Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

MEDICARE PREPAYMENT REVIEWFAIR HEARINGS 

Richard P. Kusserow 

INSPECTOR GENERAL 

OEI-07-8941680 
EXECUTIVE SUMMARY 

PURPOSE 

The purpose of the inspection is to determine where improvements can be made in 

the fair hearings process under the Medicare Part B program. 

BACKGROUND 

Private insurance companies, referred to as carriers, contract with the Health Care 

Financing Administration (HCFA). Carriers process and pay claims under the 

Medicare Part B program. The Part B program covers physicians’ services, outpatient 

hospital care, and other medical costs. The patient, physician, practitioner, or supplier 

may file a Medicare claim, with payment made either to the beneficiary or on his 

behalf to the provider of the service. For disputed claims, a claimant under the 

Medicare Part B program can request a fair hearing by the carrier if the amount in 

controversy is $100 or more, or if payment is not made promptly. 

We reviewed 210 fair hearings casesclosed in Fiscal Year (FY) 1989. We grouped 

carriers by fair hearing reversal rates and the volume of claims processed during 

three quarters of FY 1989. We then selected a sample of carriers from each group. . 

FINDINGS - .’ * 

b Ihe $100 thrdwki for a fair hearing ir low compared to various injlation hdict3. 

b ‘Ihe HCFA does not require caniim to adjust reported cost savingsdue to fair 

hearing reversalsof mdcal net@ &mid edits. 

b Some caniim may not be correctly reporting cost savingsdue to hearing reversals. 

RECOMMENDATIONS 

b The HCFA should seek l&i&ion to herease the $100 thrahoki amount for a fair 

hearing and the threshok& for subquent leveLrof appeoL 

b l%e HCFA should require that car&m adjust for fair hearing revemaLrof medical 

nece denial edit screens. 

b The HCFA should assurethat car&m adjwt for fair hearing reversal of HCFA 

mandated and canier inihhted &it screens. 

i 
We did not receive comments from HCFA on the draft of this report. 

We received comments on the draft of this report from the Assistant Secretary for 

Planning and Evaluation. They fully concurred with our recommendations. The 

complete text of their comments are contained in Appendix D. 

ii 
TABLE OF CONTENTS 

EXECUTIVE SUMMARY.......................................... i 

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 

COMMENTS ON THE DRAFT REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 

APPENDIX A - Consumer Price Index (CPI) and Fair Hearings 

Administrative Cost, 1973 TO 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-l 

APPENDIX B - Estimated Annual Budget Savings Based Upon 

Increased Fair Hearing Threshold Amounts . . . . . . . . . . . . . . . . . . . . . . . . . B-i 

APPENDIX C - Estimated Total Amount of Fair Hearing 

Reversals of Medical Necessity Denial Edits Not Adjusted From 

The Quarterly Carrier Medical Review Reports, Fourth Quarter of 

Fiscal Year 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-l 

APPENDIX D - Assistant Secretary for Planning and 

Evaluation’s Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-l 
INTRODUCTION 

PURPOSE 

The purpose of the inspection is to determine where improvements can be made in 

the fair hearings process under the Medicare Part B program. 

BACKGROUND 

The Medicare program provides hospital and medical care for beneficiaries under two 

separate programs identified as Part A and Part B. The Part A program provides 

coverage for hospital services. The Part B program covers physician services, 

outpatient hospital services, and other medical services and supplies. 

The Health Care Financing Administration (HCFA) administers Medicare. The 

HCFA is responsible for developing program policy, setting standards, and assuring 

compliance with Federal legislation and regulation. The HCFA contracts with private 

insurers, referred to as carriers, to administer Medicare Part B benefits. 

As part of their contract with HCFA, carriers process and pay Medicare Part B claims 

for services. The carriers determine the reasonable charges for services provided and 

assure that payments to physicians and suppliers are only for covered and medically 

necessary-services. The HCFA monitors carriers’ performance through the annual 

Contractor Performance Evaluation Program (CPEP). 

