Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

FEBRUARY 2000 

OEI-04-97-00330 

Durable Medical Equipment Regional 

Carriers 

Meeting HCFA’s Objectives 
OFFICE OF INSPECTOR GENERAL 

Public Law 95-452, as amended by Public Law 100-504, mandated the mission of the Office of 

Inspector General (OIG). That mission 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 Atlanta Regional Office prepared this report under the direction of Jesse J. Flowers, 

Regional Inspector General, and Christopher H. Koehler, Deputy Regional Inspector General. 

Principal OEI staff included: 

Lisa Keating, Lead Analyst Brian Ritchie, Program Analyst

Tricia Davis, Program Specialist Bambi Straw, Program Specialist

Scott Horning, Program Analyst Barbara Tedesco, Mathematical Statistician

Graham Rawsthorn, Team Leader Stuart Wright, Associate Director

To obtain copies of this report, please call the Atlanta Regional Office at 404-562-7723. Reports 

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

http://www.dhhs.gov/progorg/oei 
TABLE OF CONTENTS 

EXECUTIVE SUMMARY ............................................... 1

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

FINDINGS

Medical Policies ....................................................... 7

Education ........................................................... 8

Fraud Activities ....................................................... 9

Processing Costs ..................................................... 11

Carrier Shopping ..................................................... 13

Positive Results ...................................................... 14

RECOMMENDATION ................................................. 16

COMMENTS ........................................................ 17

APPENDIX

Comments .......................................................... 18
EXECUTIVE SUMMARY 

PURPOSE 

To determine if Durable Medical Equipment Regional Carriers met the Health Care 

Financing Administration’s implementation objectives. 

BACKGROUND 

On October 1, 1993, the Health Care Financing Administration (HCFA) began using four 

Durable Medical Equipment Regional Carriers (DMERCs) to process Durable Medical 

Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) claims for Medicare 

payment. Prior to the DMERCs, HCFA used 34 carriers to process all Part B claims, 

including those for DMEPOS. 

The change to four DMERCs was an effort by HCFA to improve ineffective and costly 

claims processing under the 34 carrier system. Specifically, HCFA was concerned with 

ineffective education and outreach efforts, a lack of basic data for fraud prevention, a lack 

of claims processing expertise for medical equipment and supplies, a lack of standardized 

forms for claims processing, and “carrier shopping” by suppliers for the highest 

reimbursement rates among carriers. 

HCFA charged the DMERCs with establishing medical policies for the 100 items that had 

the highest allowed charges, developing aggressive education and fraud prevention 

programs, and reducing claims processing costs. At the same time, HCFA required all 

Medicare carriers to use a standard claims form and changed its claims jurisdiction policy. 

HCFA designed these initiatives to reduce both administrative costs and costs to the 

Medicare Trust Fund. 

FINDINGS 

DMERCs Established Most Medical Policies as Required 

By October 1, 1993, the DMERCs were to establish medical policies defining the 

circumstances under which the 100 DMEPOS items that had the highest allowed charges 

were to be paid. They did so for 87 of the targeted DMEPOS items. Eight of the 

remaining policies were finalized in 1995 and two were finalized in 1997. An additional 

two items were dropped from consideration, and a policy for the remaining item has yet to 

be developed. 

DMERCs - Meeting HCFA’s Objectives 1 OEI-04-97-00330 
DMERCs are Providing Education as Required 

HCFA charged the DMERCs with developing an aggressive educational component, with 

the purpose of reducing incorrect claims submission, as well as reducing fraud. DMERCs 

have responded with a series of educational seminars directed at suppliers, physicians and 

beneficiaries, as well as a focused effort to educate particular suppliers that have a history 

of billing problems. 

DMERC Fraud Units Experienced Excellent Outcomes on Individual Fraud Cases, 

but Their Overall Effectiveness is Unclear 

HCFA charged the DMERCs to make a concerted effort to reduce fraud in DMEPOS 

billing and payments. DMERCs are attacking fraud in many specific cases; however, a 

lack of complete information precluded us from determining the effectiveness of DMERC 

fraud unit activities. While we obtained some workload data that quantifies their fraud 

efforts, the DMERCs did not provide needed data that documented the quality and result 

of their efforts. 

DMERCs Succeeded in Decreasing Claims Processing Costs 

Claims processing costs for DMEPOS claims have declined by 15 percent since the 

DMERCs were established, from $1.17 per claim in 1995 to $1.00 per claim in 1998. 

