Department of Health  &  Human  Services 

Ofice of InspectorGeneral 

Cost-SaverHandbook 

THE  2000 
RED 
BOOK 
1 
June.Gibbs Brown 
Inspector General  OFFICE  OF INSPECTOR GENERAL 

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 OIGs 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 assessmentsof 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 OIGs Office  of Evaluation  and Inspections (OEI) conducts short-term management and program 
evaluations  (called inspections)  that focus on issues of concern to the Department, the Congress, and the 
public.  The findings  and recommendations  contained in the inspections reports generate rapid, accurate, and 
up-to-date information  on the efficiency,  vulnerability,  and effectiveness of departmental programs. 
Office of Investigations 
The OIGs Office  of Investigations  (01) 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 01 lead to criminal  convictions,  administrative  sanctions, or civil  monetary 
penalties.  The 01 also oversees State Medicaid  fraud control units which  investigate  and prosecute fraud 
and patient abuse in the Medicaid  program. 
OfJice of Counsel to the Inspector General 
The Office  of Counsel to the Inspector General (OCIG)  provides general legal services to OIG, rendering 
advice and opinions  on HHS programs and operations and providing  all legal support in OIGs  internal 
operations.  The OCIG imposes program exclusions  and civil  monetary penalties on health care providers 
and litigates  those actions within  the Department.  The OCIG also represents OIG in the global settlement of 
cases arising  under the Civil  False Claims Act, develops and monitors  corporate integrity  agreements, 
develops model compliance  plans, renders advisory opinions  on OIG sanctions to the health care 
community,  and issues fraud alerts and other industry  guidance.  Introduction  to the Red Book 
Purpose  The Red Book is a compendium  of significant  Office  of Inspector  General 
(OIG)  cost-saving recommendations  that have not been fully  implemented. 
of the 
These recommendations  may require one of three types of actions: legislative, 
Red Book 
regulatory,  or other administrative  (such as manual revisions).  Some 
complex  issues involve two or all three types of actions. 
The Inspector  General Act requires that the OIGs semiannual reports to the 
Congress include  an identification  of each significant  recommendation 
described in previous semiannual reports on which  corrective  action has not 
been completed.  Thus, appendices to each semiannual report list significant 
unimplemented  recommendations.  Because of the abbreviated nature of 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 2000 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 
coverage for the elderly, the disabled, and the poor.  The balance of the 
and Human 
programs  support research into the causes of disease, promote preventive 
Services 
health measures, support the provision  of health and social services, and 
combat alcoholism  and drug abuse. 
The Departments  operating  agencies are briefly  described below: 
0 	 The Health Care Financing  Administration  (HCFA)  administers  the 
Medicare,  Medicaid,  and State Childrens  Health Insurance programs. 
0 	 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  Page1  The 2000 RedBook  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. 
0 	 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 Nations  families,  including  a variety of social service 
programs for American  children  and families, Native  Americans,  and 
the developmentally  disabled. 
0 	 The  Administration  on Aging  (AoA)  serves as an advocate for older 
persons at the national  level. 
0 	 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 
recommendations  to each of the agencies listed above.  Most  of these 
of the 
recommendations  stem from final reports.  Recommendations  from draft 
Red Book 
reports represent the OIGs  tentative position  and are subject to change when 
the final versions of the reports are issued. 
For each recommendation,  we summarize the current law, the reason that 
action is needed, the estimated savings that would  result from taking  the 
recommended  action, the status of actions taken, and the report number and 
date.  In addition,  the type of action needed (legislative,  regulatory,  or other 
administrative)  is indicated.  Recommendations  for proposed legislation  are 
removed from the Red Book once the law has been fully  enacted.  On 
regulatory  and other administrative  issues, recommendations  are removed 
when the action has been substantially  completed. 
Each final report, including  the full text of comments from the cognizant 
agency, is available upon request.  Each report also includes an appendix 
detailing  OIGs  methodology  for estimating cost savings; we encourage the 
reader interested in a particular  proposal to review  the report. 
We hope that this 2000 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  Page2  The 2000 RedBook  Table of Contents: 
Health  Care Financing  Administration 
Annual  Pape 
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 
$90  Reduce Medicare  Payments for Hospital  Outpatient  Services 
TBD  Adjust  Base-Year Costs in the Prospective Payment System 
for Hospital  Outpatient Department  Services  1 
$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 ofprecision.  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 CareFinancing Administration  Pagei  The 2000 Red Book  Annual 
Savings 
(in  millions)  Pape 
$4  Preclude Improper  Payments to Hospitals  for Hospice Beneficiaries  16 
TBD  Eliminate  Provider-Based  Designations  or Improve  Management 
of Hospital-Owned  Physician  Practices  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 StageRenal 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 
$12  Reduce Payments for Pressure Support Surfaces  27 
$1  Revise Medicare  Guidelines  for Coding  Orthotic  Body  Jackets  28 
$10  Improve  Billing  Practices for Medicare  Orthotics  29 
$7  Improve  Guidelines  for Therapeutic  Footwear  30 
$65  Examine Payment Method  for Parenteral Nutrition  31 
$28  Reduce and Control  Enteral Nutrition  Equipment  Costs  32 
$15  Reduce Medicare  Part B Payments for Enteral Nutrition  at Home  33 
$130  Minimize  Payments for Portable Imaging  Services  34 
$263  Improve  Medical  Reviews for Home Oxygen Therapy  35 
Health CareFinancing Administration  Pageii  The 2000 Red Book  Annual 
Savings 
[in  millions)  PaFe 
Medicare Managed Care 
$5 billion  Adjust  Managed Care Capitation  Rates for Unrecovered 

Improper  Payments  36 

$2 billion  Correct Overstated Managed Care Capitation  Rates  37 

$1 billion  Change Method  of Allocating  Administrative  Costs in Managed  Care 

Rate Proposals  38 

TBD  Pay Managed Care Organizations  Only Reasonable Administrative 

costs  39 

TBD  Place a Ceiling  on Administrative  Costs Included  in Managed  Care 

Organizations  Rate Proposals  40 

$22  Identify  Medicare  Overpayments for Beneficiaries  Incorrectly 

Classified  as Institutionalized  41 

$2  Prevent Duplicate  Fee-for-Service  Payments for Beneficiaries 

Enrolled  in Managed Care Plans  42 

$3  Prevent Payments to Managed Care Plans for Deceased Beneficiaries  43 

Other Medicare Reimbursement 
$21  Eliminate  Medicare  Payments for Services After  Death  44 

Over  $1 billion  Change the Way Medicare  Pays for Clinical  Laboratory  Tests  45 

$47  Prevent Inappropriate  Medicare  Payments for Clinical  Laboratory  Tests  46 

$12  Eliminate  Vulnerabilities  to Medicare  of Independent  Diagnostic 

Testing Facilities  47 

TBD  Require Physician  Examination  Before Ordering  Home Health  Services  48 

TBD  Ensure Validity  of Medicare  Hospice Enrollments  49 

TBD  Adjust  Base-Year Costs in the Prospective Payment System 

for Skilled Nursing  Facilities  50 

Over  $1 billion  Adequately  Fund Medical  Reviews of Therapy  Services  51 

$260  Strengthen Controls  Over Partial Hospitalization  Programs at 

Community  Mental  Health Centers  52 

$1 billion  Revise Medicare  Prescription  Drug Payment Methods  53 

$242  Establish Fee Schedule for Medicare  Ambulance  Payments  54 

Health CareFinancing Administration  Pageiii  The 2000 Red Book  Annual 
Savings  Pape 
(in  millions) 
$47  Allow  Payment for Nonemergency  Advanced  Life  Support Ambulance 

Services Only When Medically  Necessary  55 

$104  Ensure the Medical  Necessity of Ambulance  Claims  56 

$78  Stop Inappropriate  Payments for Chiropractic  Maintenance  Treatments  57 

$30  Establish Utilization  Parameters for Chiropractic  Treatments  58 

TBD  Provide Explicit  Guidelines  on Allowability  of Institutional  General 

and Administrative  and Fringe Benefit  Costs  59 

$9  Discontinue  Use of a Separate Carrier to Process Medicare  Claims 

for Railroad  Retirement  Beneficiaries  60 

TBD  Raise the Medicare  Entitlement  Age to 67  61 

$291  Subject Funds Placed in Flexible  Benefit  Plans to Hospital 

Insurance Tax  62 

$40  Improve  Medicare  Secondary Payer Safeguards  63 

TBD  Expand Medicare  Secondary Payer Provisions  for End Stage Renal 

Disease Benefits  64 

Medicaid Reimbursement 
Over  $4 billion  Modify  Formula  for the Medicaid  Program  65 

$7  Limit  Medicaid  Reimbursement  for Higher  Priced Generic Drugs 

to the Amount  Reimbursed  for Lower  Priced Brand Name Drugs  66 

TBD  Establish Connection  Between the Calculation  of Medicaid  Drug 

Rebates and Drug Reimbursement  67 

$123  Implement  an Indexed Best Price Calculation  in the Medicaid 

Drug Rebate Program  68 

$18  Install  Edits to Preclude Improper  Medicaid  Reimbursement  for 

Clinical  Laboratory  Services  69 

$683  Control  Medicaid  Payments to Institutions  for Mentally 

Retarded People  70 

Health CareFinancing Administration  Pageiv  The 2000 Red Book  Table of Contents: 
Public  Health  Service Agencies 
Annual 
Savings 
(in-*  Page 
PUBLIC  HEALTH  SERVICE AGENCIES 
 71 
$76 
 Institute  and Collect User Fees for Food Safety Inspections  72 
$8 
 Require Hospitals  to Accept Medicare  Rates in the Indian  Health  Services 

Contract Health  Services Program 
 73 
$2 
 Propose Changes to Office of Management  and Budget  Circular  A-21 

Regarding  Recharge Centers 
 74 
* These estimated savings have varying  levels ofprecision.  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. 
Public Health ServiceAgencies  Pagev  The 2000 RedBook  Table of Contents: 

Administration  for  Children  and Families 

Annual 
Savings 
tin  millions)*  Pace 
ADMINISTRATION  FOR CHILDREN  AND FAMILIES  75 
$1  Recover Unallowable  Foster Care Maintenance  Payments  76 
$4  Obtain Government  Reimbursement  for Head Start Grantees 
Unallowable  Charges  77 
$46  Recover Costs Claimed Under the Emergency Assistance Program  78 
$0.1  Recover Unallowable  Office of Community  Services Discretionary  Grant 
Charges  79 
* These estimated savings have varying  levels ofprecision.  Further,  the actual  savings to be achieved 
depend on the speciJic legislative,  regulatory,  or administrative  action  taken.  However,  the estimates 
listed provide  a general  indication  of the magnitude  of savings possible. 
Administration for Children and Families  Pagevi  The 2000 Red Book  Table of Contents: 

General  Departmental  Management 

Annual  Pape 
Savings 
[in  millions)* 
GENERAL  DEPARTMENTAL  MANAGEMENT 
80 
$245  Improve  Funding  System for Welfare Administrative  Costs  81 
* These estimated savings have varying  levels ofprecision.  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, 
GeneralDepartmentalManagement  Pagevii  The 2000 Red Book  HEALTH  CARE  FINANCING 
ADMINISTRATION  Health  Care Financing  Administration 
Overview 	
The Health Care Financing  Administration  (HCFA)  is responsible  for 
administering  the Medicare,  Medicaid,  and State Childrens  Health 
Insurance programs.  Medicare  Part A provides hospital  and other 
institutional  insurance for persons age 65 or older and for certain disabled 
persons, including  those with  end stage renal disease, and is financed 
primarily  by payroll  tax deductions through  the Federal Hospital  Insurance 
Trust Fund.  Medicare  Part B (Supplementary  Medical  Insurance), which 
is financed by participants  and general revenues, is an optional  program 
which  covers most of the costs of medically  necessary physician  and other 
services. 
The Medicaid  program provides grants to States for medical  care for 
almost 42 million  low-income  people.  Eligibility  for Medicaid  is, in 
general, based on the rules in place on July  16, 1996, for the former Aid  to 
Families with  Dependent Children  program.  State expenditures  for 
medical assistance are matched by the Federal Government  using a 
formula  that measures per capita income in each State relative to the 
national  average. 
Significant 
OIG 
Over the years, Office of Inspector General (OIG)  findings  and
Activities 	
recommendations  have contributed  to many significant  reforms in the 
Medicare  program.  Such reforms include  implementation  of the 
prospective payment system for inpatient  hospital  services and a fee 
schedule for physician  services, the Clinical  Laboratory  Improvement 
Amendments  of 1988, regional  consolidation  of claims processing  for 
durable medical equipment,  and new payment methodologies  for graduate 
medical education. 
The unimplemented  OIG recommendations  in this Red Book that relate to 
HCFA  activities  could produce significant  annual savings and recoveries 
to the Department.  The OIG has identified  a number of significant 
Medicare  policy  issues, such as adjusting managed care capitation  rates to 
account for unrecovered improper  payments, revising  prescription  drug 
payment methods, and reducing reimbursement  for hospital  capital costs. 
Regarding  Medicaid,  the OIG has recommended modifying  the formula 
that determines the Federal share of costs, establishing  a more realistic 
drug rebate, and installing  edits to preclude improper  payment  for 
laboratory  services. 
Health Care Financing Administration  Page1  The 2000 Red Book  REQUIRE MEDICARE  COVERAGE OF ALL  STATE AND LOCAL 

GOVERNMENT  EMPLOYEES  OR MAKE  MEDICARE 

THE  SECONDARY  PAYER 

Current  Law: 
The Consolidated  Omnibus Budget Reconciliation  Act of 1985 established Medicare Part A coverage and payment of 
lospital  insurance contributions  for new State and local government employees hired after March  3 1, 1986. However, 
zmployees hired before April  1, 1986, are not covered by Medicare Part A unless the government  entity  has voluntarily 
igreed to cover groups of its employees under the full  Old-Age,  Survivors  and Disability  Insurance program. 
Proposal: 
Medicare coverage and hospital  insurance contributions  should be required for all State and local employees, including 
those hired before April  1, 1986. If this proposal is not enacted, HCFA  should seek legislation  making Medicare the 
secondary payer for retirees from exempt State and local agencies. 
Lepislative  Renulatorv  Other  Administrative 
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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 employers 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  FY2  FY3  FY4  FY5 
$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 Presidents 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 CareFinancing Administration  Page2  The 2000 RedBook  CONTINUE  MANDATED  REDUCTIONS  IN 
HOSPITAL  CAPITAL  COSTS 
Current  Law: 
3n October 1, 1991, HCFA  began a lo-year  transition  period for paying hospital  capital costs under a prospective 
payment system.  Final regulations  were promulgated August 30, 1991 (56FR43358).  The rates are based on historical 
:osts, 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 
zapacity and report the percentage of reduction  to the Congress. 
Legislative  Repulatorv  Other  Administrative 
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Reason for Action: 
Hospital capital costs soared during  the first 5 years of the prospective payment system (PPS), despite low bed 
occupancy.  The Medicare  system of reimbursing  capital costs on a pass-through basis (i.e., reimbursed outside of 
diagnosis related group) was a major reason for this increase.  Paying capital costs prospectively,  as required by 
recently implemented  regulations,  should assist in curbing escalating costs. However, the PPS rates are based on 
historical  costs that are inflated  because (1) excess capacity in the hospital industry  has caused more capital costs to be 
incurred than economically  necessary and (2) inappropriate  elements, such as charges for depreciation  on federally 
funded assets, are included  in the historical  costs. 
Savings (in millions): 
FY  FY  FY3  FY4  FY5 
$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 CareFinancing Administration  Page3  The 2000 Red Book  Mom  ACCURATELY  REFLECT  BASE-YEAR  COSTS IN 

