Background

Before 1996, Medicare program integrity activities were subsumed under  Medicare’s general administrative budget and performed, along with  general claims processing functions, by insurance companies under  contract with CMS, which led to certain problems. The level of funding  available for program integrity activities was constrained, not only by the  need to fund ongoing Medicare program operations—such as the costs for  processing medical claims, but also by budget procedures imposed under  the Budget Enforcement Act of 1990. In the early and mid-1990s, we  reported that such funding constraints had reduced Medicare contractors’  ability to conduct audits and review medical claims. HHS advocated for a  dedicated and stable amount of program integrity funding outside of the  annual appropriations process, so that CMS and its contractors could plan  and manage the function on a multiyear basis. HHS also asserted that past  fluctuations in funding had made it difficult for contractors to retain  experienced staff who understood the complexities of, and could protect,  the financial integrity of Medicare program spending.

		HIPAA Established MIP and Provided Dedicated Funding

Beginning in fiscal year 1997, HIPAA established MIP and provided CMS  with dedicated funding to conduct program integrity activities. HIPAA  stipulated a range of funds available for these activities from the Medicare  trust funds each year. For example, for fiscal year 1997, the law stipulated  that at least $430 million and not more than $440 million should be used.  The maximum amount of MIP funds rose from $440 million in fiscal year  1997 to $720 million in fiscal year 2003. For fiscal year 2003, and every year  thereafter, the maximum amount that HIPAA stipulated for MIP was   $720 million. (See app. II, table 2, for additional information on the MIP  funding ranges.) As a result of the increases stipulated in HIPAA, from  fiscal years 1997 through 2005, total MIP expenditures increased about   63 percent—from about $438 million to $714 million, as figure 1 shows.  HIPAA authorized MIP funds to be used to enter into contracts to  “promote the integrity of the Medicare program.” The statute also listed  the various program integrity activities to be conducted by contractors.

		MIP Funds Support Program Integrity Efforts

CMS allocates MIP funds primarily to support its contractors’ program  integrity efforts for the traditional Medicare program, known as fee-for- service Medicare. Among these contractors are fiscal intermediaries  (intermediaries), carriers, PSCs, and Medicare administrative contractors  (MAC). MACs are a new type of contractor that will replace all  intermediaries and carriers by October 2011, as required by the Medicare  Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).  MMA required CMS to conduct full and open competition to select MACs.  CMS refers to this change as contracting reform.
CMS has contracted with intermediaries, carriers, and MACs to perform  two types of activities—claims processing and program integrity. Their  claims processing activities include receiving and paying claims. These  activities are classified as program management and are funded through a  program management budget. In addition, intermediaries and carriers  have been charged with conducting some program integrity activities  under MIP, including performing medical review of claims. The four MACs  selected in January 2006 will not conduct medical review activities. CMS  plans to assign responsibility for medical review of claims to the MAC  selected in July 2006 and to the other MAC contracts to be awarded in the  future. MIP provides funds to support these program safeguard efforts.
In addition, CMS uses MIP funds to support the activities of PSCs, which  perform medical review of claims and identify and investigate potential  fraud cases; a coordination of benefits (COB) contractor, which  determines whether Medicare or other insurance has primary  responsibility for paying a beneficiary’s health care costs; the National  Supplier Clearinghouse (NSC), which screens and enrolls suppliers in the  Medicare program; and the data analysis and coding (DAC) contractor,  which maintains and analyzes Medicare claims data for durable medical  equipment (DME), prosthetics, orthotics, and supplies.
Contractors receive MIP funds to perform one or more of the following  five program integrity activities:    Audits involve the review of cost reports from institutions, such as  hospitals, nursing homes, and home health agencies. Cost reports play a  role in determining the amount of providers’ Medicare reimbursement.
Medical review includes both automated and manual prepayment and  postpayment reviews of Medicare claims and is intended to identify claims  for noncovered or medically unnecessary services.
The secondary payer activity seeks to identify primary sources of  payment--such as employer-sponsored health insurance, automobile  liability insurance, and workers’ compensation insurance--that should be  paying claims mistakenly billed to Medicare. Secondary payer activities  also include recouping Medicare payments made for claims not first  identified as the responsibility of other insurers.
Benefit integrity involves efforts to identify, investigate, and refer potential  cases of fraud or abuse to law enforcement agencies that prosecute fraud  cases.
Provider education communicates information related to Medicare  coverage policies, billing practices, and issues related to fraud and abuse  both to providers identified as having submitted claims that were  improper, and to the general provider population.
CMS also uses MIP to fund support for the five activities, such as certain  information technology systems, fees for consultants, storage of CMS  records, and postage and printing. The agency allocates the cost of this  support to the five activities, depending on which of the activities is  receiving support. Table 1 provides information on specific MIP activities  performed by the contractors. Appendix III provides examples of key  tasks performed by each of these contractors.

