For Release on Delivery

Expected at

10 a.m.

Wednesday,

July 12, 2000

GAO/T-AIMD/OSI-00-251

MEDICARE IMPROPER

PAYMENTS

Challenges for Measuring

Potential Fraud and Abuse

Remain Despite Planned

Enhancements

Statement of Gloria L. Jarmon

Director, Health, Education, and Human Services

Accounting and Financial Management Issues

Accounting and Information Management Division

Testimony

Before the Task Force on Health, Committee on the

Budget, House of Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-AIMD/OSI-00-251

Mr. Chairman and Members of the Task Force:

I am pleased to be here today to discuss our review of the Health Care

Financing Administration’s (HCFA) efforts to improve the measurement of

improper payments in the Medicare fee-for-service program. Identifying

the extent of improper payments and their causes, including those

attributable to potential fraud and abuse, are the first steps toward

implementing the most cost-effective ways to reduce losses. In my

statement today, I would like to share with you the results of our review

which is being conducted at the request of the Chairman of the House

Committee on the Budget.

HCFA, an operating division within the Department of Health and Human

Services (HHS), has designated ensuring the integrity of the Medicare

program a top priority. It recognizes that inappropriate payments are a

drain on the program’s financial resources— resources intended to

provide essential health care services to millions of elderly and disabled

Americans. In conjunction with its audit of HCFA’s annual financial

statements since 1996, the HHS Office of the Inspector General (OIG) has

conducted a nationwide study to estimate Medicare fee-for-service

improper payments.1 The statistically-projectable results cited in the OIG’s

study have provided valuable insights regarding the extent of Medicare

vulnerabilities. Results from the most recent study indicate that, of the

$164 billion in fiscal year 1999 Medicare fee-for-service claim payments, a

projected $13.5 billion were paid improperly for various reasons ranging

from inadvertent errors to outright fraud and abuse. The magnitude of

these estimated losses has led to considerable concern regarding HCFA’s

efforts to protect Medicare dollars as well as the need to obtain a better

understanding of the nature and extent of the problems.

The OIG’s study was a major undertaking and, as we recently reported,2

the development and implementation of the methodology (referred to as

“current methodology”) it used as the basis for its estimates represents a

significant step toward quantifying Medicare improper payments. It is

important to note however, that this methodology was not intended to and

would not detect all potentially fraudulent schemes perpetrated against

the Medicare program. Rather, it was designed to provide users of HCFA’s

1The Chief Financial Officers Act of 1990, as expanded by the Government Management Reform Act of

1994 (GMRA), requires 24 major departments and agencies, including HHS, to prepare and have

audited agencywide financial statements. Major “components” of these 24 agencies, such as HCFA,

may also be required to have audited financial statements.

2Efforts to Measure Medicare Fraud (GAO/AIMD-00-69R, February 4, 2000).
Page 2 GAO/T-AIMD/OSI-00-251

financial statements with an initial estimate of Medicare fee-for-service

claims that may have been paid in error and has served as a performance

measure for the program. However, given the size and complexity of the

Medicare program, the usefulness of this estimate as a tool for targeting

specific corrective actions is limited.

To demonstrate a commitment to improving payment safeguards, in

January 2000, HCFA reaffirmed its goal of reducing the Medicare fee-forservice payment errors to 5 percent or less by the year 2002, about a 3

percent or $5 billion reduction from fiscal year 1999 levels. However,

without additional information on the extent of improper payments3

attributable to potential fraud and abuse, HCFA’s ability to fully measure

the success of its efforts remains limited. Accomplishing this goal will

depend, in part, on HCFA’s ability to further develop improper payment

measures to enable it to more effectively target specific corrective actions.

In response to this need, HCFA has begun three projects intended to

enhance its understanding of improper payments and help it develop

targeted corrective actions.

Given the importance of Medicare to millions of beneficiaries and

concerns about the financial health of the program, you asked us to

provide suggested improvements to assist HCFA in its efforts to further

estimate Medicare improper payments, including potential fraud and

abuse. In summary, we concluded that

• because it was not intended to include procedures designed specifically to

identify all types of potential fraudulent and abusive activity, the current

methodology does not provide an estimate of the full extent of improper

Medicare fee-for-service payments;

• HCFA has initiated three projects designed to further its measurement

efforts which offer some promise for determining the extent of improper

payments attributable to potential fraud and abuse; and

3Improper payments are defined as payments made for unauthorized purposes or excessive amounts.

Improper payments can be caused by fraud and abuse, which involve a deliberate disregard for the

truth or falsity of information or an intentional deception or misrepresentation that an individual

knows or should know to be false or does not believe to be true and makes, knowing the deception

could result in some unauthorized benefit to himself or some other person. Using information, such as

the factors contributing to improper payments, to address fraudulent or abusive payments only as such

payments are specifically identified and adjudicated unnecessarily limits and delays developing

effective corrective actions. Accordingly, we believe that using these data as soon as practical to

analyze and develop appropriate initiatives, represents effective management efforts to increase

accountability over federal assets.
Page 3 GAO/T-AIMD/OSI-00-251

• based on careful evaluation of their effectiveness, performing additional

potential fraud identification techniques as part of its efforts to measure

improper payments could assist HCFA in arriving at a more

comprehensive measurement and, ultimately, develop cost-effective

internal controls to combat improper payments; however, no set of

techniques, no matter how extensive, can be expected to measure all

potential fraud and abuse.

We are making recommendations designed to assist HCFA in its efforts to

further enhance its ability to measure the extent of losses emanating from

Medicare fee-for-service payments. Although we believe HCFA’s efforts to

measure Medicare fee-for-service improper payments can be further

enhanced with the use of additional fraud detection techniques, we

support the efforts they have taken thus far. Considering the challenges

associated with identifying and measuring improper payments, the

projects discussed in our statement represent important steps toward

advancing the usefulness of its improper payment measurement efforts.

To fulfill our objectives, we analyzed the current methodology and HCFA’s

three planned projects related to improper payment measurement; related

documents discussing the methodologies, designs, planned steps, and time

frames for implementation of these initiatives; and relevant HHS OIG and

GAO reports. We also interviewed HCFA officials and recognized experts

in health care and fraud detection in academia, federal and state

government, and the private sector on the various types of improper

payments and the techniques used to identify and measure them. We

performed our work from November 1999 through June 2000 in

accordance with generally accepted government auditing standards. See

appendix 1 for a more detailed discussion of our objectives, scope, and

methodology.

In my statement today, I will summarize our conclusions and

recommendations regarding

• the three HCFA projects that have been designed or initiated to measure

Medicare fee-for-service improper payments;

• how such projects will potentially enhance HCFA’s ability to

comprehensively measure improper payments, including those

attributable to potentially fraudulent and abusive provider practices based

on the extent to which effective techniques used to detect common types

of potential fraud and abuse are included in their design; and
Page 4 GAO/T-AIMD/OSI-00-251

• actions HCFA should take to further enhance its efforts to measure the

extent of improper Medicare fee-for-service payments and help HCFA

better develop targeted corrective actions.

But, first I would like to begin with some relevant background about

HCFA, the Medicare program, and the vulnerabilities of the Medicare

program to fraud and abuse.