The HCFA requires each carrier to set up and conduct fair hearings. A fair hearing is 

an impartial review of a disputed claims decision by a carrier employee or 

subcontractor. The procedure allows a beneficiary enrolled under Part B the 

opportunity for a fair hearing if the claimed amount in controversy is $100 or more, or 

if payment is not made promptly and the request is filed within six months of the 

initial notice. One claim, or a combination of claims for the beneficiary totaling $100 

or more, will meet this threshold requirement. 

Physicians or suppliers under the Part B program may also request a fair hearing. 

Decisions which can be appealed include: coverage of items and services, application 

of the deductible, whether the charges for items and services are reasonable, the 

medical necessity of services and supplies, and whether the beneficiary, physician, or 

supplier knew or could reasonably have been expected to know that the items or 

services were excluded from coverage. When the appeal for a fair hearing is by a 

physician or supplier, the claims of more than one beneficiary may be combined to 

meet the $100 threshold. 

The carriers use three methods to conduct fair hearings. These are: on-the-record, 

telephone, and in-person hearings. In 1988, HCFA revised the appeals process to 

1 
provide for the expanded use of on-the-record fair hearings where the evidence in the 

file is the basis for the decision. The beneficiary, physician, or supplier chooses the 

method of the fair hearing. If dissatisfied with the fair hearing decision, they may also 

appeal by: 

b requesting a hearing by an Administrative Law Judge (ALJ) of the Social 

Security Administration within 60 days following a carrier’s fair hearing decision 

which involve denied amounts of $500 or more; 

b requesting a Departmental Appeals Council review if dissatisfied with an ALJ 

decision or dismissal; and, 

b bringing a civil suit in U. S. District Court of an appeals council decision which 

involves a denied amount of $1000 or more. 

For the Fiscal Year (FY) 1989 review period (October 1, 1988, to September 30, 

1989), Medicare carriers’ workload was as follows: 

Percentage (%) of Claims Hearing Hearing 

Claims Volume Denied or Reduced Decisions Reversals (%I 

410,700,ooo 17.5 % 47,881 26,726 (55.8 %) 

There were 66,802 fair hearing casescleared in FY 1989 as a result of either a hearing 

decision, hearing dismissal, or hearing withdrawal. 

m 

METHODOXDGY- *. 

We randomly selected a sample of eight carriers from all carriers. We used data 

available from two overlapping periods for the sample selection. The method used to 

select the sample was a two-stage stratified cluster sample. The carriers were divided 

into a.matrix of four categories based on the reversal rate of fair hearings and the 

volume of claims processed for payment during the period October 1988 to June 1989. 

The reversal rate of fair hearings is the percentage of reversals in relation to the totals 

for the period October 1988 through July 1989. 

We grouped the carriers either above or below the respective median value of the 

carriers’ volume of claims and reversal rates. The resulting four categories of carriers 

were as follows: 

b High volume of claims and high reversal rate 

b High volume of claims and low reversal rate 

b Low volume of claims and high reversal rate 

b Low volume of claims and low reversal rate 

2 
We selected two carriers meeting the criteria within each of the four categories. The 

carrier’s selection was directly proportional to the volume of claims processed. 

We dropped one of the eight carriers from our review when we became aware of a 

civil suit brought by the Federal government. The civil suit alleged the carrier 

improperly administered the Medicare program. 

We randomly selected thirty fair hearing casesclosed during the FY 1989 period from 

each of the sample carriers. After selection, we reviewed the casesfor the appeal 

issues, the amount in controversy, and the decision. In addition, for reversals, we 

determined if there was an audit trail to the carrier savings report. We also held 

discussions with personnel at each of the seven carriers who were responsible for 

operation of Medicare Part B fair hearings. We questioned staff about the fair 

hearings process, cost of conducting fair hearings, program weaknesses, and 

recommendations for improvements. 

3 
FINDINGS 

IXE $100 THRESHOLD FOR A FAIR HEARING IS LOW COMPARED TO 

VARIOUS LiWLAT7ON lNDKES. 

The U.S. Congress amended the review and hearing procedures under the Part B 

Medicare program, Section 1842(b)(3)(C) of the Social Security Act. This section of 

the law became effective in FY 1973. The section imposes a threshold of $100 or 

more before an individual qualifies for a fair hearing under the Medicare Part B 

program. This threshold was established to avoid administrative burdens for Medicare 

claims hearings involving small amounts. 

