03-96-00090 (Final report, Aug. 1999) 
Health Care Financing Administration  Page 38  The 2001 Red Book  S I P
TOP NAPPROPRIATE AYMENTS FOR
       
H O T
YPERBARIC XYGEN HERAPY
     
Current Law: 
Hyperbaric oxygen therapy (HBO2) was originally developed for the treatment of decompression sickness, but its 
primary use in the United States is for wound care. The HCFA Coverage Instruction Manual, section 35-10, establishes 
14 conditions for which hyperbaric therapy is reimbursable. 
Proposal: 
The HCFA should (1) initiate its national coverage decision process for HBO2, (2) strengthen policy guidance by
clarifying existing language and incorporating new guidance on issues such as physician attendance and documentation, 
and (3) improve oversight of this procedure by requiring contractors to implement appropriate edits and medical review 
standards. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
Our inspection found substantial inappropriate payments in the $49.9 million allowed for outpatient hospital and 
physician charges for HBO2 in 1997-98. Inappropriate payments were made for treatments that either were not in 
compliance with HCFA guidelines or did not have sufficient documentation to support reimbursement, treatments 
deemed to be excessive, and treatments that lacked appropriate testing or monitoring.  Inappropriate payments resulted 
from abuse of or confusion over the current coverage policy, treating physicians medical opinions that did not align
with HCFA guidelines, inconsistent application of coverage criteria, inadequate documentation, and a failure by 
contractors to implement appropriate edits and medical review standards. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$19.1  $19.1  $19.1  $19.1  $19.1 
Status: 
We are awaiting agency comments. 
Report: 
OEI-06-99-00090 (Draft report, July 2000) 
Health Care Financing Administration  Page 39  The 2001 Red Book  M P
ODIFY AYMENTS TO
     
M C O
ANAGED ARE RGANIZATIONS
     
Current Law: 
The Balanced Budget Act of 1997 established the Medicare+Choice (M+C) program with the primary goal of providing 
a wider range of health plan choices to Medicare beneficiaries. The act also modified the payment methodology under 
the M+C program to correct excess payments, reduce geographic variations in payment, and align managed care 
organization (MCO) payments to reflect beneficiaries health status. 
Proposal: 
The HCFA should modify monthly capitation rates to a level fully supported by empirical data. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
While some BBA provisions reduced payments to MCOs, the overall impact of BBA is that MCO payments for 
Calendar Year (CY) 2000 will be about 95.5 percent of the average amount paid in the Medicare fee-for-service (FFS) 
sector. Because the Balanced Budget Refinement Act of 1999 delayed full implementation of the health status risk 
adjustment factor, MCOs will receive about $1.8 billion more in CY 2000 Medicare payments than they would have 
received had the full risk adjustment been implemented. The BBA-required minimum 2 percent annual increase in 
MCO payments proved beneficial to MCOs overall. If MCOs had been paid under the pre-BBA payment methodology, 
that is, based on annual costs in the FFS sector, Medicare payments in 1998 and 1999 would have been lower than what 
was actually paid to MCOs. We believe that the effect is over $1.5 billion for CY 2000 MCO payments. In addition, 
several OIG reviews have shown that other factors should be considered when evaluating MCO payment rates. These 
include improper payments included in the 1996 FFS payments used to develop the 1997 base-period MCO payments; 
unaccounted-for investment income earned by MCOs on Medicare funds, resulting in about a 0.5 percent increase in 
MCOs payments; and excessive administrative costs, equivalent to about 1.3 percent of CY 2000 Medicare MCO 
payments, included as part of MCOs annual submissions to HCFA of revenue needs. We found that MCOs receive 
more than an adequate amount of funds to deliver the Medicare package of covered services; the base of payments on 
which MCOs are paid is incorrect, resulting in higher than necessary monthly capitation payments; and Medicare 
payments have been made to fund excessive administrative costs at MCOs. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
                      $3,500  $3,500  $3,500  $3,500  $3,500 
Status: 
The HCFA agreed that M+C payments are adequate to fund the Medicare package of covered services. Agency
officials stated that they will move toward full implementation of a risk adjustment methodology that will incorporate
diagnosis data from physician services and hospital outpatient services. 
Report: 
A-14-00-00212 (Final report, Sept. 2000) 
Health Care Financing Administration  Page 40  The 2001 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 a 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 the base 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 
TTTT 
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 
$2,000  $2,000  $2,000  $2,000  $2,000 
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 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. 
Subsequent to our report, the Congress modified the reductions of the BBA, and a legislative proposal was introduced to 
change the managed care payment system based on the BBA to a system based on bids submitted by the plans. The 
congressional change resulted in increasing managed care payments; the legislative proposal was not enacted. 
Report: 
A-14-97-00206 (Final report, Sept. 1998) 
Health Care Financing Administration  Page 41  The 2001 Red Book  C O M C C R
ORRECT VERSTATED ANAGED ARE APITATION ATES
           
Current Law: 
The Balanced Budget Act of 1997 revised the Medicare payment methodology for managed care organizations (MCOs)
effective January 1998. The calculation uses as a base the 1997 county-specific rates. The BBA does not allow any
adjustments to the 1997 base, other than a reduction for a small portion of the rates applicable to medical education 
expenses. The 1997 rates are updated each year by the national average per capita increase in Medicare expenditures
minus a percentage specified in the law. The resulting capitation rate is the basis for Medicare payments to MCOs. 
Proposal: 
The HCFA should seek legislation to correct the overstated base-year rates or eliminate any future increases in managed 
care capitation rates. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
Information provided by HCFA shows that the 1997 standardized county rates were based on actuarial estimates and, 
when compared with actual costs incurred, were overstated by 3.1 percent. Because the BBA established the 1997 
county rates as the base year, all future managed care capitation rates will include this overstatement. To develop our 
savings estimate, we applied the 3.1 percent overstatement to Congressional Budget Office projections of future 
Medicare payments to MCOs. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
 $1,260  $1,480  $1,350  $1,630  $1,850 
Status: 
The HCFAs response to our draft report stated that the Presidents Medicare reform package included a proposal to 
change the methodology used to set payment rates for MCOs. Because this new methodology would not use the 
overstated base-year rates enacted under the BBA of 1997, HCFA believed the legislation we recommended, correcting
the base-year rates, was unnecessary. The Medicare reform package is included in the Administrations FY 2001 
budget. 
Report: 
A-05-99-00025 (Final report, Dec. 1999) 
Health Care Financing Administration  Page 42  The 2001 Red Book  P M C O O R
AY ANAGED ARE RGANIZATIONS NLY EASONABLE
           
