United States Government Accountability Office

GAO Report to the Chairman, Committee on 

Finance, U.S. Senate 

MEDICARE 

INTEGRITY 

PROGRAM 

Agency Approach for 

Allocating Funds 

Should Be Revised 

September 2006 

 

GAO-06-813 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2005

MEDICARE INTEGRITY PROGRAM

Agency Approach for Allocating Funds 

Highlights of GAO-06-813, a report to the Should Be Revised 

Chairman, Committee on Finance, U.S. 

Senate 

Since 1990, GAO has considered

Medicare at high risk for fraud,

waste, abuse, and mismanagement.

The Medicare Integrity Program 

(MIP) provides funds to the

Centers for Medicare & Medicaid

Services (CMS)—the agency that

administers Medicare—to

safeguard over $300 billion in 

program payments made on behalf

of its beneficiaries. CMS conducts 

five program integrity activities: 

audits; medical reviews of claims;

determinations of whether 

Medicare or other insurance 

sources have primary responsibility

for payment, called secondary 

payer; benefit integrity to address 

potential fraud cases; and provider 

education. In this report, GAO 

determined (1) the amount of MIP 

funds that CMS has allocated to the 

five program integrity activities

over time, (2) the approach that

CMS uses to allocate MIP funds, 

and (3) how major changes in the

Medicare program may affect MIP 

funding allocations. 

What GAO Recommends

GAO recommends that CMS 

develop an approach for allocating

funds that is based on the 

effectiveness of the activities, 

contractors’ workload, and risk.

CMS generally agreed with GAO’s

recommendation. CMS also stated 

that a quantitative measure can be

an indicator of effectiveness, but 

emphasized that such a measure 

cannot serve as the sole basis for 

informing funding decisions. 

For fiscal years 1997 through 2005, CMS’s MIP expenditures generally 

increased for each of the five program integrity activities, but the amount of 

the increase differed by activity. Since fiscal year 1997, provider education 

has had the largest percentage increase in funding—about 590 percent, while 

audit and medical review had the largest amounts of funding allocated. In 

fiscal year 2006, funding for MIP will increase further to $832 million, which 

includes $112 million in funds that CMS plans to use, in part, to address 

potential fraud and abuse in the new Medicare prescription drug benefit. 

MIP Expenditures for the Five Program Integrity Activities, Fiscal Year 2005 

Source: GAO analysis of CMS data.

Benefit integrity

$118.5

Provider education

$70.0

Medical review

$165.9

Secondary payer

$151.5

Audit

$207.6

23%

21%

10%

29% 17%

Dollars in millions

CMS officials told us that they have allocated MIP funds to the five program

integrity activities based primarily on past allocation levels. Although CMS 

has quantitative measures of effectiveness for two of its activities—the 

savings that medical review and secondary payer generate compared to their 

costs—it does not have a means to determine the effectiveness of each of 

the five activities relative to the others to aid it in allocating funds. Further, 

CMS has generally not assessed whether MIP funds are distributed to the 

contractors conducting each program integrity activity to provide the 

greatest benefit to Medicare. 

Because of significant programmatic changes, such as the implementation of 

the Medicare prescription drug benefit and competitive selection of 

contractors responsible for claims administration and program integrity 

activities, the agency’s current approach will not be adequate for making 

future allocation decisions. For example, CMS will need to allocate funds for 

program integrity activities to address emerging vulnerabilities that could 

affect the Medicare prescription drug benefit. Further, through contracting 

reform, CMS will task new contractors with performing a different mix of 

program integrity activities. However, the agency’s funding approach is not 

geared to target MIP resources to the activities with the greatest impact on 

the program and to ensure that the contractors have funding commensurate 

with their relative workloads and risk of making improper payments. 

www.gao.gov/cgi-bin/getrpt?GAO-06-813.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Leslie G. 

Aronovitz at (312) 220-7600 or 

aronovitzl@gao.gov. 
Contents 

Letter 1

Results in Brief 4

Background 6

MIP Funding for All Five Activities Has Generally Increased over 

Time 11

CMS’s Current MIP Funding Allocation Approach Has Weaknesses 15 

Future Programmatic Changes Will Affect MIP Funding Allocations 26 

Conclusions 30

Recommendation for Executive Action 31 

Agency Comments and Our Evaluation 31 

Appendix I Objectives, Scope, and Methodology 34 

Appendix II Information on MIP Funding, Expenditures, and ROI 36 

Appendix III Key Tasks Performed by Contractors That Conduct 

MIP Activities 38 

Appendix IV CMS’s Planned Spending of $100 Million Provided 

by DRA 40 

Appendix V Comments from the Centers for Medicare & 

Medicaid Services 42 

Tables 

Table 1: MIP Activities Performed by Specific Types of Medicare 

Contractors 10

Table 2: Fiscal Year MIP Funding Ranges under HIPAA 36 

Table 3: Amount of MIP Expenditures Allocated to the Five 

Program Integrity Activities, Fiscal Years 1997 through 

2005 36 

Page i GAO-06-813 Medicare Integrity Program
Table 4: Percentage of MIP Funds Allocated to the Five Program 

Integrity Activities, Fiscal Years 1997 through 2005 37 

Table 5: Reported ROI for Audit, Medical Review, and Secondary 

Payer Activities, Fiscal Years 1997 through 2005 37 

Table 6: CMS’s Planned Spending of MIP Funds Provided by DRA 40 

Figures 

Figure 1: MIP Expenditures for Fiscal Years 1997 through 2005 8 

Figure 2: MIP Expenditures by Activity, Fiscal Years 1997 through 

2005 12

Figure 3: Spending for the Five MIP Activities for Fiscal Years 1997, 

2001, and 2005 13 

Figure 4: Percentage of MIP Funds Allocated to the Five Program 

Integrity Activities, Fiscal Years 1997 and 2005, and 

Average for Fiscal Years 1997 through 2005 15 

Figure 5: CMS Reported ROI for Secondary Payer, Medical Review, 

and Audit, Fiscal Years 1997 through 2005 17 

Page ii GAO-06-813 Medicare Integrity Program
Abbreviations 

ACRP Adjusted Community Rate Proposal 

CMS Centers for Medicare & Medicaid Services 

COB coordination of benefits

DAC data analysis and coding 

DME durable medical equipment 

DRA Deficit Reduction Act of 2005 

ESRD end-stage renal disease

FBI Federal Bureau of Investigation 

HHS Department of Health and Human Services 

HIPAA Health Insurance Portability and Accountability Act of 1996 

MAC Medicare administrative contractor 

MEDIC Medicare prescription drug integrity contractor

MedPAC Medicare Payment Advisory Commission 

MIP Medicare Integrity Program 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

NSC National Supplier Clearinghouse 

OIG Office of Inspector General 

PDE prescription drug event 

PPS prospective payment system 

PSC program safeguard contractor 

ROI return on investment 

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Page iii GAO-06-813 Medicare Integrity Program
United States Government Accountability Office

Washington, DC 20548 

September 6, 2006 

The Honorable Charles E. Grassley 

Chairman 

Committee on Finance 

United States Senate 

Dear Mr. Chairman: 

In 1990, we designated the Medicare program as high risk for fraud, waste, 

abuse, and mismanagement, in part because of its sheer size and 

complexity. Medicare is a federal program that now pays over $300 billion 

a year to over 1 million providers to help more than 42 million elderly and 

certain disabled beneficiaries obtain a variety of health care services and 

items. One measure of the program’s vulnerability is the billions of dollars 

in improper payments that Medicare makes each year to providers that 

participate in the program.1

 In November 2005, the Centers for Medicare & 

Medicaid Services (CMS)

2

—the agency that administers the Medicare 

program—reported that Medicare made an estimated $12.1 billion in 

improper payments to providers.3

 To address Medicare’s vulnerability, the 

Congress enacted a provision in the Health Insurance Portability and 

Accountability Act of 1996 (HIPAA) that established the Medicare Integrity 

Program (MIP).4

 MIP provides CMS with dedicated funds to identify and 

combat improper payments, including those caused by fraud and abuse. 

 1

Improper payments are payments made for unauthorized purposes or in excessive 

amounts and range from inadvertent errors to outright fraud and abuse. 

2

Until July 1, 2001, CMS was called the Health Care Financing Administration. We use the 

name CMS throughout this report. 

3

The estimated amount of $12.1 billion represents gross dollars paid in error, which is 

calculated by adding estimated dollars paid in error that were due to overpayments to the 

estimated amount of underpayments. In 2004, Medicare paid an estimated $11.2 billion in

overpayments and underpaid claims by an estimated $0.9 billion. 

4

Pub. L. No. 104-191, § 202, 110 Stat. 1996-98 (codified at 42 U.S.C. § 1395ddd (2000)). 

Page 1 GAO-06-813 Medicare Integrity Program
CMS pays MIP funds to its Medicare contractors to conduct five activities 

to safeguard Medicare payments.5

 These activities are (1) audits of cost 

reports, which are financial documents that hospitals and other 

institutions are required to submit annually to CMS; (2) medical reviews of 

claims to determine whether services provided are medically reasonable 

and necessary; (3) determinations of whether Medicare or other insurance 

sources have primary responsibility for payment, which is called 

secondary payer; (4) identification and investigation of potential fraud 

cases, which is called benefit integrity; and (5) education to inform 

providers about appropriate billing procedures. 

Recent events have raised questions about how MIP funding is being used. 

In addition to establishing MIP, HIPAA established a fund to provide 

resources for the Department of Justice—including the Federal Bureau of

Investigation (FBI)—and the Department of Health and Human Services 

(HHS) Office of Inspector General (OIG) to investigate and prosecute 

health care fraud and abuse.6

 In 2005, we reported that the FBI could not 

adequately account for its share of these funds or demonstrate that its 

funds were being used to investigate health care cases.7

 This finding raises 

concerns about how CMS is using its MIP funds to conduct its program 

integrity efforts—also called program safeguard activities. Further, the 

Medicare program is undergoing significant changes that will alter the 

nature and scope of CMS’s program integrity efforts. For example, the new 

Medicare Part D prescription drug benefit will increase Medicare’s 

vulnerability to improper payments. 

You expressed interest in CMS’s efforts to safeguard Medicare payments 

and ensure that MIP funds are used effectively. In this report, we 

(1) provide information on CMS’s allocation of MIP funds among its five 

program integrity activities over time, (2) examine the approach that CMS 

uses to allocate MIP funds among these activities, and (3) describe how 

major changes in the Medicare program may affect MIP funding 

allocations.

 5

These payments include those made to participating Medicare providers of services, such

as physicians, hospitals, and others. 

6

HIPAA § 201(b), 110 Stat. 1992 (codified at 42 U.S.C. § 1395i(k)(4) (2000)).

7

GAO, Federal Bureau of Investigation: Accountability over the HIPAA Funding of 

Health Care Fraud Investigations Is Inadequate, GAO-05-388 (Washington, D.C.: Apr. 22, 

2005). 

Page 2 GAO-06-813 Medicare Integrity Program
In preparing this report, we interviewed CMS officials about their 

allocation of MIP funds among the five activities for fiscal years 1997 

through 2005 and reviewed allocations of MIP funds to the five activities.

