GAO

United States General Accounting Office

Report to Congressional Requesters

April 2000 MEDICARE HOME

HEALTH AGENCIES

Overpayments Are

Hard to Identify and

Even Harder to Collect

GAO/HEHS/AIMD-00-132

Page 1 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

Contents

Letter 3

Appendixes Appendix I: Comments From the Health Care Financing Administration

24

Related GAO Products 27

Table Table 1: Overpayment Amounts for 15 Closed HHAs in Texas With the

Largest HFCA-Reported Overpayments 15

Figure Figure 1: The Number of Medicare-Certified HHAs That Closed, Fiscal

Years 1997-99 7

Abbreviations

BBA Balanced Budget Act of 1997

HCFA Health Care Financing Administration

HHA home health agency

HHS Department of Health and Human Services

IPS interim payment system

PIP periodic interim payment

POR Provider Overpayment Report

PPS prospective payment system
Page 2 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments
Page 3 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

United States General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-284164 Letr

April 28, 2000

The Honorable Pete Stark

Ranking Minority Member

Committee on Ways and Means

House of Representatives

The Honorable Lloyd Doggett

House of Representatives

Medicare, the nation’s largest health care payer, provides insurance

coverage to elderly and disabled Americans. Administered by the Health

Care Financing Administration (HCFA) within the Department of Health

and Human Services (HHS), Medicare covers both inpatient and outpatient

services, including services for homebound beneficiaries. Home health

care, consisting of skilled nursing, therapy, and related services, was until

1997 one of Medicare’s fastest growing benefits. Between 1990 and 1997,

spending for home health care more than quadrupled, from $3.7 billion to

$17.8 billion. At the same time, the number of Medicare-certified home

health agencies (HHA) almost doubled—reaching 10,500—with nearly one

in five located in Texas. Since 1997, however, both the rate of growth and

the number of HHAs have declined.

The Balanced Budget Act of 1997 (BBA) was particularly important in

controlling Medicare’s home health spending.1 This act mandated that

HCFA implement a new prospective payment system (PPS). Until this

system is implemented, the act requires that agencies be paid under a costbased interim payment system (IPS). IPS imposes limits on agencies’ costbased payments that are intended to control both cost per visit and the

average cost per beneficiary an agency serves.

Following the passage of BBA, a large number of HHAs closed. Between

October 1997 and September 1999, more than 2,350 Medicare-certified

HHAs left the program. Approximately 650 HHAs closed in Texas alone, or

almost one-quarter of all closures nationwide. Before BBA, the number of

HHAs in Texas had increased significantly, from 961 in October 1994 to

1,949 in October 1997. Texas was also one of several states where the

1 P.L. 105-33 §§ 4601-4616
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Page 4 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

number of visits per user was much higher than the national average and

one of the states identified as having higher rates of unnecessary and

uncovered home health visits. HCFA initially reported to you that the

closed Texas agencies collectively owed Medicare $627 million. HCFA

subsequently revised its figure for HHAs with the largest reported

overpayment amounts after further reviewing information contained in its

reporting and tracking systems.

Because of your concerns about the potentially significant amounts that

the HHAs in Texas owed Medicare, you asked us to determine (1) whether

HCFA quickly identifies and collects overpayments from closed HHAs, (2)

the accuracy of the overpayment amounts HCFA reported for closed Texas

HHAs, and (3) whether HCFA can effectively record and track

overpayments due from closed agencies. As we discussed with your

offices, we conducted work to address your questions as part of a broader

review we are conducting of HCFA’s processes for identifying and

recovering Medicare overpayments.

During the assignment, we reviewed Medicare claims administration

contractor procedures for identifying and collecting overpayments from

closed HHAs. We interviewed representatives at two contractors that are

responsible for processing and paying HHA claims, including the

contractor that has primary responsibility for HHAs in Texas. We selected

15 Texas HHAs that this contractor had served and that HCFA reported as

owing the largest amounts to Medicare when they closed. From a review of

accounting and other records, we prepared an updated estimate of the

overpayment amounts the 15 HHAs owed. We asked HCFA officials about

their processes for (1) identifying and collecting overpayments from closed

HHAs and (2) recording and tracking overpayments for both ongoing and

closed HHAs. Finally, we interviewed HCFA officials responsible for

initially identifying the amounts closed HHAs in Texas owed. We also used

work from our recently issued reports as well as work related to the Chief

Financial Officers Act audit of HCFA’s financial statements that identified

problems with how HCFA records and tracks overpayments. We conducted

our work between October 1999 and March 2000 in accordance with

generally accepted government auditing standards.

Results in Brief HCFA is slow to identify amounts closed HHAs owe Medicare and collects

little of the overpayments due from such agencies following their closure.

Because HHAs receive interim payments based on estimates of what their

allowable costs will be, Medicare claims administration contractors must
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retrospectively adjust the payments after receiving and reviewing a report

of an agency’s costs. Agencies have 5 months after they close to submit

their final cost report to the contractors; contractors then generally take 18

months to make a final determination of the amount, if any, a closed HHA

owes. Contractors have been discouraged from making quicker

determinations for closed agencies because doing so would disrupt timely

determinations on cost reports from operating agencies. Not surprisingly,

we found that little has been collected from the 15 closed Texas HHAs that

HCFA reported as owing the most money; closed HHAs typically have few

assets or other resources to repay Medicare. Later this year, HCFA plans to

implement the home health prospective payment system mandated by

BBA, which will involve predetermined payments for home health services.

