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THE 1997-98
RED
BOOK
June Gibbs Brown
Inspector General O I G
FFICE OF  NSPECTOR  ENERAL
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as amended, is to
protect the integrity of the Department of Health and Human Services (HHS) programs, as well as the health
and welfare of beneficiaries served by those programs.  This statutory mission is carried out through a
nationwide network of audits, investigations, and inspections conducted by the following operating
components:
Office of Audit Services
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by conducting audits
with its own audit resources or by overseeing audit work done by others.  Audits examine the performance of
HHS programs and/or its grantees and contractors in carrying out their respective responsibilities and are
intended to provide independent assessments of HHS programs and operations in order to reduce waste, abuse,
and mismanagement and to promote economy and efficiency throughout the Department.
Office of Evaluation and Inspections
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and program
evaluations (called inspections) that focus on issues of concern to the Department, the Congress, and the
public.  The findings and recommendations contained in the inspections reports generate rapid, accurate, and
up-to-date information on the efficiency, vulnerability, and effectiveness of departmental programs.
Office of Investigations
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative investigations of
allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment by providers. 
The investigative efforts of OI lead to criminal convictions, administrative sanctions, or civil monetary
penalties.  The OI also oversees State Medicaid fraud control units which investigate and prosecute fraud and
patient abuse in the Medicaid program.
Office of Counsel to the Inspector General
The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG, rendering
advice and opinions on HHS programs and operations and providing all legal support in OIGs internal
operations.  The OCIG imposes program exclusions and civil monetary penalties on health care providers and
litigates those actions within the Department.  The OCIG also represents OIG in the global settlement of cases
arising under the Civil False Claims Act, develops and monitors corporate integrity agreements, develops
model compliance plans, renders advisory opinions on OIG sanctions to the health care community, and issues
fraud alerts and other industry guidance. HSDUWPHQW RI +HDOWK (cid:9) +XPDQ 6HUYLFHV
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THE 1997-98
RED
BOOK
June Gibbs Brown
Inspector General Introduction to the Red Book
Purpose The Red Book is a compendium of significant Office of Inspector General
(OIG) cost-saving recommendations that have not been fully implemented. 
of the
These recommendations may require one of three types of actions: legislative,
Red Book
regulatory, or other administrative (such as manual revisions).  Some complex
issues involve two or all three types of actions. 
The Inspector General Act requires that the OIG's semiannual reports to the
Congress include "an identification of each significant recommendation
described in previous semiannual reports on which corrective action has not
been completed."  Thus, appendices to each semiannual report list significant
unimplemented recommendations.  Because of the abbreviated nature of this
list, however, we prepare the Red Book to further highlight the potentially
significant impact of cost-saving recommendations.
The savings estimates indicated for these unimplemented recommendations
are updated from time to time to reflect more current data as it becomes
available.  The estimates have varying levels of precision.  Full implementation
of the recommendations in this 1997-98 edition of the Red Book could
produce substantial savings to the Department. 
The Department of Health and Human Services (HHS) promotes the health
Department
and welfare of Americans and provides essential services to people of every
of Health
age group.   Eighty-five percent of the HHS budget provides medical care
and Human  coverage for the elderly, the disabled, and the poor.  The balance of the
Services  programs support research into the causes of disease, promote preventive
health measures, support the provision of health and social services, and
combat alcoholism and drug abuse.  
The Department's operating divisions are briefly described below:
(cid:4)
The  Health Care Financing Administration (HCFA) administers the
Medicare and Medicaid programs.
(cid:4)
The Public Health Service (PHS) agencies include the National
Institutes of Health, the Food and Drug Administration, the Centers
for Disease Control and Prevention, the Health Resources and
Services Administration, the Indian Health Service, the Agency for
Toxic Substances and Disease Registry, the Agency for Health Care
Policy and Research, and the Substance Abuse and Mental Health
Services Administration.  They promote biomedical research and 
Introduction Page 1 The 1997-98 Red Book disease cure and prevention; ensure the safety and efficacy of marketed
food, drugs, and medical devices; measure the impact of 
toxic waste sites on health; and conduct other activities designed to
ensure the general health and safety of American citizens.
(cid:4)
The Administration for Children and Families (ACF) provides Federal
direction and funding for State-administered programs designed to
promote stability, economic security, responsibility, and self-support
for the Nation's families, including a variety of social service programs
for American children and families, Native Americans, and the
developmentally disabled.
  
(cid:4)
The  Administration on Aging (AoA) serves as an advocate for older
persons at the national level.
(cid:4)
General departmental management (GDM) includes such staff division
activities as financial management and grant and contract
administration.
Organization The following sections of the Red Book separately address the OIGs
recommendations to each of the operating divisions listed above.  Most of
of the 
these recommendations stem from final reports.  Recommendations from draft
Red Book
reports represent the OIGs tentative position and are subject to change when
the final versions of the reports are issued.
For each recommendation, we summarize the current law, the reason that
action is needed, the estimated savings that would result from taking the
recommended action, the status of actions taken, and the report number and
date.  In addition, the type of action needed (legislative, regulatory, or other
administrative) is indicated.  Recommendations for proposed legislation are
removed from the Red Book once the law has been fully enacted.  On
regulatory and other administrative issues, recommendations are removed
when the action has been substantially completed.
Each final report, including the full text of comments from the cognizant
operating division, 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.
The Red We hope that this 1997-98 edition of the Red Book will prove to be a useful
asset for departmental decision-makers, the Administration, and the Congress
Book at a
in their continuing efforts to contain costs and improve program efficiency at
Glance
HHS.  A quick glance at OIGs cost-saving recommendations is provided on
the following page.
Introduction Page 2 The 1997-98 Red Book The Red Book at a Glance
Red Book Items HCFA PHS Agencies ACF GDM Total
Type of Action
Recommended
Legislative 34 2 2 2 40
Regulatory 7 0 0 0 7
Administrative 10 3 2 1 16
Estimated Savings
 by Type of Action
(in millions of dollars)
Legislative $15,847 $186  $258 $896  $17,187 
Regulatory  753 0 0 0    753 
Administrative      459  35 21       22 537 
Introduction Page 3 The 1997-98 Red Book Table of Contents:
Health Care Financing Administration
Annual Savings Page
(in millions)*
HEALTH CARE FINANCING ADMINISTRATION 1
Hospitals
Over $1 billion Require Medicare Coverage of All State and Local Government
Employees or Make Medicare the Secondary Payer 2
$820 Continue Mandated Reductions in Hospital Capital Costs 3
$249 More Accurately Reflect Base Year Costs in Prospective Payment
Systems Capital Cost Rates 4
TBD Reduce the Prospective Payment System Adjustment Factor for
Indirect Medical Education Costs 5
$157 Revise Graduate Medical Education Payment Methodology 6
$110 Deny Medicare Reimbursement for Patients Who Receive
Substandard Medical Care 7
TBD Modify Payment Policy for Medicare Bad Debts 8
$210 Limit Prospective Payment System Reimbursement for Hospital
Admissions Not Requiring an Overnight Stay 9
$84 Recover Overpayments and Expand the Diagnosis Related Group
Payment Window 10
$90 Reduce Medicare Payments for Hospital Outpatient Services 11
$48 Apply 190-Day Lifetime Limit for Medicare Inpatient Psychiatric Care
and a 60-Day Annual Limit 12
$4 Preclude Improper Payments to Hospitals for Hospice Beneficiaries 13
Physicians
$544 Selectively Contract for Coronary Artery Bypass Graft Surgery 14
Over $2 billion Roll Reimbursement for Laboratory Services Into Charge for
Physician Office Visits 15
$130 Expand National List of Chemistry Panel Tests 16
* These estimated savings have varying levels of precision.
Health Care Financing Administration Page i  The 1997-98 Red Book Table of Contents (continued)
Annual Savings Page
(in millions)
$126 Encourage Physicians to Use Paperless Claims 17
$91 Modify Medicare Incentive Payments in Health Professional
Shortage Areas 18
End Stage Renal Disease
$22 Reduce Medicare End Stage Renal Disease Payment Rates 19
$90 Ensure That Claims for Ambulance Services for End Stage Renal
Disease Beneficiaries Meet Coverage Guidelines 20
$15 Modify Payment Practices of Ambulance Services for Medicare
End Stage Renal Disease Beneficiaries 21
$21 Collect Overpayments from Health Maintenance Organizations for
Misclassified End Stage Renal Disease Beneficiaries 22
Durable Medical Equipment
TBD Ensure Legitimacy of Medicare Suppliers 23
$6 Limit Medicare Part B Reimbursement for Hospital Beds 24
$12 Reduce Payments for Pressure Support Surfaces 25
$8 Improve Billing Practices for Medicare Orthotics 26
$65 Examine Payment Method for Parenteral Nutrition 27
$28 Reduce and Control Enteral Nutrition Equipment Costs 28
$15 Reduce Medicare Part B Payments for Enteral Nutrition at Home 29
$174 Eliminate Separate Enteral Nutrient Payments in Nursing Homes 30
$130 Minimize Payments for Portable Imaging Services 31
Other Medicare Reimbursement
Over $1 billion Change the Way Medicare Pays for Clinical Laboratory Tests 32
TBD Require Physician Examination Before Ordering Home Health Services 33
TBD Ensure Validity of Medicare Hospice Enrollments 34
TBD Reduce Excessive Payments for Hospice Patients in Nursing Homes 35
$160 Revise Medicare Prescription Drug Payment Methods 36
Health Care Financing Administration Page ii  The 1997-98 Red Book Table of Contents (continued)
Annual Savings Page
(in millions)
$242 Establish Fee Schedule for Medicare Ambulance Payments 37
$47 Allow Payment for Nonemergency Advanced Life Support Ambulance
Services Only When Medically Necessary 38
TBD Provide Explicit Guidelines on Allowability of Institutional General
and Administrative and Fringe Benefit Costs 39
$9 Discontinue Use of a Separate Carrier to Process Medicare Claims
for Railroad Retirement Beneficiaries 40
Over $4 billion Raise the Medicare Entitlement Age to 67 41
$291 Subject Funds Placed in Flexible Benefit Plans to Hospital
Insurance Tax 42
TBD Improve Medicare Secondary Payer Safeguards 43
TBD Expand Medicare Secondary Payer Provisions for End Stage Renal
Disease Benefits 44
Medicaid Reimbursement
Over $4 billion Modify Formula for the Medicaid Program 45
$122 Promote Medicaid Cost Sharing 46
$35 Support Medicaid Payments of Premiums for Employer Group Health
Insurance 47
$3 Close Loopholes That Shelter Third Party Liability Settlements
and Awards 48
$123 Implement an Indexed Best Price Calculation in the Medicaid
Drug Rebate Program 49
$81 Reduce Nonemergency Use of Emergency Rooms by
Medicaid Recipients 50
$14 Install Edits to Preclude Improper Medicaid Reimbursement for
Clinical Laboratory Services 51
$683 Control Medicaid Payments to Institutions for Mentally
Retarded People 52
Health Care Financing Administration Page iii  The 1997-98 Red Book Table of Contents:
Public Health Service Agencies
Annual Page
Savings
(in millions)*
PUBLIC HEALTH SERVICE AGENCIES 53
$176 Institute and Collect User Fees for Food Safety Inspections 54
$10 Cap Medical Malpractice Coverage to Community and Migrant
  Health Centers 55
$28 Improve Indian Health Service Billings and Collections from Private
  Health Insurance Companies 56
$1 Propose Changes to Office of Management and Budget Circular
A-21 Regarding Recharge Centers 57
$6 Limit Graduate Student Compensation to That Paid for Similar Work 58
* These estimated savings have varying levels of precision.
Public Health Service Agencies Page iv The 1997-98 Red Book Table of Contents:
Administration for Children and Families
Annual Page
Savings
(in millions)*
ADMINISTRATION FOR CHILDREN AND FAMILIES 59
$11 Refer Foster Care Cases to Child Support Enforcement Agencies 60
$247 Limit Federal Participation in States Costs for Administering the
Foster Care Program 61
$18 Improve State Oversight of Private Nonprofit Child Placing Agencies 62
$3 Obtain Government Reimbursement for Head Start Grantees
Unallowable Charges 63
* These estimated savings have varying levels of precision.
    
Administration for Children and Families Page v  The 1997-98 Red Book Table of Contents:
General Departmental Management
Annual Page
Savings
(in millions)*
GENERAL DEPARTMENTAL MANAGEMENT 64
$660 Simplify Administrative/Indirect Cost Allocation Systems 65
$236 Improve Funding System for Welfare Administrative Costs 66
$22 Properly Allocate Training Costs Under Federally Supported Programs 67
* These estimated savings have varying levels of precision.
General Departmental Management Page vi The 1997-98 Red Book HEALTH CARE FINANCING
ADMINISTRATION Health Care Financing Administration
Overview
The Health Care Financing Administration (HCFA) is responsible for
administering the Medicare and Medicaid programs.  Medicare Part A
provides hospital and other institutional insurance for persons age 65 or
older and for certain disabled persons, including those with end stage renal
disease, and is financed by payroll tax deductions through the Federal
Hospital Insurance Trust Fund.  Medicare Part B (Supplementary Medical
Insurance), which is financed by participants and general revenues, is an
optional program which covers most of the costs of medically necessary
physician and other services.
The Medicaid program provides grants to States for medical care for
approximately 37 million low-income people.  Eligibility for Medicaid is, in
general, based on a person's eligibility for cash assistance programs.  State
expenditures for medical assistance are matched by the Federal Government
using a formula that measures per capita income in each State relative to
the national average.    
Significant 
Over the years, Office of Inspector General (OIG) findings and
OIG
recommendations have contributed to many significant reforms in the
Activities 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 revising prescription drug payment methods,
adjusting graduate medical education costs, and reducing reimbursement
for hospital capital costs.  Regarding Medicaid, the OIG has recommended
modifying the formula that determines the Federal share of costs,
promoting Medicaid cost sharing, and controlling Medicaid payments to
institutions for mentally retarded people.
Health Care Financing Administration Page 1 The 1997-98 Red Book R M C A S L
EQUIRE  EDICARE  OVERAGE OF  LL  TATE AND  OCAL
G E M M
OVERNMENT  MPLOYEES OR  AKE  EDICARE
S P
THE  ECONDARY  AYER
Current Law:
The Consolidated Omnibus Budget Reconciliation Act of 1985 established Medicare Part A coverage and payment of
hospital insurance contributions for new State and local government employees hired after March 31, 1986.  However,
employees hired before April 1, 1986, are not covered by Medicare Part A unless the government entity has voluntarily
agreed to cover groups of its employees under the full Old-Age, Survivors and Disability Insurance program.
Proposal:
Medicare coverage and hospital insurance contributions should be required for all State and local employees, including
those hired before April 1, 1986.  If this proposal is not enacted, HCFA should seek legislation making Medicare the
secondary payer for retirees from exempt State and local agencies.
Legislative Regulatory Other Administrative
77
Reason for Action:
Retirees from exempt agencies paid significantly lower taxes than nonexempt retirees.  We estimate that over a 9-year
period (1982-1990), Medicare will have spent about $16.9 billion in benefits for these retirees.  However, only an
estimated $2.7 billion of taxes, with interest, will have been collected, leaving a shortfall of $14.2 billion to be subsidized
by other taxpayers.  Most of these retirees qualify for Medicare through other covered employment or as a spouse of a
covered worker.  Those insured through other employment contributed far less for their coverage than other retirees, yet
their hospital benefit protection is the same.  Furthermore, exempt government agencies that did not pay the employer's
share of hospital insurance contributions will have the windfall advantage of Medicare as the primary payer of health
costs for retirees over age 65.  Both conditions unfairly drain the hospital insurance trust fund and are inequitable to
employees and employers who must contribute.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
$1,559 $1,552 $1,521 $1,490 $1,451
Status:
Although HCFA included a proposal to mandate Medicare coverage for all State and local government employees in the
FY 1990 budget submission, no legislative proposal was included in the President's current budget.  Also, HCFA did not
agree with our recommendation to make Medicare the secondary payer, noting, among other things, that this would
eventually be more costly for the exempt agencies than mandated coverage. 