PROSPECTIVE  PAYMENT  SYSTEMS 

CosT 
CAPITAL  RATES 

:urrent  Law: 
Jnder section 1886(d) of the Social Security Act, the Medicare program pays for the operating costs attributable  to 
iospital inpatient  services under a PPS. A PPS pays for care using a predetermined  specific rate for each discharge. 
ublic  Law  loo-203  required  the Secretary of Health and Human Services to establish a PPS for capital costs for cost 
eporting periods beginning  in FY  1992. 
reposal: 
TheHCFA  should (1) consider reducing payment rates by 7.5 percent to more accurately reflect costs of the base year 
ised for the capital cost PPS and (2) continue to monitor  the most current data and make any necessary further 
adjustments to the base rate. 
LePislative  Reeulatory  Other  Administrative 
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Reason for Action: 
GVhileHCFA  took care to devise and implement  an equitable PPS for capital costs, some future cost items had to be 
zstimated. A few years later, when actual data was available, we compared HCFAs estimates with  the actual data and 
yound, in some cases, that the estimates were too high.  A 7.5 percent reduction  would  correct all forecasting estimates 
.hat 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 
:apital cost PPS is fully  implemented  in 2002. 
Savings (in  millions): 
FY  FY  FY  FY  FY 
$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-07-95-01  127 (Final  report, Aug.  1995) 
Health CareFinancing Administration  Page4  The 2000 RedBook  REDUCE  THE PROSPECTIVE  PAYMENT 
SYSTEM  ADJUSTMENT  FACTOR  FOR INDIRECT 
MEDICAL  EDUCATION  COSTS 
Current  Law: 
Since thle inception  of Medicares PPS, indirect  medical education payments have been paid only to teaching hospitals. 
These payments are designed to alleviate  an anticipated adverse effect that PPS would  have on teaching hospitals.  The 
indirect medical education adjustment factor was determined by HCFA  and the Congress.  Using historical  data, HCFA 
compared costs per case in teaching and nonteaching  hospitals using regression analysis and determined that operating 
costs in hospitals with  teaching programs increased approximately  5.79 percent for every 0.1 resident physician  per 
hospital bed compared with  hospitals without  teaching programs.  Under a congressional mandate, HCFA  was required 
to double the adjustment factor under PPS--increasing it to 11.59 percent. 
The Consolidated  Omnibus Budget Reconciliation  Act of 1985 reduced the indirect  medical education adjustment 
factor from  11.59 percent to 8.1 percent for discharges occurring  on or after May  1, 1986, and before October 1, 1988. 
The Omnibus Budget Reconciliation  Act of 1987 further modified  the adjustment by reducing  it to approximately 
7.7 percent for each 0.1 in the ratio of interns and residents to beds. 
Proposal: 
The indirect  medical education adjustment factor should be reduced to the level supported by HCFAs empirical  data, 
and further  studies should be made to determine whether different  adjustment factors are warranted for different  types 
3f teaching hospitals. 
Leeislative  Repulatorv  Other  Administrative 
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Reason for Action: 
3ur  extensive analytical  work shows that teaching hospitals continue to earn substantial profits.  In addition,  a 
Prospective Payment Assessment Commission report found that the indirect  medical education adjustment substantially 
overlaps with  the disproportionate  share adjustment at teaching hospitals and that these payments are a major source of 
revenue for some hospitals. 
Savings (in millions): 
FY  FY  FY3  FY4  FY 
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  1997to 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-07-88-001  11 (Final  report, Sept. 1989) 
Health CareFinancing Administration  Page5  The 2000 RedBook  REVISEGRADUATEMEDICALEDUCATION 
PAYMENTMETHODOLOGY 
Zurrent  Law: 
section 9202 of the Consolidated  Omnibus Budget Reconciliation  Act of 1985 and section 93 14 of the Omnibus 
3udget Reconciliation  Act of 1986 changed the way Medicare reimburses hospitals for the cost of direct graduate 
nedical  education.  Under the revised methodology,  these costs are reimbursed on a hospital  specific  prospective 
>ayment 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 hospitals allowable  graduate medical education base-
year costs any cost center with  little  or no Medicare utilization  and (2) submit a legislative  proposal to compute 
Medicares percentage of participation  under the former more comprehensive system. 
Legislative  Repulatorv  Other  Administrative 
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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 Medicares share of these costs is based on inpatient  data only  and is higher 
than Medicares overall  share of graduate medical education costs as determined under the previous  method, which  also 
included  ancillary  and outpatient  data. 
Savings (in millions): 
FY  FY2  FY3  FY4  FY5 
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 p YOp  osed changes are handled as one combined calculation,  the savings are less than thosefrom
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 CareFinancing Administration  Page6  The 2000 RedBook  DENY  MEDICARE  REIMBURSEMENT 
FOR PATIENTS  WHO  RECEIVE 
SUBSTANDARD  MEDICAL  CARE 
Zurrent  Law: 
Jnder 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 
hagnoses. The Congress established peer review  organizations  to protect the integrity  of the prospective payment 
#ystem#andto maintain  the quality  of care. The Consolidated Omnibus Budget Reconciliation  Act of 1985 authorized 
hese organizations  to deny Medicare reimbursement  for patients receiving  substandard medical care, defined as 
nedical care clearly  failing  to meet professionally  recognized standards. 
reposal: 
TheHCFA  should increase efforts to identify  and address poor quality  care in hospitals by issuing regulations  to 
mplement the provisions  of the 1985 act. 
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Reason for Action: 
If  the patients sampled, 6.6 percent received poor quality  of care. 
Savings (in millions): 
FY  FY  EyJ  FY  FY 
TBD  TBD  TBD  TBD  TBD 
Status: 
[n 1989, HCFA  issued a notice of proposed rulemaking  to authorize the peer review  organizations  to deny Medicare 
eeimbursement for patients who received substandard medical care. The HCFA has not yet issued a final regulation. 
Report: 
OIEI-09-88-00870  (Final  report, July  1989) 
Health CareFinancing Administration  Page7  The 2000 RedBook  MODIFY  PAYMENT  POLICY 

FOR MEDICARE  BAD  DEBTS 

Current  Law: 
Under Medicares 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  Repulatorv  Other  Administrative 
J  I  I 
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Reason for Action: 
The HCFAs 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  FY  lyJ  FY  FY5 
$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 CareFinancing Administration  Page8  The 2000 RedBook  LIMIT  PROSPECTIVE PAYMENT  SYSTEM 
REIMBURSEMENT  FOR HOSPITAL  ADMISSIONS 
NOT  REQUIRING  AN OVERNIGHT  STAY 
:urrent  Law: 
Jnder the prospective  payment system, hospitals are reimbursed for each admission when the patient is discharged 
jased on established rates which  are grouped into diagnosis related groups.  Current Medicare  instructions  provide  that 
.n admission occurs when it is expected that the patient will  occupy a bed and remain overnight.  This applies even if 
he person is later discharged or transferred to another hospital without  actually  using a hospital bed overnight. 
reposal: 
:he HCFA  should seek legislation  to pay for covered services related to l-day  admissions without  an overnight  stay as 
butpatient services which  are paid on the basis of the lower of the actual costs or the customary charges in a locality. 
Legislative  Regulatorv  Other  Administrative 
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ieason  for Action: 
3ased on Medicare  records for 1989, our follow-up  review  (A-05-92-00006)  revealed that the volume  of l-day 
admissions on a national  basis had increased approximately  150 percent over 1985 levels and that Medicare  had paid 
or 179,500 admissions that did not require overnight  stays. Many  of these casesrelated to observations after 
:mergency or outpatient  services, to surgeries later canceled, or to acute care stays of doubtful  necessity.  In many 
:ases, documentation  revealed that few, if any, services were provided  while  the patient was an inpatient. 
Savings (in millions): 
FY  FY2  EyJ  FY4  m 
$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 
.n the Presidents FY 2001 budget. 
Report: 
A-05-89-00055  (Final  report, July  1989) 
A-05-92-00006  (Final  report, Jan. 1992) 
Health CareFinancing Administration  Page9  The 2000 RedBook  MORE  CLOSELY  MONITOR  SAME-DAY 
HOSPITAL  READMISSIONS 
:urrent  Law: 
he Social Security Amendments  of 1983 provided  for establishing  a prospective payment system for Medicare 
layment of inpatient  hospital  services.  Under this system, hospitals are paid a predetermined rate for each patient 
[ischarge.  In the past, peer review  organizations  reviewed a HCFA-generated  sample of hospital  readmission claims to 
letermine whether patients were prematurely  discharged from the first confinement,  thus causing a readmission.  These 
eviews were discontinued  in 1993. 
reposal: 
:he HCIFA should work with  the OIG in reviewing  hospital readmissions to identify  overpayments, to monitor  the 
luality  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 
eview organizations. 
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ieason  for Action: 
Hospital readmissions to the same prospective payment system hospital on the same day of discharge are vulnerable  to 
mproper payments and may be indicative  of problems with quality  of care, such as premature hospital  discharges. 
Xher problems include  separate claims for one continuous  stay, medically  unnecessary readmissions for services that 
:ould have been provided  in a less acute setting, and diagnosis related group upcoding. 
Savings (in millions): 
FY  FY  FY  FY  FY 
$22  $22  $22  $22  $22 
Status: 
The HCIFA 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-O l-98-00504  (Final  report, May  1999) 
A-14-99-00401  (Final  report, Feb. 2000) 
Health CareFinancing Administration  Page10  The 2000 RedBook  RECOVER  OVERPAYMENTS  AND EXPAND  THE 
DIAGNOSIS  RELATED  GROUP  PAYMENT  WINDOW 
Zurrent  Law: 
Jnder the prospective  payment system, Medicare fiscal intermediaries  reimburse hospitals a predetermined  amount for 
npatient  services furnished  to Medicare beneficiaries  depending on the illness and its classification  under a diagnosis 
.elated group.  Currently,  separate payments for nonphysician  outpatient services (such as diagnostic  tests and 
aboratory tests) provided  to the patient during the 3 days immediately  preceding the patients  admission are not 
lermitted  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 
lay of admission. 
Legislative  Repulatorv  Other  Administrative 
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Reason for Action: 
Our review  identified  about $83.5 million  in admission-related  nonphysician  outpatient  services rendered 4 to 7 days 
immediately  before an inpatient  admission.  The fiscal intermediaries  cited clerical  errors and insufficient  or 
nonexistent edits for improper payments, and the hospitals cited clerical  errors and misinterpretation  of the regulations. 
Savings (in millions): 
FY  FY2  FY3  j!Jg  FY 
$83.5  $83.5  $83.5  $83.5  $83.5 
Status: 
The HCFA  agreed to recover the improper billings  and to refund the beneficiaries  coinsurance and deductible. 
Collection  of the overpayment  is being handled by settlement agreements with  the hospitals through the Department of 
Justice working  with  HCFA  and the OIG.  The HCFA  did not concur with  the recommendation  to further  expand the 
payment window.  No legislative  proposal was included  in the Presidents FY 2001 budget. 
Report: 
A-O l-92-0052  1 (Final  report, July  1994) 
Health CareFinancing Administration  Page11  The 2000 RedBook  REDUCE  MEDICARE  PAYMENTS  FOR 
HOSPITAL  OUTPATIENT  SERVICES 
Current  Law: 
To bring payments for services in hospital  outpatient departments more in line with  the payments for services in an 
ambulatory service center, the Omnibus Budget Reconciliation  Act of 1990, section 415 1, reduced Medicare payments 
Forhospital  outpatient  services by (1) adjusting the payment formula to 58 percent of the ambulatory  service center 
ates and 42 percent of the hospitals outpatient costs and (2) lowering  hospital payments made on a reasonable cost 
Jasis by 5.8 percent.  The Omnibus Budget Reconciliation  Act of 1993 extended the 5.8 percent reduction  in payments 
:or hospital  outpatient  department services fi-om FY  1996 through  1998. 
Proposal: 
Legislation  is needed to reduce the current payments for services in outpatient  departments to bring them more in line 
with amlbulatory service center approved payments.  We recommended paying outpatient  departments the ambulatory 
service center approved rate or adjusting hospital payments by a uniform  percentage. 
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Reason for Action: 
Our study of hospital  outpatient  surgeries showed that the current blended rate to hospitals in the aggregate is greater 
than the payment rate for ambulatory  service center approved services.  We analyzed over 2 million  hospital  outpatient 
bills containing  ambulatory  center approved surgeries from 5,421 hospitals.  The disparity  between Medicare payments 
to outpatient  departments and the centers for similar  services still  exists. 
Savings (in millions): 
FY  FY2  FY3  FY4  FY5 
$90  $107  $126  $147  $175 
Status: 
The HCFA  acknowledged  that our report would be helpful  in developing  a legislative  proposal to bring  about greater 
parity of payments for services performed in an outpatient  setting and those performed in ambulatory  service centers. 
Included  in the Balanced Budget Act of 1997 was the requirement to develop a prospective payment system for 
hospital outpatient  services for FY  1999, as well as provisions  to eliminate  a formula-driven  overpayment.  The new 
system -isnow targeted for implementation  by July 2000. 
Report:: 
A- 14-98-00400 (Final  report, Nov.  1998) 
A-14-89-00221  (Final  report, Mar.  1991) 
O:EI-09-88-01003  (Final report, May  1989) 
Health CareFinancing Administration  Page12  The 2000 RedBook  ADJUST  BASE-YEAR  COSTS IN THE 

