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,

United States Senate

August 1995 MEDICARE

Excessive Payments

for Medical Supplies

Continue Despite

Improvements

GAO/HEHS-95-171

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-258070 

August 8, 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:

In fiscal year 1994 alone, Medicare was billed over $6.8 billion for medical

supplies. Congressional hearings and government studies have shown that

Medicare has been extremely vulnerable to fraud and abuse in its

payments for medical supplies, especially surgical dressings. For example,

hearings before the Senate Appropriations Subcommittee on Labor, Health

and Human Services, Education, and Related Agencies last year identified

a case in which Medicare paid over $15,000 worth of claims for a month’s

supply of surgical dressings for one patient, apparently without reviewing

the reasonableness of the claims before payment.

Until recently, medical suppliers had considerable freedom in selecting the

Medicare contractors that would process and pay their claims. Some

exploited this freedom by “shopping” for contractors with the weakest

controls and highest payment rates. To address this problem, Medicare

revised its payment rules to preclude suppliers from contractor shopping

and established four regional contractors to specialize in processing these

and similar types of claims.

This report responds to your request that we determine the

(1) circumstances allowing payment for unusually high surgical dressing

claims and (2) adequacy of Medicare’s internal controls to prevent paying

such claims.1

 To make these determinations, we obtained information

from Office of Inspector General (OIG) and Health Care Financing

Administration (HCFA) officials at the Department of Health and Human

Services (HHS) and visited three types of contractors that process and pay

Medicare claims. See appendix I for a more detailed description of our

scope and methodology.

1

Surgical dressings may also come under the broader category of medical supplies. In this report, we

use the term medical supplies when this is the case. When referring solely to surgical dressings, we use

that term.

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Results in Brief Although HCFA has made improvements to prevent contractor shopping,

unwarranted expenditures persist for several reasons. First, many

Medicare contractors still lack internal controls that would reliably

identify suspicious medical supply claims before payment. Following are

examples of the lack of controls:

• Contractors that pay medical supply claims submitted by nursing homes,

home health agencies, and other institutional providers do so without

knowing specifically what they are being asked to pay for on behalf of

beneficiaries. Submitted claims lack sufficient detail, for example, to

inform contractors whether they are being asked to pay more than $21,000

for a pacemaker or $.75 for a gauze pad.

• None of the four regional contractors automatically reviewed high-dollar

claims for newly covered surgical dressings. This explains why a

contractor paid $23,000 for surgical dressings when the appropriate

payment was $1,650.

• Medicare does not have a systematic way of detecting duplicate bills

submitted to different types of Medicare contractors, and we found some

evidence that duplicate payments occur.

Second, Medicare payment rates for surgical dressings are high compared

with wholesale and many retail prices. For example, Medicare pays $2.32

for a gauze pad whose wholesale price is $.19 and that another

government agency purchases for $.04.

HCFA and its contractors know about these problems and have tried to

address some of them. Though the problems persist, these efforts have

provided more and better information to define the problem. This

information suggests that inadequate controls are causing Medicare to lose

hundreds of millions of dollars. HCFA could curtail these losses by

establishing procedures to (1) identify what Medicare is being asked to

pay for, (2) prevent duplicate payments, and (3) identify high-dollar,

high-volume claims that should be reviewed before payment. Further, HCFA

needs the legislative authority to set payments at rates more favorable to

large-volume purchasers.

Background Medicare provides health insurance coverage for approximately 37 million

elderly and disabled people under two parts: part A, primarily hospital

insurance, and part B, supplementary insurance. HCFA, which administers

the Medicare program, contracts with insurance companies (called “fiscal

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B-258070 

intermediaries” for part A and “carriers” for part B) to process, review, and

pay claims for covered services.

Payments for medical supplies are made under either of Medicare’s two

parts. Medical supply claims submitted by hospitals or other institutions,

such as nursing homes or home health agencies, are paid by 43 local fiscal

intermediaries. Medical supply claims submitted by noninstitutional

providers, such as physicians or medical supply companies, are paid by

carriers. Thus, the same supply item can be billed to Medicare for an

individual under two completely different payment systems, one for part A

and another for part B. Under part A, the payment is generally made on the

basis of reasonable costs. Under part B, the payment is made using a fee

schedule established by HCFA.

Historically, part B fraud and abuse have plagued Medicare, and HCFA has

recently reformed its operations. In October 1993, acting under specific

statutory authority,2 HCFA started transferring carrier claims processing

responsibility for durable medical equipment (DME); prosthetics; orthotics;

and medical supplies, including surgical dressings, from 32 local carriers

to 4 regional carriers. These carriers are commonly referred to as durable

medical equipment regional carriers (DMERC).

In March 1994, after lobbying by suppliers and manufacturers, among

others, HCFA greatly expanded its surgical dressing benefit, broadening the

types of dressings covered and the conditions under which they would be

covered. For example, the benefit was expanded to cover payment for

various types and sizes of gauze pads that Medicare previously did not

cover. Also, the duration of coverage was extended from 2 weeks to

whatever is considered medically necessary.

Payment Control

Weaknesses Led to

Widespread Abuses

DME claims have long been abused, in part, because of fundamental

weaknesses in Medicare payment controls. In response to these

weaknesses, HCFA has recently implemented significant changes in the

processing of DME claims to reduce Medicare’s vulnerability to this

particular fraud and abuse.

Lack of Systemwide

Controls Led to Large

Losses

Before DME claims processing was transferred to the 4 regional carriers in

1993, each of the 32 carriers paid DME claims, which represented a small

part of the total claims each carrier processed. Under this process, HCFA

2

42 U.S.C. 1395m(a)(12).

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B-258070 

did not require its contractors to implement basic controls before payment

that would identify and set aside for review those claims with unusually

high per-patient expenditures or improbably large quantities of supplies.

Without such controls, some DME suppliers billed for equipment never

delivered, higher cost equipment than delivered, or totally unnecessary

equipment or supplies. Further, suppliers frequently engaged in contractor

shopping. Although, they might deliver equipment or supplies to

beneficiaries in one state, they would bill a contractor in another state

because that contractor paid more for the items delivered or had relatively

weak payment controls for the equipment or supply items.

These weaknesses explain why Medicare contractors processed, without

questioning, claims that later proved to be fraudulent or abusive. For

example, as reported by the OIG, Medicare paid

• an estimated $20 million in claims for unneeded nutritional supplements

and feeding kits;

• approximately $5.2 million in claims for oxygen concentrators, nebulizers,

medications, and tests either not needed or not delivered;

• approximately $500,000 in claims for unneeded transcutaneous electrical

nerve stimulators; and

• $7 million in claims for orthotic body jackets that should not have been

paid.

Claims Processing System

Reformed to Limit Losses

Establishing four regional carriers to process and oversee DME claims,

including surgical dressings, eliminated some of the weaknesses that

allowed prior abuses to flourish. The regional carriers are better able to

prevent Medicare payments for unusually high medical supply claims for

two key reasons.

First, the ability of suppliers to shop for contractors with the highest

payments and weakest controls has been eliminated. With only four

regional carriers, HCFA has better standardized the amount that Medicare

pays for medical supplies and the controls used to detect and prevent

payment of problem claims. Claims must be submitted to the regional

carrier responsible for payments in the state where the beneficiary resides

rather than the carrier allowing the highest payment.

Second, medical supply and surgical dressing claims can receive more

attention from regional carriers than local carriers because these claims

are a larger portion of the regional carriers’ workloads. As a result, the

Page 4 GAO/HEHS-95-171 Excessive Medical Supply Payments
B-258070 

regional carriers should be better able to detect and prevent inappropriate

payments for abnormally expensive surgical dressing claims.