HCFA’s proposed home health prospective payment system should reduce

the potential for overpayments to HHAs because payment amounts would

not be adjusted retrospectively to reflect allowable agency costs.

Our estimate of the overpayments due from the 15 closed HHAs differs

significantly from the estimate HCFA initially reported. Using the same

definition of an overpayment as HCFA, we estimate that these agencies

could owe $68 million—one-third of HCFA’s initial $209 million estimate.

Two factors accounted for nearly all the difference. First, contractor staff

made errors entering data into one of HCFA’s overpayment recording and

tracking systems, such as a $4.6 million duplicate entry. Second, HCFA’s

initial query of this overpayment recording and tracking system did not

specify that superseded transactions be excluded from the reported

overpayments. This type of error, for example, resulted in overstating one

agency’s overpayments by $4 million. About $43 million of our $68 million

overpayment estimate stems primarily from unfiled cost reports. Although

it is likely that most of Medicare’s payments were allowable, to provide

agencies an incentive to file cost reports on time HCFA deems the entire

amount paid to an agency during the reporting period to be an overpayment

when no cost report is filed.

HCFA’s inability to accurately record and track overpayments has been a

consistent weakness documented in its financial statement audits from

fiscal year 1996 through fiscal year 1999. The fiscal year 1998 audit, for

example, reported that HCFA lacked an integrated financial management

system to track overpayments and their collection and that its procedures

to ensure that overpayments were valid and supported were inadequate.

HCFA’s contractors record and track overpayment activity for HHAs and

other providers using a variety of fragmented and overlapping computer

systems but do not always reconcile the data from these various systems.
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For example, contractor staff incorrectly keyed data from one of the

contractor’s systems into a HCFA system, erroneously reporting $77 million

in overpayments for one Texas HHA in 1998. No edits are in place to

identify such errors. HCFA implemented several interim measures in 1999

to improve the reliability of its overpayment information and is planning

additional improvements; however, they could take years to implement.

Background Medicare’s home health benefit covers skilled nursing; physical,

occupational, and speech therapy; and home health aide services provided

in beneficiaries’ homes. To qualify for home health services, a beneficiary

must be confined to his or her residence; require intermittent skilled

nursing, physical therapy, or speech therapy; and be under a written plan of

care signed by a physician. Only home health agencies that have been

certified as meeting Medicare’s conditions of participation are allowed to

bill the program.2

Medicare home health expenditures increased at an average annual rate of

approximately 25 percent between 1990 and 1997—almost three times

faster than the rate for the Medicare program overall. During this period,

the number of Medicare-certified HHAs almost doubled to 10,524 at the end

of fiscal year 1997. However, as shown in figure 1, the number of HHAs that

closed has increased each year since fiscal year 1997—the year the

Congress passed BBA. By the end of fiscal year 1999, the number of HHAs

had declined approximately 20 percent, to 8,172.3

2 HCFA administers its certification process through state survey agencies, usually

components of state health departments, that assess whether HHAs deliver quality care and

have the appropriate staff, policies and procedures, medical records, and operational

practices to deliver quality care.

3 During the same 3-year period, there were 1,560 new Medicare-certified HHAs.
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Figure 1: The Number of Medicare-Certified HHAs That Closed, Fiscal Years 1997-99

Closures are either voluntary, as when an HHA goes out of business, or

involuntary, as when the agency fails to meet Medicare’s quality of care or

financial standards and is terminated from the program. Closure statistics

also include agencies that merge with another HHA and continue to serve

Medicare beneficiaries. Labeling mergers as “closures” is misleading, but

HCFA’s data systems cannot distinguish mergers from closures. We

reported in May 1999 that agencies that closed after BBA was enacted

shared many of the characteristics of agencies that opened in the 1990s.4

That is, they were disproportionately urban, free standing, and for profit;

however, compared with agencies that remained open, the closed agencies

tended to be newer, treated fewer beneficiaries, provided more services per

user, and had declining numbers of patients. We also reported that despite

these closures, beneficiaries’ access to services appeared to be unaffected.

4 Medicare Home Health Agencies: Closures Continue With Little Evidence Beneficiary

Access Is Impaired (GAO/HEHS-99-120, May 26, 1999).

 0

 200

 400

 600

 800

1,000

1,200

1,400

1,600

1,800

2,000

Fiscal

Year

1997

Fiscal

Year

1998

Fiscal

Year

1999

459

1,128

1,731
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BBA Changed How HHAs

Are Paid

To control rapidly rising home health care expenditures while ensuring the

appropriate provision of services, PPS, mandated by BBA, is a payment

system intended to reward efficient providers and financially penalize

inefficient ones. However, in recognition of the time needed to develop

PPS, coupled with the need to control spending growth immediately, BBA

prescribed IPS. Under IPS, HHAs receive interim payments throughout the

year that are based on the projected allowable per-visit costs and, in some

cases, the projected volume of services for Medicare beneficiaries.5 After

the HHA’s cost reporting year is over, agencies file cost reports specifying

their costs of serving Medicare beneficiaries. Under IPS, Medicare pays

these costs up to a cost-per-visit cap, which BBA reduced from the prior

per-visit cap, and up to an average annual per-beneficiary limit, which BBA

added.6 When the interim payments exceed or fall short of the actual costs

Medicare will pay, agencies return or receive the difference. Through the

application of the payment limits, IPS attempts to control the costs and

amount of services provided to beneficiaries. IPS will be in effect only for

several more months; the new PPS is scheduled for implementation at the

beginning of fiscal year 2001. As proposed by HCFA, this system will pay

HHAs predetermined rates for home health services.7

Five Medicare contractors, called regional home health intermediaries, are

responsible for paying home health agencies.8 To help ensure that the

interim payments are aligned with what Medicare will ultimately pay, the

five contractors periodically conduct interim rate reviews of each agency.