We also reviewed related financial and other documentation, including 

budget, expenditure, and savings data for fiscal years 1997 through 2005,

and budget proposals for fiscal years 2006 and 2007. Because most MIP 

expenditures are for activities related to Medicare Parts A and B,8

 our 

analysis focused on those expenditures;9

 however, we also collected some 

information about CMS’s planned MIP expenditures for the new 

prescription drug benefit (Part D). In addition, the Deficit Reduction Act of

2005 (DRA), which was enacted in February 2006, established an 

additional activity under MIP and provided $12 million in funding for this

activity in fiscal year 2006.10 We did not review allocations of funds for this 

activity because our review covered expenditures through fiscal year 2005. 

We also interviewed CMS officials regarding the approach they use to 

make decisions on MIP funding allocations and reviewed related 

documentation, including CMS reports on dollars saved in relation to 

dollars spent. We did not independently examine the internal and 

automated data processing controls for CMS systems from which we 

obtained data used in our analyses, but we reviewed selected data for 

internal consistency and accuracy. CMS subjects its data to different levels

 8

Medicare Part A covers inpatient hospital care, skilled nursing facility care, some home 

health care services, and hospice care. Part B services include physician and outpatient 

hospital services, diagnostic tests, mental health services, outpatient physical and 

occupational therapy, ambulance services, some home health services, and medical 

equipment and supplies. 

9

Under the traditional Medicare fee-for-service program, beneficiaries are usually charged

for each health care service or item provided to them. Medicare Advantage plans, under

Part C of Medicare, charge a fixed monthly fee per enrollee regardless of the number and 

mix of services they provide. In fiscal year 2005, about 87 percent of Medicare beneficiaries

were enrolled in fee-for-service and about 13 percent were enrolled in Medicare Advantage. 

10Pub. L. No. 109-171, § 6034(d), 120 Stat. 4, 77 (2006) (to be codified at 42 U.S.C. § 

1395ddd(b)(6) and 1395i(k)(4)(D)). This activity is the Medi-Medi program, which is 

designed to identify improper billing and utilization patterns by matching Medicare and 

Medicaid claims information on providers and beneficiaries to reduce fraudulent schemes

that cross program boundaries. The statute appropriates funds for CMS to contract with 

third parties to identify program vulnerabilities in Medicare and Medicaid through 

examining billing and payment abnormalities. The funds also can be used in connection 

with the Medi-Medi program for two other purposes: (1) coordinate actions by CMS, the 

states, the Attorney General, and the HHS OIG to protect Medicaid and Medicare 

expenditures and (2) increase the effectiveness and efficiency of both Medicare and 

Medicaid through cost avoidance, savings, and recouping fraudulent, wasteful, or abusive 

expenditures. 

Page 3 GAO-06-813 Medicare Integrity Program
of review and conducts periodic examinations of selected systems and 

controls over the data. The agency uses these data to support its 

management and budgetary decisions and expend funds to contractors. 

Therefore, we considered the data to be reliable for the purposes of our 

review. In addition, we interviewed CMS officials regarding changes in

Medicare contracting that may affect MIP funding allocations, 

performance measures, and contractors’ evaluations, and reviewed related 

agency documents. Appendix I contains a more detailed discussion of our 

scope and methodology. We performed our work from August 2005 

through August 2006 in accordance with generally accepted government 

auditing standards. 

MIP funding allocated to the five program integrity activities has generally

increased since fiscal year 1997, but the amounts of the allocations and the 

percentage increases varied by year and activity. For fiscal years 1997 

through 2005, provider education received the largest percentage increase

in funds, while audit and medical review received the largest share of 

funds. Among the five activities, from fiscal year 1997 to fiscal year 2005,

CMS increased its allocation by about 45 percent for audits to 

$207.6 million, 40 percent for medical review to $165.9 million, 49 percent 

for secondary payer to $151.5 million, and 89 percent for benefit integrity 

to $118.5 million. CMS increased its allocation by about 590 percent for 

provider education to $70 million. This increase was due, in part, to CMS’s 

decision in fiscal year 2002 to use MIP funds for outreach activities to 

groups of providers, which had not previously been funded through MIP. 

In fiscal year 2006, CMS will be able to further increase expenditures to 

MIP activities because the $720 million originally appropriated for fiscal 

year 2006 under HIPAA was increased by $112 million under DRA.11 CMS 

plans to use these additional funds, in part, to address potential fraud and

abuse in the new Medicare prescription drug benefit. 

Results in Brief 

CMS officials told us that they generally have allocated MIP funds to the 

five activities based predominantly on their past allocation levels. 

Although CMS has quantitative measures of effectiveness for two 

activities—the savings generated by medical review and secondary payer 

compared to their costs—it does not have similar measures to determine 

the effectiveness of each of its program integrity activities in relation to 

 11DRA §§ 5204 and 6034(d), 120 Stat. 48 and 77 (to be codified at 42 U.S.C. § 1395i(k)(4)(C)

and (D)).

Page 4 GAO-06-813 Medicare Integrity Program
the others. In addition, CMS has generally not assessed whether MIP funds 

are allocated within the program integrity activities to address risks or 

provide the greatest overall potential benefit to Medicare. For example, 

distribution of medical review funds to individual contractors has not 

considered the size of a particular contractor’s claims payment workload 

and its risk of making improper payments, based on the propensity of 

fraud in the area or past levels of improper payments. While agency

officials told us that MIP allocations are generally historically based, in a

few instances, CMS has modified its funding to respond to the agency’s 

immediate priorities. For example, in fiscal year 2004, CMS began to 

increase funds to expand the scope of its annual study to estimate 

Medicare improper payment rates, and in fiscal year 2002, it increased its

MIP allocation for contractors to better educate providers about Medicare. 

As a result of significant changes that the Medicare program is undergoing,

CMS will need to make new choices about how it should allocate its MIP 

funds to best address challenges that will occur. For example, in 2006, 

CMS implemented the new Part D prescription drug benefit. CMS may 

need to reallocate funds from program integrity activities for Parts A and B 

to conduct program integrity activities for Part D. Further, the agency is 

also reforming contracting practices for claims administration services, 

which include program integrity activities. As part of its contracting 

reform efforts, CMS plans to reduce the number of Medicare claims 

administration contractors from 51 to 23 by 2009, has established new 

jurisdictions for them and the program safeguard contractors (PSC) that 

will be working with them, and will require the contractors to perform 

different MIP activities from those they perform currently. While there is 

little precedent for CMS to follow in addressing these programmatic 

changes, its current allocation approach is not geared to best address 

future needs by targeting MIP funds to the activities with the greatest 

impact on the program and to ensure that the contractors have funding 

commensurate with their relative workloads and risk of making improper 

payments. 

To better ensure that MIP funds are appropriately allocated among and 

within the five activities, we recommend that CMS develop a method of 

allocating funds based on the effectiveness of its program integrity 

activities, the contractors’ workloads, and risk. 

In its written comments on a draft of this report, CMS generally agreed 

with our recommendation. (See app. V). However, CMS expressed concern 

that the report appeared to emphasize the use of a quantitative measure 

that tracks dollars saved in relation to dollars spent as a way to allocate 

Page 5 GAO-06-813 Medicare Integrity Program
MIP funds. CMS stated that this quantitative measure can be an indicator 

of effectiveness, but noted that such a measure cannot serve as the sole 

basis for informing funding decisions. While our report does discuss the 

importance of quantitative measures of effectiveness, it also discusses 

other considerations for allocating MIP funds. 

Before 1996, Medicare program integrity activities were subsumed under 

Medicare’s general administrative budget and performed, along with 

general claims processing functions, by insurance companies under 

contract with CMS, which led to certain problems. The level of funding 

available for program integrity activities was constrained, not only by the 

need to fund ongoing Medicare program operations—such as the costs for 

processing medical claims, but also by budget procedures imposed under

the Budget Enforcement Act of 1990.

12 In the early and mid-1990s, we 

reported that such funding constraints had reduced Medicare contractors’

ability to conduct audits and review medical claims.13 HHS advocated for a

dedicated and stable amount of program integrity funding outside of the 

annual appropriations process, so that CMS and its contractors could plan 

and manage the function on a multiyear basis. HHS also asserted that past 

fluctuations in funding had made it difficult for contractors to retain 

experienced staff who understood the complexities of, and could protect, 

the financial integrity of Medicare program spending. 

Beginning in fiscal year 1997, HIPAA established MIP and provided CMS 

with dedicated funding to conduct program integrity activities. HIPAA 

stipulated a range of funds available for these activities from the Medicare

trust funds each year. For example, for fiscal year 1997, the law stipulated 

that at least $430 million and not more than $440 million should be used. 

The maximum amount of MIP funds rose from $440 million in fiscal year 

Background 

HIPAA Established MIP 

and Provided Dedicated 

Funding 

 12Pub. L. No. 101-508, tit. XIII, 104 Stat. 1388, 1388-573—1388-630. Under the Budget 

Enforcement Act, funding for Medicare administrative activities, including for program 

safeguard activities that were found to be very cost-effective, could be increased only if

discretionary funding for other programs, such as immunizations or job training, were 

reduced. 

13GAO, Medicare Spending: Modern Management Strategies Needed to Curb Billions in

Unnecessary Payments, GAO/HEHS-95-210 (Washington, D.C.: Sept. 19, 1995); Medicare: 

Adequate Funding and Better Oversight Needed to Protect Benefit Dollars, 

GAO/T-HRD-94-59 (Washington, D.C.: Nov. 12, 1993); and Medicare: Funding and 

Management Problems Result in Unnecessary Expenditures, GAO/T-HRD-93-4 

(Washington, D.C.: Feb. 17, 1993).

Page 6 GAO-06-813 Medicare Integrity Program
1997 to $720 million in fiscal year 2003. For fiscal year 2003, and every year 

thereafter, the maximum amount that HIPAA stipulated for MIP was 

$720 million. (See app. II, table 2, for additional information on the MIP 

funding ranges.) As a result of the increases stipulated in HIPAA, from 

fiscal years 1997 through 2005, total MIP expenditures increased about 

63 percent—from about $438 million to $714 million, as figure 1 shows.14

HIPAA authorized MIP funds to be used to enter into contracts to 

“promote the integrity of the Medicare program.” The statute also listed 

the various program integrity activities to be conducted by contractors.15

 14A CMS official told us that the agency typically spends about 1 percent less than the 

maximum appropriated amount to ensure that it can cover additional contractor expenses

that may occur. 

15These activities are (1) review of activities of providers of services or other individuals 

and entities furnishing items and services for which payment may be made (such as skilled 

nursing facilities and home health agencies), including medical and utilization review and 

fraud review; (2) audit of cost reports; (3) determinations as to whether payment should 

not be, or should not have been, made and recovery of payments that should not have been

made; (4) education of providers of services, beneficiaries, and other persons with respect

to payment integrity and benefit quality assurance issues; and (5) developing (and

periodically updating) a list of items of durable medical equipment (DME) that are subject 

to prior authorization. Concerning the fifth activity, CMS has published instructions related 

to the prior authorization of customized DME in the Medicare Program Integrity Manual, 

and contractors (Medicare administrative contractors and PSCs) are required to publish 

examples of the types of items for which prior authorization is available. The first activity 

listed above includes both medical review and benefit integrity. 