	MIP Funding for All Five Activities Has Generally Increased over Time

For fiscal years 1997 through 2005, CMS generally increased the amount of  funding for each of its five program integrity activities, but the amount of  the funding provided and the percentage increase have varied among the  activities. Provider education received the largest percentage increase in  funds, while audit and medical review received the largest amount of  funds overall. (See fig. 2.) CMS increased its allocation for provider  education by about 590 percent from fiscal year 1997 through fiscal year  2005. This increase was due, in part, to CMS’s decision in fiscal year 2002  to use MIP funds for outreach activities to groups of like providers, which  had not previously been funded through MIP. CMS will be able to further  increase expenditures for program integrity in fiscal year 2006. In addition  to the maximum of $720 million originally appropriated under HIPAA for  fiscal year 2006, DRA increased the maximum by an additional   $112 million, for a total of $832 million. CMS plans to use some of the  $112 million to address potential fraud, waste, and abuse in the new  Medicare prescription drug benefit.
In each year from fiscal year 1997 through fiscal year 2005, CMS generally  increased the amount of MIP funds spent for each of its five program  integrity activities, as figure 2 shows. In addition to the increase in the  amount of funding for provider education, the expenditures for audit  increased 45 percent during the same period. As figure 3 shows,  expenditures for medical review increased from fiscal year 1997 to fiscal  year 2001 to almost $215 million—about 81 percent—and, since fiscal year  2001, decreased to about $166 million, or about 23 percent. Overall,  expenditures for medical review increased 40 percent from fiscal year  1997 to fiscal year 2005. During this period, expenditures for secondary  payer increased 49 percent, and for benefit integrity, expenditures  increased 89 percent. (See fig. 3 for the amount of expenditures by activity  in fiscal years 1997, 2001, and 2005 and app. II, table 3, for more detailed  information on the amount of expenditures for each activity in each year.)
Increased spending for provider education stemmed, in part, from  provider concerns about an increased burden on them in the medical  review process. In 2001, we reported that as CMS increasingly focused on  ensuring program integrity, providers were concerned about what they  considered to be inappropriate targeting of their claims for review.  Further, providers asserted that they may have billed incorrectly because  of their confusion about Medicare’s program rules. To address these  concerns, CMS developed a more data-driven approach for conducting  medical review and also increased its emphasis on provider education.
CMS officials explained that medical review would help identify providers  that were billing inappropriately, and provider education would focus on  individuals’ specific billing errors to eliminate or prevent recurrence of the  problems. In addition, beginning in fiscal year 2002, spending for the  provider education activity increased significantly because CMS began to  use MIP funds for what the agency called provider outreach. Provider  outreach focuses on communicating with groups of providers about  Medicare policies, initiatives, and significant programmatic changes that  could affect their billing. This information is conveyed through seminars,  workshops, articles, and Web site publications. Previously, provider  outreach had been funded outside of MIP, as part of CMS’s program  management budget. Provider education spending increased from   $17 million in fiscal year 2001—before provider outreach was added to the  provider education activity—to $53.5 million in fiscal year 2002. In fiscal  year 2005, funding for the provider education activity reached   $70 million.
In comparing the share of funds spent on each program integrity activity,  from fiscal year 1997 through fiscal year 2005, we found that CMS  generally spent the largest share on audit, averaging about 31 percent, and  on medical review, averaging about 27 percent. CMS spent less on  secondary payer, averaging 21 percent, and benefit integrity, averaging   15 percent. In contrast, during this period, CMS spent the smallest  percentage on provider education, which averaged about 6 percent of MIP  expenditures. See figure 4 for information on the percentage of funds  allocated to each activity. (For more detail, see table 4 in app. II.)

	CMS’s Current MIP Funding Allocation Approach Has Weaknesses

CMS officials told us that they generally had allocated MIP funds to the  five activities based predominantly on historical funding, but sometimes  considered high-level priorities. However, this approach does not take into  account data or information on the effectiveness of one activity over the  other in ensuring the integrity of Medicare or allow CMS to determine if  activities are yielding benefits that are commensurate with the amounts  spent. For example, while CMS has noted that benefit integrity and  provider education activities have intangible value, the agency has not  routinely collected information to evaluate their comparative  effectiveness. Furthermore, CMS has not fully assessed whether MIP funds  are appropriately allocated within the audit, medical review, benefit  integrity, and provider education activities. For example, audit’s role has  changed as Medicare’s payment methods have changed in the last decade,  but it continues to have the largest share of MIP funding.

