Department of Health and Human Services 

OFFICE OF


INSPECTOR GENERAL 

DESIGN FLAWS IN THE MEDICARE


INCENTIVE PAYMENT PROGRAM


ManagementAdvisory Report 

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> OEI-01-93-00051 
OFFICE OF INSPECTOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Services’ (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three OIG operating components: the Office of Audit Services, the 

Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program and management problems and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICES 

The OIGS Office of Audit Services (OAS) provides all auditing services for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIGS Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions, 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECI’IONS 

The OIGS Office of Evaluation and Inspections (OEI) conducts short-term management and


program evaluations (called inspections) that focus on issues of concern to the Department,


the Congress, and the public. The findings and recommendations contained in these inspection


reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability,


and effectiveness of departmental programs.


This report was prepared under the direction of Mark R. Yessian, Ph. D., Regional Inspector


General, and Martha B. Kvaal, Deputy Regional Inspector General, Boston Region, Office of


Evaluation and Inspections. Participating in the project were the following people:


Boston Headquarters


David R. Veroff, Project Leader Hugh Hetzer, Program Specialist


David Schrag, Lead Analyst


For adddimal copies of this rep~ please contact the Boston regional ofice by telephone at 

(617) 565-1050, or@ Fax at (617) 565-3751. 
Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

DESIGN FLAWS IN THE MEDICARE


INCENTIVE PAYMENT PROGRAM


Management Advisory Report 

# SERVICZ$ 

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g JUNE GIBBS BROWN 

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> OEI-01-93-OO051 
EXECUTIVE SUMMARY 

PURPOSE 

To identify design flaws in the Medicare incentive payment program for physicians in 

Health Professional Shortage Areas. 

BACKGROUND 

The Omnibus Budget Reconciliation Acts of 19S7 and 1989 provide bonus payments 

for physicians who treat Medicare patients in Health Professional Shortage Areas 

(HPSAS). The payments are intended to serve as incentives to attract new physicians 

to HPSAS and to retain physicians already practicing there. 

Having reviewed the program, we recommend in a companion report that the Health 

Care Financing Administration (HCFA) seek to target the program to primary care 

physicians. Nonetheless, the program will still be vulnerable to fraud and waste and 

will likely fail to achieve its goals unless a number of concerns are addressed. We are 

issuing this Management Advisory Report to bring those concerns to the attention of 

HCFA and the Congress. 

FINDINGS 

Because the availability of specialists is not considered in the HPSA designation 

process, Medicare may be paying incentives to specialists who are not in short supply. 

Because HPSAS represent entire communities with physician access problems but the 

Medicare program is focused on the elderly, Medicare may not be paying incentives to 

physicians who are in short supply. 

Physicians are eligible to receive Medicare bonus payments even when they treat 

patients who do not live in HPSAS. 

The instability of HPSA designation over time means that the incentive payments 

cannot be counted on to retain physicians in particular areas for the long term. 

The complex method of establishing eligibility for incentive payments makes effective 

financial controls very difficult, leaving the program vulnerable to inappropriate 

payments. 

CONCLUSION 

If the incentive payment program continues in its present or a modified form, we 

believe the design of the program warrants review to ensure that the program is a 

logical mechanism for accomplishing its purported goals. The HCFA will have to 

i 
ensure that all cost-effective measures are taken to prevent inappropriate use of 

incentive payment funds. 

COMMENTS ON OUR DRAFT’ REPORT 

We solicited comments on a draft of this Management Advisory Report along with our


draft inspection report, “Medicare Incentive Payments in Health Professional Shortage


Areas,” OEI-01-93-00050, from the Health Care Financing Administration (HCFA),


the Public Health Service, the Assistant Secretary for Planning and Evaluation


(ASPE), the Assistant Secretary for Management and Budget, the Assistant Secretary


for Legislation, and the Physician Payment Review Commission. We received


comments from HCFA and ASPE that are reproduced in the final inspection report


issued in June 1994.