Accordingly, the DMERCs have saved an estimated $37 million per year compared to preDMERC costs. This was done largely through HCFA’s initiative to standardize claims 

forms and increase use of electronic claims submission. In addition, DMERC medical 

expertise has contributed substantially to Medicare Trust Fund savings. 

HCFA’s Claims Jurisdiction Policy Stopped Carrier Shopping 

To prevent carrier shopping, HCFA dropped its point of sale billing policy and adopted a 

beneficiary residence jurisdiction policy. This action prevented suppliers from shopping for 

specific carriers that would give the most favorable reimbursement. Under the new policy, 

carriers were predetermined, based on where the beneficiary who received DMEPOS 

lived. 

DMERC Activities Produced Positive Results 

Concurrent with implementing the activities described above, the DMERCs worked 

cooperatively with the HCFA, the Statistical Analysis Durable Medical Equipment 

Regional Carrier, the Office of Inspector General, and others to improve Medicare claims 

processing and prevent fraud, waste, and abuse. Such cooperative efforts led to 

development and revision of various policies, and changes in claims processing practices. 

The changes in policies and practices led to financial savings in several operational areas, 

including wound care supplies, lymphedema pumps, incontinence supplies, and orthotics. 

DMERCs - Meeting HCFA’s Objectives 2 OEI-04-97-00330 
RECOMMENDATION 

Overall, the DMERCs generally met HCFA’s objectives. However, one area of 

uncertainty is the effectiveness of their fraud units. To facilitate measurement of fraud unit 

effectiveness, we recommend that HCFA require the DMERCs to maintain needed data in 

their automated fraud information systems. This data should include complete and 

accurate documentation on the sources of opened cases and detailed financial information 

on fraud cases in overpayment status. Such data would facilitate an analysis of not only 

the quantity of the fraud units’ efforts, but also the quality. 

COMMENTS 

The HCFA concurred with our recommendation that the DMERCs maintain additional 

data in their automated fraud information systems. HCFA is currently developing a 

Program Integrity Management Reporting system which will require Medicare contractors 

to report data on fraud and abuse overpayments status. The new system is scheduled for 

implementation during Fiscal Year 2000. The full text of their comments is in appendix A. 

DMERCs - Meeting HCFA’s Objectives 3 OEI-04-97-00330 
INTRODUCTION 

PURPOSE 

To determine if Durable Medical Equipment Regional Carriers met the Health Care 

Financing Administration’s implementation objectives. 

BACKGROUND 

On October 1, 1993, the Health Care Financing Administration (HCFA) began using four 

Durable Medical Equipment Regional Carriers (DMERCs) to process Durable Medical 

Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) claims for Medicare 

payment. Prior to the DMERCs, HCFA used 34 carriers to process all Part B claims, 

including DMEPOS. The change to four DMERCs for processing DMEPOS claims was a 

HCFA effort to improve ineffective and costly claims processing under the 34 carrier 

system. 

Claims Processing and Payment Problems 

By the late 1980s, the number of complaints received by HCFA on processing and 

payment of DMEPOS claims had increased substantially. The complaints were coming 

from beneficiaries, suppliers, and carriers. Also, HCFA, the Department of Health and 

Human Services, Office of Inspector General, and the U.S. General Accounting Office 

issued numerous reports highlighting the following problems with DMEPOS claims. 

Carriers were not sufficiently educating suppliers and beneficiaries on Medicare 

requirements. Under the 34 carrier system, suppliers often claimed to be unaware of, or 

not to understand, Medicare claims requirements. Hence, many claims were denied for 

technical and coverage errors, which ultimately added to Medicare administrative costs 

and increased claims processing time, and effort by beneficiaries and suppliers. 

Additionally, Medicare beneficiaries were easy targets for unscrupulous DMEPOS 

suppliers. Educating Medicare beneficiaries would help them recognize and report 

improper services and claims. 

Carriers lacked basic data for fraud prevention. Unusual billing patterns may be the 

first indication of fraud. Further, early discovery of billing trends allows for development 

of new or revised policies before a costly large scale problem arises. However, DMEPOS 

claims analysis for potential fraud was difficult under the 34 Part B carrier system. The 

carriers used their own electronic claims processing forms and systems. Establishing 

billing patterns and trends on a large scale for identifying potential fraud was seldom done. 

DMERCs - Meeting HCFA’s Objectives 4 OEI-04-97-00330 
Carriers lacked expertise for processing DMEPOS claims. The 34 carriers generally 

had not developed staff expertise to efficiently and effectively review and approve 

DMEPOS claims, which were often more complicated than other Medicare Part B claims. 

