United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Labor, Health and

Human Services, Education, and Related

Agencies, Committee on Appropriations,

U.S. Senate

August 1995 MEDICARE

Antifraud Technology

Offers Significant

Opportunity to Reduce

Health Care Fraud

GAO/AIMD-95-77

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-260886 

August 11, 1995

The Honorable Tom Harkin

Ranking Minority Member

Subcommittee on Labor, Health

 and Human Services,

 Education, and Related Agencies

Committee on Appropriations

United States Senate

Dear Senator Harkin:

This report responds to your September 1, 1994, request for information

on existing tools used by the Medicare program to detect and prevent

fraud, and discusses the availability of other technologies to assist in

combatting fraudulent billing.1

 This evaluation focused on Medicare part B

benefits, which cover physician, supplier, and other outpatient services,

provided at a cost of about $60 billion during 1994. This portion of the

Medicare program currently constitutes slightly over a third of total

Medicare costs (part A—hospital care—makes up the rest) and is

expected to become an increasingly larger share.

In addition, this report addresses your request for information on

Medicare fraud being perpetrated in South Florida and actions being taken

to mitigate this problem. It also complements our recently issued report on

abusive Medicare billing practices and existing information technology to

help avoid the payment of abusive claims.2

Currently, no reliable estimate of the cost of fraud to the Medicare

program exists; however, health care experts have estimated that as much

as 10 percent of national health care spending is attributable to waste,

fraud, and abuse. Although the Department of Health and Human Service’s

(HHS) Health Care Financing Administration (HCFA), which manages the

Medicare program, has acted to reduce program fraud, the program

remains vulnerable in this area. Thus, we added the Medicare program to

our list of high-risk government programs in 1992.3

1

Abuse also involves actions resulting in inappropriate Medicare program costs. However, fraud differs

from abuse in that it is an illegal act that involves obtaining something of value through willful

misrepresentation.

2

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

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

3

Medicare Claims (GAO/HR-93-6, December 1992). This information has been updated in Medicare

Claims (GAO/HR-95-8, February 1995).

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HCFA contracts with 32 insurance companies, called carriers, who

processed 623 million Medicare part B claims in 1994. These carriers are

also responsible for protecting program funds by developing payment

controls and performing other review activities called payment safeguards.

Medicare fraud units within each carrier are the focal points for

coordinating and referring potential fraud cases to the HHS Office of

Inspector General (OIG).

Results in Brief Medicare’s controls against fraud have not kept pace with today’s health

care environment in which the number of claims processed—and those

submitted electronically—have risen dramatically. Processed Medicare

part B claims reached 623 million in 1994, a 32-percent jump in 4 years.

The percentage processed electronically doubled during this period, from

36 to 72 percent. While electronic claims processing is critical for

efficiency, when the volume rises to this degree, it also increases the need

for more innovative controls to curtail fraud.

Existing Medicare carriers’ controls rely on data from systems that may

identify potential fraud, but were primarily designed for other purposes,

such as identifying services that are not medically necessary or were

overutilized. Medicare carrier fraud units also rely heavily on beneficiary

complaints to identify discrepancies between services rendered and those

billed. Each of these controls, however, have inherent limitations in

detecting attempted fraud.

New antifraud systems are available and used today by private insurers,

some of whom are also Medicare carriers. This technology may

complement existing—and planned—Medicare systems. The principal

advantage of these sophisticated systems is their ability to recognize

patterns in paid claims data and thus identify potentially fraudulent

relationships. While it is too early to fully document the cost-effectiveness

of such systems, several potential fraud cases have been detected by this

new technology, indicating that these systems can be cost-beneficial in

combatting emerging types of fraud. Such technology may ultimately be

utilized in the claims-processing environment to delay or even prevent the

payment of questionable claims submitted by suspect providers.

Florida, with its highly publicized health care fraud issues, may be a

logical place to start expanding Medicare’s fraud detection capabilities

with innovative and more imaginative approaches, and new antifraud

technologies. Although Florida represents 7 percent of the Medicare

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beneficiary population, in fiscal year 1994, Florida accounted for over

20 percent of Medicare part B spending. In addition, reports continue to

indicate that South Florida in particular has been victimized by new types

of fraud—often by persons impersonating legitimate health care providers.

In response to this problem, HCFA formed the interagency South Florida

Workgroup, to coordinate enforcement actions, identify specific problems,

and recommend corrective actions. This effort has identified several

problems, including attempted fraud due to weaknesses in the provider

enrollment process.

Background Authorized in 1965 under title XVIII of the Social Security Act, Medicare

pays for health care services and supplies for millions of beneficiaries,4

mostly elderly, and provides direct payment to 1 million providers and

suppliers of services. Medicare provides coverage under two sections: part

A, primarily hospital insurance, and part B, supplementary insurance. Part

B covers physician services, outpatient hospital care, medical supplies,

and other health benefits, such as emergency ambulance services.

Medicare part B generally pays 80 percent of the Medicare-approved

amounts, with beneficiaries responsible for the remaining 20 percent (the

copayment).

Medicare part B program costs (mainly direct payments to providers) rose

an average of 9 percent per year from fiscal year 1990 through fiscal year

1994, increasing from $43 billion to $60 billion. These costs are expected

to almost double over the next 5 years. Figure 1 depicts actual and

projected increases in Medicare part B outlays from 1990 to 2000.