Significant

Vulnerabilities

Continue Despite

Improvements

HCFA’s recent efforts to prevent abuses in medical supply claims apply only

to part B claims submitted to regional carriers, which represent half of

Medicare’s total medical supply payments. Claims processed by fiscal

intermediaries are still subject to some of the same fraud and abuse

problems that have historically plagued medical supply claims. Further,

despite the improvements, medical supply claims submitted to the regional

carriers are still subject to significant abuse.

Fiscal Intermediaries Do

Not Know What Supplies

They Pay For

Fiscal intermediaries pay medical supply claims without knowing

specifically what they are being asked to pay for on behalf of beneficiaries.

The claims submitted by providers have no detailed information that

would allow fiscal intermediaries to assess the claims’ reasonableness.

This lack of detail exists because HCFA guidance allows providers to bill all

medical supplies under 10 broad codes; billed items are not listed by type

or amount.

A code frequently used to record medical supplies is code 270

(medical/surgical supplies and devices-general classification), which we

found included many different items, such as a $21,437 pacemaker, a $.75

sterile sponge, and even daily rental charges of $59 for an aqua pad.

Consequently, unless fiscal intermediaries identify these claims for review

and request additional documentation before payment, they will pay for

the claims without knowing what the specific purchase was or whether it

was covered or medically necessary. For example, a fiscal intermediary

processed a code 270 claim for more than $21,000 without any review. At

our request, the fiscal intermediary asked the provider to submit medical

records and a list of items billed under this claim. After the fiscal

intermediary reviewed the documentation to support this claim, it denied

more than $13,000 in charges because the medical records contained no

doctor’s orders for the billed items.

In total, we requested the fiscal intermediary to obtain the medical records

and an itemized list of supplies supporting 85 high-dollar medical supply

claims submitted by 38 providers during a 1-month period. All of these

claims had been processed without any review. The results of the fiscal

intermediary’s subsequent review are as follows:

Page 5 GAO/HEHS-95-171 Excessive Medical Supply Payments
B-258070 

• Eighty-nine percent of the claims for which documentation was received

and reviewed (42 of 47) should have been totally or partially denied.

• Almost 61 percent of the dollars billed for medical supplies ($193,147 of

$316,824) should have been denied for various reasons, including, among

others, items not medically necessary, items not covered by Medicare or

covered as part of routine or administrative costs, no documentation of

supplies used, no doctor’s orders, and no itemized list of supplies. (See

app. II for detailed information.)3

• Forty-five percent of the claims for which documentation was not

returned (38 of 85), totaling $487,412, was subsequently denied.

• One claim was determined to be potentially fraudulent because the

beneficiary’s condition required none of the $2,404 in medical supplies

billed. A further review, by the fiscal intermediary’s fraud and abuse unit,

of the same provider’s claims for this beneficiary for the previous 5

months resulted in the identification of an additional $20,393 in potentially

fraudulent medical supply charges.

Fiscal intermediaries obtain similar or better results when they conduct

their own prepayment reviews of medical supply claims. For example, a

fiscal intermediary used a computerized payment control to identify all

medical supply claims (code 270) in excess of $500 submitted between

October and December 1993. After reviewing documentation supporting

the claims, the fiscal intermediary denied 69 percent of the dollars billed

($59,542 of $86,046).

Legislation Partially

Addresses Problem

The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) partially

addressed the problem of providers not submitting documentation that

would allow fiscal intermediaries to adequately assess medical supply

claims.4 OBRA 1993 provided essentially for certain supplies, including

surgical dressings, to be paid on the basis of the fee schedule that regional

carriers use for the part B program. As a result, providers must submit to

fiscal intermediaries claims that itemize the specific supplies and

quantities being billed. Because the provision does not apply to all medical

supplies, many other types of medical supplies are still billed using broad

codes that do not adequately describe the type and amount of such

supplies.

3

In addition to the medical supplies that should have been denied on these claims, the fiscal

intermediary reviewers also identified another $174,489 for items other than medical supplies that

should have been denied. Consequently, total denials for these claims should have been $367,636 or an

average of $7,822 for each claim reviewed. (See app. III for detailed information on the denial of

nonmedical supplies.)

4

Public Law 103-66, sec. 13544, 107 Stat. 312, 589.

Page 6 GAO/HEHS-95-171 Excessive Medical Supply Payments
B-258070 

The provision does not at all apply to surgical dressings supplied by a

home health agency. As a result, home health agencies, which billed

Medicare for almost half a billion dollars of medical supplies in fiscal year

1994, can continue to submit claims for surgical dressings without the

detailed itemization required of other types of providers billing for these

items.

Regional Carriers Still Lack

Significant Controls

For Medicare part B claims, the regional carriers have not adopted

important fraud and abuse controls for many surgical dressing items.

Specifically, the 29 surgical dressings covered by the expanded Medicare

surgical dressing benefit have no formal medical policies specifying the

conditions under which payment is to be made.5

 Without these policies,

regional carriers cannot implement systematic controls to identify

questionable claims for review. As a result, they pay many high-dollar,

high-volume claims without review.

We found that the utilization level—the number of dressings billed per

beneficiary—was, on average, nearly three times higher for the newly

covered dressings—that is, those for which no formal medical policies

apply. Moreover, on average, the dressings that have no medical policies

exceeded the expected utilization level, as determined by recommended

industry and draft regional carrier standards. In some cases, the average

number of dressings billed per beneficiary was four times greater than

expected.

Formal medical policies for the newly covered dressings cannot be

adopted until the surgical dressing industry and others have been allowed

to comment on them. HCFA expanded surgical dressing coverage and

instructed regional carriers to pay for newly covered surgical dressings

before the carriers had a chance to develop new medical policies. As a

result, most claims for surgical dressings for which no medical policies

apply are being paid and will continue to be paid without a routine review

to determine whether the amount of dressings billed is reasonable or

medically necessary. HHS estimates that this process will be completed and

medical policies will be effective October 1, 1995.

We asked officials at one regional carrier to identify high-dollar claims it

paid. While the claims the carrier identified for us were subject to some

review before payment, the review only applied to those dressings that

5

See appendix IV for a description of all Medicare-covered surgical dressings, including the 29 newly

covered dressings for which no medical policies apply.

Page 7 GAO/HEHS-95-171 Excessive Medical Supply Payments
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had a formal medical policy. As a result, thousands of dollars were paid for

surgical dressings that were not needed and the claims for which were not

subject to review because they did not have formal medical policies.

For example, in the case of one beneficiary, the carrier—over 3 months

and on the basis of a formal medical policy—had denied over $8,500 worth

of claims for dressings and sterile saline before paying $23,000. However,

in performing the review we requested, the carrier determined that only

$1,650 of the $23,000 for dressings should have been paid because the

beneficiary’s condition did not appear to justify the use of large quantities

of dressings. The $23,000 had been paid without review for medical

necessity because no formal medical policies applied to most of the

surgical dressings. Therefore, no internal policies were in place to trigger a

review of these dressings.

Without such policies, suppliers have exploited Medicare with little risk of

ever having to repay the program. Following are examples of this

exploitation:

• One supplier regularly billed Medicare for 60 or more transparent films per

beneficiary per month. For some beneficiaries the supplier billed for 120

or more films a month. Recommended industry standards suggest the need

for no more than 24 films per beneficiary per month.6

• Another supplier billed Medicare an average of 268 units of tape per

beneficiary during a 15-month period.