Page 7 GAO-06-813 Medicare Integrity Program
Figure 1: MIP Expenditures for Fiscal Years 1997 through 2005 

0

100

200

300

400

500

600

700

800

900

1997 1998 1999 2000 2001 2002 2003 2004 2005 

Dollars in millions

438 

545 556 

624 

677 693 712 712 714 

Fiscal years

Source: GAO analysis of CMS data.

MIP Funds Support 

Program Integrity Efforts 

CMS allocates MIP funds primarily to support its contractors’ program 

integrity efforts for the traditional Medicare program, known as fee-forservice Medicare.16 Among these contractors are fiscal intermediaries 

(intermediaries), carriers,17 PSCs, and Medicare administrative contractors 

(MAC).18 MACs are a new type of contractor that will replace all 

intermediaries and carriers by October 2011, as required by the Medicare

Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).19

MMA required CMS to conduct full and open competition to select MACs. 

CMS refers to this change as contracting reform. 

 16In fiscal year 2005, about 1.6 percent of total MIP expenditures were used for program

integrity efforts for Medicare Advantage plans. 

17Intermediaries process Medicare Part A and Part B claims paid to hospitals and other

institutions, such as home health agencies. Carriers process the majority of Part B claims 

for the services of physicians and other providers.

18In January 2006, CMS selected four MACs. 

19Pub. L. No. 108-173, § 911, 117 Stat. 2066, 2378-86. 

Page 8 GAO-06-813 Medicare Integrity Program
CMS has contracted with intermediaries, carriers, and MACs to perform 

two types of activities—claims processing and program integrity. Their 

claims processing activities include receiving and paying claims. These 

activities are classified as program management and are funded through a 

program management budget. In addition, intermediaries and carriers 

have been charged with conducting some program integrity activities 

under MIP, including performing medical review of claims. The four MACs 

selected in January 2006 will not conduct medical review activities. CMS 

plans to assign responsibility for medical review of claims to the MAC 

selected in July 2006 and to the other MAC contracts to be awarded in the 

future. MIP provides funds to support these program safeguard efforts. 

In addition, CMS uses MIP funds to support the activities of PSCs, which 

perform medical review of claims and identify and investigate potential 

fraud cases; a coordination of benefits (COB) contractor, which 

determines whether Medicare or other insurance has primary 

responsibility for paying a beneficiary’s health care costs; the National 

Supplier Clearinghouse (NSC), which screens and enrolls suppliers in the 

Medicare program; and the data analysis and coding (DAC) contractor, 

which maintains and analyzes Medicare claims data for durable medical 

equipment (DME), prosthetics, orthotics, and supplies.20

Contractors receive MIP funds to perform one or more of the following 

five program integrity activities: 

• Audits involve the review of cost reports from institutions, such as 

hospitals, nursing homes, and home health agencies. Cost reports play a 

role in determining the amount of providers’ Medicare reimbursement. 

• Medical review includes both automated and manual prepayment and 

postpayment reviews of Medicare claims and is intended to identify claims 

for noncovered or medically unnecessary services. 

 20Medicare defines DME as equipment that serves a medical purpose, can withstand 

repeated use, is generally not useful in the absence of an illness or injury, and is 

appropriate for use in the home. DME includes items such as wheelchairs, hospital beds, 

and walkers. Medicare defines prosthetic devices (other than dental) as devices that are

needed to replace a body part or function. Prosthetic devices include artificial limbs and 

eyes and cardiac pacemakers. Medicare defines orthotic devices to include leg, arm, back, 

and neck braces that provide rigid or semirigid support to weak or deformed body parts or

restrict or eliminate motion in a diseased or injured part of the body. Medicare-reimbursed

DME supplies are items that are used in conjunction with DME and consumed during the

use of the equipment—such as drugs used for inhalation therapy—or items that need to be

replaced on a frequent, usually daily, basis—such as surgical dressings. 

Page 9 GAO-06-813 Medicare Integrity Program
• The secondary payer activity seeks to identify primary sources of 

payment--such as employer-sponsored health insurance, automobile 

liability insurance, and workers’ compensation insurance--that should be 

paying claims mistakenly billed to Medicare. Secondary payer activities 

also include recouping Medicare payments made for claims not first 

identified as the responsibility of other insurers. 

• Benefit integrity involves efforts to identify, investigate, and refer potential 

cases of fraud or abuse to law enforcement agencies that prosecute fraud 

cases. 

• Provider education communicates information related to Medicare 

coverage policies, billing practices, and issues related to fraud and abuse 

both to providers identified as having submitted claims that were 

improper, and to the general provider population. 

CMS also uses MIP to fund support for the five activities, such as certain 

information technology systems, fees for consultants, storage of CMS 

records, and postage and printing. The agency allocates the cost of this 

support to the five activities, depending on which of the activities is 

receiving support. Table 1 provides information on specific MIP activities 

performed by the contractors. Appendix III provides examples of key 

tasks performed by each of these contractors. 

Table 1: MIP Activities Performed by Specific Types of Medicare Contractors 

Activity Intermediaries Carriers MACsaPSCs COB contractor NSC DAC contractor 

Auditb● ○ ○ ● ○ ○ ○

Medical review ● ● ○ ● ○ ○ ○

Secondary payer ● ● ● ○ ● ○ ○

Benefit integrity

c

○ ○ ○ ● ○ ● ●

Provider education ● ● ● ● ○ ○ ○

Source: GAO analysis of CMS information. 

Legend: ● Contractor performs this activity; ○ Contractor does not perform this activity or supports

other contractors that have primary responsibility for performing this activity. 

a

This information pertains to the four MACs that were selected by CMS in January 2006. The MAC 

selected in July 2006 will perform audit, medical review, secondary payer, and provider education 

activities. This contractor will also support a PSC that performs the benefit integrity activity. 

b

Audits of cost reports are conducted for the benefits paid under Part A, the part of the program that 

pays for the services of institutional providers, such as hospitals. All of the other activities are 

conducted for both Parts A and B.

c

Intermediaries, carriers, and MACs do not have primary responsibility for benefit integrity, but they do 

provide support to the PSCs that perform this activity. 

Page 10 GAO-06-813 Medicare Integrity Program
For fiscal years 1997 through 2005, CMS generally increased the amount of 

funding for each of its five program integrity activities, but the amount of 

the funding provided and the percentage increase have varied among the 

activities. Provider education received the largest percentage increase in 

funds, while audit and medical review received the largest amount of 

funds overall. (See fig. 2.) CMS increased its allocation for provider 

education by about 590 percent from fiscal year 1997 through fiscal year 

2005. This increase was due, in part, to CMS’s decision in fiscal year 2002 

to use MIP funds for outreach activities to groups of like providers, which 

had not previously been funded through MIP. CMS will be able to further 

increase expenditures for program integrity in fiscal year 2006. In addition

to the maximum of $720 million originally appropriated under HIPAA for 

fiscal year 2006, DRA increased the maximum by an additional 

$112 million, for a total of $832 million.21 CMS plans to use some of the 

$112 million to address potential fraud, waste, and abuse in the new 

Medicare prescription drug benefit.22

MIP Funding for All 

Five Activities Has 

Generally Increased 

over Time 

 21For fiscal year 2006, DRA appropriated $100 million to MIP in general and $12 million for 

the Medi-Medi program, for a total of $112 million. In addition to the $12 million 

appropriated in fiscal year 2006 for the Medi-Medi program, the statute also appropriated 

$24 million for fiscal year 2007, $36 million for fiscal year 2008, $48 million for fiscal year 

2009, and $60 million for fiscal year 2010 and each subsequent fiscal year for the Medi-Medi 

program. 

22The President’s budget for fiscal year 2007 has proposed funding for MIP beyond the

HIPAA-specified maximum amount of $720 million. The proposal is part of a

governmentwide effort to provide a specified level of discretionary funding for a defined 

period for program integrity activities. 

Page 11 GAO-06-813 Medicare Integrity Program
Figure 2: MIP Expenditures by Activity, Fiscal Years 1997 through 2005 

0 

50 

100 

150 

200 

250 

Audit

Medical review

Secondary payer

Benefit integrity

Provider education

1997 1998 1999 2000 2001 2002 2003 2004 2005 

Fiscal year 

Dollars in millions

Source: GAO analysis of CMS data.

In each year from fiscal year 1997 through fiscal year 2005, CMS generally

increased the amount of MIP funds spent for each of its five program 

integrity activities, as figure 2 shows. In addition to the increase in the 

amount of funding for provider education, the expenditures for audit 

increased 45 percent during the same period. As figure 3 shows, 

expenditures for medical review increased from fiscal year 1997 to fiscal

year 2001 to almost $215 million—about 81 percent—and, since fiscal year 

2001, decreased to about $166 million, or about 23 percent. Overall, 

expenditures for medical review increased 40 percent from fiscal year 

1997 to fiscal year 2005. During this period, expenditures for secondary 

payer increased 49 percent, and for benefit integrity, expenditures 

increased 89 percent. (See fig. 3 for the amount of expenditures by activity 

in fiscal years 1997, 2001, and 2005 and app. II, table 3, for more detailed 

information on the amount of expenditures for each activity in each year.) 

Page 12 GAO-06-813 Medicare Integrity Program
Figure 3: Spending for the Five MIP Activities for Fiscal Years 1997, 2001, and 2005

0

100

200

300

400

500

600

700

800

1997 2001 2005

Dollars in millions

Fiscal year

Provider education

Benefit integrity

Secondary payer

Medical review

Audit

Source: GAO analysis of CMS data.

$143.3

$209.5 $207.6

$165.9

$214.8

$118.6

$102.0

$62.7

$140.6

$151.5

$118.5 $95.5

$70.0 $17.0

$10.1

$437.9

$677.4 $713.5

Note: The total expenditures for fiscal year 1997 ($437.9 million) include $1.2 million in “other” 

expenditures that CMS did not include under a particular MIP activity. 

Increased spending for provider education stemmed, in part, from 

provider concerns about an increased burden on them in the medical 

review process. In 2001, we reported that as CMS increasingly focused on 

ensuring program integrity, providers were concerned about what they 

considered to be inappropriate targeting of their claims for review.23

Further, providers asserted that they may have billed incorrectly because 

of their confusion about Medicare’s program rules. To address these 

concerns, CMS developed a more data-driven approach for conducting 

medical review and also increased its emphasis on provider education. 

 23GAO, Medicare Management: CMS Faces Challenges in Safeguarding Payments While

Addressing Provider Needs, GAO-01-1014T (Washington, D.C.: July 26, 2001). 

Page 13 GAO-06-813 Medicare Integrity Program
CMS officials explained that medical review would help identify providers 

that were billing inappropriately, and provider education would focus on 

individuals’ specific billing errors to eliminate or prevent recurrence of the 

problems. In addition, beginning in fiscal year 2002, spending for the 

provider education activity increased significantly because CMS began to

use MIP funds for what the agency called provider outreach. Provider 

outreach focuses on communicating with groups of providers about 

Medicare policies, initiatives, and significant programmatic changes that 

could affect their billing. This information is conveyed through seminars, 

workshops, articles, and Web site publications. Previously, provider 

outreach had been funded outside of MIP, as part of CMS’s program 

management budget. Provider education spending increased from 

$17 million in fiscal year 2001—before provider outreach was added to the 

provider education activity—to $53.5 million in fiscal year 2002. In fiscal 

year 2005, funding for the provider education activity reached 

$70 million.24

In comparing the share of funds spent on each program integrity activity, 

from fiscal year 1997 through fiscal year 2005, we found that CMS 

generally spent the largest share on audit, averaging about 31 percent, and

on medical review, averaging about 27 percent. CMS spent less on 

secondary payer, averaging 21 percent, and benefit integrity, averaging 

15 percent. In contrast, during this period, CMS spent the smallest 

percentage on provider education, which averaged about 6 percent of MIP 

expenditures. See figure 4 for information on the percentage of funds 

allocated to each activity. (For more detail, see table 4 in app. II.) 