		MIP Funds Allocated Primarily on a Historical Basis

According to agency officials, CMS allocates funds for the five activities  based primarily on an analysis of previous years’ spending and may also  consider other information when developing the MIP budget, such as  current expenditures by individual contractors. CMS officials told us that  they may also consider the agency’s high-level priorities. For example, in  fiscal year 2004, CMS began to increase funds to expand the scope of its  annual study to estimate Medicare improper payment rates, and in fiscal  year 2002, it increased its MIP allocation for provider education.
CMS does not have a means to compare quantitative data or qualitative  information on the relative effectiveness of MIP activities that it could use  in allocating funds. Instead, it calculates the quantitative benefits for two,  and assesses the qualitative benefits—which are not objectively  measured—for the other three. In fiscal year 2005, for its medical review  and secondary payer activities, CMS tracked dollars saved in relation to  dollars spent—a quantitative measure that the agency calls a return on  investment (ROI).
Having an ROI figure is useful because it measures the effectiveness of an  individual activity so that its value can be compared with that of another  activity. As of fiscal year 2005, secondary payer had an ROI of $37 for  every dollar spent on the activity, and medical review had an ROI of $21  for every dollar spent. CMS tracked the ROI for audit, but by fiscal year  2002, audit’s reported contribution to ROI fell to almost zero. (See fig. 5  and app. II, table 5, for additional ROI details.)
CMS officials told us that the decrease in the ROI for audit was due to the  implementation of prospective payment systems (PPS), under which  Medicare pays institutional providers fixed, predetermined amounts that  vary according to patients’ need for care. Until fiscal year 2001, audits  had achieved an ROI that was generally $9 or more for every dollar spent  conducting them, by disallowing payment for individual costs that should  not have been paid by Medicare under the previous payment method.  Under PPS, CMS’s methods for paying providers changed. However, the  information system that had been used to track ROI began to incorrectly  calculate the savings from audit because it had not been adjusted for the  new payment method. According to agency officials, CMS is implementing  a different way to track audit savings, and an overall ROI. It will focus on  the savings from disallowing items that directly affect an individual  provider’s payment under a PPS, such as bad debts and the number of low- income patients hospitals serve. It will track the amounts related to these  add-on payments actually paid by Medicare to, or recouped from, the  provider after an audit. The difference between the amount paid prior to  the audit and the amount paid after the audit (assuming there has been an  adjustment) would be the savings.
However, all audit functions do not result in measurable savings. For  example, in its written comments on a draft of this report, CMS noted that  many audit functions funded by MIP do not have an ROI. CMS stated that  these include processing cost reports for data collection purposes,  correcting omissions on providers’ cost reports, implementing court  decisions, and issuing notifications concerning Medicare payments. In  addition, CMS stated that some of these activities are mandated by law,  while others have significant value to the Medicare Payment Advisory  Commission (MedPAC), which is an independent federal commission;  providers; provider associations; and actuaries.
From fiscal year 1997 through fiscal year 2005, CMS developed qualitative  assessments of the impact of benefit integrity and provider education.  According to CMS, the agency develops such assessments when the  savings generated by MIP activities are impossible or difficult to identify.  Nevertheless, CMS officials told us that these activities provide value to  the program in helping to ensure proper Medicare payments. For example,  CMS officials said that benefit integrity contributes to the work of federal  law enforcement agencies, which investigate and prosecute Medicare  fraud and abuse. CMS officials also noted that they consider benefit  integrity to have a sentinel effect in discouraging entities that may be  considering defrauding the Medicare program, but this effect is impossible  to measure.
CMS indicated that trying to measure the results of the contractors’ benefit  integrity activities could create incentives that undermine the value of  their work. For example, counting the number of cases referred to law  enforcement for further investigation could lead the contractors to refer  more cases that were less fully developed. However, other agencies that  investigate or prosecute fraud, such as HHS and the Department of  Justice, keep track of their successful cases, recoveries, and fines to  demonstrate their results. Similarly, CMS could assess the degree to which  each of its contractors had contributed to HHS and the Department of  Justice’s successful investigations and prosecutions.
In regard to educating providers on appropriate billing practices, CMS may  be missing opportunities to evaluate its contractors’ performance.  Provider education can help reduce billing errors, according to CMS.  However, according to an OIG report, CMS has not evaluated the  strategies used to modify the behavior of providers through education to  determine if these strategies are achieving desired results.
CMS has noted the intangible value inherent in benefit integrity and  provider education activities, but the agency has not routinely collected  information to evaluate their comparative effectiveness in ensuring  program integrity. Further, as discussed earlier, correct information on  audit’s effectiveness, based on an ROI, has not been available for the last  several years. Consequently, CMS is not able to determine if some of the  funds spent for benefit integrity, provider education, and audit—about  $396 million, or 56 percent of MIP funds in fiscal year 2005—could be  better directed to secondary payer or medical review. Nevertheless, CMS  officials told us that they plan to decrease the allocation to medical review  and increase the allocation to provider education.
CMS officials stated that they are developing two initiatives that will give  the agency objective measures of the results of the audit and provider  education activities. As discussed earlier, CMS is implementing a revised  methodology for calculating the ROI for audit. In addition, it is trying to  develop information on the effectiveness of provider education. A CMS  official explained that the agency is adding a provider education  component to its program integrity management reporting system. This  component will potentially allow CMS to develop an ROI figure for  provider education by correlating educational efforts to a decrease in  claim denials and provide a measure of the quantitative benefits of this  activity. This component is scheduled to begin operating in the summer of  2006.

		CMS Does Not Ensure That Funds Are Allocated in an Optimal Way within Activities

After CMS has allocated funds to each of the five MIP activities, it must  decide how to further distribute those funds to pay contractors that carry  out each one. For example, in fiscal year 2004, after CMS allocated about  $135 million for medical review to be conducted by intermediaries and  carriers, it then distributed those funds to pay 28 intermediaries and 24  carriers that were conducting medical review at that time. However, given  vulnerabilities for improper payment, contractor workload, and the  relative effectiveness of activities performed, CMS has not always taken  steps to ensure that it has allocated funds in an optimal way within its  activities. Nevertheless, CMS has used information on relative savings to  decide on funding allocations within the secondary payer activity.

			Allocations for Medical Review, Provider Education, and Benefit Integrity Are Not Based on Vulnerabilities

Medical review, provider education, and benefit integrity are activities for  which allocation of MIP funds may not be optimal, because our analysis  suggests that CMS has not allocated funds within these activities based on  information concerning contractor vulnerabilities. Such vulnerabilities  include the potential for fraudulent billing in different locations and the  amount of potential benefit payments at risk in the contractor’s  jurisdiction. For example, CMS estimated that the contractor that handled  claims for DME, orthotics, prosthetics, and supplies in a jurisdiction that  included Texas and Florida—two states experiencing high levels of  fraudulent Medicare billing—improperly paid 11.5 percent of its 2004  claims—or $474.9 million—which was a higher improper payment rate  than that of other contractors paying these types of claims. As we  previously reported, our analysis indicated this contractor received almost  a third less funds for medical review per $100 in submitted claims in fiscal  year 2003 than the amount given to contractors in other regions with less  risk of fraudulent billing. Our most recent analysis indicated that the  imbalance in fund allocation did not change in fiscal years 2004 and 2005.  We could not determine the rationale for this allocation beyond what was  historically budgeted for this contractor.
The amount of medical review funds allocated to individual contractors is  not directly tied to the amount of benefits that they pay, which is a key  measure of potential risk. For example, in fiscal year 2004, one contractor  paid out $66 million in benefits and received about 28 cents in medical  review funds for each $100 in benefits paid. In contrast, another contractor  paid out considerably more in benefits—about $5 billion in fiscal year  2004—and received about 7 cents in medical review funds for each $100 in  benefits paid.
Further, CMS has not adjusted the amount of funding for individual  contractors to educate providers based on their relative risks. A CMS  official told us that the amount of provider education funding is generally  aligned with the amount allocated for medical review, regardless of the  value of the benefits that the contractor pays.
Similarly, the amount of MIP funds provided to PSCs is not directly tied to  the amount of benefits paid in jurisdictions for which they have  responsibility for benefit integrity. For example, CMS spent about   $75 million for work performed by PSCs under 13 benefit integrity task  orders. The PSCs averaged about 3 cents for each $100 in paid claims in  the jurisdictions for which they conducted benefit integrity tasks.  However, the amount of MIP funding paid to the PSCs to conduct benefit  integrity activities varied from about 1 cent to about 7 cents for each $100  in claims paid. Further, our analysis showed no clear relationship between  funds provided to PSCs and their responsibilities for conducting benefit  integrity activities in jurisdictions with high incidences of fraudulent  Medicare billing. For example, one PSC received about 4 cents for  conducting benefit integrity work for each $100 in paid claims for benefit  integrity work in a jurisdiction that included Florida, which is at high risk  for fraudulent billing. In contrast, PSCs received the same level of funding  to conduct benefit integrity work in states at lower risk for fraudulent  billing, including Iowa, Montana, Pennsylvania, and Wyoming.

