Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

JULY 2000 

OEI-05-99-00071 

MEDICAID 

Claims Processing Safeguards 
OFFICE OF INSPECTOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 

protect the integrity of the Department of Health and Human Services programs as well as the 

health and welfare of beneficiaries served by them. This statutory mission is carried out through a 

nationwide program of audits, investigations, inspections, sanctions, and fraud alerts. The 

Inspector General informs the Secretary of program and management problems and recommends 

legislative, regulatory, and operational approaches to correct them. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 

Inspector General. It conducts short-term management and program evaluations (called 

inspections) that focus on issues of concern to the Department, the Congress, and the public. The 

inspection reports provide findings and recommendations on the efficiency, vulnerability, and 

effectiveness of departmental programs. 

OEI's Chicago Regional Office prepared this report under the direction of William C. Moran, 

Regional Inspector General and Natalie A. Coen, Deputy Regional Inspector General. Principal 

OEI staff included: 

REGION HEADQUARTERS 

John M. Traczyk, Project Leader Jennifer Antico, Program Specialist 

To obtain copies of this report, please call the Chicago Regional Office at 312-353-4124. 

Reports are also available on the World Wide Web at our home page address: 

http://www.hhs.gov/oig/oei/ 
EXECUTIVE SUMMARY 

PURPOSE 

This is the second of three reports describing Medicaid program safeguards. This report 

discusses claims processing safeguards. The first report discusses proactive safeguards 

and the third report discusses post payment safeguards. 

This report is intended to provide information about and increase awareness of Medicaid 

claims processing safeguards. Claims processing safeguards ensure that claims submitted 

for payment are properly adjudicated. 

CLAIMS PROCESSING SAFEGUARDS 

System Access Safeguards validate that the claims submitted for payment are from

providers authorized to bill Medicaid. Claims from unauthorized providers, are rejected

from processing. 

Claims Adjudication Safeguards help to ensure that the services listed on a claim are

covered, medically necessary and properly adjudicated. They include prepayment provider

flags, prepayment procedure flags, concurrent reviews and fully automated computer

edits.

Manual Claim Reviews including utilization and medical reviews are conducted by

trained specialists. Staff specialists review specific claims with established program and

medical policy, with previously paid claims, and with other information to decide if

Medicaid should pay for the services. 

Audits in the report refers to those manual functions (i.e., pricing and reviews of

certificates of medical necessity) that do not require decisions of a medical nature. Audits

help identify patients who have other health insurance or who may be eligible for

workman’s compensation or other payments to cover the cost of their medical care.

Payment Suspensions prevent financial losses while questions concerning overpayments,

fraud and abuse are resolved.

Claims Processing Safeguards 1 OEI-05-99-00071 
<

<

OPPORTUNITIES FOR IMPROVEMENT 

Based on our prior studies and information gathered during this study, we would 

encourage States to consider the following opportunities for improving program 

safeguards: 

< Establish a system that identifies all third party billers/agents and the 

physicians using their services. The ability to know who is authorized to bill on 

behalf of a provider can help eliminate the misuse of provider numbers by clinics 

and third party billing agents. 

< Reduce the “hassle factor” by providing providers with a complete list of all 

critical errors on a claim. Medicaid systems should identify all fatal errors on a 

claim and notify the provider of all errors at one time. This would help avoid third 

and fourth claim submissions. 

< Use fatal reject data and edit data to identify problematic providers. States 

have the opportunity to use claim reject and edit data to improve claim processing 

safeguards, to clarify policies and to identify providers who may need additional 

training on Medicaid policies and claim submission requirements. 

< Use edit, utilization, medical and audit data to identify problematic policies 

and procedures. A number of States in our sample have successfully reengineered their Medicaid policies and procedures using information obtained from 

edits. 

< Improve State Agency employee and contracted workers sensitivity to 

potential fraud and abuse issues by providing ongoing training. With proper 

training the role of Medicaid staff in spotting and reporting of potential fraudulent 

and abusive practices can be improved. 