Report:
A-09-88-00072 (Final report, Feb. 1989)
Health Care Financing Administration Page 2 The 1997-98 Red Book C M R
ONTINUE  ANDATED  EDUCTIONS IN
H C C
OSPITAL  APITAL  OSTS
Current Law:
On October 1, 1991, HCFA began a 10-year transition period for paying hospital capital costs under a prospective
payment system.  Final regulations were promulgated August 30, 1991 (56FR43358).  The rates are based on historical
costs, less a mandated reduction of 7.4 percent under the Omnibus Budget Reconciliation Act of 1993.
Proposal:
The HCFA should (1) seek legislative authority to continue mandated reductions in capital payments beyond FY 1995 and
(2) determine the extent that capital payment reductions are needed to fully account for hospitals' excess bed capacity and
report the percentage of reduction to the Congress.
Legislative Regulatory Other Administrative
77
Reason for Action:
Hospital capital costs soared during the first 5 years of the prospective payment system (PPS), despite low bed
occupancy.  The Medicare system of reimbursing capital costs on a pass-through basis (i.e., reimbursed outside of
diagnosis related group) was a major reason for this increase.  Paying capital costs prospectively, as required by recently
implemented regulations, should assist in curbing escalating costs.  However, the PPS rates are based on historical costs
that are inflated because (1) excess capacity in the hospital industry has caused more capital costs to be incurred than
economically necessary and (2) inappropriate elements, such as charges for depreciation on federally funded assets, are
included in the historical costs.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$820 $950  $1140 $1450 $1840
Status:
The HCFA did not agree with our recommendation.  Although the Balanced Budget Act of 1997 reduces capital
payments, it does not include the effect of excess bed capacity and other elements included in the base year historical
costs.
Report:
A-09-91-00070 (Final report, Apr. 1992)
A-14-93-00380 (Final report, Apr. 1993)
Health Care Financing Administration Page 3 The 1997-98 Red Book M A R B Y C
ORE  CCURATELY  EFLECT  ASE  EAR  OSTS IN
P P S '
ROSPECTIVE  AYMENT  YSTEM S
C C R
APITAL  OST  ATES
Current Law:
Under section 1886(d) of the Social Security Act, the Medicare program pays for the operating costs attributable to
hospital inpatient services under a prospective payment system (PPS).  A PPS pays for care using a predetermined
specific rate for each discharge.  Public Law 100-203 required the Secretary of Health and Human Services to establish a
PPS for capital costs for cost reporting periods beginning in FY 1992.  
Proposal:
The HCFA should (1) consider reducing payment rates by 7.5 percent to more accurately reflect costs of the base year
used for the capital cost PPS and (2) continue to monitor the most current data and make any necessary further
adjustments to the base rate.
Legislative Regulatory Other Administrative
 77
Reason for Action:
While HCFA took great pains to devise and implement an equitable PPS for capital costs, information now available
indicates that HCFA's 1992 estimated base year rate is 7.5 percent higher than current actual costs.  A 7.5 percent
reduction would also correct all forecasting estimates that HCFA had to make in arriving at an anticipated rate to
implement the capital cost PPS.  The total effect of overpayments in relation to cost used as the basis for the capital cost
PPS will gradually increase from 1996 until the capital cost PPS is fully implemented in 2002.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$249 $284 $319 $354 $388
Status:
The HCFA agreed that the capital rate reflected an overestimation of base year costs, and the Balanced Budget Act of
1997 provides for a reduction in capital payments for 1998-2002.  However, we believe HCFA should continue to
monitor current data since additional reductions may be warranted in the future.
Report:
A-07-95-01127 (Final report, Aug. 1995)
Health Care Financing Administration Page 4 The 1997-98 Red Book R P P
EDUCE THE  ROSPECTIVE  AYMENT 
S A F I
YSTEM  DJUSTMENT  ACTOR FOR  NDIRECT
M E C
EDICAL  DUCATION  OSTS
Current Law:
Since the inception of Medicare's prospective payment system (PPS), indirect medical education payments have been paid
only to teaching hospitals.  These payments are designed to alleviate an anticipated adverse effect that PPS would have on
teaching hospitals.  The indirect medical education adjustment factor was determined by HCFA and the Congress.  Using
historical data, HCFA compared costs per case in teaching and nonteaching hospitals using regression analysis and
determined that operating costs in hospitals with teaching programs increased approximately 5.79 percent for every 0.1
resident physician per hospital bed compared with hospitals without teaching programs.  Under a congressional mandate,
HCFA was required to double the adjustment factor under PPS--increasing it to 11.59 percent.  
The Consolidated Omnibus Budget Reconciliation Act of 1985 reduced the indirect medical education adjustment factor
from 11.59 percent to 8.1 percent for discharges occurring on or after May 1, 1986, and before October 1, 1988.  The
Omnibus Budget Reconciliation Act of 1987 further modified the adjustment by reducing it to approximately 7.7 percent
for each 0.1 in the ratio of interns and residents to beds. 
Proposal:
The indirect medical education adjustment factor should be reduced to the level supported by HCFA's empirical data, and
further studies should be made to determine whether different adjustment factors are warranted for different types of
teaching hospitals.  
Legislative Regulatory Other Administrative
77
Reason for Action:
Our extensive analytical work shows that teaching hospitals continue to earn substantial profits.  In addition, a
Prospective Payment Assessment Commission report found that the indirect medical education adjustment substantially
overlaps with the disproportionate share adjustment at teaching hospitals and that these payments are a major source of
revenue for some hospitals.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA agreed with our recommendation.  In addition, the Balanced Budget Act of 1997 gradually reduces the indirect
medical education adjustment factor from the current 7.7 percent in FY 1997 to 5.5 percent in 2001 and thereafter.  We
believe the factor should be further reduced to eliminate any overlap with the disproportionate share adjustment.
Report:
A-07-88-00111 (Final report, Sept. 1989)
Health Care Financing Administration Page 5 The 1997-98 Red Book R G M E
EVISE  RADUATE  EDICAL  DUCATION
P M
AYMENT  ETHODOLOGY
Current Law:
Section 9202 of the Consolidated Omnibus Budget Reconciliation Act of 1985 and section 9314 of the Omnibus Budget
Reconciliation Act of 1986 changed the way Medicare reimburses hospitals for the cost of direct graduate medical
education.  Under the new methodology, these costs are reimbursed on a "hospital specific" prospective payment basis,
which is retroactive to cost reporting periods beginning on or after July 1, 1985.
Proposal:
The HCFA should (1) revise the regulations to remove from a hospital's allowable graduate medical education base year
costs any cost center with little or no Medicare utilization and (2) submit a legislative proposal to compute Medicare's
percentage of participation under the former more comprehensive system.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
The HCFA estimated that the new graduate medical education regulations would result in substantial Medicare savings. 
Our review indicated that Medicare costs under the new reimbursement method may actually increase because of two
factors.  First, the new 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 in the new system to compute Medicare's share of these costs is based on inpatient data only and is
higher than Medicare's overall share of graduate medical education costs as determined under the previous method, which
also included ancillary and outpatient data.
Savings (in millions):
  FY 1     FY 2    FY 3    FY 4    FY 5 
Factor 1 $  39.2 $  39.2 $  39.2 $  39.2 $  39.2
Factor 2   125.6   125.6   125.6   125.6   125.6
Combined *   157.3   157.3   157.3   157.3   157.3
* Note:  When the two proposed changes are handled as one combined calculation, the savings are less than those from
calculating the effect of the changes separately.
Status:
The HCFA did not concur with our recommendations.  Although the Balanced Budget Act of 1997 contains provisions to
slow the growth in Medicare spending on graduate medical education, we continue to believe that our recommendations
should be implemented and that further savings can be achieved.
Report:
A-06-92-00020 (Final report, Apr. 1994)
Health Care Financing Administration Page 6 The 1997-98 Red Book D M R
ENY  EDICARE  EIMBURSEMENT
P W R
FOR  ATIENTS  HO  ECEIVE
S M C
UBSTANDARD  EDICAL  ARE
Current Law:
Under Medicare, hospitals receive a pre-established payment for each discharge based on an assigned diagnosis related
group (DRG).  Each DRG results in an associated payment that represents an average cost for patients having similar
diagnoses.  The Congress established peer review organizations to protect the integrity of the prospective payment system
and to maintain the quality of care.  The Consolidated Omnibus Budget Reconciliation Act of 1985 authorized these
organizations to deny Medicare reimbursement for patients receiving substandard medical care, defined as medical care
clearly failing to meet professionally recognized standards.
Proposal:
The HCFA should increase efforts to identify and address poor quality care in hospitals by issuing regulations to
implement the provisions of the 1985 act.
Legislative Regulatory Other Administrative
77
Reason for Action:
Of the patients sampled, 6.6 percent received poor quality of care.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$110 $110 $110 $110 $110
Status:
In 1989, HCFA issued a notice of proposed rulemaking to authorize the peer review organizations to deny Medicare
reimbursement for patients who received substandard medical care.  The HCFA has not yet issued a final regulation. 
Report:
OEI-09-88-00870 (Final report, July 1989)
Health Care Financing Administration Page 7 The 1997-98 Red Book M P P
ODIFY  AYMENT  OLICY
M B D
FOR  EDICARE  AD  EBTS
Current Law:
Under Medicare's prospective payment system (PPS), hospitals are reimbursed for inpatient services rendered to Medicare
beneficiaries by a fixed payment amount based on a diagnosis related group (DRG).  However, bad debts related to
unpaid deductible and coinsurance amounts are reimbursed separately as pass-through (i.e., reimbursed outside of DRG)
items under reasonable cost principles.
Proposal:
We presented an analysis of four options for HCFA to consider, including the elimination of a separate payment for bad
debts, the offset of Medicare bad debts against beneficiary Social Security payments, the limitation of bad debt payments
to prospective payment system hospitals which are profitable, and the inclusion of a bad debt factor in the DRG rates. 
The HCFA should seek legislative authority to further modify bad debt policies.
Legislative Regulatory Other Administrative
77
Reason for Action:
Our review of HCFA's Hospital Cost Report Information System showed that total Medicare bad debts increased from
$159 million during the second year of PPS (FY 1985) to $398 million during the fifth year of PPS (FY 1988).  During
this same period, hospitals continued to earn significant profits.  Also, hospital bad debt collection efforts have often been
less than adequate since there is little incentive for a hospital to collect the unpaid deductible and coinsurance amounts
when Medicare pays these amounts.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
Agreeing with our recommendation to include a bad debt factor in the DRG rates, HCFA said that our report should assist
the Congress in understanding the rapid growth in hospital bad debts.  The Balanced Budget Act of 1997 provides for
some reduction of bad debt payments to providers, but additional legislative changes are needed to implement the
modifications we recommended.
Report:
A-14-90-00339 (Final report, June 1990)
Health Care Financing Administration Page 8 The 1997-98 Red Book L P P S
IMIT  ROSPECTIVE  AYMENT  YSTEM
R H A
EIMBURSEMENT FOR  OSPITAL  DMISSIONS
N R O S
OT  EQUIRING AN  VERNIGHT  TAY
Current Law:
Under the prospective payment system (PPS), hospitals are reimbursed for each admission when the patient is discharged
based on established rates which are grouped into diagnosis related groups (DRG).  Current Medicare instructions
provide that an admission occurs when it is expected that the patient will occupy a bed and remain overnight.  This
applies even if the person is later discharged or transferred to another hospital without actually using a hospital bed
overnight.
Proposal:
The HCFA should seek legislation to pay for covered services related to 1-day admissions without an overnight stay as
outpatient services which are paid on the basis of the lower of the actual costs or the customary charges in a locality.
Legislative Regulatory Other Administrative
77
Reason for Action:
Based on Medicare records for 1989, our follow-up review (A-05-92-00006) revealed that the volume of 1-day
admissions on a national basis had increased approximately 150 percent over 1985 levels and that Medicare had paid for
179,500 admissions that did not require overnight stays.  Many of these cases related to observations after emergency or
outpatient services, to surgeries later canceled, or to acute care stays of doubtful necessity.  In many cases, documentation
revealed that few, if any, services were provided while the patient was an inpatient.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$210 $210 $210 $210 $210
Status:
The HCFA proposed to implement our recommendation through administrative remedies which would designate whether
specific services are to be covered and paid for as inpatient or outpatient services.   No proposal was included in the
President's current budget.
Report:
A-05-89-00055 (Final report, July 1989) 
A-05-92-00006 (Final report, Jan. 1992)
Health Care Financing Administration Page 9 The 1997-98 Red Book R O E
ECOVER  VERPAYMENTS AND  XPAND THE 
D R G P W
IAGNOSIS  ELATED  ROUP  AYMENT  INDOW
Current Law:
Under the prospective payment system (PPS), Medicare fiscal intermediaries reimburse hospitals a predetermined amount
for inpatient services furnished to Medicare beneficiaries depending on the illness and its classification under a diagnosis
related group (DRG).  Currently, separate payments for nonphysician outpatient services (such as diagnostic tests and
laboratory tests) rendered within 72 hours of the day of an inpatient admission are not permitted under the Omnibus
Budget Reconciliation Act of 1990, section 4003.
Proposal:
The HCFA should propose legislation to expand the DRG payment window to at least 7 days immediately prior to the day
of admission.
Legislative Regulatory Other Administrative
77
Reason for Action:
Our review identified about $83.5 million in admission-related nonphysician outpatient services rendered 4 to 7 days
immediately before an inpatient admission.  The fiscal intermediaries cited clerical errors and insufficient or nonexistent
edits for improper payments, and the hospitals cited clerical errors and misinterpretation of the regulations.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$83.5 $83.5 $83.5 $83.5 $83.5
Status:
The HCFA agreed to recover the improper billings and to refund the beneficiaries' coinsurance and deductible.  Collection
of the overpayment is being handled by settlement agreements with the hospitals through the Department of Justice
working with HCFA and the OIG.  The HCFA did not concur with the recommendation to further expand the payment
window.  No legislative proposal was included in the President's current budget.
Report:
A-01-92-00521 (Final report, July 1994)
Health Care Financing Administration Page 10 The 1997-98 Red Book R M P
EDUCE  EDICARE  AYMENTS
H
FOR  OSPITAL
O S
UTPATIENT  ERVICES
Current Law:
To bring payments for services in hospital outpatient departments more in line with the payments for services in an
ambulatory service center, the Omnibus Budget Reconciliation Act of 1990, section 4151, reduced Medicare payments for
hospital outpatient services by (1) adjusting the payment formula to 58 percent of the ambulatory service center rates and
42 percent of the hospital's outpatient costs and (2) lowering hospital payments made on a reasonable cost basis by 5.8
percent.  The Omnibus Budget Reconciliation Act of 1993 extended the 5.8 percent reduction in payments for hospital
outpatient department services from FY 1996 through 1998.
Proposal:
Legislation is needed to reduce the current payments for services in outpatient departments to bring them more in line with
ambulatory service center approved payments.  We recommended paying outpatient departments the ambulatory service
center approved rate or adjusting hospital payments by a uniform percentage.
Legislative Regulatory Other Administrative
77
Reason for Action:
Our study of hospital outpatient surgeries showed that the current blended rate to hospitals in the aggregate is greater than
the payment rate for ambulatory service center approved services.  We analyzed over 2 million hospital outpatient bills
containing ambulatory center approved surgeries from 5,421 hospitals.  The disparity between Medicare payments to
outpatient departments and the centers for similar services still exists.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$90 $107 $126 $147 $175
Status:
The HCFA acknowledged that our report would be helpful in developing a legislative proposal to bring about greater
parity of payments for services performed in an outpatient setting and those performed in ambulatory service centers.  