7

 The average for all suppliers was 60

units during the 15-month period. Some beneficiaries received between

180 to 720 units of tape in 1 month. Using a 10-yard roll of tape, a common

industry length, these beneficiaries would have been wrapped in 60 to 240

yards of tape per day.

Supplier abuse is not limited to surgical dressings; other medical supply

items for which no formal policies or systematic controls apply have also

been exploited:

• At least four suppliers regularly billed Medicare for 30 or more drainage

bottles a month for each beneficiary. This is 90 times more than the

6

According to the Wound Ostomy and Continence Nurses Society’s and the Health Industry

Distributors Association’s draft recommendations on utilization levels for surgical dressings, up to two

transparent films can be used per dressing change. In addition, these types of dressings should be

changed no more than two to three times per week.

7

According to the Health Industry Distributors Association, normal usage of tape is no more than two

rolls per dressing change.

Page 8 GAO/HEHS-95-171 Excessive Medical Supply Payments
B-258070 

proposed standard of one bottle every 3 months.8 The number of drainage

bottles billed by these suppliers was 79 percent of all bottles billed to the

regional carrier.

• One supplier billed Medicare an average of nine urinary leg bags per

beneficiary a month. For some beneficiaries, the supplier billed for one leg

bag a day or 15 times more than the proposed standard of two leg bags a

month.9

 In total, this supplier billed Medicare for 50,834 leg bags or

21 percent of all leg bags billed to the regional carrier over 15 months.

Medicare System

Vulnerable to Duplicate

Payments

Medicare can pay for the same item twice because it does not have

effective tests to determine whether both regional carriers and fiscal

intermediaries are paying for the same surgical dressings, medical

supplies, and other items. Surgical dressings and many medical supplies

can be billed to either fiscal intermediaries or regional carriers. If

suppliers submit claims for the same items to both types of contractors,

only one should pay the claim. For example, if a fiscal intermediary pays a

nursing home for surgical dressings, a regional carrier should not pay the

supplier for the same dressings. Conversely, if a regional carrier pays a

supplier for surgical dressings, the fiscal intermediary should not pay the

nursing home that used the dressings.

Medicare does not have an effective control to prevent both types of

contractors from paying for the same medical supplies or surgical

dressings. As part of Medicare’s claims processing system, all claims

received by contractors are compared with historical beneficiary data to

verify eligibility for payment and benefits. HCFA uses this system to

conduct many types of computerized controls to determine if payment for

the claims should be approved or rejected. The system does not check,

however, to see if items paid by regional carriers have already been paid

by fiscal intermediaries or whether items paid by fiscal intermediaries

have already been paid by regional carriers. We identified a case in which

a computerized control for duplicate items would have prevented

Medicare from paying twice for the same item.10 In this case, the fiscal

8

According to the regional carriers’ draft payment and coverage policy, drainage bottles are usually

changed once every 3 months.

9

According to the regional carriers’ draft payment and coverage policy, leg bags are usually replaced

twice a month.

10We randomly selected 25 of the 85 high-volume, high-dollar claims that the fiscal intermediary

reviewed at our request to determine the appropriateness of the payments made. On the basis of dates

of service, we determined that 6 of these 25 claims were potential duplicate payments. Of these six

claims, we found one duplication and another that appeared to be a duplicate payment. In the latter

case, we could not be sure of the duplicate payment because the supplier did not provide the fiscal

intermediary with requested documentation supporting the claim.

Page 9 GAO/HEHS-95-171 Excessive Medical Supply Payments
B-258070 

intermediary paid a nursing home for two bedside drainage bags used by a

patient during a 1-month stay. A regional carrier also paid a supplier for 30

drainage bags allegedly provided to the same patient while in the nursing

home. If a duplicate payment control had existed, the regional carrier

would not have made the duplicate payment.

Medicare Surgical

Dressing Payments

Generally Excessive

Medicare’s fee schedule payments for surgical dressings are generally

excessive when compared with wholesale prices, prices paid by the

Department of Veterans Affairs (VA), and even retail prices. Overall, we

estimate that HCFA could save substantial amounts if its fee schedule was

calculated on the basis of lower available prices. For example, as shown in

table 1, if HCFA paid wholesale prices for 44 surgical dressings, total

savings would be almost $20 million or almost 35 percent of what it now

pays. Potential savings for just nine dressings would be more than

$9 million if HCFA paid at the lowest rate, that which VA paid for dressings.

We even identified potential savings of more than $2 million for nine

surgical dressings if HCFA paid at the lowest retail rates found at four Los

Angeles-area drug stores.

Table 1: Potential Medicare Savings on

Surgical Dressings Estimated 1995

expenditures Potential savings Type of

price

compared

Number of

dressings

compared

Fee

schedule

Compared

price Dollars

Percent of

fee schedule

Wholesale 44 $57,113,852 $37,388,654 $19,725,197 34.54

Lowest

retail 44 48,089,936 25,762,198 22,327,741 46.42

Actual retail 9 17,984,235 15,967,898 2,016,337 11.21

VA 9 17,055,044 7,871,643 9,183,401 53.85

Note: See appendix V for detailed tables for each type of price compared.

HCFA’s method of calculating the fee schedule for surgical dressings caused

these high payments. OBRA 1993 required HCFA to establish a fee schedule

for surgical dressings by computing the average historical charges for the

dressings. Because of the expansion of the surgical dressing benefit,

however, HCFA did not have data on historical charges. Instead, HCFA used a

gap-filling process to establish the fee schedule: HCFA used retail surgical

dressing supply catalogs to create a price list for each type of covered

surgical dressing. The price of the median-priced dressing for each type

became the fee schedule price. For example, HCFA identified 13 different

Page 10 GAO/HEHS-95-171 Excessive Medical Supply Payments
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alginate dressings 16 square inches or less (HCFA Common Procedure Code

K0196). The retail prices of the dressings ranged from $3.14 to $19.07. The

fee schedule price was set at $6.62, the median-priced or sixth dressing on

HCFA’s list. The lowest wholesale price for this type of dressing is $1.88.

If HCFA makes a mistake in calculating the fee schedule, it can correct the

mistake (for example, by using wholesale prices instead of retail prices).

However, HCFA may not change the methodology for determining the fee

schedule nor may it adjust the fee schedule if dressing prices decrease.

Therefore, if, as one HCFA official told us, the prices of surgical dressings

fall as more manufacturers produce the many types of surgical dressings

that HCFA now pays for, HCFA cannot lower the fee schedule to reflect the

change in market condition. Instead, Medicare will pay a price that is even

higher, relative to the market prices, than it pays today.

For certain DME items—but not for surgical dressings and other medical

supplies—the Secretary of HHS may adjust prices that are inherently

unreasonable.11 In these cases, the authority is very limited and involves a

complex set of procedures that can take a long time to complete. For

example, it took HCFA nearly 3 years to reduce the price it was paying for

home blood glucose monitors from a nationwide range of $144 to $211 to

$58.71, even though they were widely available for about $50 and, in some

cases, provided free as a means of obtaining customers for the disposable

items associated with this test equipment. Because of the time and

resources involved, HCFA only uses this process for one item at a time.

Before 1987, individual Medicare carriers had the authority to increase or

decrease prices to reflect local market conditions.12 The process for doing

so, which included notifying area suppliers and publishing the new prices,

could be completed in less than 90 days. If HCFA or the carriers had the

authority to adjust excessive prices in a timely manner, they could save

millions in program dollars. A HCFA official told us, however, that it

devotes no resources to routine monitoring of medical equipment and

supply prices. As a result, discrepancies in price between what Medicare

pays and what other large-volume buyers pay go undetected.