In 1990, we designated Medicare as a high-risk program,4 and it continues

to be one today. Many of Medicare’s vulnerabilities are inherent due to its

size and administrative structure, which make the largest health care

program in the nation a perpetually attractive target for exploitation.

Wrongdoers continue to find ways to dodge program safeguards. The

dynamic nature of fraud and abuse requires constant vigilance and the

development of increasingly sophisticated measures to detect fraudulent

schemes and protect the program.

With total benefit payments of $201 billion in fiscal year 1999, Medicare

enrollment has doubled since 1967 to nearly 40 million beneficiaries today.

Beneficiaries can elect to receive Medicare benefits through the program’s

fee-for-service or managed care options. With benefit payments of

$164 billion in fiscal year 1999 and about 85 percent of participating

beneficiaries, the fee-for-service option represents the most significant

part of the program. The managed care option accounts for the remaining

$37 billion and 15 percent of participating beneficiaries. The program is

comprised of two components. Hospital Insurance or Medicare Part A

covers hospital, skilled nursing facility, home health, and hospice care.

Supplementary Medical Insurance, also known as Part B, covers physician,

outpatient hospital, home health, laboratory tests, durable medical

equipment (DME), designated therapy services, and some other services

not covered by Part A.

HCFA’s administration of the Medicare fee-for-service program is

decentralized. Each year, about 1 million providers enrolled in the

program submit about 900 million claims to about 56 Medicare contractors

for payment. The bulk of the claims are submitted electronically and never

touch human hands during the entire computer processing and payment

cycle.

4High Risk Series: An Update (GAO/HR-99-1, January 1999).

Medicare Is

Vulnerable to

Fraudulent and

Abusive Activity
Page 5 GAO/T-AIMD/OSI-00-251

Ensuring the integrity of the Medicare fee-for-service program is a

significant challenge for HCFA and its Medicare claims processing

contractors and Peer Review Organizations (PROs). They are HCFA’s front

line defense against inappropriate payments including fraud and abuse and

should ensure that the right amount is paid to a legitimate provider for

covered and necessary services provided to eligible beneficiaries. Except

for inpatient hospital claims, which are reviewed by the PROs, Medicare

contractors perform both automated and manual prepayment and

postpayment medical reviews of Medicare claims. Various types of preand postpayment reviews are available to contractors to assess whether

claims are for covered services that are medically necessary and

reasonable. These include automated reviews of submitted claims based

on computerized edits within contractors’ claims processing systems,

routine manual reviews of claims submitted, and more complex manual

reviews of submitted claims based on medical records obtained from

providers.

Reliance on postpayment utilization and medical record reviews to detect

potential fraud and abuse has created opportunities for unscrupulous

providers and suppliers to defraud the program with little fear of prompt

detection. For example, a few providers—subjects of past health care

fraud investigations in which they have pled guilty to or have been

indicted for criminal charges—had set up store-front operations and

fraudulently obtained millions of dollars from Medicare before their billing

schemes were detected through postpayment reviews. HCFA is moving

toward more extensive use of prepayment reviews, but contractors’ efforts

to prevent and detect improper payments are challenged due to the sheer

volume of claims they are required to process and the need to pay

providers timely. The program’s vulnerabilities have been compounded by

the emergence of some organized groups of criminals who specialize in

defrauding and abusing Medicare, which has led to an array of fraudulent

schemes that are diverse and vary in complexity. For example, based on

our recent review of seven investigations of fraud or alleged fraud, we

reported that the criminal groups involved had created as many as 160

sham medical entities—such as medical clinics, physician groups,

diagnostic laboratories, and durable medical equipment companies—or

used the names of legitimate providers to bill for services not provided.5

Medicare contractors and PROs are identifying thousands of improper

payments each year due to mistakes, errors, and outright fraud and abuse.

They refer the most flagrant cases of potential fraud and abuse to the OIG

5Criminal Groups in Health Care Fraud (GAO/OSI-00-1R, October 5, 1999).
Page 6 GAO/T-AIMD/OSI-00-251

and Department of Justice (DOJ) so they can investigate further, and if

appropriate, pursue criminal and civil sanctions. HCFA tracks the cases

referred by Medicare contractors and PROs to the OIG and DOJ in its

Fraud Investigation Database (FID).6 Figure 1 shows the six most common

types of potential fraud and abuse cases in the FID and the relative

frequency of these cases. Definitions of these common types of fraud and

abuse and examples are provided in appendix 2 to this testimony.

6The Fraud Investigation Database is a comprehensive nationwide system devoted to Medicare fraud

and abuse data accumulation. The system was created in 1995, but contains data on potential fraud

and abuse referrals going back to 1993.
Page 7 GAO/T-AIMD/OSI-00-251

Figure 1: Fraud Investigation Database Statistics for Cases Referred, 1993

to April 2000

Source: Prepared by GAO from data in HCFA’s FID. We did not independently verify this

information.

We were unable to assess the level of actual or potential program losses

for the different types of potential fraud or abuse due to the limited

financial data in the FID. However, HCFA officials told us that while more

complex types of fraud or abuse, such as fraudulent cost reporting and

kickback arrangements may be less frequent than other types, such cases

often involve significantly greater losses.

19

7 7 7

23

37

0

5

10

15

20

25

30

35

40

45

Service not

rendered

Medically

unnecessary/

overutilization

Misrepresenting

services/

falsifying

documents/CMNs

Upcoding Fraudulent cost

reporting

Kickbacks/

accepting/

soliciting bribes

Percent
Page 8 GAO/T-AIMD/OSI-00-251

Given the broad nature of health care fraud and abuse, efforts to measure

its potential extent should incorporate carefully selected detection

techniques into the overall measurement methodology. With billions of

dollars at stake, health care fraud and abuse detection has become an

emerging field of study among academics, private insurers, and HCFA

officials charged with managing health care programs. A variety of

methods and techniques are being utilized or suggested to improve efforts

to uncover suspected health care fraud and abuse. Such variety is needed

because one technique alone may not uncover all types of improper

payments.

Although the vast majority of health care providers and suppliers are

honest, unscrupulous persons and companies can be found in every health

care profession and industry. Further, fraudulent schemes targeting health

care patients and providers have occurred in every part of the country and

involve a wide variety of medical services and products. Individual

physicians, laboratories, hospitals, nursing homes, home health care

agencies, and medical equipment suppliers have been found to perpetrate

fraud and abuse.

Fraud and abuse detection is not an exact science. No matter how

sophisticated the techniques or the fraud and abuse audit protocols, not all

fraud and abuse can be expected to be identified. However, using a variety

of techniques holds more promise for estimating the extent of potentially

fraudulent and abusive activity and also provides a deterrent to such

illegal activity. Health care fraud experts and investigators have identified

techniques that can be used to detect fraudulent and abusive activity.

According to OIG officials, these techniques are performed by Medicare

contractor fraud units7 to detect potential fraud and abuse. Table 1

summarizes the most promising techniques they identified along with

some of their limitations.

7Medicare contractor fraud units are located at each HCFA contractor and are responsible for

preventing, detecting, and deterring Medicare fraud and abuse.