A C
DMINISTRATIVE OSTS
   
Current Law: 
Following a HCFA-prescribed methodology, each risk-based managed care organization is required to submit an 
adjusted community rate proposal before the beginning of the contract period. Through this process, MCOs present
HCFA their estimate of the funds needed to provide the Medicare package of covered services to enrolled beneficiaries. 
The estimated funds are calculated to cover the plans medical and administrative costs for the upcoming year. 
Administrative costs include marketing, taxes, depreciation, reinsurance, interest, and other nonmedical compensation. 
Proposal: 
The HCFA should pursue legislation to require risk-based MCOs, when estimating administrative costs, to follow 
Medicares general principle of paying only reasonable costs. The HCFA should also publish the administrative cost 
rates of all MCOs participating in the Medicare program. 
Legislative  Regulatory  Other Administrative 
TTTT TTTT 
Reason for Action: 
Our review of the administrative costs included in the 1997 proposals submitted by nine MCOs found that $66.3 million 
of the actual administrative costs incurred by the MCOs would have been recommended for disallowance had the 
MCOs been required to follow Medicares general principle of paying only reasonable costs. Since no statutory or 
regulatory authority exists governing allowability of costs included in the rate proposal, the MCOs were not required to 
adhere to this principle. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
Status: 
The HCFA did not agree with our recommendations. 
Report: 
A-03-98-00046 (Final report, Jan. 2000) 
Health Care Financing Administration  Page 43  The 2001 Red Book  P C A C I
LACE A EILING ON DMINISTRATIVE OSTS NCLUDED IN
               
M C O  R P
ANAGED ARE RGANIZATIONS   ATE ROPOSALS
       
Current Law: 
Each risk-based managed care organization is required to submit an adjusted community rate proposal to HCFA before 
the beginning of the contract period.  Administrative costs, which are one component of the proposal, include costs 
associated with facilities, marketing, taxes, depreciation, reinsurance, interest, and other nonmedical compensation. 
Unlike other areas of the Medicare program, HCFA does not require a reasonable percentage or ceiling on the 
administrative cost rate proposed. 
Proposal: 
The HCFA should institute a ceiling on the administrative costs permitted in an MCO proposal. We suggest an 
administrative rate ceiling of 15 percent of total revenue requirements, which was MCOs average rate during our 
review period (1996 to 1999). 
Legislative  Regulatory  Other Administrative 
TTTT TTTT 
Reason for Action: 
As a percentage of the total rate proposed, the administrative rate varied widely among MCOs reviewed, regardless of 
the type of MCO (individual practice association, group, or staff) or the tax status (profit or nonprofit). For the 1999 
rate proposals, the amount allocated for administrative purposes ranged from a high of 32 percent to a low of 3 percent. 
Using 1998 data, if a 15 percent ceiling had been applied to the MCOs we reviewed, an additional $1 billion could have 
been passed on to the beneficiaries in the form of additional benefits or reduced payments (e.g., deductibles and/or 
coinsurance). 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$500  $500  $500  $500  $500 
Status: 
Although HCFA agreed that it should more thoroughly analyze rate proposals, it did not agree with our recommendation 
to institute a ceiling on the administrative costs included in an MCO rate proposal. 
Report: 
A-14-98-00210 (Final report, Jan. 2000) 
Health Care Financing Administration  Page 44  The 2001 Red Book  M I I E R -B
ONITOR NVESTMENT NCOME ARNED BY ISK ASED
           
M C O
ANAGED ARE RGANIZATIONS
     
Current Law: 
Under the Medicare+Choice program, Medicare pays predetermined per capita payments to MCOs by the first of every
month. In exchange for these capitation payments, MCOs are required to provide all Medicare-covered services to their 
members. 
Proposal: 
The HCFA should pursue legislation to either (1) adjust the timing of Medicare prepayments to MCOs to maximize the 
Health Insurance Trust Funds earnings while minimizing MCOs opportunities to earn investment income on Medicare 
funds or (2) adjust MCO payment rates to recognize the impact of investment income on the total funding available to 
MCOs for servicing their Medicare enrollees. Until such legislation is enacted, HCFA should develop policies on 
tracking, estimating, and reporting investment income through measures that could ensure that investment income funds 
are used for program purposes and for the benefit of Medicare enrollees. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
There is no present requirement for MCOs with risk contracts to account for investment income. Investment income is 
earned from the time MCOs receive payment from HCFA until these funds are disbursed to providers. We found that 
MCOs earned in excess of $100 million a year on current-year Medicare funding during 1996 and 1997 and continued 
to earn significant amounts of investment income in 1998. On average, plans earned an estimated 5 percent return from 
short-term investments of Medicares prepayment funding. As a result, we are concerned that MCOs were effectively
funded at a greater amount (approximately 0.4 percent more) than the 95 percent of Medicare fee-for-service costs used 
as a basis for calculating MCO payment rates. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$150  $150  $150  $150  $150 
Status: 
The HCFA agreed that its policies should hold MCOs accountable for investment income earned on current Medicare 
funds and should ensure that investment income is used to benefit Medicare enrollees. However, HCFA noted that it 
does not intend to pursue legislative changes at this time. 
Report: 
A-02-98-01005 (Final report, Aug. 2000) 
Health Care Financing Administration  Page 45  The 2001 Red Book  M P E S R D
ONITOR AYMENTS FOR ND TAGE ENAL ISEASE
             
B M C P
ENEFICIARIES IN ANAGED ARE LANS
         
Current Law: 
Under the Medicare managed care risk program, HCFA contracts with managed care organizations to provide
comprehensive health services to enrolled beneficiaries on a prepayment, capitated basis. For each enrolled beneficiary, 
HCFA authorizes a fixed monthly payment which is adjusted by a set of risk factors, such as the beneficiarys age and 
gender. An enhanced payment is made for certain high-cost categories of beneficiaries, such as those having end stage
renal disease. The monthly payment for an ESRD beneficiary (average of $3,393 per month) is approximately seven 
times greater than the regular non-ESRD payment rate (average of $460 per month). 
Proposal: 
The HCFA should make procedural and systems changes to prevent further erroneous misclassifications of ESRD status 
and instruct all ESRD networks to verify the status of beneficiaries and to submit census data on a timely basis. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
Our review of beneficiary Medicare records and information obtained from HCFAs Renal Beneficiary and Utilization 
System found that 18 percent of the beneficiaries reviewed were ESRD-misclassified during 1997, resulting in $112,486 
in gross payment errors. We believe that these errors occurred because HCFA received incomplete data from ESRD 
networks concerning the eligibility status of ESRD beneficiaries. As of result, we are concerned that these errors could 
affect the risk adjusted payments that were implemented in January 2000, as required by a revision in the Balanced 
Budget Act of 1997. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
Status: 
The HCFA agreed with all of our recommendations. Currently, HCFA has information management projects underway
that are focused on improved business processes within the ESRD program and better data management. 
Report: 
A-14-98-00211 (Final report, July 2000) 
Health Care Financing Administration  Page 46  The 2001 Red Book  P P M C P
REVENT AYMENTS TO ANAGED ARE LANS FOR
             