During these reviews, which generally take several months to complete, the

contractors compare an agency’s interim payment rates with cost

information submitted by the agency and the agency’s audit history. Rates

may increase or decrease as a result of the reviews, and the agency may

5 A small minority of HHAs are paid through a method known as “periodic interim

payments,” or PIP, in which level payments are made to an HHA every 2 weeks, based on

estimated annual visits and Medicare allowable costs. Medicare contractors are responsible

for reviewing an HHA’s PIP payments every quarter to ensure that the levels are appropriate

to the volume of services being provided.

6 Under IPS, the per-visit cap was based on 105 percent of the national median per-visit cost.

IPS was revised by §§5101 (b) of the Omnibus Consolidated and Emergency Supplemental

Appropriations Act of 1999 (P.L. 105-277), which increased the per-visit cap to 106 percent of

the national median cost.

7 64 Fed. Reg. 58,133 (Oct. 28, 1999).

8 Throughout this report, we refer to regional home health intermediaries as contractors.
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owe Medicare money or be owed money by Medicare. At the end of its

fiscal year, or upon closure, each agency is responsible for submitting a

report of its costs to the Medicare contractor. HCFA requires its

contractors to conduct several types of cost report reviews to determine

whether the agency has been overpaid or underpaid for the reporting

period. These reviews also take months to complete. Once a contractor has

identified an overpayment, it is responsible for notifying the agency and

requesting immediate payment. If payment is not made within 15 days, the

contractor can withhold payments to the agency until the overpayment has

been repaid; interest also accrues on any balances unpaid longer than 30

days. If a contractor is unable to collect all outstanding overpayments from

an HHA, the contractor should refer the debt to HCFA for collection. If

HCFA is unable to make the collection, it is required under the Debt

Collection Improvement Act of 1996 to transfer debt that is 180 days

delinquent to the Department of the Treasury or a designated debt

collection center.

Following the BBA Changes,

Some HHAs Experienced

Large Overpayments

Unless HHAs’ interim payment rates were reduced, BBA payment changes

created the potential for large overpayments to HHAs in Texas and

elsewhere. First, IPS resulted in new payment limits that substantially

lowered payments for many HHAs. Agencies in Texas were particularly

affected because they provided more visits per user on average than did

HHAs in most other states and, thus, were under greater pressure to reduce

their per-patient costs. Agencies can take several steps to adjust costs to

the new limits. These include balancing their mix of low-cost and high-cost

patients, reducing their costs overall, increasing the proportion of low-cost

patients treated, or doing some combination of these activities. By not

taking such steps, agencies increased their potential to be overpaid

following the implementation of the new IPS rates.

Second, information on the new payment limits was not available for

months following the effective date of IPS, and HHAs continued to be paid

at the earlier, and in some cases higher, interim rates. Specifically, under

BBA, HCFA was required to publish the per-visit limits by January 1, 1998,

and the new per-beneficiary limits by April 1, 1998, which HCFA did.

However, the limits took effect on October 1, 1997. Only after these notices

were published could contractors begin recalculating each agency’s interim

payments and then actually adjust them. Some HHAs incurred large

overpayments between October 1997 and the date when the agencies’

interim rates were adjusted. Some of these agencies also closed because

they were unable to repay their Medicare debt.
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Overpayments Are Not

Quickly Identified and

Are Difficult to Collect

Identifying amounts closed HHAs owe under IPS is a slow process that

reduces the potential for collecting overpayments. Contractor

overpayment determinations generally depend on the receipt of a cost

report, yet HHAs have up to 5 months to file such reports after they close.

And it is not until about 18 months following the receipt of the cost report

that contractors generally make final determinations of the amounts, if any,

that closed HHAs owe. Further, contractors are discouraged from making

these final overpayment or underpayment determinations more quickly for

closed agencies because doing so would affect their determinations on cost

reports from operating agencies. We found that once an HHA closes, little

of an overpayment is collected, because closed agencies generally lack

cash and other assets to repay the debt. Implementing PPS should virtually

eliminate overpayments except in cases of fraud or abuse. As proposed by

HCFA, this new payment method will pay a predetermined amount per unit

of service, adjusted for patient characteristics that affect the cost of care,

and will not involve retrospective reviews of an agency’s interim payments

and costs. Overpayments should result only from HHAs’ improperly

claiming payments for patients, not from the amounts of payment per

patient.

