GAO

United States General Accounting Office

Report to the Chairman, Committee on

Government Reform, House of

Representatives

September 2000 MEDICARE

HCFA Could Do More

to Identify and Collect

Overpayments

HEHS/AIMD-00-304

Page 1 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Contents

Letter 3

Appendixes Appendix I: Comments From the Health Care Financing

Administration 38

Appendix II: GAO Contacts and Staff Acknowledgments 43

Tables Table 1: Medicare Accounts Receivable 22

Table 2: Medicare Claims Administration Contractors’ New Accounts

Receivable and Collections 22

Abbreviations

DCIA Debt Collection Improvement Act of 1996

DRG diagnosis-related group

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HHA home health agency

HIPAA Health Insurance Portability and Accountability Act of 1996

IRS Internal Revenue Service

MIP Medicare Integrity Program

MSP Medicare secondary payer

OIG HHS Office of Inspector General

PRO peer review organization

PSC program safeguard contractor

SSA Social Security Administration
Page 2 GAO/HEHS/AIMD-00-304 Medicare Overpayments
Page 3 GAO/HEHS/AIMD-00-304 Medicare Overpayments

United States General Accounting Office

Washington, D.C. 20548

Health, Education,

and Human Services Division

B-283654 Letr

September 7, 2000

The Honorable Dan Burton

Chairman

House Committee on Government Reform

House of Representatives

Dear Mr. Chairman:

The Health Care Financing Administration (HCFA), within the Department

of Health and Human Services (HHS), is the nation’s largest health insurer.

It administers the Medicare program, which paid approximately $200

billion in total benefits and covered nearly 40 million beneficiaries in fiscal

year 1999. The vast majority of beneficiaries—about 85 percent—chose to

receive their benefits under the traditional fee-for-service program.1

Although most participating providers comply with Medicare billing rules,

the inadvertent errors or intentional misrepresentations that do occur

result in overpaymentsmoney owed back to Medicare. In its fiscal year

1999 financial statements, HCFA’s overpayments that had not yet been

recoveredclassified as accounts receivable for accounting

purposestotaled $7.3 billion at the end of the fiscal year.

Recovery auditing is a service conducted by private firms to identify and

sometimes collect overpayments for clients such as health insurance

companies. In the second session of the 106th Congress, the House of

Representatives passed H.R. 1827, the Government Waste Corrections Act

of 2000, which you sponsored, requiring use of recovery auditing for federal

programs that directly purchase goods and services. Because Medicare’s

fee-for-service program pays claims to providers and suppliers for goods

and services provided to beneficiaries, Medicare is excluded from the bill.

Because of your concerns regarding Medicare overpayments, you asked us

to answer the following questions: (1) How do HCFA and its contractors

identify potential overpayments, and would techniques used by recovery

auditors improve overpayment identification? (2) How well do HCFA and

its contractors collect overpayments once they are identified, and would

the services of recovery auditors improve HCFA’s collection efforts?

1

Most beneficiaries have the option to enroll in managed careMedicare+Choiceor

Medicare’s traditional fee-for-service program.
B-283654

Page 4 GAO/HEHS/AIMD-00-304 Medicare Overpayments

(3) What challenges would HCFA face if it were required to hire recovery

auditors to augment its overpayment identification and collection

activities?

To address these questions, we reviewed HCFA policies and procedures,

and examined its current and planned efforts to identify and collect

overpayments. We also met with representatives from four HCFA

contractors that process and pay claims and take steps to minimize

overpayment losses. We discussed with these contractors how they

identified and collected Medicare overpayments. We also obtained and

analyzed financial reports from HCFA and the four contractors and

examined HCFA’s implementation of the Debt Collection Improvement Act

of 1996 (DCIA). We also met with representatives of several recovery audit

firms and several of their clients to determine if the techniques they use

might be applicable to Medicare.

Finally, to determine the implementation challenges HCFA might face if it

were to use the services of recovery auditors, we interviewed HCFA

officials and contractor, recovery auditor, and medical association

representatives. We also reviewed the HHS Office of Inspector General’s

(OIG) and our prior work. We performed our work from September 1999 to

July 2000 in accordance with generally accepted government auditing

standards.

Results in Brief Despite HCFA’s efforts to pay claims correctly in its $167 billion fee-forservice Medicare program, several billions of dollars in Medicare

overpayments occur each year. It is therefore critical that HCFA undertake

effective postpayment activities to identify overpayments expeditiously.

HCFA’s claims administration contractors use several postpayment

techniques to identify overpayments. These include medical review to

ensure appropriateness of services, reviews of interim payments and audits

of cost reports for providers that are paid on the basis of their costs, and

reviews to determine if another entity besides Medicare has primary

payment responsibility. The contractors identify and collect billions of

dollars through these activities, but how well each contractor performs

them is not clear because HCFA currently lacks the information it needs to

measure the effectiveness of contractors’ overpayment identification

activities. While recovery auditors may also save money for clients, such as

state Medicaid agencies, by identifying overpayments, the identification

techniques they use are generally similar to those already used by HCFA

and its contractors. This does not mean that HCFA could not benefit from a
B-283654

Page 5 GAO/HEHS/AIMD-00-304 Medicare Overpayments

stronger focus on specific postpayment activities. However, doing so may

require additional program safeguard funding so as not to shift funds away

from HCFA’s other efforts, such as prepayment review to prevent

overpayments. The Congress has given HCFA assured funding for program

safeguard activities; however, the funding level is about one-third less (on a

per-claim basis) than it was in 1989 and, although it will increase until 2003,

it will only keep pace with expected growth in Medicare expenditures. For

fiscal year 1999, based on HCFA estimates, the Medicare Integrity Program

saved the Medicare program more than $17 for each dollar spent—about 55

percent from prepayment activities and the rest from postpayment

activities. Because these activities can bring a positive return, GAO

suggests that the Congress consider increasing HCFA’s funding to bolster

its postpayment review program.

Overpayment collections, made principally by the claims administration

contractors, totaled $8.7 billion during fiscal year 1999, or about 70 percent

of the $12.6 billion in overpayments identified during the year. Different

factors affect contractors’ ability to collect overpayments, including the

type of overpayment, the promptness with which it is identified, and the

financial condition of the overpaid provider. Contractors transfer

overpayments they are unable to collect to HCFA, but HCFA’s success in

collecting them is limited. HCFA could increase collections if it fully

implemented DCIA, which generally requires that debts delinquent over

180 days be transferred to the Department of the Treasury and, in certain

cases, a Treasury-designated debt collection center. Treasury and the

Treasury-designated debt collection center at HHS conduct varied

collection activities, which include contracting with private companies to

collect debt, such as certain Medicare overpayments. Treasury’s standards

require the use of techniques similar to those used by recovery auditors.

HCFA has two pilot projects under way to transfer some delinquent

overpayments to Treasury’s designated debt collection center, but the

projects are limited to large-value, aged overpayments, rather than all

eligible delinquent debt. HCFA plans to expand its pilot projects from some

to all of its claims administration contractors. However, it has established

minimum thresholds for referrals for collection that are higher than the

Treasury and debt collection center will accept because HCFA says that it

does not have the resources needed to pursue collection on the large

volume of debt below its thresholds. To promote improved collections,

GAO recommends that HCFA fully implement DCIA by immediately

referring overpayments as they become over 180 days delinquent to the

designated debt collection center to be collected or, where appropriate, to
B-283654

Page 6 GAO/HEHS/AIMD-00-304 Medicare Overpayments

be referred to Treasury for collection, while continuing efforts to clear its

backlog of aged receivables.

HCFA and its contractors are using techniques similar to recovery auditing

for identification and collection of overpayments. In addition, HCFA has

already recognized that the use of specialized contractors to improve

overpayment identification may be beneficial and is currently contracting

with such companies. Under authority provided by the Health Insurance

Portability and Accountability Act (HIPAA) of 1996, HCFA has contracted

with 12 firms to assist in its program safeguard efforts. Implementation is

progressing as HCFA resolves complex challenges regarding how to

compensate the firms, deal with the administrative burdens these firms

place on the claims administration contractors, handle coordination and

privacy issues, and determine how to oversee the firms’ activities—

virtually the same challenges HCFA would need to address if it hired

recovery auditors. If a particular recovery auditing firm offered

postpayment expertise that met HCFA’s needs, HCFA could contract with it

and gain its expertise within the agency’s existing program safeguard

contracting structure.

Background The Medicare program utilizes a variety of payment methods to reimburse

providers for the services it covers. Hospital insurance, or Part A, covers

inpatient hospital, skilled nursing facility, and hospice care, and certain

home health services. Supplemental medical insurance, or Part B, covers

physician and outpatient hospital services, diagnostic tests, and other

medical services and supplies. Depending on the service, HCFA pays Part A

providers based on their costs, or on a prospective payment basis designed

to cover the cost of providing a bundle of services related to a particular

medical condition. In contrast, Part B providers are typically paid for each

individual service, based on a fee schedule. To ensure that only services the

statute specifies are covered, Medicare has extensive policies and rules

about what constitutes covered services. It is not surprising, therefore, that

providers are sometimes overpaid for their services.