D B
ECEASED ENEFICIARIES
   
Current Law: 
Enrollment in Medicare managed care organizations becomes effective on the first day of the month. Under Medicare 
risk-based contracts, MCOs receive a capitated payment every month for each of their Medicare enrollees. When a 
Medicare MCO enrollee dies, the disenrollment becomes effective on the first day of the month immediately following
death. Thus, HCFAs final payment to the MCO should be for the month in which the beneficiary died. 
Proposal: 
The HCFA should make immediate corrections to its computer system to prevent payments to MCOs for deceased 
beneficiaries. It should also recover the improper capitation payments that were paid to the MCOs for deceased 
benficiaries. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
We found that HCFA paid $4.2 million in capitated payments to MCOs after beneficiaries died. Although HCFA 
recouped $1.2 million of the improper payments, $3 million remains outstanding because HCFA was unaware of the 
deaths and did not act to collect some identified overpayments. The improper payments started as early as 
January 1993 and continued through June 1999. In addition, HCFA is continuing to pay at least $1.3 million per year to 
MCOs for deceased beneficiaries. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$3  $1.3  $1.3  $1.3  $1.3 
Status: 
The HCFA stated that it was aware that payments were being made to MCOs for deceased beneficiaries and made 
system corrections in mid-1998 to address the problem. The HCFA agreed to investigate and collect, if appropriate, any
OIG-identified MCO overpayments for deceased beneficiaries. 
Report: 
A-07-99-01283 (Final report, Feb. 2000) 
Health Care Financing Administration  Page 47  The 2001 Red Book  E M P S A D
LIMINATE EDICARE AYMENTS FOR ERVICES FTER EATH
             
Current Law: 
Medicares Common Working File (CWF) host sites receive updated beneficiary information, including date of death, 
from HCFAs enrollment database on a daily basis. The data contained in the enrollment database is received daily
from the Social Security Administration and the Railroad Retirement Board. In addition to receiving date of death from 
the enrollment database, the CWF received some date-of-death information directly from institutional claims submitted 
by intermediaries. 
Proposal: 
The HCFA should require Medicare contractors to conduct annual postpayment reviews to identify and recover 
payments for services after death. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
Medicare paid $20.6 million in 1997 for services that started after a beneficiarys date of death. Further, we found that 
Medicare does not have uniform postpayment procedures to identify and recover payments for deceased beneficiaries. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$20.6  $20.6  $20.6  $20.6  $20.6 
Status: 
The HCFA concurred with our recommendations and has taken a number of actions to correct the deficiencies identified 
in the report. In addition to providing special funding for contractors to identify and recover improper payments, HCFA 
plans to issue instructions for FY 2001, requiring all Medicare contractors to perform these reviews. 
Report: 
OEI-03-99-00200 (Final report, Mar. 2000) 
Health Care Financing Administration  Page 48  The 2001 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, generally were established by each carrier at 60 percent of the Medicare prevailing charge (the 
charge most frequently used by all suppliers). The Balanced Budget Act of 1997 reduced 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. 
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 
TTTT TTTT 
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 
Copayment*  $1,130  $1,240  $1,370  $1,520  $1,690 
*Copayment 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. A proposal to reduce payment updates from 
2003 through 2005 is included in the Presidents FY 2001 budget, as is a proposal to reinstate laboratory cost sharing. 
In addition, the BBA required the Secretary to contract with the Institute of Medicine for a study of Part B laboratory 
test payments; HCFA may use the results to develop new payment methodologies. 
Report: 
A-09-89-00031 (Final report, Jan. 1990)
A-09-93-00056 (Follow-up report, Jan. 1996) 
Health Care Financing Administration  Page 49  The 2001 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 
TTTT 
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. As of 1999, two codes for indices were removed 
from the physicians current procedural terminology. 
Report: 
A-01-96-00509 (Final report, Nov. 1997)
A-01-96-00527 (Final report, Nov. 1998) 
Health Care Financing Administration  Page 50  The 2001 Red Book  E V M I
LIMINATE ULNERABILITIES TO EDICARE OF NDEPENDENT
           