Efforts to Measure

Potential Fraud and

Abuse Rely on

Effective Use of

Diverse Techniques
Page 9 GAO/T-AIMD/OSI-00-251

Table 1: Techniques for Detecting Potential Fraud and Abuse

Medical record review: Doctors and nurses review medical records to assess whether

the services billed were allowable, reasonable, medically necessary, adequately

documented, and coded correctly in accordance with Medicare reimbursement rules and

regulations.

Limitations: Medical reviews may not uncover services that have not been rendered or

billing for more expensive procedures when the medical records have been falsified to

support the claim.

Beneficiary contact: Verify that the services billed were actually received through

contacting the beneficiary either in person or over the phone, or by mailing a

questionnaire.

Limitations: Beneficiary may be difficult to locate and not be fully aware of, or understand

the nature of, all services provided. Contact may not reveal collusion between the

beneficiary and provider to fraudulently bill for unneeded services or services not

received. In some instances, medical necessity and quality of care may be difficult to

judge.

Provider contact: Visit provider to confirm that a business actually exists, that the activity

observed supports the number of claims being submitted by the provider, and that medical

records and other documentation support the services billed.

Limitations: Provider contact may not reveal collusion between the provider and

beneficiary to fraudulently bill for unneeded services or services not rendered. In some

instances, medical necessity and quality of care may be difficult to judge.

Data analysis: Examine provider and beneficiary billing histories to identify unusual or

suspicious claims. Provider focused data analysis attempts to identify unusual billing,

utilization, and referral patterns relative to a provider’s peer group. Beneficiary focused

data analysis looks for unusual treatment patterns such as visiting several different

providers for the same ailment or claims for duplicate or similar services.

Limitations: Data analysis may only identify the most flagrant cases of potential fraud

and abuse because it relies on detecting unusual patterns relative to the norm. Application

of additional techniques may be necessary to assess the appropriateness of unusual

patterns identified.

Third party contact/confirmation: Validate information relied on to pay claims with third

parties to assist in identifying potential fraud and abuse. For example, verify that a

provider is qualified to render medical services to Medicare beneficiaries through

contacting state licensing boards or other professional organizations. Also, other entities,

such as employers, private insurers, other governmental agencies (e.g., Internal Revenue

Service, Social Security Administration, state Medicaid agencies) and law enforcement

authorities represent valuable sources in determining the validity of claim payments when

the reliability of data from primary sources (e.g., claims data, beneficiaries, and providers)

is questionable.

Limitations: Does not address utilization patterns, whether services were rendered, the

need for services, or quality of services.
Page 10 GAO/T-AIMD/OSI-00-251

Consequently, health care experts and investigators also told us that

effective detection of potential fraud and abuse necessarily involves the

application of several of these techniques and considerable analysis,

especially for the more sophisticated types of billing schemes and

kickback arrangements. In addition, data on fraud referrals contained in

the FID indicate that information necessary for identifying potential

Medicare fraud and abuse comes from a variety of sources, as shown in

figure 2. In particular, these data and the fraud experts we spoke with

suggest that Medicare beneficiaries represent a valuable source for

detecting certain types of potential fraud and abuse, especially services

not rendered. HCFA officials told us that beneficiary complaints stem

largely from the beneficiaries’ review of their explanation of Medicare

benefit (EOMB) statements received after health services and supplies are

provided. These findings suggest that potential fraud and abuse can only

be comprehensively measured by effectively applying a variety of

investigation techniques using a variety of sources.
Page 11 GAO/T-AIMD/OSI-00-251

Figure 2: Sources of Common Fraud and Abuse Referrals, 1993 to April

2000

Type of Referral

7%

18%

13%

16%

20%

21%

30%

28%

18%

28%

17%

13%

11%

10%

10%

10%

8%

40%

19%

27%

44%

7%

5%

9%

11%

18%

9%

13%

18%

42%

6%

24%

8%

13%

7%

0%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Kickbacks/ accepting/

soliciting bribes

Fraudulent cost reporting

Upcoding

Misrepresenting services/

falsifying documents/

CMNs

Medically

unnecessary/overutilization

Services not rendered

Percentage of Referrals

Beneficiary

Referral

Provider

Fraud Unit

Other contractor/PRO

Other
Page 12 GAO/T-AIMD/OSI-00-251

Notes:

Beneficiary: A person eligible to receive Medicare payment or services. This category

includes beneficiary telephone, walk-in, and written complaints.

Referral: A formal submission of a case by various federal investigators (for example,

Federal Bureau of Investigations, Office of Inspector General, and Health Care Financing

Administration).

Provider: Persons or entities, including their employees and former employees, who

provide health care services or supplies to Medicare beneficiaries.

Fraud Unit: Individuals responsible for preventing, detecting, and deterring Medicare

fraud and abuse. Such a unit is located at each HCFA contractor.

Other contractor/PRO: In addition to fraud units, Medicare contractor medical review,

claims processing, and audit units perform a broad range of activities in the identification

of fraud, including reviews of submitted claims and medical records by medical

professionals to assess whether services billed were allowed, medically necessary,

adequately documented, and coded correctly in accordance with Medicare requirements.

In addition, audits of provider cost reports are performed to determine the appropriateness

of costs reimbursed in connection with the cost report settlement process.

Other: In addition to the sources listed above, referrals of fraud and abuse cases are

sometimes generated based on leads obtained via calls made to the OIG Hotline, from

media sources, or other anonymous sources. The OIG Hotline allows employees and the

public to directly report allegations or provide information regarding problems of possible

waste, mismanagement, and abuse in the Medicare program.

Source: Prepared by GAO from data in HCFA’s FID and interviews with HCFA and

contractor officials. We did not independently verify information contained in HCFA’s FID.

The inherent vulnerabilities of the Medicare fee-for-service program have

fueled debate over how extensively the measurement of potential fraud

and abuse should be pursued to provide information that policymakers

and HCFA managers need to effectively target program integrity efforts.

Implementing the current methodology to estimate improper payments is

a major undertaking and represents an attempt to give HCFA a national

estimate of payment accuracy in the Medicare program. The current

methodology focuses on estimating Medicare payments that do not

comply with payment policies as spelled out in Medicare laws and

regulations, but does not specifically attempt to identify potential fraud

and abuse. In addition to the current methodology, HCFA has three

projects in various stages of development that could somewhat enhance

the capability to uncover potential fraud and abuse and help HCFA better

target program safeguard efforts over the next few years.

Planned HCFA

Projects Will Provide

Some Improvements
Page 13 GAO/T-AIMD/OSI-00-251

The primary purpose of the current methodology is to provide an estimate

of improper payments that HCFA can use for financial statement reporting

purposes, and it has served as a performance measure. The OIG is

responsible for overseeing the annual audit of HCFA’s financial

statements, as required by the Chief Financial Officers Act of 1990 as

expanded by the Government Management Reform Act of 1994. The

current methodology has identified improper payments ranging from

inadvertent mistakes to outright fraud and abuse. However, specifically

identifying potentially fraudulent and abusive activity and quantifying the

portion of the error rate attributable to such activity has been beyond the

scope of the current methodology.

The focus of the current methodology is on procedures that verify that the

claim payments made by Medicare contractors were in accordance with

Medicare laws and regulations. The primary procedures used are medical

record reviews and third party verifications. Medical professionals

working for Medicare contractors and PROs review medical records

submitted by providers and assess whether the medical services paid for

were allowable, medically necessary, accurately coded, and sufficiently

documented. OIG staff perform various procedures including third party

verifications to ensure that health care providers are in “good standing”

with state licensing and regulatory authorities and are properly enrolled in

the Medicare program. They also verify with the Social Security

Administration (SSA) that the beneficiaries receiving the services were

eligible for them.