1142 U.S.C. 1395m(a)(10)(B).

12The Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203, sec. 4062(b), 101 Stat. 1330,

1330-100) effectively eliminated the carriers’ inherent reasonableness authority regarding DME,

prosthetics, and orthotics paid for through the fee schedule and prohibited HCFA from using such

authority until 1991. The Medicare Catastrophic Coverage Act of 1988 (P.L. 100-360, sec.

411(g)(1)(B)(xiii), 102 Stat. 683, 782) provided that HCFA’s authority could be exercised only through

a burdensome regulatory process that previously had been applied only to physician services and

includes publication in the Federal Register.

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HCFA Initiatives

Show Promise

HCFA recently created a framework that eventually will allow it to identify

and begin addressing fraud and abuse associated with medical supply

claims. For the first time, HCFA will have data to begin assessing the size

and scope of fraud and abuse and its contractors’ performance in

addressing them. In addition, these data will allow HCFA to assess options

for addressing program weaknesses.

HCFA’s consolidation of DME and medical supply claims processing at four

regional carriers provides comprehensive national data—that were not

available previously—on utilization and payments. These data will allow

HCFA to identify, on a nationwide basis, DME and medical supplies that may

be subject to overutilization and inappropriate billing. In 1993, HCFA also

developed a programwide emphasis on data analysis. Calling its approach

focused medical review, HCFA required contractors to begin identifying

general spending patterns and trends that would allow them to identify

potential problems.

Fiscal intermediaries have started implementing this approach and have

recently begun compiling and analyzing claims payment and utilization

data. So far, some intermediaries have identified the different types and

number of claims that Medicare may be inappropriately paying. For

example, one type of review conducted by an intermediary we visited

resulted in 85 percent of the claims reviewed during a 1-month period

being denied—a total of $5.8 million in program savings. Moreover, some

intermediaries have estimated the dollars that Medicare can potentially

save by tightening prepayment review controls. The intermediary we

visited identified eight other problem areas, in addition to those that it was

already reviewing, that should be reviewed because of such things as

precipitous increases in utilization rates. This intermediary estimated

potential savings of $57 million by implementing the additional reviews,

but it did not have the resources to do so.

Armed with its new information from DMERCs and focused medical review

program reports, HCFA is now much better positioned than in past years to

provide HHS, the Office of Management and Budget, and the Congress with

concrete information on contractor activities that save program dollars.

This information could include, for example, explicit documentation on

the savings achievable from efforts to stop paying unwarranted or

overpriced claims.

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Conclusions HCFA has taken some initial steps to address Medicare medical supply and

surgical dressing payment abuses. Transferring the processing to regional

carriers—and the accompanying greater standardization of payment

policies and better information to detect problem claims—are important

steps in combatting fraud and abuse.

Medicare’s vulnerability to overpaying for surgical dressing claims will

persist, however, for several reasons:

• Many claims for surgical dressings lack sufficient detail for Medicare fiscal

intermediaries to assess what they are being asked to pay for.

• Medicare contractors have not yet developed the administrative

capabilities to detect questionable claims for many surgical dressings.

• Though the same patient may receive surgical dressings paid by either a

part A intermediary or part B carrier, HCFA has no controls to detect

duplicate bills.

• Medicare’s payment rates for dressings are high compared with wholesale

and many retail prices.

Recommendations to

the Secretary of HHS

The Secretary should direct the Administrator of HCFA to

• require that bills submitted to fiscal intermediaries itemize supplies;

• develop and implement prepayment review policies as part of the process

of implementing any new or expanded Medicare coverage; and

• establish procedures to prevent duplicate payments by fiscal

intermediaries and carriers.

Matter for

Congressional

Consideration

The fee schedule approach to setting prices provides a good starting point

for setting appropriate Medicare prices. HCFA, however, needs greater

authority and flexibility to quickly adjust fee schedule prices when market

conditions warrant such changes. To allow Medicare to take advantage of

competitive prices, the Congress should consider authorizing HCFA or its

carriers to promptly modify prices for DME and other medical supplies. For

this to work effectively, however, HCFA or the carriers must devote

adequate resources to routine price monitoring.

HHS Comments and

Our Evaluation

HHS commented on a draft of our report in a letter dated July 18, 1995 (see

app. VI). In an overall comment, HHS stated that several ongoing Medicare

initiatives involving the four regional carriers are already addressing the

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B-258070 

problems highlighted in this report. Specifically mentioned were the use of

information from processed claims to identify for prepayment review

suspicious suppliers and high-dollar, high-volume claims; prepayment

screens to detect egregious utilization of a supply item; and

comprehensive medical reviews of suppliers whose billing patterns

indicate possible overutilization.

As we have stated in this report, a number of HCFA initiatives show

promise. We specifically mentioned that transferring the claims processing

for DME and supplies to four regional carriers gives HCFA the ability to

identify overutilization and inappropriate billing. We also mentioned that

the programwide emphasis on data analysis through focused medical

review identifies potential problem areas. While such initiatives are

promising, we do not believe that they or the other promising activities of

the four regional carriers address all the problems identified in this report.

For example, HHS disagreed with our first recommendation that bills

submitted to fiscal intermediaries itemize supplies. HHS stated that it had

assessed the benefit of requiring providers to itemize home health supply

bills and found that the additional contractor and provider cost and

burden outweighed the value of the itemization. As an alternative, HHS

stated that it is assessing the benefit of requiring fiscal intermediaries to

suspend for prepayment review those bills with excessive charges. Also,

HHS believed that it was important to note that HCFA does not pay billed

charges for this type of claim.

Without itemized bills, fiscal intermediaries cannot determine what type or

amount of supplies they pay for. While it is true that HCFA does not pay the

billed charges for this type of claim, to conclude that the cost settlement

process will somehow account for all overpayments is inaccurate.

Overpayments will still be made for unnecessary or excessive supplies or

those not covered by Medicare.

HHS concurred with our second recommendation and said that it had acted

to implement it. The action described, however, appears to be in response

to the past expansion of surgical dressing benefits rather than plans for

new or expanded Medicare coverage. For example, although agreeing that

prepayment edits should be used to prevent inappropriate payment when

coverage policy changes, HHS stated that a revised regional medical review

policy for the recently expanded surgical benefits will be effective

October 1, 1995. HHS also stated that it is important to ensure that the

Page 14 GAO/HEHS-95-171 Excessive Medical Supply Payments
B-258070 

regional carriers have the flexibility to establish their own edits based on

aberrancies found in their region.

While the policies on the expanded surgical dressing benefit need to be

implemented as soon as possible to protect benefit dollars, our

recommendation would require that medical policies be developed and

approved before any further changes in benefit coverage are made.

Without medical policies, carriers cannot establish prepayment edits for

items newly covered because of changes in Medicare benefits. As we

discussed, regional carriers have been paying claims for 29 newly covered

dressings for nearly a year and a half without medical policy or

prepayment edits—that is, without a review of the claims’ reasonableness

or medical necessity.