 24In fiscal year 2005, expenditures for the provider education activity totaled $70 million, 

which consisted of $36.7 million for provider outreach and $33.3 million for provider 

education. 

Page 14 GAO-06-813 Medicare Integrity Program
Figure 4: Percentage of MIP Funds Allocated to the Five Program Integrity 

Activities, Fiscal Years 1997 and 2005, and Average for Fiscal Years 1997 through 

2005 

0

10

20

30

40

50

60

70

80

90

100

1997 2005 1997-2005 average

Percentage

Fiscal year

Provider education

Benefit integrity

Secondary payer

Medical review

Audit

Source: GAO analysis of CMS data.

33% 29% 31%

27%

23%

27%

2%

23%

21%

21%

15%

17%

10% 6%

14%

Average

allocation

to each

of the five

activities

Note: Percentages for fiscal year 1997 exclude the $1.2 million in “other” expenditures, which 

accounted for less than 1 percent of the total allocation for that fiscal year. 

CMS officials told us that they generally had allocated MIP funds to the 

five activities based predominantly on historical funding, but sometimes 

considered high-level priorities. However, this approach does not take into 

account data or information on the effectiveness of one activity over the 

other in ensuring the integrity of Medicare or allow CMS to determine if 

activities are yielding benefits that are commensurate with the amounts 

spent. For example, while CMS has noted that benefit integrity and 

provider education activities have intangible value, the agency has not 

routinely collected information to evaluate their comparative

effectiveness. Furthermore, CMS has not fully assessed whether MIP funds 

are appropriately allocated within the audit, medical review, benefit 

CMS’s Current MIP 

Funding Allocation 

Approach Has 

Weaknesses 

Page 15 GAO-06-813 Medicare Integrity Program
integrity, and provider education activities. For example, audit’s role has 

changed as Medicare’s payment methods have changed in the last decade, 

but it continues to have the largest share of MIP funding. 

MIP Funds Allocated 

Primarily on a Historical 

Basis 

According to agency officials, CMS allocates funds for the five activities

based primarily on an analysis of previous years’ spending and may also 

consider other information when developing the MIP budget, such as 

current expenditures by individual contractors.25 CMS officials told us that 

they may also consider the agency’s high-level priorities. For example, in 

fiscal year 2004, CMS began to increase funds to expand the scope of its 

annual study to estimate Medicare improper payment rates, and in fiscal

year 2002, it increased its MIP allocation for provider education. 

CMS does not have a means to compare quantitative data or qualitative

information on the relative effectiveness of MIP activities that it could use 

in allocating funds. Instead, it calculates the quantitative benefits for two, 

and assesses the qualitative benefits—which are not objectively 

measured—for the other three. In fiscal year 2005, for its medical review 

and secondary payer activities, CMS tracked dollars saved in relation to 

dollars spent—a quantitative measure that the agency calls a return on 

investment (ROI).26

Having an ROI figure is useful because it measures the effectiveness of an

individual activity so that its value can be compared with that of another 

activity. As of fiscal year 2005, secondary payer had an ROI of $37 for 

every dollar spent on the activity, and medical review had an ROI of $21 

for every dollar spent. CMS tracked the ROI for audit, but by fiscal year 

2002, audit’s reported contribution to ROI fell to almost zero. (See fig. 5 

and app. II, table 5, for additional ROI details.) 

 25According to CMS officials, before determining budget amounts for medical review, they

analyze both last year’s and current expenditures by individual contractor. A contractor

might not be spending the full amount allocated to it for various reasons, such as staff 

turnover. 

26A CMS official also indicated that the agency considers medical review to have a sentinel 

effect in discouraging providers that might be considering defrauding Medicare. However, 

this effect is not possible to measure. 

Page 16 GAO-06-813 Medicare Integrity Program
Figure 5: CMS Reported ROI for Secondary Payer, Medical Review, and Audit, 

Fiscal Years 1997 through 2005 

0 

5 

10 

15 

20 

25 

30 

35 

40 

Secondary payer

Medical review

Audit

1997 1998 1999 2000 2001 2002 2003 2004 2005 

Fiscal year 

Dollars saved in relation to every dollar invested 

Source: GAO analysis of CMS data.

CMS officials told us that the decrease in the ROI for audit was due to the 

implementation of prospective payment systems (PPS),27 under which 

Medicare pays institutional providers fixed, predetermined amounts that 

 27In 1983, legislation required the establishment of PPS for inpatient hospital services. 

Social Security Amendments of 1983, Pub. L. No. 98-21, § 601(e), 97 Stat. 65, 152-62. Before

then, Medicare had generally paid providers based on their reported costs, and audit 

disallowances of reported costs led to savings. Under PPS, payment rates are generally not 

based on individual providers’ costs, but are typically set for groups of services, with 

payment amounts varying by the intensity of need for care by patients served. From 1998

through 2002, CMS implemented PPS for skilled nursing facilities (nursing homes), hospital 

outpatient departments, home health agencies, and inpatient rehabilitation facilities. 

Page 17 GAO-06-813 Medicare Integrity Program
vary according to patients’ need for care.28 Until fiscal year 2001, audits 

had achieved an ROI that was generally $9 or more for every dollar spent 

conducting them, by disallowing payment for individual costs that should 

not have been paid by Medicare under the previous payment method. 

Under PPS, CMS’s methods for paying providers changed. However, the 

information system that had been used to track ROI began to incorrectly

calculate the savings from audit because it had not been adjusted for the 

new payment method. According to agency officials, CMS is implementing 

a different way to track audit savings, and an overall ROI. It will focus on 

the savings from disallowing items that directly affect an individual 

provider’s payment under a PPS, such as bad debts and the number of lowincome patients hospitals serve. It will track the amounts related to these 

add-on payments actually paid by Medicare to, or recouped from, the 

provider after an audit. The difference between the amount paid prior to 

the audit and the amount paid after the audit (assuming there has been an 

adjustment) would be the savings. 

However, all audit functions do not result in measurable savings. For 

example, in its written comments on a draft of this report, CMS noted that 

many audit functions funded by MIP do not have an ROI. CMS stated that

these include processing cost reports for data collection purposes, 

correcting omissions on providers’ cost reports, implementing court 

decisions, and issuing notifications concerning Medicare payments. In 

addition, CMS stated that some of these activities are mandated by law, 

while others have significant value to the Medicare Payment Advisory 

Commission (MedPAC), which is an independent federal commission; 

providers; provider associations; and actuaries. 

From fiscal year 1997 through fiscal year 2005, CMS developed qualitative 

assessments of the impact of benefit integrity and provider education. 

According to CMS, the agency develops such assessments when the 

savings generated by MIP activities are impossible or difficult to identify.

Nevertheless, CMS officials told us that these activities provide value to 

the program in helping to ensure proper Medicare payments. For example, 

 28For example, the basic PPS payment for hospitals is determined by the diagnoses of the 

patients that they serve, with the specific diagnosis-related payments based on the average

weighted costs of hospitals to provide care to patients in 1981, adjusted upwards over time. 

In addition, a hospital’s payment rates are further adjusted based on factors specific to the 

hospital, including providing an additional payment to hospitals that treat an unusually 

large number of low-income patients or that offer graduate medical education. Certain 

items, such as bad debt expense, are also paid based on a hospital’s reported costs.

Page 18 GAO-06-813 Medicare Integrity Program
CMS officials said that benefit integrity contributes to the work of federal

law enforcement agencies, which investigate and prosecute Medicare 

fraud and abuse. CMS officials also noted that they consider benefit 

integrity to have a sentinel effect in discouraging entities that may be 

considering defrauding the Medicare program, but this effect is impossible 

to measure. 

CMS indicated that trying to measure the results of the contractors’ benefit 

integrity activities could create incentives that undermine the value of 

their work. For example, counting the number of cases referred to law 

enforcement for further investigation could lead the contractors to refer 

more cases that were less fully developed. However, other agencies that 

investigate or prosecute fraud, such as HHS and the Department of 

Justice, keep track of their successful cases, recoveries, and fines to 

demonstrate their results. Similarly, CMS could assess the degree to which

each of its contractors had contributed to HHS and the Department of 

Justice’s successful investigations and prosecutions. 

In regard to educating providers on appropriate billing practices, CMS may 

be missing opportunities to evaluate its contractors’ performance. 

Provider education can help reduce billing errors, according to CMS. 

However, according to an OIG report, CMS has not evaluated the 

strategies used to modify the behavior of providers through education to 

determine if these strategies are achieving desired results.29

CMS has noted the intangible value inherent in benefit integrity and 

provider education activities, but the agency has not routinely collected 

information to evaluate their comparative effectiveness in ensuring 

program integrity. Further, as discussed earlier, correct information on 

audit’s effectiveness, based on an ROI, has not been available for the last 

several years. Consequently, CMS is not able to determine if some of the 

funds spent for benefit integrity, provider education, and audit—about 

$396 million, or 56 percent of MIP funds in fiscal year 2005—could be 

better directed to secondary payer or medical review. Nevertheless, CMS 

officials told us that they plan to decrease the allocation to medical review 

and increase the allocation to provider education.

 29Department of Health and Human Services, Office of Inspector General, Carrier Medical

Review Progressive Corrective Action, OEI-02-03-00300 (Washington, D.C.: October 2005). 

Page 19 GAO-06-813 Medicare Integrity Program
CMS officials stated that they are developing two initiatives that will give 

the agency objective measures of the results of the audit and provider 

education activities. As discussed earlier, CMS is implementing a revised

methodology for calculating the ROI for audit. In addition, it is trying to 

develop information on the effectiveness of provider education. A CMS 

official explained that the agency is adding a provider education 

component to its program integrity management reporting system.30 This 

component will potentially allow CMS to develop an ROI figure for 

provider education by correlating educational efforts to a decrease in 

claim denials and provide a measure of the quantitative benefits of this 

activity. This component is scheduled to begin operating in the summer of 

2006. 

CMS Does Not Ensure 

That Funds Are Allocated 

in an Optimal Way within 

Activities

After CMS has allocated funds to each of the five MIP activities, it must 

decide how to further distribute those funds to pay contractors that carry 

out each one. For example, in fiscal year 2004, after CMS allocated about 

$135 million for medical review to be conducted by intermediaries and 

carriers, it then distributed those funds to pay 28 intermediaries and 24 

carriers that were conducting medical review at that time. However, given 

vulnerabilities for improper payment, contractor workload, and the 

relative effectiveness of activities performed, CMS has not always taken 

steps to ensure that it has allocated funds in an optimal way within its 

activities. Nevertheless, CMS has used information on relative savings to 

decide on funding allocations within the secondary payer activity. 