Included in the Balanced Budget Act of 1997 is the requirement to develop a prospective payment system (PPS) for
hospital outpatient services for FY 1999.  The Act also includes provisions to eliminate a formula-driven overpayment
which allows Medicare to fully deduct beneficiary coinsurance payments received by the hospital before the program
makes its payments.  We will monitor the implementation of the outpatient PPS to ensure that payment rates are
comparable to the ambulatory service center rates.
Report:
A-14-89-00221 (Final report, Mar. 1991)
OEI-09-88-01003 (Final report, May 1989)
Health Care Financing Administration Page 11 The 1997-98 Red Book A 190-D L L M
PPLY  AY  IFETIME  IMIT FOR  EDICARE 
I P C
NPATIENT  SYCHIATRIC  ARE AND A
60-D A L
AY  NNUAL  IMIT
Current Law:
Medicare limits inpatient care in psychiatric hospitals to 190 days during a beneficiary's lifetime.  When Medicare was 
passed, inpatient psychiatric care was rendered, for the most part, in State psychiatric hospitals.  The Congress apparently
believed that long-term care of the mentally ill was generally a State responsibility.  The delivery of inpatient psychiatric
care has expanded beyond the psychiatric hospitals to general hospitals with distinct psychiatric units.  The 190-day limit
was not extended to these more costly general hospital units.  
Proposal:
The HCFA should develop new limits to deal with the high cost and changing patterns of utilization of inpatient
psychiatric services.  A 60-day annual and a 190-day lifetime limit should be applied to all psychiatric care regardless of
the place of service.
Legislative Regulatory Other Administrative
77
Reason for Action:
The Medicare lifetime limit on psychiatric hospital care is no longer effective because of changed patterns of inpatient
psychiatric care.  Over 82 percent of the $1.36 billion in program payments for inpatient psychiatric care is being paid to
general hospitals--where the lifetime limit does not apply.  An annual limit on care, which has congressional precedence in
a Department of Defense health care program, may be more acceptable than a lifetime limit.  We believe a 60-day annual
limit on inpatient psychiatric services will produce significant savings over the current uneven application of the Medicare
lifetime limit.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$47.6 $47.6 $47.6 $47.6 $47.6
Status:
The HCFA considered a proposal recommending that the 190-day lifetime limit for psychiatric admissions be extended to
general hospitals.  However, such a proposal was not included as part of the President's current budget.  
Report:
A-06-86-62045 (Final report, Feb. 1988)
Health Care Financing Administration Page 12 The 1997-98 Red Book P I P H
RECLUDE  MPROPER  AYMENTS TO  OSPITALS
H B
FOR  OSPICE  ENEFICIARIES
Current Law:
When a beneficiary elects hospice care, the Medicare program reimburses the hospice a fixed rate for each day of care. 
The hospice then assumes fiscal responsibility for all Medicare Part A services related to the beneficiary's terminal illness. 
A separate Medicare payment to the hospital is not allowable; instead the hospital should bill the hospice, and the hospice
then receives a higher daily rate for the number of days the hospice beneficiary is hospitalized.
Proposal:
The HCFA should instruct its fiscal intermediaries to recover improper payments from hospitals noted in our review and
to review related medical records for the potential inappropriate payments we identified.                                                    
                                                            
Legislative Regulatory Other Administrative
77
Reason for Action:
Our review showed that over $21 million in overpayments should be recovered for Calendar Years 1988-1992.  In
addition, more effective edits of hospital/hospice claims could result in annual savings of approximately $4 million over
the next 5 years.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
  $4   $4   $4   $4   $4
Status:
The HCFA agreed to recover the overpayments identified and to instruct its fiscal intermediaries to review the claims we
identified as potential overpayments.  We are currently doing additional work to assess the effectiveness of HCFA's
common working file edits in regard to hospice/hospital payments.
Report:
A-02-93-01029 (Final report, June 1995)
Health Care Financing Administration Page 13 The 1997-98 Red Book S C
ELECTIVELY  ONTRACT FOR
C A B G S
ORONARY  RTERY  YPASS  RAFT  URGERY
Current Law:
Medicare pays for coronary artery bypass graft surgery costs incurred for physician, hospital, and other services. 
Payment for hospitals is based on diagnosis related group (DRG) rates, and payment for physician and other services is
based on reasonable charge determinations.
Proposal:
The HCFA should negotiate all-inclusive package payment prices with selected surgeons and medical centers for
providing coronary artery bypass graft surgery to Medicare beneficiaries.
Legislative Regulatory Other Administrative
77
Reason for Action:
In 1985, Medicare payments for coronary artery bypass graft surgery (DRG codes 106 and 107) totaled over 
$1.5 billion--an amount that has increased over the years.  Hospitals and surgical teams performing more than 200 of
these surgeries per year had better outcomes, in terms of mortality rates, lengths of stay, and charges, than those
performing fewer surgeries.  The reasonable charge allowances for physicians are often inconsistent and inequitable. 
Similarly, both inconsistent carrier controls/payment guidelines and the revised HCFA procedure coding system have
increased Medicare costs for this surgery.  Current legislation does not allow the negotiation of preferred provider and
fixed-price packages for bypass surgery for Medicare patients, despite the fact that these practices save the private sector
millions of dollars each year.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
$543.9 $543.9 $543.9 $543.9 $543.9
Status:
The HCFA conducted a demonstration project which ended in July 1996.  The demonstration alone saved $300 million. 
A final report will be issued in March 1998. 
Report:
OEI-09-89-00076 (Final report, Aug. 1987)
Health Care Financing Administration Page 14 The 1997-98 Red Book R R
OLL  EIMBURSEMENT FOR
L S C
  ABORATORY  ERVICES INTO  HARGE
P O V
 FOR  HYSICIAN  FFICE  ISITS
Current Law:
Medicare pays the full amount of all clinical laboratory services provided in outpatient and office settings based on fee
schedules.
Proposal:
The HCFA should propose legislation to roll the reimbursement for laboratory services into the recognized charge for
physician office visits (which are subject to beneficiary co-payment).
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Clinical laboratory claims account for 25 percent of the line items in Medicare bills.  Numerous initiatives to limit
inappropriate growth have been enacted into law in recent years.  Most involve limiting the amount paid for each
laboratory service.  These initiatives have failed to limit overall spending, however, because they did not reduce the
number of tests prescribed.  Our proposal would eliminate incentives for inappropriate lab tests while still allowing
sufficient funds to pay for needed services; unnecessary tests would decrease as a result of the incentive to control costs;
beneficiary coinsurance and deductible provisions would again come into play; and administrative savings would result
from the reduction in the number of claims processed.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
Roll-in $   700 $1,500 $2,700 $4,100 $6,000
Co-payment   1,130   1,240   1,370   1,520   1,690
Admin. savings      210      210      210      210      210
Total $2,040 $2,950 $4,280 $5,830 $7,900
Status:
The HCFA does not concur with our recommendation but is studying alternative ways to limit laboratory services.  We
plan to conduct additional analytical work related to this topic.
Report:
OEI-05-89-89150 (Monograph, Oct. 1990)
OEI-05-89-89151 (Management advisory report, July 1991)
Health Care Financing Administration Page 15 The 1997-98 Red Book E N L
XPAND  ATIONAL  IST
C P T
OF  HEMISTRY  ANEL  ESTS
Current Law:
Chemistry tests are clinical laboratory services requested by physicians in order to diagnose and treat patients.  Chemistry
tests that are commonly performed on automated laboratory equipment are referred to as panel tests and are required by
HCFA to be grouped together for payment purposes.  In addition, HCFA requires that other chemistry tests available in a
carrier's service area and commonly performed on automated laboratory equipment be reimbursed as panel tests.
Proposal:
The HCFA should update its guidelines by expanding the national list of chemistry panel tests to include 10 tests
identified by our audit. 
                                                                                                           
Legislative Regulatory Other Administrative
77
Reason for Action:
Based on claims information and responses to questionnaires by hospital and independent laboratories related to 18 tests
identified for review, 10 are available in all carrier service areas and are commonly performed on automated equipment. 
These 10 tests should be paid as panel tests.  However, HCFA's guidelines specifying chemistry tests that should be
paneled by all carriers have not been updated promptly to add tests as technology has advanced.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$130 $130 $130 $130 $130
Status:
The HCFA agreed with 8 of the 10 tests recommended for addition to the list and added 3 of these tests to its carrier
manual in November 1995.  A legislative proposal to add tests was not included in the Presidents current budget.
Report:
A-01-93-00521 (Final report, Jan. 1995)
Health Care Financing Administration Page 16 The 1997-98 Red Book E P
NCOURAGE  HYSICIANS
U P C
TO  SE  APERLESS  LAIMS
Current Law:
Physicians may submit claims to Medicare in either paper or electronic form.  Seventy-three percent of all physician
claims are currently submitted electronically, and 59 percent of Medicare physicians use only paper.
Proposal:
The HCFA should: 
(cid:4)
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.
(cid:4)
Begin to plan now for the policy changes that will be necessary to achieve an almost completely paperless
environment for processing Medicare claims.  These policy changes can include targeting a date when all physicians
will be mandated to submit paperless claims, targeting a date when paperless claims submission will become a
condition for Medicare participating physician status, or continuing to accept paper claims but imposing a filing fee
to cover the incremental cost of doing so.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Approximately 65 percent of physicians who now submit Medicare claims only on paper indicate a high or moderate level
of interest in switching to paperless claims.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$126 $126 $126 $126 $126  
Status:
The HCFA concurred with our recommendations and is developing a corrective action plan.
Report:
OEI-01-94-00230 (Final report, May 1996)
A-05-94-00039 (Final report, May 1996)
Health Care Financing Administration Page 17 The 1997-98 Red Book M M I P
ODIFY  EDICARE  NCENTIVE  AYMENTS
H P S A
 IN  EALTH  ROFESSIONAL  HORTAGE  REAS
Current Law:
Since 1989, physicians who treat Medicare patients in HHS-defined health professional shortage areas have been entitled
to bonus payments that were designed to improve patient access to care.  The current law calls for a 10 percent bonus.
Proposal:
The HCFA should seek to (1) eliminate the Medicare incentive payments entirely, (2) modify the Medicare incentive
payment program to target it more effectively to primary care, or (3) channel funds from the Medicare incentive payment
program to new or existing mechanisms for improving access to primary care.
Legislative Regulatory Other Administrative
77
Reason for Action:
A substantial amount of the Medicare incentive money has gone to physicians who provide little or no primary care. 
Also, among primary care physicians, Medicare incentive payments apparently have little effect on practice location
decisions.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
$90.6 $120.8 $161 $214.6 $286
Status:
The HCFA concurred with our recommendation and had previously advanced legislation to provide larger bonuses for
primary care services and to eliminate certain bonuses in urban areas.  However, this proposal was not included in the
President's current budget, and HCFA has no immediate plans to pursue legislation for this initiative.  The U.S. General
Accounting Office recently made a recommendation similar to ours based on its review of definitions of health
professional shortage areas.
Report:
OEI-01-93-00050 (Final report, June 1994)
Health Care Financing Administration Page 18 The 1997-98 Red Book R M E S R D
EDUCE  EDICARE  ND  TAGE  ENAL  ISEASE
P R
AYMENT  ATES
Current Law:
The Omnibus Budget Reconciliation Act of 1981 established a prospective payment system for outpatient dialysis
treatments under Medicare's end stage renal disease (ESRD) program.  To reimburse facilities for these treatments,
HCFA pays a composite rate per treatment based on audited median costs.  In FY 1989, payments averaged  $125.05 per
treatment for freestanding facilities and $129.11 for hospitals.   
Proposal:
The HCFA should reduce the payment rates for outpatient dialysis treatments to reflect current efficiencies and economies
in the marketplace.
Legislative Regulatory Other Administrative
77
Reason for Action:
The HCFA, with our assistance, accumulated 1985 and 1988 cost data to update the composite rates.  The 1985 data
showed a median cost, including home dialysis costs, of $108.19 per treatment.  Even after considering the effect of home
dialysis services, the in-facility costs decreased from 1980 to 1985 without a corresponding reduction in the prospective
rates.  In addition, our audit of the 1988 home office costs of a major chain of freestanding facilities showed that its costs
decreased from $117 per treatment in 1980 to $89 in 1988.  Due to the prominence of this chain, these audited costs have
a significant impact on the median cost of dialysis treatments.  We estimated that this chain is earning $36 per treatment,
a 29 percent profit margin for each treatment in 1988.  We believe that both the 1985 and 1988 audited data justify a
decrease in the payment rate.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$22* $22* $22* $22* $22*
*This savings estimate represents program savings of $22 million for each dollar reduction in the composite rate.
Status:
The HCFA agreed that the composite payment rates should reflect the costs of outpatient dialysis treatment in efficiently
operated facilities.  While the Omnibus Budget Reconciliation Act of 1990 prohibited HCFA from changing these rates, it
mandated a study to determine the costs, services, and profits associated with various modalities of dialysis treatments.  A
March 1996 study by the Prospective Payment Assessment Commission recommended an increase in the current rates,
but HCFA did not believe an across-the-board increase was warranted.  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 requires the Secretary to audit the cost reports of each renal dialysis provider at least once every 3
years.  The HCFA does not believe that these audits will produce a recommendation to decrease composite payment rates
and estimates that the audits may reduce the average facilities costs by less than 5 percent. 
Report:
A-14-90-00215 (Final management advisory report, July 1990)
Health Care Financing Administration Page 19 The 1997-98 Red Book E T C A S
NSURE  HAT  LAIMS FOR  MBULANCE  ERVICES
E S R D B
FOR  ND  TAGE  ENAL  ISEASE  ENEFICIARIES
M C G
EET  OVERAGE  UIDELINES
Current Law:
The Medicare Part B benefit for ambulance service has very strict limits, as explained by HCFA in the Medicare Carriers
Manual, section 2120.  The transport is not covered if it fails to meet the medical necessity requirement, even if it meets
other requirements.
Proposal:
The HCFA should ensure that claims meet Medicare coverage guidelines.
Legislative Regulatory Other Administrative
77
Reason for Action:
Seventy percent of transports involving dialysis in our sample did not meet Medicare's guidelines for medical necessity
because beneficiaries did not have conditions that contraindicated use of another type of transport.  Almost two-thirds of
the beneficiaries were clearly not bed-confined. 
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$90 $99 $100 $101 $102
Status:
The HCFA issued a notice of proposed rulemaking in June 1997 which addressed Medicare ambulance payment issues. 
This regulation contained a provision to require physician certification of nonemergency transports.  However, the
regulation has not been issued in final.
Report:
OEI-03-90-02130 (Final report, Aug. 1994)
Health Care Financing Administration Page 20 The 1997-98 Red Book M P P
ODIFY  AYMENT  RACTICES OF
A S M
MBULANCE  ERVICES FOR  EDICARE
E S R D B
ND  TAGE  ENAL  ISEASE  ENEFICIARIES
Current Law:
Medicare Part B covers ambulance services under certain conditions; it prohibits coverage for ambulance transportation
unless the beneficiary is normally bed-confined and must be transported by stretcher.  Ambulance company services and
charges are represented by alphanumeric codes which the Medicare program uses to analyze utilization and payments. 
Persons with ESRD are entitled to Medicare coverage under the 1972 amendments to the Social Security Act.