The threshold amount of $100 has not changed in the past eighteen years. During the 

same period, however, there have been substantial increases in several related 

measures such as medical and general costs and the administrative costs associated 

with the fair hearing (APPENDIX A). Because the threshold is proportionately small 

as compared to these other costs, it is no longer achieving its purpose of precluding 

hearings for negligible dollar value claims. 

The effect has been a skyrocketing fair hearings workload. As reported by HCFA, the 

number of fair hearings has increased substantially since passage of the law. The 

following chart on Carrier Fair Hearings shows a progressive increase in the number 

of fair hearings from 9,384 recorded in FY 1973 to 101,246 in FY 1990. 

.m 

CARRIEK’ FAIR HEARINGS 

APPEALS CLEARED 

7s 74 7s “rn ‘77 7a 7a ‘00 ‘o- ‘SO ‘W ‘#4 ‘DS ‘W ‘07 ‘00 ‘08 ‘SO 

FISCAL YEARS CF’fJ 19?3 TO 1990 
We estimate that 26.2 percent of the fair hearing casesin FY 1989 involved claimed 

amounts in controversy that were less than the average fair hearing administrative cost 

of $224 for the seven carriers sampled. This is more than 17,500 of the 66,802 fair 

hearing cases cleared in FY 1989. 

The increase in workload correlates with an increase in administrative expenditures to 

process fair hearing requests. For example, the HCFA budget for carrier fair 

hearings in FY 1990 was more than $16 million. This is up from the previous years of 

FY 1989, FY 1988, and FY 1987 when the budgets were more than $14 million, 

$11 million, and $8 million, respectively (APPENDIX A). 

The administrative cost of $224 to process a fair hearing is more than twice the 

current threshold. The Medical Consumer Price Index (MCPI) and the Consumer 

Price Index (CPI) are 4.2 and 2.9 times greater than they were in 1973, respectively. 

Applying these ratio’s to the $100 fair hearing threshold would support an increase to: 

(1) $400, an amount that corresponds to the MCPI; (2) $300, an amount that 

corresponds to the CPI; or (3) $225, the amount that corresponds approximately to 

the administrative cost of a fair hearing. 

We estimate from the number of FY 1989 fair hearings at the sample carriers that 

HCFA could have achieved administrative budget savings ranging from almost 

$4 million dollars to over $6 million 

following amounts (APPENDIX B): 

Proposed 

Threshold Amount 

$400 

$300 

$225 

THE HCFA DOES NOT REQUIRE 

SAWNGS DUE TO FAIR HEdRING 

DENM WITS. 

dollars by raising the threshold of $100 by the 

Fair Hearing Budget 

Estimated Annual Savines 

$6,269,675 

$5,671,989 

$3,995,987 

CARRlERS TO ADJUST REPORlED COST 

REVERSALS OF MEDKXL NECESSlTY 

Carrier prepayment claim edits are designed to ensure that Medicare pays only for 

medically necessary services. These consist of Category I and Category II screens. 

Category I screens are medical necessity denials, and Category II screens are HCFA 

mandated and carrier initiated computer edits. The carriers submit reports to HCFA 

on savings achieved using these screens. When a carrier denies a claim for lack of 

medical necessity, it is claimed as a savings. For example, a denial of payment for a 

seat lift chair is a claimed savings in the period it is denied. Savings identified through 

the use of prepayment screens are used by HCFA to evaluate contractors. Carriers 

must meet, or exceed, a five dollar savings to a one dollar cost from prepayment and 

postpayment review to receive a satisfactory CPEP evaluation by HCFA. 

5 
We identified fair hearing reversals totalling $18,876 which involve screen denials in 

Category I. While the Medicare Part B Carriers Manual (MCM), Part 3, Section 

7536.2, requires an adjustment for fair hearing reversals of Category II screen denials, 

HCF’A does not require carriers to make subsequent adjustments for fair hearing 

reversals of Category I screen denials. Based on this amount, we project reversals 

totalling almost $4.4 million that would have reduced claimed savings in the fourth 

quarter of FY 1989 (APPENDIX C). Assuming equal amounts for the remaining 

3 quarters of the year, this projects to $17.5 million for the year. 