The OIG reported that the medical reviews conducted in the current

methodology have been the most productive technique for identifying

improper payments—detecting the overwhelming majority of the improper

payments identified.8 According to OIG officials, medical reviews have led

to some major prosecutions. In addition, some of the health care fraud

experts we talked with stated that such medical reviews are most effective

in detecting unintentional errors. However, they also told us that medical

reviews are less effective in identifying potentially fraudulent and abusive

activity because clever providers can easily falsify supporting information

in the medical records to avoid detection.

With respect to identifying potentially fraudulent or abusive activities, OIG

officials indicated that medical reviews performed during the current

methodology have resulted in referrals to its Investigations Office.

8Improper Fiscal Year 1999 Medicare Fee-For-Service Payments, Department of Health and Human

Services, Office of Inspector General, February 2000, A-17-99-01999.

Current Methodology Not

Designed to Measure the

Full Extent of Potential

Fraud and Abuse
Page 14 GAO/T-AIMD/OSI-00-251

However, they acknowledge that the current methodology generally

assumes that all medical records received for review are valid and thus

represent actual services provided. In addition, they agree that additional

improper payments may have been detected had additional verification

procedures been performed, such as (1) confirming with the beneficiary

whether the services or supplies billed were received and needed and

(2) confirming the nature of services or supplies provided through on-site

visits and direct contact with current or former provider employees.

Recognizing the potential for abuse based on past investigations—such as

falsified certificates of medical necessity or where beneficiaries are not

“homebound”, a requirement for receiving home health benefits—the OIG

has included face-to-face contact with beneficiaries and providers when

reviewing sampled claims associated with home health agency services.

Further, during the course of our review, OIG officials stated that they will

conduct beneficiary interviews when reviewing DME claims selected in its

fiscal year 2000 study. However, according to OIG officials, they have not

extended this or certain other techniques to the other numerous types of

claims included in its annual review because they consider them costly

and time-consuming.

Accordingly, the OIG recognizes that the current methodology does not

estimate the full extent of Medicare fee-for-service improper payments,

especially those resulting from potentially fraudulent and abusive activity

for which documentation, at least on the surface, appears to be valid and

complete. In fact, the OIG testified9 that its estimate of improper payments

did not take into consideration numerous kinds of outright fraud such as

phony records or kickback schemes. To identify potential fraud, the OIG

also relies on tips received from informants and other investigative

techniques.

A secondary benefit that has been derived from the current methodology

is that it has prompted HCFA into developing additional strategies, as we

discuss later, for reducing the types of improper payments identified.

However, HCFA is limited in developing specific corrective actions to

prevent such payments because the current methodology only produces

an overall national estimate of improper payments. Having the ability to

pinpoint problem areas by geographic areas below a national level

(referred to as subnational), Medicare contractors, provider types, and

services would make improper payment measures a more useful

management tool.

9July 17, 1997, testimony of the HHS Inspector General in a hearing before the House Committee on

Ways and Means, Subcommittee on Health, entitled Audit of HCFA Financial Statements.
Page 15 GAO/T-AIMD/OSI-00-251

HCFA has two projects that center on providing it with the capability of

producing improper payment rates on a subnational and provider type

basis—the Comprehensive Error Rate Testing (CERT) project and the

surveillance portion of the Payment Error Prevention Program (PEPP).

These projects are designed to improve the precision of future improper

payment estimates and provide additional information to help develop

corrective actions. However, since the methodologies associated with the

CERT and PEPP projects incorporate techniques for identifying improper

payments that are similar to those used in the current methodology, the

extent to which these two projects will enhance HCFA’s potential fraud

and abuse measurement efforts is limited.

HCFA has a third project in the concept phase that will test the viability of

using a variety of investigative techniques to develop a potential fraud rate

for a specific geographic area or for a specific benefit type. This project,

called the Model Fraud Rate Project (MFRP), provides HCFA the

opportunity to pilot test more extensive detection techniques that, if

effective, could be incorporated into the other measurement

methodologies to improve the measurement and, ultimately, prevention of

potential fraudulent and abusive activity. Table 2 compares the scope and

potential fraud and abuse detection capabilities of the current

methodology to the HCFA projects.

HCFA Projects Enhance

Error Rate Precision and

Some Potential Fraud and

Abuse Detection

Capabilities
Page 16 GAO/T-AIMD/OSI-00-251

Table 2: Comparison of HCFA Efforts to Measure Medicare Improper Payments

Current methodology Comprehensive Error Rate

Testing

(CERT)

Payment Error

Prevention

Program/Surveillance

(PEPP)

Model Fraud Rate

Project

(MFRP)

Key design

attributes

• First national statistically

valid estimate for all types of

fee-for-service claims,

beneficiaries, and providers

• Includes tests for:

• medical necessity and

reasonableness

• proper documentation,

• proper coding,

• provider eligibility,

• determination of

whether providers are

subject to current

sanctions or

investigations,

• beneficiary eligibility,

• duplicate payments,

• Medicare as secondary

payer (MSP)

compliance,

• compliance with pricing,

deductible, and

coinsurance rules, &

other selected rules

• Test procedures expected to

be similar to current

methodology

• Independent medical review

• Larger sample and on-going

reporting improves

analyses/utility

• Statistically valid

national error rates by

contractor, provider

type, benefit category,

and claims processing,

• Trend analysis to assist

in targeting of integrity

efforts,

• Potential platform for testing

claims software

• Designed to estimate

payment error rates

for inpatient

Prospective Payment

System (PPS) claims

by state

• Larger sample and

frequent reporting

designed to improve

analyses and

targeting of integrity

efforts

• Tests focus on:

• medical necessity

and

reasonableness,

• unnecessary

admissions,

• incorrect

diagnostic

coding,

• some quality of

care measures

• Pilot study to

develop a model

fraud rate

• Scope focused on

specific benefit or

geographic area

• Fraud investigative

techniques will be

used:

• beneficiary

contact,

• medical

records review,

• provider and

beneficiary

profiling,

• investigation of

complaints

• Results to be

categorized under

fraud types and

causes

Limitations for

detecting

potential fraud

and abuse

• Significant reliance on the

integrity of medical records

• Lacks provider-focused data

analysis during testing

• Limited provider or

beneficiary validation

• Not designed to identify

certain types of fraud or

abuse

• Similar to current

methodology

• Similar to current

methodology

• Scope limited to

inpatient PPS

• Plan for

comprehensive

nationwide study

evolving

• Limited provider or

third party

validation

Status • Fourth annual review

completed

• Contract awarded 5/00

• Phased implementation

designed to be completed by

10/2001

• Contracts completed

3/00

• Baseline error rates

and first quarterly

report due by 9/00

• Concept currently

under development

• Pilot testing

projects designed

to be implemented

by 10/2000

Costs • 1999 review $4.7 million Base year $2 million plus

$4 million annually thereafter

$7.5 million annually Not yet determined
Page 17 GAO/T-AIMD/OSI-00-251

The CERT project focuses on reviewing a random sample of all Part A and

B claims processed by Medicare contractors each year except inpatient

Prospective Payment System (PPS) hospital claims. It involves the review

of a significantly larger random sample of claims and thus, according to

HCFA officials, allowing HCFA to project subnational improper payment

rates for each Medicare contractor and provider type. It is the largest of

the projects and is undergoing a phased implementation with a scheduled

completion date of October 2001. In addition to developing subnational

error rates, HCFA officials stated that the CERT project will also be used

to develop performance measures that will assist HCFA in monitoring

contractor operations and provider compliance. For example, CERT is

designed to produce a claim processing error rate for each contractor that

will reflect the percentage of claims paid incorrectly and denied

incorrectly, and a provider compliance rate that indicates the percentage

of claims submitted correctly.