			Audit’s Role Has Changed, but Funding Allocations May Not Be Optimal

During the last decade, Medicare has significantly changed how it pays  institutional providers—such as hospitals and nursing homes—that it  audits. To align with the payment method changes, CMS has modified its  audit focus to items in the cost report that can affect payments under a  PPS. However, these audits can affect a much smaller proportion of  Medicare’s payments under a PPS than audits of costs under the previous  payment method. Given the magnitude of the payment method change,  CMS has not evaluated whether funds within the audit activity should be  further reallocated to potentially generate greater savings to the Medicare  program by addressing the accuracy of reported costs that may be used to  determine payment increases.
CMS distributes funds to its contractors to conduct certain tasks, such as  inputting data from; reviewing; and, if needed, auditing cost reports  submitted by its institutional providers in order to settle, or agree upon,  the reported costs. CMS’s audit contractors are also required to conduct  wage index reviews and assist with intermediary hearings and appeals of  settled cost reports. For several years, CMS has had a backlog of cost  reports to settle, and the agency has made a priority of reducing the  backlog. Other priorities include more closely scrutinizing those providers  that are still paid based on their costs—such as critical access hospitals— and conducting required audits.
For providers paid under a PPS, CMS has shifted its audit focus to the few  items that could affect a provider’s payments if disallowed. These include  bad debt, payments for graduate medical training, and the number of low- income patients that hospitals serve. CMS has also shifted more audit  resources to hospitals because more items on their cost reports can affect  calculations of a provider’s add-on payments.
CMS does not know the amount of MIP funds that are associated with  audits of different types of providers or specific issues, such as bad debt.  However, in fiscal year 2004, CMS began to separately track some audit  costs, such as those for desk reviews, audits, and wage index reviews.  This provided some information on how audit funds were being spent.  According to CMS officials, tracking the costs of individual audits at a  provider or issue level would be difficult and costly because multiple  issues are audited at the same time and the complexity of individual audits  varies for the same provider type. Nevertheless, more detailed information  on audit costs—such as at the provider level—than CMS currently tracks  could provide it with a better understanding of the value of its current mix  of tasks, particularly if it could associate the costs with the savings from  the audits. This could provide CMS with information on whether it needs  to change the balance of funding for those tasks—for example, whether it  should focus more attention on bad debt or other areas of the cost report  for specific types of providers.
Further, CMS’s audit function continues to focus on verifying specific  aspects of the provider’s cost report that affect its individual payment.  This type of audit generally addresses a small portion of providers’  Medicare payments, while under a PPS, a much greater portion of the  payments are based on overall industry costs. Each year, MedPAC  advises the Congress on whether the Medicare PPS rates for institutional  providers should increase, decrease, or remain constant. However,  MedPAC generally does not have a set of audited cost reports that validate  the information it uses in its assessments of providers, such as hospitals’  allocations of their costs. According to MedPAC, the current audit process  reveals little about the accuracy of the Medicare cost information. For  example, while CMS audits individual providers through full or partial  audits, it does not allocate funds to audit a panel of providers, such as  hospitals, which could provide a means to highlight areas where cost  reporting accuracy is problematic. Without accurate information, CMS  cannot ensure that payments to hospitals properly reflect their costs and  provide reliable information that can be a factor in determining whether  rates should change or remain constant.
CMS might find it cost-effective to gather additional information because  audits have the potential to give the Congress better information on  hospitals’ costs. For example, by law, CMS is required to periodically  conduct audits of end-stage renal disease (ESRD) facilities, which care for  patients who must rely on dialysis treatments to compensate for kidney  failure. CMS broadened its audit plan for these facilities to include a  review not only of bad debts, but also to validate the costs of a selected  number of items that are paid through PPS. CMS officials indicated that  their audits of these facilities generated only limited savings, usually  related to bad debts, so they did not consider these audits very valuable.  However, as a result of these audits, MedPAC officials stated in 2005 that  these facilities had a greater margin—or ratio of Medicare payments to   costs—than their cost reports suggested. This information was factored  into MedPAC’s recommendation about the amount of payment increase  needed in calendar year 2007. Setting appropriate payment increases for  hospitals is potentially more important to Medicare than for ESRD  facilities because payments to participating inpatient hospitals  represented about $116 billion, or about 40 percent of Medicare’s benefit  payments in fiscal year 2004. CMS officials agreed that gathering this  information might be valuable, but indicated that they did not currently  have sufficient funding to conduct this data validation in addition to their  current efforts funded as part of audit.