Overpayments to Closed

HHAs Are Not Identified

Quickly

Once an agency closes, it has 5 months to submit its final cost report—the

same time afforded operating HHAs to submit cost reports for the

preceding fiscal year.9 Contractor representatives told us that after 5

months, responsible officials from closed HHAs are often no longer

available to provide contractor staff with access to necessary financial

documents or to answer questions. Moreover, during the 5-month period,

closed HHAs continue to be paid for services that were provided before

they closed, unless the agencies had outstanding overpayments from

earlier years’ activities. In fact, some Medicare payments received after

closure may subsequently be determined to be overpayments. For example,

one of the 15 closed Texas HHAs was paid $669,000 after it closed but did

not file a cost report covering this payment. When an agency fails to file a

cost report, all the payments made to it during the reporting period are

deemed an overpayment. As of December 1999, the contractor had

recouped $70,000.

9 Previously, HHAs had 45 days after they closed to submit their final cost reports. A HCFA

official told us that HCFA changed this requirement because HHAs complained that 45 days

did not give them enough time to make their financial records final and prepare the final

cost report.
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Once a cost report is received, overpayments can be identified at any of

several stages of the contractor’s review. For example, the contractor may

find that the HHA cost report, as filed, indicates that the agency has been

overpaid. Also, cost reports may undergo a desk review by the contractor,

generally within 60 days of receipt. During these limited reviews,

contractors may identify overpayments from the submitted documentation.

Contractors also identify overpayments during cost report audits, but few

cost reports from either closed or ongoing HHAs undergo this type of

review. In fiscal year 2000, for example, HCFA expects contractors to audit

about 12.5 percent of all HHA cost reports.10 HHAs are selected for audit on

the basis of such factors as their total reimbursement and average number

of visits per patient. Some are audited randomly. Given HCFA’s limited audit

resources and closed HHAs’ historical inability to repay debt, it is

understandable that HCFA has not concentrated its audit efforts on closed

agencies.

All cost reports go through a settlement process in which contractors make

a final determination of how much Medicare reimbursement the HHA has

earned and whether Medicare or the agency is owed money. However, it is

generally not until about 18 months after contractors receive the cost

report that final settlement occurs. HCFA does not require contractors to

settle cost reports from closed HHAs more quickly. Moreover, contractors’

representatives said that they are discouraged from doing so because it

disrupts the order in which reports for other agencies are settled. That is,

settling a closed HHA’s cost report more quickly delays the settlement of

other cost reports, which is inconsistent with HCFA’s goals for settling all

cost reports in a timely manner.

Contractors may also identify overpayments by conducting an interim rate

review after an agency closes. During these reviews, contractors compare

the agency’s interim reimbursement rates with previous cost information

the agency has submitted, Medicare payments, the IPS per-visit and perbeneficiary limits, and the agency’s audit history. Decisions on whether to

conduct these reviews depend on factors such as the agency’s size, dollars

at risk, and the time since the contractor’s last interim rate review of the

agency. The reviews may result in revisions to the agency’s interim

payments and determinations of underpayments or overpayments. These

reviews, too, take time to conduct. We found that the contractor conducted

such reviews of 5 of the 15 closed HHAs in Texas that we reviewed and that

10 The 12.5 percent audit requirement pertains to free-standing HHAs.
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they were performed between 3 and 5 months after closure. Overpayments

ranged from $20,000 to $362,000.

Contractors’ Activities That

Impede Identifying

Overpayments From Closed

HHAs

In addition to the time lags built into the process for identifying

overpayments to closed HHAs, we found that the contractor did not always

follow the specified procedures, allowing overpayments from the Texas

HHAs to remain undetected for years without making efforts to collect

them. This also resulted in the agencies owing more to Medicare when they

closed. For example, one of the closed HHAs did not file its 1994, 1995, and

1996 cost reports until July 1997. They were 30, 16, and 4 months late,

respectively. The agency was overpaid each year, the overpayments for the

3 years totaling $3.5 million. In each case of late cost report filing, the

contractor should first have notified the agency that it would suspend

payments until it received the cost report. Then, if the agency still did not

file its cost report, the contractor should have recorded the entire amount

paid to the agency during the reporting period as an overpayment and

transferred responsibility for collecting the overpayment to HCFA. In this

case, the contractor did neither. It was not until September 1999—more

than 6 months after the agency closed—that the contractor settled the

three cost reports and asked the HHA to repay Medicare.

We also found several cases in which the contractor did not conduct timely

cost report settlements. In one case, for example, a Texas HHA filed its

1995 cost report in January 1996. The contractor should have settled this

report in 1997. However, the actual cost report settlement that identified a

$171,000 overpayment did not occur until 1999, almost 2 years late and 2

months after the agency closed. In another case, the contractor received an

agency’s 1995 cost report in May 1996. The settlement that should have

occurred by 1998 did not take place until late 1999, by which time the

agency had been closed for almost a year. The agency owed Medicare

$15,500 from this settlement.

Apparently, the first case discussed was one of the few in which the

contractor did not conduct timely cost report settlements in fiscal year

1997. HCFA provided information stating that the contractor was timely in

settling nearly 95 percent of the cost reports due for settlement that fiscal

year. In fiscal year 1998, however, HCFA did not evaluate the contractor’s

performance in this area, in part because the contractor’s workload nearly

doubled from absorbing the workload of a different contractor that left

Medicare. In fiscal year 1999, the contractor was timely in settling
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approximately 75 percent of the cost reports received; HCFA attributed the

reduction to its cuts in the contractor’s budget.