We intend to do additional in depth studies on proactive safeguards used by States. 

AGENCY COMMENTS 

The HCFA believes that the opportunities for improvement described in this report provide 

valuable information that will be shared with the State Medicaid programs. 

Claims Processing Safeguards 2 OEI-05-99-00071 
TABLE OF CONTENTS 

PAGE 

EXECUTIVE SUMMARY

INTRODUCTION ..................................................... 4

CLAIMS PROCESSING SAFEGUARDS ................................... 6

System Access Safeguards ...................................... 6

Electronic Claim Submission 

Claim Rejection 

Claims Adjudication Safeguards .................................. 8

Prepayment Provider Flags 

Prepayment Procedure Flags 

Concurrent Reviews 

Automated Edits 

Manual Claim Review .............................................. 13

Utilization and Medical Claim Review

Audits

Payment Suspension .......................................... 14

OPPORTUNITIES FOR IMPROVEMENT . ................................ 15

AGENCY COMMENTS ................................................ 16

APPENDIX A ....................................................... 17

Claims Processing Safeguards 3 OEI-05-99-00071 
INTRODUCTION 

PURPOSE 

To provide information about and increase awareness of Medicaid claims processing 

safeguards. 

BACKGROUND 

Medicaid is a health insurance program for certain low income and needy people. Within 

Federal limits, each State decides eligibility, benefit coverage, administrative practices, 

reimbursement and operational resource requirements. About 70 cents of every Medicaid 

dollar goes to institutional providers (hospitals, nursing homes). Thirty cents pays for 

non-institutional services (physician services, laboratory and radiology). Federal law 

requires States to pay for services provided by certain institutional providers and noninstitutional providers. State may elect to offer additional services such as dental care, 

podiatric care and prescription drugs just to name a few. 

The Health Care Financing Administration (HCFA) is responsible for administering 

Federal matching funds to the States and for legislation and regulations affecting Title 

XIX (commonly referred to as the Medicaid program). The HCFA also provides 

guidelines, technical assistance and periodic assessments of State programs. More than 

36 million recipients are enrolled in Medicaid. In 1991, 90 percent of these recipients 

were enrolled in fee-for-service (FFS) programs. By 1998, the number of recipients in 

FFS had decreased to 46 percent and enrollment in managed care plans increased to nearly 

54 percent. Nearly $169 billion was spent by the Federal Government and the States on 

Medicaid benefits in Fiscal Year 1998. 

State Medicaid programs are administered by State Agencies or contractors hired by the 

State. Most States also have a Medicaid Fraud Control Unit that handles investigations 

into allegations of fraud and abuse. 

States are required by legislation to make every effort to eliminate waste and illegitimate 

program expenditures. States are required to develop payment safeguards designed to 

protect their Medicaid funds from unscrupulous and fraudulent providers. 

Claims Processing Safeguards 4 OEI-05-99-00071 
METHODOLOGY 

We visited or interviewed over the telephone agency(ies) responsible for administering the 

Medicaid program in the following eight States: 

California Florida Illinois 

Louisiana Maryland Oregon 

Pennsylvania Texas 

These States were selected for site visits because they account for nearly half of all 

Medicaid expenditures. They were also chosen for their geographic location. Our site 

visits were conducted during the spring of 1999. During our visits, we discussed program 

safeguards used by the State’s Medicaid program. We spoke to State Agency officials 

and, when appropriate, to State subcontractors. 

Our discussions focused on Medicaid fee-for-service program safeguards. We have not 

attempted to assess the effectiveness of each safeguard. State Medicaid programs use 

many different terms to describe safeguards built into their systems. We have divided 

Medicaid program safeguards into three categories (proactive, claims processing and post 

payment safeguards). 