Medical review, provider education, and benefit integrity are activities for

which allocation of MIP funds may not be optimal, because our analysis 

suggests that CMS has not allocated funds within these activities based on

information concerning contractor vulnerabilities. Such vulnerabilities 

include the potential for fraudulent billing in different locations and the 

amount of potential benefit payments at risk in the contractor’s 

jurisdiction. For example, CMS estimated that the contractor that handled 

claims for DME, orthotics, prosthetics, and supplies in a jurisdiction that 

included Texas and Florida—two states experiencing high levels of 

fraudulent Medicare billing—improperly paid 11.5 percent of its 2004 

claims—or $474.9 million—which was a higher improper payment rate 

than that of other contractors paying these types of claims. As we 

Allocations for Medical Review, 

Provider Education, and 

Benefit Integrity Are Not Based 

on Vulnerabilities 

 30CMS began implementing the first phase of this system in 2000 and fully implemented it in 

2004. 

Page 20 GAO-06-813 Medicare Integrity Program
previously reported, our analysis indicated this contractor received almost 

a third less funds for medical review per $100 in submitted claims in fiscal 

year 2003 than the amount given to contractors in other regions with less 

risk of fraudulent billing.31 Our most recent analysis indicated that the 

imbalance in fund allocation did not change in fiscal years 2004 and 2005.

We could not determine the rationale for this allocation beyond what was 

historically budgeted for this contractor. 

The amount of medical review funds allocated to individual contractors is 

not directly tied to the amount of benefits that they pay, which is a key 

measure of potential risk. For example, in fiscal year 2004, one contractor

paid out $66 million in benefits and received about 28 cents in medical 

review funds for each $100 in benefits paid. In contrast, another contractor

paid out considerably more in benefits—about $5 billion in fiscal year 

2004—and received about 7 cents in medical review funds for each $100 in

benefits paid. 

Further, CMS has not adjusted the amount of funding for individual 

contractors to educate providers based on their relative risks. A CMS 

official told us that the amount of provider education funding is generally

aligned with the amount allocated for medical review, regardless of the 

value of the benefits that the contractor pays. 

Similarly, the amount of MIP funds provided to PSCs is not directly tied to

the amount of benefits paid in jurisdictions for which they have 

responsibility for benefit integrity. For example, CMS spent about 

$75 million for work performed by PSCs under 13 benefit integrity task 

orders. The PSCs averaged about 3 cents for each $100 in paid claims in 

the jurisdictions for which they conducted benefit integrity tasks.32

However, the amount of MIP funding paid to the PSCs to conduct benefit

integrity activities varied from about 1 cent to about 7 cents for each $100 

in claims paid. Further, our analysis showed no clear relationship between

funds provided to PSCs and their responsibilities for conducting benefit

integrity activities in jurisdictions with high incidences of fraudulent 

Medicare billing. For example, one PSC received about 4 cents for 

conducting benefit integrity work for each $100 in paid claims for benefit 

 31GAO, Medicare: CMS’s Program Safeguards Did Not Deter Growth in Spending for

Power Wheelchairs, GAO-05-43 (Washington, D.C.: Nov. 17, 2004). 

32Task orders were effective for about 1 year, and beginning task order dates ranged from

November 1, 2004, through January 25, 2005.

Page 21 GAO-06-813 Medicare Integrity Program
integrity work in a jurisdiction that included Florida, which is at high risk 

for fraudulent billing. In contrast, PSCs received the same level of funding 

to conduct benefit integrity work in states at lower risk for fraudulent 

billing, including Iowa, Montana, Pennsylvania, and Wyoming. 

During the last decade, Medicare has significantly changed how it pays 

institutional providers—such as hospitals and nursing homes—that it 

audits.33 To align with the payment method changes, CMS has modified its 

audit focus to items in the cost report that can affect payments under a 

PPS. However, these audits can affect a much smaller proportion of 

Medicare’s payments under a PPS than audits of costs under the previous

payment method. Given the magnitude of the payment method change, 

CMS has not evaluated whether funds within the audit activity should be 

further reallocated to potentially generate greater savings to the Medicare

program by addressing the accuracy of reported costs that may be used to

determine payment increases. 

Audit’s Role Has Changed, but 

Funding Allocations May Not 

Be Optimal 

CMS distributes funds to its contractors to conduct certain tasks, such as 

inputting data from; reviewing; and, if needed, auditing cost reports 

submitted by its institutional providers in order to settle, or agree upon, 

the reported costs.34 CMS’s audit contractors are also required to conduct 

wage index reviews35 and assist with intermediary hearings and appeals of 

settled cost reports. For several years, CMS has had a backlog of cost 

reports to settle, and the agency has made a priority of reducing the 

backlog. Other priorities include more closely scrutinizing those providers 

that are still paid based on their costs—such as critical access hospitals—

and conducting required audits. 

 33CMS officials indicated that although the hospital inpatient PPS was implemented in 1983, 

the major changes to payment methods occurred beginning in 1998 and later as prospective

payment was introduced for skilled nursing facilities, hospital outpatient departments, and 

home health agencies. 

34Institutional providers are required to submit cost reports and CMS is required to settle 

them, even though most institutional providers are paid through a prospective payment

method. 

35As part of the methodology for determining prospective payments to hospitals, CMS is 

required to adjust standardized amounts for area differences in hospital wage levels by a 

factor, which is known as the wage index. The wage index reflects the relative hospital 

wage level (in the geographic area of the hospital) compared to the national-average 

hospital wage level. Through a survey, CMS obtains hospital wages and wage-related costs. 

As part of the process of adjustment, contractors conduct reviews of the submitted data

and the supporting documentation. 

Page 22 GAO-06-813 Medicare Integrity Program
For providers paid under a PPS, CMS has shifted its audit focus to the few 

items that could affect a provider’s payments if disallowed. These include

bad debt, payments for graduate medical training, and the number of lowincome patients that hospitals serve. CMS has also shifted more audit 

resources to hospitals because more items on their cost reports can affect 

calculations of a provider’s add-on payments. 

CMS does not know the amount of MIP funds that are associated with 

audits of different types of providers or specific issues, such as bad debt. 

However, in fiscal year 2004, CMS began to separately track some audit 

costs, such as those for desk reviews,36 audits, and wage index reviews. 

This provided some information on how audit funds were being spent. 

According to CMS officials, tracking the costs of individual audits at a 

provider or issue level would be difficult and costly because multiple 

issues are audited at the same time and the complexity of individual audits

varies for the same provider type. Nevertheless, more detailed information 

on audit costs—such as at the provider level—than CMS currently tracks 

could provide it with a better understanding of the value of its current mix 

of tasks, particularly if it could associate the costs with the savings from 

the audits. This could provide CMS with information on whether it needs 

to change the balance of funding for those tasks—for example, whether it 

should focus more attention on bad debt or other areas of the cost report 

for specific types of providers. 

Further, CMS’s audit function continues to focus on verifying specific 

aspects of the provider’s cost report that affect its individual payment. 

This type of audit generally addresses a small portion of providers’ 

Medicare payments, while under a PPS, a much greater portion of the 

payments are based on overall industry costs.37 Each year, MedPAC 

advises the Congress on whether the Medicare PPS rates for institutional 

providers should increase, decrease, or remain constant. However, 

 36A desk review determines the acceptability of the cost report; the need for audit; and if 

needed, the depth of audit to be performed.

37CMS audit priorities include reviewing providers under PPS for non-PPS payments made 

through the cost report, including those associated with bad debts; graduate medical 

education; indirect medical education; disproportionate share hospitals, which provide

care to an unusually large proportion of low-income patients; and organ acquisition. 

Priorities also include focusing on providers not recently audited and on specific types of 

providers, including those still reimbursed on a cost basis, such as critical access and 

cancer hospitals and end-stage renal disease facilities. Under the Balanced Budget Act of

1997, CMS is required to audit end-stage renal disease facilities every 3 years (Pub. L. No. 

105-33, § 4558(a), 111 Stat. 251, 463). 

Page 23 GAO-06-813 Medicare Integrity Program
MedPAC generally does not have a set of audited cost reports that validate 

the information it uses in its assessments of providers, such as hospitals’ 

allocations of their costs. According to MedPAC, the current audit process 

reveals little about the accuracy of the Medicare cost information.38 For 

example, while CMS audits individual providers through full or partial 

audits, it does not allocate funds to audit a panel of providers, such as 

hospitals, which could provide a means to highlight areas where cost 

reporting accuracy is problematic. Without accurate information, CMS 

cannot ensure that payments to hospitals properly reflect their costs and 

provide reliable information that can be a factor in determining whether 

rates should change or remain constant. 

CMS might find it cost-effective to gather additional information because 

audits have the potential to give the Congress better information on 

hospitals’ costs. For example, by law, CMS is required to periodically 

conduct audits of end-stage renal disease (ESRD) facilities, which care for 

patients who must rely on dialysis treatments to compensate for kidney 

failure. CMS broadened its audit plan for these facilities to include a 

review not only of bad debts, but also to validate the costs of a selected

number of items that are paid through PPS.39 CMS officials indicated that 

their audits of these facilities generated only limited savings, usually 

related to bad debts, so they did not consider these audits very valuable. 

However, as a result of these audits, MedPAC officials stated in 2005 that 

these facilities had a greater margin—or ratio of Medicare payments to 

 38Medicare Payment Advisory Commission, Report to the Congress: Sources of Financial

Data on Medicare Providers (Washington, D.C.: June 2004). This report mentions several 

possibilities for using audit to obtain more accurate data, including making that an 

objective of the audit, focusing audit attention on the section of the cost report that deals 

with a hospital’s total financial performance data, conducting full scale audits—which 

MedPAC estimates can take from 1,000 to 2,000 hours of auditors’ time to complete, or 

targeting audits to suspected areas within cost reports to determine reporting accuracy. 

39Contractors typically develop an “audit program,” or plan, which identifies the audit 

objectives, issues, transactions, or cost report entries to audited, reviewed, or verified; the 

audit steps to be performed; and the tests to be applied. 

Page 24 GAO-06-813 Medicare Integrity Program
costs—than their cost reports suggested.40 This information was factored 

into MedPAC’s recommendation about the amount of payment increase 

needed in calendar year 2007. Setting appropriate payment increases for 

hospitals is potentially more important to Medicare than for ESRD 

facilities because payments to participating inpatient hospitals

represented about $116 billion, or about 40 percent of Medicare’s benefit 

payments in fiscal year 2004. CMS officials agreed that gathering this 

information might be valuable, but indicated that they did not currently 

have sufficient funding to conduct this data validation in addition to their 

current efforts funded as part of audit. 

In contrast to provider education and audit, CMS collects information on 

the relative savings from specific secondary payer functions and has used 

this information to decide on funding allocations within the secondary 

payer activity. CMS allocates funds to, and calculates savings for, about 16 

secondary payer functions. Among these functions are (1) a data match 

that helps identify instances when a Medicare beneficiary was covered by

other insurance and (2) the initial enrollment questionnaire, which gathers 

insurance information on beneficiaries before they become eligible for 

Medicare. Within secondary payer, for fiscal year 2005, savings for the 16 

functions ranged from less than 1 percent to 49 percent of savings of over 

$5 billion for all of the functions. 