The PEPP project is similar to the CERT project and is designed to

develop payment error rates for the Part A inpatient PPS hospital claims

not covered by CERT. PEPP is designed to produce subnational error

rates for each state and for each PRO area of responsibility. Claim reviews

under PEPP are designed to be continuous in nature with results reported

quarterly. HCFA officials stated that the project is the furthest along in

implementation, with the first quarterly reports expected in September

2000. The contractors and PROs implementing the project are expected to

identify the nature and extent of payment errors for these inpatient claims

and implement appropriate interventions aimed at reducing them.

After their full implementation, HCFA intends to develop a national

improper payment rate by combining the results of the CERT and PEPP

projects. This rate will be compared to the rate produced by the current

methodology to identify, and research reasons for, any significant

variances among results. While the national estimate will continue to

provide valuable information concerning the extent of improper payments,

HCFA officials state that the availability of reliable estimates at the

subnational levels contemplated by these efforts will greatly enhance the

usefulness of these estimates as management tools.

While enhancing the precision of improper payment estimates will offer a

richer basis for analyzing causes and designing corrective actions,

conceptually, the MFRP holds the most promise for improving the

measurement of potential fraud and abuse. However, the Medicare

contractor assisting HCFA in developing this project is dropping out of the

Medicare program in September 2000 and has ceased work on the project.

Efforts to date have focused on developing a potential fraud rate for a
Page 18 GAO/T-AIMD/OSI-00-251

specific locality and specific benefit type; however, HCFA intends to

eventually expand the scope of the project to provide a national potential

fraud rate. As currently conceived, the project involves studying the pros

and cons of using various investigative techniques, such as beneficiary

contact, to estimate the occurrence of potential fraud. HCFA officials

informed us that before the contractor ceased work on this project, it

conducted a small pilot test using beneficiary contact as a potential fraud

detection technique that identified some of the challenges HCFA will face

in implementing this technique. The results of the test are discussed later.

HCFA is seeking another contractor to take over implementation of the

project. The contractor eventually selected will be expected to produce a

report that identifies the specific potential fraud and abuse identification

techniques used, the effectiveness of the techniques in identifying

potential fraud and abuse, and recommendations for implementing the

techniques nationally. The contractor will also be expected to develop a

“how to manual” that Medicare contractors and other HCFA program

safeguard contractors (PSC) can use to implement promising techniques.

HCFA officials stated that promising techniques identified through MFRP

could also be exported to the CERT and PEPP projects and the current

methodology to enhance national and subnational estimates of potential

fraud and abuse over time.

Collectively, HCFA’s projects do not comprehensively attempt to measure

potential fraud and abuse or evaluate the specific vulnerabilities in the

claims processing process that may be allowing fraud and abuse to be

perpetrated. Table 3 shows the limited use of selected identification

elements among the current methodology and the HCFA projects. The

MFRP project’s scope, for example, does not include studying the viability

of making provider and supplier contact or using third party confirmations

to detect potential fraud and abuse.

Contacting beneficiaries and checking providers are valuable investigative

techniques used to develop potential fraud and abuse cases. For example,

California officials recently visited all Medicaid10 Durable Medical

Equipment (DME) suppliers as part of a statewide Medicaid provider

enrollment effort and found that 40 percent of the dollars paid to the

10The Medicaid program represents the primary source of health care for medically vulnerable

Americans, including poor families, the disabled, and persons with developmental disabilities requiring

long-term care. Medicaid is administered in partnership with the states pursuant to Title XIX of the

Social Security Act with combined state and federal medical assistance outlays in fiscal year 1999

totaling $180.8 billion.

Expanding the Scope of

the HCFA Projects Could

Enhance Measurement of

Potential Fraud and Abuse
Page 19 GAO/T-AIMD/OSI-00-251

suppliers was potentially fraudulent. The on-site visits not only helped to

identify the fraudulent activity, but also to obtain sufficient evidence to

support criminal prosecutions for fraud.
Page 20 GAO/T-AIMD/OSI-00-251

Table 3: Methodologies for Estimating Medicare Improper Payments

Key characteristics Current

methodology

CERT PEPP MFRP

Scope -

• Geographical

• Claim type

Nationwide

All

Nationwidea

All but Inpatient

Nationwidea

Inpatient only

Evolving b

Measurement-

• Technique used

• Annual claims sample

size

Sampling

5,000 – 8,000

Sampling

100,000+

Sampling

55,000+

Sampling

Not yet determined

Measurement

elements

Classification of errors c

• Cause

• Type —

X

—

X

—

X

X

X

Claims Validation:

• Medical record

and claims

processing review

XX X X

• Beneficiary

contact — d — d — X

• Provider/Supplier

contact e — d —— —

• Third party

contact/confirmation f

X— — —

Identification

elements

• Data analysis g

• Provider

focusedh

• Beneficiary

focused

—

X

—

—

—

—

X

X

Legend: X Element included — Element not included

a

The CERT and PEPP projects also provide for estimates of improper payments at the

subnational and provider type levels.

b

The scope of the MFRP is still conceptual. Efforts to date have focused on developing a

potential fraud rate for specific benefit types and specific localities and to eventually

expand efforts to provide a national rate.

c

Errors can be classified in many ways; table 3 shows two types of categories. For

example, cause classifications may include inadvertent billing errors or possible fraud and

abuse errors. Type categories may include documentation errors or lack of medical

necessity errors.

d

Methodology includes face-to-face contact with beneficiaries and providers for home

health agency claims only.

e

Other than requests for medical records.
Page 21 GAO/T-AIMD/OSI-00-251

f

Third party contact/confirmation, for example, may include contact with state licensing

boards or other professional organizations to verify provider standing. This example

represents only one of the numerous methods of utilizing third party confirmation to

identify improper payments

g

See table 1 for a discussion of data analysis techniques for detecting potential fraud and

abuse.

h

OIG officials recently told us that each year at the end of the their review, after all data

has been entered in their national database, they profile each provider type in the claims

sample.

Including an assessment of the likely causes of specific payment errors

could help HCFA better develop effective strategies to mitigate them. The

current methodology classifies errors by type, such as lack of

documentation or medically unnecessary services, which is used to show

the relative magnitude of the problems. Knowing the relative magnitude of

a problem offers perspective on what issues need to be addressed. For

example, based on its review of errors identified in the current

methodology, HCFA recently issued a letter to physicians emphasizing the

need to pay close attention when assigning Current Procedural

Terminology (CPT) codes11 and billing Medicare for two closely related,

yet differing, types of evaluation and management services.