Contractors Pay Claims and

Identify and Collect

Overpayments

Medicare claims are paid by a network of private health insurance

companies hired by HCFA, such as Blue Cross and Blue Shield plans,

Mutual of Omaha, and CIGNA. Contractors that process Part A claims are

referred to as fiscal intermediaries, while those that process Part B claims

are called carriers. In fiscal year 1999, fiscal intermediaries processed

about 133 million claims representing $124 billion in payments, while
B-283654

Page 7 GAO/HEHS/AIMD-00-304 Medicare Overpayments

carriers processed about 721 million claims and paid benefits of about $43

billion. Fiscal intermediaries and carriers also perform activities related to

safeguarding Medicare payments. These include using prepayment

computer edits to prevent potential overpayments, conducting

postpayment medical reviews, determining whether other insurers should

pay before Medicare, and auditing reports of providers’ costs to determine

if any costs are overstated or not allowed by Medicare. HCFA uses

specialized contractors to supplement these program safeguard efforts.

Claims administration contractors have principal responsibility for claims

processing and administration. Specifically, they contract with HCFA to (1)

receive claims; (2) judge their appropriateness; (3) pay appropriate claims

promptly; (4) identify potentially incorrect or fraudulent claims or

fraudulent providers, and withhold payment if justified; and (5) identify and

recover overpayments. The contractors are expected to manage Medicare’s

funds in a fiscally responsible way, effectively address provider and

beneficiary inquiries, and establish a process for handling provider and

beneficiary appeals of claims decisions.

Until the HIPAA of 1996 established the Medicare Integrity Program (MIP),

only claims administration contractors performed program safeguard

activities. Under HIPAA, HCFA has the authority to enter into contracts

with a variety of firmsnot just insurance companiesto perform certain

safeguard-related functions or undertake specific program initiatives to

promote Medicare’s integrity. For example, one such initiative is aimed at

the early detection of fraudulent and abusive billing in three Midwestern

states. Under MIP, HCFA has contracted with 12 firms known as program

safeguard contractors (PSCs) that compete among themselves to perform

program safeguard work detailed in individual task orders. These MIP

contractors can subcontract with other companies that may have special

expertise to help them perform particular task orders. As of June 2000,

HCFA had issued a total of 10 task orders—each for a defined set of

program safeguard services provided over a specified time period.

In addition to providing HCFA with new contracting authority, HIPAA

provided HCFA with predictable increases in program safeguard funding.

Before HIPAA, contractor program safeguard activities were funded from

contractors’ general program management budgets, which also covered

contractors’ costs for processing claims. This meant that program

safeguard activities had to compete for funding with other contractor

activities that might have higher priority. For example, funding system

improvements to ensure that claims were paid promptly might require a
B-283654

Page 8 GAO/HEHS/AIMD-00-304 Medicare Overpayments

shift in funding allocations, as would emergencies or new HCFA initiatives.

By contrast, HIPAA provides HCFA with assured funding levels for program

safeguard activities. Program safeguard expenditures totaled $438 million

in fiscal year 1997the first year of MIPand HIPAA provides for

increased funding in each subsequent year through fiscal year 2003, when

the program safeguard appropriation is expected to total $720 million.

Overpayments Occur for

Various Reasons

Most of HCFA’s accounts receivable are the result of overpayments that

have yet to be recovered from providers. Overpayments to providers result

from a variety of inadvertent errors or intentional misrepresentations. The

following are the four main categories of Medicare overpayments:2

• Coverage, medical necessity, or documentation issuesMedicare

should pay claims only for services that are medically necessary, meet

Medicare coverage requirements, and are properly documented to

indicate that the service took place as reflected in the claim. Claims can

appear to be correct even though they do not meet these conditions. For

example, a home health agency may receive reimbursement for services

on behalf of a beneficiary who did not meet the program requirements

of being homebound.

• Provider billing errorsProviders make manual or automated billing

errors, either of which can lead to overpayments. For example, if a

physician’s billing clerk enters the wrong procedure code on a claim, the

physician may receive a larger reimbursement for a more

comprehensive office visit than the visit that actually occurred.

• Cost reporting errorsFor services paid on the basis of provider costs,

providers receive interim payments based on their projected allowable

costs. If costs are later disallowed, providers will have to return these

overpayments.

2

In addition, claims administration contractors can make errors that lead to overpayments.

For example, one contractor we visited said that a recent system processing error caused

Medicare to pay claims that should have been paid by another federal program.
B-283654

Page 9 GAO/HEHS/AIMD-00-304 Medicare Overpayments

• Medicare secondary payer (MSP) debtThese debts occur when

Medicare pays for a service that subsequently is determined to be the

responsibility of another payer.3 These include certain cases in which

beneficiaries (1) have other health insurance coverage provided by their

employer or their spouse’s employer (2) have occupational injuries or

illnesses that would be covered by workers’ compensation (3) have

injuries which are covered by liability insurance or a settlement arising

from an accident; or (4) are receiving care for end-stage renal disease

during the first 30 months of their treatment and have other health

insurance coverage.

Recovery Audit Firms Also

Perform Program Safeguard

Activities

Recovery auditing has been used in various industries, including health

care, to identify and collect overpayments for about the last 30 years.

Recovery audit firms that specialize in health issues contract with private

insurance companies, state Medicaid agencies, managed care plans, and

employee group health plans. In some cases, clients rely exclusively on

recovery audit firms to identify and collect overpayments. In other cases,

they supplement their own internal capabilities with the services of

recovery audit firms. These firms generally focus on overpayment

identification but will also collect identified overpayments. Typically, they

are paid a contingency fee based on a percentage of the overpayments that

they or their clients collect. Fees vary depending on such factors as the

type of overpayment involved and the degree of difficulty associated with

identifying and collecting it.

Recovery audit firms employ a variety of techniques to identify

overpayments. For example, one firm may use proprietary software to

analyze a large database of claims to identify potential overpayments while

another may have specially trained staff review medical records for

potentially inappropriately billed services. Recovery audit firms may also

collect overpayments through such means as issuing demand letters to

providers or negotiating an amount to be returned to the client.

3

MSP debt differs from other types of Medicare program overpayments because the validity

of the service itself is not in dispute; the question concerns which payer is responsible for

primary coverage. In some cases, contractors may not be aware of the existence of a

primary payer. In other cases, contractors make conditional payments when there are

indications that another payer has not paid promptly but may ultimately be liable. Later,

contractors determine whether other insurance should have paid the claim and, if so, they

attempt to recover the Medicare payment.
B-283654

Page 10 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Expanded

Postpayment Activities

Could Benefit

Overpayment

Identification

In the last several years, HCFA has increased its emphasis on prepayment

activities that help contractors avoid payment errors. Correct payment

involves several prepayment processing steps to determine whether the

claim is for covered, medically necessary and reasonable services; is

provided to an eligible beneficiary; and contains a valid provider number.

All claims go through a variety of computerized prepayment edits designed

to ensure they are correct on their facefor example, to ensure that they

are not duplicate payments. In addition, many claims go through

prepayment medical reviews that are either automated or performed by

contractor staff. However, the tremendous volume of Medicare claims

processed by each contractor makes it impractical to manually review

more than a small fraction of claims prior to payment. For example, in

fiscal year 1998, only about 1 in 8 claims were medically reviewed prior to

payment and only about 1 in 16 underwent any type of manual prepayment

review. As a result, adequate postpayment review is critical to ensuring that

overpayments are identified in a timely way.

Identification of Potential

Overpayments

In conducting postpayment reviews to identify potential overpayments,

contractors primarily focus on three program safeguard

activitiespostpayment medical review, reviews and audits of cost-based

reimbursement payments, and MSP reviews. These activities are described

below:

Postpayment medical review. Overpayments due to claims that are

medically unnecessary, insufficiently documented, or for noncovered

services and that were not identified through prepayment edits must

generally be discovered through contractor postpayment medical review.

By reviewing paid claims data, contractors identify patterns that could

indicate potential abuse. For example, contractor staff may review billing

patterns for certain procedure codes and find unusual increases in

utilization over time or significant utilization differences among providers.

Once a potential problem is identified, contractors typically sample a

provider’s claims and request documentation from the provider for selected

claims to determine if they were paid properly or if overpayments

occurred.
B-283654

Page 11 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Peer review organizations (PROs) are independent physician organizations

located in each state that work under contract to HCFA. They conduct

postpayment medical review for Medicare claims involving inpatient

services.4 PROs are primarily responsible for ensuring that care provided

Medicare beneficiaries is medically necessary, reasonable, is provided in an

appropriate setting, and meets professionally accepted standards of quality.

If, in the course of their reviews, the PROs discover overpayments, they are

supposed to refer the cases to the appropriate fiscal intermediary for

payment adjustment.