This is the second of three reports on Medicaid safeguards. This report discusses claims 

processing safeguards. Claims processing safeguards are those measures taken to ensure 

that claims submitted for payment are properly adjudicated. Our first report discussed 

proactive safeguards. Proactive safeguards are those measures taken to prevent fraud, 

abuse and waste before a claim is ever submitted for payment. The final report discusses 

post payment safeguards. Post Payment safeguards are measures taken after a claim has 

been processed to ensure proper payment. 

The primary purpose of these reports was to compile a catalog of program safeguards 

used by State Medicaid programs. Every effort was made to prepare a comprehensive and 

complete list. Some disagreement as to what constitutes a program safeguard may exist 

and some safeguards may have been overlooked. Fragmentation of responsibility in many 

State Medicaid programs often makes it difficult to reach all of the people responsible for 

Medicaid program safeguards. Consequently, States, their subcontractors and others may 

have information about other safeguard measures not mentioned in this report. 

Claims Processing Safeguards 5 OEI-05-99-00071 
CLAIMS 

SAFEGUARDS 

PROCESSING 

Providers, who treat Medicaid patients not enrolled in a managed care plan, must file an 

electronic or paper claim to receive payment for their services. Claims provide 

information about the patient and the provider. They provide a listing of the medical 

treatments and services provided to a patient. They also provide diagnostic information to 

justify the medical need for the services/treatments being billed. 

Claims processing safeguards, as we have defined them for this inspection, do not protect 

patients from receiving uncovered, excessive or medically unnecessary procedures and 

services. Claims processing safeguards only affect the claims submitted for payment after 

a patient has received services. They are designed to facilitate cost effective processing of 

claims and to protect Medicaid funds by identifying claims that require additional 

development before they are adjudicated for payment. 

For purposes of this report, we have divided claims processing safeguards into two 

groups. The first group consists of access safeguards that ensure that a claim submitted 

for payment is from an authorized provider and contains sufficiently accurate information 

to process the claim. The second group of claims processing safeguards ensures that the 

claims accepted for processing are properly adjudicated. 

SYSTEM ACCESS SAFEGUARDS 

Claims processing safeguards protect Medicaid systems from unauthorized access and 

help to ensure proper payment for medically needed services. They are also used to detect 

potentially fraudulent and abusive practices. 

Before claims for services are adjudicated for payment, they are scrutinized by a series of 

claims processing safeguards. Computer systems validate that the claims submitted for 

payment are from providers authorized to bill Medicaid. Claims from unauthorized 

providers, are rejected from processing. Claims submitted by billing agencies and other 

third parties on behalf of a provider must also have valid provider numbers or they will be 

rejected from Medicaid claims processing systems. 

Electronic Claim Submission 

California, Florida, Louisiana, Maryland and Texas believe that the safeguards currently in 

use for electronic claims submission are inadequate and do not adequately protect their 

programs from fraudulent and abusive billers. These States believe that they know little 

about subcontractors submitting claims on behalf of physicians and other providers. 

Claims Processing Safeguards 6 OEI-05-99-00071 
Consequently, the exact number of providers using billing agencies, clearinghouses, 

subcontractors and other entities to submit bills on their behalf is unknown. More 

importantly, adequate safeguards do not exist to ensure that a provider is really using the 

agency submitting claims using their billing number. States, like Medicare, cannot readily 

identify the actual party submitting a claim nor can they identify the location from which 

claims were transmitted.1 

Florida is in the process of re-engineering their electronic claims program. They plan to 

use new technology to tighten controls and add additional safeguards to their electronic 

systems. The new system will log and verify the identity of the computer used to produce 

claims and the telephone line tied to that computer terminal. The new systems will also 

log and verify user passwords and provider numbers. Claims from unrecognized 

terminals, claims received over unauthorized telephone lines and those with invalid 

passwords and provider identification will be rejected from processing. 