D T F
IAGNOSTIC ESTING ACILITIES
     
Current Law: 
Independent physiological laboratories (IPLs) operate independently of a hospital, physicians office, or rural health 
clinic. IPL testing modalities include neurological and neuromuscular tests, echocardiograms, ultrasounds, x-rays, 
pulmonary function tests, cardiac monitoring, and nuclear medicine. New regulations affecting IPLs (now designated
independent diagnostic testing facilities, or IDTFs) went into effect January 1, 1998. 
Proposal: 
The HCFA should more clearly define the term operating independent, establish a more stringent enrollment and 
verification process, and strengthen monitoring and control processes. As an option, HCFA could completely reform 
the payment system by eliminating direct payment to IPLs/IDTFs. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
Based on our sample, nearly 1,000 of the 5,000 provider numbers issued to IPLs may have been to entities that no 
longer exist. We estimated that Medicare could have paid about $11.6 million in 1996 to such entities. We also noted 
that a number of IPLs in our sample were owned by hospitals, physicians, or rural health clinics that did not consider 
their IPLs to be operating independent as the services provided were principally for their own patients. 
Savings (in millions):* 
FY 1  FY 2  FY 3  FY 4  FY 5 
$11.6  $11.6  $11.6  $11.6  $11.6 
* Possible payments to IPLs that do not exist. 
Status: 
The HCFA has site-visited and desk-reviewed all existing IDTFs and has verified all information that these entities 
provided on their required Provider Enrollment Forms. This includes information concerning their qualifications. The 
HCFA is also in the process of revising these forms. The revision, coupled with corresponding updated Medicare 
contractor operating manual provisions, will aid in determining what qualifies as an IDTF. 
Report: 
OEI-05-97-00240 (Final report, Aug. 1998)
OEI-05-97-00241 (Final report, Aug. 1998) 
Health Care Financing Administration  Page 51  The 2001 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. Before October 1, 2000, when the prospective payment system for home health services was implemented, 
providers were reimbursed for the cost of each visit up to limits established by the Department. Home health agencies 
are now reimbursed under the PPS. 
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 
TTTT 
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. Subsequent to implementation of the Balanced Budget Act, our four-
State review found that unallowable services continued to be provided because of inadequate physician involvement. 
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, Feb. 1995)
A-04-96-02121 (Final report, July 1997)  A-04-97-01166 (Final report, Apr. 1999)
A-04-97-01169 (Final report, Apr. 1999)  A-04-97-01170 (Final report, Apr. 1999)
A-04-99-01194 (Final report, Nov. 1999)  A-02-97-01034 (Final report, Sept. 1999)
A-04-95-01106 (Final report, Mar. 1996)  A-04-95-01105 (Final report, Sept. 1996)
A-04-95-01107 (Final report, Sept. 1996)  A-03-95-00011 (Final report, Nov. 1996)
A-04-98-01184 (Final report, Sept. 1999)  A-02-97-01026 (Final report, Sept. 1997) 
Health Care Financing Administration  Page 52  The 2001 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 therapeutic to palliative care (such as pain control and symptom management). To qualify for Medicare 
hospice benefits, which began in 1983, a patient must be entitled to Medicare Part A and be certified as terminally ill, 
which is defined as having a life expectancy of 6 months or less if the illness runs its normal course. 
Proposal: 
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 
TTTT TTTT 
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 has increased its scrutiny of hospice claims by subjecting an increased number of claims to medical review. No 
changes have been proposed to modify the payment methodology for dually eligible nursing facility residents. The 
Presidents FY 2001 budget proposes civil monetary penalties for false certification of the need for hospice care. 
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 53  The 2001 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 
TTTT TTTT 
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 OIG, in conjunction with HCFA, proposed to further examine the extent to which the base-year 
cost data used to develop the rates included costs that were inappropriately allowed. The OIG subsequently advised 
HCFA of the significant problems found during our review of infusion therapy services provided by some infusion 
suppliers to skilled nursing facilities and recommended that HCFA consider our finding when updating or refining the 
payment rates. The HCFA concurred. 
Report: 
A-14-98-00350 (Final report, July 1998)
A-06-99-00058 (Final report, Dec. 1999) 
Health Care Financing Administration  Page 54  The 2001 Red Book  E O U C B
LIMINATE VERPAYMENTS NDER ONSOLIDATED ILLING BY
           
S N F
KILLED URSING ACILITIES
     
Current Law: 
The Balanced Budget Act of 1997 required implementation of a prospective payment system for skilled nursing
facilities and required consolidated billing by these facilities. Under the PPS, a skilled nursing facility is reimbursed a 
prospective payment for all covered skilled nursing services rendered to its residents in a Part A stay, and outside 
providers and suppliers must bill the facility for services rendered. Under consolidated billing, the facility is 
responsible for billing all covered skilled nursing services, including services provided under arrangement with outside 
parties. 
Proposal: 
The HCFA should establish payment edits in its Common Working File and Medicare contractors claim processing 
systems to ensure compliance with consolidated billing requirements. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
For over one-third of the claims reviewed, we found that Medicare contractors made separate Part B payments to 
outside suppliers for services that were subject to consolidated billing. These services were included in the prospective 
payments that Medicare made to the skilled nursing facilities. As a result, the Medicare program paid twice for the 
same service--once to the nursing facility under the Part A prospective payment and again to the outside supplier under 
Part B. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
TBD  TBD  TBD  TBD  TBD 
Status: 
The HCFA concurred with our recommendation. Until the edits are in place, we will continue our work to identify
additional overpayments. 
Report: 
A-01-99-00531 (Final report, Mar. 2000) 
Health Care Financing Administration  Page 55  The 2001 Red Book  A F M R T S
DEQUATELY UND EDICAL EVIEWS OF HERAPY ERVICES
             
Current Law: 
Medicare coverage guidelines state that therapy must be reasonable, necessary, specific, and an effective treatment for 
the patient's condition. 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 adequately fund Medicare contractors to perform medical reviews of therapy. The inappropriate 
costs identified in our report should be considered if Federal prospective payment rates are modified or rebased. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
Based on our sample results, we estimated that for the 12-month period ending June 30, 1998, Medicare reimbursed 
skilled nursing facilities $955 million for improperly billed physical and occupational therapy. This therapy was not 
medically necessary and was provided by staff who did not have the appropriate skill for the patients medical 
condition. We also estimated that Medicare reimbursed skilled nursing facilities almost $331 million for undocumented 
physical and occupational therapy. The results of our study, as well as implementation of the new prospective payment 
system, have implications for the need to ensure that therapy services are medically appropriate. 
The cost of unnecessary and undocumented therapy was not identified prior to the implementation of the prospective 
payment system rates. As a result, the base-year cost data used to develop the rates was inflated by these unallowable 
costs. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$1,286  $1,286  $1,286  $1,286  $1,286 
Status: 
The HCFA has instructed its contractors to concentrate their efforts on random reviews of all claims and plans to use 
the results of those reviews to focus additional efforts. The Balanced Budget Refinement Act of 1999 requires the 
Secretary to conduct focused medical reviews of therapy services during 2000 and 2001. Using Medicare Integrity
Program funds, HCFA has awarded a contract for the Therapy Review Program, which will study the utilization of 
therapy services in 1998, 1999, and 2000. It will perform a significant number of focused medical reviews of therapy
claims in skilled nursing facilities and other therapy settings. 
Report: 
OEI-09-97-00122 (Final report, Aug. 1999) 
Health Care Financing Administration  Page 56  The 2001 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 
TTTT  TTTT TTTT 
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 FY 2001 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 57  The 2001 Red Book  R M P D
EVISE EDICARE RESCRIPTION RUG
       