Interim rate reviews and cost report audits. These activities are

performed by fiscal intermediaries to determine whether the payments

made to providers paid on the basis of their costs accurately reflect their

allowable costs. Interim rate reviews allow contractors to adjust payment

rates during the fiscal year after comparing a provider’s interim payment

rates with its previous cost information, its Medicare payments, and its

audit history. These reviews may result in revisions to providers’ interim

payment rates for the remainder of the year if it is found that the provider

was being overpaid or underpaid. Once a provider files its year-end cost

report, it is reviewed and may be audited to determine whether there are

overpayments or underpayments relating to the costs claimed by the

provider.5

MSP reviews. HCFA officials estimate that about 8 percent of

beneficiaries have medical claims that are potentially the responsibility of

another health insurer, liability insurer, or workers’ compensation program.

MSP reviews seek to identify such primary sources of payment and recoup

any primary payments made by the Medicare program. HCFA and its

contractors use a variety of techniques to find MSP cases. Contractors send

a questionnaire to each new beneficiary 3 months prior to their entitlement

to Medicare benefits to determine if the beneficiary or spouse is employed

and has group health insurance coverage. Medicare beneficiary

information is also matched periodically with Social Security

Administration (SSA) and Internal Revenue Service (IRS) data on

employment status and earnings. If beneficiaries are identified as employed

4

By law, the PROs are allowed to conduct postpayment medical review of inpatient hospital

claims, including validating the appropriateness of the codes charged for services provided.

5

In the future, Medicare should have fewer of these overpayments since prospective

payment systems are being implemented for home health, hospital outpatient, and

rehabilitation hospital services.
B-283654

Page 12 GAO/HEHS/AIMD-00-304 Medicare Overpayments

and earning less than $10,000 per year, contractors may elect not to send

questionnaires to employers asking about the beneficiary’s employment

and health insurance coverage. In addition, some private insurance

companies have agreed (voluntarily or as part of a legal settlement with

HCFA) to share information on their policyholders. Finally, if a claim is

submitted with certain diagnosis codes indicating traumatic or workrelated injury, contractors automatically send the beneficiary a letter

requesting information about a potential lawsuit, automobile liability

insurance, or workers’ compensation coverage. In a recent report, the HHS

OIG took steps to identify beneficiaries who had other primary sources of

coverage and concluded that HCFA’s current MSP questionnaire and data

match activities successfully identified most of the beneficiaries with other

coverage that the OIG was able to identify. However, it estimated that $56

million had been paid out improperly in 1997 to certain beneficiaries who

had other insurance that had not been identified by HCFA’s questionnaire

and data match activities.6

HCFA has contracted with a coordination-of-benefits contractor under MIP

to consolidate and improve many of the MSP functions currently

performed by the claims administration contractors. In addition, several

claims administration contractors have taken lead roles in identifying

potential MSP recoveries from nationwide class action lawsuits, such as

the product liability case involving breast implants.

Providers themselves are a major source of information on overpayments.

Most providers make an honest effort to bill Medicare correctly, but when

errors are discovered through their own internal reviews, our work showed

that many providers notify their contractor. Often they send payment along

with a corrected claim, so the contractor learns of the overpayment at the

same time it is recovered.

HCFA Lacks Information to

Measure Effectiveness of

Overpayment Identification

Activities

HCFA currently has limited information available to measure how effective

the contractors are in identifying Medicare overpayments. The HHS OIG’s

annual estimate of improper payments within the Medicare fee-for-service

program provides some indication of national error rates, but is not

designed to measure individual contractor performance.

6

DHHS-OIG, Unidentified Primary Health Insurance: Medicare Secondary Payer Auxiliary

File, OEI-07-98-00180 (June 2000). The OIG’s study included about half of Medicare’s

beneficiaries.
B-283654

Page 13 GAO/HEHS/AIMD-00-304 Medicare Overpayments

The HHS OIG’s analysis of a sample of Medicare claims for fiscal year 1999

estimates that improper payments totaled about $13.5 billion, or about 8

percent of all Medicare fee-for-service payments.7 The main reasons for

improper payments were insufficient documentation to support a claim

and lack of medical necessity for a service or procedure. While the HHS

OIG estimates improper payments at the national level, the sample size

does not allow HCFA to draw conclusions on contractor-specific

performance. The OIG’s analysis also does not take into account that an

overpayment may have been identified and recovered by the contractor

during its postpayment review activities.

HCFA is developing the Comprehensive Error Rate Testing program to

better evaluate individual contractor performance. When this program is

implemented, an independent firm will periodically review a random

sample of claims to determine if the contractors’ payment decisions were

appropriate. HCFA officials expect that this program will enable the agency

to develop error rates specific to each contractor and for different types of

benefits and providers. While the program will provide HCFA with

additional data on contractor overpayment error rates, it is being designed

as a management tool to identify problem areas. It will not identify specific

claims beyond claims in the sample that were paid in error during the

covered time period. The program will be implemented this fiscal year,

beginning with the contractors that process and pay claims for durable

medical equipment and supplies, and will include all claims administration

contractors by the end of fiscal year 2002. It is too early to determine how

the information generated by this program will be used to improve

contractor effectiveness by restructuring overpayment identification

methods.

Overpayment Identification

Efforts Used by Recovery

Auditors Mirror HCFA’s

Current Efforts

We found that the techniques used by recovery auditors were similar to

those already employed by HCFA’s contractors in their postpayment

review, MSP, and other program safeguard activities. While the techniques

are similar, the specific application—such as what factors trigger a more

extensive reviewaffect how well overpayments are identified. The

recovery auditing techniques most applicable to the Medicare

programdata mining, diagnosis-related group (DRG) validation, cost

report audits, and third-party liability reviewsare part of current

7

HHS-OIG, Improper Fiscal Year 1999 Medicare Fee-for-Service Payments, A-17-99-01999

(Feb. 2000).
B-283654

Page 14 GAO/HEHS/AIMD-00-304 Medicare Overpayments

postpayment review activities. HCFA’s decision to concentrate its program

safeguard resources on prepayment, rather than postpayment, activities in

recent years is justified given the cost-effectiveness of error prevention.

However, the result is that postpayment review activities have been

reduced for some types of claims: only about 565,000 claims were subject

to postpayment medical review in fiscal year 1998, compared to

approximately 960,000 claims in fiscal year 1995a drop of over 40

percent. HCFA may be missing opportunities to identify significant

overpayments through postpayment activities. However, any increase in

these efforts would likely require additional program safeguard funding to

ensure that prepayment reviews are not decreased.

Investment in evaluation of the most cost-effective postpayment review

activities for identifying overpayments would be worthwhile. HCFA has

limited ability to do this kind of evaluation now because it cannot measure

the effectiveness of each contractor’s program safeguard activities by type

of activity.

Data Mining Programs Identify

Aberrant Billing Patterns

The large number of computerized claims processed by Medicare lends

itself to the application of data mining techniques. Data mining involves

specialized software programs that analyze large volumes of claims data to

identify potential overpayments. The programs typically contain specific

algorithms used to identify billing errors and abusive practices, and are

based on the insurer’s policies, procedures, and contractual arrangements,

as well as common sense. HCFA’s claims administration contractors

currently use data mining and statistical analysis as part of their

postpayment review activities. Since 1993, HCFA also has contracted with a

specialized statistical analysis contractor to perform large-scale analysis of

durable medical equipment claims. Data mining can identify many

potentially inappropriate payments, but determining which ones are actual

overpayments takes additional investigation. Currently, the contractors

only have the resources to investigate situations in which the data indicate

potential large-scale abusive practices.

Several of HCFA’s program safeguard contractors also specialize in data

mining and the manipulation of large data sets. For example, one program

safeguard contractor is preparing algorithms and analyzing national data to

identify potential fraud that occurred during the critical months leading to

the year 2000. Another program safeguard contractor is conducting data

mining activities to support development of medical policies and the early

detection of fraudulent and abusive billing in three Midwestern states.
B-283654

Page 15 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Recovery auditors also use data mining to identify overpayments for their

clients. For example, in 1999 a recovery auditor under contract with a state

Medicaid program subjected 3 years of paid claims to its data mining edits

and identified $52 million in overpayments. These overpayments were

approved for collection by an independent state review board. Another

recovery auditor found, through its data mining efforts, that a state

Medicaid agency was paying 10 times that amount allowed for an asthma

inhaler because providers were billing based on the drug’s unit

dosagewhich represents part of a gramrather than by the gram.

DRG Validation Currently

Receives Low Priority

Medicare’s payments for hospital inpatient services are determined on the

basis of the beneficiary’s diagnosis. These diagnoses are grouped for

payment, with each DRG designed to reflect the bundle of services and

supplies required to treat different medical conditions. Overpayments can

result if a DRG reflects a more serious—and expensive—condition than the

beneficiary actually had. Some recovery auditors validate DRGs for their

clients, such as private insurers who have adopted Medicare’s DRG coding

system for inpatient claims. According to the representatives of one PRO,

while DRG validation was an area of emphasis for PROs in the 1980s and

early 1990s, this activity was not a high priority in recent years for the

PROs. The PROs, rather than the claims administration contractors, review

hospital inpatient DRG-based claims.