Claim Rejection 

We defined claim rejects as those manual or computerized functions that prevent a claim

from being accepted into the claims processing system. Seven of the eight States we

visited reject claims from entering their claims processing system if they contain “fatal

errors.” Generally speaking, a fatal error is one that would prevent a claim from being

posted to an eligible patient’s claim history file or to the history file of an enrolled

provider. On average, about 15 percent of claims submitted for payment contain fatal

errors. In Texas, 500,000 claims are rejected each month, Pennsylvania returns 13,000

claim each day. 

The most common fatal errors include missing or erroneous:

< provider and patient identification numbers,

< birth dates,

< diagnostic information, and

< prior authorization information. 

Claims with fatal errors are rejected from the claims payment system. Seven of the eight

States we visited do not assign claim control numbers to claims with fatal errors. 

However, these States do have aggregate data as to the number of claims returned to

providers each day due to a fatal error. 

Claims rejected from processing are returned to the provider (or the provider’s agent)

along with information about the type of error that causes the claim to be rejected. The

provider (or their billing agent) must correct the identified critical error and resubmit the

1 Additional information concerning electronic claim safeguards and vulnerabilities can be found 

in Medical Billing Software And Processes Used To Prepare Claims. OEI-05-99-00100. 

Claims Processing Safeguards 7 OEI-05-99-00071 
claim. In many States, a claim is rejected from further processing when the first critical 

error is found. Consequently, claims resubmitted for processing may also be returned 

because they contain other critical errors. The submit and reject cycle is repeated until all 

critical errors are resolved. 

Unlike the other seven Medicaid programs in our sample, Maryland accepts all claims for 

processing. An internal control number is assigned to every claim the Maryland Medicaid 

program receives. The entire claim will be processed to completion even if no payment 

will be made due to fatal billing errors. In Maryland, all claims complete the entire 

processing cycle. At the end of the claims process, the provider is notified of all errors 

found on the claim. It is the provider’s responsibility to correct all fatal errors and nonfatal errors and to re-submit the claim for payment. There is insufficient information and 

data to determine whether one method is better than the other. 

In most States, claims for services that require prior authorization must contain the unique 

prior authorization number assigned by the approving agency/individual. If this number is 

not on the claim it will reject and no payment will be made. 

CLAIMS ADJUDICATION SAFEGUARDS 

Claims that successfully enter the claims processing system are assigned an internal control

number that is used to track processing, adjudication decisions and payment information. 

Claims accepted for processing are subjected to prepayment reviews, concurrent care

reviews, limitation edits, relationship edits, audits and medical review. 

Claims processing safeguards help to ensure that the services listed on a claim are:

< covered Medicaid services,

< medically necessary services, and

< properly adjudicated. 

Provider and procedure flags, concurrent reviews, automated edits, manual reviews,

utilization and medical reviews, audits and payment suspension are claims processing

safeguards used by State Medicaid programs. 

Prepayment Provider Flags 

Provider flags help States identify claims from problematic providers and problematic 

services. Flags interrupt the claims processing cycle until claim information is manually 

reviewed by Medicaid employees. Flags are prepayment claims processing safeguards 

that help to ensure proper adjudication of a claim and compliance with Medicaid policy 

and procedures. They often involve obtaining and reviewing additional medical 

information, contacting third parties and analyzing past patient and/or provider claim 

histories. 

Claims Processing Safeguards 8 OEI-05-99-00071 
In the eight States we visited, nearly all of the claims flagged for prepayment review 

involved providers who: 

< Were the subject of an ongoing investigation that may involve a substantial 

overpayment, 

< Were found to be billing improperly and had been advised to correct their aberrant 

billing practice(s), 

< Provided excessive and unnecessary services, and 

< Had unusual shifts in their claim volume or claim charges. 

In most States, very few providers are ever flagged for prepayment review. At the time of 

our visit, Texas had none, Oregon and Louisiana had less than 3 and Florida had about 30. 