PROSPECTIVE  PAYMENT  SYSTEM  FOR 

HOSPITAL  OUTPATIENT  DEPARTMENT  SERVICES 

Current  Law: 
The Balanced Budget Act of 1997 required HCFA to develop a prospective payment system for hospital  outpatient 
lepartment  services.  The act required HCFA  to use 1996 hospital claim data and the most recent available  cost report 
datato develop the rates. 
Proposal: 
lhe  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 
ae made to the fee schedules and expenditure  ceiling. 
Legislative  Repulatorv  Other  Administrative 
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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  FY  FY3  FY  FY 
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 CareFinancing Administration  Page13  The 2000 Red Book  PRECLUDE  PAYMENT  FOR  MUTUALLY  EXCLUSIVE  PROCEDURE 
CODES  FOR  HOSPITAL  OUTPATIENT  SERVICES 
Current  Law: 
The HCFA  requires Medicare  carriers to implement  edits for mutually  exclusive  procedure codes in their claim 
lrocessing  systems. Mutually  exclusive  procedure codes represent medical services that cannot reasonably be 
3erformed in the same session, to the same patient, and by the same provider.  When the edits identify  pairs of mutually 
:xclusive  codes, the procedure with  the lowest work relative  value unit is allowed and the matching procedure is 
lenied. 
Proposal: 
The HCIFA should instruct  fiscal intermediaries  (FIs) to implement  edits to preclude payment for Medicare  Part B 
nutually  exclusive  procedure codes as well  as notify  hospital providers that Medicare Part B will  no longer pay for 
nutually  exclusive  procedure codes related to radiology  and pathology/laboratory  services. 
Legislative  Repulatorv  Other  Administrative 
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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 
outpatie:nt 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  FY  FYJ  FY4  FY5 
$14.55  $14.55  $14.55  $14.55  $14.55 
Status: 
The HCIFA 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 July 1,200O.  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-O l-98-00507  (Final  report, May  1999) 
Health CareFinancing Administration  Page14  The 2000 RedBook  APPLY  190-DAY  LIFETIME  LIMIT  FOR MEDICARE 
INPATIENT  PSYCHIATRIC  CARE AND A 
60-DAY ANNUAL  LIMIT 
Jurrent  Law: 
tiedicare  limits  inpatient  care in psychiatric  hospitals to 190 days during a beneficiarys  lifetime.  When Medicare was 
lassed, 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 
npatient psychiatric  care has expanded beyond the psychiatric  hospitals to general hospitals with  distinct  psychiatric 
n-tits. 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 
If the p.lace of service. 
Legislative  Repulatory  Other  Administrative 
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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-dav annual limit  on inpatient  psychiatric  services will  produce significant  savings over the current uneven 
application  of the Medicare  lifetime  limit. 
Savings (in millions): 
FY  FY  FY3  FY4  FY 
$47.6  $47.6  $47.6  $47.6  $47.6 
Status: 
The HCFA  considered a proposal recommending  that the 190-day lifetime  limit  for psychiatric  admissions be extended 
to general hospitals.  However,  such a proposal was not included  as part of the Presidents FY 2001 budget. 
Report: 
A-06-86-62045  (Final report, Feb. 1988) 
Health Care Financing  Administration  Page 15  The 2000 Red Book  PRECLUDE  IMPROPER  PAYMENTS  TO HOSPITALS 
FOR HOSPICE  BENEFICIARIES 
Zurrent  Law: 
Nhen a beneficiary  elects hospice care, the Medicare program reimburses the hospice a fixed rate for each day of care. 
Thehos,pice then assumes fiscal responsibility  for all Medicare Part A services, including  hospital  services, related to 
he beneficiarys  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 
s hospitalized. 
?roposal: 
TheHCFA  should instruct  its fiscal intermediaries  to recover improper payments from hospitals noted in our review 
md to rfeview related medical records for the potential  inappropriate  payments we identified. 
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Reason for Action: 
3ur review  showed that over $2 1 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 
3ver the next 5 years. 
Savings (in  millions): 
FY  FY2  FY3  FY  FY5 
$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 2000 Red Book  ELIMINATE  PROVIDER-BASED  DESIGNATIONS  OR 
IMPROVE  MANAGEMENT  OF 
I
HOSPITAL-OWNED  PHYSICIAN  PRACTICES 
(
I3urrent  Law: 
t 
Hospital-owned physician  practices may be treated in one of two ways: free-standing  or a part of the hospital  (provider-
lased).  If the practice is provider-based,  hospitals may include the operating costs of the practice in the hospitals  cost 
r,eport. The payments for these provider-based  services are typically  higher than the payment for services provided  in a 
fkee-standing physician  office. 
1Proposal: 
r
The HCFA  should (1) eliminate  the provider-based  designation for hospital-owned  physician  practices or (2) require 
1lo: s
 pitals  to report all purchases of physician  practices or clinics  and declare how the costs associated with  the operation
(>f these entities will  be handled in hospital  cost reports. 

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Reason for Action: 
We found that 62 percent of hospitals in our study had purchased physician  practices.  How these hospitals were billing 
for services provided  by the practice was unclear.  At issue is whether the site, or ownership  of the site where the 
service is rendered, should dictate a higher payment amount by Medicare and the beneficiary. 
Savings (in  millions): 
FY  FY2  FY3  FY  FY 
TBD  TBD  TBD  TBD  TBD 
Status: 
The HCFA published  a notice of proposed rulemaking  establishing provider-based  criteria  in regulation.  Comments on 
the proposed rule have been reviewed,  and a final rule has been prepared and should be published  in the near future. 
Report: 
OEI-05-98-00110  (Final report, Sept. 1999) 
lhealth Care Financing  Administration  Page 17  The 2000 Red Book  SELECTIVELY  CONTRACT  FOR 
CORONARY  ARTERY  BYPASS GRAFT  SURGERY 
Zurrent  Law: 
Wedicare 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 
In the applicable  fee schedule. 
Proposal: 
The HCFA  should negotiate all-inclusive  package payment prices with  selected surgeons and medical centers for 
Jroviding  CABG  surgery to Medicare beneficiaries. 
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Reason for Action: 
Medicare paid over $1.5 billion  in 1985 for CABG  surgery (DRG codes 106 and 107) performed on about 63,000 
aeneficiaries.  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  FY2  FY3  FY  FY 
$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: 
OIEI-09-89-00076  (Final  report, Aug.  1987) 
Health Care Financing  Administration  Page 18  The 2000 Red Book  EXPAND  NATIONAL  LIST 
OF CHEMISTRY  PANEL  TESTS 
Zurrent  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 
-equired by HCFA  to be grouped together for payment purposes. In addition,  HCFA requires that other chemistry tests 
available in a carriers service area and commonly  performed on automated laboratory  equipment be reimbursed  as 
Jane1tests. 
Propoxal: 
The HCFA  should update its guidelines  by expanding the national  list of chemistry panel tests to include  10 tests 
Identified by our audit. 
Legislative  Regulatorv  Other  Administrative 
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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, HCFAs 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): 
FY1  FY  FY3  FY  FY 
$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 wasincluded  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 2000 Red Book  ENCOURAGE  PHYSICIANS 

TO USE PAPERLESS  CL.AIMS 

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: 
l 	 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. 
l 	 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. 
Lepislative  Regulatorv  Other  Administrative 
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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  FY2  FY3  FY  FY 
$126  $126  $126  $126  $126 
Status: 
The HCFA  concurred with  our recommendations.  The Presidents FY 200 1 budget proposes to allow  an assessmentof 
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-0 l-94-00230  (Final  report, May  1996) 
A-05-94-00039  (Final  report, May  1996) 
Health Care Financing  Administration  Page 20  The 2000 Red Book  MODIFY  MEDICARE  INCENTIVE  PAYMENTS 
IN HEALTH  PROFESSIONAL  SHORTAGE  AREAS 
3urrent  Law: 
since 1989,physicians  who treat Medicare patients in HHS-defined  health professional  shortage areas have been 
:ntitled  to bonus payments that were designed to improve patient accessto care. The current law calls for a 10 percent 
jonus. 
Propos,al: 
The HCFA  should seek to (1) eliminate  the Medicare incentive  payments entirely,  (2) modify  the Medicare  incentive 
laymen t program to target it more effectively  to primary  care, or (3) channel funds from the Medicare  incentive 
)aymen.t program to new or existing  mechanisms for improving  accessto primary  care. 
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Reason for Action: 
4 substiantial amount of the Medicare  incentive  money has gone to physicians  who provide  little  or no primary  care. 
41~0,among primary  care physicians,  Medicare incentive  payments apparently have little  effect on practice location 
zlecisions. 
Savings (in millions): 
FY  FY2  FY3  FY  FY 
$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:: 
O:EI-01-93-00050  (Final  report, June 1994) 
Health Care Financing  Administration  Page 21  The 2000 Red Book  REDUCE  MEDICARE  END  STAGE  RENAL  DISEASE 
PAYMENT  RATES 
Current  Law: 
The Omnibus Budget Reconciliation  Act of 1981 established a prospective payment system for outpatient  dialysis 
treatments under Medicares end stage renal disease (ESRD) program.  To reimburse facilities  for these treatments, 
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. 
Lepislative  Reeulatorv  Other  Administrative 
J  I  I 
I 
Reason for Action: 
The HCFA,  with  our assistance, accumulated  1985 and 1988 cost data to update the composite rates.  The 1985 data 
showed a median cost, including  home dialysis  costs, of $108.19 per treatment.  Even after considering  the effect of 
home dialysis  services, the in-facility  costs decreased from 1980 to 1985 without  a corresponding  reduction  in the 
prospective rates.  In addition,  our audit of the 1988 home office costs of a major chain of freestanding  facilities 
showed that its costs decreased from $117 per treatment in 1980 to $89 in 1988. Due to the prominence  of this chain, 
these audited costs have a significant  impact on the median cost of dialysis  treatments.  We estimated that this chain is 
earning $36 per treatment, a 29 percent profit  margin for each treatment in 1988. We believe that both the 1985 and 
1988 audited data justify  a decrease in the payment rate. 
Savings (in millions):  * 
FY  FY  FY  FY  EyJ 
$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 di;alysis 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 3 1, 1999, and for services during 200 1 by 1.2 percent above the payment for 
services,provided  on December 3 1,200O. 
Report: 
A- 14-90-00215 (Final  management advisory report, July 1990) 
Health Care Financing  Administration  Page 22  The 2000 Red Book  REDUCETHEEPOGENREIMBURSEMENTRATE 

Current  Law: 
Section 1881 (b)( 1l)(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  Regulatorv  Other  Administrative 
J  J
I  I  I 
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  FY2  EyJ  FY4  FY5 
$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 2000 Red Book  ENSURE  THAT  CLAIMS  FOR AMBULANCE  SERVICES 
FOR END  STAGE  RENAL  DISEASE  BENEFICIARIES 
MEET  COVERAGE  GUIDELINES 
Zurrent  Law: 
The Medicare  Part B benefit  for ambulance service has very strict limits,  as explained by HCFA  in the Medicare 
Zarriers Manual,  section 2120.  The transport is not covered if it fails to meet the medical necessity requirement,  even 
fit  meets other requirements. 
Proposal: 
The HCFA  should ensure that claims meet Medicare coverage guidelines. 
Legislative  Regulatory  Other  Administrative 
J
I  I  I 
Reason for  Action: 
Seventy percent of transports involving  dialysis  in our sample did not meet Medicares guidelines  for medical necessity 
aecauseon the date of ambulance service, beneficiaries  did not have conditions  that contraindicated  use of another type 
lf 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): 
p-L  FY  FY  FY  FY 
$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:: 
O:EI-03-90-02  130 (Final report, Aug.  1994) 
Health Care Financing  Administration  Page 24  The 2000 Red Book  MODIFY  PAYMENT  PRACTICES  OF 
AMBULANCE  SERVICES  FOR MEDICARE 
END  STAGE  RENAL  DISEASE  BENEFICIARIES 
Current  Law: 
Medicare Part B covers ambulance services under certain conditions.  Ambulance  transport must be reasonable and 
medically necessary.  Ambulance  company services and charges are represented by alphanumeric  codes which  the 
Medicare program uses to analyze utilization  and payments.  Persons with ESRD are entitled  to Medicare  coverage 
xrder 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. 
Lepislative  Regulatorv  Other  Administrative 
J  J 
I  I  I 
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  lyJ  FY  FY  FY 
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 prospective  payment system which  links payments to the type of services provided,  effective 
January 1,2002. 
Report:: 
OIEI-03-90-02131  (Final  report, Mar.  1994) 
Health Care Financing Administration  Page 25  The 2000 Red Book  LIMIT  MEDICARE  PART  B REIMBURSEMENT 
FOR HOSPITAL  BEDS 
2urrent  Law: 
vledicare Part B covers the rental of medically  necessary hospital beds used in the home when prescribed by a 
jhysician.  Monthly  rental payments are made according to a fee schedule established by the Omnibus Budget 
<econciliation  Act of 1987. Medicare payments are capped at 120 percent of the allowed  fee schedule amount over a 
naximum  15-month period. 
Iropos;al: 
TheHCFA  should take immediate  steps to reduce Medicare payments for hospital beds used in the home.  This should 
nclude the elimination  of the higher reimbursement rate currently  paid during the first 3 months of rental. 
Lepislative  Repulatorv  Other  Administrative 
J  J
I  I  I 
Reason for  Action: 
3ur reviews  found that Medicare payments for hospital beds used in the home were substantially  higher than rates paid 
>y other payers.  In addition,  Medicare  was the only payer we sampled that pays a higher reimbursement  rate for the 
nitial  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  FY  FY  FY  FYS 
[nheren t reasonable  $40  $40  $40  $40  $40 
reduction 
Elimination  of  $15  $15  $15  $15  $15 
higher .rate 
Vote:  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.  The Presidents FY 2001 budget includes a proposal 
to reduce durable medical equipment payment updates from 2003 through 2005. 
Report:: 
OEI-07-96-0022  1 (Final report, Nov.  1998) 
O:EI-07-96-00222  (Final report, Nov.  1998) 
A-06-91-00080  (Final  report, May  1993) 
Health Care Financing  Administration  Page 26  The 2000 Red Book  REDUCEPAYMENTSFOR  PRESSURESUPPORTSURFACES 