P M
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 
TTTT  TTTT TTTT 
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 2001 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 58  The 2001 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 are 
contraindicated by the beneficiarys condition. 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 
TTTT 
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. We believe that additional savings beyond those contemplated in legislation are possible. 
The recommendations will be addressed in the forthcoming Federal Register which implements the Medicare ambulance 
fee schedule, anticipated to take effect January 1, 2001. 
Report: 
OEI-05-95-00300 (Final report, Nov. 1997) 
Health Care Financing Administration  Page 59  The 2001 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 services 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 are contraindicated by the beneficiarys condition. 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 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 Balanced Budget Act of 1997 required that HCFA link payments to services provided and that the definitions of 
basic life support and advanced life support ambulance services be subject to negotiated rulemaking. The Negotiated
Rulemaking Committee Statement on the Medicare Ambulance Services Fee Schedule was signed on February 14, 
2000. The HCFA published the proposed rule titled Fee Schedule for Payment of Ambulance Services and Revisions 
to the Physician Certification Requirements for Coverage of Nonemergency Ambulance Services in the Federal 
Register on September 11, 2000. 
Report: 
A-01-91-00513 (Final report, Oct. 1992)
A-01-94-00528 (Final report, June 1995) 
Health Care Financing Administration  Page 60  The 2001 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 are 
contraindicated by the beneficiarys condition. The Balanced Budget Act of 1997 mandated 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 
TTTT 
Reason for Action: 
Two-thirds of ambulance services that did not result in hospital or nursing home admissions or emergency room care on 
the same date were medically unnecessary. We estimate that Medicare allows approximately $104 million each year for 
these medically unnecessary services. 
Savings (in millions):* 
FY 1  FY 2  FY 3  FY 4  FY 5 
$104  $104  $104  $104  $104 
*Savings may depend on the timing and nature of the fee schedule mandated by the Balanced Budget Act. 
Status: 
The HCFA has completed negotiated rulemaking on development of the Medicare ambulance fee schedule and is in the 
process of proposing regulations. The fee schedule is planned to go into effect in January 2001. The HCFA contracted 
for a study related to nonemergency ambulance transportation and is currently reviewing the results to determine the 
appropriate actions to take in light of the new fee schedule and the codes associated with the schedule. As the new 
codes are established, HCFA intends to explore appropriate edits. 
Report: 
OEI-09-95-00412 (Final report, Dec. 1998) 
Health Care Financing Administration  Page 61  The 2001 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. Effective January 1, 2000, the Balanced Budget Act of 1997 
eliminated the requirement for an x-ray to demonstrate subluxation of the spine; a subluxation may now be 
demonstrated by an x-ray or by physical examination. The BBA also required the development of utilization guidelines
for chiropractic services and treatment. 
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 
TTTT 
Reason for Action: 
We found that Medicare, Medicaid, and private insurers rely, in varying degrees, on utilization caps, x-rays, physician
referrals, copayments, and prepayment and postpayment reviews to control utilization of chiropractic benefits. 
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: 
Now that Y2K issues have been resolved, HCFA plans to move forward with its efforts to require that all contractors 
establish systems utilization frequency edits and that chiropractic physicians use modifiers distinguishing the categories
of spinal joint problems. In the interim, in some instances, contractors are reviewing chiropractic claims on a 
postpayment basis and are detecting maintenance therapy through data analysis. 
Report: 
OEI-04-97-00490 (Final report, Nov. 1998)
OEI-06-97-00480 (Final report, Sept. 1998) 
Health Care Financing Administration  Page 62  The 2001 Red Book  E U P
STABLISH TILIZATION ARAMETERS FOR
       
C T
HIROPRACTIC REATMENTS
   
Current Law: 
The Balanced Budget Act of 1997 required HCFA to establish new utilization guidelines for Medicare chiropractic care. 
The HCFA currently allows each carrier to establish its own utilization review parameter for chiropractic treatments. 
Proposal: 
The HCFA should require carriers to use 12 services as a maximum review parameter. This parameter does not mean 
that payments for services above 12 should be disallowed, but rather it should trigger a more intensive review of claims 
to ensure that the billed services are necessary and covered. Once these parameters are implemented, HCFA should 
collect data about the cost of administering them, related edits and frequency screens, and medical reviews with a view 
to finding the best mix of these controls and recalibrate them after 1 or 2 years of experience. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
We found that Medicare savings would be higher with a cap of 12 rather than 18 treatments per year. This is the 
number most commonly used by Medicare carriers; 29 of the 55 carriers already have chiropractic utilization 
parameters set at 12 treatments per year. Therefore, implementing a utilization parameter of 12 will result in the least 
administrative change for carriers overall. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$30.2  $32.3  $34.5  $36.9  $39.4 
Status: 
The HCFA is currently developing utilization guidelines as specified in the Balanced Budget Act of 1997. It is using
the information in our report to help determine the most appropriate utilization screen. 
Report: 
OEI-04-97-00496 (Final report, Nov. 1999) 
Health Care Financing Administration  Page 63  The 2001 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 for covered services 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 
TTTT 
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 64  The 2001 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, currently Palmetto Government Benefits 
Administrators, has a contract with the Railroad Retirement Board (RRB) to process Medicare Part B claims for 
Railroad Retirement beneficiaries. All other Medicare carriers contract with HCFA to process claims. The authority
for this unique contracting arrangement is section 1842(g) of the Social Security Act, as amended. 
Proposal: 
The HCFA should discontinue the use of a separate carrier to process Medicare claims for Railroad Retirement 
beneficiaries. 
Legislative  Regulatory  Other Administrative 
TTTT 
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 the RRB carrier and other Medicare claims to a different carrier. A further benefit is that 
beneficiaries would be assured that their claims would be processed timely and not routed to the wrong carrier for 
payment, as has sometimes happened in the past. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$9.1  $9.1  $9.1  $9.1  $9.1 
Status: 
The Presidents FY 2001 budget does not include such a proposal. 
Report: 
A-14-90-02528 (Final report, Dec. 1990) 
Health Care Financing Administration  Page 65  The 2001 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 for the nondisabled population. 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 
TTTT 
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 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 Presidents FY 2001 budget does not include a proposal to raise the entitlement age. 
Report: 
OEI-07-91-01600 ( Final report, Nov. 1992) 
Health Care Financing Administration  Page 66  The 2001 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 
TTTT TTTT 
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 
$40  $190  $190  $190  $190 
*Amounts total the savings shown in the Presidents FY 2001 budget. 
Status: 
The HCFA is pursuing the recommended administrative actions through improved processes to identify and recover 
overpayments related to MSP. In this regard, the coordination-of-benefits contract has been awarded, and all MSP 
development will be coordinated under this contract. In addition, HCFA supports legislation that would require all 
group health plans to report information to Medicare, and the Presidents FY 2001 budget proposes a requirement that 
private insurance companies provide Medicare secondary payer information. The HCFA is also negotiating data-
sharing agreements with several State workers compensation boards. 
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)
A-02-98-01036 (Final report, July 2000) 
Health Care Financing Administration  Page 67  The 2001 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 Medicare eligibility or entitlement. Effective 
November 5, 1990, Medicare became secondary payer for the first 18 months of Medicare entitlement. The Balanced 
Budget Act of 1997 made Medicare the secondary payer for the first 30 months of Medicare eligibility. 
Proposal: 
The Medicare secondary payer provision should be extended to include ESRD beneficiaries without a time limitation. 
Legislative  Regulatory  Other Administrative 
TTTT 
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. Although the Balanced Budget Act of 1997 extended MSP 
provisions 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 based 
on age or disability and is not currently employed. At that point, Medicare would become the primary payer. 
Report: 
A-10-86-62016 (Final report, Dec. 1987) 
Health Care Financing Administration  Page 68  The 2001 Red Book  M F M P
ODIFY THE 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 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 
TTTT 
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 
FY 2001 budget. 
Report: 
A-06-89-00041 (Final report, Aug. 1991) 
Health Care Financing Administration  Page 69  The 2001 Red Book  L M R H P
IMIT EDICAID EIMBURSEMENT FOR IGHER RICED
           
