United States General Accounting Office

GAO Testimony

Before the Subcommittee on Oversight and Investigations,

Committee on Commerce,

House of Representatives

For Release on Delivery

Expected at

2 p.m.

Tuesday,

May 19, 1998

MEDICARE BILLING

Commercial System Will

Allow HCFA to Save Money,

Combat Fraud and Abuse

Statement of Joel C. Willemssen

Director, Civil Agencies Information Systems

Accounting and Information Management Division

GAO/T-AIMD-98-166

Mr. Chairman and Members of the Subcommittee:

We are pleased to join you today in examining the actions of the Health

Care Financing Administration (HCFA)—an agency of the Department of

Health and Human Services (HHS)—in assessing the benefits of

commercial claims-auditing software for nationwide implementation with

its Medicare processing systems. Such software can be a critical tool in

helping HCFA address fraud and abuse in the Medicare program. Fraud and

abuse within Medicare is pervasive; accordingly, we have designated the

program a high-risk area for the federal government.1

 According to HHS’

Office of Inspector General, incorrect coding by physicians cost Medicare

about $1.7 billion in improper payments during fiscal year 1997, an

increase of about $630 million from fiscal year 1996.

Commercial systems to detect inappropriate coding/billing have been

available for several years. As early as 1991 commercial firms marketed

specialized auditing systems that identified inappropriately coded claims.

Both the HHS Inspector General and we have noted the potential value of

such systems. In 1991, the Inspector General reported that commercially

available claims-auditing systems had the potential to save $12 million

annually at one Medicare processing site alone.2

 Similarly, in 1995 we

reported that such systems could save Medicare about $600 million

annually if implemented on a nationwide basis.3

Instead of acquiring available commercial software, however, HCFA initially

chose to develop its own system. In 1991, HCFA directed its Medicare

insurance carriers to begin developing edits to be included in its

claims-auditing systems. In 1994, it awarded a contract for further

development of these edits, which it called the correct coding initiative—a

system HCFA now owns and operates. According to HCFA, these edits helped

Medicare save about $217 million in 1996 by successfully identifying

inappropriate claims. Now, 3 years after our recommendation, HCFA has

tested a commercial system and found that it could indeed save

substantially higher sums—in this case, about $465 million annually

in addition to the savings resulting from the coding initiative.

Consequently, HCFA now plans to acquire this commercial claims-editing

capability as soon as possible.

1

High-Risk Series: Medicare (GAO/HR-97-10, February 1997).

2

Manipulation of Procedure Codes by Physicians to Maximize Reimbursement, Office of Inspector

General, Department of Health and Human Services, CIN: A-03-91-00019, August 30, 1991.

3

Medicare Claims: Commercial Technology Could Save Billions Lost to Billing Abuse

(GAO/AIMD-95-135, May 5, 1995).

Page 1 GAO/T-AIMD-98-166
In a report being released today, we analyzed HCFA’s progress in testing

and acquiring a commercial system for identifying inappropriate Medicare

bills.4

 My statement today will discuss how HCFA tested this commercial

system, its initial management decisions and their consequences, and its

current plans for immediate implementation.

HCFA’s Test

Methodology

HCFA used a test methodology that was comparable with processes

followed by other public insurers who have successfully tested and

implemented such commercial systems. Other public insurers—such as

the military’s TRICARE, Veterans Affairs’ CHAMPVA, and the Kansas and

Mississippi Medicaid offices—each used four key steps to test their

claims-auditing systems prior to implementation. Specifically, they

(1) performed detailed comparisons of their payment policies with

systems’ edits to determine where conflicts existed, (2) modified the

commercial systems’ edits to comply with their payment policies,

(3) integrated the systems into their claims payment systems, and

(4) conducted operational tests to ensure that the integrated systems

processed claims properly. This is a comprehensive approach that requires

significant time to complete. For example, TRICARE took about 18 months

for two sites and allowed about 2 years for its remaining nine sites.

HCFA’s approach was similar. From contract award on September 30, 1996,

through its conclusion 15 months later at the end of December 1997, both

HCFA and contractor staff made significant progress in integrating the test

commercial system and evaluating its potential for Medicare use

nationwide. HCFA used both a policy evaluation team and a technical team

to concentrate separately on these aspects of the test.

A detailed comparison of the commercial system’s payment policies with

those of Medicare identified conflicting edits—inconsistencies that in

some cases would increase and in others decrease the amount of the

Medicare payments. For example, the commercial system would pay for

the higher cost procedure of those deemed mutually exclusive, while

Medicare dictates paying for the lower cost procedure. (A mutually

exclusive procedure would be, for instance, the same patient’s receiving

both an open and a closed treatment for a fracture.) Conversely, the

commercial claims-auditing system would deny certain payments for

assistant surgeons, while Medicare allows them. These and all other

4

Medicare Billing: Commercial System Could Save Hundreds of Millions Annually (GAO/AIMD-98-91,

April 15, 1998).

Page 2 GAO/T-AIMD-98-166
identified conflicts were provided to the vendor, who modified the

system’s edits to make them consistent with HCFA policy.