			CMS Used Savings Information to Optimize Allocation of Secondary Payer Funds

In contrast to provider education and audit, CMS collects information on  the relative savings from specific secondary payer functions and has used  this information to decide on funding allocations within the secondary  payer activity. CMS allocates funds to, and calculates savings for, about 16  secondary payer functions. Among these functions are (1) a data match  that helps identify instances when a Medicare beneficiary was covered by  other insurance and (2) the initial enrollment questionnaire, which gathers  insurance information on beneficiaries before they become eligible for  Medicare. Within secondary payer, for fiscal year 2005, savings for the 16  functions ranged from less than 1 percent to 49 percent of savings of over  $5 billion for all of the functions.
CMS officials told us that they have used relative savings information for  secondary payer functions as one factor in determining whether to  increase, decrease, or terminate funding for the functions within this  activity. For example, according to CMS officials, in fiscal year 2005,  savings for one secondary payer function—voluntary reporting of primary  payer information to CMS by health insurance companies—increased by  about 65 percent over fiscal year 2004. Further, savings from this effort  continue to increase. CMS is planning to maintain or expand funding to it.  However, CMS officials said that after confirming their relatively low  savings, they had terminated certain other efforts to identify secondary  payer claims. The terminated efforts included (1) a second questionnaire  sent as follow-up to determine whether a beneficiary who is claiming  Medicare benefits for the first time has other health insurance that would  be responsible for paying the claim and (2) an effort to determine whether  certain trauma codes contained in a claim could indicate that another  insurer, such as worker’s compensation, could be the primary payer.

	Future Programmatic Changes Will Affect MIP Funding Allocations

The Medicare program is undergoing significant changes for which there is  little precedent. These include the addition of the new Part D prescription  drug benefit and the reform of Medicare contracting. Both will require  CMS to make new choices in how it should allocate its MIP funds to best  address its program integrity challenges. CMS’s current allocation  approach—which agency officials characterized as primarily relying on  previous fiscal year funding allocations for each activity, and to each  contractor, to determine current allocations—will not be adequate to  address emerging program integrity risks and ongoing programmatic  changes. In addition, as contracting reform proceeds, CMS intends to  increase its use of MIP funds to reward contractors to encourage superior  performance. However, the usefulness of award payments as a tool to  encourage contractors to perform MIP tasks effectively depends on how  well CMS can develop, and consistently apply, performance measures to  gauge differences in the quality of performance.

		CMS’s Current MIP Allocation Approach Is Not Adequate to Address Emerging Risks

CMS’s current allocation approach will not be adequate to address  Medicare’s emerging program integrity risks related to the prescription  drug benefit. Over the next 10 years, total expenditures for the  prescription drug benefit, which was implemented in January 2006, are  projected to be about $978 billion, while total expenditures for the  Medicare program are projected to be about $6.1 trillion. CMS and others  have stated that the prescription drug benefit is at risk for significant fraud  and abuse. In December 2005, an assistant U.S. attorney noted that the  Medicare prescription drug benefit would be vulnerable to a host of fraud  and abuse schemes unless better detection systems are developed.  According to CMS, the prescription drug benefit may be vulnerable to  fraud and abuse in particular areas, including beneficiary eligibility, fraud  by pharmacies, and kickbacks designed to encourage certain drugs to be  included by the plans administering the benefit. To respond to these  challenges, CMS has selected eight private organizations, called Medicare  prescription drug integrity contractors (MEDIC), to support CMS’s benefit  integrity and audit efforts.
Because the Medicare prescription drug benefit is in the early stages of  implementation, CMS does not yet have data to estimate the level of  improper payments or information to determine the level of program  integrity funds needed to address emerging vulnerabilities. As a result, it is  not clear whether, in the future, CMS will need to shift funds from  program integrity activities for Parts A and B to protect the Part D drug  benefit from potential fraud and abuse. For fiscal year 2006, $112 million  beyond the HIPAA limit of $720 million has been appropriated for CMS to  support program integrity activities. The President’s Budget for fiscal year  2007 has also proposed additional funds for fiscal year 2007 and fiscal year  2008. CMS plans to use some of the additional funding provided under  DRA for fiscal year 2006 to support Part D program integrity efforts. For  example, CMS plans to spend $14 million over the next fiscal year to fund  efforts by MEDICs to protect the prescription drug benefit by performing  selected tasks, such as analyzing data to identify instances of potential  fraud and abuse. In addition, CMS plans to spend about $33 million on   Part D information technology systems to track data related to beneficiary  eligibility and to collect, maintain, and process information on Medicare  covered and noncovered drugs for Medicare beneficiaries participating in  Part D. See appendix IV for more information.