Proposal:
The HCFA should ensure appropriate payment for services rendered and may consider using one or more of the following
strategies:  (1) establish a payment schedule for ambulance transport to maintenance dialysis, and set the fee lower than
that paid for unscheduled, emergency transports; (2) negotiate preferred provider agreements with ambulance companies
to provide scheduled transportation for ESRD beneficiaries; (3) use competitive bidding to establish a price for scheduled
transports for ESRD beneficiaries or to select companies that agree to provide such services; (4) establish a rebate
program for companies that routinely transport ESRD beneficiaries; and (5) provide an add-on to the composite rate
Medicare pays dialysis facilities, and allow the facilities to negotiate agreements with ambulance companies.
Legislative Regulatory Other Administrative
77
Reason for Action:
The payment system does not take into account the routine, predictable nature of scheduled ambulance transports, nor
does it take advantage of the lower costs associated with high-volume scheduled transports.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Lower estimate$4.9 $6.0 $7.3 $8.9 $10.9
Upper estimate 14.7 18.0 22.0 26.8   32.7
Status:
The HCFA has established codes for scheduled transport and has required uniform use of national ambulance codes but
has not modified the payment method.  The Balanced Budget Act of 1997 authorizes the establishment of a prospective
payment system which links payments to the type of services provided, effective January 1, 2000.  
Report:
OEI-03-90-02131 (Final report, Mar. 1994)
Health Care Financing Administration Page 21 The 1997-98 Red Book C O
OLLECT  VERPAYMENTS FROM
H M O
  EALTH  AINTENANCE  RGANIZATIONS FOR
M E S R D B
  ISCLASSIFIED  ND  TAGE  ENAL  ISEASE  ENEFICIARIES
Current Law:
Health maintenance organizations (HMOs) receive a monthly list of Medicare beneficiaries who have been classified as
having end stage renal disease (ESRD).   Monthly payment rates to HMOs for these beneficiaries are about 7 to 10 times
higher than the rates for other Medicare beneficiaries.  There are no statutory, regulatory, or manual provisions which
specify time limits for the recovery of overpayments from risk-based HMOs.  In contrast, Medicare's fee-for-service
program imposes a 3-year statute of limitations on overpayment collections.
Proposal:
The HCFA should issue clear guidelines for the recovery of overpayments from HMOs.  Also, HCFA should recover all
overpayments occurring at least since 1992 which were made to HMOs on behalf of misclassified ESRD beneficiaries.
Legislative Regulatory Other Administrative
77
Reason for Action:
Because of weaknesses in HCFA's systems, some beneficiaries were misclassified as having ESRD.  The HMOs knew, or
should have known, that the misclassified beneficiaries were not receiving ESRD services which they were being paid to
provide.  It would be logical to collect the overpayments from HMOs on the same basis as overpayments are collected
from providers in the Medicare fee-for-service program, that is, for up to 3 years.  Since plans were formally notified in
February 1995 of HCFA system weaknesses and the resulting overpayments, we believe collections should be made
retroactively to 1992.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$20.5
Status:
The HCFA agreed to clarify its policies for collecting overpayments from HMOs.  However, it collected overpayments
retroactively only to March 1995 for the majority of misclassified beneficiaries and retroactively to October 1993 for the
remaining beneficiaries who were misclassified as having ESRD before enrollment in the HMO.  Due to this limited
recovery schedule, HCFA has not collected $20.5 million in overpayments which occurred since 1992.  The HCFA
disagreed with our recommendation to collect the overpayments retroactively to 1992.
Report:
A-14-96-00203 (Final report, June 1997) 
Health Care Financing Administration Page 22 The 1997-98 Red Book E L M S
NSURE  EGITIMACY OF  EDICARE  UPPLIERS
Current Law:
Before businesses can bill Medicare for the sale and rental of durable medical equipment, they must apply for and receive
a supplier number.  To help ensure that applicants are bona fide businesses, HCFA also requires that each supplier meet
11 standards.
Proposal:
The HCFA should charge all applicants an application fee to cover all costs associated with processing applications,
including the costs of conducting on-site visits at applicants' physical locations.
Legislative Regulatory Other Administrative
77
Reason for Action:
We found that 1 of every 14 suppliers and 1 of every 9 new applicants did not have a required physical address.  Further,
41 percent of suppliers and 40 percent of new applicants failed to meet at least one supplier standard.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA concurred with our recommendation and is actively increasing the areas in which it conducts site visits of
applicants.  In addition, the Balanced Budget Act of 1997 contained a number of reforms, including requiring a surety
bond for durable medical equipment suppliers. 
Report:
OEI-04-96-00240 (Draft report, Apr. 1997)
Health Care Financing Administration Page 23 The 1997-98 Red Book L M P B R
IMIT  EDICARE  ART    EIMBURSEMENT
H B
FOR  OSPITAL  EDS
Current Law:
Medicare Part B allows for reimbursing suppliers of  hospital beds used at home by Medicare beneficiaries if the beds are
prescribed by physicians.  Monthly rental payments are made according to a fee schedule established by the Omnibus
Budget Reconciliation Act of 1987.  Medicare payments are capped at 120 percent of the allowed fee schedule amount
over a maximum 15-month period.    
Proposal:
The HCFA should develop a new approach for reimbursing suppliers of hospital beds used by Medicare beneficiaries at
home.  The new reimbursement methodology should reflect a hospital bed's useful life and the number of times a bed can
customarily be rented over that period.  
Legislative Regulatory Other Administrative
77
Reason for Action:
Our sample of beneficiaries in Texas during 1989 disclosed that the current Medicare reimbursement policy allows a bed
supplier to recover the bed's wholesale cost within approximately 4 months.  The majority of rentals in our sample were
for periods of less than 6 months.  Since the useful life of a hospital bed is 5 years, we estimated that a supplier could
recover the wholesale cost of a bed as many as 7.5 times over the life of the bed.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$6.2 $6.2 $6.2 $6.2 $6.2
Status:
The HCFA awarded a demonstration project on this subject in 1996.  The project is expected to run in at least 3 sites for
2 cycles of 2 years each beginning in January 1997.  The Balanced Budget Act of 1997 requires the Secretary to conduct
a competition among individuals and entities supplying Part B items and services.  However, only oxygen and oxygen
equipment were specifically mentioned for one of the five demonstration projects.
Report:
A-06-91-00080 (Final report, May 1993)
Health Care Financing Administration Page 24 The 1997-98 Red Book R P P S S
EDUCE  AYMENTS FOR  RESSURE  UPPORT  URFACES
Current Law:
Federal law states that durable medical equipment provided in the beneficiary's residence may be billed only to Medicare
Part B.  This equipment includes pressure-reducing support surfaces used for the care of decubitus ulcers or pressure
sores.  The HCFA processes equipment claims through four regional carriers called durable medical equipment regional
carriers.  Effective January 1, 1996, new regional carrier guidelines were developed to control medically unnecessary
Medicare reimbursement for support surfaces.
Proposal:
The HCFA should require periodic review and renewal of the certificate of medical necessity for beneficiaries' use of
group 2 support surface equipment.
Legislative Regulatory Other Administrative
77
Reason for Action:
While the 1996 guidelines appear to be having a positive impact on controlling Medicare costs for support surfaces,
inappropriate payments are still noted.  In 1996, 29 percent of beneficiaries sampled used support surfaces that were
medically unnecessary, compared with 47 percent in 1995.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$12 $12 $12 $12 $12
Status:
The HCFA did not agree with our recommendation and expressed concern about the timeliness and costs associated with
using a certificate of medical necessity for group 2 equipment.
Report:
 OEI-02-95-00370 (Final report, June 1997)
Health Care Financing Administration Page 25 The 1997-98 Red Book I B P M O
MPROVE  ILLING  RACTICES FOR  EDICARE  RTHOTICS
Current Law:
Section 1834(h) of the Social Security Act provides for payment of orthotics and prosthetics as described in section
1861(s)(9).  The HCFA regulations define orthotic devices as leg, arm, back, and neck braces and artificial legs, arms,
and eyes, including replacements if required because of a change in the beneficiary's physical condition.  Orthotic devices,
which are mainly covered under Medicare Part B, must be reasonable and necessary for the diagnosis or treatment of an
illness or injury or to improve a malformed body member.  
Proposal:
The HCFA, in concert with the durable medical equipment regional carriers, should:
(cid:4)
Develop guidelines that better define orthotic devices, distinguishing among such categories of devices as custom-
made and off-the-shelf;
(cid:4)
Develop policies for orthotic codes, giving priority to upper limb devices, which we have identified as most
problematic;
(cid:4)
Develop screens for billing many orthotic devices on the same day or within a short time frame and pay special
attention to billing for orthotics in nursing facilities;
(cid:4)
Work with the American Orthotic and Prosthetic Association to develop a table of devices that should not be used
together; and 
(cid:4)
Consider stricter standards for who is allowed to bill for orthotics, such as requiring professional credentials for
orthotic suppliers.
Legislative Regulatory Other Administrative
77
Reason for Action:
The OIGs medical record review, performed in concert with the Medicare peer review organizations, found that at least
19 percent of the orthotic devices covered in our study were medically unnecessary.  Also, 68 percent of the orthotic
billings for patients in nursing facilities were questionable, and the medical equipment carriers have no policy for the 
majority of the orthotic billing codes.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$7.9 $7.9 $7.9 $7.9 $7.9
Status:
The HCFA concurred with our recommendations and has revised its national codes to distinguish among categories of
devices. 
Report:
OEI-02-95-00380 (Final report, Oct. 1997)
Health Care Financing Administration Page 26 The 1997-98 Red Book E P M P N
XAMINE  AYMENT  ETHOD FOR  ARENTERAL  UTRITION
Current Law:
Parenteral nutrition, a liquid solution provided intravenously through use of an indwelling catheter and infusion pump, is
covered under Medicare's Part B prosthetic device provision.  Medicare uses the reasonable charge methodology to
determine allowances for 23 parenteral nutrition procedure codes.
Proposal:
The HCFA should examine other payment methods that could lead to more cost-effective reimbursement for parenteral
nutrition solutions.  We suggest three alternative payment methods: (1) inherent reasonableness, (2) acquisition cost, and
(3) competitive bidding.
Legislative Regulatory Other Administrative
77 77
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 (HMOs).
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$65 $65 $65 $65 $65
Status:
The Balanced Budget Act of 1997 enacted several provisions that would address our recommendation.  Section 4316
authorizes HCFA to make "inherent reasonableness" adjustments up to 15 percent for all Part B services other than
physician services.  Also, section 4319 authorizes up to five competitive bidding demonstrations.  The HCFA has
convened a workgroup to focus on ways to reduce costs for parenteral nutrition.
Report:
OEI-03-96-00230 (Final report, July 1997)
Health Care Financing Administration Page 27 The 1997-98 Red Book R C
EDUCE AND  ONTROL
E N E C
  NTERAL  UTRITION  QUIPMENT  OSTS
Current Law:
Enteral nutrition therapy, commonly called tube feeding, provides nourishment to patients who cannot swallow because of
severe or permanent medical problems.  This therapy, covered under Medicare Part B as a prosthetic benefit, is limited to
patients unable to eat normally who require enteral therapy as their primary source of nutrition.  The durable medical
equipment regional carriers were created by Federal regulation in 1993 to establish medical policy and guidelines for the
review of durable medical equipment claims.   
Proposal:
The durable medical equipment regional carriers should consider selecting claims for special formulas, pump equipment,
and/or pump supply kits when they determine target areas for focused medical reviews.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Eighty percent of the beneficiaries sampled met Medicare criteria for enteral nutrition therapy in 1995.  However,
vulnerabilities were identified with the use of special enteral formulas and the pump delivery method.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$28 $28 $28 $28 $28
Status:
The HCFA agreed with our recommendation.  Also, the Balanced Budget Act of 1997 contained several reforms related to
reimbursement for beneficiaries in nursing homes, including a mandatory prospective payment system for Part A covered
stays and consolidated billing for beneficiaries not in Part A covered stays.  
Report:
OEI-03-94-00022 (Draft report, Mar. 1997)
Health Care Financing Administration Page 28 The 1997-98 Red Book R M P B P
EDUCE  EDICARE  ART    AYMENTS
E N H
FOR  NTERAL  UTRITION AT  OME
Current Law:
Enteral nutrition therapy is covered under Medicare Part B as a prosthetic benefit, limited to patients unable to eat
normally who require enteral therapy as their primary source of nutrition.  While the majority of payments are for patients
in nursing homes, some patients receive enteral therapy as part of home care.
Proposal:
The HCFA should reduce payments through competitive acquisition strategies for patients receiving enteral nutrition at
home.
Legislative Regulatory Other Administrative
77
Reason for Action:
Payments for enteral nutrition therapy are excessive because reimbursement rates are high and competitive acquisition
strategies are not fully used.  In our review of other payers of enteral nutrition, we found that payers who negotiated
prices, taking advantage of discounts and other competitive acquisition strategies, reimbursed from 17 to 48 percent less
than Medicare.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Enteral payments for 
non-nursing-home residents $15  $15 $ 15 $ 15 $ 15
The savings is based on a 17 percent savings through use of competitive acquisition strategies applied to 34 percent (non-
nursing-home residents) of the total enteral nutrient expenditure of $330 million in 1994. 
Status:
The HCFA concurs that Medicare is paying too much for enteral nutrients and supports the recommendation to reduce
payments for enteral therapy administered at home under Part B.  Included in section 4552(a) of the Balanced Budget Act
of 1997 is a provision to freeze Medicare payments for parenteral and enteral nutrition, equipment, and supplies for 1998
through 2002.  However, we believe additional reductions are appropriate.
Report:
OEI-03-94-00021 (Final report, Apr. 1996)
Health Care Financing Administration Page 29 The 1997-98 Red Book E S E N P
LIMINATE  EPARATE  NTERAL  UTRIENT  AYMENTS
N H
IN  URSING  OMES
Current Law:
Suppliers may bill Medicare Part B for enteral nutrients delivered to patients in nursing homes or may furnish such
services under arrangements with nursing homes in which the nursing home claims the cost of the service.
Proposal:
The HCFA should eliminate separate payments for enteral nutrients for beneficiaries in nursing homes.
Legislative Regulatory Other Administrative
77
Reason for Action:
Medicare allowed $218 million for enteral nutrition in 1994 for beneficiaries in nursing homes.  As food, it also
duplicates payments already being made to the nursing home.  In addition, reimbursement for nutrients exceeds the
purchase price commonly available to nursing homes by over 40 percent, because separate payment does not take
advantage of nursing homes purchasing power.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
Medicare $174 $174  $174  $174  $174
(Proposal may result in slight cost shifting to Medicare Part A and Medicaid.)
Status:
The HCFA concurred with our recommendation.  Included in the Balanced Budget Act of 1997 is a provision for a
prospective payment system for Part A covered skilled nursing facility stays which will effectively eliminate separate
payment for enteral nutrients.  Payments made for non-Part A covered stays will continue to be allowable but must be
billed by the nursing facility. 
Report:
OEI-06-92-00861 (Final report, Mar. 1996)
Health Care Financing Administration Page 30 The 1997-98 Red Book M P
INIMIZE  AYMENTS FOR
P I S
ORTABLE  MAGING  ERVICES
Current Law:
Nursing homes arrange for ancillary services (such as x-rays) for patients who require them.  In some instances, firms
known as portable imaging suppliers provide x-ray and electrocardiogram services in nursing homes.  Imaging services
consist of several components--technical, professional, transportation, and setup--depending on the type of service and
where and by whom it is rendered.
Proposal:
The HCFA should seek legislation, as appropriate, to ensure that historically inflated payments are not built into the
prospective payment system that will reimburse care provided under a Part A covered stay.  Additionally, under Part B,
payments for transportation should be limited to the national median (and prorated when multiple patients are seen), and
payments for x-ray setup should be eliminated.  The HCFA also should enforce the requirement that physicians justify the
need for portable services.