Effective HCFA oversight to ensure that its contractors are requiring timely

submission of HHA cost reports, and subsequently settling them in a timely

way, is critical to sound program management in general and, in particular,

to reducing the amounts HHAs owe Medicare when they close. However, as

we noted in an earlier report, HCFA’s oversight process has weaknesses

that impede its review of contractors’ performance.11 Although HCFA

requires contractors to certify annually that they have sound internal

management controls over all their Medicare operations, we found that it

rarely checks to ensure that the controls are working as required.

Once Identified, Few

Overpayments Are

Collected From Closed

HHAs

Once an HHA closes, there is little likelihood of HCFA’s collecting all the

outstanding overpayments that cost report reviews and interim rate

adjustments have identified. Some HHAs rely almost exclusively on

Medicare for their revenue and have few assets. Without other revenue

streams or assets, HHAs may not have funds available to repay Medicare.

For the 15 closed Texas HHAs that we reviewed, we found that the

contractor had collected approximately $5.3 million, or just 7 percent of the

total overpayments owed. For example, one of the Texas agencies closed in

January 1998 and had outstanding overpayments for 1998 of $209,150; none

of this debt had been collected by December 1999. Another of the Texas

HHAs closed in 1998 with overpayments from earlier years of $3.7 million,

of which only about $200,000 had been collected.

Bankruptcy can further complicate overpayment collection efforts and

reduce potential collections. Once an HHA has filed for bankruptcy, the

contractor’s collection activities are subject to the review and approval of

the bankruptcy court. Whether any of the bankrupt agency’s Medicare

overpayments are eventually repaid depends on the results of the

bankruptcy proceedings. Of the 15 closed HHAs in Texas, 3 were in

bankruptcy as of December 1999.

11 Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their Effectiveness or

Integrity (GAO/HEHS-99-115, July 14, 1999).
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HCFA Overstated

Amounts Owed From

Closed HHAs in Texas

HCFA reported that 642 Medicare-certified HHAs in Texas closed between

October 1997 and July 1999 and that these agencies collectively owed

Medicare $627 million.12 HCFA generated its overpayment amounts from its

Provider Overpayment Report (POR) system, which records and tracks

overpayments from HHAs and other types of providers, both ongoing and

closed. Our analysis showed that HCFA significantly overstated the

amounts that the 15 closed Texas HHAs with the largest reported

overpayments owed. Additionally, we found that almost two-thirds of the

overpayments resulted from unfiled cost reports. To provide an incentive

for HHAs to file timely cost reports, HCFA deems the entire amount paid to

the agency during the reporting period to be an overpayment when cost

reports are overdue. HCFA knows that it is likely that at least some of the

payments were appropriate and allowable.

As is shown in table 1, HCFA reported that the 15 closed Texas agencies

owed Medicare about $209 million, or one-third of the overpayments due

from all the closed Texas HHAs.13 However, we estimate that these HHAs

owed $68 million, or one-third what HCFA originally reported.

12 This figure includes interest accrued on unpaid overpayments.

13 Most of the 15 terminated agencies were new entrants to the home health industry. Only

two were Medicare providers before 1991. Medicare payments to the 15 HHAs for fiscal year

1997 ranged from $1.4 million to $12.8 million.
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Table 1: Overpayment Amounts for 15 Closed HHAs in Texas With the Largest HFCA-Reported Overpayments

Most of these overpayments are for services provided in 1996, 1997, and

1998; however, some are for the costs of home health services provided as

far back as 1994. For example, HHA 12 did not file its 1994 and 1995 cost

reports until July 1997. In September 1999, the contractor settled the 1994

cost report and determined that the agency was overpaid approximately

$474,000 and that it owed an additional $158,000 in penalties.14 The

contractor also settled the 1995 cost report in September 1999 and

identified a $955,000 overpayment plus $169,000 in penalties. This same

agency had additional overpayments of approximately $3.5 million,

including penalties and interest, related to its fiscal year 1996, 1997, and

1998 activities. This amount included $1.7 million related to overpayments

HHA

HCFA’s reported

overpayment

GAO’s estimated

overpayment Primary reason for difference

1 $21,939,652 $18,341,695 HCFA amount includes contractor data entry error

2 6,145,572 1,381,737 HCFA extracted POR data incorrectly

3 9,533,916 1,494,121 HCFA extracted POR data incorrectly

4 5,749,580 3,688,232 HCFA extracted POR data incorrectly

5 5,983,577 563,908 HCFA extracted POR data incorrectly

6 5,053,679 599,598 HCFA extracted POR data incorrectly

7 79,247,220 2,365,262 HCFA amount includes contractor data entry error

8 16,853,645 2,356,325 HCFA extracted POR data incorrectly

9 8,473,051 2,738,402 HCFA amount includes contractor data entry error

10 9,567,131 126,379 HCFA extracted POR data incorrectly

11 8,077,040 5,943,379 HCFA overpayment amount exceeds Medicare payment to HHA for the year

12 6,697,425 5,334,822 HCFA amount includes contractor data entry error

13 6,722,368 9,139,407 HCFA amount includes contractor data entry error

14 6,404,648 7,319,658 HCFA amount includes contractor data entry error

15 12,319,664 6,555,153 HCFA extracted POR data incorrectly

Total $208,768,168 $67,948,078

14 HCFA imposes a penalty for each month that a cost report is filed late.
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from a September 1999 desk review of the agency’s 1996 cost report and

$1.6 million related to unfiled cost reports for 1997 and 1998.