G D A R
ENERIC RUGS TO THE MOUNT EIMBURSED FOR
             
L P B N D
OWER RICED RAND AME RUGS
         
Current Law: 
Each State Medicaid agency has the authority to develop its own reimbursement methodology for prescription drugs, 
subject to upper limits set by HCFA. For the most part, State Medicaid agencies use either a discounted AWP or 
estimated/wholesale acquisition costs as the basis for calculating reimbursement for individual prescription drugs. 
Proposal: 
The HCFA should limit Medicaid reimbursement for higher priced generic drugs to the amount reimbursed (prior to 
rebate) for lower priced brand name drugs or appropriately priced generic drugs. 
Legislative  Regulatory  Other Administrative 
TTTT TTTT 
Reason for Action: 
Currently, Medicaid reimburses certain generic prescription drugs at a higher level than lower priced brand name drugs. 
We found that one Medicaid agency would have saved half a million dollars for just eight drugs in 1996 if 
reimbursement had been limited to the lower priced brand name drugs. We estimate that the Medicaid program, as a 
whole, would have saved $7 million in 1996 for these eight drugs. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$7  $7  $7  $7  $7 
Status: 
The HCFA did not concur with our recommendation. The agency agreed that high-priced drugs can adversely affect 
Medicaid reimbursement but believed that States already have the authority to institute programs to ensure appropriate 
payments for prescription drugs. However, we found that the current authorities provided to States did not prevent
Medicaid from paying more for generic versions of drugs than for brand name products. 
Report: 
OEI-03-97-00510 (Final report, July 1998) 
Health Care Financing Administration  Page 70  The 2001 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 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 
TTTT TTTT 
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 71  The 2001 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, 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 
TTTT 
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 72  The 2001 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 
TTTT 
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 
$17.8  $17.8  $17.8  $17.8  $17.8 
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. The OIG is currently performing several followup reviews in this area. The status will be updated as these 
reviews progress. 
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)
A-04-98-01185 (Final report, Sept. 1999) 
Health Care Financing Administration  Page 73  The 2001 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. At the time of our study, States were required to pay "reasonable costs" incurred by
"efficiently and economically operated facilities." Section 4711 of the Balanced Budget Act of 1997 repealed these 
requirements. Current Federal Medicaid rules allow each State considerable discretion in setting payment methodology
for these types of facilities. 
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 
TTTT TTTT 
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. Section 4711 of 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-04-91-01010 (Final report, June 1993) 
Health Care Financing Administration  Page 74  The 2001 Red Book  PUBLIC HEALTH SERVICE
    

AGENCIES

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XVHU IHHV IRU )$ DFWLYLWLHV DQG FKDQJLQJ 2IILFH RI 0DQDJHPHQW DQG 
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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 
TTTT  TTTT  TTTT 
Reason for Action: 
As a Federal purchaser of inpatient health care from the private sector, IHS should receive rates commensurate with 
those received by other Federal agencies that engage in similar purchases. However, IHS paid as much as $8.2 million 
more than Medicare rates for services provided in FY 1995 because there is no law requiring providers to offer 
Medicare or lower rates and because the agency has not been fully successful in its efforts to obtain favorable rates 
through contracts and other procurement mechanisms. If the favorable Medicare rates were legislatively required, the 
dollars saved could be applied to the backlog of patient services that cannot be accommodated in the Contract Health 
Services program. 
Savings (in millions): 
FY 1  FY 2  FY 3  FY 4  FY 5 
$8.2  *  *  *  * 
*Recurring, undetermined savings would result with the legislative change. 
Status: 
The IHS fully concurred with our recommendations. This proposal is on the Departments list of legislative initiatives 
for 2002. The IHS notes that by applying a 5 percent inflation factor, the savings projection for 2002 would be almost 
$11 million. 
Report: 
A-15-97-50001 (Final report, Jan. 1999) 
Indian Health Service  Page 76  The 2001 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 
TTTT 
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, and 
OMB plans to revise Circular A-21. 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 77  The 2001 Red Book  ADMINISTRATION FOR CHILDREN
    