Legislative Regulatory Other Administrative
77 77 77
Reason for Action:
Medicare pays more than twice as much for imaging services when they are billed under arrangement than when payment
is limited to the fee schedule.  Also, the amounts Medicare carriers allow for transportation of portable x-ray equipment
vary widely, and some are excessive.  Additionally, there is no statutory requirement for HCFA to allow setup charges for
portable x-rays, and these appear unjustified.  Finally, our review of the medical records of nursing home residents
receiving portable x-ray services showed that 31 percent of the records lacked a physician order for the portable service
and that 53 percent lacked documentation that the patient was not ambulatory.
Savings (in millions):
  FY 1   FY 2   FY 3   FY 4   FY 5
Inflated Part A payments $ 28.3 $ 30.0 $ 31.9 $ 33.9 $ 36.0
Transport and x-ray setup    37.5    38.6    39.9    41.4    43.0
Justification for portable
  service    63.7    68.6    73.9    79.6    85.8
Total $129.5 $137.2 $145.7 $154.9 $164.8
Status:
The HCFA did not agree with our recommendations.
Report:
 OEI-09-95-00090 (Draft report, Feb. 1997)
 OEI-09-95-00091 (Draft report, Feb. 1997)
Health Care Financing Administration Page 31 The 1997-98 Red Book C W M
HANGE THE  AY  EDICARE 
P
AYS FOR
C L T
LINICAL  ABORATORY  ESTS
Current Law:
The amount the Medicare program pays for most clinical lab tests is based on fee schedules.  These fee schedules,
effective July 1, 1984, were established by each carrier at 60 percent of the Medicare prevailing rate (the rate most
frequently used by all suppliers).  The Congress took action in the Omnibus Budget Reconciliation Act of 1990 to pay
comparable prices by limiting the annual fee schedule increase to 2 percent for 1991, 1992, and 1993 and by reducing the
national cap to 88 percent of the median of all fee schedules.  The Omnibus Budget Reconciliation Act  of 1993 further
reduced the national Medicare fee cap to 80 percent of the median of carrier prices in 1995 and to 76 percent in 1996. 
The law also called for no cost-of-living increases for 1994 and 1995.
Proposal:
The HCFA should (1) develop a methodology and legislative proposal to pay for tests ordered as custom panels at
substantially less than the full price for individual tests and (2) study reinstating the beneficiary coinsurance and
deductible provisions for laboratory services as a means of controlling utilization.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
The Omnibus Budget Reconciliation Act of 1993, if fully implemented, should reduce the higher profit rates from
Medicare billings.  However, although prices on individual tests are being reduced by legislation, panels are still generally
being billed as individual tests to Medicare.  Medicare policies are not sufficient to control the billing of profile tests
because there is no requirement that the tests ordered as a panel by the physician be billed only as a panel.  The HCFA's
guidelines do not address the problem of panels as a marketing mechanism of the laboratory industry or the problem of
industry billing for the contents of the panels individually.  In our opinion, these conditions have contributed to the
significant increase in the use of laboratory services.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
Panels  TBD  TBD  TBD  TBD  TBD
Co-payment $1,130 $1,240 $1,370 $1,520 $1,690
Status:
The HCFA concurred with our first recommendation but not our second.  The agency recently added that it is encouraging
the individual ordering of tests to help control utilization and is therefore discouraging the creation of laboratory or
physician specific customized panels. 
The Balanced Budget Act of 1997 reduces 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. 
Report:
A-09-89-00031 (Final report, Jan. 1990)
A-09-93-00056 (Follow-up report, Jan. 1996)
Health Care Financing Administration Page 32 The 1997-98 Red Book R P E B O
EQUIRE  HYSICIAN  XAMINATION  EFORE  RDERING 
H H S
OME  EALTH  ERVICES
Current Law:
Section 1861 of Title XVIII of the Social Security Act authorizes Medicare Part A payment for home health care services. 
Under the home health benefit, providers are reimbursed for the cost of each visit up to limits established by the
Department.
Proposal:
The HCFA should revise Medicare regulations to require the physician to examine the patient before ordering home health
services.  As discussed in the Status section, other OIG recommendations to correct abusive and wasteful practices are
being addressed. 
Legislative Regulatory Other Administrative
77
Reason for Action:
Audits and investigations have identified medically unnecessary care and inappropriate fraudulent billing by specific home
health agencies.  Other OIG studies describe extreme variations and broad patterns of billing by these agencies, which
raise questions about the appropriateness of some billings.  We therefore believe it is necessary to place systematic
controls on the home health benefit to prevent abuse. 
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
Although the Congress and the Administration included provisions to restructure home health benefits in the Balanced
Budget Act of 1997, HCFA still needs to revise Medicare regulations to require that physicians examine Medicare
patients before ordering home health services.  While agreeing in principle, HCFA said it would continue to examine both
coverage rules and conditions of participation to develop the discipline necessary for ensuring proper certification.
Report:  
A-04-95-01103 (Final report, Mar. 1996) A-04-95-01104 (Final report, June 1996) 
OEI-04-93-00262 (Final report, Sept. 1995) OEI-04-93-00260 (Final report, July 1995) 
OEI-12-94-00180 (Final report, May 1995) OEI-02-94-00170 (Final report, June 1995)
A-04-94-02087 (Final report, June 1995) A-04-94-02078 (Final report, Nov. 1994)
A-04-96-02121 (Final report, July 1997)
Health Care Financing Administration Page 33 The 1997-98 Red Book E V M H E
NSURE  ALIDITY OF  EDICARE  OSPICE  NROLLMENTS
Current Law:
Hospice care is a treatment approach which recognizes that the impending death of an individual warrants a change in
focus from curative to palliative care (such as pain control and symptom management).  To qualify for Medicare hospice
benefits, which began in 1983, a patient must be entitled to Medicare Part A and be certified as terminally ill, which is
defined as having a life expectancy of 6 months or less if the illness runs its normal course.
Proposal:
The HCFA should strengthen its controls over the hospice program, such as by reinforcing the 6-month terminal prognosis
requirement; holding hospice physicians more accountable for certifications of terminal prognosis; strengthening claims
processing controls; and prohibiting hospices from paying nursing facilities more for "room and board" than the hospices
receive from State Medicaid agencies on behalf of dually eligible beneficiaries.  The HCFA should also seek legislation to
change the payment methodology for dually eligible nursing facility residents; to  restructure the use of benefit periods;
and to establish a more meaningful cap on hospice payments.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Our audits of 12 large hospices identified a substantial number of ineligible enrollments.  Working with OIG, physicians
from Medicare peer review organizations reviewed the medical files of 2,109 long-term beneficiaries in hospice care over
210 days and concluded that 1,373 beneficiaries were ineligible because they were not terminally ill.  Also, analysis of the
HCFA data base for hospice beneficiaries showed evidence of many long-term beneficiaries in other hospices across the
country.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The Balanced Budget Act of 1997 modified the hospice benefit but did not address the above recommendations.  The
HCFA generally concurred with our recommendations and plans to develop a corrective action plan.
Report:
 A-05-96-00023 (Final report, Nov. 1997)
Health Care Financing Administration Page 34 The 1997-98 Red Book R E P
EDUCE  XCESSIVE  AYMENTS FOR
H P N H
  OSPICE  ATIENTS IN  URSING  OMES
Current Law:
Hospice care is a treatment approach which recognizes that the impending death of an individual warrants a change in
focus from curative to palliative care.  The Medicare hospice benefit program began in 1983 and was expanded in 1986 to
cover individuals residing in nursing facilities.  To qualify, a patient must be certified as terminally ill with a life
expectancy of 6 months or less if the illness runs its normal course.
Proposal:
The HCFA should modify Medicare or Medicaid payments for hospice patients living in nursing homes.
Legislative Regulatory Other Administrative
77
Reason for Action:
In view of the lower frequency of services, the overlap of services, and the questionable enrollment in hospices by nursing
home patients, current payment levels for hospice care in nursing homes may be excessive.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA concurred with our recommendation.  While the Balanced Budget Act of 1997 made a number of reforms to
the hospice benefit, we believe additional corrective action is needed.
Report:
OEI-05-95-00250 (Final report, Sept. 1997)
OEI-05-95-00251 (Final report, Nov. 1997)
Health Care Financing Administration Page 35 The 1997-98 Red Book R M P
EVISE  EDICARE  RESCRIPTION
D P M
RUG  AYMENT  ETHODS
Current Law:
Medicare Part B covers prescription drugs for certain medical disorders, such as end stage renal disease and cancer, and
when necessary for the effective use of durable medical equipment.  Reimbursement is based on the lower of an estimated
acquisition cost or a national average wholesale price (AWP).  Payment for drugs under the Medicaid program varies
among the States but generally includes use of a discounted acquisition cost, as well as a federally mandated
manufacturers' rebate program.
Proposal:
The HCFA should reexamine its Medicare drug reimbursement methodologies with a goal of further reducing payments
as appropriate.
Legislative Regulatory Other Administrative
77 77 77
Reason for Action:
Several OIG studies have indicated that Medicare pays more than other payers for prescription drugs.  For example, for
three nebulizer drugs in 1994, Medicare and its recipients could have saved substantial amounts by using a discounted
AWP reimbursement formula similar to that used by many Medicaid States.  Another review of 17 high-volume
prescription drugs in the Medicare program in 1994 showed the possibility of substantial savings based on a
manufacturer rebate similar to that obtained by the Medicaid program.  A more recent review found that manufacturers
published AWP considerably overstates the actual wholesale cost.  For 22 drugs with high Medicare allowance amounts,
Medicare could have saved $447 million in 1996 by using actual wholesale prices rather than the manufacturers
published AWP.  Savings for all Medicare drugs could have been as much as $667 million in 1996.  
Savings (in millions):
The savings will depend on the percentage by which the AWP is discounted for Medicare payments.  The Balanced
Budget Act of 1997 reduced Medicare payments to 95 percent of the AWP.  The following estimates, based on a
Congressional Budget Office estimate of those savings, show the effects of additional 5 and 10 percent reductions.  
FY 1 FY 2 FY 3 FY 4 FY 5
 
90% of AWP  $ 80 $110 $110 $40 $30
85% of AWP   160   220   220   80   60
Status:
The HCFA concurred with our recommendation.  As noted above, the Balanced Budget Act of 1997 limited Medicare
payments for drugs to 95 percent of the AWP.
Report:
OEI-03-94-00390 (Final report, Mar. 1996)
OEI-03-95-00420 (Final report, May 1996)
OEI-03-97-00290 (Final report, July 1997)
Health Care Financing Administration Page 36 The 1997-98 Red Book E F S
STABLISH  EE  CHEDULE FOR
M A P
  EDICARE  MBULANCE  AYMENTS
Current Law:
Medicare pays for medically necessary ambulance services when the use of other methods of transportation would
endanger the patient's health.  Two levels of service, advanced and basic life support, are covered by Medicare. 
Reimbursement is based on the type of vehicle and personnel used (advanced or basic life support) and the service status
(emergency or nonemergency).
Proposal:
The HCFA should establish new guidelines for ambulance payments:
(cid:4)
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.
(cid:4)
Eliminate separate payments for oxygen, supplies, injectables, and other services, such as electrocardiograms.  These
items should be included in the base rate.
(cid:4)
Limit the number of procedure codes available to ambulance suppliers for billing.
Legislative Regulatory Other Administrative
77
Reason for Action:
Medicare payments for ambulance services appear to lack common sense and are vulnerable to fraud and abuse.  For
example, in 26 States, Medicare pays more for routine, nonemergency basic life support than it does for advanced life
support emergency transportation.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$242 $242 $242 $242 $242
Status:
While the Balanced Budget Act of 1997 mandated the establishment of a fee schedule for Medicare ambulance
transportation, we believe that additional savings beyond those contemplated in legislation are possible.  We are awaiting
HCFAs comments.
Report:
OEI-05-95-00300 (Final report, Nov. 1997)
Health Care Financing Administration Page 37 The 1997-98 Red Book A P N
LLOW  AYMENT FOR  ONEMERGENCY
A L S A S
DVANCED  IFE  UPPORT  MBULANCE  ERVICES
O W M N
NLY  HEN  EDICALLY  ECESSARY
Current Law:
The Social Security Act, section 1861(s)(7), provides for coverage of ambulance service when medically necessary.  The
limitations for this coverage, as specified in 42 CFR 410.40, include the requirement that the services be medically
necessary, specifically that other means of transportation would endanger the beneficiary's health.  However, because 
HCFA does not make a coverage distinction between advanced life support and basic life support services, payments are
based on the type of transportation furnished and not the level of service required by the beneficiary.  Effective March 1,
1982, HCFA allowed separate reimbursement rates for advanced and basic life support ambulances.  
Proposal:
The HCFA should modify its Medicare policy to allow payment for nonemergency advanced life support services only
when that level of service is medically necessary, instruct carriers to institute controls to ensure that payment is based on
the medical need of the beneficiary, and closely monitor carrier compliance.  
Legislative Regulatory Other Administrative
7
Reason for Action:
From Calendar Years (CY) 1986 to 1989, the number of trips by Medicare beneficiaries in advanced life support
ambulances increased by 131 percent, while the number of trips in basic life support ambulances increased by only 14
percent.   Of a sample of 400 claims in CY 1989, 18 percent were for services not medically necessary at the advanced
level and where basic life support services were available in the same city or town.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$47 $47   $47   $47   $47
Status:
The HCFA issued a proposed regulation in June 1997 that would shift the policy focus away from the type of vehicle used
and toward the medical condition of the beneficiary.
Report:
   A-01-91-00513 (Final report, Oct. 1992)
   A-01-94-00528 (Final report, June 1995)
Health Care Financing Administration Page 38 The 1997-98 Red Book P E G A
ROVIDE  XPLICIT  UIDELINES ON  LLOWABILITY OF  
I G
NSTITUTIONAL  ENERAL AND
A F B C
DMINISTRATIVE AND  RINGE  ENEFIT  OSTS 
Current Law:
The HCFA guidelines--Provider Reimbursement Manual, section 2100--establish the general principle that payments to a
provider must be covered under Medicare.  Sections 2102.1, 2102.2, and 2103 of the manual expand this principle by
explaining factors that affect the allowability of costs, such as the reasonableness of costs, their relationship to patient
care, and the prudent buyer concept.
Proposal:
The HCFA should revise the Provider Reimbursement Manual to provide explicit guidelines on the allowability of certain
general and administrative and fringe benefit costs. 
Legislative Regulatory Other Administrative
77
Reason for Action:
We reviewed general and administrative and fringe benefit costs at 19 selected hospitals 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 hospitals reviewed, Medicare participated in approximately $50.7 million of costs that were
unallowable, unreasonable, or not allocable to the Medicare program.  Although Medicare's share amounted to
approximately $2.1 million, the bulk of the costs were passed on to other health care consumers.  Also, $3.5 million of
costs are "costs for concern" because of their tenuous relationship to patient care.  We believe that many of the
unallowable costs resulted from the providers' lack of adequate internal controls.  However, other unallowable costs, as
well as the "costs for concern," appear to have resulted from different interpretations of the guidelines in HCFA's Provider
Reimbursement Manual, which is the principal guideline used by providers to charge costs to the Medicare program.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA has published changes to the Provider Reimbursement Manual to clarify the allowability of several of the cost
categories identified in our report.  In addition, the Balanced Budget Act of 1997 prohibits 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 39 The 1997-98 Red Book D U S C
ISCONTINUE  SE OF A  EPARATE  ARRIER
P M C
TO  ROCESS  EDICARE  LAIMS FOR
R R B
AILROAD  ETIREMENT  ENEFICIARIES
Current Law:
From the inception of the Medicare supplementary medical insurance program (Part B), claims for Railroad Retirement
beneficiaries have been processed by a single carrier.  This carrier, The Travelers Insurance Company, has a contract
with the Railroad Retirement Board to process Medicare Part B claims for Railroad Retirement beneficiaries.  All other
Medicare carriers contract with HCFA to process claims.  The authority for this unique contracting arrangement is
section 1842(g) of the Social Security Act, as amended.