In Florida, the State’s Medicaid program integrity unit identified and requested flags on 

more than 30 providers with specific problems ranging from excessive services to potential 

fraud. Louisiana reviews diagnostic codes, procedure codes, patient visits, prescriptions 

and other criteria to identify providers whose claims differ substantially from their peers. 

These “outlier” providers are flagged for prepayment review to ensure that the claims they 

submit are properly billed and adjudicated. Florida, Illinois and Louisiana have flags that 

identify new providers with “fast starts.” Fast starts include new and established providers 

whose claim volume increases dramatically in a relatively short period of time. Only one 

of our eight States withholds payment until they have researched the cause of the increase 

in billing. 

Providers flagged for prepayment review will have their claims reviewed until Medicaid is 

sure that unacceptable billing practices have been corrected. Some States use the results 

of their prepayment reviews to ensure that the problem(s) that led to the establishment of a 

prepayment flag have been corrected. If the reviews find that the problem no longer 

exists, the provider flag will be removed. Other States conduct a more in depth review 

before removing a provider from prepayment review. These States believe that they need 

to know whether the provider has truly corrected their aberrant practice(s) or simply 

changed billing to avoid detection. 

States appear reluctant to placing providers on prepayment review. They claim that 

prepayment reviews of provider claims are labor intensive, costly, increase claim 

processing time and exposes them [the State] to possible litigation. Some States felt that 

prepayment findings help them develop better policies and procedures to address 

deficiencies that necessitated the flag prepayment safeguard. 

Prepayment Procedure Flags 

Procedure specific flags suspend, for manual review, any claim containing the flagged 

procedure code(s). Procedure flags are more common than provider flags. In Illinois, 

Claims Processing Safeguards 9 OEI-05-99-00071 
claims for anesthesia reimbursement are suspended from the payment system for 

prepayment review. Illinois also flags claims that appear to contain excessive durable 

medical equipment and supplies. Some States believe that procedure specific flags are 

easily circumvented and that providers find ways around the flags and avoid prepayment 

scrutiny of their claims. 

Oregon and Texas conduct an in-depth audit of recent claims before removing providers 

from prepayment review. These audits help to ensure that the problems that resulted in 

the provider being placed on prepayment review have been corrected. They help ensure 

that the provider has actually corrected their aberrant billing practices and not simply 

found a way around Medicaid safeguards. 

Concurrent Reviews 

Concurrent reviews examine specific claims to determine whether services are medically 

indicated and being provided in the appropriate setting for care. They are conducted while 

patients are receiving services and help minimize overpayments to facilities and providers. 

Concurrent reviews recognize that under some circumstances obtaining prior approval 

may delay patient care. Concurrent care reviews are conducted while medical services are 

being provided. 

Of the eight States in our sample, only Pennsylvania uses concurrent care reviews. 

Pennsylvania uses concurrent reviews to determine the medical necessity of admissions to 

mental health facilities. The Pennsylvania policy ensures that those in need would have 

access to care and those who did not need this type of care would get the appropriate level 

of care. Pennsylvania examines medical records and other information to determine 

whether a patient’s hospitalization was medically indicated. The State also determines 

how many days of inpatient care it will authorize for payment. 

After Pennsylvania instituted concurrent care reviews they saw a decrease in the volume of 

claims for inpatient mental health services. Payments for mental health admissions in 

Pennsylvania fell and the length of inpatient stays also decreased. Pennsylvania believes 

that concurrent reviews help identify medically unnecessary hospitalizations for problems 

related to mental health. The State found that many of the services patients received while 

institutionalized could be provided safely in another setting. 

Automated Edits 

For this study, we defined automated edits as those claims’ processing safeguards that are 

coded into a State’s Medicaid claims processing system. Automated edits do not suspend 

claims from the processing cycle for manual review. Decisions on whether to pay or deny 

a claim are derived from hard logic programmed into the claims processing system. 

Automated edits check the quality of data on claims submitted for payment. They help 

ensure that the services billed by providers are properly processed and paid in accordance 

with Federal and State laws, regulations and policies. 