4

Medicare insures 36 million people aged 65 and over, and individuals under 65 who are disabled.

Page 3 GAO/AIMD-95-77 Antifraud Technology and Medicare
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Figure 1: Medicare Part B Outlays,

1990-2000 Billions of Dollars

0

15

30

45

60

75

90

105

120

135

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Fiscal Year

Actual

Projected

Note: We did not independently verify these figures.

Sources: Overview of Entitlement Programs, 1994 Green Book, Committee on Ways and Means,

U.S. House of Representatives, 103rd Congress, 2nd Session, 1994; and Congressional Budget

Office: The Economic and Budget Outlook, Fiscal Years 1996-2000, January 1995.

As part of their contract to process, review, and pay claims for covered

services, Medicare carriers receive funding to perform payment safeguard

activities. These activities are mainly performed by claims processing,

medical review, and fraud units. Claims processing units ensure that

Medicare claims are paid properly. These units also review claims that are

suspended due to prepayment controls. Medical review units perform

payment safeguard activities by identifying questionable billing patterns

and practices. Potential fraud cases identified by either the claims

processing or medical review units are referred to fraud units. Fraud units

are responsible for examining these referrals, as well as tips and

complaints received from beneficiaries, government agencies, or other

sources, to determine their validity. Fraud units also forward potential

fraud cases to the HHS OIG, as appropriate, for further investigation and

Page 4 GAO/AIMD-95-77 Antifraud Technology and Medicare
B-260886 

possible punitive actions, such as fines, exclusion from the Medicare

program, or referral to the Department of Justice for criminal or civil

action.

Scope and

Methodology

We reviewed HCFA’s documentation on Medicare carrier antifraud

responsibilities, functions, workload, and funding. We met with HCFA

officials at HCFA’s headquarters in Baltimore and at the Atlanta regional

office. We also interviewed all 32 Medicare carrier fraud unit managers

and met with several representatives from their claims processing and

medical review units to learn how potential fraud is detected and what

tools are being used to support this effort. We obtained views on health

care antifraud activities by meeting with officials from the HHS OIG and the

Department of Justice. Finally, we met with representatives of the private

sector to obtain information on antifraud technology.

Our work was performed from August 1993 through May 1995, in

accordance with generally accepted government auditing standards.

Details of our scope and methodology are in appendix I. We requested

written comments on a draft of this report from the Secretary of Health

and Human Services or her designee. The Inspector General of the

Department of Health and Human Services provided us with written

comments. These comments are discussed in the Agency Comments and

Our Evaluation section of the report and are reprinted in appendix II.

Existing Payment

Safeguards Detect

Fraud but Have

Limitations

Over the past several years, HCFA has initiated a number of actions to

increase the efficiency and effectiveness of its controls over fraud.

Although these controls have been implemented within various functions

throughout the 32 Medicare carriers, they have limitations that do not

address the full spectrum of changes in today’s health care environment.

Rapidly Changing Health

Care Environment Makes

Fraud Detection More

Difficult

The already difficult task of detecting fraud has become a greater

challenge as the number of Medicare part B claims has increased from

468 million in 1990 to 623 million in 1994. At the same time, the percentage

of claims processed electronically doubled from 36 to 72 percent, with

further increases likely. Figure 2 shows the volume of Medicare part B

claims processed from paper and electronic submissions from 1990

through 1994.

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Figure 2: Medicare Part B Claims

Submitted on Paper and Electronically,

1990-1994

Claims in Millions

0

50

100

150

200

250

300

350

400

450

500

550

600

650

1990 1991 1992 1993 1994

Paper Claims

Electronic Claims

Source: HCFA.

The former Secretary of Health and Human Services initiated the

Workgroup for Electronic Data Interchange in 1991 to reduce

administrative costs in the nation’s health care system by promoting

electronic claims submission. HCFA promoted this initiative by requiring

that carriers reimburse providers for electronic claims more quickly than

for paper claims (14 days versus 27 days), thus encouraging providers to

submit more claims electronically. This is an important gain, and the

increased use of electronic claims submission should be encouraged;

however, this method also increases the need for more innovative controls

to curtail fraud.

With paper claims, signatures of providers and any obvious alterations to

documents are apparent to claims adjudicators. In addition, the same

types of claims (for example, by medical specialty) typically were handled

by the same adjudicator. Therefore, aberrations could be more easily

spotted. In contrast, electronic claims submission eliminates human

Page 6 GAO/AIMD-95-77 Antifraud Technology and Medicare
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intervention and thus any opportunity to examine provider signatures or

detect any alterations to claims data.

Existing Medicare

Electronic and Manual

Controls Can Identify

Potential Fraud

HCFA requires Medicare carriers to implement various manual and

electronic fraud-detection controls, such as prepayment edits, medical

review of overutilized and medically unnecessary procedures, and review

of beneficiary complaints. Electronic controls within claims processing

systems suspend claims with erroneous or incomplete data. These

controls include, for example, edits to determine whether the number and

accuracy of digits in a provider’s billing number or beneficiary’s

identification number are correct. Such edits also check for duplicate

claims, beneficiary eligibility, and whether the procedure cited in the claim

was possible for the beneficiary’s gender. Also, the system suspends

claims that are flagged by electronic edits as not meeting certain

conditions for payment. For example, if foot care is covered only under

certain conditions, claims not meeting these conditions will be suspended

until further review.