Further analysis of identified improper payments that provide additional

insights into possible root causes for their occurrence is essential for

developing effective corrective actions. For example, if errors are resulting

from intentionally abusive activity, specific circumstances or reasons that

permit the abuse to be perpetrated can be analyzed to develop and

implement additional prepayment edits to detect and prevent their

occurrence. In this regard, GAO has long advocated enhancing automated

claims auditing systems to more effectively detect inappropriate payments

due to inadvertent mistakes or deliberate abuse of Medicare billing

systems.12 Also, developing or strengthening specific enforcement

sanctions offer an additional tool to deter providers or suppliers from

submitting inappropriate claims.

Likewise, numerous individuals and entities are involved throughout the

entire Medicare claims payment process, including providers, suppliers,

employees (caregivers, clerical, and management), Medicare claims

11CPT consists of a list of 5-digit codes for most of the services performed by physicians as well as

instructions for using them for billing purposes.

12Medicare Billing: Commercial System Could Save Hundreds of Millions Annually (GAO/AIMD-98-91,

April 15, 1998) and Medicare Claims: Commercial Technology Could Save Billions Lost to Billing

Abuse (GAO/AIMD-95-135, May 5, 1995).
Page 22 GAO/T-AIMD/OSI-00-251

processing contractors, HCFA, beneficiaries (and their relatives), and

others. Interestingly, in its review of Illinois Medicaid payments,13 the

Illinois Department of Public Aid (IDPA) determined that over 45 percent

of the errors it identified were inadvertent or caused by the IDPA itself

during the process of approving services or adjudicating claims, and that

55 percent appeared to be caused by questionable billing practices. IDPA

officials told us that having a clear understanding of the root causes for

these errors has been instrumental in developing effective corrective

actions. Similarly, attributing the causes of Medicare fee-for-service

improper payments to those responsible for them could provide HCFA

with useful information for developing specific corrective actions.

Certain third party validation techniques are included and have been

successfully implemented in the current methodology. For example, OIG

staff confirm a provider’s eligibility to bill the Medicare program by

contacting state licensing boards to ensure that the doctors billing

Medicare have active licenses. They also verify that beneficiaries are

eligible to receive medical services under the Medicare program with the

SSA. However, as currently conceived, none of the HCFA projects include

third party contact as a potential fraud detection technique.

The experiences of recent efforts to apply more aggressive fraud detection

techniques coupled with our discussions with patient and provider

advocacy groups indicate that finding successful protocols for

implementing some detection techniques may require careful study. Our

review of three studies that have attempted to use beneficiary contact as a

measurement device—the MFRP and two Medicaid studies in Texas and

Illinois—indicate that, while useful, it is a challenging technique to

implement.

• The initial contractor for the MFRP conducted a small pilot test using

beneficiary contact to verify Medicare billed services and found that

making contact was more difficult than anticipated. Telephone contact

was the most cost-effective approach for contacting beneficiaries, but the

contractor could only reach 46 percent of them due to difficulty in

obtaining valid phone numbers and difficulty in actually talking to the

beneficiary or his or her representative once a valid number was located.

Using more costly and time-consuming approaches, such as mailing

written surveys and conducting face-to-face interviews only increased the

13Payment Accuracy Review of the Illinois Medical Assistance Program, Illinois Department of Public

Aid, August 1998.

Implementing More

Aggressive Fraud

Detection Techniques Will

Require Careful Study and

Additional Resources
Page 23 GAO/T-AIMD/OSI-00-251

success rate to 64 percent. To maximize the effectiveness of these

alternative approaches, the contractor noted that it was important to

obtain valid addresses and ensure that the written survey instrument was

concise, easy to understand, and complete for beneficiaries to take the

time to respond.

• The state of Texas experienced similar difficulties contacting Medicaid

recipients in a recent statewide fraud study.14 Telephone numbers for

more than half of the 700 recipients that the state attempted to contact

were not available or were incorrect. The state attempted to make face-toface contact if telephone contact was not possible, and by the study’s end,

over 85 percent of the recipients were contacted. The state concluded that

contacting a recipient by telephone is the only cost-effective way to verify

that services had been delivered. It also found that delays in making

contact could impact the results since recipients’ ability to accurately

recall events appeared to diminish over time.

• For the Illinois Medicaid study, the IDPA found other problems in using

beneficiary contact as a detection technique in the payment accuracy

study of its program.15 Department investigators met with almost 600

recipients or their representatives to verify that selected medical services

had been received. The investigators found that while recipient interviews

were an overall useful step in the study’s methodology, they did not always

produce the desired results. For example, investigators found cases where

caretaker relatives could not verify the receipt of services. They also found

other cases where recipients were unaware of the services received, such

as lab tests, or could not reliably verify the receipt of services because

they were mentally challenged.

Illinois officials involved with implementing the Medicaid study told us

that direct provider contact is also challenging. For example, an important

consideration is whether or not to make unannounced visits. According to

the Illinois officials, unannounced visits can be disruptive to medical

practices and inappropriately harm the reputations of honest providers by

giving patients and staff the impression that suspicious activities are

taking place. Announced visits, on the other hand, can give the provider

time to falsify medical records, especially if they know which medical

records are going to be reviewed. The Illinois officials resolved this

dilemma by announcing visits two days in advance and requesting records

14Final Staff Draft Report on Health Care Claims Study and Comments from Affected State Agencies,

Texas Comptroller of Public Accounts, December 1998.

15See footnote 13.
Page 24 GAO/T-AIMD/OSI-00-251

for 50 recipients so it would be difficult for the provider to falsify all the

records on such short notice.

Data on fraud referrals included in HCFA’s FID indicates that health care

providers and beneficiaries represent important sources for identifying

improper payments, particularly for certain types of potential fraud and

abuse. Moreover, the application of more extensive fraud detection

techniques into efforts to measure improper payments will require their

cooperation. Our discussions with patient and health care provider

advocacy groups indicated they may oppose the application of more

extensive detection techniques due to concerns with violating doctorpatient confidentiality, protecting the privacy of sensitive medical

information, and added administrative burdens. For example, officials

from the Administration on Aging, an HHS operating division, told us that

they discourage elders from responding to telephone requests for medical

and other sensitive information. Similarly, the American Medical

Association and American Hospital Association emphasize the adverse

impact that meeting what they consider to be complex regulations and

responding to regulatory inquiries has on health care providers’ ability to

focus on meeting patient needs. They also voiced concerns with the added

cost that would have to be absorbed by providers to comply with even

more requests for medical information in an era of declining Medicare

reimbursements. Further, some of the health care experts we talked with

cautioned that there are practical limits to the amount of potentially

fraudulent and abusive activity that can be measured. These experts

emphasize that no set of techniques, no matter how extensive, can be

expected to identify and measure all potential fraud and abuse.

In addition to beneficiary and provider contact, the health and fraud

experts we spoke with told us that validating the information that

Medicare contractors are relying on to pay claims, including provider and

supplier assertions concerning the appropriateness of those claims, with

third parties could also help to identify potential fraudulent or abusive

activity. The current methodology incorporates such procedures to

confirm providers’ current standing with state licensing authorities and

beneficiaries’ eligibility status with SSA. Other sources—such as

beneficiary employers, beneficiary relatives or personal caregivers, State

Medicaid agencies, and employees of providers and suppliers—could also

offer useful information for assessing the appropriateness of claims.