Concerning our recommendation that procedures be established to

prevent duplicate payments by carriers and intermediaries, HHS stated that

identifying duplicate claims is difficult when they are sent to different part

A and part B contractors because the claims are submitted with different

codes and supplier numbers and then processed using different payment

schedules and processing systems. In what it described as an effective

alternative, HHS stated that HCFA currently uses “conflict edits” through the

Common Working File system to alert contractors to conflicting payment

situations. For example, if part B is being billed for outpatient supplies for

a specific date and part A receives an inpatient claim for the same patient

covering the same period, the system generates an alert. Questionable

claims are then manually reviewed before payment, according to HHS. In

the future, with Medicare’s new claims processing system, the Medicare

Transaction System, HHS stated that it will be simpler to identify duplicate

claims because the same system will process part A and part B claims in

the same format.

As a result of OBRA 1993, surgical dressings can be identified with the same

codes regardless of which contractor, part A or part B, processes and pays

a claim. Combining a common identification code with the Common

Working File’s ability to identify claims for which part A and part B

contractors both receive a claim for the same beneficiary covering the

same time period allows contractors to easily identify a potential duplicate

payment. This ability applies to all medical supplies that use the same

identification code. For example, we identified one case in which

Medicare paid twice for a supply item using the same code for both the

part A and part B contractor.

Page 15 GAO/HEHS-95-171 Excessive Medical Supply Payments
B-258070 

The Common Working File duplicate payment alert, or conflict edit, does

not entirely prevent Medicare from paying for the same item twice. The

system generates an alert only when an institutional provider, such as a

nursing home or home health agency, has billed the intermediary before

the supplier has billed the regional carrier. More importantly, officials at

the four DMERCs told us that they do not investigate or review claims

identified by the duplicate payment alert. Instead, they pay the claims

without reviewing for duplication.

Concerning the matter for congressional consideration, HHS has stated that

on several occasions since 1987, it has submitted legislative proposals to

the Congress to simplify the process it may use to adjust or limit fee

schedule amounts.

HHS also made a number of technical and other comments that we

considered in finalizing this report.

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

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

issue date. At that time, we will send copies to the Secretary of Health and

Human Services and other interested parties.

Please call me on (202) 512-7119 if you or your staff have any questions

about this report. Major contributors are listed in appendix VII.

Sincerely yours,

Sarah F. Jaggar

Director, Health Financing

 and Policy Issues

Page 16 GAO/HEHS-95-171 Excessive Medical Supply Payments
Page 17 GAO/HEHS-95-171 Excessive Medical Supply Payments
Contents

Letter 1

Appendix I 

Scope and

Methodology

20

Appendix II 

Medical Supply

Charges Denied

21

Appendix III 

Nonmedical Supply

Charges Denied

23

Appendix IV 

Surgical Dressings

Covered by Medicare

in 1995

25

Appendix V 

Fee Schedule Prices

Compared With Other

Available Prices

30

Appendix VI 

Comments From the

Department of Health

and Human Services

37

Appendix VII 

Major Contributors to

This Report

44

Page 18 GAO/HEHS-95-171 Excessive Medical Supply Payments
Contents

Tables Table 1: Potential Medicare Savings on Surgical Dressings 10

Table V.1: Fee Schedule Compared With the Lowest Wholesale

Prices

31

Table V.2: Fee Schedule Compared With Lowest Retail Prices 33

Table V.3: Fee Schedule Compared With Lowest Retail Drugstore

Prices

35

Table V.4: Fee Schedule Compared With Department of Veterans

Affairs Lowest Purchase Prices

36

Abbreviations

DME durable medical equipment

DMERC durable medical equipment regional carrier

HCFA Health Care Financing Administration

HCPC HCFA Common Procedure Code

HHS Department of Health and Human Services

OBRA 1993 Omnibus Budget Reconciliation Act of 1993

OIG Office of Inspector General

VA Department of Veterans Affairs

Page 19 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix I 

Scope and Methodology

To identify the circumstances allowing the payment of unusually high

surgical dressing claims, we interviewed OIG officials from HHS and

reviewed past OIG and GAO reports on Medicare fraud and abuse problems.

We also visited Transamerica, one of the many carriers that processed

medical supply claims before the creation of the four regional carriers.

This carrier was judgmentally selected.

To determine the adequacy of Medicare’s internal controls, we visited Blue

Cross of California, a fiscal intermediary that processes claims submitted

by institutional providers; and CIGNA, one of the four regional carriers

responsible for processing durable medical equipment (DME) and medical

supply claims submitted by suppliers. These contractors were

judgmentally selected. To supplement work performed at these locations

and broaden our areas of analysis, we obtained information on medical

supply and surgical dressing claims and payment safeguards from the

remaining 42 fiscal intermediaries and three regional carriers. We also

discussed the adequacy of contractors’ internal controls and obtained

information about these controls from HCFA officials at HHS.

In addition, we requested the two contractors that we visited, Blue Cross

of California and CIGNA, to review medical records and other

documentation for selected high-dollar medical supply claims to

determine whether the records supported the need for services or items

billed to Medicare. Further, we obtained recommended utilization

standards from a trade association for medical supply distributors and a

national association of specialty nurses for wound, ostomy, and

continence care and compared the standards with actual utilization levels

found on claims submitted by suppliers.

We compared the fee schedule that Medicare uses to pay suppliers of

surgical dressings with prices obtained from a wholesale surgical dressing

supplier, four retail drugstores, the Department of Veterans Affairs, and a

HCFA-generated surgical dressing price list. We also reviewed HCFA

procedures to determine if any would prevent regional carriers and fiscal

intermediaries from paying duplicate claims for medical supplies and

surgical dressings.

We performed our work between May 1994 and June 1995 in accordance

with generally accepted government auditing standards.

Page 20 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix II 

Medical Supply Charges Denied

Claim number

Submitted

charges

Denied

charges

Percent of

charges

denied

1 $5,737 $5,737 100

2 157 25 16

3 2,404 2,404 100

4 373 373 100

5 752 349 46

6 13,254 262 2

7 1,545 1,545 100

8 400 0 0

9 10,161 8,738 86

10 6,216 680 11

11 7,921 7,194 91

12 21,071 13,154 62

13 6,196 3,206 52

14 1,743 34 2

15 5,965 0 0

16 676 215 32

17 8,218 224 3

18 18,479 8,106 44

19 3,432 3,432 100

20 366 366 100

21 190 0 0

22 2,957 24 1

23 3,607 78 2

24 1,108 1,019 92

25 2,313 2,281 99

26 3,860 2,889 75

27 2,041 1,573 77

28 33,363 33,363 100

29 2,145 2,145 100

30 633 383 61

31 2,871 490 17

32 2,121 344 16

33 7,968 80 1

34 53,869 44,517 83

35 11,331 11,331 100

36 642 0 0

(continued)

Page 21 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix II 

Medical Supply Charges Denied

Claim number

Submitted

charges

Denied

charges

Percent of

charges

denied

37 11,192 149 1

38 6,707 6,707 100

39 18,101 18,101 100

40 481 481 100

41 5,926 5,926 100

42 518 296 57

43 3,876 442 11

44 12,465 176 1

45 6,124 0 0

46 1,059 18 2

47 4,290 4,290 100

Total $316,824 $193,147 61

Page 22 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix III 

Nonmedical Supply Charges Denied

Claim number

Submitted

charges

Denied

charges

Percent

denied

1 $9,328 $7,836 84

2 1,600 0 0

3 5,113 5,113 100

4 2,644 969 37

5 2,665 16 1

6 10,218 7,025 69

7 188 0 0

8 3,315 0 0

9 4,319 0 0

10 3,498 0 0

11 9,612 208 2

12 45,649 5,103 11

13 42,246 0 0

14 9,889 4,940 50

15 620 0 0

16 9,449 945 10

17 6,972 0 0

18 2,556 2,556 100

19 1,335 0 0

20 7,743 0 0

21 2,995 0 0

22 4,850 0 0

23 75,259 75,259 100

24 5,700 0 0

25 2,924 0 0

26 5,494 46 1

27 9,612 45 0

28 3,882 30 1

29 101,710 29,460 29

30 3,272 3,272 100

31 1,340 0 0

32 5,919 22 0

33 2,815 2,815 100

34 19,636 19,636 100

35 519 519 100

36 3,830 0 0

37 6,303 82 1

(continued)