Jurrent  Law: 
Tederal law states that durable medical equipment provided  in the beneficiarys  residence may be billed  only to 
vIedicare Part B.  This equipment includes pressure-reducing  support surfaces used for the care of decubitus ulcers or 
lressure: sores. The HCFA  processes equipment claims through four regional  carriers called durable medical equipment 
,egional carriers.  Effective  January 1, 1996, new regional  carrier guidelines were developed to control  medically 
mnecessary Medicare  reimbursement  for support surfaces. 
Proposal: 
The HC.FA should require periodic  review  and renewal of the certificate  of medical necessity for beneficiaries  use of 
group 2 support surface equipment. 
Lepislative  Regulatorv  Other  Administrative 
I  I  J 
II
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  FY2  FY3  FY  FY 
$12  $12  $12  $12  $12 
Status: 
The HCIFA did not agree with  our recommendation  and expressed concern about the timeliness  and costs associated 
with usilng a certificate  of medical necessity for group 2 equipment. 
Report: 
O:EI-02-95-00370  (Final  report, June 1997) 
Health Care Financing  Administration  Page 27  The 2000 Red Book  REVISE  MEDICARE  GUIDELINES  FOR CODING 
ORTHOTIC  BODY  JACKETS 
Zurrent  Law: 
3ody jackets are spinal orthotic  devices that are covered by Medicare when prescribed by a physician.  Code LO430 is 
lefined  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 
nclude more information  on their Medicare claims.  In addition,  HCFA  should determine the appropriateness of 
Medicare allowed  charges for orthotic  body jackets.  Specifically,  HCFA  should use a product classification  listing  to 
define exactly  which  products should be billed  under code LO430. 
Lepislative  Regulatory  Other  Administrative 
J
I  III  I 
Reason for  Action: 
We found that suppliers upcoded 42 percent of 1996 LO430 body jacket claims.  Lack of uniformity  and standardization 
.n the Medicare  guidelines  may account for some upcoding. 
Savings (in millions): 
FY  FY  FY  FY  FY 
$0.8  $0.8  $0.8  $0.8  $0.8 
Status: 
Ihe HCFA  agreed that a product classification  list is an effective tool to define exactly  which products should be billed 
under code LO430 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 28  The 2000 Red Book  IMPROVE  BILLING  PRACTICES  FOR MEDICARE  ORTHOTICS 
I 
Zurrent  Law: 
Medicare pays for orthotic  devices which  are defined by regulation  as leg, arm, back, and neck braces and artificial 
egs, arms, and eyes, including  replacements if required because of a change in the beneficiarys  physical  condition. 
1rthotic  devices, which  are mainly  covered under Medicare Part B, must be reasonable and necessary for the diagnosis 
jr treatment of an illness  or injury  or to improve  a malformed body member. 
reposal: 
TheHCFA  should improve  Medicare billing  for orthotics, including  development of standards required  for suppliers of 
:ustom molded/fabricated  devices. 
Lepislative  Regulatorv  Other  Administrative 
I  I  J 
I 
Reason for Action: 
3ur recent review  found continued inappropriate  Medicare reimbursement  for orthotics  at significant  levels.  Thirty 
lercent of beneficiaries  have one or more miscoded devices.  We also found that qualifications  of orthotic  suppliers 
{ax-y,with  noncertified  suppliers in our sample the most likely  to provide  inappropriate  devices. 
Savings (in  millions): 
FY  FY  FY3  FY  FY5 
$10  $10  $10  $10  $10 
Status: 
Although  HCFA  concurred with  our original  recommendations, problems continue. 
Report: 
OEI-02-95-00380  (Final  report, Oct. 1997) 
O:EI-02-99-00 120 (Final  report, Mar. 2000) 
OEI-02-99-00  121 (Final  report, Mar. 2000) 
Health Care Financing  Administration  Page 29  The 2000 Red Book  IMPROVE  GUIDELINES  FOR THERAPEUTIC  FOOTWEAR 

Jurrent  Law: 
TheMedicare  Part B benefit  covers therapeutic footwear for beneficiaries  with  diabetes and one or more of six 
lualifying  conditions.  A doctor of medicine or a doctor of osteopathy who is treating the beneficiarys  systemic 
liabetic  condition  under a comprehensive plan of care must certify  the need for therapeutic  footwear. 
?roposal: 
TheHCFA  should make Medicare  coverage guidelines  more explicit  and improve  documentation  requirements  for 
herapeutic footwear.  The HCFA  should also ensure that the therapeutic footwear benefit contains quality  assurance 
safeguards. 
LefMative  Reeulatorv  Other  Administrative 
I  I  J 
I 
Reason for Action: 
We found that the documentation  for 57 percent of therapeutic shoe claims included  in our sample was missing or 
nadequate.  We also found that because Medicare guidelines  do not clearly  define qualifications  of nonphysician 
:ntities  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  FY  FY3  FY  FY5 
$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 30  The 2000 Red Book  EXAMINEPAYMENTMETHODFORPARENTERALNUTRITION 

Current  Law: 
Parenteral nutrition,  a liquid  solution  provided  intravenously  through use of an indwelling  catheter and infusion  pump, 
.s covered under Medicares Part B prosthetic  device provision.  Medicare uses the reasonable charge methodology  to 
letermine  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  Repulatorv  Other  Administrative 
J  J 
I  I  I 
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  FY  FY  FY  FX 
$65  $65  $65  $65  $65 
Status: 
The Balanced Budget Act of 1997 enacted several provisions  that would  address our recommendation.  Section 43 16 
authorizes HCFA  to make inherent  reasonableness adjustments up to 15 percent for all Part B services other than 
physician  services.  Also,  section 43 19 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: 
OIEI-03-96-00230  (Final  report, July  1997) 
Health Care Financing  Administration  Page 3 1  The 2000 Red Book  REDUCEANDCONTROL 
ENTERALNUTRITIONEQUIPMENTCOSTS 
Zurren t Law: 
3nteral -nutrition therapy, commonly  called tube feeding, provides nourishment  to patients who cannot swallow  because 
If severe or permanent medical problems.  This therapy, covered under Medicare Part B as a prosthetic benefit,  is 
imited to patients unable to eat normally  who require enteral therapy as their primary  source of nutrition.  The durable 
nedical  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: 
rhe durable medical equipment regional  carriers should consider selecting claims for special formulas, pump 
:quipment,  and/or pump supply kits when they determine target areas for focused medical reviews. 
Lepislative  Regulatorv  Other  Administrative 
J  J
I  I  I 
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  FY  FY  FY  FY 
$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: 
OIEI-03-94-00022  (Final  report, June 1997) 
Health Care Financing  Administration  Page 32  The 2000 Red Book  REDUCE  MEDICARE  PART  B PAYMENTS 
FOR ENTERAL  NUTRITION  AT HOME 
lurrent  Law: 
Znteral 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 
batients in nursing  homes, some patients receive enteral therapy as part of home care. 
reposal: 
TheHCFA  should reduce payments through  competitive  acquisition  strategies for patients receiving  enteral nutrition  a 
iome. 
Legislative  Regulatorv  Other  Administrative 
J 
El  I  II 
Xeason for Action: 
ayments 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 
Irices, taking  advantage of discounts and other competitive  acquisition  strategies, reimbursed  from  17 to 48 percent 
ess than Medicare. 
Savings (in millions): 
FY1  FY2  Eyj  FY4  FY5 
Znteral payments for 

Ion-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 

3ayments 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 

hrough  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 33  The 2000 Red Book  MINIMIZE  PAYMENTS  FOR 
PORTABLE  IMAGING  SERVICES 
Zurrent  Law: 
Vursing homes arrange for ancillary  services (such as x-rays) for patients who require them.  In some instances, firms 
crown as portable imaging  suppliers provide  x-ray and electrocardiogram  services in nursing  homes.  Imaging  services 
:onsist of several components--technical,  professional, transportation,  and setup--depending  on the type of service and 
where and by whom it is rendered. 
Proposal: 
fhe HCFA  should seek legislation,  as appropriate, to ensure that historically  inflated  payments are not built  into the 
lrospective  payment system that will  reimburse care provided  under a Part A covered stay.  Additionally,  under Part B, 
jayments for transportation  should be limited  to the national  median (and prorated when multiple  patients are seen), 
md payments for x-ray  setup should be eliminated.  The HCFA  also should enforce the requirement  that physicians 
ustify  the need for portable  services. 
LeGslative  Repulatorv  Other  Administrative 
J  J  J 
I  I  I 
Reason for Action: 
Medicare pays more than twice as much for imaging  services when they are billed  under arrangement than when 
3ayment is limited  to the fee schedule.  Also, the amounts Medicare carriers allow  for transportation  of portable x-ray 
:quipment  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 
nome residents receiving  portable x-ray  services showed that 3 1 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  FY2  FY3  FY4  FY5 
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 34  The 2000 Red Book  IMPROVE  MEDICAL  REVIEWS FOR HOME  OXYGEN THERAPY 

Current  Law: 
Medicare covers home oxygen therapy for beneficiaries  diagnosed with  significant  hypoxemia  (a deficiency  in the 
amount of oxygen in the blood).  A physcian-signed  certificate  of medical necessity is required  for payment.  The 
Balance Budget Act of 1997 mandated specific service standards for oxygen equipment. Home oxygen therapy 
accounts for the largest portion  of Medicare payments for durable medical equipment with  over $2 billion  paid in 1997. 
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. 
Lepislative  Regulatorv  Other  Administrative 
I  J  I 
I 
Reason for Action: 
Nearly one-quarter of oxygen certificates  of medical necessity included  in our study were inaccurate or incomplete.  We 
estimate the resultant cost to Medicare  in 1996 to be $263 million.  We also found that while  all beneficiaries  used their 
stationary oxygen equipment,  13 percent of beneficiaries  in our sample never using their portable system which  resulted 
in a cost to Medicare  of about $9.7 million  in 1996. 
Savings (in millions): 
FY1  FY  EyJ  FY  FY 
Certificates  $263  $263  $263  $263  $263 
Portable systems  $9.7  $9.7  $9.7  $9.7  $9.7 
Status: 
The HCFA  concurred with  our recommendations, 
Report: 
OEI-03-96-00090  (Final  report, Aug.  1999) 
Health Care Financing  Administration  Page 35  The 2000 Red Book  ADJUST MANAGED  CARE CAPITATION  RATES FOR 

UNRECOVERED  IMPROPER PAYMENTS 

Zurrent  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 
:ost of treating  a beneficiary  in the fee-for-service  program.  As such, 95 percent of any improper  fee-for-service 
3ayments are included  in the capitation  rates. 
Proposal: 
The HCFA  should pursue legislation  that will  allow modifications  to managed care capitation  rates, including  an 
adjustment for the estimated unrecovered improper payments included  in the rate calculations.  The legislation  should 
recognize the offsetting  effect of any payments subsequently found to be proper or subsequently paid to the fee-for-
service providers  based on the provider  appeals process. 
Lepislative  Repulatorv  Other  Administrative 
J 
I  I  I 
Reason for Action: 
Our audits of HCFAs  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  FY2  EyJ  JyA  FY 
$5,000  $6,000  $7,000  $8,000  $9,000 
Status: 
The HCFA  agreed that Medicare managed care payments have been overstated and should be reduced.  However, 
HCFA  did not agree that it would  be appropriate 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 36  The 2000 Red Book  CORRECT OVERSTATED MANAGED  CARE CAPITATION  RATES 

Zurrent  Law: 
ihe Balanced Budget Act of 1997 revised the Medicare payment methodology  for managed care organizations  (MCOs) 
:ffective 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 
:xpenses. The 1997 rates are updated each year by the national  average per capita increase in Medicare  expenditures 
ninus a percentage specified in the law.  The resulting  capitation rate is the basis for Medicare payments to MCOs. 
reposal: 
TheHCFA  should seek legislation  to correct the overstated base-year rates or eliminate  any future increases in managed 
:are capitation  rates. 
Lepislative  Regulatory  Other  Administrative 
J 
I  El  El 
Reason for Action: 
Information  provided  by HCFA  shows that the 1997 standardized county rates were based on actuarial  estimates and, 
vhen compared with  actual costs incurred, were overstated by 4.2 percent.  Because the BBA  established the 1997 
:ounty rates as the base year, all future managed care capitation rates will  include this overstatement.  To develop our 
;avings estimate, we applied the 4.2 percent overstatement to Congressional Budget Office projections  of future 
Medicare payments to MCOs. 
Savings (in millions): 
FY  FY2  FY3  FY4  FY 
$1,722  $2,05 8  $2,016  $2,520  $2,940 
Status: 
The HCFAs  response to our draft report stated that the Presidents Medicare reform package included  a proposal to 
:hange 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 37  The 2000 Red Book  CHANGEMETHODOFALLOCATINGADMINISTRATIVECOSTS 
INMANAGED  CARE RATEPROPOSALS 
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.  Through  this process, MCOs present their estimate of the funds needed to provide 
the Medicare  package of covered services to enrolled beneficiaries.  The estimated funds are calculated to cover the 
plans medical and administrative  costs for the upcoming year and must be supported by the individual  MCOs 
aperating experiences relating  to utilization  and expenses. If the estimate is lower than the average Medicare payment 
rate, the plan must return the excess to Medicare enrollees as additional  benefits or reduced premiums. 
Proposal: 
The HCFA  should (1) require MCOs to allocate administrative  costs on their adjusted community  rate proposals using a 
more realistic  allocation  method, such as the ratio of Medicare enrollees in the MC0  to the total MC0  enrollment,  and 
[2) introduce  legislation  to return the resulting  savings to the Medicare trust fund. 
Lepislative  Regulatorv  Other  Administrative 
J  J  J
I  I  I 
Reason for Action: 
The adjusted community  rate process enables plans to exploit  the use of medical utilization  factors when computing 
their anticipated  administrative  costs. As a result, MCOs overestimated their anticipated need for such costs. The 
MCOs used these excess amounts to finance a portion  of the additional  benefits offered to Medicare beneficiaries. 
Even allowing  for funding  of these additional  benefits, we estimate that the MCOs administrative  needs were 
overstated by 5 percent of total Medicare payments during  1994-96. 
Savings (in millions): 
FY  FY  lQl.3  FY  FY 
$1,000  $1,000  $1,000  $1,000  $1,000 
Status: 
The HCFA  agreed that the criteria  governing  the computation  of administrative  costs almost certainly  resulted in 
overstated costs. As part of the Medicare+Choice  program, a new format to be used for adjusted community  rate 
proposals is expected to more accurately reflect administrative  costs and should result in the allocation  of lower costs to 
Medicare enrollees.  However,  HCFA  did not concur with  our recommendation  to introduce  legislation  to recover the 
excessive amount presently being paid for administration.  The HCFA  officials  believed that the congressional  intent of 
the changes brought  about by the Balanced Budget Act of 1997 was to pass on all savings to the beneficiaries.  In 
addition,  they stated that some MCOs are reducing benefits because of reduced Medicare  capitation  payments.  The 
officials  believed  that it may be appropriate to reassessour recommendation  in the future once they have had an 
opportunity  to fully  assessthe impact of the payment changes and adjusted community  rate audits mandated by the act. 
Report: 
A-14-97-00202  (Final report, July  1998) 
Health Care Financing  Administration  Page 38  The 2000 Red Book  PAY MANAGED  CARE ORGANIZATIONS ONLY  REASONABLE 
ADMINISTRATIVE  COSTS 
Zurrent  Law: 
;ollowing  a HCFA-prescribed  methodology,  each risk-based managed care organization  is required to submit an 
adjustedcommunity  rate proposal before the beginning  of the contract period.  Through  this process, MCOs present 
1CFA their estimate of the funds needed to provide the Medicare package of covered services to enrolled beneficiaries. 
Theestimated funds are calculated to cover the plans medical and administrative  costs for the upcoming  year. 
idministrative  costs include  marketing,  taxes, depreciation, reinsurance, interest, and other nonmedical  compensation. 
Troposal: 
TheHCFA  should pursue legislation  to require risk-based MCOs, when estimating  administrative  costs, to follow 
vledicares general principle  of paying  only reasonable costs. The HCFA  should also publish  the administrative  cost 
,atesof all MCOs participating  in the Medicare program. 
Lepislative  Repulatorv  Other  Administrative 
J  J 
I  III  I 
Reason for Action: 

3ur review  of the administrative  costs included  in the 1997 proposals submitted by nine MCOs found that the 

nethodology  used resulted in Medicare paying  a disproportionate  share of the costs. By following  HCFAs 

nethodology,  five of the nine MCOs overestimated their administrative  costs by an average of 100 percent.  The five 

MCOs proposed costs totaling  $23 1.9 million  and incurred costs totaling  $115.7 million,  for an excess of 

6116.2 million.  We were unable to determine if the remaining  four MCOs overestimated their proposed administrative 

:osts because their accounting records did not segregate Medicare and non-Medicare  costs. We note that $66.3 million 

If the actual administrative  costs incurred by the nine 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 

-egulatory authority  exists governing  allowability  of costs included  in the rate proposal, the MCOs were not required to 

Idhere to this principle. 