We found that three primary types of errors explain nearly all the difference

between our overpayment estimate of approximately $68 million and the

approximately $209 million that HCFA reported.15

• Contractors’ errors entering data into the POR system, such as

keypunch errors, failure to enter appropriate data, and duplicate entries,

totaled about $100 million. One keypunch mistake alone for HHA 7

resulted in an erroneous reporting of a $76.9 million overpayment for

1998. In another case, the contractor entered a $4.6 million overpayment

amount twice for the same HHA.

• How HCFA extracted data from the POR system accounted for another

$50 million in errors. The POR system consists of two parts. One is the

Master File that contains current outstanding overpayment activity for a

provider. For example, the Master File shows that HHA 10 has an

outstanding overpayment of approximately $145,000 due from the

settlement of its 1998 cost report. The other is the History File that

contains information on all overpayment transactions associated with

the provider and thus serves as an audit trail. For example, this file

shows that HHA 10 initially failed to file its 1998 cost report, resulting in

an overpayment of approximately $4 million. Because HCFA extracted

both Master File and History File information for each of the closed

Texas HHAs, it overstated the amounts due Medicare by including

information from the History File that had been superseded. In the case

of HHA 10, HCFA overstated the agency’s fiscal year 1998 overpayments

by $4 million.

• A third type of error relates to the data contained in the POR system.

POR data are not reconciled against information contained in other

HCFA data systems, such as the System Tracking for Audit and

Reimbursement that reports information on Medicare’s total annual

payments to a provider. Because there is no reconciliation among the

different systems, the POR system may indicate that an HHA’s

overpayments for a year, exclusive of penalties and interest, exceeded

its Medicare payments—an impossibility. For example, HHA 11 received

$2.8 million in total Medicare payments during its fiscal year 1998. Yet

15 These errors resulted in both increases and decreases to HCFA’s original overpayment

amount. Because of this, the total value of the errors—approximately $159 million—

exceeds the $141 difference between our overpayment estimate and what HCFA reported.
B-284164

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HCFA reported that the HHA’s overpayments that year totaled $5.1

million. HCFA’s overpayment figure included $2.3 million because of an

interim rate adjustment and $2.8 million because of an unfiled cost

report.16 We found $7 million in these types of errors.

Our $68 million overpayment estimate is net of about $5.3 million—7

percent—collected by withholding payments to the agencies or by

extended repayment arrangements.17 More could have been recouped had

the contractor not made mistakes. For example, HHA 15 had agreed to a 12-

month extended repayment plan related to a $251,500 1996 overpayment

but defaulted after about 6 months. The contractor should have put the

agency on 100 percent withholding 2 months after the agency stopped

making payments. In this case, however, the contractor did not begin

withholding until 5 months after the agency’s payments stopped. During

this delay, the agency received more than $800,000 from Medicare, part of

which could have been used to repay the remaining $83,800 due from the

agency’s outstanding 1996 overpayment.

We found that about $43 million of our $68 million estimate was the result

of documentation problems, primarily unfiled cost reports. In these cases,

it is likely that at least some of, or potentially all, Medicare’s payments were

appropriate and allowable; this would result in reducing the amounts the 15

agencies owed. However, while HCFA could likely estimate whether an

agency was overpaid or underpaid for the reporting period, given the

agency’s past history, without a cost report the entire amount paid to an

HHA during the year is deemed an overpayment. The remaining $25 million

in estimated overpayments reflects amounts determined through

settlement of cost reports, interim payment adjustments, or other audit

activities.

16 While an agency’s overpayments for a year cannot exceed its total Medicare payments for

that year, POR data represent valid Medicare overpayments. In the case of HHA 11, it is

appropriate for POR to record both types of overpayments for fiscal year 1998.

17 HCFA’s $209 million overpayment estimate is also net of collections.
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HCFA Lacks a Reliable

Integrated System for

Recording and

Tracking

Overpayments

It is not surprising that HCFA reported inaccurate overpayment

information on closed HHAs in Texas, given its longstanding and systemic

problems accounting for overpayments—its accounts receivable.18

Inaccurate accounts receivable prevented HCFA from obtaining an

unqualified opinion on the accuracy of its annual financial statements until

1999.19 Contractors track and report overpayment activity for HHAs and

other providers by means of a variety of fragmented and overlapping

systems but are unable to reconcile the data in these systems—resulting in

reporting errors. While HCFA implemented several interim measures in

1999 to improve the reliability and completeness of its accounts receivable

information, permanent solutions, such as an integrated accounts

receivable tracking and reporting system, will not be fully implemented

until 2001 at the earliest.

Ineffective management of Medicare accounts receivable has been noted as

a consistent problem in HCFA’s financial statement audits for fiscal years

1996 through 1999.20 These audits identified numerous recurring control

weaknesses and systems problems with Medicare’s accounts receivable.

The fiscal year 1998 audit, for example, disclosed deficiencies in nearly all

facets of HCFA’s accounts receivable activity, including the lack of an

integrated financial management system to track overpayments and their

collections as well as inadequate procedures for ensuring that receivables

were valid and supported. In 1999, auditors found that despite significant

improvements in contractors’ recordkeeping, controls over accounts

receivable continued to be a material weakness.21

18 Overpayments are classified for accounting purposes as accounts receivable.

19 In 1997 and 1998, HCFA received a qualified opinion on its financial statements, in part

because of deficiencies in accounts receivable activities at Medicare contractors. Auditors

did not express an opinion on HCFA’s 1996 financial statements for several reasons,

including contractors’ inability to support their accounts receivable.