In addition, DMEPOS claims comprised only about 5 percent of each carrier’s workload. 

Logically, Part B carriers gave low priority to them. 

Carriers used different claims forms. HCFA determined that processing DME claims 

electronically was more cost effective than processing hard copy claims -- $2 per claim 

versus $4.1 However, the 34 carriers used over 30 different electronic claims formats. 

The multiple formats created confusion among suppliers. Therefore, many suppliers 

submitted claims manually rather than electronically, not realizing the potential savings. 

Suppliers shopped for favorable carrier practices. Prior to creation of DMERCs, the 

carrier responsible for claims processing was determined by where a sale took place, e.g., 

a point of sale jurisdiction policy. However, differences existed among the 34 carriers in 

their review and approval of DMEPOS. Reimbursement rates, quantities allowed, and 

medical policies and their enforcement varied among carriers. This allowed national 

suppliers to manipulate the point of sale policy for excessive financial gain -- referred to as 

“carrier shopping.” Carrier shopping cost the Medicare program $22 million in 1989.2 

Policy Solutions for Claims Processing Problems 

In response to the processing and payment problems of the 34 carrier system highlighted 

above, HCFA established the DMERCs as part of a larger re-engineering effort. HCFA 

required the DMERCs to 

< Establish standardized medical policies for the 100 DMEPOS items that had the 

highest allowed charges, 

< Implement comprehensive educational outreach programs,

< Develop aggressive fraud detection and prevention programs, and

< Improve claims processing expertise and efficiency.

To support DMERCs and improve their ability to accomplish their objectives, HCFA also 

< Developed a standardized claims submission form, and

< Changed the point of sale jurisdiction policy to a beneficiary residence policy.

Finally, HCFA established a Statistical Analysis Durable Medical Equipment Regional

Carrier (SADMERC) to perform large scale analysis for all four DMERCs and a National

Supplier Clearinghouse as a central issuer and repository of supplier numbers.

1

1989 HCFA Industrial Engineering study

2

Carrier Shopping, A Management Advisory Report (OEI-05-91-00043)

DMERCs - Meeting HCFA’s Objectives 5 OEI-04-97-00330 
Prior Studies of DMERC Operations 

The DHHS Office of Inspector General and the U.S. General Accounting Office have 

reported on DMERC operations, including payment for DMEPOS items. Often, the 

reports depicted potential fraud, waste, and abuse. Typically, the reports were narrowly 

focused on claims processing and payment for discrete DMEPOS items. 

METHODOLOGY 

Our report provides a “big picture” view on how the DMERCs have instituted changes 

HCFA deemed necessary to protect the Medicare Trust Fund and reduce administrative 

costs for claims processing. Specifically, we determined if the DMERCs had established 

medical policies, education programs, fraud detection and prevention programs, and 

improved claims processing expertise and efficiency as required by HCFA. 

We focused our analysis on DMERC operations and data for fiscal years 1995 through 

1998. We excluded fiscal year 1994 as it was a transition period. 

We collected data on expectations for the DMERCs and their actual operations through 

interviews, database analysis, and document searches. To illustrate, we interviewed 

headquarters and regional HCFA staff to determine DMERC performance expectations. 

We also obtained HCFA’s Contractor Accounting and Financial Management (CAFM) 

data for each DMERC. Further, we used HCFA’s Contractor Reporting of Operational 

and Workload Data (CROWD) system to obtain DMERC workload statistics. 

We made site visits to the four DMERCs. At each DMERC, we interviewed key officials 

and staff, including the DMERC directors, medical directors, medical review staff, claims 

processing staff, fraud unit staff, and outreach staff. In some instances, the DMERCs 

were unable to provide systemic data that we could use to measure their program 

effectiveness. This was particularly true for the fraud control units. In this instance, we 

used case examples and changes in workload data as an indication of performance. 

In comparing what DMERCs were expected to do with what they actually did, we 

aggregated and summarized data collected. Our data showed wide variation in 

performance by the four DMERCs. However, for the purposes of this report, we based 

our findings on the aggregate performance of all the DMERCs unless otherwise noted. 

We recognize that both the Statistical Analysis Durable Medical Equipment Regional 

Carrier and the National Supplier Clearinghouse could contribute to improvements in 

propriety of Medicare services and claims. However, we limited the scope of our study to 

DMERC activities, and generally excluded other components from our analysis. 

_____ ____ ____ _____ 

We did our study between May 1997 and May 1999. We conducted our review in 

accordance with the Quality Standards for Inspections issued by the President’s Council 

on Integrity and Efficiency. 