DRG validation involves verification that a provider classified a patient

within the DRG code that accurately reflects the patient’s condition as

described in the discharge information. According to recovery auditors,

bills are sometimes miscoded because providers base their codes on the

patient’s medical complaints, rather than on the physician’s diagnosis. DRG

validation should be based on a patient’s principal diagnosis and procedure

code information contained in the medical record. The validation is done

by staff who have been trained in applying medical coding terminology to

medical records information; clinical judgment is not necessarily required.

HCFA’s Payment Error Prevention Program, which all PROs must

undertake, recently has increased the priority they must give to reviewing

hospital claims for billing accuracy as well as quality of care.8 However,

two contractors we visited reported that they rarely, if ever, receive reports

from the PROs on overpayments that the PROs have identified.

8

Under this program, which began in fiscal year 2000, the PROs must address two common

inpatient problems—unnecessary admissions and miscoded claims—and work with the

hospitals to improve their billing accuracy.
B-283654

Page 16 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Increased Review of Provider

Cost Information Could Benefit

Medicare

Review of provider cost report financial information is a cost-effective way

to identify overpayments. In 1999, cost report reviews and audits of

providers not covered by a prospective payment system resulted in

disallowing $2.7 billion, or about 10 percent of the total costs claimed by

providers. However, as prospective payment systems replace cost-based

reimbursement, fewer overpayments of this type will occur.9 We found that

the two intermediaries we visited use cost report audits and rate reviews as

the primary means of identifying overpayments for Part A providers. One

contractor representative estimated a return of $13 saved for every dollar

spent conducting the audits. Although the number of cost reports audited

between 1995 and 1998 has increased, a large percentage of cost reports

are still never audited by HCFA’s contractors. For example, in fiscal year

2000, HCFA expects contractors to audit only about 12 percent of the cost

reports submitted by home health agencies and 25 percent of those

submitted by single-facility hospitals. It can take up to 2 years after the end

of the provider’s fiscal year to reach a final settlement on the provider’s

costs that are allowable by Medicare. So, even though HCFA is changing its

payment methods, cost report audits and rate reviews will continue to be

important program safeguards for several years. HCFA’s financial auditors

estimated that if all cost reports submitted by providers not under

prospective payment had been fully audited, HCFA might have been able to

identify an additional $600 million in fiscal year 1999 overpayments.

It is not necessary to perform a complete audit to identify overpayments.

For example, contractors can conduct focused reviews that examine only

certain aspects of the cost report. HCFA has encouraged intermediaries to

concentrate on these focused reviews. This allows the intermediaries to

stretch their audit resources by concentrating on areas yielding the most

return, and increases the number of providers whose records are reviewed.

Some fiscal intermediaries have contracted with private firms to augment

their cost report audit efforts, albeit with mixed results. For example, one

intermediary we visited told us that these firms require substantial up-front

training on Medicare’s rules and generally had a rate of return lower than

with the intermediary’s own internal auditors.

9

The Balanced Budget Act of 1997 required HCFA to design and implement prospective

payment for skilled nursing facilities, home health agencies, hospital outpatient surgery, and

rehabilitation hospitals.
B-283654

Page 17 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Some recovery auditing firms specialize in focused reviews of provider

financial records, such as credit balance audits. HCFA requires its

institutional providers to submit quarterly credit balance reports

identifying whether the provider owes Medicare money. However, although

these reports are required, HCFA’s intermediaries do not routinely conduct

credit balance audits outside the context of a full cost report audit. Credit

balance audits involve an on-site review of accounting and medical

records, and tracing transactions through the accounting system to identify

cases in which a provider has been overpaid and not returned the money to

the insurer. HCFA is currently developing a statement of work for a

contractor to evaluate (1) credit balance reporting policies, procedures,

and practices in place at selected Medicare claims administration

contractors and (2) HCFA’s oversight of those contractors’ efforts, so that

the contractor can recommend improvements.

Improved Access to Information

in MSP Reviews Would Benefit

Medicare

HCFA’s contractors conduct postpayment MSP reviews by attempting to

identify possible alternative sources of health insurance coverage with

primary payment responsibility. Contractors’ ability to identify MSP debt is

hampered by private insurance companies’ and employer group health

plans’ unwillingness to share information about their enrollees with HCFA.

GAO has long recognized that private insurance companies and employers

are in the best position to routinely identify policyholders and employees

who might be eligible for Medicare. Some recovery auditors have

developed proprietary databases that contain insurance company

enrollment information and other data that could potentially help Medicare

identify beneficiaries with other health insurance. However, HCFA might

not be able to access this information if the insurance companies involved

were unwilling to share beneficiary data.

One recovery audit firm we spoke with that specializes in third-party

liability performs its work for 20 state Medicaid agencies. This organization

maintains a database containing Medicaid recipient enrollment data along

with enrollment data from commercial health insurance plans, Medicare

contractors, and Blue Cross and Blue Shield plans. The firm conducts many

different types of data matches that involve multiple, successively applied

matches, and augments its data match techniques by reviewing employer

wage files, credit bureau information, Department of Motor Vehicles data,

state vital statistics files and property records to identify possible casualty,

tort, and estate sources of payment.

As previously mentioned, HCFA matches Medicare data with employment

and earnings data maintained by the IRS and the SSA to identify
B-283654

Page 18 GAO/HEHS/AIMD-00-304 Medicare Overpayments

beneficiaries who may have health insurance through their employer or

their spouse’s employer. However, there can be a 2-year time lag between

when a beneficiary or spouse is employed and when contractors can

confirm the information about employment. Information on employment is

reported to IRS after the fact. IRS must then prepare the employment

information, which is made available for matching with Medicare

beneficiary data. Contractors then confirm it by querying employers. As a

result, even with current data match activities, Medicare can have paid for

claims long before another liable insurer is identified. Even more time will

pass before any funds can be recouped.

Commercial insurers share information with each other on their

beneficiaries to determine which beneficiaries have more than one source

of insurance. It is advantageous for companies to share this information

because, for some beneficiaries, an insurer will be the secondary payer. If

firms do not try to coordinate their benefit payments, they may both pay as

the primary payer.

Better access to health insurers’ beneficiary data could help HCFA identify

MSP cases by providing more current data. However, because Medicare is

generally the secondary payer to other insurers, it may not be to other

insurers’ advantage to share beneficiary data with HCFA. At present,

insurers are under no obligation to inform HCFA that some of their

policyholders are Medicare beneficiaries unless there is a court settlement

requiring such data sharing. HCFA has had to pursue certain insurance

companies—some with related corporations that are Medicare

contractors—in federal civil court for refusing to pay before Medicare

when the government contends that Medicare should have been the

secondary payer. From 1995 to 1999, HCFA reached settlements that

totaled almost $66 million in cases in which a related company was a

Medicare carrier or intermediary, including the national Blue Cross Blue

Shield Association, Blue Cross Blue Shield of Florida, Blue Cross Blue

Shield of Massachusetts, Blue Cross Blue Shield of Michigan,

Transamerica, and Travelers. As a result of these legal settlements, some

major insurers have agreed to share data, but some of these settlements are

about to expire. While insurers can voluntarily share data on their

policyholders with HCFA, few have opted to participate, thereby reducing

HCFA’s ability to identify claims that are the responsibility of another

insurer.
B-283654

Page 19 GAO/HEHS/AIMD-00-304 Medicare Overpayments

If private insurers were required to share information on their

policyholders, HCFA could more easily determine which Medicare

beneficiaries had other health insurance. In the late 1980s, HCFA

proposedbut did not obtainlegislation granting it access to private

insurers’ policyholder data. Insurer reporting provisions were included in

the President’s budget proposals for both fiscal years 2000 and 2001, but

these provisions were not accepted by the Congress. Without such a

requirement, the recovery auditing firm we visited told us that access to

some of the private insurer and Medicaid data they used would have to be

negotiated with each of the participating insurers before they could be used

for Medicare.

Additional Efforts May Require

Increased Funding

While Medicare would be likely to benefit from additional efforts to identify

overpayments, further efforts may require increased funding. As it has

sought to run the program economically, HCFA has been left with fewer

and fewer dollars to pay for administering a program that has grown in

volume and whose management involves increasingly complex tasks. The

Congress has recognized the importance of ensuring that Medicare have

adequate program safeguards in place and has developed an assured

funding stream for these activities through MIP. For fiscal year 2000, $630

million was appropriated for MIP. The amounts appropriated will grow

until fiscal year 2003, when funding will reach $720 million.

However, funding dedicated to program safeguards in fiscal year 2000 is

still about one-third less (on a per-claim basis) than it was in 1989. Based on

estimates of the growth of trust fund expenditures, our analysis indicates

that MIP funding, as a percentage of program dollars, will be less in 2003

than it is today. It will still represent little more than one-quarter of 1

percent of Medicare program expenditures.

With this funding, HCFA and its contractors carry out a range of program

safeguard activities, with an emphasis on prepayment reviews designed to

prevent overpayments. If HCFA were to increase its overpayment

identification activities, it likely would have to do it by curtailing other

types of program safeguard activities, such as these prepayment reviews.