The technical team carried out three critical tasks. First, it developed the

design specifications and related computer code necessary for integrating

the commercial system into the Medicare claims-processing software.

Second, it integrated the claims-auditing system into the system that

processes Medicare part B claims.5

 Finally, the team conducted numerous

tests of the integrated system to determine its effect both on processing

speed and accuracy. HCFA management was kept apprised of the status of

the test through regular progress reports and frequent contact with the

project management team.

HCFA found that the edits in this commercial system could save Medicare

up to $465 million annually by identifying inappropriate claims.

Specifically, HCFA’s analysis showed that the system’s mutually exclusive

and incidental procedure edits6

 would save about $205 million, and the

diagnosis-to-procedure edits7

 could save about $260 million. HCFA’s

analysis was based on a national sample of paid claims already processed

by Medicare part B and audited for inappropriate coding with HCFA’s

internal software. We reviewed the reports of HCFA’s estimated savings, but

did not independently verify the national sample from which these savings

were derived. However, the magnitude of savings—$682 million, including

the savings derived from HCFA’s internal software, which HCFA reported at

$217 million for 1996—is in line with our 1995 estimate that about

$600 million in annual savings are possible.8

On November 25, 1997, HCFA officials notified the Administrator of the

successful test of the commercial system. This was a far different

conclusion than the one reported by HCFA 2 months earlier, while testing

was ongoing. At a September 29, 1997, hearing before this subcommittee, a

senior HCFA official stated that the agency was testing the commercial

system as a stand-alone system against Medicare’s claims-processing

system. He testified that “for the month of August, our system, the CCI

5

Medicare part B claims are those submitted by providers, such as physicians, laboratories, and

outpatient clinics; part A covers hospitals, home health agencies, and other in-patient-facility care.

6

An incidental procedure is one that is clinically integral to and covered by the primary procedure,

such as control of intraoperative bleeding with a tonsillectomy.

7

Diagnosis-to-procedure edits compare bills for procedures that are unexpected for a given diagnosis,

such as a corneal transplant with a diagnosis of pneumonia.

8

As with any claims editing, some of the denied items will likely be appealed and paid. The estimates

are not adjusted for this.

Page 3 GAO/T-AIMD-98-166
system [correct coding initiative] achieves savings of $422,000 more than

the [commercial] system would have achieved if that would have been

what we were using. We were outperforming a [commercial] product.”

However, as we testified at that same hearing,9

 the test needed to compare

the commercial system as a supplement to the existing one, rather than as

a replacement. Before HCFA completed its test it did compare the

commercial system as a supplement. This comparison showed that

commercial systems offer the potential for substantial Medicare savings.

Management

Decisions Could Have

Cost Months and

Hundreds of Millions

of Dollars

Despite the successful outcome of the test, two early management

decisions, if left unchanged, would have significantly delayed national

implementation of claims-auditing software in the Medicare program.

First, the use of the test system was limited to its single Iowa location,

thereby requiring another contract for nationwide implementation.

Second, HCFA’s initial plan following the test was to proceed with

developing its own edits, rather than to acquire those available through

commercial systems. This plan would not only have required additional

time before implementation, but could well have resulted in a system less

comprehensive in its capacity to flag suspect claims than what is available

commercially. I would now like to provide some details surrounding both

of these decisions.

Limited Test Contract

Precluded Speedy

Nationwide

Implementation

HCFA’s contract limited the use of the test system to its Iowa site and did

not include a provision for implementation throughout the Medicare

program if the test proved successful. As a result, additional time will now

be needed to award another contract to implement the test system’s

claims-auditing software or any other approach nationwide. According to

a HCFA contracting official, it could take as much as a year to award

another contract using “full and open” competition—the method normally

used for such implementation. This entails preparing for and issuing a

request for proposals, evaluating the resulting bids, and awarding the

contract. HCFA’s estimated savings of up to $465 million per year

demonstrates the costs associated with delays in implementing such

payment controls nationwide.

Along with additional time and lost savings from the lack of early

nationwide implementation, awarding a new contract could result in

additional expense to either develop new edits or for substantial rework to

9

Medicare Automated Systems: Weaknesses in Managing Information Technology Hinder Fight Against

Fraud and Abuse (GAO/T-AIMD-97-176, September 29, 1997).

Page 4 GAO/T-AIMD-98-166
adapt the new system’s edits to HCFA’s payment policies if a contractor

other than the one performing the original test wins the competition. If

another contractor were to become involved, much of the work HCFA

performed during the test period would have to be redone. Specifically,

another company’s claims-auditing edits would have to be evaluated for

potential conflict with agency payment policy.

Other options were open to HCFA from the beginning. For example, HCFA

could have followed the approach used by TRICARE, whose contract

provided for a phased, 3-year implementation at its 11 processing sites

following successful testing. According to HCFA’s Administrator, the agency

is doing what it can to avoid any delays resulting from the limited test

contract. The Administrator said HCFA is evaluating legal options to

determine if other contracting avenues are available, options that would

allow expedited national implementation of commercial claims-auditing

software.