Medical review is another manual and electronic control that can serve to

identify potential fraud. This function, which HCFA requires carriers to

perform, primarily involves identifying abuse and overutilization, and

preventing payments for medically unnecessary and noncovered services.

According to HCFA data, in 1994, medical review referrals were among the

23,290 referrals made to carrier fraud units, and approximately 4,100 of

these were subsequently referred to the HHS OIG.

5

 Two kinds of

postpayment medical review exist, with differing emphases. In the first

type, called focused medical review, each of the 32 carriers examines

national statistics to identify specific types of medical procedure codes for

which the carrier exceeds the national Medicare norm. By changing

individual carrier payment policies for such procedures and educating

providers to bill correctly, HCFA hopes to discourage the submission of

claims for noncovered or unnecessary services. In the second type, called

comprehensive medical review, carriers audit individual providers whose

claims appear to demonstrate a pattern of overutilizing procedures or

performing those that are not medically necessary.

HCFA required carriers to obtain automated systems to support medical

review functions and identify areas requiring special attention. These

systems, for example, contain paid-claims data and use such techniques as

5

HCFA combines potential fraud referrals from providers, medical review, and special requests from

the OIG or HCFA into one category; therefore, we could not determine the number of referrals made

specifically by medical review.

Page 7 GAO/AIMD-95-77 Antifraud Technology and Medicare
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trend analysis to profile providers and identify those who bill

disproportionately, causing a carrier to exceed the national Medicare

utilization norm. These providers are then ranked for investigation, based

on the extent to which they exceed specified limits, such as the number of

services provided. Further investigation of these providers may identify

cases of unnecessary medical care or overall aberrant practice patterns

compared with peers within their specialty and locality. Based on the

outcome of this investigation, the provider may be referred to the fraud

unit as a potential fraud case. For instance, due to a comprehensive

medical review, a provider identified for billing an excessive and,

therefore, questionable amount of psychotherapy sessions on the same

day was referred to the fraud unit because the carrier’s psychiatric

medical consultant determined that it would be impossible to perform that

many procedures in 1 day.

Beneficiaries also serve as controls over fraud and abuse in the Medicare

program and are considered to be the front-line defense for referring

potential fraud cases to fraud units. Beneficiaries receive explanation of

Medicare benefits (EOMB) statements that list charges submitted to

Medicare and the amount paid to providers, thus uniquely positioning

beneficiaries to identify payments for medical services or supplies that

were not received or that they believe were unnecessary. HCFA encourages

beneficiaries to notify carrier fraud units if they notice such discrepancies

and requires carriers to analyze such complaints for their potential for

fraud.

Medicare’s Controls Have

Technical and Funding

Limitations

While HCFA has implemented Medicare part B controls that may identify

fraud, these controls have technical limitations. In addition, per-claim

funding for Medicare program safeguard activities declined by over

20 percent from 1989 through 1993.

Prepayment electronic edits help ensure that billed services are paid

correctly, but these edits are not specifically designed to detect indicators

of potential fraud. HCFA has progressively reduced the percentage of claims

that can be suspended and reviewed by the carrier prior to payment from

20 percent during 1989 to 5 percent in 1994, due to per-claim reductions in

safeguard funding.

Fraud-detection capabilities of medical review are limited since the

systems used for this function usually concentrate on relatively few

variables, such as the total number of services per beneficiary. These

Page 8 GAO/AIMD-95-77 Antifraud Technology and Medicare
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systems typically do not examine questionable behavior patterns,

including the percentage of visits on Sundays and holidays, and a

percentage of billing outside of the providers’ geographic area. According

to private industry, fraud is difficult to detect in this manner because

individual billing patterns may not reveal anything meaningful about the

overall behavior of a provider. In some cases, medical review systems

results may be distorted when, for example, a cancer specialist is

classified as an internist and measured against other internists on the

number of laboratory tests rendered. Since cancer specialists perform a

relatively high number of laboratory tests, misclassified internists would

appear to have significantly exceeded the normal rates for laboratory tests

when compared to all internists.

One medical review unit manager stated that another difficulty in

detecting fraud through medical review systems is the risk that the data

from which they evaluate trends may be skewed if the peer group as a

whole is engaging in egregious billing patterns. Also, as long as fraud

perpetrators stay within the parameters of payment policies and peer

group norms, they may escape detection. Funding limitations have also

constrained medical review, with HCFA reducing the number of providers

audited from 8 per 1,000 providers in 1992 to 3 per 1,000 in 1995.

As post-payment safeguards, beneficiary complaints are only effective if

recipients receive an EOMB statement and conscientiously report

apparent discrepancies. For example, numerous cases have been alleged

or adjudicated in which unscrupulous providers have persuaded Medicare

recipients into accepting services or items in exchange for their Medicare

identification numbers. These providers then used the beneficiaries’

identification numbers to bill Medicare for other procedures or services

not rendered. Beyond these limitations, HCFA data show that fraud units

devoted 70 percent of their time responding to almost 100,000 beneficiary

complaints during 1994, and over 5,000 complaints were referred to the

HHS OIG for further investigation and possible prosecution. This workload

may also increase as the volume of claims continues to rise, and thus, may

necessitate a reevaluation on how these complaints are handled.