Claims Processing Safeguards 10 OEI-05-99-00071 
Today, States rely more and more on automated decisions during the claim processing 

cycle. Most edit safeguards use hard coded logic to make adjudication decisions about 

claims and services submitted to Medicaid for payment. The States we visited believe that 

automated edit safeguards improve claim processing times and are more cost effective 

than manual reviews of claim data. We categorized edit safeguards into three groups: 

Quality of data edits, relationship edits and limitation edits. 

Quality of data edits deny entire claims, or specific services on a claim, because the claim 

contains invalid or missing data needed for processing. Unlike rejects, that deny claims 

before they are assigned an internal control number, quality edits apply to claims assigned 

an internal control number and accepted for processing. 

Quality of data safeguards, in the eight States we visited, automatically deny payment for 

services containing invalid, or missing data. Claims containing invalid dates of service or 

missing dates of service, invalid or missing diagnostic or procedure codes and other key 

information required for accurate processing are denied by claims processing software. 

No attempt is made to resolve the data error. Claims are processed to completion and the 

provider is notified as to what items edited during process. The provider is also notified 

as to how much Medicaid paid for items and services that did not edit. 

Limitation edits are hard coded computer program logic that analyze current, and past, 

claim data to arrive at decisions concerning whether or not to pay for a service. 

Limitation edits ensure that duplicate payments are not made. They automatically deny 

non-covered drugs and services. They deny payment for excessive services ( i.e., one 

service every 7 days) and for services that exceed annual maximum allowed limits. They 

identify services and procedures included in the global payment made for certain surgical 

procedures to name just a few functions of that limitation edits perform. 

In Louisiana, limitation edits are used to limit the number of echocardiograms that State’s 

Medicaid program will pay for during a pregnancy. Services in excess of the allowed 

number are automatically denied by their claims processing system. In Maryland, 

limitation edits are used to ensure that the number of pre-authorized services being billed 

does not exceed the number that was actually authorized. For example, if the State 

authorized 10 services but the claim is for 12 services, the system will deny 2 services for 

being in excess of the authorized amount. If less than 10 services are billed, the State pays 

the lower number. 

Relationship edits use patient history information and current claim information to ensure 

that services being billed do not conflict with past services. They also ensure that the 

services being billed were provided in the appropriate setting. All of the States we visit 

use hard coded computer program logic to analyzes current, and past, claim data. Most 

services, that fail relationship safeguards, are automatically denied payment in most State 

systems. Services not automatically denied will be suspended from the claims processing 

cycle for manual review by trained specialists before the claim is adjudicated. 

Claims Processing Safeguards 11 OEI-05-99-00071 
Relationship safeguards identify inconsistencies on the claim being submitted. They also 

identify services that appear in conflict with past services received by a Medicaid patient. 

Relationship edits ensure that the sex of a patient agrees with the medical procedures 

being billed. They also identify and properly adjudicate claims for once in a lifetime 

services. For example, relationship edits identify and deny male patients receiving 

hysterectomies. They also identify and deny patient’s who have had their appendix or 

tonsils removed more than once. 

In most States, reviewing edits to determine their effectiveness is an ongoing process. In 

Louisiana, reports on each edit in their system are generated daily and weekly. The 

weekly edit report lists all edits in Louisiana’s claims processing system and provides data 

as to the number of times a claim or service is edited for each reason. Edits that reject too 

many or too few claims or services are re-evaluated to determine if they were properly 

implemented. Edits on the weekly report are then reviewed and analyzed by the State 

Agency component responsible for the creation of the edit and having responsibility for 

policy in the program area. 

Illinois, like most States we visited, reviews all edits (including those that produced no 

claim or line item edits) on an ongoing basis to ensure that their claims processing edits 

function properly. If the edit is not catching any claims or services, Illinois check to be 

sure the edit was properly designed and implemented. If the edit failed due to improper 

design, it will be re-designed and remain in the system. If the edit was properly designed 

and has outlived its usefulness, the edit can be turned off or removed from the system. 