20 The Government Management Reform Act of 1994 requires annual financial statements for

the 24 major federal agencies and the U.S. government as a whole. HCFA has issued audited

financial statements for fiscal years 1996-99.

21 A material weakness is a reportable condition in which the design or operation of one or

more of the internal control components does not reduce to a relatively low level of risk the

errors or irregularities in the amounts that would be material in relation to the financial

statements being audited.
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Page 19 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

Because HCFA does not have a single integrated system for tracking and

reporting receivables, HCFA and its contractors use several fragmented

and overlapping systems to track overpayment activity. For example,

contractors track HHA overpayments on manual ledger records and in their

claims processing systems and must manually enter information into

HCFA’s POR system. Using different, nonintegrated systems increases the

risk of errors and misstatements as we found with overpayments HCFA

reported on the 15 closed Texas HHAs. In earlier audits of HCFA’s financial

statements, auditors found that reconciliations among the recording and

tracking systems were not always done or were not done properly. In some

cases, the different systems could not be reconciled, either with one

another or with the contractors’ quarterly activity reports. During our

review, for example, we found that the contractor did not reconcile its

records with the POR system. This allowed an erroneous report of a $76.9

million overpayment to remain in POR even though the contractor’s own

records contained the correct overpayment amount due from the HHA.

Likewise, HCFA does not reconcile the POR system with other HCFA

reporting systems, such as the System Tracking for Audit and

Reimbursement, as an additional quality control check. We found several

instances in which, because the two systems were not reconciled, HCFA

reported an HHA’s overpayment to be greater than the HHA’s total Medicare

payments for a year. In one case, for example, HCFA reported that the

agency owed $12 million for its fiscal year 1996 activities. However,

Medicare payments to the agency that year totaled $7 million.

In 1999, HCFA initiated several actions to improve the accuracy and

reliability of the receivable activity and balances reported by its

contractors, including HHA receivables. First, during 1999, HCFA entered

into a reimbursable interagency agreement with the HHS Office of

Inspector General to perform detailed reviews of Medicare receivable

balances and activity at HCFA’s central and regional offices. Second, HCFA

contracted with outside consultants to review internal controls and

accounts receivable activity at its 15 largest contractors. Third, HCFA

issued new instructions to its regional offices requiring detailed reviews of

receivable balances at all contractors that were not included in the

consultant study. Fourth, HCFA contracted with other outside consultants

to review internal controls at 26 contractors and recommend any needed

improvements. And last, HCFA directed contractors to review their

Medicare receivables and recommend items for possible write-off.
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Page 20 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

While HCFA’s recent write-off efforts have made receivable balances more

reliable in the short term, they do not address the underlying causes for the

weaknesses found in past audits. More permanent solutions to HCFA’s

accounts receivable problems could take years to implement. HCFA has

long recognized that it needs to replace its fragmented accounts receivable

tracking and reporting systems with a single integrated system. However,

efforts to develop new systems were delayed by more immediate needs,

such as fixing potential year 2000 computer glitches. HCFA officials told us

that developing new financial management systems is now one of the

agency’s highest priorities.

One proposed system, called the Medicare Accounts Receivable System,

would replace the POR system. According to HCFA officials, the new

receivables system will be fully automated and will take overpayment

information directly from the contractors’ claims processing systems. It

will also interact with other new financial management systems being

developed, including an automated Medicare general ledger system to

better track and report contractors’ financial activity. HCFA hopes to begin

implementing the new Medicare Accounts Receivable System in 2001.

Conclusions Under IPS, HHAs receive interim cost-based payments that contractors

must adjust retrospectively through activities such as interim rate

adjustments, desk reviews, audits, and final settlements. These activities

may or may not identify overpayments but are usually not performed for

months after an agency closes. There is little likelihood of collecting

significant portions of a closed agency’s overpayments because closed

agencies have few, if any, non-Medicare resources or other assets with

which to repay their Medicare debts. The fact that HCFA has collected only

about 7 percent of the overpayments due from the 15 closed Texas HHAs

we reviewed attests to this. It is important to note, however, that the large

overpayments to some HHAs under IPS is a one-time situation related to

the change in Medicare’s payment method; overpayment problems for the

same reasons and of this magnitude are unlikely under PPS as proposed by

HCFA.

HCFA’s initial calculation of what closed HHAs in Texas owed was

significantly overstated because HCFA’s POR system for tracking and

reporting overpayments is unreliable and inaccurate. Not only does the

POR system lack edits to check for data entry errors but HCFA does not

reconcile POR data with other HCFA data systems, such as the System

Tracking for Audit and Reimbursement. This has resulted in HCFA’s
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Page 21 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

reporting that some providers owed more money than Medicare actually

paid them in a year. While we estimate that the 15 closed Texas HHAs owe

$68 million, two-thirds of this amount, or $43 million, stems primarily from

unfiled cost reports. It is likely that at least some of the $43 million is

allowable and therefore not an overpayment, but without the cost reports,

the entire amount paid to the agency during the cost report period is

deemed an overpayment.