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AINTENANCE AYMENTS AND DMINISTRATIVE OSTS
         
Current Law: 
7KH#$GRSWLRQ#$VVLVWDQFH#DQG#&KLOG#:HOIDUH#$FW#RI 1980, 3XEOLF# /DZ 96-272, HVWDEOLVKHG#WKH#7LWOH#,9-(#SURJUDP, 
)HGHUDO#3D\PHQWV#IRU#)RVWHU#&DUH#DQG#$GRSWLRQ#$VVLVWDQFH. 7LWOH#,9-(#SURYLGHV#IRU#WKH#)HGHUDO#*RYHUQPHQW#WR#VKDUH#LQ#
WKH#SD\PHQW#RI#PDLQWHQDQFH#FRVWV#DQG#UHODWHG#DGPLQLVWUDWLYH#FRVWV#DVVRFLDWHG#ZLWK#WKH#FDUH#RI#IRVWHU#FKLOGUHQ. 
Proposal: 
7KH#6WDWHV#UHYLHZHG#VKRXOG#UHIXQG#XQDOORZDEOH#FRVWV#WR#WKH#)HGHUDO#*RYHUQPHQW#DQG#PDNH#DSSURSULDWH#DGMXVWPHQWV#WR#
WKHLU#TXDUWHUO\#H[SHQGLWXUH#UHSRUWV#WR#DFFXUDWHO\#UHIOHFW#PDLQWHQDQFH#SD\PHQWV#PDGH. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
7KH#6WDWHV#UHYLHZHG (1) LQFRUUHFWO\#FODLPHG#XQDOORZDEOH#RU#LQHOLJLEOH#7LWOH#,9-(#PDLQWHQDQFH#SD\PHQWV; (2) XVHG#DQ#
LQFRUUHFW#)HGHUDO#ILQDQFLDO#SDUWLFLSDWLRQ#UDWH#DSSOLFDEOH#WR#DGPLQLVWUDWLYH#FRVWV; (3) LQFXUUHG#HUURUV#LQ#WKH#PDQXDO#
SURFHVVLQJ#RI#FODLPV#IRU#HPHUJHQF\#IRVWHU#FDUH; (4) XVHG#LQDFFXUDWH#SD\PHQW#LQIRUPDWLRQ#WR#FODLP#UHLPEXUVHPHQW#IRU#
SD\PHQWV#PDGH#E\#WKH#6WDWH#KHDOWK#FDUH#DJHQFLHV; DQG/RU (5) FODLPHG#FRQWLQJHQF\#IHH#FRQWUDFW#FRVWV#WKDW#DUH#QRW#
SHUPLWWHG. 
Savings (in millions): 
)< 1  )< 2  )< 3  )< 4  )< 5 
$77.9 
Status: 
7KH#$&)#YHUEDOO\#FRQFXUUHG#ZLWK#RXU#ILQGLQJV#DQG#UHFRPPHQGDWLRQV#DQG#LV#LQ#WKH#SURFHVV#RI#UHVROYLQJ#HDFK#ILQGLQJ#
ZLWK#WKH#LQGLYLGXDO#6WDWHV. 
Report: 
$-01-98-02505 ()LQDO#UHSRUW, )HE. 2000) 
$-02-97-02002 ()LQDO#UHSRUW, )HE. 2000) 
$-04-98-00126 ()LQDO#UHSRUW, $XJ. 2000) 
$-05-99-00004 ()LQDO#UHSRUW, )HE. 2000) 
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BTAIN OVERNMENT EIMBURSEMENT FOR
       
H S G  U C
EAD TART RANTEES   NALLOWABLE HARGES
       
Current Law: 
)HGHUDO#UHJXODWLRQ#UHTXLUHV#WKDW#QRQIHGHUDO#PDWFKLQJ#DQG#FRVW#VKDULQJ#FRQWULEXWLRQV#EH#YHULILDEOH#DQG#DOORZDEOH#XQGHU#
WKH#DSSOLFDEOH#FRVW#SULQFLSOHV#DQG#WKDW#WKH#JUDQWLQJ#DJHQF\#SUHDSSURYH#FHUWDLQ#FKDQJHV#LQ#WKH#EXGJHW#DQG#LQ#WKH#JUDQW#
DZDUG#SURSRVDO. ,Q#DGGLWLRQ, FRPSHQVDWRU\#WLPH#SD\PHQWV#DUH#DOORZHG#LI#WKH\#IROORZ#WKH#JUDQWHH'V#RZQ#SROLF\#IRU#VXFK#
SD\PHQWV. 
Proposal: 
7KH#)HGHUDO#*RYHUQPHQW#VKRXOG#EH#UHLPEXUVHG#IRU#LQHOLJLEOH#H[SHQGLWXUHV. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
*UDQWHHV#FODLPHG#XQDOORZDEOH#FRVWV, LQFOXGLQJ (1) QRQFRPSOLDQFH#ZLWK#EXGJHW#SURYLVLRQV#DQG#GHYLDWLRQV#IURP#JUDQW#
DZDUG#SURSRVDOV ($1,308,952), (2) LUUHJXODULWLHV#LQ#ILQDQFLDO#DFFRXQWLQJ ($345,461), (3) QRQFRPSOLDQFH#ZLWK#SUHDSSURYDO#
UHTXLUHPHQWV#IRU#FRQVWUXFWLRQ ($351,895), (4) XQUHFRUGHG#OLDELOLWLHV ($216,746), DQG (5) XQVXSSRUWHG#QRQIHGHUDO#
PDWFKLQJ#IXQGV ($1,351,353). 
Savings (in millions): 
)< 1  )< 2  )< 3  )< 4  )< 5 
$3.5 
Status: 
6RPH#JUDQWHHV#GLG#QRW#DJUHH#ZLWK#RXU#ILQGLQJV#DQG#UHFRPPHQGDWLRQV. 7KH#$&)#LV#XVLQJ#RXU#ILQGLQJV#DQG#
UHFRPPHQGDWLRQV#DV#SDUW#RI#LWV#PRQLWRULQJ#DFWLYLW\. 
Report: 
$-06-96-00062 ()LQDO#UHSRUW, $XJ. 1996) 
$-07-98-01037 ()LQDO#UHSRUW, $XJ. 1998) 
$-07-99-01039 ()LQDO#UHSRUW, $XJ. 1999) 
$-08-96-01024 ()LQDO#UHSRUW, )HE. 1997) 
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$-12-96-00017 ()LQDO#UHSRUW, -XO\ 1996) 
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MERGENCY SSISTANCE ROGRAM
     