CMS Used Savings Information 

to Optimize Allocation of 

Secondary Payer Funds 

CMS officials told us that they have used relative savings information for 

secondary payer functions as one factor in determining whether to 

increase, decrease, or terminate funding for the functions within this 

activity. For example, according to CMS officials, in fiscal year 2005,

savings for one secondary payer function—voluntary reporting of primary 

payer information to CMS by health insurance companies—increased by 

about 65 percent over fiscal year 2004. Further, savings from this effort 

continue to increase. CMS is planning to maintain or expand funding to it. 

However, CMS officials said that after confirming their relatively low 

savings, they had terminated certain other efforts to identify secondary 

payer claims. The terminated efforts included (1) a second questionnaire 

 40The margin—the difference between Medicare payments and providers’ costs for services 

to Medicare beneficiaries expressed as a percentage of payments—is one of the factors

MedPAC uses in developing a recommendation. MedPAC reported in 2004 that preaudit

costs for ESRD facilities were 4 percent higher than postaudit costs in 1996 based on the 

audited cost reports it reviewed. Audits reveal the difference between allowable and

nonallowable costs. There is generally a several year time lag during which CMS’s

contractors receive and audit cost reports, which is why MedPAC had to rely upon the 1996

audited cost reports in 2004. 

Page 25 GAO-06-813 Medicare Integrity Program
sent as follow-up to determine whether a beneficiary who is claiming 

Medicare benefits for the first time has other health insurance that would

be responsible for paying the claim and (2) an effort to determine whether 

certain trauma codes contained in a claim could indicate that another 

insurer, such as worker’s compensation, could be the primary payer. 

The Medicare program is undergoing significant changes for which there is 

little precedent. These include the addition of the new Part D prescription 

drug benefit and the reform of Medicare contracting. Both will require 

CMS to make new choices in how it should allocate its MIP funds to best 

address its program integrity challenges. CMS’s current allocation 

approach—which agency officials characterized as primarily relying on 

previous fiscal year funding allocations for each activity, and to each 

contractor, to determine current allocations—will not be adequate to 

address emerging program integrity risks and ongoing programmatic 

changes. In addition, as contracting reform proceeds, CMS intends to 

increase its use of MIP funds to reward contractors to encourage superior

performance. However, the usefulness of award payments as a tool to 

encourage contractors to perform MIP tasks effectively depends on how 

well CMS can develop, and consistently apply, performance measures to 

gauge differences in the quality of performance. 

CMS’s current allocation approach will not be adequate to address 

Medicare’s emerging program integrity risks related to the prescription 

drug benefit. Over the next 10 years, total expenditures for the 

prescription drug benefit, which was implemented in January 2006, are 

projected to be about $978 billion, while total expenditures for the 

Medicare program are projected to be about $6.1 trillion.41 CMS and others 

have stated that the prescription drug benefit is at risk for significant fraud 

and abuse. In December 2005, an assistant U.S. attorney noted that the 

Medicare prescription drug benefit would be vulnerable to a host of fraud 

and abuse schemes unless better detection systems are developed. 

According to CMS, the prescription drug benefit may be vulnerable to 

fraud and abuse in particular areas, including beneficiary eligibility, fraud 

by pharmacies, and kickbacks designed to encourage certain drugs to be 

Future Programmatic 

Changes Will Affect 

MIP Funding 

Allocations 

CMS’s Current MIP 

Allocation Approach Is Not 

Adequate to Address 

Emerging Risks 

 41Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical 

Insurance Trust Funds, 2006 Annual Report of the Boards of Trustees of the Federal

Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

(Washington, D.C.: May 1, 2006). 

Page 26 GAO-06-813 Medicare Integrity Program
included by the plans administering the benefit. To respond to these 

challenges, CMS has selected eight private organizations, called Medicare 

prescription drug integrity contractors (MEDIC), to support CMS’s benefit 

integrity and audit efforts.42

Because the Medicare prescription drug benefit is in the early stages of 

implementation, CMS does not yet have data to estimate the level of 

improper payments or information to determine the level of program 

integrity funds needed to address emerging vulnerabilities. As a result, it is

not clear whether, in the future, CMS will need to shift funds from 

program integrity activities for Parts A and B to protect the Part D drug 

benefit from potential fraud and abuse. For fiscal year 2006, $112 million 

beyond the HIPAA limit of $720 million has been appropriated for CMS to

support program integrity activities. The President’s Budget for fiscal year 

2007 has also proposed additional funds for fiscal year 2007 and fiscal year 

2008. CMS plans to use some of the additional funding provided under 

DRA for fiscal year 2006 to support Part D program integrity efforts. For 

example, CMS plans to spend $14 million over the next fiscal year to fund 

efforts by MEDICs to protect the prescription drug benefit by performing 

selected tasks, such as analyzing data to identify instances of potential 

fraud and abuse. In addition, CMS plans to spend about $33 million on 

Part D information technology systems to track data related to beneficiary 

eligibility and to collect, maintain, and process information on Medicare 

covered and noncovered drugs for Medicare beneficiaries participating in

Part D. See appendix IV for more information. 

Medicare Contracting 

Changes Will Affect MIP 

Allocations 

Another significant programmatic change that will affect future MIP 

funding allocations is Medicare contracting reform. MMA required CMS to 

transfer all claims administration work, which includes selected program 

integrity activities, to MACs by October 2011. CMS plans to transfer all 

work to the MACs by July 2009—about 2 years ahead of MMA’s specified 

time frame. Contracting reform will affect MIP funding allocations because 

 42Some of the main functions of the MEDICs will include identifying and investigating 

potential fraud and abuse, developing cases for referral, acting as liaisons to law

enforcement agencies, and providing audit services. MEDICs may be assigned various 

types of audits, such as audits of the information provided to CMS by the plans

administering the Part D benefits, the plans’ required fraud and abuse compliance plans,

and plans’ services to beneficiaries. In addition, CMS plans to determine an improper 

payment rate for the prescription drug benefit, and at least one of the MEDICs may assume 

that task. CMS used start-up funds in fiscal year 2005 for the prescription drug benefit, 

which were not part of MIP funds, to conduct the competition to select the MEDICs. 

Page 27 GAO-06-813 Medicare Integrity Program
of (1) changes in contractors’ responsibilities for program integrity 

activities and their jurisdictions, (2) the potential for operational 

efficiencies, and (3) increasing use of MIP funds for contractor award 

payments. 

The transition to MACs will change some contractors’ program integrity 

responsibilities and require reallocation of MIP funds among them. The 

new MACs will be responsible for paying claims that were previously 

processed by intermediaries and carriers, but CMS has decided that MACs 

will not be performing all of the MIP activities that they previously 

conducted. For example, PSCs performed medical reviews of claims in 

some contractors’ jurisdictions, but this activity will be performed by 

almost all of the MACs in the future.43 Further, contractors’ jurisdictions 

will change as 23 MACs assume the work previously performed by a total 

of 51 Medicare intermediaries and carriers, within the confines of 15 newly 

designated geographic jurisdictions.44 The PSCs conducting benefit 

integrity work will be aligned with the MACs in the 15 jurisdictions. In 

some cases, one PSC may be aligned with more than one MAC jurisdiction. 

According to CMS officials, Medicare contracting reform will lead to 

operational efficiencies and savings that would mostly be due to more 

effective medical review. For example, CMS anticipates that greater 

incentives for MACs to operate efficiently and adopt industry innovations

in the automated medical review of claims will result in total estimated 

trust fund savings of $650 million for Medicare from fiscal year 2006 to 

fiscal year 2011. Having program integrity activities operate more 

effectively could give CMS additional flexibility to reallocate some funding 

while achieving reductions in improperly paid claims. However, we have 

not validated CMS’s estimate, and in our August 2005 report on CMS’s plan 

for implementing Medicare contracting reform, we raised concerns about 

 43The first four MACs selected in January 2006 will process DME, prosthetics, orthotics, 

and supply claims and will not be responsible for medical review of the claims they 

process. Three PSCs will conduct medical review for these claims.

44Fifteen MACs will each process both Part A and Part B claims in 1 of the 15 jurisdictions. 

In addition, 4 MACs will process DME, prosthetics, orthotics, and supply claims, and 4 

MACs will process home health and hospice claims in 4 jurisdictions that encompass the 15

Part A and Part B jurisdictions. 

Page 28 GAO-06-813 Medicare Integrity Program
the uncertainty of savings estimates, which were based on future 

developments that are difficult to predict.45

As part of contracting reform, CMS plans to increase its allocation of MIP 

funds that are used as award payments to encourage superior performance 

of program integrity activities by contractors. Award payments that are 

tied to appropriate performance measures could encourage contractors to 

conduct MIP activities effectively and introduce innovations, such as 

developing new analytical approaches to enhance the medical review 

process. Intermediaries and carriers, both of which conduct some program 

integrity activities, are currently paid on the basis of their costs, generally

without financial incentives to encourage superior performance.46 In 

contrast, CMS currently offers award payments to other types of 

contractors that conduct program integrity activities, including four MACs 

that were selected in January 2006, PSCs, the COB contractor, NSC, and 

the DAC contractor. As early as 2009, or when all administrative work has 

been transferred to MACs, CMS will be offering the opportunity to be 

selected for award payments to all contractors that conduct program 

integrity activities.47

The usefulness of using MIP funding for award payments to encourage 

contractors to conduct program integrity tasks effectively depends on how 

well CMS can develop, and consistently apply, performance measures to 

gauge differences in the quality of performance. In 2004, CMS conducted a 

study to evaluate whether the agency could reduce improper payments by

using award payments for contractors to lower their paid claims error 

rates, which represent the amount of claims contractors paid in error 

compared with their total fee-for-service payments. According to CMS, the 

outcome of that pilot was positive, and CMS plans to use award payments 

in the future as part of its strategy for reducing improper payments. 

However, as we reported in March 2006, CMS will need to refine its 

measure of contractor-specific improper payments, which would enhance 

its ability to evaluate their performance of medical review and provider 

 45GAO, Medicare Contracting Reform: CMS’s Plan Has Gaps and Its Anticipated Savings

Are Uncertain, GAO-05-873 (Washington, D.C.: Aug. 17, 2005). 

46Prior to MMA, CMS’s authority to contract using other payment methods was restricted. 

47In addition to the 4 MACs that were selected in January 2006 and 1 that was selected in 

July 2006, CMS plans to select 18 MACs from September 2007 through September 2008. 

Page 29 GAO-06-813 Medicare Integrity Program
education activities.48 Further, even when CMS has developed measures to 

assess the performance of contractors that conduct MIP activities, it has 

not always effectively or consistently applied them. For example, the OIG 

recently reviewed the extent and type of information provided in 

evaluation reports on PSCs’ performance in detecting and deterring fraud 

and abuse. The OIG found that although the evaluation reports were used 

as a basis to assess contractors’ overall performance, they did not 

consistently include quantitative information on the activities contractors 

performed or their effectiveness. 