Page 23 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix III 

Nonmedical Supply Charges Denied

Claim number

Submitted

charges

Denied

charges

Percent

denied

38 4,634 1,277 28

39 10,412 1,059 10

40 514 0 0

41 6,256 6,256 100

Total $456,835 $174,489 38

Page 24 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix IV 

Surgical Dressings Covered by Medicare in

1995

HCFA Common

Procedure Code Description and unit of purchase

Newly covered by

surgical dressing

expansion

A4460 Elastic bandage, per roll (e.g.,

compression bandage) X

A4649 Surgical supplies, miscellaneous

K0154 Wound pouch, each

K0196 Alginate dressing, wound cover, pad

size 16 square inches or less, each

dressing

K0197 Alginate dressing, wound cover, pad

size more than 16 but less than or equal

to 48 square inches, each dressing

K0198 Alginate dressing, wound cover, pad

size more than 48 square inches, each

dressing

K0199 Alginate dressing, wound filler, per 6

inches

K0203 Composite dressing, pad size 16

square inches or less, with any size

adhesive border, each dressing X

K0204 Composite dressing, pad size more

than 16 but less than or equal to 48

square inches, with any size adhesive

border, each dressing X

K0205 Composite dressing, pad size more

than 48 square inches, with any size

adhesive border, each dressing X

K0206 Contact layer, less than 16 square

inches, each dressing X

K0207 Contact layer, more than 16 but less

than or equal to 48 square inches, each

dressing X

K0208 Contact layer, more than 48 square

inches, each dressing X

K0209 Foam dressing, wound cover, pad size

16 square inches or less, without

adhesive border, each dressing

K0210 Foam dressing, wound cover, pad size

more than 16 square inches but less

than or equal to 48 square inches,

without adhesive border, each dressing

K0211 Foam dressing, wound cover, pad size

more than 48 square inches, without

adhesive border, each dressing

(continued)

Page 25 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix IV 

Surgical Dressings Covered by Medicare in

1995

HCFA Common

Procedure Code Description and unit of purchase

Newly covered by

surgical dressing

expansion

K0212 Foam dressing, wound cover, pad size

16 square inches or less, with any size

adhesive border, each dressing

K0213 Foam dressing, wound cover, pad size

more than 16 square inches but less

than or equal to 48 square inches, with

any size adhesive border, each dressing

K0214 Foam dressing, wound cover, pad size

more than 48 square inches, with any

size adhesive border, each dressing

K0215 Foam dressing, wound filler, per gram X

K0216 Gauze, nonimpregnated, pad size 16

square inches or less, without adhesive

border, each dressing

K0217 Gauze, nonimpregnated, pad size more

than 16 square inches but less than or

equal to 48 square inches, without

adhesive border, each dressing

K0218 Gauze, nonimpregnated, pad size more

than 48 square inches, without

adhesive border, each dressing

K0219 Gauze, nonimpregnated, pad size 16

square inches or less, with any size

adhesive border, each dressing

K0220 Gauze, nonimpregnated, pad size more

than 16 square inches but less than or

equal to 48 square inches, with any size

adhesive border, each dressing

K0221 Gauze, nonimpregnated, pad size more

than 48 square inches, with any size

adhesive border, each dressing

K0222 Gauze, impregnated, other than water

or normal saline, pad size 16 square

inches or less, without adhesive border,

each dressing X

K0223 Gauze, impregnated, other than water

or normal saline, pad size more than 16

square inches but less than or equal to

48 square inches, without adhesive

border, each dressing X

K0224 Gauze, impregnated, other than water

or normal saline, pad size more than 48

square inches, without adhesive border,

each dressing X

(continued)

Page 26 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix IV 

Surgical Dressings Covered by Medicare in

1995

HCFA Common

Procedure Code Description and unit of purchase

Newly covered by

surgical dressing

expansion

K0228 Gauze, impregnated, water or normal

saline, pad size 16 square inches or

less, without adhesive border, each

dressing X

K0229 Gauze, impregnated, water or normal

saline, pad size more than 16 square

inches but less than or equal to 48

square inches, without adhesive border,

each dressing X

K0230 Gauze, impregnated, water or normal

saline, pad size more than 48 square

inches, without adhesive border, each

dressing X

K0234 Hydrocolloid dressing, wound cover,

pad size 16 square inches or less,

without adhesive border, each dressing

K0235 Hydrocolloid dressing, wound cover,

pad size more than 16 square inches

but less than or equal to 48 square

inches, without adhesive border, each

dressing

K0236 Hydrocolloid dressing, wound cover,

pad size more than 48 square inches,

without adhesive border, each dressing

K0237 Hydrocolloid dressing, wound cover,

pad size 16 square inches or less, with

any size adhesive border, each dressing

K0238 Hydrocolloid dressing, wound cover,

pad size more than 16 square inches

but less than or equal to 48 square

inches, with any size adhesive border,

each dressing

K0239 Hydrocolloid dressing, wound cover,

pad size more than 48 square inches,

with any size adhesive border, each

dressing

K0240 Hydrocolloid dressing, wound filler,

paste, per fluid ounce X

K0241 Hydrocolloid dressing, wound filler, dry

form, per pram X

K0242 Hydrogel dressing, wound cover, pad

size 16 square inches or less, without

adhesive border, each dressing

K0243 Hydrogel dressing, wound cover, pad

size more than 16 square inches but

less than or equal to 48 square inches,

without adhesive border, each dressing

(continued)

Page 27 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix IV 

Surgical Dressings Covered by Medicare in

1995

HCFA Common

Procedure Code Description and unit of purchase

Newly covered by

surgical dressing

expansion

K0244 Hydrogel dressing, wound cover, pad

size more than 48 square inches,

without adhesive border, each dressing

K0245 Hydrogel dressing, wound cover, pad

size 16 square inches or less, with any

size adhesive border, each dressing

K0246 Hydrogel dressing, wound cover, pad

size more than 16 square inches but

less than or equal to 48 square inches,

with any size adhesive border, each

dressing

K0247 Hydrogel dressing, wound cover, pad

size more than 48 square inches, with

any size adhesive border, each dressing

K0248 Hydrogel dressing, wound filler, paste,

per fluid ounce

K0249 Hydrogel dressing, wound filler, dry

form, per gram X

K0251 Specialty absorptive dressing, wound

cover, pad size 16 square inches or

less, without adhesive border, each

dressing X

K0252 Specialty absorptive dressing, wound

cover, pad size more than 16 square

inches but less than or equal to 48

square inches, without adhesive border,

each dressing X

K0253 Specialty absorptive dressing, wound

cover, pad size more than 48 square

inches, without adhesive border, each

dressing X

K0254 Specialty absorptive dressing, wound

cover, pad size 16 square inches or

less, with any size adhesive border,

each dressing X

K0255 Specialty absorptive dressing, wound

cover, pad size more than 16 square

inches but less than or equal to 48

square inches, with any size adhesive

border, each dressing X

K0256 Specialty absorptive dressing, wound

cover, pad size more than 48 square

inches, with any size adhesive border,

each dressing X

K0257 Transparent film, 16 square inches or

less, each dressing

(continued)

Page 28 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix IV 

Surgical Dressings Covered by Medicare in

1995

HCFA Common

Procedure Code Description and unit of purchase

Newly covered by

surgical dressing

expansion

K0258 Transparent film, more than 16 but less

than or equal to 48 square inches, each

dressing

K0259 Transparent film, more than 48 square

inches, each dressing

K0261 Wound filler, not elsewhere classified,

gel/paste, per fluid ounce X

K0262 Wound filler, not elsewhere classified,

dry form, per gram X

K0263 Gauze, elastic, all types, per linear yard X

K0264 Gauze, nonelastic, per linear yard X

K0265a Tape, all types, per 18 square inches X

K0266 Gauze, impregnated, other than water

or normal saline, any width, per linear

yard X

aBefore 1995, tape was recorded as HCPC A4454 and the unit of purchase was a roll of tape.