Sophisticated New

Technology Available

to Complement HCFA

Initiatives

Commercial vendors have developed specialized antifraud systems that

are much more sophisticated than the electronic controls used by

Medicare carriers. Although it is too early to fully quantify the benefits of

this new technology, one carrier’s experience suggests that this technology

Page 9 GAO/AIMD-95-77 Antifraud Technology and Medicare
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has greater fraud-detection capabilities and can complement carriers’

existing controls against fraud.

Antifraud System Offers

Opportunities to Improve

Detection and Prevention

of Medicare Fraud

The antifraud systems recently developed and implemented by the private

sector appear promising in identifying potentially fraudulent providers. We

identified three vendors involved in developing such systems which

incorporate a wide array of technologies to evaluate data and identify

provider behavior patterns consistent with known attempts at fraud.

Antifraud systems can formulate preliminary conclusions about both these

patterns and their relative significance for further investigation. Although

HCFA has recently acknowledged the importance of antifraud technology, it

has not yet formally directed carriers to obtain it. Table 1 highlights some

of the technical tools currently being used in antifraud systems.

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Table 1: Technical Tools Used in

Antifraud Systems Technical tool Description

Artificial intelligence A form of computing used to develop programs that

emulate the way humans solve problems, learn from

experience, and make reasonable inferences from

incomplete information.

Fuzzy logic A form of logic used in some expert systems and other

artificial-intelligence applications that processes data by

monitoring very subtle degrees of abnormality for any

given behavior. This technology weights factors and

measures them collectively to reach certain conclusions

and is suitable for detecting potential fraud and abuse

because it takes into account many different factors at

once. For example, the number or percentage of patient

visits to a provider on Sundays and holidays can be

combined and weighted with other data, such as the

number of duplicate bills submitted. This information is

then scored and measured against a peer group score.

Link analysis A powerful visual tool that allows one to uncover, analyze,

and display patterns of interaction among individuals and

groups. These patterns are displayed by linking diagrams

or two-dimensional shapes that represent an entity (e.g.,

patients, providers, etc.) with lines to display

relationships. For example, one pattern may identify

providers who over-refer patients to other providers

because of possible kickbacks or collusion between

providers.

Neural network

(pattern recognition)

A type of artificial intelligence system intended to simulate

the way in which a brain processes information, learns,

and remembers. Neural networks learn by comparing

new data to what has already been experienced, and can

be used to detect hidden patterns in large volumes of

data. They can learn characteristics of potentially

fraudulent claims and quickly identify claims and

providers suspected of fraud. Neural networks can

identify, for instance, all providers who have a post office

box mailing address, did not pass the usual certification

boards, and for whom all patients seen have at least one

lab test in common. Neural networks can also

automatically learn new characteristics of potentially

fraudulent claims, thereby updating their capabilities over

time.

Sources: Computer Dictionary 2nd Edition, Microsoft Press, Redmond, Washington, 1994; and

product descriptions from Booz-Allen & Hamilton, Inc.; Healthcare Information Services Team;

and International Business Machines, Inc.

In many respects, antifraud technology can complement the current

controls used by carriers. Antifraud technology allows looking at a number

of variables concurrently to assess the validity of claims and whether the

data display patterns of potential fraud. In addition, while medical review

Page 11 GAO/AIMD-95-77 Antifraud Technology and Medicare
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systems typically only look at a specific service, antifraud technology can

look at entire episodes of care so that a service performed in the right

context becomes apparent. For example, referrals for radiological services

would typically originate with other providers, entail analysis of x-rays by

other practitioners, and involve at least some follow-up treatment of some

beneficiaries. If a provider continues to bill for radiological procedures

without the full range of expected relationships and services for the

beneficiaries, an antifraud system can monitor this activity or target the

provider for further inquiry. Once a provider is suspected of potential

fraud, future claims submitted by this provider may be suspended from

claims processing to prevent additional losses.

Fraudulent providers must mirror many different behaviors to be

consistent with legitimate providers—both in their prescribing habits and

relationships with other providers—which makes it more difficult to avoid

detection by this new technology. For example, to avoid detection by this

technology, a fraudulent provider may have to ensure that (1) the bills

submitted for a patient are for services consistent with other treatments

received by the patient, (2) the sequence and timing of the patient’s

Medicare bills makes sense, and (3) referring providers listed on claims

forms are also billing for that patient’s care.

In addition to HCFA’s existing controls, antifraud systems may also be a

valuable component for its planned Medicare Transaction System (MTS),

primarily a claims-processing system that is expected to be in use about

1999. According to HCFA’s director of operations, MTS will increase

Medicare’s ability to detect potential fraud and abuse by providing a

uniform claims format, integrated Medicare part A and B claims

processing, and some standard statistical data analysis functions. Although

HCFA is reviewing new emerging technologies, it has not yet determined

whether antifraud technology will become part of MTS or how this

technology would be acquired.

Private Health Insurers,

One Medicare Carrier

Using Latest Technology

Sophisticated, new antifraud technology is being used by several private

health insurers, and early results have been positive. Several Medicare

carriers—Aetna, CIGNA, and Travelers—have incorporated antifraud

systems for their own private insurance business. According to a CIGNA

official, its antifraud system has made fraud detection and investigation

faster and easier. The assistant vice president of Aetna Health Plans stated

that antifraud systems can yield a significant return on investment.