We designated the Medicare program as high risk for fraud, waste, abuse, 

and mismanagement in 1990, and the program remains so today. To 

address this ongoing risk and reduce the program’s billions of dollars in 

improper payments, CMS must use Medicare’s program integrity funding

as effectively as possible. Further, Medicare’s susceptibility to fraud is 

growing, as it addresses the challenges of adding a prescription drug 

benefit to the program. Despite Medicare’s increasing vulnerability, CMS 

has generally not changed its allocation approach for MIP funding. In 2006, 

a decade after MIP was established to support Medicare program integrity 

activities, CMS officials state that the primary basis for their allocation of 

funds is how they have been allocated in the past. However, programmatic 

changes for Medicare’s contractors and emerging risks for the Part D 

prescription drug benefit suggest that CMS needs to modify its approach 

for deciding on funding allocations for—and within—the five program 

integrity activities. Also supporting the need for CMS to assess its current 

allocation approach is that the agency’s funding decisions do not routinely 

take into account quantitative data or qualitative information on the 

relative effectiveness of its five program integrity activities or contractors’ 

vulnerabilities. Without considering information or data, CMS cannot 

judge whether funds are being spent as effectively as possible or if they 

should be reallocated. CMS is developing two new measures that may help

the agency evaluate the relative effectiveness of provider education and 

the audit activity. Better information about MIP activities’ effectiveness 

should assist CMS in making more prudent management and funding 

allocation decisions. 

Conclusions 

 48GAO, Medicare Payment: CMS Methodology Adequate to Estimate National Error Rate, 

GAO-06-300 (Washington, D.C.: Mar. 24, 2006). 

Page 30 GAO-06-813 Medicare Integrity Program
To better ensure that MIP funds are appropriately allocated among and 

within the five program integrity activities, we recommend that CMS 

develop a method of allocating funds based on the effectiveness of its 

program integrity activities, the contractors’ workloads, and risk. 

In its written comments on a draft of this report, CMS stated that it 

generally agreed with our recommendation to develop a method of 

allocating MIP funds based on the effectiveness of the agency’s program 

integrity activities, Medicare contractors’ workloads, and risk. However, 

the agency expressed concern that the report appeared to emphasize the 

use of ROI, a quantitative measure that tracks dollars saved in relation to

dollars spent, as a way to allocate funds. CMS stated this quantitative 

measure can be an indicator of effectiveness, but noted that such a 

measure cannot serve as the sole basis for informing funding decisions. 

The agency stated that some of its MIP activities had benefits that could 

not be easily quantified. CMS agreed on the value of allocating funds based 

on risk and provided information on programmatic changes that would 

help it do so. The agency also noted the efforts it had recently made to 

strengthen program integrity. 

Recommendation for 

Executive Action 

Agency Comments 

and Our Evaluation 

CMS expressed concern about our discussion in the draft report 

concerning the use of ROI as a way to quantitatively measure effectiveness 

and to allocate MIP funds. CMS stated that the agency cannot provide 

funding based exclusively on an ROI because some activities, including 

benefit integrity, do not lend themselves to an ROI measurement and 

others, such as audit, are governed by statutory requirements. CMS also 

stated that in allocating MIP funds, it is critical that it consider factors 

other than ROI, including historical funding, because MIP funding has not

increased since 2003. 

Our report indicates that an ROI is an important factor that should be 

considered in allocating funds, but cannot be the sole consideration. Our 

conclusions reflect our support of an approach that takes into account the 

qualitative benefits of program integrity activities. Our report discusses 

agency officials’ views on the difficulty of developing quantitative 

measures for the benefit integrity activity. We also provide information on 

CMS officials’ qualitative assessments of the positive impact of benefit 

integrity and provider education. For example, our report notes that 

according to CMS officials, these benefits include discouraging entities 

that may be considering defrauding the Medicare program and helping to

ensure proper Medicare payments. Both quantitative and qualitative 

assessments of effectiveness—to the extent they can be developed—could 

Page 31 GAO-06-813 Medicare Integrity Program
help CMS determine whether MIP funds are being wisely invested or if 

they should be reallocated. 

CMS also commented on the allocation of MIP funds to Medicare 

contractors based on workload and risk. CMS noted that contracting 

reform and the introduction of MACs will result in contractors’ workloads 

being more evenly distributed. In addition, CMS noted that it is developing

award fee measures for contractors’ medical review activities, including

establishing performance goals for the Comprehensive Error Rate Testing 

program contractor-specific error rate. CMS agreed with us that risk is a 

factor that should be considered in allocating funds. 

CMS stated that it is committed to identifying and investigating better 

approaches to allocate resources to support critical agency functions, 

including using its new contracting authority to introduce incentives for 

Medicare fee-for-service claims processing contracts and consolidating 

Medicare secondary payer activities. CMS also noted that it is using stateof-the-art systems and expertise to aggressively fight waste and abuse in 

the program, continues to work closely with its contractors to help ensure

that providers receive appropriate education and guidance in areas where 

billing problems have been identified, and has expanded oversight of the 

new Medicare Part D prescription drug benefit. In addition, CMS discussed 

recent program integrity efforts and successes, including reducing the 

number of improper fee-for-service Medicare payments and addressing 

fraud across all provider types by coordinating the activities of CMS, law 

enforcement, and Medicare contactors in Los Angeles, California, and 

Miami, Florida. 

We have reprinted CMS’s letter in appendix V. CMS also provided us with 

technical comments, which we incorporated in the report where 

appropriate.

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

date. At that time, we will send copies to the Secretary of HHS, the 

Administrator of CMS, appropriate congressional committees, and other 

interested parties. We will also make copies available to others upon 

request. This report will also be available at no charge on GAO’s Web site 

at http://www.gao.gov. 

Page 32 GAO-06-813 Medicare Integrity Program
If you or your staff have any questions about this report, please contact me 

at (312) 220-7600 or aronovitzl@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

Sheila K. Avruch, Assistant Director; Hazel Bailey; Krister Friday; 

Sandra D. Gove; and Craig Winslow. 

Sincerely yours, 

Leslie G. Aronovitz 

Director, Health Care 

Page 33 GAO-06-813 Medicare Integrity Program
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

Methodology 

To provide information on the amount of funds allocated to the five 

Medicare Integrity Program (MIP) activities over time, we interviewed 

officials from the Centers for Medicare & Medicaid Services (CMS). We 

obtained information concerning MIP funding allocations for audit, 

medical review, secondary payer, benefit integrity, and provider education 

for fiscal years 1997 through 2005. We also analyzed allocations within 

these activities. Further, we obtained and analyzed related financial 

information, including CMS’s planned and actual expenditures, savings, 

and return on investment (ROI) calculations for fiscal year 1997 through

fiscal year 2005; CMS financial reports; and presidential and Department of 

Health and Human Service (HHS) budget proposals for fiscal years 2006 

and 2007. Because most MIP expenditures are for activities related to the

Medicare fee-for-service plan, our analyses focused on those expenditures. 

We reviewed relevant legislation, such as the Health Insurance Portability 

and Accountability Act of 1996 (HIPAA); the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (MMA); and the Deficit 

Reduction Act of 2005 (DRA). We reviewed pertinent reports and 

congressional testimony, including our own and those of CMS and the 

HHS Office of Inspector General (OIG), related to program integrity 

requirements. 

To examine the approach that CMS uses to allocate MIP funds, we 

interviewed CMS officials regarding factors they consider when allocating

MIP funds. We reviewed related documentation provided to us by CMS, 

including budget development guidelines; manuals, such as the Financial 

Management Manual; operating plans; and selected workload data. We 

also reviewed information on individual projects, such as information 

technology systems. We also reviewed pertinent GAO reports and 

testimony and Medicare Payment Advisory Commission reports. We did 

not independently examine the internal and automated data processing 

controls for CMS systems from which we obtained data used in our 

analyses. CMS subjects its data to limited reviews and periodic 

examinations and relies on the data obtained from these systems as 

evidence of Medicare expenditures and to support CMS’s management and 

budgetary decisions. Therefore, we considered these data to be reliable for 

the purposes of our review. 

In addition, we interviewed CMS officials regarding changes in the 

Medicare program that may affect MIP funding allocations, including 

CMS’s plans to support activities to detect fraud and improper billing for 

the new Part D prescription drug benefit and MIP activities to be 

performed by contractors in the future. We also interviewed CMS officials 

concerning performance measures and evaluations of contractors. We 

Page 34 GAO-06-813 Medicare Integrity Program
Appendix I: Objectives, Scope, and 

Methodology 

reviewed related documentation, including the statement of work for the 

Medicare prescription drug integrity contractors; plans for Medicare 

contracting reform; policies and procedures associated with CMS’s 

measurement of contractor performance; standards and performance 

measures, such as the Comprehensive Error Rate Testing program; various 

manuals, including the Medicare Program Integrity Manual; and an OIG 

report on performance evaluations of program safeguard contractors 

(PSC). We also reviewed CMS’s evaluations of contractor performance. 

We performed our work from August 2005 through August 2006 in 

accordance with generally accepted government auditing standards. 

Page 35 GAO-06-813 Medicare Integrity Program
Appendix II: Information on MIP Funding, Appendix II: Information on MIP Funding, Expenditures, and ROI 

Expenditures, and ROI 

The following tables contain details on MIP funding, expenditures, 

allocations, and ROI. Table 2 shows MIP funding ranges under HIPAA. 

Table 3 shows the amounts of MIP expenditures allocated to each of the 

program integrity activities. Table 4 shows the percentage of MIP funds 

allocated to the program integrity activities. Table 5 shows the ROI for 

three of the program integrity activities. 

Table 2: Fiscal Year MIP Funding Ranges under HIPAA 

Dollars in millions 

Amount 1997 1998 1999 2000 2001 2002 2003 and later years

Not less than $430 $490 $550 $620 $670 $690 $710

Not more than 440 500a 560 630 680 700 720b

Source: GAO analysis of HIPAA and DRA. 

a

This amount does not include the $50 million in supplemental program integrity funds made available 

by HHS’s fiscal year 1998 appropriation. 

b

This amount does not include the $112 million for fiscal year 2006, which was included in DRA. 

Table 3: Amount of MIP Expenditures Allocated to the Five Program Integrity Activities, Fiscal Years 1997 through 2005 

Dollars in millions 

Activity 1997 1998 1999 2000 2001 2002 2003 2004 2005

Audit $143.3 $187.2 $177.3 $193.8 $209.5 $205.4 $221.9 $210.2 $207.6

Medical review 118.6 158.3 178.7 196.0 214.8 193.2 162.4 166.5 165.9

Secondary payer 102.0 108.5 103.6 128.5 140.6 138.5 143.5 152.1 151.5

Benefit integrity 62.7 78.5 86.8 91.3 95.5 102.4 119.4 113.1 118.5

Provider education 10.1 12.1 9.9 14.6 17.0 53.5a65.1 70.3 70.0

Total $437.9b$544.6 $556.3 $624.2 $677.4 $693.0 $712.3 $712.2 $713.5

Source: GAO analysis of CMS data. 

a

From fiscal year 2002, provider education includes amounts for both provider education and provider

outreach. 

b

Fiscal year 1997 total also includes $1.2 million for “other” MIP expenditures.

Page 36 GAO-06-813 Medicare Integrity Program
Appendix II: Information on MIP Funding, 

Expenditures, and ROI 

Table 4: Percentage of MIP Funds Allocated to the Five Program Integrity Activities, Fiscal Years 1997 through 2005 

Activity 1997 1998 1999 2000 2001 2002 2003 2004 2005 Average

Audit 33 34 32 31 31 30 31 30 29 31

Medical review 27 29 32 31 32 28 23 23 23 27

Secondary payer 23 20 19 21 21 20 20 21 21 21

Benefit integrity 14 14 16 15 14 15 17 16 17 15

Provider education 2 2 2 2 3 8 9 10 10 6

Total 100a100 100 100 100 100 100 100 100 100

Source: GAO analysis of CMS data. 