		Medicare Contracting Changes Will Affect MIP Allocations

Another significant programmatic change that will affect future MIP  funding allocations is Medicare contracting reform. MMA required CMS to  transfer all claims administration work, which includes selected program  integrity activities, to MACs by October 2011. CMS plans to transfer all  work to the MACs by July 2009—about 2 years ahead of MMA’s specified  time frame. Contracting reform will affect MIP funding allocations because  of (1) changes in contractors’ responsibilities for program integrity  activities and their jurisdictions, (2) the potential for operational  efficiencies, and (3) increasing use of MIP funds for contractor award  payments.
The transition to MACs will change some contractors’ program integrity  responsibilities and require reallocation of MIP funds among them. The  new MACs will be responsible for paying claims that were previously  processed by intermediaries and carriers, but CMS has decided that MACs  will not be performing all of the MIP activities that they previously  conducted. For example, PSCs performed medical reviews of claims in  some contractors’ jurisdictions, but this activity will be performed by  almost all of the MACs in the future. Further, contractors’ jurisdictions  will change as 23 MACs assume the work previously performed by a total  of 51 Medicare intermediaries and carriers, within the confines of 15 newly  designated geographic jurisdictions. The PSCs conducting benefit  integrity work will be aligned with the MACs in the 15 jurisdictions. In  some cases, one PSC may be aligned with more than one MAC jurisdiction.
According to CMS officials, Medicare contracting reform will lead to  operational efficiencies and savings that would mostly be due to more  effective medical review. For example, CMS anticipates that greater  incentives for MACs to operate efficiently and adopt industry innovations  in the automated medical review of claims will result in total estimated  trust fund savings of $650 million for Medicare from fiscal year 2006 to  fiscal year 2011. Having program integrity activities operate more  effectively could give CMS additional flexibility to reallocate some funding  while achieving reductions in improperly paid claims. However, we have  not validated CMS’s estimate, and in our August 2005 report on CMS’s plan  for implementing Medicare contracting reform, we raised concerns about  the uncertainty of savings estimates, which were based on future  developments that are difficult to predict.
As part of contracting reform, CMS plans to increase its allocation of MIP  funds that are used as award payments to encourage superior performance  of program integrity activities by contractors. Award payments that are  tied to appropriate performance measures could encourage contractors to  conduct MIP activities effectively and introduce innovations, such as  developing new analytical approaches to enhance the medical review  process. Intermediaries and carriers, both of which conduct some program  integrity activities, are currently paid on the basis of their costs, generally  without financial incentives to encourage superior performance. In  contrast, CMS currently offers award payments to other types of  contractors that conduct program integrity activities, including four MACs  that were selected in January 2006, PSCs, the COB contractor, NSC, and  the DAC contractor. As early as 2009, or when all administrative work has  been transferred to MACs, CMS will be offering the opportunity to be  selected for award payments to all contractors that conduct program  integrity activities.
The usefulness of using MIP funding for award payments to encourage  contractors to conduct program integrity tasks effectively depends on how  well CMS can develop, and consistently apply, performance measures to  gauge differences in the quality of performance. In 2004, CMS conducted a  study to evaluate whether the agency could reduce improper payments by  using award payments for contractors to lower their paid claims error  rates, which represent the amount of claims contractors paid in error  compared with their total fee-for-service payments. According to CMS, the  outcome of that pilot was positive, and CMS plans to use award payments  in the future as part of its strategy for reducing improper payments.  However, as we reported in March 2006, CMS will need to refine its  measure of contractor-specific improper payments, which would enhance  its ability to evaluate their performance of medical review and provider  education activities. Further, even when CMS has developed measures to  assess the performance of contractors that conduct MIP activities, it has  not always effectively or consistently applied them. For example, the OIG  recently reviewed the extent and type of information provided in  evaluation reports on PSCs’ performance in detecting and deterring fraud  and abuse. The OIG found that although the evaluation reports were used  as a basis to assess contractors’ overall performance, they did not  consistently include quantitative information on the activities contractors  performed or their effectiveness.

	Conclusions

We designated the Medicare program as high risk for fraud, waste, abuse,  and mismanagement in 1990, and the program remains so today. To  address this ongoing risk and reduce the program’s billions of dollars in  improper payments, CMS must use Medicare’s program integrity funding  as effectively as possible. Further, Medicare’s susceptibility to fraud is  growing, as it addresses the challenges of adding a prescription drug  benefit to the program. Despite Medicare’s increasing vulnerability, CMS  has generally not changed its allocation approach for MIP funding. In 2006,  a decade after MIP was established to support Medicare program integrity  activities, CMS officials state that the primary basis for their allocation of  funds is how they have been allocated in the past. However, programmatic  changes for Medicare’s contractors and emerging risks for the Part D  prescription drug benefit suggest that CMS needs to modify its approach  for deciding on funding allocations for—and within—the five program  integrity activities. Also supporting the need for CMS to assess its current  allocation approach is that the agency’s funding decisions do not routinely  take into account quantitative data or qualitative information on the  relative effectiveness of its five program integrity activities or contractors’  vulnerabilities. Without considering information or data, CMS cannot  judge whether funds are being spent as effectively as possible or if they  should be reallocated. CMS is developing two new measures that may help  the agency evaluate the relative effectiveness of provider education and  the audit activity. Better information about MIP activities’ effectiveness  should assist CMS in making more prudent management and funding  allocation decisions.

	Recommendation for Executive Action

To better ensure that MIP funds are appropriately allocated among and  within the five program integrity activities, we recommend that CMS  develop a method of allocating funds based on the effectiveness of its  program integrity activities, the contractors’ workloads, and risk.