DMERCs - Meeting HCFA’s Objectives 6 OEI-04-97-00330 
FINDINGS 

Most indicators show that restructuring DMEPOS claims processing into specialized,

regional carriers was on the whole a successful effort. The DMERCs

< Established most of the medical policies covering the 100 mandated items,

< Educated suppliers, beneficiaries, and others,

< Identified and processed fraud cases,

< Reduced claims processing costs,

< Halted carrier shopping, and

< Produced positive results.

DMERCs established most medical policies as required 

The medical directors established medical review policies that defined circumstances under 

which particular DMEPOS items would be allowed. The policies are used by all 

DMERCs, thus making claims processing more uniform and reliable. Based on the 

policies, computer edits are incorporated into automated processing systems that accept or 

reject claims, with the expectation of saving Trust Fund dollars. HCFA targeted the top 

100 codes, based on 1991 allowed charges, for DMERCS to finalize medical policies by 

October 1, 1993. 

The DMERCs finalized medical policies for 87 of the targeted 100 DMEPOS items 

by the October 1, 1993 deadline 

The DMERC medical directors established medical policies for 87 of the 100 DMEPOS 

items. The policies were finalized and implemented by the October 1, 1993 deadline. 

Not only did the medical directors establish policies for the 87 items, they expanded the 

scope of those policies. Foreseeing that unscrupulous suppliers may manipulate the 

system by code shifting for similar items, the medical directors established medical review 

policies for a wider spectrum of related DMEPOS items. For example, the medical 

directors constructed an “ostomy supply” policy that covered relevant items from the list 

of 100 as well as other ostomy items not on the original list. By creating this broader 

policy from the start, the directors eliminated or minimized costly code shifting that could 

have occurred had the policies been developed piecemeal. 

The DMERCs did not finalize policies for 13 of the 100 DMEPOS items by the 

October 1, 1993 deadline 

HCFA and the DMERCs discontinued using two of the 13 codes, and delayed finalizing 

policy for ten codes. Policy for the remaining code has not yet been developed. 

DMERCs - Meeting HCFA’s Objectives 7 OEI-04-97-00330 
HCFA discontinued using codes for two of the remaining 13 DMEPOS items. 

Because the codes were no longer used, no medical policy was needed or developed. 

HCFA and DMERCs delayed final medical policies for 10 items. The DMERCs had 

drafted polices for 10 items prior to the October 1, 1993 deadline. However, HCFA staff 

and the DMERC medical directors delayed finalizing the policies because of pressure from 

industry groups, suppliers, and beneficiaries who saw the policies as too restrictive. 

HCFA staff and DMERC medical directors, with input from the industry groups, finalized 

8 of the 10 policies in 1995 and the remaining 2 in 1997. 

The financial impact of the delay was minimal. Overall, our analysis of HCFA claims data 

for the 10 DMEPOS items showed a slight net increase in allowed charges following 

policy implementation. Allowed charges for three items decreased, but increased for the 

remaining seven items. In effect, the increases for the seven items offset the decreases and 

produced a small net increase. One medical director attributed some of the increase to 

expanded benefits under the codes. 

DMERCs did not develop a policy for one item. As of February 2000, the DMERCs 

had not developed a policy for one item from the original list of 100 codes. This item, a 

ventilator, accounted for $8.4 million in allowed charges in 1991. The allowed charges 

increased to $44.4 million in 1999. 

The DMERCs issued a Respiratory Assist Device policy in October, 1999. Included in 

this policy were two ventilator codes. According to a DMERC medical director, the 

specific code identified as a top 100 code in 1991 was not included as it was no longer the 

top billed ventilator code. The two codes included in the Respiratory Assist Device policy 

had allowed charges of $152.8 million in 1999. 

DMERCs are providing education as required 

In establishing the DMERCs, HCFA required them to provide education and training, 

primarily to suppliers, physicians, and beneficiaries. The objective was to reduce fraud 

and abuse and improve claims processing efficiency. 

HCFA’s Contractor Performance Evaluations3 indicate that DMERCs consistently provide 

education. Our analysis tended to corroborate HCFA’s evaluations. To illustrate, 

DMERC educational efforts seem to have led to increased beneficiary complaints. This 

indicates that beneficiaries are better educated on Medicare benefits and the propriety of 

claims. In fact, while the overall number of fraud cases that the DMERCs opened actually 

declined, the number that they opened as a result of beneficiary complaints increased from 

3

HCFA’s primary oversight mechanism for DMERC performance is the Contractor Performance Evaluation (CPE). 