Notes: These amounts also include supporting activities, such as information technology. Numbers 

do not always add to 100 percent because of rounding. 

a

Percentages for fiscal year 1997 exclude $1.2 million in “other expenditures” for that year, which 

accounted for less than 1 percent of the total. 

Table 5: Reported ROI for Audit, Medical Review, and Secondary Payer Activities, Fiscal Years 1997 through 2005 

Activity 1997 1998 1999 2000 2001 2002 2003 2004 2005

Audit $11.6 $8.9 $15.7 $12.6 $3.7 $0.0 $0.0 $0.0 $0.0

Medical review 23.6 22.5 21.1 22.2 23.1 21.8 28.0 24.0 20.5

Secondary payer 33.1 30.1 32.2 24.3 26.8 30.9 32.0 31.7 37.4

Source: GAO analysis of CMS data. 

Notes: Based on dollars saved in relation to dollars invested. CMS does not track ROI for benefit 

integrity or provider education activities. 

Page 37 GAO-06-813 Medicare Integrity Program
Appendix III: Key Tasks Performed by

Contractors That Conduct MIP Activities 

Activity 

Medicare contractors 

conducting activity Examples of key tasks performed 

Audits Fiscal intermediaries 

(intermediaries), one PSC, and 

MAC selected in July 2006 

• Hospitals, nursing homes, home health agencies, and other institutional 

providers that are—or have been— paid on a cost reimbursement basis 

submit cost reports to CMS. Cost reports provide a detailed accounting of 

what costs have been incurred, what costs the provider is charging to the 

Medicare program, and how such costs are accounted for by the 

provider. 

• Contractors review all or part of the cost report to assess whether costs 

have been properly allocated and charged to the Medicare program. 

• Contractors determine if the cost report is acceptable or if it needs further 

review. 

• In some instances, contractors may conduct on-site cost report audits, 

which include the review of financial records and related documentation 

supporting costs and charges. 

Medical review Intermediaries, carriers, and 

PSCs, and MAC selected in 

July 2006 

• Contractors identify billing errors made by providers through analysis of 

claims data; take action to prevent errors, address identified errors, or 

both; and publish local coverage policies to provide guidance to the public 

and medical community concerning items and services that are eligible 

for Medicare payment. 

• Most medical reviews do not require a manual review of medical records. 

Often contactors conduct medical reviews simply by examining the claim 

itself, usually using automated methods. 

Secondary payer Coordination of benefits (COB) 

contractor, intermediaries and

carriers, and Medicare 

administrative contractors 

(MAC) 

• The COB contractor collects, manages, and maintains information 

regarding health insurance coverage for Medicare beneficiaries. 

• To gather information to properly adjudicate submitted claims, the COB 

contractor sends questionnaires to newly enrolled Medicare beneficiaries 

and employers to solicit information about beneficiaries’ health insurance 

coverage. 

• The COB contractor also collects secondary payer data from providers, 

insurers, attorneys, and some state agencies.

• The COB contractor uses data match programs to identify claims that 

should have been paid by another insurer. When information indicates 

that a beneficiary has other health insurance, the COB contractor initiates 

a secondary payer claims investigation. 

• Intermediaries and carriers also conduct secondary payer operations, 

including prepayment activities in conjunction with the COB contractor, 

and they recover erroneous secondary payer payments. 

Appendix III: Key Tasks Performed by 

Contractors That Conduct MIP Activities 

Page 38 GAO-06-813 Medicare Integrity Program
Appendix III: Key Tasks Performed by

Contractors That Conduct MIP Activities 

Activity 

Medicare contractors 

conducting activity Examples of key tasks performed 

Benefit integrity PSCs, the National Supplier 

Clearinghouse (NSC), and the

data analysis and coding (DAC) 

contractor 

• Contractors are tasked with preventing, detecting, and deterring Medicare 

fraud. 

• PSCs conduct medical reviews to support fraud investigations, analyze

data to support medical reviews, process fraud complaints, develop fraud 

cases, conduct provider education related to fraud activities, and support 

law enforcement entities. 

• Once a case is developed, PSCs refer it to the OIG or to law enforcement 

for prosecution.

• NSC reviews and processes applications from organizations and 

individuals seeking to become suppliers of medical equipment and 

supplies in the Medicare program. 

• NSC verifies suppliers’ application information; conducts on-site visits to 

the prospective suppliers; issues supplier authorization numbers, which 

allow suppliers to bill Medicare; and maintains a central data repository of

information concerning suppliers. 

• NSC also periodically reenrolls active suppliers and uses data to assist 

with fraud and abuse research. 

• The DAC contractor conducts ongoing data analysis and reporting of 

trends related to supplier billing for medical equipment and supplies and 

provides ongoing feedback to the PSCs. 

Provider education Intermediaries, carriers, MACs, 

and PSCs 

• When billing problems are identified through medical reviews, contractors 

take a variety of steps to educate providers about Medicare coverage 

policies, billing practices, and issues related to fraud and abuse. 

• Contractors may conduct group training sessions, including seminars and 

workshops; send informational letters to providers; arrange for 

teleconferences; conduct site visits; and provide information on their Web 

sites. 

Source: GAO analysis of CMS documents. 

Page 39 GAO-06-813 Medicare Integrity Program
Appendix IV: CMS’s Planned Spending of 

$100 Million Provided by DRA

For fiscal year 2006, DRA provided $112 million in MIP funds beyond the 

annual HIPAA limit of $720 million. Of this amount, DRA specified that 

$12 million was for the Medi-Medi program and $100 million was for MIP 

in general. Table 6 provides information on CMS’s planned spending of 

$100 million in general MIP funds provided by DRA, including spending 

related to the Part D prescription drug benefit.

Table 6: CMS’s Planned Spending of MIP Funds Provided by DRA 

Category Amount Description

Information technology $33,100,000 CMS developed several information technology systems to implement the

prescription drug benefit. These MIP funds from DRA are partially supporting 

these systems. They include the following: 

• Medicare Drug Data Processing System contains summary prescription 

drug claim information on all Medicare covered and noncovered drug events, 

including non-Medicare drug events, for Medicare beneficiaries. Each time a 

beneficiary fills a prescription drug covered under Part D, plans must submit 

a summary record called the prescription drug event (PDE) record to CMS. 

The PDE record contains prescription drug cost and payment data that will

enable CMS to make payments to plans and otherwise administer the Part D 

benefit. 

• Medicare Advantage Prescription Drug System will be a stand-alone 

system that will include the processing of all enrollment and disenrollment 

transactions associated with the Part D benefit. 

• Medicare Beneficiary Database tracks data related to beneficiary eligibility 

for Part D. 

Reviews of requested 

exceptions to therapy 

cap 

20,000,000 Medicare has financial limitations on payments for certain types of therapy 

services provided to a beneficiary during a calendar year—called therapy caps.a

DRA allows CMS to grant exceptions to these therapy caps, as long as the 

services are medically necessary for the beneficiary. CMS will use these DRA 

funds to review supporting documentation for requests for exception to the 

therapy cap amounts to determine whether the services are medically 

necessary and whether the exception should be granted. 

Information technology 

infrastructure 

15,000,000 CMS is consolidating data generated by Medi-Medi and Parts B and D into an 

integrated data repository.b

 MIP funds are to be used to help develop the 

information technology infrastructure to achieve this task. 

Medicare prescription 

drug integrity contractor 

(MEDIC) 

14,000,000 In November 2005, CMS awarded one task order to the enrollment and 

eligibility MEDIC, which is tasked with identifying and addressing potential 

fraud, waste, and abuse in the early implementation of the Part D benefit. This 

task order will be in effect until CMS selects three regional MEDICs and one 

MEDIC to act as a data integrator. CMS plans to select these MEDICs later this 

summer. 

Part D and Medicare 

Advantage activities 

8,749,732 These funds are to be used to monitor and audit Part D and Medicare 

Advantage activities. Several types of audits are to be carried out for Part D.c

Funds, for example, will be used for Part D compliance monitoring and auditing 

activities. 

Appendix IV: CMS’s Planned Spending of 

$100 Million Provided by DRA 

Page 40 GAO-06-813 Medicare Integrity Program
Appendix IV: CMS’s Planned Spending of 

$100 Million Provided by DRA

Category Amount Description

Audits of Adjusted 

Community Rate 

Proposals (ACRP) 

4,077,000 A Medicare Advantage plan’s ACRP identifies the health services that will be 

provided to beneficiaries, the estimated costs of providing these health 

services, and the estimated payments the plan will receive—so that CMS can 

ensure that the plans are using any excess payments as allowed by law. CMS 

will use these DRA funds to conduct required audits in order to evaluate the 

reasonableness of ACRPs.d

 Prior to this year, these audits were paid by MIP 

funds provided through HIPAA. 

Contingency funds 5,073,268 CMS is reserving these funds to be allocated later in the fiscal year. 

Total $100,000,000 

Source: GAO analysis of CMS and DRA information. 

a

The term therapy caps refers to limitations on Medicare payments for certain outpatient rehabilitation 

services, which were initiated by the Balanced Budget Act of 1997. Pub. L. No. 105-33, § 4541(c), 

111 Stat. 251, 456-57. As of January 1, 2006, caps are in effect for occupational therapy and 

outpatient physical therapy and speech-language pathology received by Medicare beneficiaries. For 

services received in 2006, beneficiaries may request an exception to the caps based on medical 

necessity. In addition, such necessity will be deemed present if a decision is not made on a request

within 10 business days of its receipt. DRA § 5107, 120 Stat. 4, 42 (to be codified at 42 U.S.C. § 

1395l(g)(5)). 

b

This amount does not include the $12 million specifically provided for the Medi-Medi program by

DRA for fiscal year 2006. 

c

CMS will do regularly scheduled audits and do focused and targeted audits when questionable 

findings are identified through contractor activities, such as data analysis. In instances of allegations 

of fraud, waste, or abuse, MEDICs will conduct audits. Also, CMS has planned a 3-year 

comprehensive, regularly scheduled audit cycle for Part D plans, because MMA required audits of 

financial records for at least one-third of all Part D prescription drug plans each year. MMA § 

101(a)(2), 117 Stat. 2100 (to be codified at 42 U.S.C. § 1395w-112(b)(3)(C)). 

d

CMS is required to audit the financial records of at least one-third of the participating Medicare 

Advantage Plans (formerly called Medicare+Choice Plans) annually. 42 U.S.C. § 1395w-27(d)(1) 

(2000). 

Page 41 GAO-06-813 Medicare Integrity Program
Appendix V: Comments from the Centers for Appendix V Medicare & Medicaid Services : Comments from the Centers for 

Medicare & Medicaid Services 

Page 42 GAO-06-813 Medicare Integrity Program
Appendix V: Comments from the Centers for 

Medicare & Medicaid Services 

Page 43 GAO-06-813 Medicare Integrity Program
Appendix V: Comments from the Centers for 

Medicare & Medicaid Services 

Page 44 GAO-06-813 Medicare Integrity Program
Appendix V: Comments from the Centers for 

Medicare & Medicaid Services 

(290473) Page 45 GAO-06-813 Medicare Integrity Program
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