Initial HCFA Plan to

Develop Own Edits

Expensive and Ineffective

In reporting the test results, HCFA representatives recommended that the

HCFA Administrator award a contract to develop HCFA-owned

claims-auditing edits to supplement the correct coding initiative, rather

than acquire these edits commercially. They provided the following

rationale: First, this approach could cost substantially less than

commercial edits because HCFA would have the option of changing

contractors for edit updates, it would not have to pay annual licensing

fees, and the developmental cost would be much less than purchasing the

capability commercially. Second, according to HCFA officials, this approach

would result in HCFA-owned claims-auditing edits, which are in the public

domain and consequently allow HCFA to disclose its policies and coding

combinations to providers, as it currently does with the correct coding

initiative edits. Officials also explained that if a commercial vendor bid,

won, and agreed to allow its claims-auditing edits to enter the public

domain, HCFA would allow the vendor to start with its existing edits, which

should shorten development time.

We found serious flaws in this approach—in terms of cost, overall

effectiveness, and underlying assumptions. First, upgrading the edits by

moving from the initial contract developer to one unfamiliar with them

would not be easy or inexpensive; it is a major task, facilitated by a

thorough clinical knowledge of the existing edits. Second, the annual

licensing fees that HCFA would avoid with its own edits would be offset to

some degree by the need to pay a contractor with the clinical expertise to

Page 5 GAO/T-AIMD-98-166
keep the edits current. Third, while the commercial software could cost

more than developing HCFA-owned edits, this increased cost has already

been more than justified by HCFA’s test results demonstrating that

commercial edits provide significantly more Medicare savings. Finally, the

cost of delay is significant: HCFA has realized no savings from such

commercial software over the past 6 years.

Moreover, we found that HCFA’s plan to fully disclose its edits to the

medical community is not required by federal law and is not followed by

other public insurers; it could also result in limiting the number of

potential contractors with an interest in bidding. In May 1995 HHS’ Office of

General Counsel informed HCFA that no federal law or regulation precludes

it from protecting the proprietary nature of the edits and the related

computer logic used in commercial claims-auditing systems. Further,

HCFA’s Deputy Director of the Provider Purchasing and Administration

Group stated that the agency has no explicit Medicare policy requiring it to

disclose to providers the specific edits used to audit their claims. Rather

than disclosing the edits, other public insurers, such as CHAMPVA and

TRICARE, notified providers that they were implementing the system, and

supplied examples of categories of edits that would be used to check for

such disparities as mutually exclusive claims.

Finally, while it is true that development time would likely be shortened if

a commercial claims-auditing vendor were awarded the contract and used

its existing edits as a starting point, it is doubtful that such vendors would

bid on the contract if resulting edits were to be in the public domain. This

response was confirmed to us by an executive of a company that has

already developed a claims-auditing system; he said he would not enter

into such a contractual agreement if HCFA insisted on making the edits

public because this would result in the loss of the proprietary rights to his

company’s claims-auditing edits.

HCFA’s plan to develop its own edits was also inconsistent with Office of

Management and Budget (OMB) policy in acquiring information resources.10

HCFA has not demonstrated the cost-effectiveness of its plan to develop

edits internally. In fact, a prime example showing otherwise is HCFA’s own

estimate that every year it delays implementing claims-auditing edits of the

caliber of those used in the commercial test system in Iowa, about

$465 million in savings could be lost.

10OMB Circular A-130, 8b(5)(b) states that in procuring information resources, agencies shall “acquire

off-the-shelf software from commercial sources, unless the cost-effectiveness of developing custom

software to meet mission needs is clear and has been documented.”

Page 6 GAO/T-AIMD-98-166
Developing comprehensive HCFA-owned claims-auditing edits could take

years, during which time hundreds of millions of dollars could be lost

annually due to incorrectly coded claims. To illustrate: HCFA began

developing its database of edits in 1991 and has continued to improve it

over the past 6 years. While HCFA reported that its correct coding initiative

identified $217 million in savings in 1996 (in the mutually exclusive and

incidental procedure categories), this database did not identify an

additional $205 million in those categories identified by the test edits, nor

does it address the diagnosis-to-procedure category, where the test edits

identified an additional $260 million in possible savings. HCFA has no

assurance that its own edits would be as effective as those available

commercially.

Current Plans Will

Expedite

Implementation of

Commercial Edits

This past March, after considering our findings and other factors, the HCFA

Administrator said that the agency’s plans had changed. She said that HCFA

plans to begin immediately to acquire and implement commercial

claims-auditing software in as expedited a manner as possible.

We are encouraged that after a slow start, HCFA now plans to move quickly

to take advantage of the comprehensive claims-auditing capability that is

available, and we are looking forward to seeing HCFA’s milestones for

expeditiously implementing this capability. Typically, such milestones

would include dates for awarding a contract for the commercial

claims-auditing edits, initiating and completing implementation at the first

Medicare site, and implementing the edits at the remaining Medicare

processing sites.

Mr. Chairman, this concludes my statement. I would be happy to respond

to any questions that you or other members of the Subcommittee may

have at this time.

(511251) Page 7 GAO/T-AIMD-98-166
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