HCFA staff evaluate the DMERCs on four criterion, each of which include ten to twelve individual activities. The criterion are 

quality (accurate claims processing and program effectiveness), efficiency (timely claims processing, electronic claims 

processing), service (accurate reviews and hearings, responsive to inquiries), and fraud and abuse (program integrity 

effectiveness). The evaluation includes some quantified measures as well as some qualitative assessments by review staff. 

DMERCs - Meeting HCFA’s Objectives 8 OEI-04-97-00330 
7,474 in 1995 to 8,192 in 1998. Further, the number of beneficiary calls to the OIG 

hotline regarding DMEPOS increased from 86 in 1995 to 757 in 1998. 

Education is carried out several ways. Much of the supplier education program is carried 

out through quarterly or biannual seminars. Topics generally include recent changes in 

policy and areas in which internal operations indicate billing problems exist. Additionally, 

DMERC representatives have increasingly attended trade shows, participated in industry 

meetings, and visited suppliers to enhance their knowledge of supplier operations and 

products. Further, each region produces a quarterly newsletter to suppliers. It notifies 

them of policy changes, provides answers to supplier questions, and provides information 

on various special interest topics. 

Another important method is focused education on targeted suppliers to address individual 

billing issues. One DMERC director reported that such targeted efforts were very 

effective. He said that as targeted suppliers were educated, their billing problems 

declined. 

In addition, the DMERCs provide information and education to members of Congress, 

their staff, and special interest groups. 

DMERC fraud units experienced excellent outcomes on 

individual fraud cases, but their overall effectiveness is 

unclear 

To protect the Medicare Trust Fund and reduce Medicare costs, HCFA charged the 

DMERCs to make a concerted effort to reduce fraud in DMEPOS billing and payments. 

DMERCs are successfully attacking fraud in many specific cases, however, a lack of 

complete information precluded us from determining effectiveness of fraud unit activities. 

While we obtained some workload data that quantifies their fraud efforts, the DMERCs 

did not provide various other data that was needed to document the quality of their 

efforts. For example, they all did not provide systemic data documenting proactive case 

development, or the volume and value of identified overpayments and collections. In the 

absence of complete information for all four DMERCs, we are unable to fully evaluate 

DMERC effectiveness as a whole. However, we do provide some insights on the three 

DMERCs that provided the necessary data. 

Individual DMERC fraud unit efforts have saved millions 

The DMERCs have assisted Federal agents from various agencies in developing fraud 

cases involving DMEPOS. OIG agents involved in the following cases said that the 

DMERC fraud unit’s assistance was timely and responsive. 

In one example, a DMERC assisted in an extensive undercover operation by educating 

Federal agents on claims processing and identifying problem areas in the industry. Fraud 

DMERCs - Meeting HCFA’s Objectives 9 OEI-04-97-00330 
unit staff identified suppliers to target. They also posed as office workers, and helped with 

investigations of questionable suppliers. The FBI, IRS, USPS, and the OIG were involved 

in this investigation. It resulted in five arrests for upcoding, kickbacks, mail fraud, and tax 

violations involving over $500,000. 

Another DMERC used data analysis to identify suppliers that were fraudulently billing for 

orthotics. The DMERC fraud staff analyzed data on supplier billing, including products 

sold, referring physicians, geographic areas, beneficiaries, and sales staff. This analysis 

linked suppliers together and identified a ring that was perpetrating fraud. One hundred 

ninety-four suppliers are identified with the ring. Thirty seven have been referred to other 

law enforcement organizations. The estimated impact of the orthotics crime ring on the 

Medicare Trust Fund exceeds $87 million. 

DMERC fraud units are not proactively identifying fraud 

In establishing the four DMERCs, HCFA instructed them to use all available data to 

identify trends and patterns that might suggest fraudulent activity. However, DMERCs 

rarely used proactive analysis to identify fraud cases. 

The significance of proactive data analysis is best reflected by HCFA’s previous 

conclusion that the 34 carriers were vulnerable to fraudulent and abusive billing practices. 

With so many carriers, it was difficult for them to identify aberrant billing patterns by 

suppliers that billed multiple carriers. According to HCFA, the consolidation of DMEPOS 

claims processing to four DMERCs would facilitate early detection of abusive and 

fraudulent billing practices through data analysis. 