	Agency Comments and Our Evaluation

In its written comments on a draft of this report, CMS stated that it  generally agreed with our recommendation to develop a method of  allocating MIP funds based on the effectiveness of the agency’s program  integrity activities, Medicare contractors’ workloads, and risk. However,  the agency expressed concern that the report appeared to emphasize the  use of ROI, a quantitative measure that tracks dollars saved in relation to  dollars spent, as a way to allocate funds. CMS stated this quantitative  measure can be an indicator of effectiveness, but noted that such a  measure cannot serve as the sole basis for informing funding decisions.  The agency stated that some of its MIP activities had benefits that could  not be easily quantified. CMS agreed on the value of allocating funds based  on risk and provided information on programmatic changes that would  help it do so. The agency also noted the efforts it had recently made to  strengthen program integrity.
CMS expressed concern about our discussion in the draft report  concerning the use of ROI as a way to quantitatively measure effectiveness  and to allocate MIP funds. CMS stated that the agency cannot provide  funding based exclusively on an ROI because some activities, including  benefit integrity, do not lend themselves to an ROI measurement and  others, such as audit, are governed by statutory requirements. CMS also  stated that in allocating MIP funds, it is critical that it consider factors  other than ROI, including historical funding, because MIP funding has not  increased since 2003.
Our report indicates that an ROI is an important factor that should be  considered in allocating funds, but cannot be the sole consideration. Our  conclusions reflect our support of an approach that takes into account the  qualitative benefits of program integrity activities. Our report discusses  agency officials’ views on the difficulty of developing quantitative  measures for the benefit integrity activity. We also provide information on  CMS officials’ qualitative assessments of the positive impact of benefit  integrity and provider education. For example, our report notes that  according to CMS officials, these benefits include discouraging entities  that may be considering defrauding the Medicare program and helping to  ensure proper Medicare payments. Both quantitative and qualitative  assessments of effectiveness—to the extent they can be developed—could  help CMS determine whether MIP funds are being wisely invested or if  they should be reallocated.
CMS also commented on the allocation of MIP funds to Medicare  contractors based on workload and risk. CMS noted that contracting  reform and the introduction of MACs will result in contractors’ workloads  being more evenly distributed. In addition, CMS noted that it is developing  award fee measures for contractors’ medical review activities, including  establishing performance goals for the Comprehensive Error Rate Testing  program contractor-specific error rate. CMS agreed with us that risk is a  factor that should be considered in allocating funds.
CMS stated that it is committed to identifying and investigating better  approaches to allocate resources to support critical agency functions,  including using its new contracting authority to introduce incentives for  Medicare fee-for-service claims processing contracts and consolidating  Medicare secondary payer activities. CMS also noted that it is using state- of-the-art systems and expertise to aggressively fight waste and abuse in  the program, continues to work closely with its contractors to help ensure  that providers receive appropriate education and guidance in areas where  billing problems have been identified, and has expanded oversight of the  new Medicare Part D prescription drug benefit. In addition, CMS discussed  recent program integrity efforts and successes, including reducing the  number of improper fee-for-service Medicare payments and addressing  fraud across all provider types by coordinating the activities of CMS, law  enforcement, and Medicare contactors in Los Angeles, California, and  Miami, Florida.
We have reprinted CMS’s letter in appendix V. CMS also provided us with  technical comments, which we incorporated in the report where  appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  date. At that time, we will send copies to the Secretary of HHS, the  Administrator of CMS, appropriate congressional committees, and other  interested parties. We will also make copies available to others upon  request. This report will also be available at no charge on GAO’s Web site  at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (312) 220-7600 or aronovitzl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  Sheila K. Avruch, Assistant Director; Hazel Bailey; Krister Friday;   Sandra D. Gove; and Craig Winslow.

Appendix I: Objectives, Scope, and Methodology

To provide information on the amount of funds allocated to the five  Medicare Integrity Program (MIP) activities over time, we interviewed  officials from the Centers for Medicare & Medicaid Services (CMS). We  obtained information concerning MIP funding allocations for audit,  medical review, secondary payer, benefit integrity, and provider education  for fiscal years 1997 through 2005. We also analyzed allocations within  these activities. Further, we obtained and analyzed related financial  information, including CMS’s planned and actual expenditures, savings,  and return on investment (ROI) calculations for fiscal year 1997 through  fiscal year 2005; CMS financial reports; and presidential and Department of  Health and Human Service (HHS) budget proposals for fiscal years 2006  and 2007. Because most MIP expenditures are for activities related to the  Medicare fee-for-service plan, our analyses focused on those expenditures.  We reviewed relevant legislation, such as the Health Insurance Portability  and Accountability Act of 1996 (HIPAA); the Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA); and the Deficit  Reduction Act of 2005 (DRA). We reviewed pertinent reports and  congressional testimony, including our own and those of CMS and the  HHS Office of Inspector General (OIG), related to program integrity  requirements.
To examine the approach that CMS uses to allocate MIP funds, we  interviewed CMS officials regarding factors they consider when allocating  MIP funds. We reviewed related documentation provided to us by CMS,  including budget development guidelines; manuals, such as the Financial  Management Manual; operating plans; and selected workload data. We  also reviewed information on individual projects, such as information  technology systems. We also reviewed pertinent GAO reports and  testimony and Medicare Payment Advisory Commission reports. We did  not independently examine the internal and automated data processing  controls for CMS systems from which we obtained data used in our  analyses. CMS subjects its data to limited reviews and periodic  examinations and relies on the data obtained from these systems as  evidence of Medicare expenditures and to support CMS’s management and  budgetary decisions. Therefore, we considered these data to be reliable for  the purposes of our review.
In addition, we interviewed CMS officials regarding changes in the  Medicare program that may affect MIP funding allocations, including  CMS’s plans to support activities to detect fraud and improper billing for  the new Part D prescription drug benefit and MIP activities to be  performed by contractors in the future. We also interviewed CMS officials  concerning performance measures and evaluations of contractors. We  reviewed related documentation, including the statement of work for the  Medicare prescription drug integrity contractors; plans for Medicare  contracting reform; policies and procedures associated with CMS’s  measurement of contractor performance; standards and performance  measures, such as the Comprehensive Error Rate Testing program; various  manuals, including the Medicare Program Integrity Manual; and an OIG  report on performance evaluations of program safeguard contractors  (PSC). We also reviewed CMS’s evaluations of contractor performance.  We performed our work from August 2005 through August 2006 in  accordance with generally accepted government auditing standards.

Appendix II: Information on MIP Funding, Expenditures, and ROI

The following tables contain details on MIP funding, expenditures,  allocations, and ROI. Table 2 shows MIP funding ranges under HIPAA.  Table 3 shows the amounts of MIP expenditures allocated to each of the  program integrity activities. Table 4 shows the percentage of MIP funds  allocated to the program integrity activities. Table 5 shows the ROI for  three of the program integrity activities.