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One carrier, Pennsylvania Blue Shield (PBS), has acquired an antifraud

system for its Medicare operations.6

 Both identified potential fraud and

actual savings from improper payments not made showed marked

increases. PBS advised us that since the system’s implementation in

April 1994, it has identified over $6 million in overpayments due to

potentially fraudulent claims. The carrier also reported that it more than

doubled actual savings (from payments not made to suspicious providers),

from over $2 million in 1993 to almost $5 million in 1994. This is a principal

advantage because once a fraudulent pattern is identified, prepayment

claims suspension for the suspect provider can be applied to the claims

processing system. If the suspicion is confirmed, this claims suspension

avoids additional losses to Medicare. Another benefit PBS associated with

the system is a significant reduction in time needed to develop potential

fraud cases.

The antifraud system used by PBS allows the carrier with the opportunity

to identify fraudulent patterns of billing behavior. Since not all behaviors

deserve equal weight in determining potential fraud, the carrier assigns

each pattern a different weight, on the basis of its judgment and

experience. The antifraud system identifies providers whose scores fall

significantly above those of their peers in the same medical specialty.

One potentially fraudulent case identified by PBS’ system concerned an

ambulance service—an historically high-risk area for potential fraud. The

ambulance company scored significantly high in 12 of 18 potentially

fraudulent behavior patterns. PBS’ antifraud system ranked the company

particularly high in behavior patterns, such as percentage of trips out of

the area in which the patient lives, average cost per patient, and other

behavior patterns that could indicate nonhospital transports. Based on its

investigation, PBS alleged that the company was inflating its Medicare

reimbursements by using a different state identification number than the

one for the state in which it was actually rendering services. This

difference alone resulted in the company’s charging about $70 more for

each of about 23,000 trips, amounting to reimbursement of $1.6 million.

PBS’ fraud unit staff also suspected that almost half of the claims submitted

by the company in a 6-month period were for transports not covered by

Medicare.7

 While payment for many of these claims was initially denied by

the carrier’s claims processing system, to make the claims payable, the

6

PBS, which is now referring to its Medicare operations as Xact Medicare Services, is the largest

Medicare part B carrier, having processed over 74 million claims in 1994.

7

Medicare covers ambulance transports to or from a hospital or skilled nursing facility only.

Page 13 GAO/AIMD-95-77 Antifraud Technology and Medicare
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provider allegedly modified the patient’s destination to reflect a hospital

transport.

The data generated by the antifraud system allowed the carrier to

immediately refer the case to the HHS OIG for further investigation. This

case has been accepted by one of the U.S. attorneys for Pennsylvania, who

is pursuing a criminal investigation. These suspicions materialized quickly

with this new complex technology, which combines an analytical

tool—fuzzy logic (see table 1)—with high-performance computing8

 and

statistics to identify high-risk providers within peer groups. According to

the vendor, the cost to purchase a system similar to the one used by PBS

would range from $315,000 to $400,000, depending on current hardware

configuration, level of customization needed, installation, training, and

support.

Rising Medicare

Fraud in Florida

Offers Opportunity for

Operational Test of

Antifraud Technology

Despite efforts to halt rising fraud, information from HCFA, law

enforcement agencies, carriers, and health insurance organizations,

indicates that Medicare fraud in Florida has mushroomed out of control

over the past few years and may be costing taxpayers hundreds of millions

of dollars every year. The South Florida area has been a particular target

of fraud against Medicare. In response, HCFA formed the interagency South

Florida Workgroup to coordinate the efforts to stop this fraud. Antifraud

technology, too, might help considering the complex nature of health care

fraud and the many types of schemes perpetrated against Medicare.

Florida’s Medicare Fraud

Schemes

Florida has been reported to have the highest rate of Medicare fraud in the

nation. According to its U.S. attorney, the state has been particularly

victimized by Medicare fraud due to the large percentage of poor and

elderly people in the area. With only 7 percent of the Medicare beneficiary

population, Florida accounted over 20 percent (about $12 billion) of total

fiscal year 1993 Medicare part B spending (about $54 billion). Further,

Florida’s Medicare carrier identified about $21 million in overpayments for

potential fraudulent claims during 1994—about half the total $46 million

identified by carrier fraud units nationwide.

During a hearing on health care fraud in March 1995, Florida’s U.S.

attorney described Medicare fraud in South Florida as rampant. Particular

schemes have included (1) offering beneficiaries free groceries, medical

8

High-performance computing refers to the use of advanced computing technologies, including

hardware and software that solve highly complex, numerically intensive problems quickly.

Page 14 GAO/AIMD-95-77 Antifraud Technology and Medicare
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services, or cash in exchange for Medicare identification numbers that can

be used to fraudulently bill the program, (2) using physicians’ names and

identification numbers to submit fraudulent claims, and (3) applying for

and obtaining Medicare physician/supplier identification numbers though

not authorized or licensed as a health care provider.

One Florida company that allegedly existed just to bill Medicare without

rendering medical services was paid about $2 million during a 5-month

period. By the time this scheme was detected and a court order obtained

to freeze the company’s bank account, most of the $2 million had

disappeared—as had the company’s owner. Table 2 provides examples of

other recent Medicare fraud cases in Florida, as reported by the

Department of Justice in 1994.