ii 
TABLE OF CONTENTS


EXECUTIVE SUMMARY


INTRODUCITON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1


FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2


� Incentive payments to physicians not in short supply . . . . . . . . . . . . . . . . . 2


� No incentives to physicians truly in demand . . . . . . . . . . . . . . . . . . . . . . . 2


� Lack of residency requirement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...3


� No guarantee of long-term incentives . . . . . . . . . . . . . . . . . . . . . . . . . ...3


� Vulnerability to inappropriate payments . . . . . . . . . . . . . . . . . . . . . . . . . . 4


CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5


COMMENTS ON THE DRAFI’ REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . ...6


APPENDIX Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..A-l 
�

INTRODUCTION 

PURPOSE 

To identify design flaws in the Medicare incentive payment program for physicians in 

Health Professional Shortage Areas. 

BACKGROUND 

The Omnibus Budget Reconciliation Acts of 1987 and 1989 provide bonus payments 

for physicians who treat Medicare patients in Health Professional Shortage Areas 

(HPSAS).l In Calendar Year 1992, these payments amounted to $68 million and were 

distributed to nearly 22,000 physicians .2 The payments are intended to serve as 

incentives to attract new physicians to HPSAS and to retain physicians already 

practicing there.3 

The Office of Inspector General recently conducted an inspection to determine 

whether the bonus payments were effective in furthering the Federal government’s 

interest in improving access to primary health care. In the report resulting from that 

inspection,* we raise serious doubts about the payments’ contribution to that goal. 

We recommend in that report that the Health Care Financing Administration (HCFA) 

seek to target the program to primary care physicians. Nonetheless the program will 

still be vulnerable to fraud and waste and will likely fail to achieve its goals unless a 

number of concerns are addressed. We are issuing this Management Advisory Report 

to bring these concerns to the attention of HCFA and the Congress. 

Information for this Management AdvisoV Report was drawn from several sources. 

They include research conducted by all three branches of the Office of Inspector 

General, reports from the Physician Payment Review Commission and other 

government agencies, and Federal laws and regulations. 

This report was prepared in accordance with the Quality Standards for Inspections 

issued by the President’s Council on Integrity and Efficiency. 

“Medicare Incentive Payments in Health Professional Shortage Areas,” OEI-Ol-93-

00050, June 1994. 

1 
FINDINGS


Because the availability of specialir~r ir not considered in the HPSA desi~ation process, 

Medicare may be paying incentives to speciali~t.s who are not in short supply. 

HPSAS were created to identify eligible placement sites for physicians who are 

obligated to serve in the National Health Service Corps (NHSC). The NHSC, 

administered by the Public Health Semite (PHS), provides scholarships and loan 

repayments to providers of primary health care in underserved areas. In judging 

whether an area qualifies as a HPSA, PHS calculates the ratio of population to 

primary care physicians.4 Primary care physicians include doctors of medicine and 

osteopathy in the fields of general or family practice, general internal medicine, 

pediatrics, and obstetrics/gynecology. 5 The presence of physicians in other fields has 

no effect on HPSA designation. 

Because of the way HPSAS are designated, Medicare is paying additional money to 

attract and retain specialists in areas where there may be a sufficient number or even 

a surplus of specialists. Because rural HPSAS generally encompass entire population 

centers such as counties, it may be reasonable to assume that they suffer from 

shortages of specialists as well as primary care physicians. Urban HPSAS, however, 

may be small areas such as census tracts. The distribution of physicians within urban 

areas may leave these HPSAS with shortages of primary care physicians but high 

concentrations of specialists. Many inner-city HPSAS that are unattractive to officebased primary care physicians include large hospitals. Those hospitals attract large 

numbers of specialists, and those specialists earn incentive payments for providing 

services within the hospitals. 

All physicians’ services provided in HPSAS count toward the incentive payments. This 

establishes an incentive for physicians in HPSAS to provide all types of procedures, 

even those that are prone to overuse. 

Because HPSAs represent entire communities with physician accem problems but the 

Medicare program ir focused on the elderly, Medicare may not be paying incentives to 

physicians who are in short supplj. 