SOME G4R.RlER.S hUY NOT BE CORRECZZY REPOR7TNG COST SAVINGS DUE 

TO H-G REWRSALS. 

The MCM requires an adjustment for Category II reversals. All carriers reviewed, 

except one, had a process to reduce carrier savings by subtracting from it the 

monetary value of the fair hearing reversals of Category II prepayment screens. The 

medical review section of that carrier did not consider it their responsibility to adjust 

Category II savings for fair hearing reversal decisions after completion of the review. 

The manager stated that the carrier’s manual instruction was “vague” concerning 

adjustment of fair hearing reversals from Category II savings. The potential exists, 

since one of seven carriers did not adjust savings as a result of fair hearing reversals, 

that other carriers may not correctly reduce savings as a result of fair hearing 

reversals. 
RECOMMENDATIONS 

7HE HCFA SHOULD SEEK LEGISLAlTON To INCREASE THE $100 

lHRE!JHOLD AMOUNT FOR A Fm HEARlNG AND THE llXUESHOLDS FOR 

SUBSEQUENTLEWLS OFAPPEALa 

The HCFA should pursue a legislative initiative to raise the fair hearing threshold. 

Alternatives to the current threshold include the following suggestions. 

b Increase the threshold amount to $225 which is approximately equal to the 

administrative cost to conduct a fair hearing at the seven carriers sampled. 

Projected savings would be $3995,987 (APPENDIX B). The threshold should 

be indexed to the administrative cost of a fair hearing. This would achieve 

greater savings in future years. 

b Increase the threshold amount to $300 which approximately reflects the 

increase in the CPI since 1973. Projected savingswould be $5,671,989 

(APPENDIX B). The threshold should be indexed to the CPI in future years. 

b Increase the threshold amount to $400 which approximately reflects the 

increase in the MCPI since 1973. Projected savings would be $6,269,675 

(APPENDIX B). The threshold should be indexed to the MCPI in future 

years. 

b Increase the Part B thresholds for requesting an ALJ hearing and other levels 

of appeal proportionally. 

THE HCFA SHOULD REQUIRE Tli%T CLIRRIERSADJUST FOR F&R HEARllvG 

R.EK?XW!S OF MEDICAL NECESSITY DENLLiL EDIT SCREENS. 

The HCFA’s instructions to carriers should require adjustment of reported medical 

necessity denial edits in the quarterly period when the fair hearing reversals occur. 

There were approximately $17.5 million in savings that should have been adjusted 

from the claimed savings in FY 1989 due to fair hearing reversal decisions. 

Z-HE HCFA SHOULD ASSURE TK4T CARRIERS ADJUST FOR FAIR HEARING 

REWRSALS OF HCFA MANDATED AND CARRIER INmTED EDIT SCREENS. 

The HCFA should assure that all carriers adjust affected savings after a fair hearing 

reversal. This adjustment should be made in the quarterly period when the fair 

hearing reversal occurs. The HCFA should also review the clarity of the MCM 

section that pertains to the handling of these savings. 

7 
COMMENTS ON THE DRAFT REPORT 

We did not receive comments from HCFA on the draft of this report. 

We received comments on the draft of this report from the Assistant Secretary for 

Plating and Evaluation. They fully concurred with our recommendations. The 

complete text of their comments are contained in Appendix D. 

8 
109.6 122.1 

APPENDIX A 

CONSUMER PRICE INDEX (CPI) and 

FAIR HEARINGS ADMINISTRATIVE COST 

1973 TO 1990 

Medical 

Year CPI(1) CPI(1) 

1973 44.4 38.8 

1974 49.3 42.4 

1975 53.8 47.5 

1976 56.9 52.0 

1977 60.6 57.0 

1978 65.2 61.8 

1979 72.6 67.5 

1980 82.4 74.9 

1981 90.9 82.9 

1982 96.5 92.5 

1983 99.6 100.6 

1984 103.9 106.9 

1985 - 107.6 113.5 

1986 

1987 113.6 130.1 

1988 118.3 138.6 

1989 124.0 149.3 

1990 130.7* 162.8** 

Carrier Fair Hearings 

Administrative Cost(2) 

(in millions\ 

Not Available (NA) 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

K3 

$11.8 

$14.3 

$16.4 

* The 1990 CPI is over 2.9 times greater than the 1973 Index. 