However, determining the appropriate nature and extent of third party

verification procedures to incorporate into efforts to measure improper

payments should be considered carefully. Excluding third party

verification efforts, and therefore placing greater reliance on the accuracy
Page 25 GAO/T-AIMD/OSI-00-251

of data developed internally or provided independently, should be based

on risks determined through analysis of reliable indicators.

The Comptroller General’s Standards for Internal Control in the Federal

Government stresses the importance of performing comprehensive risk

assessments and implementing control activities, including efforts to

monitor the effectiveness of corrective actions to help managers

consistently achieve their goals. While the annual cost of the current

methodology and the HCFA projects involve several million dollars, these

efforts represent a needed investment toward avoiding significant future

losses through better understanding the nature and extent of improper

payments—including potential fraud and abuse. As shown in table 2, the

current methodology costs $4.7 million, not counting the cost of medical

review staff time at contractors. PEPP is estimated to cost $7.5 million

annually, and CERT costs are expected to be over $4 million annually once

fully implemented. While these may seem to be expensive efforts, when

considered in relation to the size and vulnerability of the Medicare

program and the known improper payments that are occurring, they

represent prudent, needed outlays to help ensure program integrity.

In our recent report on improper payments across the federal

government,16 we discussed the importance of ascertaining the full extent

of improper payments and understanding their causes to establish more

effective preventive measures and to help curb improper use of federal

resources. However, as we recently testified,17 HCFA’s ability to protect

against fraud and abuse depends on adequate administrative funding.

Therefore, in developing effective strategies for measuring improper

payments, consideration of the most effective techniques to apply in the

most efficient manner is essential to maximize the value of administrative

resources. While HCFA faces significant challenges for ensuring the

integrity of the Medicare fee-for-service program, importantly, HCFA can

use the results of these efforts to more effectively assess corrective

actions, target high-risk areas, and better meet its role as steward of

Medicare dollars.

16Financial Management: Increased Attention Needed to Prevent Billions in Improper Payments (GAO/AIMD00-10, October 29, 1999).

17Medicare: HCFA Faces Challenges to Control Improper Payments (GAO/T-HEHS-00-74, March 9, 2000).
Page 26 GAO/T-AIMD/OSI-00-251

HCFA plans to expand its efforts to measure Medicare improper payments

by assessing the usefulness of performing additional fraud detection

techniques with the MFRP. Meanwhile, since the current methodology and

the CERT and PEPP projects do not incorporate the use of some

techniques considered effective in identifying potential fraud and abuse,

HCFA’s ability to fully measure the success of its efforts to reduce fraud

and abuse remains limited.

Health care fraud experts told us that the ability of these projects to

measure potential fraud and abuse are somewhat dependent on the nature,

extent, and level of fraud sophistication that may be involved. For

example, the introduction of beneficiary contact, in conjunction with other

techniques, should improve the ability to determine whether services were

actually rendered. However, if the beneficiary is a willing participant in the

potential fraud and abuse scheme, these additional techniques may not

lead to an accurate determination.

The size and administrative complexity of the Medicare fee-for-service

program make it vulnerable to inadvertent error and exploitation by

unscrupulous providers and suppliers. Given the billions of dollars that are

at risk, it is imperative that HCFA continue its efforts to develop timely

and comprehensive payment error rate estimates that can be used to

develop effective program integrity strategies for reducing errors and

combating fraud and abuse. The current methodology represented a

significant first step in obtaining such information, but the lack of key

fraud and abuse detection techniques limit its effective use as a

management tool to estimate potential fraud and abuse and ultimately

achieve important program integrity goals. HCFA’s projects could

collectively address some of the limitations of the current methodology if

properly executed, but do not appear to go far enough. Expanding the

scope of the Model Fraud Rate Project to include studying provider visits

and a more extensive assessment of the cause of improper payments and

other promising techniques could help HCFA pinpoint additional high-risk

areas and develop more effective corrective actions. The implementation

of more extensive detection techniques is bound to be challenging and

expensive, so using rigorous study methods and consulting with the

people affected, such as beneficiary and provider advocacy groups, are

essential steps to ensure success, as well as considering the tangible and

intangible benefits of using particular techniques. Given the delays and

potential challenges associated with implementing the Model Fraud Rate

Project, substantial improvements in the measurement of improper

payments, especially those stemming from potential fraudulent and

abusive activity, will probably not be realized for a few years.

MFRP Holds Some

Promise for Advancing

Potential Fraud and Abuse

Management

Conclusions
Page 27 GAO/T-AIMD/OSI-00-251

To improve the usefulness of measuring Medicare fee-for-service improper

payments, including those attributable to potential fraud and abuse, we

recommend that the HCFA Administrator take the following actions:

• Experiment with incorporating additional techniques for detecting

potential fraud and abuse into methodologies used to identify and measure

improper payments and then evaluate their effectiveness. In determining

the nature and extent of additional specific procedures to perform, the

overall measurement approach should (1) recognize the types of fraud and

abuse perpetrated against the Medicare program, (2) consider the relative

risks of potential fraud or abuse that stem from the various types of

claims, (3) identify the advantages and limitations of common fraud

detection techniques and use an effective combination of these techniques

to detect improper payments, and (4) consider, in consultation with

advocacy groups, concerns of those potentially affected by their use,

including beneficiaries and health care providers.

• Include in the methodologies’ design, sufficient scope and evaluation to

more effectively identify underlying causes of improper payments,

including potential fraud and abuse, to develop appropriate corrective

actions.

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

any questions you or other Members of the Task Force may have.

For information about this statement, please contact Gloria Jarmon at

(202) 512-4476 or at jarmong.aimd@gao.gov. Individuals making key

contributions to this statement included Shawn Ahmed, Aditi Archer, Kay

Daly, Bill Hamel, Don Hunts, Jim Kernen, and Meg Mills.

Recommendations

Contact and

Acknowledgments
Page 28 GAO/T-AIMD/OSI-00-251

Our objective was to identify additional improvements to the Medicare

improper payments measurement projects that were recently designed by

HCFA to further estimate improper payments including potential fraud

and abuse.

Through interviews with HCFA Program Integrity Group officials and

reviews of HCFA documentation including program integrity plans, project

descriptions, statements of work, and requests for proposals, we identified

HCFA projects that could improve the measurement of Medicare fee-forservice improper payments.

Through interviews with health care fraud and investigation experts, we

gained an understanding of the vulnerabilities in the Medicare fee-forservice program that create opportunities for improper payments,

especially those stemming from fraudulent and abusive activity, and the

most promising detection techniques to identify these payments.

Specifically, we talked with officials from the Department of Health and

Human Service’s Office of the Inspector General (OIG) and Office of

Investigations (OI), Department of Justice (DOJ), Federal Bureau of

Investigation (FBI), HCFA’s program integrity group, HCFA’s Atlanta

Regional Office unit specializing in fraud detection efforts, a Medicare

claims processing contractor, Association of Certified Fraud Examiners,

three private health insurance organizations, National Health Care AntiFraud Association (NHCAA), Health Insurance Association of America

(HIAA), three states in connection with their Medicaid program, and two

academicians with notable fraud investigation experience. We also

reviewed various documents including HCFA and OIG Fraud Alerts, prior

GAO, OIG, and other studies on health care fraud and abuse, particularly

those related to the Medicare fee-for-service program.