HCFA has estimated significant returns from both its prepayment and

postpayment MIP activities. While it is difficult to isolate the dollar savings

attributable to a single year’s funding, based on HCFA estimates for fiscal

year 1999, MIP saved the Medicare program more than $17 for each dollar

spent—about 55 percent from prepayment activities and the rest from

postpayment activities.
B-283654

Page 20 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Additional investment seems likely to yield additional positive returns.

However, it is important that both current funding and any additional

investment be spent as effectively as possible. In addition, investments in

these activities should not be expanded beyond levels likely to yield

positive returns. Additional information on the relative effectiveness of

these activities could help guide HCFA in its allocation of funds, but

precisely measuring the effect of MIP funding efforts is difficult. Savings

realized today may result from activities begun several years ago. For

example, postpayment activities such as medical review can be used to

identify program vulnerabilities that can be addressed in the future through

automated prepayment edits and manual reviews. Therefore, while their

immediate return on investment can be relatively low, such postpayment

activities may lead to future prepayment savings.

Reliable information on the relative value of specific program safeguards

could help HCFA target its program integrity efforts. However, at present,

HCFA lacks the detailed data that can provide the best estimates of returns

from specific program safeguard activities. For example, HCFA does not

have information on whether automated or manual prepayment medical

reviews generate the most savings. Similarly, HCFA does not know which

contractors are realizing the highest return on investment from their

program safeguard activities. To remedy this information gap, HCFA will

implement a new Program Integrity Management Reporting system for

carriers and intermediaries in fiscal year 2001. This system will be used to

collect information that HCFA expects will allow it to report savings and

provide details by contractor, program activity, and provider type. The

system will generate monthly reports, which should allow HCFA to more

closely monitor and direct their program integrity activities. HCFA plans to

audit the information input into the system to verify its accuracy.

HCFA Needs to

Improve Its Collection

of Overpayments

HCFA’s claims administration contractors are initially responsible for

recovering the overpayments they identify. Often they do this by offsetting

subsequent payments to providers but this is not possible when, for

example, providers leave the program and stop billing Medicare for

services. While contractors collect most of the identified overpayments,

they still are unable to collect several billion dollars each year. This has

resulted in a growing and aging accounts receivable balance that totaled

$7.3 billion at the end of fiscal year 1999. If accounts receivable have been

delinquent for over 180 days, the contractors must transfer collection

responsibility to HCFA’s regional offices, which we found typically are

unsuccessful in collecting the transferred debt. In addition, HCFA has not
B-283654

Page 21 GAO/HEHS/AIMD-00-304 Medicare Overpayments

fully implemented DCIA, which generally requires agencies to transfer debt

over 180 days delinquent to the Treasury or a Treasury-designated debt

collection center. The designated debt collection center for certain

Medicare debtsthe HHS Program Support Centercontracts with a

private debt collection company and uses other collection techniques

similar to those used by recovery auditors.10 Therefore, we do not believe

that recovery auditors are necessary to assist HCFA in improving

overpayment collections. Instead, our work showed that HCFA could

benefit most by accelerating its compliance with DCIA’s requirements and

referring debt to the Program Support Center.

Large Percentage of

Receivables Are Collected

but Billions Remain

Delinquent

The results of our analysis of HCFA’s accounts receivable, shown in tables 1

and 2, indicate that the amount of Medicare’s identified overpayments

collected increased between fiscal years 1998 and 1999, both in total and

separately for parts A and B. Specifically, collections rose from $7.5 billion

in fiscal year 1998 to $8.7 billion in fiscal year 1999a 16 percent increase.

At the same time, however, the value of the new accounts receivable

identified increased from $10.1 billion to $12.6 billion over the 2 years, or

by 25 percent. The difference between the collection and overpayment

identification rates resulted in a fiscal year 1999 ending accounts receivable

balance of $7.3 billion, as over $3 billion of uncollectable accounts

receivable were written off by HCFA under a special initiative to remove

old debt from HCFA’s accounts receivable. Further, although not shown in

the table, a large percentage of the ending accounts receivable balance

each year was more than 6 months delinquent—40 percent in fiscal year

1998 and 45 percent in fiscal year 1999.11 HCFA’s claims administration

contractors are responsible for nearly all of the collections.

10Currently, Treasury’s Financial Management Service is the only government-wide debt

collection center. Treasury has granted a waiver for HHS to continue to service MSP debt,

unfiled cost report debt, and health profession debt, and to be designated as a debt

collection center for that purpose.

11A non-MSP receivable becomes delinquent if it is not repaid within 30 days of the date of a

demand letter and where the provider or supplier has not entered into a satisfactory

extended repayment schedule. Generally, MSP debt becomes delinquent if it is not repaid

within 60 days of the date of a demand.
B-283654

Page 22 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Table 1: Medicare Accounts Receivable

(Dollars in Billions)

Notes: Dollar amounts represent principal amounts only and represent accounts receivable from

provider and beneficiary overpayments, civil monetary penalties and other restitutions, fraud and

abuse, managed care, Medicare premiums, and audit disallowances. Numbers may not add due to

rounding.

Sources: DHHS HCFA Financial Report, Fiscal Year 1998 (Baltimore, Md.: Feb. 1999); and DHHS

Health Care Financing Administration Financial Report, Fiscal Year 1999 (Baltimore, Md.: Feb. 2000).

Table 2: Medicare Claims Administration Contractors’ New Accounts Receivable

and Collections

(Dollars in Billions)

Notes: Dollar amounts represent principal amounts only. These figures reflect only claims

administration contractors’ accounts receivable. They do not include accounts receivable from provider

and beneficiary overpayments transferred to the HCFA regional offices, HCFA central office, Treasury,

or the HHS Program Support Center. The figures also do not include accounts receivable from

managed care and Medicare premiums and may not include those associated with civil monetary

penalties and other restitutions, such as fraud and abuse cases referred to law enforcement.

Therefore, figures in this table cannot be combined with figures in table 1.

Sources: internal HCFA documentsHCFA Form H751 A and B, Status of Accounts Receivable, for

Fiscal Years 1998 and 1999.

Contractors are generally able to collect many overpayments immediately,

by offsetting them against current payments due. However, contractors’

ability to collect Medicare overpayments is affected by a number of

different factors, including the type of overpayment, the promptness with

which the overpayment was identified, and whether the provider is still in

business and participating in Medicare. These factors are discussed below.

Fiscal year 1998 Fiscal year 1999

Part A Part B Total Part A Part B Total

Beginning

balance $3.4 $2.2 $5.5 $4.9 $2.5 $7.4

Ending balance 4.9 2.5 7.4 5.4 2.0 7.3

Fiscal year 1998 Fiscal year 1999

Part A Part B Total Part A Part B Total

New accounts

receivable $7.5 $2.6 $10.1 $9.3 $3.3 $12.6

Collections 5.7 1.8 7.5 6.3 2.4 8.7
B-283654

Page 23 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Type of overpayment. We found that contractors were much more

successful in collecting overpayments identified in cost report audits and

medical reviews than those identified through MSP activities. In fiscal year

1998, for example, less than 10 percent of MSP receivables nationally were

collected, versus about 62 percent of non-MSP receivables. This low rate of

MSP collections is not surprising for several reasons. First, contractors are

only required to send one demand letter to the responsible party requesting

payment of MSP overpayments, whereas up to three demand letters are

sent on other types of receivables. Second, other insurers often dispute that

they are responsible for payment. Third, MSP collection rates are also

affected by potential conflict of interest or lack of diligence: the claims

administration contractors may themselves be responsible for payment and

may not be quick to collect on those receivables. For example, in 1999,

HCFA hired a private accounting firm to review Medicare accounts

receivable at 15 contractors. At one contractor, the firm identified 91 MSP

overpayments more than 6 months old totaling $290,000 that the

contractor’s private operations owed Medicare but had not yet repaid.

Prompt collection of overpayments and provider participation in

Medicare. Contractors have not always followed procedures that require

prompt efforts to collect overpayments they identify. This affects their

ability to collect what becomes aging debt. For example, home health

agencies (HHA) are required to submit annual reports of their Medicare

costs to the fiscal intermediaries. All cost reports then go through a

settlement process that may identify overpayments.12 At one contractor, we

identified several cases in which the contractor did not conduct timely cost

report settlements. The contractor was 2 years late in settling one HHA’s

cost report and, in another case, a cost report settlement that should have

occurred in 1996 did not take place until late 1999. Collections are even

more difficult when providers terminate their Medicare participation. For

example, in a recent GAO report regarding overpayments due from 15

HHAs in Texas that closed between October 1997 and July 1999, we found

that HCFA had collected $5.3 million, or about 7 percent of the $73 million

due from the closed agencies.13

12During cost report settlement, contractors make a final determination of how much

Medicare reimbursement the HHA has earned and whether Medicare or the agency is owed

money.