Proposal:
The HCFA should discontinue the use of a separate carrier to process Medicare claims for Railroad Retirement
beneficiaries.
Legislative Regulatory Other Administrative
77
Reason for Action:
Since 1979, the General Accounting Office, the Grace Commission, and HCFA have recommended that Railroad
Retirement beneficiaries be placed under the HCFA carrier system.  In following up on these recommendations, we found
that cost savings of $9.1 million could be achieved by implementing the proposal.  In addition, provider billings would be
simplified since the service providers would no longer need to separate and submit Railroad Retirement claims for
payment to Travelers and other Medicare claims to a different carrier.  A further benefit is that beneficiaries would be
assured that their claims would be processed timely and not routed to the wrong carrier for payment, as has sometimes
happened in the past.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$9.1 $9.1 $9.1 $9.1 $9.1
Status:
While HCFA has supported legislation in the past, there is currently no legislative proposal before the Congress.
Report:
A-14-90-02528 (Final report, Dec. 1990)
Health Care Financing Administration Page 40 The 1997-98 Red Book R M E A 67
AISE THE  EDICARE  NTITLEMENT  GE TO 
Current Law:
The Social Security Act and related laws established a number of Federal programs, including Social Security Retirement
Insurance benefits and the Medicare program.  Historically, Social Security and Medicare have been closely linked.  Both
established age 65 as their entitlement age.  The Social Security Amendments of 1983 increased the age of entitlement for
Social Security unreduced benefits from age 65 to age 67 over the transition period 2003 to 2027.  This was done as one
of several methods to strengthen the solvency of the Social Security Trust Fund.  However, the age of entitlement for
Medicare has remained unchanged.
Proposal:
The HCFA should gradually increase the Medicare entitlement age to 67, following the same schedule for the increase in
the age of entitlement to unreduced Social Security benefits.
Legislative Regulatory Other Administrative
77
Reason for Action:
If the Medicare entitlement age were gradually raised to age 67 following the same schedule as the Social Security
program, the Medicare Hospital Insurance Trust Fund would save three quarters of a trillion dollars over a 30-year period
beginning in the year 2003.  The Medicare Supplementary Medical Insurance program would also save significant
amounts, and since the impact of raising the entitlement age on future Medicare beneficiaries is not known, potential
negative consequences could be reduced by providing substantial advance notice of the change.  The proposal could help
alleviate the Federal deficit and deal with the projected solvency of the trust fund.
Savings:
Potential savings would amount to approximately $60 billion per year in the years immediately after the entitlement age
reaches 67 in 2027.  In today's terms, this amounts to between $4.7 and $14.6 billion per year, depending on the measure
used.  Savings would first be realized in 2003 and would increase each year until 2027.
Status:
The HCFA currently has no plans to pursue this change.  Although a bill to raise the entitlement age to 67 was introduced
in the 105th Congress, it was not enacted.
Report:
OEI-07-91-01600 ( Final report, Nov. 1992)
Health Care Financing Administration Page 41 The 1997-98 Red Book S F P F B P
UBJECT  UNDS  LACED IN  LEXIBLE  ENEFIT  LANS 
H I T
TO  OSPITAL  NSURANCE  AX
Current Law:
Flexible benefit plans are employer-employee arrangements in which the employee elects a reduced salary and receives
payment in the form of fringe benefits.  The fringe benefits selected instead of salary are exempt from Medicare, Social
Security, and Federal income taxes.  These plans are authorized by section 125 of the Internal Revenue Code.
Proposal:
The value of the amounts placed in flexible benefit plans should be included in the definition of wages for the Hospital
Insurance portion of the Federal Insurance Contributions Act tax.
Legislative Regulatory Other Administrative
77
Reason for Action:
Flexible benefit plans deprive the financially unstable Medicare Hospital Insurance trust fund of needed revenue.  Also,
the tax break provided by these plans is discriminatory as it is not available to all workers and may indirectly contribute to
the rapid rise of health care costs.  An exemption from Medicare taxes seems particularly inappropriate because the costs
of Medicare benefits provided to individuals already far exceed taxes paid to the Medicare trust fund.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$291 $354 $421 $489 $555
Status:
The HCFA agreed with our recommendation and has submitted a legislative proposal to subject flexible benefit plans to
the Hospital Insurance tax.  However, the proposal was not included in the President's budget.
Report:
A-05-93-00066 (Final report, Aug. 1994)
Health Care Financing Administration Page 42 The 1997-98 Red Book I M S P S
MPROVE  EDICARE  ECONDARY  AYER  AFEGUARDS
Current Law:
Medicare is the secondary payer (MSP) to certain group health plans in instances where medical services were rendered to
Medicare-entitled employees or to the Medicare-entitled spouses and other family members of employees.  Medicare is
also the secondary payer in situations involving coverage under Worker's Compensation; black lung benefits; automobile
and nonautomobile, no fault, or liability insurance; and Department of Veterans Affairs programs.  The HCFA provides
administrative funds to Medicare contractors to monitor and collect incorrect primary benefits paid on behalf of Medicare
beneficiaries.
Proposal:
The HCFA should (1) ensure that contractor resources are sufficient and instruct contractors to recover improper primary
payments from insurance companies other than the Blue Cross and Blue Shield insurance companies, 
(2) implement financial management systems to ensure all overpayments (receivables) are accurately recorded, 
(3) develop detailed procedures to properly handle employers that refuse to provide other health insurance coverage
information, and (4) resubmit the justification of a legislative proposal that would require insurance companies,
underwriters, and third-party administrators to periodically submit private insurance coverage data directly to HCFA.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Although agreement was reached to relieve all Blue Cross and Blue Shield plans of past due MSP overpayments and
although there is a 3-year future plan to identify MSP situations, it applies only to the Blue Cross and Blue Shield plans
and not to other insurance companies.  Additional measures are still needed to collect accurate and timely information on
other primary payers.  This will help to reduce future Medicare overpayments that result from unidentified MSP cases
and improve the recovery process for overpayments.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD TBD TBD TBD TBD
Status:
The HCFA is pursuing the recommended administrative actions through improved processes to identify and recover
overpayments related to MSP, as well as improved information systems to guard against making improper Medicare
payments where the Blue Cross and Blue Shield plans are primary payers.  However, safeguards are still  needed to guard
against improper payments where insurance companies other than the Blues are primary payers.  
Report:
A-09-89-00100 (Final management advisory report, Mar. 1990)
OEI-07-90-00760 (Final report, Aug. 1991)
OEI-03-90-00763 (Management advisory report, Nov. 1991)
A-09-91-00103 (Final report, Aug. 1992)
A-14-94-00391 (Final report, Dec. 1993)
A-14-94-00392 (Final report, Mar. 1994)
Health Care Financing Administration Page 43 The 1997-98 Red Book E M S P P
XPAND  EDICARE  ECONDARY  AYER  ROVISIONS
E S R D B
 FOR  ND  TAGE  ENAL  ISEASE  ENEFITS
Current Law:
The Omnibus Budget Reconciliation Act of 1981 changed the status of Medicare from primary to secondary payer for
beneficiaries with end stage renal disease (ESRD) for the first 12 months of health benefits.  Effective February 1, 1990,
Medicare became secondary payer for the first 18 months of Medicare entitlement.  After October 1, 1998, Medicare
again became the secondary payer for the first 12 months.
Proposal:
The Medicare secondary payer (MSP) provision should be extended to include ESRD beneficiaries without a time
limitation.  
Legislative Regulatory Other Administrative
77
Reason for Action:
The proposed change for ESRD beneficiaries would make MSP provisions consistent with legislation passed by the
Congress for aged and disabled beneficiaries, which does not restrict the period of time that Medicare is the secondary
payer.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
TBD      TBD TBD TBD TBD
Status:
The HCFA was concerned that an indefinite secondary payer provision might encourage insurers to drop uneconomical
services, namely facility dialysis and transplantation.  The HCFA favored indefinitely extending the MSP provision for all
other services and included this proposal in an earlier budget submission.  Although the Balanced Budget Act of 1997
extends MSP policies for individuals with ESRD to 30 months, we continue to advocate that when Medicare eligibility is
due solely to ESRD, the group health plan should remain primary until the beneficiary becomes entitled to Medicare for
old age or disability.  At that point, Medicare would become the primary payer.
Report:
A-10-86-62016 (Final report, Dec. 1987)
Health Care Financing Administration Page 44 The 1997-98 Red Book M F M P
ODIFY  ORMULA FOR THE  EDICAID  ROGRAM
Current Law:
The Federal Medical Assistance Percentage prescribed in the Social Security Act determines the Federal share of costs for
the Medicaid and various other programs.
Proposal:
The HCFA should consult with the Congress on modifications to the Federal Medical Assistance Percentage formula
which would result in distributions of Federal funds that more closely reflect per-capita-income relationships. 
Legislative Regulatory Other Administrative
77
Reason for Action:
The  Federal Medical Assistance Percentage formula does not fully reflect the congressional objective of distributing
Federal funds according to a State's ability to share in program costs, as measured by State per capita income.  Two
provisions result in higher income States receiving 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.  Higher income States could offset the Federal share reduction by reducing their comparatively greater program
benefits.  However, if a cost-of-living factor were added to the formula, it would help ensure that any reductions in
Federal sharing would be more equitable.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
$4,100 $4,100 $4,100 $4,100 $4,100
Status:
The HCFA did not agree with our recommendation, and no legislative proposal was included in the President's current
budget.
Report:
A-06-89-00041 (Final report, Aug. 1991)
Health Care Financing Administration Page 45 The 1997-98 Red Book P M C S
ROMOTE  EDICAID  OST  HARING
Current Law:
Section 1902(a)(14) of the Social Security Act provides that Medicaid may impose "enrollment fees, premiums, or similar
charges, and deductions, cost sharing, or similar charges."  Children, health maintenance organization (HMO) enrollees,
pregnancy services, emergency services, and hospice services provided to residents of nursing facilities or medical
institutions are exempt from cost sharing.
Proposal:
The HCFA should promote the development of effective cost sharing programs by:
(cid:4)
Allowing States to experiment with cost sharing programs that target new populations and reflect more substantial
cost sharing amounts, 
(cid:4)
Recommending changes to Federal requirements allowing for greater State flexibility in determining exempted
populations and services and allowing for higher recipient cost sharing amounts, and/or
(cid:4)
Promoting the use of cost sharing in States that do not currently have programs.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Cost sharing programs, which save money, are used by 27 States in their Medicaid programs.  States without cost sharing
could save between $167 and $335 million annually (of which the Federal share would be $99 to $198 million) by
applying cost sharing to just four services: inpatient hospital, outpatient hospital, physician visits, and prescription drugs. 
States with cost sharing do not report significant impacts on utilization of services or access to care and have not
experienced excessive administrative, recipient, or provider burdens.  Federal requirements may hinder States from
designing even more effective cost sharing programs.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
$121.7 $135.9 $151.8 $169.6 $189.5
Status:
The HCFA provided States with program and administrative flexibility through waivers for Medicaid programs and, if a
State asks for help, will assist by soliciting information from States that currently impose cost sharing and will share those
experiences.
Report:
OEI-03-91-01800 (Final report, July 1993)
Health Care Financing Administration Page 46 The 1997-98 Red Book S M P P
UPPORT  EDICAID  AYMENTS OF  REMIUMS
E G H I
FOR  MPLOYER  ROUP  EALTH  NSURANCE
Current Law:
Effective January 1, 1991, section 1906 of the Social Security Act mandated that State Medicaid agencies, when cost
effective, pay premiums for employer group health plan insurance for Medicaid-eligible individuals.
Proposal:
The HCFA should propose legislation that allows States to pay employer group health plan deductibles and coinsurance
using Medicaid fee schedules rather than group health plan fee schedules.
Legislative Regulatory Other Administrative
77
Reason for Action:
Most States have not purchased employer group health plan insurance for Medicaid-eligible individuals, and compliance
with current legislation could reduce potential savings resulting from such insurance.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$34.7 $37.6 $40.8 $44.3 $48.1
Status:
The HCFA deferred commenting on our recommendation because of legislative proposals being considered at that time.
Report:
OEI-04-91-01050 (Final report, May 1994)
Health Care Financing Administration Page 47 The 1997-98 Red Book C L T S
LOSE  OOPHOLES  HAT  HELTER
T P L S A
HIRD  ARTY  IABILITY  ETTLEMENTS AND  WARDS
Current Law:
Some Medicaid recipients who receive settlements and awards from liable third parties as a result of accidents are able to
shelter the assets in irrevocable trusts and retain their eligibility for Medicaid.  With these trusts, they are also able to
prevent Medicaid from being repaid for medical services related to injuries sustained in the accidents.
Proposal:
The HCFA should develop (1) legislative proposals to close the loopholes in the Omnibus Budget Reconciliation Act of
1993 and (2) guidelines to assist States in strengthening Medicaid's right to recover when trusts are established by third
parties. 
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Our national survey of the 51 Medicaid agencies disclosed that in 36 agencies, Medicaid and Supplemental Security
Income recipients used trusts to shelter assets.  Although we were unable to determine the financial impact of these trust
funds on Medicaid nationally, we concluded that the impact on Medicaid from 25 such trusts in California was
significant.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
  $3   $3   $3   $3   $3
Status:
The HCFA agreed that the exception in the law contains loopholes.  It indicated that recommendations could be made to
the Congress to amend the exception limiting the use of trust funds to certain well-defined necessities (e.g., health care
that is not covered by Medicaid).  The HCFA also agreed to take appropriate action to strengthen Medicaid's right to
recover from trusts established from third party settlements.  In June 1996, HCFA issued guidelines which set forth
advice on ways in which States can better recover Medicaid expenditures from established third party settlements,
especially for the disabled population.
Report:
A-09-93-00033 (Final report, Oct. 1994)
Health Care Financing Administration Page 48 The 1997-98 Red Book I I B P C
MPLEMENT AN  NDEXED  EST  RICE  ALCULATION
M D R P
IN THE  EDICAID  RUG  EBATE  ROGRAM
Current Law:
The Omnibus Budget Reconciliation Act of 1990 authorized States to collect rebates from drug manufacturers for drug
purchases made under the Medicaid program.  Rebates are calculated using average manufacturer price (AMP), the
manufacturer's best price, and other factors.  To discourage drug manufacturers from raising AMP amounts, the basic
rebate amount is increased by the amount AMP increases over and above the consumer price index for all urban
consumers.  However, no similar indexing of best price is made, even though best price is part of the basic rebate
calculation for brand name drugs.
Proposal:
The best price calculation in the Medicaid drug rebate program should be indexed.
Legislative Regulatory Other Administrative
77
Reason for Action:
Drug manufacturers have consistently increased best prices in excess of the consumer price index for all urban consumers
since the inception of the Medicaid drug rebate program.  To determine the potential effect that increases in best price
(beyond the rate of inflation) had on rebates, we calculated the difference in rebates that would have resulted from using
an indexed best price.  We estimate that drug rebates would have increased by about $123 million for the 406 drug
products included in our review.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$123 $123 $123 $123 $123
Status:
We are continuing to monitor the Medicaid drug rebate program; audits will continue to focus on  enhancing the collection
of rebates and providing potential savings to the rebate program. 
Report:
 A-06-94-00039 (Final report, Oct. 1995)
Health Care Financing Administration Page 49 The 1997-98 Red Book R N U
EDUCE  ONEMERGENCY  SE OF
E R M R
MERGENCY  OOMS BY  EDICAID  ECIPIENTS
Current Law:
States attempting to control nonemergency use of emergency rooms must consider several Federal requirements. 