Savings (in millions): 

FY  FY  FY3  FY  FY5 
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 39  The 2000 Red Book  PLACE A CEILING  ON ADMINISTRATIVE  COSTS INCLUDED IN 
MANAGED  CARE ORGANIZATIONS~ RATE  PROPOSALS 
lurrent  Law: 
Zachrisk-based managed care organization  is required to submit an adjusted community  rate proposal to HCFA before 
he beginning  of the contract period.  Administrative  costs, which  are one component of the proposal, include  costs 
associatedwith  facilities,  marketing,  taxes, depreciation, reinsurance, interest, and other nonmedical  compensation. 
Jnlike  other areas of the Medicare  program, HCFA  does not require a reasonable percentage or ceiling  on the 
administrative cost rate proposed. 
?roposal: 
TheHCFA  should institute  a ceiling  on the administrative  costs permitted in an MC0  proposal.  We suggest an 
idministrative  rate ceiling  of 15 percent of total revenue requirements, which  was MCOs  average rate during  our 
,eview period (1996 to 1999). 
Legislative  Regulatorv  Other  Administrative 
J  J 
I  I  I 
Reason for  Action: 
4s a percentage of the total rate proposed, the administrative  rate varied widely  among MCOs reviewed, regardless of 
:he type of MC0  (individual  practice association, group, or staff) or the tax status (profit  or nonprofit).  For the 1999 
-ate 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 
beenpassed on to the beneficiaries  in the form of additional  benefits or reduced payments (e.g., deductibles and/or 
Zoinsurance). 
Savings (in millions): 
FY  FY  FY3  FY4  FY5 
TBD  TBD  TBD  TBD  TBD 
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 MC0  rate proposal. 
Report: 
A- 14-98-002 10 (Final  report, Jan. 2000) 
Health Care Financing  Administration  Page 40  The 2000 Red Book  IDENTIFY  MEDICARE  OVERPAYMENTS FOR BENEFICIARIES 
INCORRECTLY  CLASSIFIED AS INSTITUTIONALIZED 
Current  Law: 
Under risk-based contracts, HMOs receive Medicare payments for services to enrollees on a prospective per capita 
oasis. A higher  capitation  rate is paid for enrollees who are classified as institutionalized.  The HMO  Provider  Manual 
requires that HMOs  submit to HCFA  a monthly  list of the beneficiaries  who meet institutional  status requirements. 
These requirements  are met if a beneficiary  was a resident of a skilled nursing  facility  (Medicare),  a nursing  facility 
[Medicaid),  an intermediate  care facility  for the mentally  retarded, a psychiatric  hospital  or unit, a rehabilitation 
hospital or unit,  a long-term-care  hospital,  or a swing-bed hospital  for a minimum  of 30 consecutive days immediately 
prior to the first day of the current reporting  month. 
Proposal: 
The HCFA  should strengthen its onsite review procedures to better identify  HMOs that are unable to accurately verify 
and report the institutional  status of enrolled beneficiaries,  use the strengthened procedures on the next round of site 
visits to identify  HMOs  that have incorrectly  reported beneficiaries  as institutionalized,  and conduct detailed audits to 
identify  and recover overpayments. 
Lepislative  Regulatorv  Other  Administrative 
I  I  J 
I 
Reason for Action: 
At 8 statistically  selected HMOs,  137 of 800 sampled beneficiaries  (17 percent) did not meet institutional  status 
requirements for months reported to HCFA.  The majority  of the Medicare overpayments identified  resulted from 
inadequate HMO  internal  controls in two areas: (1) verification  of beneficiaries  institutional  status and (2) reporting  of 
institutionalized  beneficiaries  to HCFA. 
Savings (in millions): 
FY  FY  FY3  FY4  m 
$22.2 
Status: 
The HCFA has revised its managed care monitoring  protocol  to address our recommendations  and has convened a work 
group to develop a statement of work to address oversight of special status rates. The HCFAs  target for obtaining  a 
contract is summer of 2000. 
Report: 
A-05-98-00046  (Final  report, Apr.  1999) 
Health Care Financing  Administration  Page 4 I  The 2000 Red Book  PREVENT DUPLICATE  FEE-FOR-SERVICE PAYMENTS FOR 
BENEFICIARIES  ENROLLEDINMANAGED  CARE PLANS 
Current  Law: 
Under Medicare  risk-based contracts, managed care organizations receive a capitated payment every month for each of 
their enrollees.  With  these capitations, MCOs must arrange and pay for all medically  necessary services.  Under the 
YfCOs lock-in  provision,  beneficiaries  are required to use an MCOs  physicians,  hospitals, and affiliated  providers. 
Payment for services from providers  outside the MCOs  network  are the responsibility  of the enrollee, not Medicare or 
the MCO.  (The MC0  is responsible for out-of-network  emergency services and services denied and later approved 
upon appeal.) 
Proposal: 
The HCFA  should strengthen procedures to prevent and detect duplicate payments where the MC0  has payment 
responsibility.  It should also identify  and recoup all fee-for-service  payments (Medicare  Part A and Part B) for 
beneficiaries ehrolled  in MCOs. 
LeGslative  Reaulatorv  Other  Administrative 
I  I  J 
I 
Reason for Action: 
In four States, the Medicare  fiscal intermediaries  improperly  paid $2.3 million  for Part A services provided  to 
beneficiaries  enrolled  in risk-based MCOs.  These services were furnished during  calendar years 1995 through  1997. 
Because Medicare  paid MCOs to provide  all medically  necessary services for these beneficiaries,  the fee-for-service 
payments were duplicative.  Although  we did not review potential  duplicate fee-for-service  payments beyond the four 
States, we believe that improper payments are being made nationally  since HCFA  has not implemented  procedures to 
detect and prevent these duplicate  payments. 
Savings (in millions): 
FY  FY2  FY3  FY  FY 
$2.3  TBD  TBD  TBD  TBD 
Status: 
The HCFA  agreed to strengthen procedures to prevent and detect duplicate payments where the MC0  has payment 
responsibility.  It also agreed to identify  and recoup all duplicate fee-for-service  payments retroactively  to 1996 or as 
far back as legally  possible. 
Report: 
A-07-97-01247  (Final  report, Oct. 1999) 
Health Care Financing  Administration  Page 42  The 2000 Red Book  PREVENT PAYMENTS TO MANAGED  CARE PLANS 
FOR DECEASED BENEFICIARIES 
7urrent  Law: 
3nrollment  in Medicare  managed care organizations becomes effective on the first day of the month.  Under Medicare 
isk-based contracts, MCOs receive a capitated payment every month for each of their Medicare  enrollees.  When a 
Medicare MC0  enrollee dies, the disenrollment  becomes effective on the first day of the month immediately  following 
leath.  Thus, HCFAs  final  payment to the MC0  should be for the month in which  the beneficiary  died. 
Troposal: 
TheHCFA  should make immediate  corrections to its computer system to prevent payments to MCOs for deceased 
leneficiaries.  It should also recover the improper capitation payments that were paid to the MCOs for deceased 
)enficiaries. 
Lepislative  Regulatory  Other  Administrative 
J 
I  El  El 
Reason for Action: 
We found that HCFA  paid $4.2 million  in capitated payments to MCOs after beneficiaries  died.  Although  HCFA 
.ecouped $1.2 million  of the improper payments, $3 million  remains outstanding because HCFA  was unaware of the 
leaths and did not act to collect  some identified  overpayments.  The improper payments started as early as 
lanuary 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  FY2  FY  FY  FY 
$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  MC0  overpayments for deceasedbeneficiaries. 
Report: 
A-07-99-01283  (Final  report, Feb. 2000) 
Health Care Financing  Administration  Page 43  The 2000 Red Book  ELIMINATE  MEDICARE  PAYMENTS FOR SERVICES AFTER DEATH 

Zurrent  Law: 
tiedicares  Common Working  File (CWF) host sites receive updated beneficiary  information,  including  date of death, 
ram HCFAs  enrollment  database on a daily basis. The data contained in the enrollment  database is received daily 
%omthe Social Security Administration  and the Railroad Retirement Board.  In addition  to receiving  date of death from 
he enrollment  database, the CWF received some date-of-death information  directly  from institutional  claims submitted 
myintermediaries. 
Proposal: 
The HCFA  should require Medicare  contractors to conduct annual postpayment reviews to identify  and recover 
3ayments for services after death. 
Lepislative  Reeulatory  Other  Administrative 
J 
I  I  I 
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  FY2  FY3  FY  FY 
$20.6  $20.6  $20.6  $20.6  $20.6 
Status: 
The HCFA  concurred with  our recommendations. 
Report: 
OEI-03-99-00200  (Final report, Mar. 2000) 
Health Care Financing  Administration  Page 44  The 2000 Red Book  CHANGETHEWAYMEDICAREPAYSFOR 
CLINICALLABORATORYTESTS 
Zurrent  Law: 
rhe amount the Medicare program pays for most clinical  lab tests is based on fee schedules.  These fee schedules, 
:ffective  July  1, 1984, were established by each carrier at 60 percent of the Medicare prevailing  rate (the rate most 
requently  used by all suppliers).  The Congress took action in the Omnibus Budget Reconciliation  Act of 1990 to pay 
:omparable prices by limiting  the annual fee schedule increase to 2 percent for 1991, 1992, and 1993 and by reducing 
.henational  cap to 88 percent of the median of all fee schedules. The Omnibus Budget Reconciliation  Act of 1993 
Furtherreduced the national  Medicare  fee cap to 80 percent of the median of carrier prices in 1995 and to 76 percent in 
1996. The law also called for no cost-of-living  increases for 1994 and 1995. 
Proposal: 
The HCFA  should (1) develop a methodology  and legislative  proposal to pay for tests ordered as custom panels at 
substantially  less than the full  price for individual  tests and (2) study reinstating  the beneficiary  coinsurance and 
deductible provisions  for laboratory  services as a means of controlling  utilization. 
Legislative  Repulatorv  Other  Administrative 
J  J
I  El  I 
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 HCFAs 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  FY2  FY  FY  FY 
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  laborato y  services into the charge for 
physician  office visits. 
Status: 
The HCFA  concurred with  our first recommendation  but not our second. 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.  A proposal to reduce payment updates from 
2003 through  2005 is included  in the Presidents FY 200 1 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-09-89-0003  1 (Final  report, Jan. 1990) 
A-09-93-00056  (Follow-up  report, Jan. 1996) 
Health Care Financing  Administration  Page 45  The 2000 Red Book  PREVENTINAPPROPRIATEMEDICAREPAYMENTSFOR 
CLINICALLABORATORYTESTS 
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 
:efer to tests that can be and are frequently  performed together on automated multichannel  equipment as panels. 
Zarriers 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 carriers 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. 
Lepislative  Regulatory  Other  Administrative 
I  I  J 
III
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  FY  FY3  FY  FY5 
$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-O l-96-00509  (Final report, Nov.  1997) 
A-O l-96-00527  (Final report, Nov.  1998) 
Health Care Financing  Administration  Page 46  The 2000 Red Book  ELIMINATE  VULNERABILITIES  TO MEDICARE  OF INDEPENDENT 
DIAGNOSTIC TESTING FACILITIES 
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. 
Lepislative  Repulatorv  Other  Administrative 
I  I  J 
I 
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  FY  EyJ  FY  FY 
$11.6  $11.6  $11.6  $11.6  $11.6 
* Possible payments to IPLs that do not exist. 
Status: 
The HCFA  has implemented  a new enrollment  process for IDTFs, and previously  existing  IPLs have had to re-enroll  as 
IDTFs. 
Report: 
OEI-05-97-00240  (Final  report, Aug.  1998) 
OEI-05-97-0024  1 (Final  report, Aug.  1998) 
Health Care Financing  Administration  Page 47  The 2000 Red Book  REQUIRE PHYSICIAN  EXAMINATION  BEFORE ORDERING 
HOME  HEALTH  SERVICES 
Zurrent  Law: 
section 1861 of Title  XVIII  of the Social Security Act authorizes Medicare Part A payment for home health care 
services. Under the home health benetit, providers  are reimbursed for the cost of each visit  up to limits  established by 
:he Department. 
Proposal: 
Ihe HCFA  should revise Medicare regulations  to require the physician  to examine the patient before ordering  home 
wealth services.  As discussed in the Status  section, other OIG recommendations to correct abusive and wasteful 
3ractices are being addressed. 
Lepislative  Regulatorv  Other  Administrative 
I  J  I 
I 
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  FY  EyJ  FY  FY 
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-04-95-0 1103 (Final  report, Mar.  1996)  A-04-95-0 1104 (Final report, June 1996) 
OEI-04-93-00262  (Final report, Sept. 1995)  OEI-04-93-00260  (Final  report, July  1995) 
OEI- 12-94-00 180 (Final  report, May  1995)  OEI-02-94-00  170 (Final report, June 1995) 
A-04-94-02087  (Final  report, June 1995)  A-04-94-02078  (Final report, Feb. 1995) 
A-04-96-02  121 (Final  report, July  1997)  A-04-97-0 1166 (Final report, Apr.  1999) 
A-04-97-0  1169 (Final  report, Apr.  1999)  A-04-97-0 1170 (Final  report, Apr.  1999) 
A-04-99-0  1194 (Final  report, Nov.  1999)  A-02-97-0 1034 (Final  report, Sept. 1999) 
A-04-95-01  106 (Final  report, Mar.  1996)  A-04-95-01 105 (Final  report, Sept. 1996) 
A-04-95-0 1107 (Final  report, Sept. 1996)  A-03-95-0001 1 (Final  report, Nov.  1996) 
A-04-98-0  1184 (Final report, Sept. 1999)  A-02-97-01026  (Final report, Sept. 1997) 
Health Care Financing  Administration  Page 48  The 2000 Red Book  ENSURE VALIDITY  OF 