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Table 2: Examples of Medicare Fraud

Cases Recently Adjudicated in Florida Provider type Description

Home health In October 1994, an owner and operator of a home health

agency was sentenced to 37 months in prison, fined

$100,000, and ordered to forfeit real and personal

property valued at approximately $750,000. Through his

home health agency, the defendant submitted thousands

of Medicare claims that falsely stated that licensed,

medical doctors ordered health services for Medicare

patients. The indictment alleged that the defendant

received $1.4 million in Medicare reimbursements from

1990 through 1993.

Lab services In September 1994, five defendants were sentenced after

pleading guilty to scheming to defraud the Medicare and

Medicaid programs out of approximately $4 million. The

lead defendant admitted that she routinely purchased

Medicare and Medicaid information and often paid

people to undergo various tests. She used this

information to submit fraudulent claims. Two other

defendants admitted that, as diagnostic technicians

working for the lead defendant, they performed 98

diagnostic tests on each other to generate additional test

results, which were used as a basis for false claims

submissions.

Home infusion therapy Twelve defendants were convicted and sentenced for

defrauding Medicare of over $14 million from 1989

through 1991. The principal defendants owned and

operated eight companies in Miami, which distributed

(usually to the home) nutritional supplements to Medicare

beneficiaries. However, these supplements are only

covered by Medicare if a beneficiary is unable to eat solid

foods. Doctors who signed blank prescriptions and

door-to-door recruiters who fraudulently obtained

Medicare beneficiary numbers in exchange for free liquid

nutrients described as “milk” were also convicted.

Source: Department of Justice Health Care Fraud Report, Fiscal Year 1994.

HCFA’s South Florida

Initiative

To coordinate the South Florida antifraud effort, in September 1994, HCFA

formed the South Florida Workgroup. The workgroup has undertaken the

“South Florida Project” to identify specific problems and recommend

corrections. Participants include Medicare contractors in Florida, the HHS

OIG, the Federal Bureau of Investigation, Justice, Miami’s United States

attorney, and the Florida Attorney General’s Medicaid fraud control unit.

The workgroup made recommendations to the HCFA Administrator this

spring.

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One issue addressed by the workgroup concerns a problem identified in

July 1994, in which 335 potentially fraudulent applications for provider

numbers were discovered by chance during a manual review of pending

applications. If these suspicious applications had been approved, each

provider number would have created additional opportunities for

perpetrators to fraudulently bill Medicare. Weaknesses in the provider

enrollment process9

 have also contributed to Medicare’s vulnerability to

fraud, particularly in Florida. HCFA’s controls for monitoring the process

had been weak; it was, therefore, easy for fraudulent providers to obtain

and retain credentials that allowed them to be paid by Medicare. The HCFA

task force has already taken several actions to strengthen the conditions

of enrollment, such as verifying addresses, telephone numbers, and other

information submitted by the applicant.

Antifraud Technology May

Benefit Florida’s Carrier

The following example illustrates how losses to Medicare fraud can occur,

and how antifraud technology can prevent such losses. In one recent and

highly publicized case in South Florida, an unemployed tow-truck driver

was charged with using a nonexistent medical laboratory to cheat

Medicare out of more than $300,000 by allegedly filing 717 false electronic

claims in just 2 weeks. According to investigators, the suspect was

arrested as he tried to withdraw $200,000 in cash from his “company’s”

bank account. If not for the actions of a suspicious bank teller,

investigators say, the suspect would have disappeared. An additional

$300,000 in electronic claims from this same individual were in process,

but had not yet been paid at the time of his arrest.

We discussed this case with several antifraud system vendors, who

confirmed that their technology could have detected this type of fraud.

According to one company representative, antifraud systems can identify

individuals in this type of scheme if a combination of behavior patterns is

established in the system to evaluate all new Medicare billers. For

instance, if the patterns included all new providers having a post office

box (in lieu of a street address) combined with a high number of first-time

claims and a large number of beneficiaries located very long distances

from the place of service, the provider in this example would have

matched known behavior patterns consistent with attempted fraud.

In its current efforts to combat Medicare fraud in Florida, HCFA acquired an

advanced data query system. Although the capabilities of this system are

9

Medicare and Medicaid: Opportunities to Save Program Dollars by Reducing Fraud and Abuse

(GAO/T-HEHS-95-110, March 22, 1995).

Page 17 GAO/AIMD-95-77 Antifraud Technology and Medicare
B-260886 

substantial for medical review and reporting functions, it does not include

the capabilities available through antifraud technology to draw inferences

regarding potential fraud. The substantial losses attributable to the Florida

fraud problem provide HCFA with an opportunity to test the effectiveness

of this latest antifraud technology in reducing Medicare fraud.

Conclusions Medicare continues to experience large losses each year due to fraud.

Existing risks are sharply increased by the continual growth in Medicare

claims—both in number and percentage processed electronically. Existing

Medicare payment safeguard controls can be bypassed and apparently do

not deter fraudulent activities. HCFA should be able to benefit by taking full

advantage of the emerging antifraud technology to better identify and

prevent Medicare fraud. The number and types of Medicare fraud schemes

perpetrated in South Florida may make that area the best place to test

antifraud systems before nationwide use.