Medicaid recipients must have the right to freedom of choice of a health care provider as stated in section 1902 (a)(23) of
the Social Security Act.  Before recipients are restricted in this choice, a waiver under section 1915(b) must be obtained.
Proposal:
The HCFA should encourage States to develop initiatives for reviewing and reducing nonemergency use of emergency
rooms by Medicaid recipients and should assist them through data analysis instructions, expedited review of waiver
applications for managed care, and dissemination of effective emergency room control practices.
Legislative Regulatory Other Administrative
77
Reason for Action:
Heavy nonemergency use of emergency rooms by Medicaid recipients has been a continuing problem, and substantial
Medicaid savings could be realized by redirecting nonemergency visits to more appropriate and less costly care sites.  
States have developed controls to improve access to, and continuity of, care as well as to reduce costs of determining
which managed care/pre-paid programs are the most successful.
Savings (in millions):
 FY 1   FY 2   FY 3   FY 4   FY 5 
$80.5  $103.8 $133.9 $172.7 $222.8
Status:
While HCFA was concerned that it may not have sufficient resources to encourage States to develop initiatives to review
and reduce nonemergency use of emergency rooms or to disseminate annual reports on effective practices, it will expedite
the review of State applications for waivers to implement their efforts to control emergency rooms.
Report:
OEI-06-90-00180 (Final report, Mar. 1992)
Health Care Financing Administration Page 50 The 1997-98 Red Book I E P I
NSTALL  DITS TO  RECLUDE  MPROPER
M R
EDICAID  EIMBURSEMENT
C L S
FOR  LINICAL  ABORATORY  ERVICES
Current Law:
Clinical diagnostic laboratory tests performed in a physician's office, by an independent laboratory, or by a hospital
laboratory for its outpatients are reimbursed on the basis of fee schedules.  Medicaid reimbursement for these tests may
not exceed the amount that Medicare recognizes, and each Medicare carrier in a State is to provide its fee schedule to the
State agency.  For purposes of the fee schedule, clinical diagnostic laboratory services include laboratory tests listed in
codes 80002 - 89399 of the Current Procedural Terminology Manual.  Effective for services rendered on or after 
July 1, 1984, Federal matching funds are not available for any amount over the amount recognized by Medicare for such
tests.
Proposal:
The State agencies should (1) install edits to detect and prevent payments that exceed the Medicare limits and billings that
contain duplicative tests, (2) recover overpayments for clinical laboratory services identified in each of the reviews, and
(3) make adjustments for the Federal share of the amounts recovered by the State agencies.                           
Legislative Regulatory Other Administrative
77
Reason for Action:
Overall, our reviews disclose that State agencies are reimbursing providers for laboratory services which exceed the
Medicare limits or are duplicated for payment purposes.  These overpayments are occurring because the State agencies do
not have adequate computer edits in place to prevent the payment of unbundled or duplicated claims for chemistry,
hematology, or urinalysis tests.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$14 $14 $14 $14 $14
Status:
The HCFA is evaluating our results.
Report:
A-01-95-00005 (Final report, Jan. 1996) A-06-96-00031 (Final report, Dec. 1995)
A-01-96-00001 (Final report, Feb. 1996) A-06-95-00078 (Final report, Nov. 1995)
A-04-95-01108 (Final report, Dec. 1995)                        A-07-95-01139 (Final report, Sept. 1995)
A-04-95-01109 (Final report, Apr. 1996) A-07-95-01147 (Final report, Oct. 1995)
A-04-95-01113 (Final report, Feb. 1996) A-07-95-01138 (Final report, Mar. 1996)
A-05-95-00035 (Final report, Feb. 1996) A-09-95-00072 (Final report, May 1996)
A-05-96-00019 (Final report, Mar. 1996) A-10-95-00002 (Final report, Mar. 1996)
Health Care Financing Administration Page 51 The 1997-98 Red Book C M P
ONTROL  EDICAID  AYMENTS TO
I
NSTITUTIONS FOR
M R P
ENTALLY  ETARDED  EOPLE
Current Law:
Federal Medicaid rules for reimbursing States for intermediate care facilities/mentally retarded are not tailored to the 
operations of these institutions.  "Reasonable costs" and "efficiently and economically operated facility" are not defined in
regulations.  Each State has considerable discretion in defining these terms and in setting payment methodology.
Proposal:
The HCFA should reduce excessive spending of Medicaid funds for intermediate care facilities/mentally retarded by one
or more of the following:
(cid:4)
Take administrative action to control reimbursement by encouraging States to adopt controls.
(cid:4)
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.
(cid:4)
Seek comprehensive legislation to restructure Medicaid reimbursement for both intermediate care facilities/mentally
retarded and home and community-based waiver service for developmentally disabled people via global budgeting,
block grants, or financial incentive programs.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Medicaid reimbursement rates for large intermediate care facilities/mentally retarded are more than five times greater in
some States than in others.  The  average Medicaid reimbursement in 1991 for large facilities ranged among States from
$27,000 to $158,000 per resident.  This variation was unrelated to the patients' severity of illness, quality of service,
facility characteristics, or resident demographics.  A lack of effective controls results in excessive spending.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$683 $683 $683 $683 $683
Status:
The HCFA sent copies of our report to State Medicaid Directors but did not concur with our recommendation.  The
HCFA believes Medicaid statutory provisions allow States to establish their own payment systems.  This flexibility
allows for the variations found among States in their payment rates and the methods and standards used in determining
these rates.  The Balanced Budget Act of 1997 requires the Secretary to conduct a study on the effect of the States rate-
setting methods on access to, and quality of, services provided to beneficiaries.
Report:
OEI-09-91-01010 (Final report, June 1993)
Health Care Financing Administration Page 52 The 1997-98 Red Book PUBLIC HEALTH SERVICE
AGENCIES Public Health Service Agencies
Overview The activities conducted and supported by the Public Health Service (PHS)
operating divisions represent this country's primary defense against acute
and chronic diseases and disabilities.  These programs provide the
foundation for the Nation's efforts in promoting and enhancing the
continued good health of the American people.  
These independent operating divisions include the  National Institutes of
Health (NIH), to advance our knowledge through research; the Food and
Drug Administration (FDA), to ensure the safety and efficacy of marketed
drugs, biological products, and medical devices; the Centers for Disease
Control and Prevention (CDC), to combat preventable diseases and protect
the public health; the Health Resources and Services Administration
(HRSA), to support the development, distribution, and management of
health care personnel, other health resources, and services; the Indian
Health Service (IHS), to improve the health status of Native Americans; the
Agency for Toxic Substances and Disease Registry (ATSDR), to address
issues related to Superfund toxic waste sites; the Agency for Health Care
Policy and Research (AHCPR), to enhance the quality and appropriateness
of health care services and access to services through scientific research and
the promotion of improvements in clinical practice and in the organization,
financing, and delivery of services; and the Substance Abuse and Mental
Health Services Administration (SAMHSA), to assist States in refining and
expanding treatment and prevention services.
Significant The Office of Inspector General (OIG) concentrates on such issues as
biomedical research, substance abuse, acquired immune deficiency
OIG
syndrome, and medical effectiveness.  Significant unimplemented monetary
Activities
recommendations identified by the OIG relate to instituting and collecting
user fees for FDA activities and changing Office of Management and
Budget Circular A-21 to effect more productive use of Federal research
dollars at the Nation's colleges and universities.
Public Health Service Agencies Page 53 The 1997-98 Red Book I C
NSTITUTE AND  OLLECT
U F F S I
SER  EES FOR  OOD  AFETY  NSPECTIONS
Current Law:
The Food and Drug Administration (FDA) imposes user fees for several activities, including color certification and
reconditioning of products.  In 1993, the FDA began collecting fees for activities covered by the Prescription Drug User
Fee Act.  In the absence of specific authorizing legislation, the FDA is precluded by statute from imposing user fees to
cover additional functions.
Proposal:
The FDA should extend user fees to various FDA functions, possibly including pre-market review and approvals for
devices, inspections of manufacturing facilities, and food processors and establishments.
Legislative Regulatory Other Administrative
77
Reason for Action:
User fees, if properly instituted, represent a legitimate method to recover regulatory costs.  Such fees would be consistent
with fee systems in other Federal regulatory environments, such as the Environmental Protection Agency, the Federal
Communications Commission, and the Nuclear Regulatory Commission.  In addition, user fees would properly reflect the
value of discrete benefits enjoyed by manufacturers from FDA's regulatory activities, such as increased consumer
confidence in products and protection from unfair competition. 
The imposition of user fees for major FDA regulatory functions not only will shift the economic burden of FDA's
functions to users but will have the potential added benefits of increasing revenue for needed expansion of services,
improving agency tracking of resources, and increasing agency accountability for the costs of regulation.
Savings (in millions):
 FY 1  FY 2  FY 3  FY 4  FY 5
$175.9 $185.5 $185.5 $185.5 $185.5
Status:
The total estimated FY 1998 collections for all user fees are $112.7 million ($7.5 million from certification,
$91.2 million from Prescription Drug User Fee activities, and $14 million from the Mammography Quality Standards
Act).  The Presidents FY 1998 budget request included a provision to assess additional user fees that would mostly
replace existing base appropriations for foods, human drugs, biologics, animal drugs, and devices.  However, FDAs FY
1998 appropriation did not include this provision.  New legislation is required to authorize additional user fees.
Report:
OEI-12-90-02020 (Final report, July 1990)
OEI-05-90-01070 (Final report, Aug. 1991)
Food and Drug Administration Page 54 The 1997-98 Red Book C M M
AP  EDICAL  ALPRACTICE
C
OVERAGE TO
C M H C
OMMUNITY AND  IGRANT  EALTH  ENTERS
Current Law:
The Federal Tort Claims Act provides unlimited medical malpractice coverage to Community and Migrant Health
Centers.  Under the act, the Government consents to be sued for claims resulting from any personal injury caused by the
negligence of employees who were acting within the scope of their employment.  The Federally Supported Health Centers
Assistance Act of 1992, Public Law 102-501, extended this coverage to Community and Migrant Health Centers medical
personnel for a 3-year demonstration period beginning January 1, 1993.  The 1992 act has since been extended
indefinitely.
Proposal:
The Health Resources and Services Administration (HRSA) should consider seeking a legislative change that will  limit to
$1 million malpractice settlements or judgments involving Community and Migrant Health Centers. 
                                                                                  
Legislative Regulatory Other Administrative
7
Reason for Action:
The U.S. General Accounting Office (GAO) reported in 1993 that malpractice insurance with unlimited dollar coverage,
such as the Federal Tort Claims Act currently provides, will generally cost about 50 percent more than coverage limited
to $1 million per claim.  The GAO also reported that about 57 percent of the policies Community and Migrant Health
Centers purchased from private insurers during Calendar Year 1991 provided coverage up to $1 million per claim.  Our
actuarial consultant advised us that for this same period, the average limit purchased at that time by the centers was
$850,000.  The consultant estimated that the Federal Government would incur $30.6 million more over a
3-year period to provide unlimited dollar coverage, compared with providing coverage with a limit of $1 million per claim.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $10  $10  $10  $10  $10
Status:
After conferring with the Department of Justice, HHS has decided not to seek a legislative change at this time.
Report:
        A-04-95-05018 (Final report, Mar. 1996)
Health Resources and Services Administration Page 55 The 1997-98 Red Book I I H S
MPROVE  NDIAN  EALTH  ERVICE
B C
ILLINGS AND  OLLECTIONS
P H I C
FROM  RIVATE  EALTH  NSURANCE  OMPANIES
Current Law:
The Indian Health Service (IHS) funds health care to American Indians and Alaska Natives through appropriations by
the Congress and collections from third party resources.  Public Law 100-713, the Indian Health Care Amendments of
1988, authorizes the IHS to bill third parties, including private insurance companies, for both inpatient and outpatient
services.  According to IHS, reimbursements received from private insurance companies for patients in IHS-operated
facilities are used to establish IHS business offices and purchase medical supplies and equipment.  
Proposal:
The IHS should establish the necessary internal controls, assign adequate resources to its business offices, and provide
additional training to business office staff to ensure that underbillings of approximately $7 million per quarter are
properly filed and collected.
Legislative Regulatory Other Administrative
7
Reason for Action:
The IHS had not established the controls necessary to ensure that the amounts billed to private insurance companies
were accurate and that all covered services were billed.  As a result, for the 3-month period we tested, IHS underbilled
private insurers by approximately $7 million.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $28  $28  $28  $28  $28
Status:
The IHS fully concurred with our recommendations and is in the process of (1) implementing an automated system to
achieve the necessary internal controls, (2) allocating resources to improve methods for billings and collections, (3)
meeting the training needs of business office staff, (4) implementing fee schedules on a timely basis, (5) ensuring
adequate accounting and medical records are maintained for each patient, (6) providing adequate resources to carry out
claims follow-up, and (7) improving policies and procedures for follow-up of unpaid claims. 
Report:
         A-06-93-00080 (Final report, June 1995)
Indian Health Service Page 56 The 1997-98 Red Book P C
ROPOSE  HANGES TO 
O M B C A-21
FFICE OF  ANAGEMENT AND  UDGET  IRCULAR   
R R C
EGARDING  ECHARGE  ENTERS
Current Law:
The Office of Management and Budget (OMB) Circular A-21, "Cost Principles for Educational Institutions," requires
that billing rates for specialized service funds (recharge centers) be based on actual costs, designed to recover the
aggregate cost of goods or services, and reviewed periodically.
Proposal:
The Assistant Secretary for Management and Budget should propose changes to OMB Circular A-21 to improve
guidance on the financial management of recharge centers.  The revision should include criteria for (1) establishing,
monitoring, and adjusting billing rates to eliminate accumulated surpluses and deficits, (2) preventing the use of recharge
funds for unrelated purposes and excluding unallowable costs from the calculation of recharge rates, (3) ensuring that
Federal projects are billed equitably, and (4) excluding recharge costs from the recalculation of facilities and
administrative cost rates.
Legislative Regulatory Other Administrative
77
Reason for Action:
At 15 universities, 21 of the 87 recharge centers (1) accumulated surplus fund balances and deficits which were not used
in the computation of subsequent billing rates, (2) overstated billing rates by transferring funds from center accounts or
including unallowable costs in rate calculations, (3) billed users inequitably, and (4) used recharge center fund balances
(surpluses or deficits) inappropriately to calculate facilities and administrative cost rates.  These practices resulted in
overcharges to the Federal Government of $1.9 million during fiscal years 1995 and 1996.
Savings (in millions):
FYs 1 & 2 FY 3 FY 4 FY 5
   $1.9   *   *   *
* Recurring savings would result with the circular change.
Status:
The Deputy Assistant Secretary for Grants and Acquisition Management concurred with our recommendations.  In
addition, the Council on Government Relations generally agreed and stated that the proposed criteria should be included
in the Compliance Supplement to OMB Circular A-133, which provides guidance to independent auditors in conducting
compliance audits of educational institutions.
Report:
         A-09-96-04003 (Final report, Mar. 1997)
National Institutes of Health Page 57 The 1997-98 Red Book L G S C
IMIT  RADUATE  TUDENT  OMPENSATION
T P S W
TO  HAT  AID FOR  IMILAR  ORK
Current Law:
The OMB Circular A-21, "Cost Principles for Educational Institutions," requires that tuition remission (the forgiveness
by the institution of all or a portion of the students tuition costs) and other forms of compensation charged to federally
sponsored research be reasonable. 
Proposal:
The Assistant Secretary for Management and Budget should work with OMB to revise Circular A-21 to stipulate a
reasonableness standard for graduate student compensation based on assigned responsibilities and not to exceed
compensation paid to other individuals of similar experience for similar work.