13Medicare Home Health Agencies: Overpayments Are Hard to Identify and Even Harder to

Collect (GAO/HEHS/AIMD-00-132, Apr. 28, 2000).
B-283654

Page 24 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Legal proceedings. When a provider has filed for bankruptcy, the

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

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

overpayments are eventually collected depends on the results of the

bankruptcy proceedings. Contractors’ collection abilities are also affected

when providers who owe the program money are under investigation by

the HHS OIG or involved in litigation with the Department of Justice. In

such cases, contractors must suspend their collection efforts until

resolution occurs. A substantial amount of overpayments cannot be

collected because the debtors are involved in bankruptcy proceedings or

litigation. According to HCFA, $845 million in overpayments cannot be

collected because they are protected under bankruptcy proceedings. In

addition, $147 million cannot be collected because of litigation.

HCFA’s Success in

Collecting Delinquent Debt

Is Limited

Debt that the contractors cannot collect is referred to HCFA for collection.

However, we found that contractors do not always refer debt in a timely

way. Even when debt is referred appropriately, we found that the age and

type of debt HCFA receives makes it difficult to collect. In addition, HCFA’s

recording and tracking systems are unreliable, further complicating

collection efforts.

HCFA’s low rate of collection for transferred debt is attributed in large part

to the age and type of debt HCFA receives. HCFA regional office staff

informed us that this debt is difficult to collect due to such factors as

provider bankruptcy or closure. In addition, it is generally recognized by

HCFA and contractor representatives that the longer an overpayment is

outstanding, the less likely it is that it will be collected. At one of the

intermediaries in our study, accounts receivable transferred to HCFA in

fiscal year 1998 totaled $59.8 million; of that amount, HCFA collected $2.1

million as of June 2000—a 3.5 percent collection rate.

When contractors are unable to offset payment or otherwise recover an

overpayment from a provider, they are supposed to refer the receivable to

their respective HCFA regional offices for review. If regional office staff

find that the contractor has taken all appropriate collection actions, the

contractor may transfer the receivable to HCFA, which then assumes

responsibility for collection through its regional offices. We found that

contractors were not always referring receivables appropriately to HCFA

regional offices, thus preventing it from initiating its own collection

activities.
B-283654

Page 25 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Although contractors are supposed to refer uncollected debt to HCFA

according to time frames set out by HCFA’s regional offices, we found that

this does not always happen. For example, one contractor we visited told

us that referring receivables to its HCFA regional office was a relatively low

priority because of the unlikelihood that HCFA would be able to collect

them. As a result of untimely referral, the chances that HCFA could collect

the debt are substantially reduced because the debt becomes increasingly

delinquent.

Another problem related to contractor referrals is inconsistent regional

office guidance to contractors. We found that in one HCFA region,

contractors were asked to refer receivables less than $1,000 to be written

off.14 At another region, the referral threshold was $50 and the region made

the decision whether to write off the debt or pursue collection. Within

HCFA, only the regional offices have the authority to authorize the writeoff

of government debt. They are allowed to exercise this authority consistent

with their judgment regarding the cost-effectiveness and potential for

recovery of these debts.

Finally, we found that the various systems HCFA regional offices used to

track and report transferred receivables were neither consistent nor

reliable. For example, one region provided us with current information on

the status of each receivable; however, because many of the overpayments

did not exceed $600, they were not included in HCFA’s automated tracking

system and, as a result, the information had to be compiled for us manually.

Another region generated detailed computer data for its Part A receivables,

including information on outstanding balances, collection activities, and

notes about their collection status. However, this same region could not

provide any information on the status of Part B accounts receivable due to

problems with its computer files. Because of problems like these, HCFA

does not have reliable data on how well it collects debt transferred to it by

contractors.

14A writeoff occurs when an agency determines that a debt is uncollectable and removes it

from its accounting records—that is, it no longer carries it as a receivable. A writeoff does

not extinguish the underlying liability for the debt.
B-283654

Page 26 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Ineffective tracking and reporting systems may also result in receivables

being recorded in error. For example, in our report on the identification

and collection of overpayments from closed HHAs, we noted that a

contractor made a $76.9 million keypunch error when entering

overpayment information into one of HCFA’s central overpayment

recording systems. Further, we noted that ineffective management of

Medicare accounts receivable was found to be a consistent problem in

HCFA’s financial statement audits for fiscal years 1996 through 1999.15 The

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

aspects 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. HCFA’s fiscal year 1999 financial statement audit report noted

that despite significant improvements, controls over accounts receivable

continued to be a material weakness.16 HCFA has plans to replace its

fragmented accounts receivable tracking and reporting systems with a

single integrated one, but this will not be implemented until September

2001 at the earliest. In March 2000, we made a number of recommendations

to the HCFA Administrator to improve financial management and

accountability of the Medicare program, including that HCFA develop a

comprehensive financial management improvement strategy.17

HCFA agreed with our recommendations and committed itself to

aggressively address shortcomings in its financial management of

Medicare. For example, in an effort to clean up its financial records in

preparation for its fiscal year 1999 financial statement audit, HCFA initiated

a one-time project to write down its oldest delinquent receivables. This

effort resulted in HCFA’s and its contractors’ writing off delinquent

receivables that were at least 6 years old. Over $3 billion was written off by

HCFA and its contractors in fiscal year 1999. Receivables less than 6 years

15The 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 through 1999.

16A 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 the risk

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

statements being audited may occur and not be detected in a timely way.

17Medicare Financial Management: Further Improvements Needed to Establish Adequate

Financial Control and Accountability (GAO/AIMD-00-66, Mar. 15, 2000).
B-283654

Page 27 GAO/HEHS/AIMD-00-304 Medicare Overpayments

old, however, remain on the financial records; whether they are collectable

remains in question.

HCFA Slow to Implement

DCIA

DCIA mandates that HCFA and other federal agencies refer all eligible debt

over 180 days delinquent to the Treasury or a Treasury-designated debt

collection center for collection activities. In 1999, Treasury granted a

waiver for HHS to continue to service certain debts including MSP debt and

debt related to unfiled cost reports and to be designated as a debt

collection center for that purpose.18 Within HHS, the Program Support

Center is the Treasury-designated debt collection center.19 As such, it is

responsible for attempting to collect referred debt related to MSP or

unfiled cost reports, and for referring all other types of Medicare debt to

the Treasury for collection. At Treasury, collection can be attempted

through Treasury’s offset program and various other debt collection tools,

such as referral to private collection agencies.20 Although the act is now

over 4 years old, HCFA has not fully implemented DCIA and will not be

referring all eligible receivables until the end of fiscal year 2002, at the

earliest, because of the work involved in certifying that the debt amount is

correct and still outstanding.21

To improve management of its accounts receivable, HCFA analyzed its

debt, performed a one-time writeoff of very old debt, and established two

pilot projects to refer eligible debt to the Program Support Center. To

address the issue of aging receivables, HCFA wrote off all debt that it

determined could not be offset and that was more than 6 years old, and

referred the remainder of the 6-year-old (or older) debt to the Program

Support Center for collection. This was done in preparation for its annual

financial statement audit.

18The waiver was granted subject to several conditions, including a provision that HHS refer

the remainder of its eligible program and administrative debt to Treasury for collection.

19The Program Support Center is an operating division within HHS that provides a variety of

financial and administrative support services to federal agencies.

20Under Treasury’s offset program, delinquent federal debts are collected through offset of

certain other federal agency payments including federal income tax refunds. Treasury also

contracts with a number of private collection agencies to collect delinquent debt.

21For more detail on implementation of DCIA, see Debt Collection: Treasury Faces

Challenges in Implementing Its Cross-Servicing Initiative (GAO/AIMD-00-234, Aug. 4, 2000).
B-283654

Page 28 GAO/HEHS/AIMD-00-304 Medicare Overpayments

As mentioned earlier, HCFA’s objective for its two pilot projects was to

develop a process for contractors to expedite the transfer of eligible Part A

debt to the Program Support Center. HCFA concentrated its pilots on older,

high-value Part A debt rather than newly eligible delinquent debt. One pilot

deals with MSP debt valued at more than $5,000 or more and is up to 6

years old, while the other pilot deals with non-MSP debt, primarily related

to cost report audits, of $100,000 or more. Under the pilots, contractors

record eligible delinquent debt in a HCFA central office database that is

used to transmit the debt to the Program Support Center for collection.

Before they refer this debt to the Program Support Center, contractors

must validate it by reviewing records and ensuring that the debt is still

uncollected and that the debt balance is correct. Validation is necessary

because HCFA’s systems for recording and tracking overpayments are

unreliable. In addition, contractors must seek to collect the receivable by

issuing a demand letter that indicates that nonpayment will result in

referral to the Program Support Center.