Page 29 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix V 

Fee Schedule Prices Compared With Other

Available Prices

To estimate total 1995 surgical dressings expenditures, we multiplied the

number of surgical dressings purchased by the regional carriers in 1994 by

the 1995 fee schedule prices and the other comparison prices. For each

category of surgical dressing identified by HCFA Common Procedure Codes

(HCPC), we obtained the total units of surgical dressings purchased by all

four regional carriers from the regional carrier responsible for compiling

and analyzing DME claim data for all four regional carriers. We used this

information in conjunction with surgical dressing pricing data to make

several pricing comparisons. For all comparisons, estimated expenditures

under HCFA’s surgical dressing fee schedule were calculated by multiplying

the number of units purchased in 1994 by the 1995 fee schedule price for

that code. These calculations were done for each HCPC and then totaled to

get overall expenditures.

Table V.1 illustrates our comparison of fee schedule prices with wholesale

prices. It ranks the categories of surgical dressings from the category in

which the fee schedule is the furthest above the wholesale dressing price

to the category in which the fee schedule is the furthest below the

wholesale price. We obtained wholesale pricing information from a

national medical supplier’s 1994-1995 mail order catalog. We identified a

dressing in 44 of the HCPC surgical dressing categories. We calculated a per

dressing, or unit, price for each of the 44 categories by taking the best

wholesale price and dividing it by the number of dressings, or units, that

would be provided at that price. The prices for each category were

multiplied by the number of units of dressings purchased in that category

in 1994 to get total expenditures in each category. We used these data to

determine what total expenditures would be if HCFA paid wholesale prices

rather than the fee schedule prices. As table V.1 indicates, HCFA would pay

almost $20 million less for surgical dressings in the 44 categories if it paid

the lower wholesale prices.

Page 30 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix V 

Fee Schedule Prices Compared With Other

Available Prices

Table V.1: Fee Schedule Compared With the Lowest Wholesale Prices

Number of dressings

compared

HCFA

Common

Procedure

Code

1995 fee

schedule

prices

Lowest

wholesale

prices

Fee

schedule

relationship

to

wholesale

pricesa

Number of

units

purchased

in 1994

Estimated

fee schedule

expenditures

Estimated

wholesale

expenditures

Potential

savings

from

lowest

wholesale

purchases

1 K0220 $2.32 $0.19 12.21 26,655 $61,840 $5,064 $56,775

2 K0240 11.03 2.65 4.16 21,885 241,392 57,995 183,396

3 K0248 14.63 3.56 4.11 744,953 10,898,662 2,652,033 8,246,630

4 K0209 6.75 1.79 3.77 577,012 3,894,831 1,032,851 2,861,980

5 K0197 14.81 3.97 3.73 47,500 703,475 188,575 514,900

6 K0263 0.26 0.07 3.71 2,782,913 723,557 194,804 528,753

7 K0262 0.99 0.27 3.67 118,860 117,671 32,092 85,579

8 K0222 1.91 0.54 3.54 170,527 325,707 92,085 233,622

9 K0196 6.62 1.88 3.52 262,137 1,735,347 492,818 1,242,529

10 K0249 0.78 0.24 3.25 179,119 139,713 42,989 96,724

11 K0257 1.38 0.44 3.14 156,359 215,775 68,798 146,977

12 K0238 20.53 8.03 2.56 7,357 151,039 59,077 91,963

13 K0259 9.85 3.92 2.51 87,202 858,940 341,832 517,108

14 K0203 3.77 1.58 2.39 144,542 544,923 228,376 316,547

15 A4454b 2.18 1.03 2.12 6,248,901 13,622,604 6,436,368 7,186,236

16 K0212 8.74 4.32 2.02 120,830 1,056,054 521,986 534,069

17 K0224 3.25 1.64 1.98 23,525 76,456 38,581 37,875

18 K0223 2.17 1.14 1.90 235,851 511,797 268,870 242,927

19 K0251 1.80 0.95 1.89 197,421 355,358 187,550 167,808

20 K0237 7.12 3.82 1.86 14,725 104,842 56,250 48,593

21 K0229 3.25 1.84 1.77 769,838 2,501,974 1,416,502 1,085,472

22 K0236 24.54 14.83 1.65 7,754 190,283 114,992 75,291

23 K0211 26.46 18.00 1.47 37,113 982,010 668,034 313,976

24 K0243 11.10 7.64 1.45 289,106 3,209,077 2,208,770 1,000,307

25 K0258 3.87 2.72 1.42 502,244 1,943,684 1,366,104 577,581

26 A4460 1.00 0.73 1.37 84,803 84,803 61,906 22,897

27 K0234 5.89 4.30 1.37 182,247 1,073,435 783,662 289,773

28 K0245 6.54 4.99 1.31 46,441 303,724 231,741 71,984

29 K0264 0.44 0.34 1.29 5,592,523 2,460,710 1,901,458 559,252

30 K0247 21.42 16.78 1.28 2,373 50,830 39,819 11,011

31 K0204 3.18 2.58 1.23 192,766 612,996 497,336 115,660

32 K0242 5.47 4.53 1.21 416,099 2,276,062 1,884,928 391,133

33 K0255 2.73 2.58 1.06 46,859 127,925 120,896 7,029

(continued)

Page 31 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix V 

Fee Schedule Prices Compared With Other

Available Prices

Number of dressings

compared

HCFA

Common

Procedure

Code

1995 fee

schedule

prices

Lowest

wholesale

prices

Fee

schedule

relationship

to

wholesale

pricesa

Number of

units

purchased

in 1994

Estimated

fee schedule

expenditures

Estimated

wholesale

expenditures

Potential

savings

from

lowest

wholesale

purchases

34 K0199 4.76 4.59 1.04 216,512 1,030,597 993,790 36,807

35 K0154 11.98 13.26 0.90 12,161 145,689 161,255 (15,566)

36 K0254 1.10 1.58 0.70 18,837 20,721 29,762 (9,042)

37 K0219 0.86 1.39 0.62 66,828 57,472 92,891 (35,419)

38 K0246 8.93 16.95 0.53 25,157 224,652 426,411 (201,759)

39 K0214 9.27 22.30 0.42 3,415 31,657 76,155 (44,497)

40 K0253 0.81 2.57 0.32 593,349 480,613 1,524,907 (1,044,294)

41 K0241 2.31 7.52 0.31 4,606 10,640 34,637 (23,997)

42 K0216 0.07 0.23 0.30 23,790,031 1,665,302 5,471,707 (3,806,405)

43 K0252 0.49 1.62 0.30 1,103,586 540,757 1,787,809 (1,247,052)

44 K0217 0.39 1.30 0.30 1,918,607 748,257 2,494,189 (1,745,932)

Total 48,091,529 $57,113,852 $37,388,654 $19,725,197

aThe figures in this column compare the wholesale prices with the fee schedule prices. If the

figure in this column is 1, the lowest wholesale price and fee schedule price are the same.