We analyzed HCFA’s Fraud Investigation Database (FID) to identify the

most common types of potential fraud referred to the OI and DOJ for

further investigation and possible criminal and civil sanctions. We also

analyzed the FID to determine the most frequent sources for identifying

potential fraud. The FID was created in 1995, but has data on fraud referral

going back to 1993. We did not attempt to validate the database.

To assess the potential effectiveness of the techniques planned for the

HCFA projects for identifying improper payments attributable to potential

fraud and abuse, we (1) performed a comparative analysis of common

types and sources of referrals of fraud and abuse occurring in the

Medicare program, the types of techniques identified by investigative

experts as most effective for identifying them, and the extent to which

identified techniques are incorporated in the respective methodologies

Appendix I

Objectives, Scope, and Methodology
Appendix I

Objectives, Scope, and Methodology

Page 29 GAO/T-AIMD/OSI-00-251

and (2) discussed the results of our analysis with officials in HCFA’s

Program Integrity Group and OIG.

To gain an understanding of how the implementation of additional

procedures to identify and measure improper payments attributable to

potential fraud and abuse could affect providers, suppliers, and recipients

of health care services and supplies, we interviewed officials from patient

and health care provider advocacy groups, including the American Medical

Association, American Hospital Association, HHS Administration on Aging

(AOA), American Association of Retired Persons (AARP), and the Health

Care Compliance Association (HCCA).

We performed our work from November 1999 through June 2000 in

accordance with generally accepted government auditing standards.
Page 30 GAO/T-AIMD/OSI-00-251

As the category indicates, cases involving billing for services not rendered

occur when health care providers bill Medicare for services they never

provided. Potential fraud and abuse is usually detected by statements

received from the provider’s patients or their custodians and the lack of

supporting documents in the medical records.

For example, a provider routinely submitted claims to Medicare and

CHAMPUS1 for cancer care operations for services not rendered or not

ordered; upcoded procedures, as defined below, to gain improper high

reimbursement; and double billed Medicare for certain procedures. As a

result of the fraudulent submissions, the provider allegedly obtained

millions of dollars to which they were not entitled.

Cases involving medically unnecessary services, supplies, or

overutilization occur when providers or suppliers bill Medicare for items

and services that are not reasonable and necessary for the diagnosis and

treatment of illness or injury or to improve the functioning of a body part.

They include incidents or practices of provider, physicians, or suppliers of

services that are inconsistent with accepted sound medical practices,

directly or indirectly resulting in unnecessary costs to Medicare, improper

payments, or payments for services that fail to meet professionally

recognized standards of care or are medically unnecessary.

For example, a provider ordered magnetic resonance imaging tests (MRIs)

and neurological tests which investigators questioned whether the tests

were medically necessary, and whether the neurological tests were

actually performed. Most of the tests were performed on patients who

responded to the provider’s advertisements in the yellow pages. After a 5

to 10 minute consultation, the provider would diagnose almost every

patient with the same disorder – radiculopathy, a disease involving

compression of, or injury to the roots of spinal nerves.

1CHAMPUS, or the Civilian Health and Medical Program of the Uniformed Services, is a fee-for-service

health insurance program that pays for a substantial part of the health care that civilian hospitals,

physicians, and others provide to nonactive duty Department of Defense beneficiaries.

Appendix II

Definitions and Examples of Common Types

of Potential Fraud and Abuse Referrals

Services Not

Rendered

Medically

Unnecessary Services

and Supplies and

Overutilization
Appendix II

Definitions and Examples of Common Types

of Potential Fraud and Abuse Referrals

Page 31 GAO/T-AIMD/OSI-00-251

Medicare publishes coverage rules on what goods and services the

program will pay for and under what circumstances it will pay or not pay

for certain goods and services. Providers sometimes bill Medicare,

showing a billing code for a covered item or service when, in fact, a

noncovered item or service was provided. Further, providers sometimes

intentionally falsify statements or other required documentation when

asked to support payments for claimed services or supplies. In particular,

investigators have determined that falsification of CMNs—documents

evidencing appropriately authorized health care professionals’ assertions

regarding the beneficiaries’ needs for certain types of care or supplies,

such as home health and hospice services or certain durable medical

equipment—occur, providing unscrupulous providers and suppliers

additional opportunities to abuse Medicare.

For example, a provider billed for an orthotic knee brace, when in fact the

provider was providing Medicare beneficiaries with nonelastic

compression garments and leggings. Although knee orthotics are

reimbursed by Medicare and Medi-Cal2 for a total of over $650 per brace,

the nonelastic compression garment is not reimbursed by Medicare. The

total billings totaled approximately $332,055.

One type of incorrect coding is called “upcoding.” Upcoding cases result

from health care providers changing codes on claim forms submitted to

Medicare, causing reimbursements to be paid at higher rates than are

warranted by the service actually provided. Upcoding can also result from

providers billing for services actually provided by nonphysicians, which

would be paid at a lower reimbursement rate.

For example, a provider allegedly submitted false claims for services

provided by physicians in training and inflated (upcoded) claims in

connection with patient admissions services. The provider paid the U.S.

Government $825,000 primarily to settle allegations resulting from an audit

performed by the HHS OIG. The audit was triggered by a lawsuit filed by

private citizens as authorized by the False Claims Act (31 U.S.C. sections

3729 –3733).

2The Medicaid program for the State of California is known as the Medi-Cal program.

Misrepresentation of

Services and

Products/Falsifying

Certificates of

Medical Necessity

(CMNs)/Other

Documents

Upcoding
Appendix II

Definitions and Examples of Common Types

of Potential Fraud and Abuse Referrals

Page 32 GAO/T-AIMD/OSI-00-251

Falsifying any portion of the annual report submitted by all institutional

providers participating in the Medicare program. The report is submitted

on prescribed forms, depending on the type of provider (e.g., hospital,

skilled nursing facility, etc.). The cost information and statistical data

reported must be current, accurate and in sufficient detail to support an

accurate determination of payments made for the services rendered.

For example, a provider billed Medicare for hundreds of thousands of

dollars for personal expenses disguised as legitimate healthcare expenses.

The personal expenses billed included an addition to a private home,

vacations, and beauty pageant gowns. The provider was fined over

$500,000 for the fraudulent billings.

Section 1128B of the Social Security Act, 42 U.S.C. § 1320a-7b(b), makes it

a felony to solicit, receive, offer, or pay a kickback, bribe, or rebate in

connection with the provision of goods, facilities, or services under a

federal health care program, including Medicare.

For example, a provider agreed to plead guilty to conspiracy, mail fraud,

and violating the anti-kickback provision and to pay $10.8 million in

criminal fines in connection with its scheme to defraud Medicare. The

pleas relate to kickbacks and false Medicare billings made in connection

with the provider’s receipt of fees from another company for the

provider’s management of certain home health agencies.

(916363)

Fraudulent Cost

Reporting

Kickbacks and

Accepting/Soliciting

Bribes, Gratuities or

Rebates
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