Only one DMERC fraud unit used data analysis, to any significant extent, to identify 

potential fraudulent activities. Based on fiscal year 1997 and 1998 data, this DMERC 

identified 39 percent of its fraud cases through proactive data analysis. 

By comparison, in the other two DMERCs that provided such data, only about 1 percent 

of fraud cases were opened as a result of proactive data analysis. Although the DMERCs 

are not required to meet any numerical proactive analysis standard, we believe that 1 

percent is low. Considering the significance of such analysis as a foundation in 

establishing the DMERCs, we would expect to see a larger proportion of fraud cases 

resulting from data analysis. 

Overpayment collection efforts are not quantified 

All investigations do not result in fraud identification and referral to the OIG. Another 

outcome, as defined by HCFA, includes identification and recovery of Medicare 

overpayments. Although the DMERCs provided us the number of fraud cases that 

resulted in the identification of overpayments, they did not all provide data on the total 

overpayment dollars or the extent that overpayments were collected, written off, or were 

pending. Such information is essential for establishing the magnitude of the overpayments 

and measuring the effectiveness of DMERC fraud units. 

DMERCs - Meeting HCFA’s Objectives 10 OEI-04-97-00330 
Workload measures indicate fraud activity 

We recognize that the workload data documents the quantity of DMERC fraud detection 

and prevention activities, but these data are inadequate for determining the quality of such 

activities. Workload data include cases opened, closed, and referrals as shown below. 

< The number of cases DMERC fraud units opened declined 14 percent from 1995 

through 1998, from 15,112 to 12,975. A case is opened for investigation of 

potential wrongdoing, and to determine if Medicare overpayments exist. 

< The DMERCs closed between 10,158 and 13,505 fraud cases per year. We saw 

no consistent increasing or decreasing trend. 

< The DMERCs referred 1,398 cases to the OIG in 1995. By 1998, this number had 

increased to 1,742 cases — an increase of 25 percent. We observed that the 

number of referrals more than doubled from 1995 through 1997, reaching a high of 

3,336 referred cases in 1997 and then dropped back to 1,742 referrals in 1998. 

In addition, the DMERCs inherited a large backlog of pending fraud cases from the 34 

Part B carriers. Working the inherited cases dominated much of the fraud units efforts in 

the initial years. Overall, the DMERCs have reduced the number of pending cases by 9 

percent. 

DMERCs succeeded in decreasing claims processing costs 

By establishing the DMERCs, HCFA expected to reduce administrative costs. The 

DMERCs would develop needed expertise for more cost effective processing of claims. 

To aid in cutting claims processing costs, HCFA also standardized the claim form for all 

Part B services, including DMEPOS. 

DMERCs reduced claims processing cost by 15 percent from 1995 through 1998 

Nationally, the DMERC cost of processing claims decreased from $1.17 per claim in 1995 

to $1.00 in 1998 -- a 15 percent reduction in unit cost per claim over the 4 year period. 

During the same time period, the volume of claims processed increased nearly 20 percent. 

The claims processing costs and workload were not uniform among the DMERCs. Each 

of the four DMERCs achieved a decline in the cost of claims processing since 1995. 

However, the cost of claims processing and workload varied widely among the four 

DMERCs. To illustrate, in 1995 the cost ranged from $1.00 per claim in one DMERC to 

$1.38 in another DMERC. In 1998 the cost ranged from $0.89 per claim in one DMERC 

to $1.12 in another. Table 1 shows cost per claim processed and workload statistics for 

each DMERC for fiscal year 1995 through fiscal year 1998. 

DMERCs - Meeting HCFA’s Objectives 11 OEI-04-97-00330 
TABLE 1 

CLAIMS PROCESSING WORKLOAD AND COSTS4 

FY 1995 FY 1996 FY 1997 FY 1998 

Region Claims Unit Cost Claims Unit Cost Claims Unit Cost Claims Unit Cost 

A 7,363,555 $1.14 7,546,380 $1.05 7,909,635 $0.93 7,728,909 $0.98 

B 8,291,664 $1.38 8,775,683 $1.28 9,464,583 $1.23 9,809,398 $1.11 

C 14,255,413 $1.00 15,513,246 $1.06 16,615,815 $0.94 17,904,946 $0.89 

D 6,865,857 $1.31 7,346,080 $1.31 7,927,125 $1.12 8,242,774 $1.12 

Total 36,776,489 $1.17 39,481,389 $1.14 41,917,158 $1.04 43,686,027 $1.00 

Decreased claims processing costs resulted in annual estimated savings of $37 

million 

HCFA reported that prior to establishing the DMERCs, DME claims processing costs 

were $2 for electronic claims and $4 for hard copy claims. In 1998, HCFA reported that 

DMERC claims processing unit cost for DMEPOS averaged $1.00 per claim. This 

includes cost for both electronic and manual processing. 