MEDICARE  HOSPICE ENROLLMENTS 

Current  Law: 
Hospice care is a treatment approach which recognizes that the impending  death of an individual  warrants a change in 
Focusfrom curative  to palliative  care (such as pain control  and symptom management).  To qualify  for Medicare 
lospice 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: 
Ihe HCFA  should strengthen its controls over the hospice program, such as by reinforcing  the 6-month terminal 
arognosis 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 
3oard 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 
:estructure the use of benefit periods, and to establish a more meaningful  cap on hospice payments. 
Legislative  Repulatorv  Other  Administrative 
J  J
I  El  I 
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): 
pl  FY  FY3  FY  FY 
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-05-95-0025  1 (Final  report, Nov.  1997) 
Health Care Financing  Administration  Page 49  The 2000 Red Book  ADJUST BASE-YEAR  COSTS IN THE 
PROSPECTIVE PAYMENT  SYSTEM FOR 
SKILLED  NURSING FACILITIES 
Zurrent  Law: 
Ihe Balanced Budget Act of 1997 required HCFA to develop a prospective payment system for skilled  nursing 
Bcilities  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 
:heprospective  payment system rates for skilled  nursing  facilities. 
Legislative  Repulatorv  Other  Administrative 
J  J 
I  III  I 
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  FY  FY  FY  FY 
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 50  The 2000 Red Book  ADEQUATELY  FUND MEDICAL  REVIEWS OF THERAPY  SERVICES 
Current  Law: 
Medicare coverage guidelines  state that therapy must be reasonable, necessary, specific, and an effective  treatment for 
the patients 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: 
Ihe HCFA  should adequately fund Medicare contractors to perform medical reviews of therapy.  The inappropriate 
:osts identified  in our report should be considered if Federal prospective payment rates are modified  or rebased. 
Leeislative  Regulatorv  Other  Administrative 
I  J 
I 
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 
zondition.  We also estimated that Medicare reimbursed skilled nursing  facilities  almost $33 1 million  for 
mdocumented  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. 
Ihe  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  FY  FY  FY  FY5 
$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.  However, the Medicare, Medicaid,  and SCHIP Balanced Budget 
Refinement  Act of 1999 requires the Secretary to conduct focused medical reviews of therapy services during  2000 and 
2001. 
Report: 
OEI-09-97-00  122 (Final report, Aug.  1999) 
Health Care Financing  Administration  Page 5 1  The 2000 Red Book  STRENGTHEN CONTROLS OVER 

PARTIAL  HOSPITALIZATION  PROGRAMS 

AT COMMUNITY  MENTAL  HEALTH  CENTERS 

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 HCFAs 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. 
Lepislative  Regulatorv  Other  Administrative 
J  J  J
I  I  I 
Reason for Action: 
Signiticant  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 g-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  FY2  Ey-3  FY  FY 
$260  TBD  TBD  TBD  TBD 
Status: 
The HCFA  concurred with  our recommendations  and developed a lo-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 200 1 budget 
proposes to establish more stringent  standards for community  mental health centers. 
Report: 
A-04-98-02  145 (Final  report, Oct. 1998) 
A-04-98-02146  (Final  report, Oct. 1998) 
Health Care Financing  Administration  Page 52  The 2000 Red Book  REVISE MEDICARE  PRESCRIPTION DRUG 
PAYMENT  METHODS 
Turrent  Law: 
Yledicare Part B covers prescription  drugs incident  to a physicians  services for drugs that cannot be self-administered, 
or certain medical  disorders, such as end stage renal disease and cancer, and when necessary for the effective  use of 
hirable medical equipment.  Reimbursement  is based on the lower of estimated actual charges or a national  average 
vholesale 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. 
roposal: 
TheHCFA  should reexamine  its Medicare  drug reimbursement methodologies  with  a goal of reducing  payments as 
lppropriate. 
Legislative  Regulatorv  Other  Administrative 
J  J  J 
I  I  I 
ieason  for Action: 
;indings  of several OIG reports provide  evidence that Medicare  and its beneficiaries  are making  excessive payments 
or prescription  drugs.  The published  average wholesale prices currently  used by Medicare-contracted  carriers to 
letermine reimbursement  bear little  or no resemblance to actual wholesale prices available to the physician  and 
{upplier communities  that bill  for these drugs.  We believe that the 5 percent reduction  in AWP mandated by the 
3alanced Budget Act is not enough and that further options to reduce reimbursement  should be considered.  We also 
?oundthat Medicare  and its beneficiaries  could have saved $1 billion  in 1998 if the allowed  amounts for 34 drugs had 
)een equal to prices obtained by the Department of Veterans Affairs. 
Savings (in millions):  * 
FY  FY2  FY3  FY4  FY5 
$1,000  $1,000  $1,000  $1,000  $1,000 
*Includes  beneficiary  copayment amounts. 
Status: 
The HCFA  concurred with  our recommendation.  The Presidents FY 20011budget 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 53  The 2000 Red Book  ESTABLISHFEESCHEDULEFOR 
MEDICAREAMBULANCEPAYMENTS 
Zurrent  Law: 
vledicare pays for medically  necessary ambulance services when the use of other methods of transportation  would 
ndanger  the patients health.  Two levels of service, advanced and basic life support, are covered by Medicare. 
ceimbursement is based on the type of vehicle  and personnel used (advanced or basic life  support) and the service 
;tatus (emergency or nonemergency). 
?roposal: 
The HCFA  should establish new guidelines  for ambulance payments: 
l 	 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. 
l 	 Eliminate  separate payments for oxygen, supplies, injectables, and other services, such as electrocardiograms. 
These items should be included  in the base rate. 
l  Limit  the number of procedure codes available to ambulance suppliers for billing. 
Legislative  Repulatorv  Other  Administrative 
I  J  I 
I 
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  FY  FY  FY  FY 
$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 1,200l. 
Report: 
OEI-05-95-00300  (Final  report, Nov.  1997) 
Health Care Financing  Administration  Page 54  The 2000 Red Book  ALLOW  PAYMENT  FOR NONEMERGENCY 
ADVANCED  LIFE  SUPPORTAMBULANCE  SERVICES 
ONLY  WHEN MEDICALLY  NECESSARY 
7urrent  Law: 
The Social Security Act, section 1861(s)(7), provides for coverage of ambulance services when medically  necessary. 
Thelimitations  for this coverage, as specified in 42 CFR 410.40, include the requirement  that the services be medically 
necessary,specifically  that other means of transportation  would endanger the beneticiarys  health.  However, because 
JCFA does not make a coverage distinction  between advanced life  support and basic life  support services, payments 
ue based on the type of transportation  furnished  and not the level of service required by the beneficiary.  Effective 
vlarch 1, 1982, HCFA  allowed  separate reimbursement rates for advanced and basic life  support ambulances. 
Proposal: 
fhe HCFA  should modify  its Medicare policy  to allow payment for nonemergency advanced life  support services only 
vhen that level of service is medically  necessary, instruct carriers to institute  controls to ensure that payment is based 
)n the medical need of the beneficiary,  and closely monitor  carrier compliance. 
Lepislative  Regulatory  Other  Administrative 
I  J  I 
I 
Reason for Action: 
?or Calendar Years (CY)  1986 to 1989, the number of trips by Medicare beneficiaries  in advanced life  support 
ambulances increased by 131 percent, while  the number of trips in basic life support ambulances increased by only 
14percent.  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 
samecity or town. 
Savings (in millions): 
FY  FY2  FY3  FY  FY 
$47  $47  $47  $47  $47 
Status: 
The HCFA  intends to address advanced and basic life support services as part of the ongoing negotiated rulemaking 
process of the ambulance fee schedule which began in January 1999. 
Report: 
A-O l-91 -005 13 (Final  report, Oct. 1992) 
A-O l-94-00528  (Final  report, June 1995) 
Health Care Financing  Administration  Page 55  The 2000 Red Book  ENSURETHEMEDICALNECESSITYOF 
AMBULANCECLAIMS 
Zurrent  Law: 
The HCFA regulations  state that Medicare covers ambulance services only if other forms of transportation  would 
mdanger the beneficiarys  health.  The Balanced Budget Act of 1997 mandated that HCFA  work with  the industry  to 
:stablish 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 
associatedwith  hospital  or nursing  home admissions or emergency room care. This proposal would provide  a solution 
or one group of ambulance services until  HCFA  and the industry  can better address issues of medical necessity, 
.ncluding  clear and consistent definitions. 
Legislative  Repulatorv  Other  Administrative 
I  El  J 
I 
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  FY  FY3  FY4  FY 
$104  $104  $104  $104  $104 
*Savings may depend on the timing  and nature of thefee 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 planed to go into effect in January 200 1. 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 56  The 2000 Red Book  STOP INAPPROPRIATE PAYMENTS FOR 
CHIROPRACTIC  MAINTENANCE  TREATMENTS 
Zurrent  Law: 
n 1972, Section 273 of the Social Security Amendments (P.L. 92-603) expanded the definition  of physician  under 
vIedicare Part B to include  chiropractors.  Currently,  the only Medicare reimbursable  chiropractic  treatment is manual 
nanipulation  of the spine to correct a subluxation  demonstrated by an x-ray.  The Balanced Budget Act of 1997 
.equired HCFA  to establish new utilization  guidelines  for Medicare chiropractic  care by January 1, 2000.  It also 
:liminated  the x-ray  requirement. 
Proposal: 
Ihe HCFA  should develop system edits to detect and prevent unauthorized  payments for chiropractic  maintenance 
reatments.  Examples include  (1) requiring  chiropractic  physicians  to use modifiers  to distinguish  the categories of 
;pinal joint  problems and (2) requiring  all Medicare contractors to implement  system utilization  frequency edits to 
dentify  beneficiaries  receiving  consecutive months of minimal  therapy. 
Legislative  Repulatorv  Other  Administrative 
I  I  J 
I 
Reason for Action: 
We found that Medicare,  Medicaid,  and private insurers rely, in varying  degrees, on utilization  caps, x-rays, physician 
-eferrals, 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 
arobable chiropractic  maintenance treatments at a cost to the Medicare program of $68,882,100. 
Savings (in millions): 
FY  FY  Ey-3  FY  FY5 
$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 57  The 2000 Red Book  ESTABLISHUTILIZATIONPARAMETERSFOR 
CHIROPRACTICTREATMENTS 
Zurrent  Law: 
TheBalanced Budget Act of 1997 required HCFA to establish new utilization  guidelines  for Medicare  chiropractic  care 
)y January 1, 2000.  The HCFA  currently  allows each carrier to establish its own utilization  review  parameter for 
:hiropractic  treatments. 
Proposal: 
TheHCFA  should require carriers to use 12 services as a maximum  review parameter.  This parameter does not mean 
hat payments for services above 12 should be disallowed,  but rather it should trigger  a more intensive  review  of claims 
o ensure that the billed  services are necessary and covered.  Once these parameters are implemented,  HCFA  should 
:ollect data about the cost of administering  them, related edits and frequency screens, and medical reviews with  a view 
o finding  the best mix  of these controls and recalibrate them after 1 or 2 years of experience. 
Lepislative  Regulatorv  Other  Administrative 
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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 
lumber most commonly  used by Medicare carriers; 29 of the 55 carriers already have chiropractic  utilization 
larameters set at 12 treatments per year.  Therefore, implementing  a utilization  parameter of 12 will  result in the least 
idministrative  change for carriers overall. 
Savings (in  millions): 
FY  FY2  a-3  FY  FY 
$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 58  The 2000 Red Book  PROVIDE EXPLICIT  GUIDELINES ON ALLOWABILITY  OF 
INSTITUTIONAL  GENERAL AND 
ADMINISTRATIVE  AND FRINGE BENEFIT  COSTS 
Current  Law: 
Ihe HCFA  guidelines--Provider  Reimbursement Manual,  section 2 loo--establish  the general principle  that payments to 
i provider  must be covered under Medicare.  Sections 2102.1,2 102.2, and 2103 of the manual expand this principle  by 
:xplaining  factors that affect the allowability  of costs, such as the reasonableness of costs, their relationship  to patient 
:are, and the prudent buyer concept. 
Proposal: 
The HCFA  should revise the Provider Reimbursement Manual to provide  explicit  guidelines  on the allowability  of 
:ertain general and administrative  and fringe benefit costs. 
Legislative  Regulatory  Other  Administrative 
I  El  J 
III
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  Medicares 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 

HCFAs Provider  Reimbursement  Manual,  which  is the principal  guideline  used by providers  to charge costs to the 

Medicare program. 

Savings (in millions): 

FY  FY  FY  FY  Ey-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 59  The 2000 Red Book  DISCONTINUE USE OF A SEPARATE CARRIER 
TO PROCESSMEDICARE  CLAIMS  FOR 
RAILROAD  RETIREMENT  BENEFICIARIES 
Current  Law: 
From the inception  of the Medicare  supplementary medical insurance program (Part B), claims for Railroad  Retirement 
aeneficiaries have been processed by a single carrier.  This carrier, The Travelers Insurance Company, has a contract 
with the Railroad  Retirement  Board to process Medicare Part B claims for Railroad Retirement beneficiaries.  All  other 
Medicare carriers contract with  HCFA to process claims.  The authority  for this unique contracting  arrangement is 
section 1842(g) of the Social Security Act, as amended. 
Proposal: 
Ihe HCFA  should discontinue  the use of a separate carrier to process Medicare claims for Railroad  Retirement 
3eneticiaries. 
Legislative  Repulatorv  Other  Administrative 
J  I  I 
I 
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 
:laims  for payment to Travelers  and other Medicare claims to a different  carrier.  A further benefit is that beneficiaries 
would be assured that their claims would be processed timely  and not routed to the wrong carrier for payment, as has 
sometimes happened in the past. 
Savings (in  millions): 
FY  FY  FY3  FY4  FY5 
$9.1  $9.1  $9.1  $9.1  $9.1 
Status: 
While  HCFA  has supported legislation  in the past, there is currently  no legislative  proposal before the Congress. 
Report: 
A-14-90-02528  (Final  report, Dec. 1990) 
Health Care Financing  Administration  Page 60  The 2000 Red Book  Current  Law: 
Ihe  Social Security Act and related laws established a number of Federal programs, including  Social Security 
Retirement Insurance benefits and the Medicare program.  Historically,  Social Security and Medicare have been closely 
linked.  Both established age 65 as their entitlement  age. The Social Security Amendments of 1983 increased the age 
If entitlement  for Social Security unreduced benefits from age 65 to age 67 over the transition  period 2003 to 2027. 
Ihis  was done as one of several methods to strengthen the solvency of the Social Security Trust Fund.  However,  the 
ageof entitlement  for Medicare has remained unchanged. 
Proposal: 
Ihe 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  Regulatorv  Other  Administrative 
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I 
Reason for Action: 
lf the Medicare  entitlement  age were gradually  raised to age 67 following  the same schedule as the Social Security 
x-ogram, the Medicare  Hospital  Insurance Trust Fund would  save three quarters of a trillion  dollars over a 30-year 
3eriod beginning  in 2003.  The Medicare  Supplementary Medical  Insurance program would  also save significant 
Imounts, 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  FY  pYJ  FY4  FY 
TBD  TBD  TBD  TBD  TBD 
*Savings  which would be substantial,  wouldfirst  be realized in 2003, increasing  each year until  2027 when the 
entitlemertt age reaches 67. 
Status: 
The HCFA  currently  has no plans to pursue this change. Although  a bill  to raise the entitlement  age to 67 was 
introduced  in the 105th Congress, it was not enacted. 
Report: 
OEI-07-9 1-O1600 ( Final report, Nov.  1992) 
Health Care Financing  Administration  Page 6 1  The 2000 Red Book  SUBJECT  FUNDS  PLACED  IN FLEXIBLE  BENEFIT  PLANS 
TO HOSPITAL  INSURANCE  TAX 
Current  Law: 
Flexible  benefit plans are employer-employee  arrangements in which  the employee elects a reduced salary and receives 
payment in the form of fringe benefits.  The fringe benefits selected instead of salary are exempt from Medicare,  Social 
Security, and Federal income taxes.  These plans are authorized by section 125 of the Internal  Revenue Code. 
Proposal: 
The value of the amounts placed in flexible  benefit plans should be included  in the defmition  of wages for the Hospital 
insurance portion  of the Federal Insurance Contributions  Act tax. 
Legislative  Regulatorv  Other  Administrative 
J  I  I 
I 
Reason for  Action: 
Flexible  benefit plans deprive the financially  unstable Medicare Hospital  Insurance trust fund of needed revenue.  Also, 
the tax break provided  by these plans is discriminatory  as it is not available to all workers and may indirectly  contribute 
to the rapid rise of health care costs. An exemption  from Medicare taxes seemsparticularly  inappropriate  because the 
:osts of Medicare  benefits provided  to individuals  already far exceed taxes paid to the Medicare trust fund. 
Savings (in millions): 
FY  FY2  FYJ  FY  FY5 
$291  $354  $421  $489  $555 
Status: 
The HCFA  agreed with  our recommendation  and has submitted a legislative  proposal to subject flexible  benefit plans 
to the Hospital  Insurance tax.  However,  the proposal was not included  in the Presidents FY 200 1 budget. 
Report: 
A-05-93-00066  (Final  report, Aug.  1994) 
Health Care Financing  Administration  Page 62  The 2000 Red Book  IMPROVE  MEDICARE  SECONDARY  PAYER  SAFEGUARDS 
: 
tCurrent  Law: 
1Medicare is the secondary payer (MSP) to certain group health plans in instances where medical  services were rendered 
1to 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 Workers Compensation; black lung benefits; 
1
automobile and nonautomobile,  no fault, or liability  insurance; and Department of Veterans Affairs  programs.  The 
4
1HCFA provides  administrative  funds to Medicare contractors to monitor  and collect  incorrect primary  benefits paid on 
1behalf of Medicare  beneficiaries. 
1Proposal: 
The HCFA  should (1) ensure that contractor resources are sufficient  and instruct  contractors to recover improper 
1primary payments from insurance companies, (2) implement  financial  management systems to ensure all overpayments 
i[receivables) are accurately recorded, (3) develop detailed procedures to properly  handle employers that refuse to 
1provide other health insurance coverage information,  and (4) resubmit the justification  of a legislative  proposal that 
1would require  insurance companies, underwriters,  and third-party  administrators  to periodically  submit private 
insurance coverage data directly  to HCFA. 
1
Legislative  Regulatorv  Other  Administrative 
J  J
I  I  I 
1Reason for Action: 
1Measures are needed to collect accurate and timely  information  on primary  payers.  This will  help to reduce future 
M1 edicare  overpayments that result from unidentified  MSP cases and improve the recovery process for overpayments. 
Savings (in millions):* 
FY  FY2  Ey-3  FY4  FY 
$40  $190  $190  $190  $190 
*Amounts total the savings shown in the President s FY 2001 budget. 
Status: 
The HCFA  is pursuing  the recommended administrative  actions through improved  processes to identify  and recover 
overpayments related to MSP, as well  as improved  information  systems to guard against making  improper  Medicare 
payments.  However,  safeguards are still needed to guard against improper payments until  the new information  systems 
are imp.lemented.  The Presidents FY 2001 budget proposes a requirement  for private insurance companies to provide 
Medicare  secondary payer information. 
Report:: 
A-09-89-00100  (Final  management advisory report, Mar.  1990) 