Recommendation To assist the Health Care Financing Administration in identifying more

potential fraud in the Medicare program, we recommend that the

Secretary of Health and Human Services direct the Administrator of HCFA

to develop a plan for implementing antifraud technology. One approach

would be to monitor the carrier currently using antifraud technology and

immediately begin a pilot or demonstration program that would enable the

agency to quickly see through valuable, first-hand experience how it can

best deploy antifraud technology. Such a test could be conducted where

the need to reduce fraud is great, such as in South Florida. If the results of

this test show that antifraud technology is cost effective and useful in

identifying potential fraud, HCFA should expeditiously expand the use of

this technology nationwide.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, HHS agreed that Medicare payment

safeguards could benefit from new technology to identify fraudulent

patterns of behavior. However, it expressed concerns about implementing

such technology in the Medicare program because it questions the

(1) general applicability of this technology in a health insurance setting,

(2) utility of the technology to Medicare without substantial modification,

and (3) degree to which this technology has been tested. HHS did not

respond to our recommendation to develop a plan to implement such

technology. It stated that it would continue to review antifraud technology

Page 18 GAO/AIMD-95-77 Antifraud Technology and Medicare
B-260886 

for possible inclusion in its Medicare Transaction System (MTS), now

scheduled for implementation in 1999.

As noted in our report, these new antifraud technologies are gradually

being adopted by private health insurers. On several occasions during our

fieldwork, and at our final conference with HCFA officials, we discussed the

use of this technology by Pennsylvania Blue Shield—the largest Medicare

carrier. In addition, HCFA officials attended a number of demonstrations of

this technology sponsored by the carrier. Since we completed our audit

work, several additional private health insurers have contracted for this

type of technology, and we have given HCFA a list of these companies.

We believe that, as would be the case with almost any system,

customization—along with its costs—may be needed to satisfy specific

program requirements. If Medicare is to be proactive in detecting and

preventing fraud, it must continually modify its systems’ capabilities to

keep pace with new fraud schemes and the changing health care

environment. While Pennsylvania Blue Shield noted that certain

modifications were necessary to tailor the system’s behavior patterns to fit

Medicare’s needs, the acquisition price included the costs for this

customization. According to the vendor, the cost for a similar system

would range from $315,000 to $400,000, depending on factors such as the

numbers and types of potential fraud scenarios that need to be

incorporated into the software, and a client’s particular hardware

configuration. HCFA has invested in developing fraud behavior profiles for

one carrier and, according to the vendor, this information is available to

other Medicare carriers at no additional cost.

HHS noted that HCFA is actively reviewing antifraud technology but stated

that the results of its review indicate that more testing is needed before

any judgment on the usefulness of this technology in detecting Medicare

fraud can be made. Pennsylvania Blue Shield has reported considerable

success with this technology, returning funds to the Medicare Trust Fund.

The carrier advised HCFA that it collected over $94,000 in overpayments,

and informed us that it identified over $6 million in potential fraud as a

result of cases identified by its antifraud system since the system’s

implementation in April 1994. Thus, the application of antifraud

technology to the Medicare program appears to be cost-effective. A strong

indication of its value is that other insurance companies are moving to

acquire similar technology.

Page 19 GAO/AIMD-95-77 Antifraud Technology and Medicare
B-260886 

Given the potential for substantial savings of program funds and

commonly accepted best practices in the field of information resources

management that encourage the use of available off-the-shelf software, we

continue to believe that HCFA should expeditiously expand acquisition and

testing of this technology in the Medicare program. In an era of escalating

health care costs, rising indicators of fraud, and a new market with several

competing vendors, it appears prudent and practical to acquire such

technology, starting in the higher risk environments, such as Florida.

As agreed with your office, unless you publicly announce the contents of

this report earlier, we will not distribute it until 30 days from the date of

this letter. We will then send copies of this report to other interested

congressional committees; the Secretary of Health and Human Services;

the Administrator of the Health Care Financing Administration; the

Director of the Office of Management and Budget; and the 32 Medicare

carriers. Copies will also be made available to others upon request. Should

you have any questions concerning this report, please contact me at

(202) 512-6408. Other major contributors to the report are listed in

appendix III.

Sincerely yours,

Frank W. Reilly

Director, Information Resources Management/

 Health, Education, and Human Services

Page 20 GAO/AIMD-95-77 Antifraud Technology and Medicare
Page 21 GAO/AIMD-95-77 Antifraud Technology and Medicare
Contents

Letter 1

Appendix I 

Scope and

Methodology

24

Appendix II 

Comments From the

Department of Health

and Human Services

25

Appendix III 

Major Contributors to

This Report

31

Tables Table 1: Technical Tools Used in Antifraud Systems 11

Table 2: Examples of Medicare Fraud Cases Recently

Adjudicated in Florida

16

Figures Figure 1: Medicare Part B Outlays, 1990-2000 4

Figure 2: Medicare Part B Claims Submitted on Paper and

Electronically, 1990-1994

6

Abbreviations

GAO General Accounting Office

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

MTS Medicare Transaction System

OIG Office of Inspector General

PBS Pennsylvania Blue Shield

Page 22 GAO/AIMD-95-77 Antifraud Technology and Medicare
Page 23 GAO/AIMD-95-77 Antifraud Technology and Medicare
Appendix I 

Scope and Methodology

To accomplish our objectives, we obtained information on the antifraud

activities of all 32 Medicare part B carrier fraud units. We visited the

following 10 fraud units and interviewed unit managers and staff to

determine how information technology is being used to detect and prevent

potential Medicare fraud: Blue Shield (Alabama); Travelers (Connecticut);

Blue Shield (Florida); Aetna (Georgia); Health Care Service Corporation

(Illinois); AdminaStar (Kentucky); Blue Shield (Maryland); General

American Life (Missouri); Blue Shield (New York); and Blue Shield

(Pennsylvania). In some cases, we also met with representatives from

carriers’ claims processing and medical review units to obtain information

on the process for referring suspected fraud cases to the fraud units. We

also surveyed the remaining 22 carriers by telephone to determine the

types of technology they use.