Effective edits appear to be a collaborative effort involving policy, program integrity and 

other Medicaid departments. Some edits are required by HCFA and all States have these 

edits in their system. Most edits are developed by the State Medicaid programs in 

response to their specific needs or to address problematic areas. Some edits developed in 

one State may be of use to other States. 

The eight States we visited have anywhere from 500 to 2,000 edits in their claims 

processing systems.2 On average, about 20 percent of claims submitted for payment edit 

for one or more reasons. Oregon is in the process of re-engineering all its edit 

safeguards; dropping those that are ineffective, modifying other to improve their 

effectiveness and adding new edits to address emerging problems and new policies. 

Overall, the trend is for more hard wired (computerized) edits and less human intervention 

in the claims processing cycle. 

2 Numbers are approximate. States do not uniformly define what is an edit. Some States count as 

edits only those actions that occur during claims processing. Other States will count rejects, medical 

review and claims processing interventions as edits. 

Claims Processing Safeguards 12 OEI-05-99-00071 
MANUAL CLAIM REVIEWS 

Medical, utilization and audit reviews are claim processing safeguards that interrupt the 

processing of a claim for manual review by a trained specialist. Staff specialists compare 

the claims with established program and medical policy, previously paid claims, and other 

claims to decide if Medicaid should pay for the services. 

About 20 percent of the claims processed by State Medicaid programs require manual 

reviews of the claim submitted and supporting documentation. A large number of the 

claims requiring manual review are for Medicare patients for whom Medicare is the 

primary payer and the State Medicaid program is the secondary payer. 

Utilization and Medical Review 

State Medicaid programs suspend claims for manual review that appear to contain 

excessive or duplicate services. Utilization reviews compare the services being billed with 

past services provided to the patient. The reviewer decides whether the services being 

billed should be paid or denied. Two of the States we visited, use utilization review to 

confirm whether or not services on a claim are duplicates of previously processed services 

or non-duplicated services that should be paid. 

About 1 percent of the items suspended from claims processing are referred for medical 

review. Trained medical review staff examine claims and services that appear to be 

excessive, medically unnecessary or not meeting community standards of care. Medical 

review staff, composed of nurses, physicians and other specialists review these claims to 

ensure they meet locally accepted standards of medical practice. They may contact the 

provider for additional information before deciding whether to pay a claim as submitted or 

to deny some or all services billed. The final decisions on whether to pay or deny a service 

lies in their hands. 

Audits 

For purposes of this study, we have defined audits as those manual functions that do not 

require decisions of a medical nature. Examples of audits include manual pricing of 

specific services, reviews to ensure certificates of medical necessity accompany some 

services and reviews of services requiring additional supporting documentation. 

In Pennsylvania, audits help identify patients who have other health insurance or who may 

be eligible for workman’s compensation or other payments to cover the cost of their 

medical care. Clerical staff examines claims requiring additional documentation. If the 

required documents are not attached they will request it from the provider or deny the 

service(s). 

Claims Processing Safeguards 13 OEI-05-99-00071 
Many of the States in our sample use audits, utilization reviews and medical reviews to 

increase their visibility in the field and to enhance their safeguard efforts. California 

obtains medical records and other evidence needed to verify all of the items on a claim. 

Florida and Louisiana expand the scope of their inquiry beyond the claim in process and 

obtain medical and other records to support all claims paid during a specific period of 

time. 

PAYMENT SUSPENSIONS 

All of the States in our sample can suspend payments to providers. Under what conditions 

and when suspensions take place differs from State to State. The procedures for 

suspending payments also vary widely. In Louisiana, Florida and Texas payments to 

providers can be stopped as soon as there is reasonable evidence to indicate an 

overpayment may exist. Some States suspend payments when evidence suggests fraud or 

an overpayment has been established. Other States only suspend payment when there is a 

civil or criminal indictment. 