OIEI-07-90-00760  (Final report, Aug.  1991) 

OIEI-03-90-00763  (Management advisory report, Nov.  1991) 

A-09-9 l-00 103 (Final  report, Aug.  1992) 

A- 14-94-0039 1 (Final  report, Dec. 1993) 

A-14-94-00392  (Final  report, Mar.  1994) 

A-02-98-01036  (Draft report, Feb. 2000) 

Health Care Financing  Administration  Page 63  The 2000 Red Book  EXPAND  MEDICARE  SECONDARY  PAYER  PROVISIONS 
FOR END  STAGE  RENAL  DISEASE  BENEFITS 
3urrent  Law: 
TheOmnibus  Budget Reconciliation  Act of 1981 changed the status of Medicare  from primary  to secondary payer for 
leneficiaries  with  end stage renal disease for the t%-st12 months of Medicare eligibility  or entitlement.  Effective 
November 5, 1990, Medicare became secondary payer for the first  18 months of Medicare  entitlement.  The Balanced 
3udget 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. 
Lepislative  RePulatory  Other  Administrative 
J  I  II 
I 
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 
3ayer. 
Savings (in  millions): 
FY  FY  EyJ  FY  FY 
TBD  TBD  TBD  TBD  TBD 
Status: 
The HCFA  was concerned that an indefinite  secondary payer provision  might encourage insurers to drop uneconomical 
services, namely  facility  dialysis  and transplantation.  The HCFA  favored indefinitely  extending  the MSP provision  for 
all other services and included  this proposal in an earlier budget submission.  Although  the Balanced Budget Act of 
1997 extended MSP 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 64  The 2000 Red Book  MODIFYFORMULAFORTHEMEDICAIDPROGRAM 

Zurrent  Law: 
TheFederal Medical  Assistance Percentage prescribed in the Social Security Act determines the Federal share of costs 
br Medlicaid 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  Repulatorv  Other  Administrative 
J  I  I 
I 
Reason for Action: 
The Felderal Medical  Assistance Percentage formula does not fully  reflect the congressional objective  of distributing 
Federal funds according to a States 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  FY2  FY3  FY4  FY5 
$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 Presidents 
FY 2001 budget. 
Report: 
A-06-89-0004  1 (Final  report, Aug.  1991) 
Health Care Financing  Administration  Page 65  The 2000 Red Book  LIMIT  MEDICAID  REIMBURSEMENT  FOR HIGHER  PRICED 
GENERIC  DRUGS  TO THE AMOUNT  REIMBURSED  FOR 
LOWER  PRICED  BRAND  NAME  DRUGS 
lurrent  Law: 
3ach State Medicaid  agency has the authority  to develop its own reimbursement methodology  for prescription  drugs, 
ubject to upper limits  set by HCFA.  For the most part, State Medicaid  agencies use either a discounted AWP or 
:stimated/wholesale  acquisition  costs as the basis for calculating  reimbursement  for individual  prescription  drugs. 
Troposall: 
TheHCFA  should limit  Medicaid  reimbursement  for higher priced generic drugs to the amount reimbursed  (prior  to 
,ebate) for lower priced brand name drugs or appropriately  priced generic drugs. 
Legislative  Repulatorv  Other  Administrative 
I 
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 
-eimbursement 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  FY  pJ  FY  EyJ 
$7  $7  $7  $7  $7 
Status: 
The HCIFA 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: 
OIEI-03-97-005  10 (Final  report, July  1998) 
Health Care Financing  Administration  Page 66  The 2000 Red Book  ESTABLISHCONNECTIONBETWEENTHECALCULATIONOF 
MEDICAIDDRUGREBATESANDDRUGREIMBURSEMENT 
Current  Law: 
The Omnibus  Budget Reconciliation  Act of 1990 authorized States to collect rebates from drug manufacturers  for drug 
purchases made under the Medicaid  program.  Rebates are calculated using average manufacturer  price (AMP),  the 
manufacturers best price, and other factors.  In contrast, most States reimburse pharmacies for Medicaid  prescription 
drugs based on the average wholesale price of the drug. 
Proposall: 
The HCIFA 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  Regulatorv  Other  Administrative 
J  J
I  I  I 
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 
:alculafon  of Medicaid  drug rebates and the calculation  of Medicaids reimbursement  for drugs at the pharmacy level, 
md (3) reduce the burden of administering  the Medicaid  drug rebate program at the Federal, State, and manufacturer 
levels. 
Savings (in  millions):  * 
FY  FY  FY3  FY4  FY 
TBD  TBD  TBD  TBD  TBD 
*The 1eE:islativechange 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 HCIFA 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 67  The 2000 Red Book  IMPLEMENTANINDEXEDBESTPRICECALCULATION 
INTHEMEDICAID  DRUGREBATEPROGRAM 
Zurrent  Law: 
The Omnibus Budget Reconciliation  Act of 1990 authorized States to collect rebates from drug manufacturers  for drug 
lurchases made under the Medicaid  program.  Rebates are calculated using average manufacturer  price, the 
nanufacturers  best price, and other factors.  To discourage drug manufacturers from raising AMP  amounts, the basic 
.ebate amount is increased by the amount AMP  increases over and above the consumer price index  for all urban 
:onsumers.  However,  no similar  indexing  of best price is made, even though best price is part of the basic rebate 
:alculation  for brand name drugs. 
Proposal: 
The best price calculation  in the Medicaid  drug rebate program should be indexed. 
Legislative  Repulatorv  Other  Administrative 
J 
I  I  I 
Reason for Action: 
Drug manufacturers  have consistently  increased best prices in excess of the consumer price index for all urban 
:onsumers 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  FY2  FY3  FY4  FY5 
$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 68  The 2000 Red Book  INSTALLEDITSTOPRECLUDEIMPROPER 
MEDICAIDREIMBURSEMENT 
FORCLINICALLABORATORYSERVICES 
Current  Law: 
Clinical  diagnostic  laboratory  tests performed in a physicians 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 
lot exceed the amount that Medicare recognizes, and each Medicare carrier in a State is to provide  its fee schedule to 
ihe 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, 11984F, ederal 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 
ihat contain duplicative  tests, (2) recover overpayments for clinical  laboratory  services identified  in each of the 
yeviews, and (3) make adjustments for the Federal share of the amounts recovered by the State agencies. 
Leeislative  Regulatorv  Other  Administrative 
J
I  I  I 
Reason for Action: 
Dverall,, 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 
Sonot heaveadequate computer edits in place to prevent the payment of unbundled  or duplicated  claims for chemistry, 
hematology, or urinalysis  tests. 
Savings; (in  millions): 
FY  FY  FY3  FY  FY5 
$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. 
Report: 
A-01-95-00005  (Final  report, Jan. 1996)  A-05-95-00062  (Final  report, Dec. 1996) 
A-O l-95-00006  (Final  report, June 1996)  A-05-96-00019  (Final  report, Mar.  1996) 
A-O l-96-0000  1 (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-06-96-0003  1 (Final report, Dec. 1995) 
A-03-96-00203  (Final  report, Mar.  1997)  A-07-95-01 139 (Final report, Sept. 1995) 
A-04-95-01  108 (Final  report, Dec. 1995)  A-07-95-01 147 (Final report, Oct. 1995) 
A-04-95-0  1109 (Final  report, Apr.  1996)  A-07-95-0 1138 (Final report, Mar.  1996) 
A-04-95-01  113 (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-04-98-01  185 (Final  report, Sept. 1999) 
Health Care Financing  Administration  Page 69  The 2000 Red Book  CONTROLMEDICAIDPAYMENTSTO 
INSTITUTIONSFOR 
MENTALLYRETARDEDPEOPLE 
Zurrent  Law: 
Tedera Medicaid  rules for reimbursing  States for intermediate  care facilities/mentally  retarded are not tailored  to the 
Jperations of these institutions.  At the time of our study, States were required to pay reasonable costs incurred by 
efficiently  and economically  operated facilities.  Section 47 11 of the Balanced Budget Act of 1997 repealed these 
.equirements.  Current Federal Medicaid  rules allow each State considerable discretion  in setting payment 
nethodology  for these types of facilities. 
Proposal: 
The HCFA  should reduce excessive spending of Medicaid  funds for intermediate  care facilities/mentally  retarded by 
,ne or more of the following: 
l  Take administrative  action to control reimbursement by encouraging  States to adopt controls. 
0 	 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. 
l 	 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. 
Lepislative  Regulatorv  Other  Administrative 
J  I  J 
I  I 
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  FII  FY3  F&l  FY 
$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.  The HCFA  has begun 
this study. 
Report: 
OEI-04-9 1-O1010 (Final  report, June 1993) 
Health Care Financing  Administration  Page 70  The 2000 Red Book  PUBLIC  HEALTH  SERVICE 

AGENCIES 
 Public  Health  Service Agencies 
Overview 	 The activities  conducted and supported by the Public Health  Service (PHS) 
operating  divisions  represent this countrys primary  defense against acute 
and chronic  diseases and disabilities.  These programs provide  the 
foundation  for the Nations  efforts in promoting  and enhancing the 
continued  good health of the American  people. 
These independent operating divisions  include the  National  Institutes  of 
Health (NIH),  to advance our knowledge  through  research; the Food and 
Drug  Administration  (FDA),  to ensure the safety and efficacy  of marketed 
drugs, biological  products, and medical devices and the safety of food and 
cosmetics; the Centers for Disease Control  and Prevention  (CDC),  to 
combat preventable diseases and protect the public  health; the Health 
Resources and Services Administration  (HRSA),  to support the 
development,  distribution,  and management of health care personnel,  other 
health resources, and services; the Indian Health  Service (IHS),  to improve 
the health status of Native Americans;  the Agency  for Toxic  Substances 
and Disease Registry  (ATSDR),  to address issues related to Superfund 
toxic waste sites; the Agency  for Healthcare Research and Quality 
(AHRQ),  to enhance the quality  and appropriateness of health care services 
and access to services through  scientific  research and the promotion  of 
improvements  in clinical  practice and in the organization,  financing,  and 
delivery  of services; and the Substance Abuse and Mental  Health  Services 
Administration  (SAMHSA),  to assist States in refining  and expanding 
treatment and prevention  services. 
Sign @cant  The Office of Inspector General (OIG)  concentrates on such issues as 
OK  biomedical  research, substance abuse, acquired immune  deficiency 
syndrome, and food and drug safety.  Significant  unimplemented  monetary
Activities 	
recommendations  identified  by the OIG relate to instituting  and collecting 
user fees for FDA  activities  and changing  Office  of Management  and 
Budget  Circular  A-2 1 to effect more productive  use of Federal research 
dollars at the Nations  colleges and universities. 
Public Health Service Agencies  Page 71  The 2000 Red Book  INSTITUTEANDCOLLECT 
USERFEESFORFOODSAFETYINSPECTIONS 
Current  Law: 
Ihe Food and Drug Administration  currently  imposes user fees for several activities,  including  color certification  and 
-econditioning  of products.  In  1993, the FDA began collecting  user fees for activities  covered by the Prescription  Drug 
Jser Fee Act.  In the absence of specific authorizing  legislation,  the FDA is precluded by statute from imposing  user 
feesto cover additional  functions. 
Proposal: 
LJserfees should be extended to various functions performed by FDA, possibly  including  premarket review  and 
approvals for devices, inspections  of manufacturing  facilities,  and food processors and establishments. 
Lepislative  Regulatory  Other  Administrative 
J
I  I  El 
Reason for Action: 
;Tserfees, if properly  instituted,  represent a legitimate  method to recover regulatory  costs. They provide  FDA with 
additional revenue that when tied to performance goals, as with the Prescription  Drug User Fee Act of 1992, 
$gnificantly  improves FDAs  ability  to protect the publics  health.  Such additive  user fees also benefit manufacturers 
lyhen these additional  resources are used to make regulatory  functions more efficient  and predictable  and provide 
ncreased opportunity  for manufacturers to participate  in the regulatory  process. User fees properly  reflect the value of 
liscrete benefits enjoyed by manufacturers from FDAs  regulatory  activities,  such as increased consumer confidence in 
ndustrys  products and protection  from unfair  competition.  Such fees would be consistent with  fee systems in other 
Tederal regulatory  environments,  such as the Environmental  Protection Agency, the Federal Communications 
Clommission, the Federal Energy Regulatory  Commission,  and the Nuclear Regulatory  Commission. 
The imposition  of additive  user fees for major regulatory  functions will  provide  FDA with  increased revenue for 
needed expansion of services and program improvements,  expanding FDAs  ability  to protect the publics  health, 
improve  agency tracking  of resources, and increase agency accountability  for the costs of regulation. 
Savings (in millions): 
lyJ  FY  EyJ  FY4  FY5 
$75.9  $75.9  $75.9  $75.9  $75.9 
Status: 
The total collections  for all user fees for FY  1999 were $145.1 million  ($5.8 million  from certification,  $126.6 million 
from Prescription  Drug User Fee activities,  and $12.7 million  from the Mammography  Quality  Standards Act.)  The 
Presidents FY 200 1 budget request includes provisions  to assessadditional  user fees for premarket review  of medical 
devices, premarket review  of direct food additive petitions,  and food export certifications. 
Report: 
OEI- 12-90-02020 (Final report, July  1990) 
OEI-05-90-0  1070 (Final report, Aug.  1991) 
Food and Drug Administration  Page 72  The 2000 Red Book  REQUIRE HOSPITALS TO ACCEPT MEDICARE  RATES 