To provide a conservative estimate on potential savings in claims processing, we 

compared the DMERC claims processing cost for DMEPOS to the cost of processing 

DME claims electronically prior to establishing the DMERCs. To illustrate, we compared 

the 1998 DMERC claims processing cost of $1 (see Table 1) to the $2 cost of processing 

DME claims electronically prior to establishing the DMERCs. Our comparison showed a 

conservative savings estimate of almost $44 million for the nearly 44 million claims (see 

Table 1) processed in 1998. 

Similarly, we calculated estimated annual savings for 1995, 1996, and 1997. Table 2 

shows that estimated savings steadily increased from about $30 million in 1995 to about 

$44 million in 1998. The average annual savings was about $37 million. 

TABLE 2 

ESTIMATED CLAIMS PROCESSING SAVINGS 

Region FY 1995 Estimated 

Savings 

FY 1996 Estimated 

Savings 

FY 1997 Estimated 

Savings 

FY 1998 Estimated 

Savings 

A $6,332,657 $7,169,061 $8,463,309 $7,883,487 

B $5,140,832 $6,318,491 $7,287,728 $8,730,364 

C $14,255,413 $14,582,451 $17,612,763 $19,874,490 

D $4,737,441 $5,068,795 $6,975,870 $7,253,641 

Total $30,466,343 $33,138,798 $40,339,670 $43,741,982 

4

Data extracted from HCFA’s Contractor Accounting and Financial Management system. 

DMERCs - Meeting HCFA’s Objectives 12 OEI-04-97-00330 
Standardization of claim forms was an important factor in decreasing claims 

processing costs 

Logically, many factors could have contributed to claims processing cost reductions. For 

example, staff expertise, economies of scale, supplier and beneficiary populations and 

management practices may all contribute to declining costs. Such factors are typically so 

intertwined and co-dependant that segregating and quantifying their individual impacts 

was not feasible or desirable given the objectives and scope of this study. However, 

HCFA and DMERC officials highlighted standardization of claims forms as a major 

contributor to the cost reductions. 

HCFA officials said that a lack of standard claims forms was a major influence on the high 

cost of processing claims prior to establishing the four DMERCs. To illustrate, before the 

DMERCs, the 34 Part B carriers used their own claims processing forms. According to 

HCFA officials, the multiple electronic forms used by the carriers discouraged many 

suppliers from submitting claims electronically. 

Therefore, concurrent with establishing the DMERCs, the HCFA established a 

requirement that all Part B carriers use a standard claims processing form. According to 

HCFA and DMERC staff, the standardized form streamlined claims processing, and 

therefore reduced processing costs. 

According to HCFA data on the 34 carriers, the cost of processing electronically 

submitted DME claims was half that of processing hard copy claims -- $2 versus $4. The 

cost of processing DMEPOS claims is even less under the DMERC system. As shown in 

Table 1, consolidating both electronic claims processing and hard copy claims processing, 

the cost per claim was about $1 in 1998 - a substantial reduction over the 34 carrier 

system. 

HCFA’s claims jurisdiction policy stopped carrier shopping 

In establishing the DMERC system, HCFA dropped its point of sale billing policy and 

adopted a beneficiary residence claims jurisdiction policy to resolve carrier shopping 

problems. Under the point of sale policy, a carrier that processed any given DMEPOS 

claim was identified as the carrier with jurisdiction where the sale took place. 

Under this policy, suppliers could control which carrier would pay their claims. They 

could shop for the carrier with the most favorable reimbursement, review, and payment 

policy, then establish a billing office in the jurisdiction of the carrier that offered the most 

favorable reimbursement. 

By changing to a beneficiary residence jurisdiction policy, HCFA prevented suppliers from 

determining who would pay the claim. This proactive effort closed the loophole that had 

allowed abusive billing activities. Suppliers could no longer shop for the most profitable 

reimbursement because carriers were predetermined, based on where the beneficiary who 

received DMEPOS lived. 