In defining HPSAS, the PHS strives to identify areas whose citizens have inadequate


access to health care. In addition to calculating population-to-physician ratios, PHS


considers some indicators of health status. Specifically, areas with more than 100


births per 1,000 women aged 15-44 or with more than 20 infant deaths per 1,000 live


births are considered to have “unusually high needs for primary medical care


services.”b To address these needs, the PHS allows these areas to maintain lower


population-to-physician ratios than is usually required for HPSA designation.


Presumably, the types of physicians most needed in these areas are obstetricians and


pediatricians. Yet these physicians are unlikely to treat many Medicare patients, so a


Medicare incentive payment program is unlikely to help attract or retain them there.

At the same time, there could be areas of the country with sufficiently large numbers 

of obstetricians and pediatricians to prevent the areas’ designation as HPSAS, but with 

severe shortages of physicians trained in providing care to the elderly. In these areas, 

Medicare enrollees could have serious problems obtaining access to medical care, but 

the lack of HPSA designation would prevent using the incentive payment program to 

attract more physicians. 

Physicians in HPSAS are eli~”ble 10 receive Medicare bonus payments even when they 

treat patients who do not live in HPSAS. 

The ultimate goal of the incentive payment program is to improve the health status of


residents of areas with shortages of physicians. The payments, in theory, would


motivate physicians to locate offices close to needy patients rather than having patients


travel long distances to see physicians. But the law specifies that bonus payments shall


be made for all physicians’ services provided within HPSAS, not just those provided to


HPSA residents.


Physicians in rural HPSAS probably do not see many non-HPSA residents because of


the long travel times that would be involved. But urban areas are different, because


HPSAS and non-HPSAs are in close proximity and well-known hospitals attract


patients from within a broad radius. Thus it is likely that a number of physicians are


receiving bonus payments even when they are providing services to people who have


no trouble gaining access to physicians.


The HCFA does not know what percentage of patients treated by physicians who


receive incentive payments live in HPSAS. It is not required to record this


information, and the cost and difficulty of collecting the information prevents it from


doing so voluntarily.


l%e instabiliq of HPSA desipation over time means that the incentive payments cannot 

Be counted on to retain physiciam in particular areas for the long term. 

The PHS reviews each HPSA’S status periodically. If new physicians are attracted to a 

HPSA, their presence may bring the population-to-primary-care-physician ratio below 

the ratio necessary for HPSA status. This would lead to withdrawal of the HPSA 

designation at the next review. In October 1992, the most recent date for withdrawing 

HPSA designations, 81 of the approximately 1800 HPSAS lost their HPSA status.7 

Withdrawal of HPSA designation would lead to the elimination of incentive payments 

for physicians in that area. This could prompt the departure of physicians who were 

attracted to HPSAS by the incentive payments. The threat of withdrawal also creates 

an incentive for physicians currently in HPSAS to deter other physicians from settling 

there. Once HPSA designation is withdrawn, bonus payments would cease not only 

for the newly arrived physicians but for all physicians in the HPSA. 

3

l%e complex method of establkhing eli~”bility for incentive payments makes effective 

jinancial controk very dificult, leaving lhe program vulnerable to inappropriate payments. 

Physicians who treat Medicare patients are responsible for determining whether they 

(the physicians) are eligible for incentive payments and for indicating their eligibility to 

their Medicare carriers. They base their determinations on information, such as maps 

and instructions, supplied by the carriers. They indicate their eligibility by adding a 

code to the claim forms they submit to the carriers. 

There are many possible ways for providers to submit invalid claims, including both 

honest mistakes and outright fraud. Among the scenarios are: 

� Physicians who practice from locations both within and outside HPSAS, yet who 

claim bonus payments for semices delivered from all locations. 

� Physicians who practice in areas that used to be HPSAS but whose HPSA status 

has been withdrawn. 

� Providers of services other than physicians’ services who submit claims for 

incentive payments even though they are not eligible. 