** The 1990 MCPI is almost 4.2 times greater than the 1973 Index. 

SOURCES: 

(1) The CPI is from the Office of Management and Budget Consumer Price 

Index Table B-58 CPI. Maior Expenditure Classes. 

The 1988, 1989 and 1990 CPI and the Medical CPI are from the 

Economic Renort of the President, Februarv 1991. 

(2) Carrier Fair Hearings Administrative Costs for 1987, 1988, 1989, and 

1990 represent costs (HCFA Fair Hearings Cost Data from Carriers’ 

Final Administrative Cost Pronosal). 

A -1 
APPENDIX B 

ESTIMATED ANNUAL BUDGET SAVINGS 

BASED UPON 

INCREASED FAIR HEARING THRESHOLD AMOUNTS 

Proposed 

Threshold 95 Percent Confidence Interval Estimated 

Amount Lower Estimate - UDDer Estimate Budget Savings 

$400 $4,49&013 $8,041,337 $6,269,675 

$300 $3,756,611 $7,587,367 $5,671,989 

$225 $3,387,682 $4,604,292 $3,995,987 

The budget savings calculations are based on the varying thresholds within each strata 

utilized in drawing the sample of carriers. We estimated the amount of savings within 

the sample based on the average cost per request and the number of casesbelow the 

threshold. We projected these estimated -savingswithin each strata, and summed the 

amounts to obtain the total for each threshold. 

. +. 

B-l 
APPENDIX C 

ESTIMATED TOTAL AMOUNT 

OF FAIR HEARING REVERSALS 

OF MEDICAL NECESSITY DENIAL EDDX 

NOT ADJUSTED FROM THE QUARTERLY 

CARRIER MEDICAL REVIEW REPORTS 

FOURTH QUARTER OF FISCAL YEAR 1989 

Sample 

Strata (1) Savinfzs 

I $4,758.30 

II $1,850.90 

III $9,395.60 

Iv $2,872.00 

Totals $18,876.80 

Weight (2) 

.487 

.351 

.083 

.079 

Estimated 

Total Amount 

$1,993,141.63 

$1,870,323.02 

$ 338,053.76 

$ 181,422.12 

$4,382,940.53 

At the 95 percent confidence level, this estimate may vary by as much as $1.1 million. 

Therefore, the estimated fair hearing reversals of medical necessity denial edits range 

from $3.3 - $5.5 million. 

(1) Strata I Carriers with high volume of claims and high reversal rate 

Strata II Carrier with high volume of claims and low reversal rate 

Strata III Carriers with low volume of claims and high reversal rate 

Strata IV Carriers with low volume of claims and low reversal rate 

(2) This represents the proportion of claims processed by the various strata. 

C-l 
APPENDIX D 

ASSISTANT SECRETARY FOR 

PLANNING AND EVALUATION 

COMMENTS 

D-l 
DEPARTMENT OF HEALTH & HUMAN SERVIbS iiF,CEitrED Officeof the Secretary 

Gff!CE Of iyiT3zC: [SF - -. .-.s . 

Washington,DC. 20201 

TO: Richard P. KusserOW 

Inspector General 

Office of Inspector General 

FROM: Assistant Secretary for 

Planning and Evaluation 

SUBJECT: OIG Draft Report: "Medicare Prepayment Review - Fair 

Hearings" (OEI-07-89-01680)--CONCURRENCE 

I concur with the draft Office of Inspector General (OIG) report entitled "Medicare Prepayment Review - Fair Hearings" which 

recommends that the Health Care Financing Administration (HCFA) seek legislation to increase the $100 threshold amount for fair 

hearings and subsequent levels of appeal. 

I also concur with the report's recommendation that HCFA require carriers to adjust claimed savings for fair hearing reversals of 

medical necessity denial edits and assure that carriers adjust for fair hearing reversals of HCFA mandated and carrier initiated 

edit screens. 

If you have any questions, please contact Elise D. Smith at 

245-1870.