Appendix III: Key Tasks Performed by Contractors That Conduct MIP Activities

	Medicare contractors conducting activity

Hospitals, nursing homes, home health agencies, and other institutional  providers that are—or have been— paid on a cost reimbursement basis  submit cost reports to CMS. Cost reports provide a detailed accounting of  what costs have been incurred, what costs the provider is charging to the  Medicare program, and how such costs are accounted for by the  provider.
Contractors review all or part of the cost report to assess whether costs  have been properly allocated and charged to the Medicare program.
Contractors determine if the cost report is acceptable or if it needs further  review.
In some instances, contractors may conduct on-site cost report audits,  which include the review of financial records and related documentation  supporting costs and charges.
Contractors identify billing errors made by providers through analysis of  claims data; take action to prevent errors, address identified errors, or  both; and publish local coverage policies to provide guidance to the public  and medical community concerning items and services that are eligible  for Medicare payment.
Most medical reviews do not require a manual review of medical records.
Often contactors conduct medical reviews simply by examining the claim  itself, usually using automated methods.
Coordination of benefits (COB)  contractor, intermediaries and  carriers, and Medicare  administrative contractors  (MAC)
The COB contractor collects, manages, and maintains information  regarding health insurance coverage for Medicare beneficiaries.
To gather information to properly adjudicate submitted claims, the COB  contractor sends questionnaires to newly enrolled Medicare beneficiaries  and employers to solicit information about beneficiaries’ health insurance  coverage.
The COB contractor also collects secondary payer data from providers,  insurers, attorneys, and some state agencies.
The COB contractor uses data match programs to identify claims that  should have been paid by another insurer. When information indicates  that a beneficiary has other health insurance, the COB contractor initiates  a secondary payer claims investigation.
Intermediaries and carriers also conduct secondary payer operations,  including prepayment activities in conjunction with the COB contractor,  and they recover erroneous secondary payer payments.
Contractors are tasked with preventing, detecting, and deterring Medicare  fraud.
PSCs conduct medical reviews to support fraud investigations, analyze  data to support medical reviews, process fraud complaints, develop fraud  cases, conduct provider education related to fraud activities, and support  law enforcement entities.
Once a case is developed, PSCs refer it to the OIG or to law enforcement  for prosecution.
NSC reviews and processes applications from organizations and  individuals seeking to become suppliers of medical equipment and  supplies in the Medicare program.
NSC verifies suppliers’ application information; conducts on-site visits to  the prospective suppliers; issues supplier authorization numbers, which  allow suppliers to bill Medicare; and maintains a central data repository of  information concerning suppliers.
NSC also periodically reenrolls active suppliers and uses data to assist  with fraud and abuse research.
The DAC contractor conducts ongoing data analysis and reporting of  trends related to supplier billing for medical equipment and supplies and  provides ongoing feedback to the PSCs.
When billing problems are identified through medical reviews, contractors  take a variety of steps to educate providers about Medicare coverage  policies, billing practices, and issues related to fraud and abuse.
Contractors may conduct group training sessions, including seminars and  workshops; send informational letters to providers; arrange for  teleconferences; conduct site visits; and provide information on their Web  sites.

Appendix IV: CMS’s Planned Spending of $100 Million Provided by DRA

For fiscal year 2006, DRA provided $112 million in MIP funds beyond the  annual HIPAA limit of $720 million. Of this amount, DRA specified that   $12 million was for the Medi-Medi program and $100 million was for MIP  in general. Table 6 provides information on CMS’s planned spending of  $100 million in general MIP funds provided by DRA, including spending  related to the Part D prescription drug benefit.

Appendix V: Comments from the Centers for Medicare & Medicaid Services

Summary:
Why GAO Did This Study

Since 1990, GAO has considered Medicare at high risk for fraud, waste, abuse, and mismanagement. The Medicare Integrity Program (MIP) provides funds to the Centers for Medicare & Medicaid Services (CMS--the agency that administers Medicare--to safeguard over $300 billion in program payments made on behalf of its beneficiaries. CMS conducts five program integrity activities: audits; medical reviews of claims; determinations of whether Medicare or other insurance sources have primary responsibility for payment, called secondary payer; benefit integrity to address potential fraud cases; and provider education. In this report, GAO determined (1) the amount of MIP funds that CMS has allocated to the five program integrity activities over time, (2) the approach that CMS uses to allocate MIP funds, and (3) how major changes in the Medicare program may affect MIP funding allocations.

What GAO Found

For fiscal years 1997 through 2005, CMS's MIP expenditures generally increased for each of the five program integrity activities, but the amount of the increase differed by activity. Since fiscal year 1997, provider education has had the largest percentage increase in funding--about 590 percent, while audit and medical review had the largest amounts of funding allocated. In fiscal year 2006, funding for MIP will increase further to $832 million, which includes $112 million in funds that CMS plans to use, in part, to address potential fraud and abuse in the new Medicare prescription drug benefit. CMS officials told us that they have allocated MIP funds to the five program integrity activities based primarily on past allocation levels. Although CMS has quantitative measures of effectiveness for two of its activities--the savings that medical review and secondary payer generate compared to their costs--it does not have a means to determine the effectiveness of each of the five activities relative to the others to aid it in allocating funds. Further, CMS has generally not assessed whether MIP funds are distributed to the contractors conducting each program integrity activity to provide the greatest benefit to Medicare. Because of significant programmatic changes, such as the implementation of the Medicare prescription drug benefit and competitive selection of contractors responsible for claims administration and program integrity activities, the agency's current approach will not be adequate for making future allocation decisions. For example, CMS will need to allocate funds for program integrity activities to address emerging vulnerabilities that could affect the Medicare prescription drug benefit. Further, through contracting reform, CMS will task new contractors with performing a different mix of program integrity activities. However, the agency's funding approach is not geared to target MIP resources to the activities with the greatest impact on the program and to ensure that the contractors have funding commensurate with their relative workloads and risk of making improper payments.