We interviewed HCFA officials from the Bureau of Program Operations to

identify fraud-unit requirements, guidance, and funding, and how units are

evaluated under HCFA’s Contractor Performance Evaluation Program. We

also met with the project manager for the planned Medicare Transaction

System (MTS) to determine whether this system will include antifraud

technology. To obtain additional information on health care antifraud

activities throughout the government, we met with officials from the HHS

OIG and the Department of Justice, in Washington, D.C.

To obtain data on private industry antifraud capabilities, we met with

representatives of Medicare carriers’ private insurance business units in

Middletown and East Hartford, Connecticut. In addition, we interviewed

representatives of the Health Care Insurance Association of America and

the National Health Care Anti-Fraud Association, in Washington, D.C., to

obtain background information on health care fraud and the programs

private insurers use to combat fraud. We also met with companies

developing specific technology to detect health care fraud.

Page 24 GAO/AIMD-95-77 Antifraud Technology and Medicare
Appendix II 

Comments From the Department of Health

and Human Services

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 25 GAO/AIMD-95-77 Antifraud Technology and Medicare
Appendix II 

Comments From the Department of Health

and Human Services

See comment 1.

See comment 2.

Page 26 GAO/AIMD-95-77 Antifraud Technology and Medicare
Appendix II 

Comments From the Department of Health

and Human Services

See comment 3.

See comment 4.

Page 27 GAO/AIMD-95-77 Antifraud Technology and Medicare
Appendix II 

Comments From the Department of Health

and Human Services

See comment 5.

See comment 6.

See comment 7.

See comment 8.

Page 28 GAO/AIMD-95-77 Antifraud Technology and Medicare
Appendix II 

Comments From the Department of Health

and Human Services

GAO Comments 1. We disagree with HHS’ statement that shared systems or claims

processing systems used by some contractors include sophisticated

software designed to provide data necessary to identify fraudulent claims.

As our report discusses, while these systems have some capabilities that

may identify potential fraud, including suspending duplicate claims, these

systems were primarily designed to process and pay Medicare claims. We

have also testified and reported on limitations of these systems compared

with private-sector capabilities.1

2. We commend HCFA for coordinating its antifraud efforts in South

Florida. The amounts recovered and the examples cited in our report

confirm the serious nature of the fraud plaguing the Medicare program in

South Florida. We believe that the types of fraud schemes identified lend

themselves to the antifraud technology we recommended be extended to

South Florida.

3. As discussed in the Agency Comments and Our Evaluation section of

this report, HHS officials were aware of the existence and application of

this type of technology in the health insurance setting.

4. HHS indicates that HCFA is planning to incorporate fraud detection edits

in MTS and has asked for the design of a technology that will recognize

patterns on a prepayment basis. However, MTS is not scheduled to be

implemented until 1999. Also, as our report points out, antifraud

technology is available, and current best practices in information systems

development recommend taking a hard look at commercially available

technology, and in fact favor its acquisition over specific in-house

development efforts.

5. We have updated our report to reflect current fiscal year 1994 data. Also,

because HCFA combines referrals from providers, medical review, and

special requests from the OIG and HCFA into one category, HCFA could not

provide us with the number of potential fraud referrals made specifically

by medical review or those referrals subsequently referred to the OIG.

6. Discussed in the Agency Comments and Our Evaluation section of this

report.

7. We have deleted the statement we attributed to the Director of the

Bureau of Program Operations and clarified that although HCFA is

1

Medicare Claims Billing Abuse: Commercial Software Could Save Hundreds of Millions Annually

(GAO/T-AIMD-95-133, May 5, 1995); Medicare Claims (GAO/AIMD-95-135).

Page 29 GAO/AIMD-95-77 Antifraud Technology and Medicare
Appendix II 

Comments From the Department of Health

and Human Services

reviewing emerging technologies, it has not yet determined whether

antifraud technology will be applied to MTS or whether this technology

would be developed in-house or acquired via a commercial system.

8. We have revised the report by deleting the Internal Revenue Service

from the list of participants involved in the South Florida Workgroup.

Page 30 GAO/AIMD-95-77 Antifraud Technology and Medicare
Appendix III 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

Patricia T. Taylor, Associate Director

David B. Alston, Assistant Director

Yvette R. Banks, Evaluator-in-Charge

Theodore P. Alves, Technical Adviser

Michael P. Fruitman, Communications Analyst

Teresa L. Jones, Information Processing Specialist

Atlanta Regional

Office

Carl L. Higginbotham, Senior Evaluator

Amanda S. Cooksey, Staff Evaluator

Maria B. Warkentine, Staff Evaluator

(510957) Page 31 GAO/AIMD-95-77 Antifraud Technology and Medicare
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