The potentially confusing boundaries of HPSAS (especially in urban areas, where 

HPSAS may be defined not by county but by census tract), along with the possibility of 

HPSA status changing from year to year, make mistakes likely. For example, among a 

sample of 49 prow-ders who received incentive payments in one State for a 3-month 

period in 1992, 7 (14 percent) were later found to have been ineligible for the 

payments.8 The carrier in that State had to contact these. providers in an attempt to 

have the money refunded. Although the claims error rate for the entire program has 

declined in recent quarters, problems persist.9 

Programming the carriers’ computers to detect all errant claims for incentive payments 

would be extremely difficult and expensive. The HCFA does not require the carriers 

to do so. Instead, the carriers must annually review a sample of claims from the 

providers who claim the most incentive money and resolve any discrepancies.l” 

Retrospective reviews of samples of claims may be sufficient to detect the most 

egregious cases of fraud and abuse. They may be insufficient, however, to ensure the 

overall financial integrity of the program. 

4

CONCLUSION


We believe the design and administration of the program warrants review. The 

authorizing legislation for this program needs to be modified to ensure that it is a 

logical mechanism for accomplishing its stated goals. The administrators of the 

program, the Health Care Financing Administration, will have to ensure that all costeffective measures are taken to prevent inappropriate disbursement of incentive 

payment funds. 

5

COMMENTS ON THE DRAFT REPORT 

We solicited comments on a draft of this Management Advisory Report along with our


draft inspection report, on whether the bonus payments promote access to primary


care in underserved areas, from the Health Care Financing Administration (HCFA),


the Public Health Semite, the Assistant Secretary for Planning and Evaluation


(ASPE), the Assistant Secretary for Management and Budget, the Assistant Secretary


for Legislation, and the Physician Payment Review Commission. We received


comments from HCFA and ASPE. However, none of the comments were specific to


this report so we did not provide a response to them here. We discuss them fully and


reproduce them verbatim in the final inspection report “ Medicare Incentive Payments


in Health Professional Shortage Areas, ” 0EI-01-93-OO050, June 1994.


6

1.


2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

APPENDIX A 

NOTES 

P.L. 100-203, Sec. 4043; P.L. 101-239, Sec. 6102(c). Forcurrent law, see42 

U.S.C. 13951(m). Health Professional Shortage Areas were originally known as 

Health Manpower Shortage Areas (HMSAS). 

Memorandum and attachments from Edward A. King, Health Care Financing 

Administration, to Stewart Streimer, Health Care Financing Administration, 

February 22, 1993. The figure of 22,000 excludes physicians reported by 

Medicare’s Railroad Retirement Board carrier, because most if not all of these 

physicians are also reported by the carriers in the physicians’ own States. 

Health Policy Research Consortium, Medicare BCVZUSPaymenfs ro Physicians in 

Health Manpower Shortage Areas: Final Report, Cooperative Agreement No. 18-

C-98526/l-05, report prepared for Health Care Financing Administration, April 

1989, p. 1:1. 

The PHS designates several types of HPSAS. Some HPSAS are areas with 

shortages of dentists, psychiatrists, optometrists, podiatrists, pharmacists, or 

veterinarians. Some are population groups rather than geographic areas. 

Medicare incentive payments, however, are available only in geographic, 

primary care HPSAS. 

42 C.F.R. 5, Appendix A. 

42 C.F.R. 5. 

57 Fed. Reg. 48919, October 28, 1992, and Public Health Sewice, Division of 

Shortage Designation, “Selected Statistics on Health Professional Shortage 

Areas (as of December 31, 1992),” Table 1. These totals include geographicarea HPSAS only, not population-group or facility HPSAS. 

This State was one of the 10 States included in a survey of incentive payment 

recipients conducted by the Office of Evaluation and Inspections, Office of 

Inspector General. For more information on the survey, see “Medicare 

Incentive Payments in Health Professional Shortage Areas,” OEI-01-93-00050, 

June 1994. 

Memorandum from Director, Office of Program Operations Procedures, BPO, 

HCFA, to Associate Regional Administrators for Medicare, June 30, 1993. 

Health Care Financing Administration, Medicare Cam”ers Manual, section 3350 

(revised March 1991). 

A-1