INTHEINDIANHEALTH  SERVICES 

CONTRACT HEALTH  SERVICES PROGRAM 

Current  Law: 
[n 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 
x-ograms but not to IHS. 
Proposal: 
Ihe MS  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 
xtrsue other opportunities  where lower rates may be negotiated. 
Legislative  Reeulatorv  Other  Administrative 
J  J  J 
I  I  El 
Reason for Action: 
4s a Federal purchaser of inpatient  health care from the private sector, IHS should receive rates commensurate with 
:hoserelceived by other Federal agencies that engage in similar purchases. However, IHS paid as much as $8.2 million 
nore 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 
hrough  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  lyJ  FY3  FY  FY 
*  *  *  *
$8.2 
*Recurring,  undetermined savings would result with the legislative  change. 
Status: 
The IHS fully  concurred with  our recommendations and continues to seek the legislative  change necessary.  Once 
legislation  is enacted, IHS will  formally  draft implementing  regulations.  Currently,  IHS is continuing  administrative 
efforts to obtain discounted rates throughout  its service area. 
Report: 
A- 15-97-5000 1 (Final report, Jan. 1999) 
Food and Drug Administration  Page 73  The 2000 Red Book  PROPOSECHANGESTO 
OFFICEOFMANAGEMENTANDBUDGETCIRCULAR  A-21 
REGARDINGRECHARGECENTERS 
Current  Law: 
The Oftice  of Management and Budget (OMB)  Circular  A-2 1, 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-2 1 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 
J 
I  I  El 
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 
overchalrges to the Federal Government of $1.9 million  during FYs 1995 and 1996. 
Savings (in millions): 
FYs1&2  FY  FY  FY 
*  *  *
$1.9 
* Recurring,  undetermined  savings would result with the circular  change. 
Status: 
The De:puty Assistant Secretary for Grants and Acquisition  Management concurred with  our recommendations.  In 
addition,  the Council  on Government  Relations generally  agreed and stated that the proposed criteria  should be 
includeld 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 74  The 2000 Red Book  ADMINISTRATION  FOR  CHILDREN 

AND  FAMILIES 
 Administration  for  Children  and Families 
Overview 	 The Administration  for Children  and Families  (ACF)  provides Federal 
direction  and funding  for State, local, and private organizations  as well  as for 
State-administered  programs designed to promote  stability,  economic  security, 
responsibility,  and self-support  for the Nations  families.  It also oversees a 
variety  of programs that provide  social services to the Nations  children,  youth, 
and families;  persons with  developmental  disabilities;  and Native  Americans. 
To reduce dependency on welfare programs, the Personal Responsibility  and 
Work  Opportunity  Act of 1996 eliminated  the Aid  to Families with  Dependent 
Children,  Emergency Assistance, and Job Opportunities  and Basic Skills 
Training  programs as of FY  1997 and created the Temporary  Assistance for 
Needy Families  (TANF)  block  grant.  The ACF  oversees TANF,  as well  as the 
Child  Support Enforcement  program, which  provides  grants to States to 
enforce obligations  of absent parents and to establish and enforce child  support 
orders, and the Head Start program, which  provides comprehensive  health, 
educational,  nutritional,  social, and other services primarily  to economically 
disadvantaged preschool  children  and their families.  Also,  the Foster Care and 
Adoption  Assistance program provides grants to States to assist with  the cost 
of foster care and special needs adoptions, as well  as maintenance, 
administrative,  and staff training  costs.  Other programs include  Community 
Services and the Child  Welfare program. 
Significant 
The Office of Inspector  General (OIG)  reviews the cost effectiveness of ACF 
OIG  social services and assistance programs, including  determining  whether 
authorized  services are provided  to recipients  at the lowest costs.  These
Activities 
reviews have identified  opportunities  to improve  the delivery  of program 
services, as well  as recover unallowable  costs. 
Administration for Children and Families  Page75  The 2000 RedBook  RJXOVERUNALLOWABLEFOSTER CARE 
MAINTENANCEPAYMENTS 
Zurrent  Law: 
The Adoption  Assistance and Child  Welfare Act of 1980, Public  Law 96-272, established the Title  IV-E  program, 
Tedera Payments for Foster Care and Adoption  Assistance.  Title  IV-E  provides for the Federal Government  to share in 
he payment of maintenance costs associated with the care of foster children. 
Proposal: 
The State should refund unallowable  costs to the Federal Government and make appropriate adjustments to its quarterly 
:xpenditure  reports to accurately reflect maintenance payments made. 
Legislative  Regulatory  Other  Administrative 
I  I  J 
I 
Reason for Action: 
The State (1) incorrectly  classified  and claimed costs for social services, State foster care, and clinical  treatment as Title 
[V-E maintenance payments; (2) used an incorrect Federal financial  participation  rate applicable  to administrative 
:osts; (3) incurred  errors in the manual processing of claims for emergency foster care; and (4) used inaccurate payment 
information  to claim reimbursement  for payments made by the States Health Care Authority. 
Savings (in millions): 
FY  FY  FY  FY  FY 
$0.7 
Status: 
The State concurred with  our findings  and recommendations.  A corrective  action plan was included  in the written 
response to the audit report.  The ACF will  monitor  the States corrective  action. 
Report: 
A-06-99-00008  (Final  report, Mar.  1999) 
idministration  for Children  and Families  Page 76  The 2000 Red Book  OBTAINGOVERNMENTREIMBURSEMENTFOR 

HEADSTARTGRANTEESWNALLOWABLECHARGES 

Zurrent  Law: 
Tedera regulation  requires that nonfederal matching  and cost sharing contributions  be verifiable  and allowable  under 
he applicable  cost principles  and that the granting agency preapprove certain changes in the budget and in the grant 
lward proposal.  In addition,  compensatory time payments are allowed if they follow  the grantees own policy  for such 
Jayments. 
Proposal: 
Ihe Federal Government  should be reimbursed for ineligible  expenditures. 
Lepislative  Repulatorv  Other  Administrative 
J
I  I  I 
Reason for Action: 
Grantees claimed unallowable  costs, including  (1) noncompliance  with budget provisions  and deviations  from grant 
iward proposals ($1,308,952),  (2) irregularities  in financial  accounting ($345,461)  (3) noncompliance  with  preapproval 
-equirements for construction  ($35 1,895)  (4) unrecorded liabilities  ($2 16,746)  and (5) unsupported nonfederal 
natching  funds ($1,351,353). 
Savings (in millions): 
FY  FY  FY3  FY4  FY5 
$3.5 
Status: 
Some grantees did not agree with  our findings  and recommendations.  The ACF is using our findings  and 
recommendations as part of its monitoring  activity. 
Report: 
A-06-96-00062  (Final  report, Aug.  1996) 
A-07-98-01037  (Final  report, Aug.  1998) 
A-07-99-01039  (Final  report, Aug.  1999) 
A-08-96-0 1024 (Final report, Feb. 1997) 
A- 10-96-00007 (Final  report, Mar.  1997) 
A- 12-96-00017 (Final  report, July  1996) 
Administration  for Children  and Families  Page 77  The 2000 Red Book  RECOVERCOSTSCLAIMEDUNDERTHE 
EMERGENCYASSISTANCEPROGRAM 
Clurrent Law: 
Title IV-A,  Section 406(e) of the Social Security Act established the Emergency Assistance program to assist eligible 
:hildren  and families  though emergency or crisis situations by providing  temporary  financial  assistance and supportive 
services. On September 12, 1995, ACF notified  State agencies that Federal financial  participation  was not available 
mder the Emergency Assistance program for costs associated with providing  benefits or services to children  in the 
uvenile justice  system who had been removed from their homes as a result of their alleged, charged, or adjudicated 
lelinquent  behavior. 
Proposal: 
states should reduce Federal accounts for improper costs claimed, and ACF should recover the overpayments. 
Lepislative  Repulatorv  Other  Administrative 
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I 
Reason for Action: 

Statesclaimed costs that were unallowable  or did not meet requirements under the Emergency Assistance program. 

Savings (in millions): 

FY  FY  FY  FY  FY 
$46 
Status: 
The ACF concurred with  our findings  and recommendations.  The agency notes that under the Personal Responsibility 
and Work Opportunity  Reconciliation  Act of 1996, States may use TANF  funds to cover the costs of juvenile  justice 
services. 
Report: 
A-02-98-02002  (Final  Report, Feb. 2000) 
A-04-97-00  109 (Final  Report, July  1998) 
A-04-98-00  122 (Final  Report, Sept. 1999) 
idministration  for Children  and Families  Page 78  The 2000 Red Book  RECOVERUNALLOWABLEOFFICEOFCOMMUNITYSERVICES 
DISCRETIONARYGRANTCHARGES 
:urrent  Law: 
he Office  of Community  Services (OCS) was established in the Department of Health and Human Services by the 
Community Services Block  Grant Act of 1981. The OCS has discretionary  authority  to make funds available  via grants 
o support program activities  of national  or regional  significance  to alleviate  the causes of poverty  in distressed 
.ommunities.  The objectives of the program include promoting  full-time  permanent jobs for poverty-level  individuals 
.nd providing  income and/or ownership  opportunities  for low-income  individuals. 
roposal: 
Thegrantee should refund unallowable  costs to the Federal Government and coordinate with  ACF on the resolution  of 
he costs set aside. 
Legislative  Regulatorv  Other  Administrative 
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I  I  I 
Xeason for Action: 
Thegrantee claimed costs that were unallowable  or unsupported. 
Savings (in millions): 
FY  FY  FY3  FB 
$0.1 
Status: 
The grantee concurred with  our findings  and recommendations.  The ACF is using our findings  and recommendations 
rs part of its monitoring  activity. 
Report: 
A-09-98-00065  (Final  Report, Jan. 1999) 
A-10-98-00008  (Final  Report, Dec. 1998) 
Administration  for Children  and Families  Page 79  The 2000 Red Book  GENERAL  DEPARTMENTAL 

MANAGEMENT 
 General Departmental  Management 

Overview  The Office of Inspector Generals (OIG)  departmental  management 
and Governmentwide  oversight role includes reviews of payroll 
activities,  accounting  transactions, implementation  of the Federal 
Managers  Financial  Integrity  Act and the Prompt Pay Act,  financial 
management audits under the Chief Financial  Officers  Act,  grant and 
contract issues, the Departments  Working  Capital Fund, conflict 
resolution,  and adherence to employee standards of conduct.  The OIG 
also participates  in interagency  efforts through  the Presidents  Council 
on Integrity  and Efficiency  to prevent losses to and abuses of Federal 
programs. 
A related major responsibility  flows  from Office  of Management  and 
Budget  (OMB)  Circular  A-133,  which  designates HI-IS as cognizant 
agency to audit the majority  of the Federal funds awarded to major 
research schools, State and local government  cost allocation  plans, and 
separate indirect  cost plans of State agencies and local governments. 
Also,  OIG oversees the work  of nonfederal  auditors of Federal money 
at some 6,700 entities, such as community  health centers and Head 
Start grantees, as well  as at State and local governments,  colleges and 
universities,  and other nonprofit  organizations.  In addition,  OIG is 
responsible for auditing  the Departments  financial  statements 
beginning  with  the FY  1996 statements. 
The OIGs  work  in departmental management and Governmentwide 
oversight focuses principally  on financial  statement audits, financial 
management and managers accountability  for resources entrusted, 
Sign @cant 
standards of conduct and ethics, and Governmentwide  audit oversight, 
OIG  including  recommending  necessary revisions to OMB  guidance.  The 
OIG also reviews the adequacy of States systems to control  the 
Activities 
growth  of administrative/indirect  costs claimed for Federal financial 
participation. 
GeneralDepartmentalManagement  Page80  The 2000 Red Book  IMPROVEFUNDINGSYSTEMFOR 

WELFARE ADMINISTRATIVE COSTS 

Zurrent  Law: 
TheFederal Government  pays for half of the administrative  costs for most types of administrative  activities  in the 
viedicaid program.  States have considerable latitude in defining  their administrative  costs. Costs need only be 
:onsidered reasonable and necessary as outlined  in OMB  Circular  A-87, Cost Principles  for State and Local 
>ovemments.  In  1996, the Congress enacted the Temporary Assistance to Needy Families  (TANF)  block  grant which 
lrovides  grants to States to provide  cash to low-income  individuals.  Since administrative  costs are included  in this 
qant, Federal reimbursement  for these costs is limited.  No such limits  apply to the Medicaid  program, however. 
Proposal: 
3ne of the following  options should be used to fund administrative  costs in the Medicaid  program: 
l  Reduction  in Medicaid  special match rates to 50 percent. 
l  Block grant.  Set a base amount, then provide  inflationary  increases each year. 
l  Standard cost per recipient.  Fund States based on a standard per recipient  allocation  amount. 
l  Costper  recipient  cap.  Impose a cap on Federal reimbursement  of the cost per recipient. 
Legislative  Repulatorv  Other  Administrative 
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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  FY2  FY  FY4  FY 
Reduced special match 
 $245  $284  $328  $376  $432 
Block  grant 
 119  391  698  1,032  1,406 
Standard cost per recipient 
 33  97  140  203  269 
Capped cost per recipient 
 54  60  69  99  7 
Status: 

Medicaid  administrative  costs continue to be paid as they have in the past. 
Report: 
OEI-05-91-01080  (Final  report, Jan. 1995) 
General Departmental  Management  Page 81  The 2000 Red Book  INTERNET ADDRESS 
The 2000 Red Book  and other OIG materials, including  final 
reports issued and OIG program exclusions, may be accessedon 
the Internet at the following  address: 
http:Ilwww.os.dhhs.gov/oig