Claims Processing Safeguards 14 OEI-05-99-00071 
OPPORTUNITIES 

IMPROVEMENT 

FOR 

The primary purpose of claims processing safeguards is to ensure that claims submitted for 

payment are properly adjudicated. Claims processing safeguards can also be used to 

detect fraudulent or abusive providers and to identify problematic Medicaid policies. 

Opportunities for improving claims processing safeguards exist. Based on our prior 

studies and information gathered during this study, we would encourage States to consider 

the following opportunities for improving their Medicaid program safeguards: 

Establish a system that identifies all third party billers/agents and the physicians using 

their services. 

The ability to know who is authorized to bill on behalf of a provider can help eliminate the 

misuse of provider numbers by clinics and third party billing agents. Medicaid programs 

that receive claims from agents not listed as authorized should investigate the reason. If 

the provider failed to notify them of a change in billing agent, Medicaid files could be 

updated. If the claim is found to be unauthorized, Medicaid may wish to refer a case for 

potential criminal investigation, contact the billing agency to determine why the error 

occurred and to secure a plan to prevent future errors. Billing agents/agencies with 

excessive problems should be banned from submitting claims to the Medicaid program.3 

Reduce the “hassle factor” by providing providers with a complete list of all critical 

errors on a claim. 

Returning a claim to a provider more than once because it contains fatal errors that 

prevent a claim from entering the claims processing system is costly. Medicaid systems 

should identify all fatal errors on a claim and notify the provider of all errors at one time. 

This would help avoid third and fourth claim submissions. 

Use reject and edit data to identify problematic providers. 

States have the opportunity to use claim reject and edit data to improve claim processing 

safeguards, to clarify policies and to identify providers who may need additional training 

on Medicaid policies and claim submission requirements. Edit and reject data can also be 

used to identify providers and billing agents who may be trying to defraud their systems. 

3 Additional information about billing companies and system vulnerabilities can be found in 

Medical Billing Software and Processes Used to Prepare Claims. OEI-05-99-00100. 

Claims Processing Safeguards 15 OEI-05-99-00071 
Use edit, utilization, medical and audit data to identify problematic policies and 

procedures. 

A number of States in our sample have successfully re-engineered their Medicaid policies 

and procedures using information obtained from edits. An opportunity exists for all States 

to establish a feed back system that links personnel handling edit resolution with policy 

personnel and with program integrity staff. Information about how edits work or do not 

work can be used in decisions concerning whether to delete, add or modify an edit. They 

can be used to identify policies and procedures that may need to be re-engineered. And 

finally, information obtained in the resolution of edits may indicate the need for a referral 

for investigation. 

Improve front end worker sensitivity to potential fraud and abuses issue by providing 

ongoing training. 

Medicaid staff involved in claims processing (those who develop claims for additional 

information to resolve edits and those who review medical records) are in position to spot 

potential fraudulent and abusive practices. These staff need to know the difference 

between fraud and abuse and when problematic situations should be referred for 

investigation.4 With proper training the role of Medicaid staff in spotting and reporting of 

potential fraudulent and abusive practices can be improved. 

AGENCY COMMENTS 

We received comments on this report from HCFA. The HCFA believes that the opportunities for 

improvement described in this report provide valuable information that will be shared with the 

State Medicaid programs. The full text of HCFA’s comments can be found in Appendix A. 

4 Additional information on how to improve the handling of fraud and abuse allegations can be 

found in our report entitled, Carrier Fraud Units. OEI-05-00470. 

Claims Processing Safeguards 16 OEI-05-99-00071 
APPENDIX A 

HCFA Comments on this Report 

Claims Processing Safeguards 17 OEI-05-99-00071 
Claims Processing Safeguards 18 OEI-05-99-00071 
Claims Processing Safeguards 19 OEI-05-99-00071