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FKLOGUHQ#DQG#IDPLOLHV#WKRXJK#HPHUJHQF\#RU#FULVLV#VLWXDWLRQV#E\#SURYLGLQJ#WHPSRUDU\#ILQDQFLDO#DVVLVWDQFH#DQG#VXSSRUWLYH#
VHUYLFHV. 2Q#6HSWHPEHU 12, 1995, $&)#QRWLILHG#6WDWH#DJHQFLHV#WKDW#)HGHUDO#ILQDQFLDO#SDUWLFLSDWLRQ#ZDV#QRW#DYDLODEOH#
XQGHU#WKH#(PHUJHQF\#$VVLVWDQFH#SURJUDP#IRU#FRVWV#DVVRFLDWHG#ZLWK#SURYLGLQJ#EHQHILWV#RU#VHUYLFHV#WR#FKLOGUHQ#LQ#WKH#
MXYHQLOH#MXVWLFH#V\VWHP#ZKR#KDG#EHHQ#UHPRYHG#IURP#WKHLU#KRPHV#DV#D#UHVXOW#RI#WKHLU#DOOHJHG, FKDUJHG, RU#DGMXGLFDWHG#
GHOLQTXHQW#EHKDYLRU. 
Proposal: 
6HOHFWHG#6WDWHV#VKRXOG#UHGXFH#)HGHUDO#DFFRXQWV#IRU#LPSURSHU#FRVWV#FODLPHG, DQG#$&)#VKRXOG#UHFRYHU#WKH#RYHUSD\PHQWV. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action: 
7KH#6WDWHV#WKDW#ZH#UHYLHZHG#FODLPHG#FRVWV#WKDW#ZHUH#XQDOORZDEOH#RU#GLG#QRW#PHHW#UHTXLUHPHQWV#XQGHU#WKH#(PHUJHQF\#
$VVLVWDQFH#SURJUDP. 
Savings (in millions): 
)< 1  )< 2  )< 3  )< 4  )< 5 
$261.1 
Status: 
7KH#$&)#FRQFXUUHG#ZLWK#RXU#ILQGLQJV#DQG#UHFRPPHQGDWLRQV. 7KH#DJHQF\#QRWHV#WKDW#XQGHU#WKH#3HUVRQDO#5HVSRQVLELOLW\#
DQG#:RUN#2SSRUWXQLW\#5HFRQFLOLDWLRQ#$FW#RI 1996, 6WDWHV#PD\#XVH#7$1)#IXQGV#WR#FRYHU#WKH#FRVWV#RI#MXYHQLOH#MXVWLFH#
VHUYLFHV. 
Report: 
$-02-99-02007 ()LQDO#UHSRUW, 6HSW. 1999) 
$-02-98-02002 ()LQDO#UHSRUW, )HE. 2000) 
$-03-98-00590 ()LQDO#UHSRUW, 6HSW. 1998) 
$-03-98-00592 ()LQDO#UHSRUW, $SU. 2000) 
$-03-99-00594 ()LQDO#UHSRUW, $XJ. 2000) 
$-04-97-00109 ()LQDO#UHSRUW, -XO\ 1998) 
$-04-98-00122 ()LQDO#UHSRUW, 6HSW. 1999) 
$-04-98-00125 ()LQDO#UHSRUW, 2FW. 1998) 
$-05-99-00063 ()LQDO#UHSRUW, -XO\ 2000) 
$-07-98-01035 ()LQDO#UHSRUW, $SU. 1999) 
$-07-99-01041 ()LQDO#UHSRUW, -XO\ 2000) 
$GPLQLVWUDWLRQ#IRU#&KLOGUHQ#DQG#)DPLOLHV# 3DJH 81  7KH 2001 5HG#%RRN# R U O C S
ECOVER NALLOWABLE FFICE OF OMMUNITY ERVICES
           
D G C
ISCRETIONARY RANT HARGES
     
Current Law: 
7KH#2IILFH#RI#&RPPXQLW\#6HUYLFHV (2&6) ZDV#HVWDEOLVKHG#LQ#WKH#HSDUWPHQW#RI#+HDOWK#DQG#+XPDQ#6HUYLFHV#E\#WKH#
&RPPXQLW\#6HUYLFHV#%ORFN#*UDQW#$FW#RI 1981. 7KH#2&6#KDV#GLVFUHWLRQDU\#DXWKRULW\#WR#PDNH#IXQGV#DYDLODEOH#YLD#JUDQWV#
WR#VXSSRUW#SURJUDP#DFWLYLWLHV#RI#QDWLRQDO#RU#UHJLRQDO#VLJQLILFDQFH#WR#DOOHYLDWH#WKH#FDXVHV#RI#SRYHUW\#LQ#GLVWUHVVHG#
FRPPXQLWLHV. 7KH#REMHFWLYHV#RI#WKH#SURJUDP#LQFOXGH#SURPRWLQJ#IXOO-WLPH#SHUPDQHQW#MREV#IRU#SRYHUW\-OHYHO#LQGLYLGXDOV#
DQG#SURYLGLQJ#LQFRPH#DQG/RU#RZQHUVKLS#RSSRUWXQLWLHV#IRU#ORZ-LQFRPH#LQGLYLGXDOV. 
Proposal: 
7KH#JUDQWHHV#VKRXOG#UHIXQG#XQDOORZDEOH#FRVWV#WR#WKH#)HGHUDO#*RYHUQPHQW#DQG#FRRUGLQDWH#ZLWK#$&)#RQ#WKH#UHVROXWLRQ#RI#
WKH#FRVWV#VHW#DVLGH. 
Legislative  Regulatory  Other Administrative 
TTTT 
Reason for Action:

7KH#JUDQWHHV#WKDW#ZH#UHYLHZHG#FODLPHG#FRVWV#WKDW#ZHUH#XQDOORZDEOH#RU#XQVXSSRUWHG.

Savings (in millions):

)< 1  )< 2  )< 3  )< 4  )< 5 
$0.1 
Status: 
7KH#JUDQWHHV#FRQFXUUHG#ZLWK#RXU#ILQGLQJV#DQG#UHFRPPHQGDWLRQV. 7KH#$&)#LV#XVLQJ#RXU#ILQGLQJV#DQG#UHFRPPHQGDWLRQV#
DV#SDUW#RI#LWV#PRQLWRULQJ#DFWLYLW\. 
Report: 
$-09-98-00065 ()LQDO#UHSRUW, -DQ. 1999) 
$-10-98-00008 ()LQDO#UHSRUW, HF. 1998) 
$GPLQLVWUDWLRQ#IRU#&KLOGUHQ#DQG#)DPLOLHV# 3DJH 82  7KH 2001 5HG#%RRN# GENERAL DEPARTMENTAL
  

MANAGEMENT

 General Departmental Management
     
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SURJUDPV. 
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Significant RYHUVLJKW# IRFXVHV#SULQFLSDOO\# RQ#ILQDQFLDO#VWDWHPHQW#DXGLWV, ILQDQFLDO#
 
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Activities
  LQFOXGLQJ#UHFRPPHQGLQJ#QHFHVVDU\#UHYLVLRQV# WR#20%# JXLGDQFH. 7KH#
2,*#DOVR#UHYLHZV#WKH#DGHTXDF\#RI#6WDWHV#V\VWHPV#WR#FRQWURO#WKH#JURZWK#
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SDUWLFLSDWLRQ. 
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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 
TTTT 
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  $276  $326  $377  $432  $497 
Block grant  137  450  803  1,187  1,617 
Standard cost per recipient  38  112  161  233  309 
Capped cost per recipient  62  69  79  90  100 
Status: 
Medicaid administrative costs continue to be paid as they have in the past. The FY 1999 Federal share of 
administrative costs was $5.3 billion. 
Report: 
OEI-05-91-01080 (Final report, Jan. 1995) 
General Departmental Management  Page 84  The 2001 Red Book  I A
NTERNET DDRESS
  

The 2001 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.os.dhhs.gov/oig