HCFA plans to expand its non-MSP pilot to all of its intermediaries and

carriers by October 2000; the time frame for expanding the other pilot is

uncertain. However, even under its planned efforts, certain types of eligible

debt will be excluded. For example, HCFA has established a $600 threshold

for transferring non-MSP debt and tentatively plans to continue with its

$5,000 threshold for MSP debt, even though the Program Support Center

will accept any eligible debt over $25. This leaves a large amount of

debtalmost half of all Part B delinquent debt, for examplewith no

avenue for collection beyond the contractors’ current techniques. This also

means that delinquent debt newly eligible for transfer below these

thresholds will not qualify for referral. HCFA officials told us that they

selected the $600 and $5,000 thresholds in part because they do not have

the resources necessary to validate the large volume of aged, delinquent

debt below these amounts. However, collection industry statistics as well

as Treasury’s collection experience to date have shown that collection rates

are generally higher on debts with smaller dollar balances and debts that

are less delinquent.

The Program Support Center and Treasury use many standard collection

techniques in their debt recovery efforts, such as attempting to locate

debtors that have ceased operations, issuing demand letters, and reporting

information to credit bureaus. They also refer debt to the Department of

Justice for litigation, and to Treasury’s offset program, where certain

federal agency payments can be offset to satisfy claims. To assist them,

both the Program Support Center and Treasury contract with private
B-283654

Page 29 GAO/HEHS/AIMD-00-304 Medicare Overpayments

collection agencies that are paid contingency fees for their collection

efforts. For example, for their collection services, the Program Support

Center retains 15 percent of the amount collected and the remainder is

returned to the Medicare Trust Funds. HCFA is not charged for debt that

has been transferred but cannot be collected.

It is too early to evaluate the effectiveness of Treasury and the Program

Support Center in collecting Medicare debt transferred to them. However,

they have been able to collect some aged, delinquent debt for which HCFA

and its contractors had terminated active collection actionin fiscal year

1999, HCFA transferred $341 million in delinquent debt to the Program

Support Center of which $1.8 million has been collected.

Contractors and Recovery

Auditors Use Similar

Collection Techniques

We did not find potential for HCFA to improve collections of Medicare

overpayments through the use of recovery auditors. Both the claims

administration contractors and the recovery auditors we spoke with use

the same basic technique of initiating collections by issuing a demand letter

to providers. Demand letters provide details regarding the overpayment,

and request prompt payment from the provider. For providers still in the

Medicare program, claims administration contractors can simply withhold

funds from future payments. Other collections by both the contractors and

recovery auditors depend on the debtor’s sending a check. The techniques

that recovery auditors use would not provide HCFA with collection

techniques that differ from those provided by the Treasury and the Program

Support Center. Both already use private collection agencies to assist them

in collecting delinquent debt. In addition, the Treasury can offset providers’

overpayments against certain other federal agency payments—a process

not available to recovery auditors.

Implementation

Challenges Associated

With Using Recovery

Auditors

As previously mentioned, recovery audit techniques are, for the most part,

no different from the techniques currently being used in Medicare’s

program safeguard activities. However, there is evidence that HCFA could

do more—either in-house, or through its contractors—to identify

overpayments, if it had additional resources. The concept of using recovery

auditors to help HCFA achieve its program integrity goals has been the

subject of controversy. Specific concerns relate to how to compensate

recovery auditors, the possible administrative burden that would be placed

on the current claims administration contractors and providers,

responsibilities to coordinate with law enforcement agencies and to ensure

beneficiary privacy, and HCFA’s ability to effectively manage this new set of
B-283654

Page 30 GAO/HEHS/AIMD-00-304 Medicare Overpayments

contractors. These concerns are discussed below. We found that HCFA is

already addressing most of these same challenges as it implements its PSC

activities under MIP. These contractors, like recovery auditors, are

intended to provide HCFA with new tools and capabilities to protect

Medicare from overpayments.

Compensating Recovery

Auditors

Arguably the most contentious issue regarding Medicare’s use of recovery

auditing services relates to compensation. Recovery auditors are typically

paid a contingency fee by private-sector clients, based on a percentage of

the identified overpayments collected. One of the advantages of using

recovery auditing services on a contingency fee basis is that additional

appropriations are not needed to pay these organizations because the

payment comes out of recoveries. However, HCFA and medical

associations believe that providers view contingency fees as a “bounty”

system that can damage the constructive partnership between Medicare

and its providers. The contingency fee is a strong incentive to identify and

collect overpayments and may lead to inappropriate identification and

collection efforts by recovery auditors. A HCFA official noted that

providers have raised a similar concern about the very modest reward

available under HIPAA to beneficiaries who uncover fraud.

Instead of paying recovery auditors on a contingency fee basis, HCFA could

compensate them in ways similar to the ways it pays PSCs, including firmfixed-price or cost-plus-award-fee contracts. A firm-fixed-price contract

provides for a predetermined payment to the contractor. Payments are not

subject to adjustment based on the contractor’s costs; in fact, there are

strong incentives for the contractor to control costs. A cost-plus-award-fee

contract provides for reimbursement of actual costs and can include

incentives for efficiency or performance. HCFA is using each type of

contract in its PSC task orders. Several of the recovery auditors we met

with noted that they would accept other methods of payment besides

contingency fees and thus may be agreeable to providing their services

under one or more of these different types of contracts.

Administrative Burden

Associated With Recovery

Auditors

The potential administrative burden that recovery auditors would place on

current claims administration contractors and providers has also been

raised as a concern similar to the situation HCFA faces as it integrates the

PSCs into Medicare’s integrity activities. HCFA and claims administration

contractor representatives believe recovery auditors would likely generate

additional inquiries and appeals due to providers and beneficiaries
B-283654

Page 31 GAO/HEHS/AIMD-00-304 Medicare Overpayments

challenging overpayment decisions, thereby increasing workload and costs

of the claims administration contractors. They also expressed concern that

the claims administration contractors would need to divert staff from their

normal activities to provide recovery audit staff with information about the

claims administration contractors’ operations, including local medical

policies that define the conditions under which the contractor will pay for

certain services. Recovery auditors would need to understand the local

medical policies when making determinations on whether the claims were

paid properly. Furthermore, the claims administration contractors and

recovery auditors would need to share data, requiring development of

coordination procedures. Providers, too, are concerned about the potential

administrative burden.

Representatives from two medical associations said that they were

concerned that recovery auditors working in Medicare would request

excessive numbers of medical records from providers, thereby adversely

affecting providers’office operations. Recovery auditor representatives told

us that they do not believe they place excessive demands on providers for

medical records and other information and that they are sensitive to this

concern. Representatives from one recovery auditing organization noted

that initial identification of physician overpayments often involves

computer analysis of claims data, not a review of medical records. As for

institutional providers such as hospitals, representatives of a recovery

audit firm and a recovery auditor client said these providers routinely allow

auditors from private insurance companies to review medical records at

their facilities.

Law Enforcement

Coordination and

Confidentiality of Patient

Information

Two other issues associated with hiring recovery auditors are coordination

with law enforcement agencies and maintenance of patient information

confidentiality. Representatives from some claims administration

contractors said that their fraud units closely coordinate their

investigations with the HHS OIG and Justice, and that they were concerned

that recovery auditors would inadvertently hinder their investigations.

Several medical specialty group representatives also raised the issue of

confidentiality of patient information, and questioned how HCFA would

ensure that recovery auditors did not release such information or use it for

unauthorized purposes.

HCFA has made some provisions for both of these concerns as it

implements its program safeguard contracts. PSCs are required to provide

the OIG, Justice, and the Federal Bureau of Investigation with information
B-283654

Page 32 GAO/HEHS/AIMD-00-304 Medicare Overpayments

related to potential fraud cases and may also periodically meet with law

enforcement agencies to coordinate ongoing work. In regard to privacy

concerns, the Statement of Work requires the PSCs to comply with the

Privacy Act of 1974 and applicable HHS regulations relating to information

security.

HCFA’s Ability to Effectively

Oversee Recovery Auditor

Activities

A final issue regarding Medicare’s use of recovery auditors concerns

HCFA’s ability to effectively manage and oversee these organizations, given

its other oversight responsibilities. We have reported numerous problems

with HCFA’s ability to effectively manage and oversee its current claims

administration contractors. Medical association representatives note that

HCFA has a number of other program safeguard projects under way and

have suggested that HCFA evaluate these results before undertaking any

new initiatives.

HCFA acknowledges that its oversight of the claims administration

contractors can be improved and is taking various steps toward that goal.

To ensure continual oversight of its PSCs, HCFA has already established a

performance evaluation program. Because the PSCs have been operating

for less than a year, HCFA has not formally evaluated any of them, but plans

to assess the PSCs’ performance annually against the statement of work

and applicable task order requirements.

Instead of establishing a new contracting structure for recovery auditors, if

their expertise is needed, HCFA could contract with them in the context of

its PSC initiative. In fact, a PSC teamed with a recovery auditor we met

with to bid on one of HCFA’s task orders; HCFA, however, selected another

PSC to perform this work.