DMERCs - Meeting HCFA’s Objectives 13 OEI-04-97-00330 
Our analysis showed that 1998 claims were processed by the appropriate DMERC. We 

reviewed a sample of claims to determine if more than one DMERC had paid different 

claims for the same beneficiary. The extent that claims for the same beneficiary are paid 

by different DMERCs would suggest the size of the carrier shopping problem, however, 

the absence of this does not definitively rule out carrier shopping. If carrier shopping 

continued to exist, we would expect to see a higher percentage of claims paid by two or 

more DMERCs. We determined that only 0.39 percent of beneficiaries had claims 

processed by two different DMERCs. This may be explained by the “snowbird” 

populations that maintained residences in different regions and the beneficiaries who 

moved during the year. 

DMERC activities produced positive results 

Concurrent with implementing the activities described above, the DMERCs worked 

cooperatively with the HCFA, the Statistical Analysis Durable Medical Equipment 

Regional Carrier, the Office of Inspector General, and others to improve Medicare claims 

processing and prevent fraud, waste, and abuse. Such cooperative efforts led to 

development and revision of various policies, and changes in claims processing practices. 

The net effect of such DMERC activities produced important Medicare Part B claims 

processing improvements--leading to considerable savings to the Medicare Trust Fund. 

To illustrate, DMERC data analysis, in conjunction with SADMERC analysis, has led to 

several medical policy revisions. These revisions resulted in substantial savings to the 

Medicare Trust Fund. For example, we reported that implementation of the October 1995 

DMERC wound care supply policy resulted in savings of $58 million in 1996.5 

In another example, we reported Medicare savings of $76.2 million in the allowance for 

lymphedema pumps in 1996.6 These savings were a result of a concerted OIG, HCFA, 

and DMERC effort to curb abusive billings for lymphedema pumps. The DMERC 

medical directors revised the lymphedema policy in December 1995, and monitored its 

implementation by examining claims to ensure appropriate payments. 

DMERCs have also partnered with HCFA, OIG, and other law enforcement agencies to 

produce payment and coverage policies, fraud alerts, reports, and prosecutions. Such 

efforts contributed to declines in Medicare allowances. In 1997 we reported that about 

$49 million was recovered through seizures and restitutions from abusive incontinence 

suppliers.7 Additionally, DMERC medical policy revisions made billing for questionable 

supplies more difficult. We estimated that declines in questionable billings saved the 

Medicare program $85 million in 1995. 

5 Medicare Part B Allowances for Wound Care Supplies (OEI-03-94-00793) 

6

Medicare Allowances for Lymphedema Pumps (OEI-04-97-00130) 

7

Medicare Allowances for Incontinence Supplies (OEI-03-94-00773) 

DMERCs - Meeting HCFA’s Objectives 14 OEI-04-97-00330 
Finally, 1991 Medicare payments for non-legitimate orthotics devices exceeded $7 

million.8 Subsequent to this identified problem, the DMERCs were established and 

implemented an orthotics policy. We conducted a follow-up review and concluded that 

the DMERCs’ implementation of the policy had precluded continued payments for nonlegitimate orthotics.9 

We presented the above examples not as an exhaustive list of the DMERC’s 

accomplishments, but rather to illustrate the substantial role DMERCs have played in 

saving the Medicare program millions of dollars. 

8

Medicare Payments for Orthotic Body Jackets (OEI-04-92-01080) 

9

Medicare Payments for Orthotic Body Jackets (OEI-04-97-00390) 

DMERCs - Meeting HCFA’s Objectives 15 OEI-04-97-00330 
RECOMMENDATION 

Although HCFA’s establishment of the DMERCs has generally been a success and 

resulted in program efficiencies and financial savings, we identified an opportunity for 

improvement. Specifically, HCFA should require the DMERCs to maintain additional 

data in their automated fraud information systems. This additional data should include 

complete and accurate data documenting 

< The sources of opened cases (i.e., proactive data analysis, medical review 

referrals), and 

< Detailed financial information on fraud cases in overpayment status (i.e., how 

much was collected, is pending, and was determined uncollectible). 

Such data would facilitate an analysis of not only the quantity of the fraud units’ efforts, 

but also the quality. 

DMERCs - Meeting HCFA’s Objectives 16 OEI-04-97-00330 
AGENCY COMMENTS 

The HCFA concurred with our recommendation that the DMERCs maintain additional 

data in their automated fraud information systems. HCFA is currently developing a 

Program Integrity Management Reporting system which will require Medicare contractors 

to report data on fraud and abuse overpayments status. The new system is scheduled for 

implementation during Fiscal Year 2000. The full text of their comments is in appendix A. 

DMERCs - Meeting HCFA’s Objectives 17 OEI-04-97-00330 
APPENDIX A 

DMERCs - Meeting HCFA’s Objectives 18 OEI-04-97-00330