Legislative Regulatory Other Administrative
77
Reason for Action:
Although OMB Circular A-21 requires that tuition remission and other forms of compensation charged to federally
sponsored research be reasonable, it provides unclear guidance in defining "reasonableness," relying on the concepts of the
prudent person and arm's length bargaining.  In the absence of a consistent standard, we used the salaries of postdoctoral
research assistants and equivalent positions as a "fair and reasonable benchmark" for measuring the reasonableness of
compensation packages provided to graduate students at four universities.  Based on a statistical sample, three of the four
universities audited charged a total of $5.7 million in unreasonable graduate student compensation to federally sponsored
research projects.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$5.7   *   *   *   *
* Recurring savings would result with the circular change.
Status:
The Department endorsed our recommendation, concluding that a prudent person would not provide greater compensation
to individuals who are less qualified by education and practical experience than to others performing similar work.  Also,
NIH issued a notice in its Guide for Grants and Contracts which provides that reasonable compensation for graduate
students will not exceed the amount allowable for a first-year postdoctoral level staff member at the same institution
performing comparable work. 
Report:
A-01-94-04002 (Final report, Oct. 1994)
National Institutes of Health Page 58 The 1997-98 Red Book ADMINISTRATION FOR CHILDREN
AND FAMILIES Administration for Children and Families
Overview The Administration for Children and Families (ACF) provides Federal direction
and funding for State, local, and private organizations as well as for State-
administered programs designed to promote stability, economic security,
responsibility, and self-support for the Nation's families.  It also oversees a
variety of programs that provide social services to the Nation's children, youth,
and families; persons with developmental disabilities; and Native Americans.
To reduce dependency on welfare programs, the Personal Responsibility and
Work Opportunity Act of 1996 eliminated the Aid to Families with Dependent
Children, Emergency Assistance, and Job Opportunities and Basic Skills
Training programs as of FY 1997 and created the Temporary Assistance for
Needy Families (TANF) block grant.  The ACF oversees TANF, as well as the
Child Support Enforcement program, which provides grants to States to
enforce obligations of absent parents and to establish and enforce child support
orders, and the Head Start program, which provides comprehensive health,
educational, nutritional, social, and other services primarily to economically
disadvantaged preschool children and their families.  Also, the Foster Care and
Adoption Assistance program provides grants to States to assist with the cost
of foster care and special needs adoptions, as well as maintenance,
administrative, and staff training costs.  Other programs include Community
Services and the Child Welfare program.
Significant
The Office of Inspector General (OIG) reviews the cost-effectiveness of ACF
OIG 
social services and assistance programs, including determining whether
Activities
authorized services are provided to recipients at the lowest costs.  These
reviews have identified opportunities to improve the delivery of program
services, such as by requiring States to develop criteria and implement
procedures for ensuring that appropriate foster care cases are referred to State
child support enforcement agencies and limiting Federal participation in foster
care administrative costs.
Administration for Children and Families Page 59 The 1997-98 Red Book R F C C
EFER  OSTER  ARE  ASES 
C S E A
TO  HILD  UPPORT  NFORCEMENT  GENCIES
Current Law:
Section 11 of the 1984 Child Support Amendment Act requires States to secure and enforce child support collections on
behalf of children receiving foster care maintenance payments under Title IV-E of the Social Security Act "where
appropriate."
Proposal:
As a condition of receiving Federal matching funds for foster care administration under Title IV-E, the ACF should
require States to develop criteria and implement procedures for ensuring that foster care agencies refer appropriate cases
to State child support agencies.  We believe this would increase child support collections on behalf of foster care children,
thus offsetting tax dollars spent for their care and maintenance.
Legislative Regulatory Other Administrative
77 77
Reason for Action:
Collections are being made on behalf of only 5.9 percent of foster care children in our sample.  Few foster care cases are
referred to child support agencies for possible collections.  
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
 $11        $11  $11  $11  $11
Status:
Over the last several years, ACF has redesigned its program monitoring system for all child welfare services.  Also,
section 105 of Public Law 105-89, signed November 19, 1997, mandates the use of the Federal Parent Locator Service
for Child Welfare Services.  The Children's Bureau and the Office of Child Support Enforcement plan to discuss how best
to implement these provisions.  While ACF is willing to implement a strategy to address our recommendation in light of
this new process, it did not agree with our estimate of potential savings. 
Report:
OEI-04-91-00530 (Final report, May 1992)
Administration for Children and Families Page 60 The 1997-98 Red Book L F P
IMIT  EDERAL  ARTICIPATION IN
S ' C A
TATES   OSTS FOR  DMINISTERING 
F C P
THE  OSTER  ARE  ROGRAM
Current Law:
Title IV-E of the Social Security Act makes Federal funding available to States for costs incurred in providing care and
maintenance to children eligible for foster care.  It also authorizes Federal participation in related administrative and
training costs.  Placement activities are included in administrative costs.
Proposal:
Limit Federal participation in foster care administrative costs through one of the following actions:  (1) limit future
increases in administrative costs to no more than 10 percent per year; (2) fund administrative activities via a single block
grant with future increases based on the consumer price index; (3) limit administrative costs to a percentage of
maintenance payments; or (4) require States to file claims for Federal participation within 1 year after the calendar
quarter in which the expenditure was made.  Costs for child placement services should be separated from traditional
overhead costs so they can be effectively monitored.
Legislative Regulatory Other Administrative
77
Reason for Action:
Legislative action is required to control increases in foster care administrative costs.  Current "open-ended" legislation has
allowed administrative costs to increase from $400 million in FY 1988 to an estimated $1.2 billion in FY 1994- -
approximately a 200 percent increase.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$247 $306 $364 $415 $461
Status:
This proposal was not included in the President's current budget.  The ACF generally agreed with our recommendation
but recently noted that claims for administrative costs have leveled off in the past several years.  
Report:
A-07-90-00274 (Final report, Aug. 1990)
Administration for Children and Families Page 61 The 1997-98 Red Book I S O
MPROVE  TATE  VERSIGHT OF
P N C P A
RIVATE  ONPROFIT  HILD  LACING  GENCIES 
Current Law:
Foster care maintenance payments, as defined by Title IV-E of the Social Security Act, are intended to cover the cost of 
food, clothing, shelter, and incidentals required for the childs care.  While the act allows States to claim Federal funding
for certain administrative costs related to the foster care program, Federal funding is not available for the costs of social
services provided to the child, the childs family, or the foster family. 
Proposal:
State agencies should improve their oversight activities.  Procedures need to be developed to ensure that private nonprofit
child placing agencies do not retain a portion of the maintenance payments to meet their operating costs or claim
unallowable costs under the Title IV-E program.
Legislative Regulatory Other Administrative
77
Reason for Action:
Some private nonprofit child placing agencies retained a portion of the foster care payment intended for the foster childs
maintenance payments and claimed administrative costs related to social services.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
$18.3
Status:
Final resolution of these audit findings is not yet due; however, ACF is preparing to issue a notice of proposed rulemaking
on monitoring, including reviews of Title IV-E, which may address some of these issues.
While the States concurred that the costs claimed were not allowable, they proposed to review certain costs of child
placing agencies before making the financial adjustment.  The State agencies concurred with our findings and
recommendations pertaining to the need to improve their monitoring efforts.
Report:
A-05-96-00055 (Final report, June 1997)
A-09-96-00071 (Final report, Aug. 1997)
Administration for Children and Families Page 62 The 1997-98 Red Book O G R
BTAIN  OVERNMENT  EIMBURSEMENT FOR 
H S G  U C
EAD  TART  RANTEES   NALLOWABLE  HARGES
Current Law:
Under Title 45 of the Code of Federal Regulations, non-Federal matching and cost sharing contributions must be verifiable
and allowable under the applicable cost principles, and the granting agency must preapprove certain changes in the budget
and in the grant award proposal.  In addition, compensatory time payments are allowed if they follow the grantee's own
policy for such payments.
Proposal:
The Federal Government should be reimbursed for ineligible expenditures.
Legislative Regulatory Other Administrative
77
Reason for Action:
The grantees claimed unallowable costs, including (1) noncompliance with budget provisions and deviations from grant
award proposals ($1,532,072), (2) irregularities in financial accounting ($409,805), (3) noncompliance with preapproval
requirements for construction ($351,895), (4) lack of support for labor charges ($237,563), (5) unrecorded liabilities
($216,746), (6) unsupported non-Federal matching funds ($190,840), (7) payments for compensatory time ($30,186), and
(8) travel ($4,100).
Savings (in millions):
  FY 1  FY 2  FY 3  FY 4  FY 5
$2.973
Status:
Some grantees did not agree with our findings and recommendations.  The ACF is using our findings and
recommendations as part of its monitoring activity.
Report:
A-02-95-02005 (Final report, Sept. 1995)
A-04-96-00107 (Final report, May 1997)
A-06-96-00062 (Final report, Aug. 1996)
A-06-96-00063 (Final report, Aug. 1996)
A-08-96-01024 (Final report, Feb. 1997)
A-10-96-00007 (Final report, Mar. 1997)
A-12-96-00017 (Final report, July 1996)
Administration for Children and Families Page 63 The 1997-98 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, grants and contracts, the
Departments Working Capital Fund, conflict resolution, and adherence
to employee standards of conduct.  The OIG also participates in
interagency efforts through the Presidents Council on Integrity and
Efficiency and the Presidents Council on Management Improvement to
prevent losses to and abuses of Federal programs.
The OIG has oversight responsibility for these staff division activities at
the departmental level.  A related major responsibility flows from the
Office of Management and Budgets (OMBs) designation of HHS as
cognizant agency to audit the majority of the Federal funds awarded to
major research schools, 104 State and local government cost allocation
plans, and separate indirect cost plans of about 1,000 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.
Significant The OIGs work in departmental management and Governmentwide
oversight focuses principally on financial statement audits, financial
OIG
management and managers accountability for resources entrusted,
Activities 
standards of conduct and ethics, and Governmentwide audit oversight,
including recommending necessary revisions to OMB guidance.  The
OIG also reviews the adequacy of States systems to control the growth
of administrative/indirect costs claimed for Federal financial
participation.
General Departmental Management Page 64 The FY 1997-98 Red Book S A /
IMPLIFY  DMINISTRATIVE INDIRECT
C A S
  OST  LLOCATION  YSTEMS
Current Law:
The Office of Management and Budget (OMB) Circular A-87, Cost Principles for State and Local Governments,
establishes requirements that State and local governments must follow in preparing and submitting cost allocation plans
for Federal approval.  State and local governments must adhere to the plans when claiming administrative/indirect costs
for Federal financial participation.  
Proposal:
The process for charging administrative/indirect costs to Federal programs should be simplified through reform of the cost
allocation plans.  We have identified a range of options, some of which require legislative actions, to reform the cost
allocation system.  These options include (1) use of block grant awards, (2) a flat percentage rate for
administrative/indirect costs, and (3) negotiation of a nonadjustable rate for a predetermined number of years.  
Legislative Regulatory Other Administrative
77 77
Reason for Action:
State cost allocation plans annually allocate an estimated $20 billion of administrative/indirect costs to Federal programs. 
We concluded from a review of 105 statewide cost allocation plans (plans for each of 3 years in 35 States) that the system
for allocating costs to Federal programs has degenerated into a highly technical accounting and allocation maze.  The
Federal, State, and local governmental communities have struggled to work within a burdensome system instituted over 20
years ago that seeks to equitably share administrative/indirect costs.  Prior reform efforts concentrated on individual
programs and/or cost principles instead of the system or process and thus were not entirely successful.
Savings (in millions):
FY 1 FY 2 FY 3 FY 4 FY 5
   *    *    *    *    *
* A report by the National Performance Review, "Creating a Government That Works Better and Costs Less," estimates
a 5-year savings of $3.3 billion by reducing intergovernmental administrative costs.
Status:
The National Performance Review report, which called for reform of the cost allocation process, cited some of our
recommendations, and OMB's revision of Circular A-87 addressed those recommendations.  However, further reform is
needed to address the bulk of administrative/indirect costs charged to the Federal Government.
Report:
A-12-92-00014 (Final report, Sept. 1993)
General Departmental Management Page 65 The 1997-98 Red Book I F S
MPROVE  UNDING  YSTEM FOR
W A C
ELFARE  DMINISTRATIVE  OSTS
Current Law:
The Federal Government pays for half of the administrative costs for most types of administrative activities in the
Medicaid program.  States have considerable latitude in defining their administrative costs.  Costs need only be considered
"reasonable and necessary" as outlined in OMB Circular A-87, Cost Principles for State and Local Governments.  In
1996, the Congress enacted the Temporary Assistance to Needy Families (TANF) block grant which provides grants to
States to provide cash to low-income individuals.  Since administrative costs are included in this grant, Federal
reimbursement for these costs is limited.  No such limits apply to the Medicaid program, however.
Proposal:
One of the following options should be used to fund administrative costs in the Medicaid program:
(cid:4)
Reduction in Medicaid special match rates to 50 percent. 
(cid:4)
Block grant.  Set a base amount, then provide inflationary increases each year.
(cid:4)
Standard cost per recipient.  Fund States based on a standard per recipient allocation amount.
(cid:4)
Cost per recipient cap.  Impose a cap on Federal reimbursement of the cost per recipient.
Legislative Regulatory Other Administrative
77
Reason for Action:
The current method for reimbursing States for welfare administrative costs is unwieldy, inefficient, and unpredictable.  In
addition, there is considerable unexplained disparity in administrative costs among States and significant risk of an
increase in administrative costs overall.  With the new limits imposed on Federal funding of TANF administrative costs,
States have incentives to use accounting techniques to shift administrative costs to the Medicaid program in order to
receive Federal reimbursement for these costs.
Savings (in millions):
Options FY 1 FY 2 FY 3 FY 4 FY 5
Reduced special match $236 $273 $315 $362 $  415
Block grant   114   376   671   993  1,352
Standard cost per recipient     32     93   135   195     259
Capped cost per recipient     52     58     66     95       84
Status:
Medicaid administrative costs continue to be paid as they have in the past. 
Report:
OEI-05-91-01080 (Final report, Jan. 1995)
General Departmental Management Page 66 The 1997-98 Red Book P A T C U
ROPERLY  LLOCATE  RAINING  OSTS  NDER
F S P
EDERALLY  UPPORTED  ROGRAMS
Current Law:
The Federal Government reimburses States for a portion of the training costs for such programs as the Medicaid, Foster
Care, Food Stamp, and Temporary Assistance for Needy Families programs.  Under OMB Circular A-87 and various
regulations, these costs are required to be allocated to the benefitting State programs and adequately documented.
Proposal:
The States must ensure that training costs are allocated to all benefitting programs, appropriate allocation rates are
applied, and unallowable third-party contributions are not claimed.   
Legislative Regulatory Other Administrative
77
Reason for Action:
The State agencies (1) charged training costs directly to the Federal programs instead of allocating appropriate portions of
the cost to the State-funded programs, which also benefit from the training; (2) claimed administrative costs at the
enhanced rate of 75 percent rather than the allowable rate of 50 percent; (3) provided insufficient documentation to
support costs claimed at the enhanced rate; (4) included duplicate claims; (5) used unallowable third-party contributions to
meet matching requirements; (6) claimed costs in excess of the actual costs; and (7) claimed unallowable costs for
facilities, equipment, and other miscellaneous items.
Savings (in millions):
 FY 1 FY 2 FY 3 FY 4 FY 5
$22.2
Status:
The States generally concurred with the recommendations.
Report:
A-05-96-00043 (Final report, June 1997)
A-07-97-01028 (Final report, Aug. 1997)
A-09-96-00066 (Final report, Sept. 1997)
A-10-96-00004 (Final report, Sept. 1997)
General Departmental Management Page 67 The 1997-98 Red Book I A
NTERNET  DDRESS
The 1997-98 Red Book and other OIG materials, including final
reports issued and OIG program exclusions, may be accessed on the
Internet at the following address:
http://www.hhs.gov/progorg/oig