Weaknesses with the POR system reflect HCFA’s longstanding and systemic

accounts receivable problems. HCFA has taken interim steps to address

these issues and plans to begin phasing in a single, integrated accounting

system to report and track overpayments in 2001. While this system should

help overcome the problems HCFA has with recording and tracking

overpayments, its effectiveness will not be known until it is operational.

Agency Comments and

Our Evaluation

HCFA commented on a draft of this report and generally agreed with its

contents and conclusions.22 (HCFA’s letter is printed in appendix I.) In its

comments, HCFA emphasized its commitment to strengthening Medicare’s

financial controls and systems and to bringing the agency into accord with

standard government accounting practices. HCFA acknowledged

weaknesses in the POR system that limit its effectiveness as a managerial

tool and outlined both current and future steps to correct these

weaknesses. Chief among these steps is its planned implementation of the

Medicare Accounts Receivable System in 2001. HCFA also noted that it is

considering using a commercial off-the-shelf product as a short-term

remedy to some of the problems with the POR system. The steps HCFA

outlined, if properly implemented, would improve its current accounts

receivable systems and could help manage and safeguard HCFA’s programs.

HCFA agreed with our portrayal of the difficulties contractors face in trying

to quickly identify and collect overpayments from closed HHAs. In its

comments, HCFA stated that when HCFA does receive notice of an

agency’s intent to leave the program, the contractors determine quickly

whether a provider has outstanding overpayments or the potential for

overpayments and begin withholding any future payments to recover the

money. This is a more positive picture than we found. As our report

indicates, the contractor generally did not make final determinations of the

22 HCFA also provided technical comments that we incorporated where appropriate.
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Page 22 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

amounts owed until almost 2 years after HHAs closed, and HCFA does not

require contractors to settle cost reports from closed HHAs more quickly

than from operating HHAs. While contractors can conduct interim reviews

to estimate any underpayments or overpayments, for only 5 of the 15 cases

we reviewed was an interim review conducted—all from 3 to 5 months

after closure.

HCFA emphasized in its comments that moving to a prospective payment

system for HHAs would help resolve HHA overpayment issues currently

confronting HCFA and its contractors. Strengthening financial controls and

modernizing Medicare’s accounting systems would also help resolve

financial management problems. Finally, HCFA affirmed its commitment to

protecting the home health benefit for persons who qualify for it while

protecting the financial integrity of the Medicare program.

As we arranged with your offices, unless you publicly announce the

report’s contents earlier, we plan no further distribution of it until 30 days

from the date of this letter. We will then send copies of the report to the

Secretary of Health and Human Services, the Administrator of HCFA,

appropriate congressional committees, and others who are interested. We

will also make copies available to others on request.

If you or your staff have any questions, please call me at (312) 220-7767 or

Sheila Avruch, Assistant Director, at (202) 512-7277. Other major

contributors to this report include Robert Dee, Anna Kelley, Wayne Marsh,

Frank Putallaz, and Suzanne Rubins.

Leslie G. Aronovitz

Associate Director, Health Financing and

Public Health Issues
Page 23 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments
Page 24 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

Appendix I

Comments From the Health Care Financing Apendxies

Administration ApendxiI
Appendix I

Comments From the Health Care Financing

Administration

Page 25 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments
Appendix I

Comments From the Health Care Financing

Administration

Page 26 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments
Page 27 GAO/HEHS/AIMD-00-132 Medicare Home Health Agency Overpayments

Related GAO Products

Medicare Financial Management: Further Improvements Needed to

Establish Adequate Financial Control and Accountability (GAO/AIMD-00-

66, Mar. 15, 2000).

Medicare Home Health Agencies: Closures Continue, With Little Evidence

Beneficiary Access Is Impaired (GAO/HEHS-99-120, May 26, 1999).

Medicare Home Health Agencies: Role of Surety Bonds in Increasing

Scrutiny and Reducing Overpayments (GAO/HEHS-99-23, Jan. 29, 1999).

Medicare Home Health Benefit: Impact of Interim Payment System and

Agency Closures on Access to Services (GAO/HEHS-98-238, Sept. 9, 1998).

Medicare: Interim Payment System for Home Health Agencies (GAO/THEHS-98-234, Aug. 6, 1998).

Medicare Home Health Benefit: Congressional and HCFA Actions Begin to

Address Chronic Oversight Weaknesses (GAO/T-HEHS-98-117, Mar. 19,

1998).

Medicare: Improper Activities by Med-Delta Home Health (GAO/T-OSI-98-6,

Mar. 19, 1998; GAO/OSI-98-5, Mar. 12, 1998).

Medicare Home Health Agencies: Certification Process Ineffective in

Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997).

Medicare Home Health: Success of Balanced Budget Act Cost Controls

Depends on Effective and Timely Implementation (GAO/T-HEHS-98-41,

Oct. 29, 1997).

Medicare Fraud and Abuse: Summary and Analysis of Reforms in the

Health Insurance Portability and Accountability Act of 1996 and the

Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997).

Medicare: Need to Hold Home Health Agencies More Accountable for

Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997).

Medicare: Home Health Cost Growth and Administration’s Proposal for

Prospective Payment (GAO/T-HEHS-97-92, Mar. 5, 1997).

Medicare: Home Health Utilization Expands While Program Controls

Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996).

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