Conclusions Although Medicare’s claims administration contractors already have

extensive prepayment safeguards in place to help ensure that claims are

paid correctly, Medicare continues to make overpayments totaling billions

of dollars annually. With its recent emphasis on prepayment review, HCFA

is justifiably spending much of its limited program safeguard funds on

identifying erroneous or improper claims before they are paid. However,

thousands of these claims are paid nonetheless, and if not identified during

postpayment reviews, they ultimately are lost in a program that can ill

afford the financial drain on the trust funds. In an effort to tackle its

outstanding overpayment problem, some have suggested that HCFA use
B-283654

Page 33 GAO/HEHS/AIMD-00-304 Medicare Overpayments

the services of recovery auditors to supplement its program integrity

activities.

We attempted to identify any techniques or tools used by recovery auditors

that could also benefit HCFA. While recovery audit firms we met with have

achieved results on behalf of their private insurance and Medicaid clients,

their techniques are similar to HCFA’s current postpayment tools. That is

not to say that Medicare could not benefit from a stronger focus on

postpayment activities to identify additional overpayments. While we

believe that HCFA’s effort to balance prepayment and postpayment

activities is sound, more could be done to safeguard Medicare if additional

resources were available.

Since its enactment, HIPAA has provided HCFA with increased and assured

funding for program safeguards, but funding is still less than what was

available in 1989 on a per-claim basis. While this funding is due to increase

in the next several years, it will only keep pace with expected growth in

program expenditures and amounts to little more than one-quarter of 1

percent of program expenditures. According to HCFA estimates, more than

$17 is saved for every $1 invested in safeguarding Medicare through MIP.

We believe that HCFA must target any new resources to the activities most

likely to result in the greatest payoff. We understand that HCFA is

developing a process to determine the return on its prepayment and

postpayment activities broken down by contractor and activity which,

when completed, should give it greater ability to perform this targeting.

For its MSP activities, HCFA could more effectively identify beneficiaries

who have other primary insurance coverage if insurers were required to

share information on their enrollees. HCFA has had difficulty gaining

insurers’ cooperation and has had to sue a number of them to enforce MSP

requirements. If insurers were required to share enrollee information with

HCFA, HCFA could match more current data, and in a more efficient

manner, than its present data matches. However, such a step would require

congressional action.

In regard to collecting overpayments once they have been identified, we

found that HCFA’s claims administration contractors do a fairly good job

when providers’ current payments can be offset to collect previous

overpayments. However, HCFA’s delinquent receivables are a continuing

problem. The longer debt ages, the more difficult it is to collect. HCFA’s

practice of offsetting overpayments with future payments gives it leverage

that accounts for much of its collection success, but this option is typically
B-283654

Page 34 GAO/HEHS/AIMD-00-304 Medicare Overpayments

not available on older debt, because the provider may no longer be in

business, be participating in Medicare, or even be located.

We believe HCFA could collect more of its older debt if it fully implemented

the DCIA. HCFA is not transferring all its eligible debt to HHS’ Program

Support Center in a timely manner. Under its two pilot projects, HCFA is

focusing on transferring some Part A debt of significant value that may be

as old as 6 years; its plans to expand the pilots to all contractors will still

exclude debt that falls below HCFA’s minimum thresholds. While in some

cases the cost of validating debt may exceed the amount collected, this

may be more applicable to very old debt that requires more extensive

validation efforts than to newly eligible debt. It does not seem reasonable

to wait until the end of fiscal year 2002 at the earliest to transfer all eligible

debt, as HCFA plans. Rather, transferring delinquent debt as soon as it

becomes eligible could result in a greater payback to Medicare; the sooner

it is transferred, the more likely that Treasury or the Program Support

Center will be able to collect. Treasury and the Program Support Center

use collection techniques that are similar to, and may be better than, those

available from recovery auditors. As a result, we did not identify any

additional role for recovery auditors in Medicare’s overpayment collection

activities.

We do not believe that recovery auditors offer unique benefits to either

identify or collect overpayments that are not available from HCFA’s current

contractors and contracting arrangements. Recovery audit firms whose

postpayment expertise coincides with HCFA’s needs presumably could

perform their work on specific PSC task orders or for a specified contract.

HCFA could gain the benefit of their expertise without changing its existing

and accepted payment safeguard contracting structure. In regard to

contracting with recovery auditors, providers and others have raised

concerns about issues such as compensation, administrative burden,

coordination with law enforcement, privacy protection, and contractor

oversight. HCFA is working on addressing these same issues as it

implements its PSC initiative.

Matters for

Congressional

Consideration

The Congress should consider increasing HCFA’s MIP funds to allow an

expansion of postpayment and other effective program safeguard

activities, and require HCFA to report on the financial returns from these

and other program safeguard investments.
B-283654

Page 35 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Because HCFA has had difficulties gaining the cooperation of health

insurers in identifying beneficiaries covered by other insurance under the

Medicare Secondary Payer Program, the Congress should consider

requiring all private health insurers to comply with HCFA requests for the

names and identifying information of their enrolled beneficiaries.

Recommendations To improve overpayment identification and collection, we recommend that

the Administrator of HCFA require that the effectiveness of prepayment

and postpayment activities be evaluated to determine the relative benefits

of various prepayment and postpayment safeguards.

In addition, the Administrator should require that all debt be transferred to

HHS’ Program Support Center for collection or referral to Treasury for

collection as soon as it becomes delinquent and is determined to be eligible

for transfer. For its current backlog of debt that is determined to be eligible,

HCFA should validate and refer such debt to HHS’ Program Support Center

as quickly as possible.

Agency Comments and

Our Response

In commenting on this report, HCFA agreed with our matters for

consideration by the Congress and our recommendations to the agency

(see app. I). HCFA noted that it has taken many actions to address program

safeguard and management weaknesses reported by GAO and the HHS

OIG. It outlined a number of activities under way to better prevent

overpayments from occurring and to identify those that have occurred.

In response to our matters for consideration of the Congress, HCFA stated

that having additional funding under MIP would allow HCFA and its

contractors to expand their range of program safeguard activities. In

addition, HCFA stated that requiring insurers to comply with its requests

for names and identifying information on enrolled beneficiaries would help

the agency more effectively identify beneficiaries with other primary

insurance coverage.

In regard to our recommendations to HCFA, the agency agreed with our

recommendation that it should evaluate the relative benefits and

effectiveness of specific prepayment and postpayment tools, and indicated

that a PSC contractor will begin to assist HCFA with this activity soon.

Further, HCFA agreed with our recommendation to transfer all debt to the

HHS Program Support Center for collection or referral to Treasury for
B-283654

Page 36 GAO/HEHS/AIMD-00-304 Medicare Overpayments

collection as soon as it becomes delinquent and is determined to be

eligible. The agency noted that it had begun the process of transferring its

debt nearly 18 months ago and has hired additional staff in both its central

and regional offices to focus on debt referral activities. We acknowledge

HCFA’s efforts, but believe that it should broaden its focus to transferring

debt as it becomes delinquent, rather than solely clearing out its backlog of

aged receivables, because debt that has only recently become delinquent

should be simpler to validate and is generally easier to collect. HCFA also

suggested technical changes to the report, which we incorporated where

appropriate.

We are sending copies of this report to the Honorable Nancy-Ann Min

DeParle, Administrator of the Health Care Financing Administration,

appropriate congressional committees and subcommittees, and other

interested parties. We will also make copies available to others on request.

If you have any questions regarding this report, or if we can be of further

assistance, please call me at (312) 220-7600 or Sheila Avruch at (202) 512-

7277. Other major contributors to this report are listed in app. II.

Sincerely yours,

Leslie G. Aronovitz

Associate Director, Health Financing and

Public Health Issues
Page 37 GAO/HEHS/AIMD-00-304 Medicare Overpayments
Page 38 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Appendix I

Comments From the Health Care Financing Apendxies

Administration ApendxiI
Appendix I

Comments From the Health Care Financing

Administration

Page 39 GAO/HEHS/AIMD-00-304 Medicare Overpayments
Appendix I

Comments From the Health Care Financing

Administration

Page 40 GAO/HEHS/AIMD-00-304 Medicare Overpayments
Appendix I

Comments From the Health Care Financing

Administration

Page 41 GAO/HEHS/AIMD-00-304 Medicare Overpayments
Appendix I

Comments From the Health Care Financing

Administration

Page 42 GAO/HEHS/AIMD-00-304 Medicare Overpayments
Page 43 GAO/HEHS/AIMD-00-304 Medicare Overpayments

Appendix II

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contacts Leslie G. Aronovitz, (312) 220-7600

Sheila Avruch, (202) 512-7277

Staff

Acknowledgments

In addition to those listed above, Kay Daly, Robert Dee, Anna Kelley, James

Kernen, Wayne Marsh, Frank Putallaz, and Suzanne Rubins made key

contributions to this report.

(101881) Letr
Ordering Information The first copy of each GAO report is free. Additional copies of

reports are $2 each. A check or money order should be made out to

the Superintendent of Documents. VISA and MasterCard credit

cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any list

from the past 30 days, please call (202) 512-6000 using a touchtone

phone. A recorded menu will provide information on how to obtain

these lists.

Orders by Internet:

For information on how to access GAO reports on the Internet,

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

To Report Fraud,

Waste, or Abuse in

Federal Programs

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• e-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00