Figures greater than 1 indicate the number of times that the fee schedule price is greater than the

lowest wholesale price. For example, the fee schedule price for K0220 ($2.32) is 12.21 times

greater than the wholesale price ($.19). In contrast, figures less than 1 indicate that the fee

schedule is lower than the lowest wholesale price.

bBefore 1995, tape was recorded as HCPC A4454 and the unit of purchase was a roll of tape. We

used the pricing and utilization data for HCPC A4454 to estimate 1995 expenditures.

Table V.2 illustrates our comparison of fee schedule prices with the lowest

available retail prices. The table ranks the categories of surgical dressings

from the dressing category in which the fee schedule is the furthest above

the lowest retail dressing price to the category in which the fee schedule is

the furthest below the lowest retail price. We used the surgical dressing

price lists HCFA developed to establish the surgical dressing fee schedule

prices. HCFA had a price list for 44 surgical dressing categories with prices

stated at the 1992 base year price. We identified the lowest price dressing

in each of the 44 surgical dressing categories and inflated the prices to

1995 levels using the inflation factors established by the Congress. We then

multiplied the lowest retail prices for each category by the number of units

purchased in those categories in 1994. We totaled the expenditures in all

categories and compared this figure with what HCFA would pay using the

1995 fee schedule. As table V.2 illustrates, HCFA would pay over $22 million

Page 32 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix V 

Fee Schedule Prices Compared With Other

Available Prices

less for surgical dressings in the 44 categories if it paid the lowest retail

price.

Table V.2: Fee Schedule Compared With Lowest Retail Prices

Number of dressings

compared

HCFA

Common

Procedure

Code

1995 fee

schedule

prices

Lowest

retail

prices

Fee

schedule

relationship

to lowest

retail pricesa

Number of

units

purchased

in 1994

Estimated

fee schedule

expenditures

Estimated

lowest retail

expenditures

Potential

savings

from

lowest

retail

purchases

1 K0245 $6.54 $0.66 9.85 46,441 $303,724 $30,651 $273,073

2 K0203 3.77 0.42 8.88 144,542 544,923 60,708 484,216

3 K0264 0.44 0.10 4.49 5,592,523 2,460,710 542,475 1,918,235

4 K0242 5.47 1.30 4.22 416,099 2,276,062 540,929 1,735,133

5 K0216 0.07 0.02 3.22 23,790,031 1,665,302 475,801 1,189,502

6 K0254 1.10 0.35 3.16 18,837 20,721 6,593 14,128

7 K0243 11.10 3.66 3.04 289,106 3,209,077 1,058,128 2,150,949

8 K0263 0.26 0.09 2.99 2,782,913 723,557 250,462 473,095

9 K0211 26.46 10.22 2.59 37,113 982,010 379,295 602,715

10 K0257 1.38 0.53 2.59 156,359 215,775 82,870 132,905

11 K0219 0.86 0.36 2.39 66,828 57,472 24,058 33,414

12 K0212 8.74 3.69 2.37 120,830 1,056,054 445,863 610,192

13 K0262 0.99 0.44 2.27 118,860 117,671 52,298 65,373

14 K0259 9.85 4.35 2.26 87,202 858,940 379,329 479,611

15 K0238 20.53 9.56 2.15 7,357 151,039 70,333 80,706

16 K0196 6.62 3.13 2.11 262,137 1,735,347 820,489 914,858

17 K0235 15.16 7.29 2.08 27,368 414,899 199,513 215,386

18 K0258 3.87 1.95 1.99 502,244 1,943,684 979,376 964,308

19 K0248 14.63 7.48 1.96 744,953 10,898,662 5,572,248 5,326,414

20 K0222 1.91 0.98 1.95 170,527 325,707 167,116 158,590

21 K0224 3.25 1.85 1.76 23,525 76,456 43,521 32,935

22 K0209 6.75 3.92 1.72 577,012 3,894,831 2,261,887 1,632,944

23 K0236 24.54 14.32 1.71 7,754 190,283 111,037 79,246

24 K0237 7.12 4.29 1.66 14,725 104,842 63,170 41,672

25 K0223 2.17 1.37 1.58 235,851 511,797 323,116 188,681

26 K0234 5.89 3.97 1.48 182,247 1,073,435 723,521 349,914

27 K0220 2.32 1.58 1.47 26,655 61,840 42,115 19,725

28 K0210 17.94 12.48 1.44 98,034 1,758,730 1,223,464 535,266

29 K0199 4.76 3.55 1.34 216,512 1,030,597 768,618 261,980

30 K0253 0.81 0.61 1.33 593,349 480,613 361,943 118,670

(continued)

Page 33 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix V 

Fee Schedule Prices Compared With Other

Available Prices

Number of dressings

compared

HCFA

Common

Procedure

Code

1995 fee

schedule

prices

Lowest

retail

prices

Fee

schedule

relationship

to lowest

retail pricesa

Number of

units

purchased

in 1994

Estimated

fee schedule

expenditures

Estimated

lowest retail

expenditures

Potential

savings

from

lowest

retail

purchases

31 K0251 1.80 1.39 1.29 197,421 355,358 274,415 80,943

32 K0244 35.38 27.90 1.27 75,058 2,655,552 2,094,118 561,434

33 K0229 3.25 2.80 1.16 769,838 2,501,974 2,155,546 346,427

34 K0204 3.18 2.82 1.13 192,766 612,996 543,600 69,396

35 K0240 11.03 9.80 1.13 21,885 241,392 214,473 26,919

36 K0217 0.39 0.35 1.12 1,918,607 748,257 671,512 76,744

37 K0197 14.81 13.24 1.12 47,500 703,475 628,900 74,575

38 K0249 0.78 0.73 1.07 179,119 139,713 130,757 8,956

39 K0246 8.93 8.60 1.04 25,157 224,652 216,350 8,302

40 K0241 2.31 2.26 1.02 4,606 10,640 10,410 230

41 K0247 21.42 21.19 1.01 2,373 50,830 50,284 546

42 K0255 2.73 2.72 1.00 46,859 127,925 127,456 469

43 K0214 9.27 9.27 1.00 3,415 31,657 31,657 0

44 K0252 0.49 0.50 0.98 1,103,586 540,757 551,793 (11,036)

Total 41,946,124 $48,089,936 $25,762,198 $22,327,741

aThe figures in this column compare the lowest retail prices with fee schedule prices. If the figure

in this column is 1, the lowest retail price and fee schedule price are the same. Figures greater

than 1 indicate the number of times that the fee schedule price is greater than the lowest retail

price. For example, the fee schedule price for K0245 ($6.54) is 9.85 times greater than the lowest

retail price ($.66). In contrast, figures less than 1 indicate that the fee schedule is lower than the

lowest retail price.

Table V.3 illustrates our comparison of fee schedule prices with the lowest

retail drugstore prices for similar dressings. The table ranks the categories

of surgical dressings from the category in which the fee schedule is the

furthest above the lowest retail drugstore dressing price to the category in

which the fee schedule is the furthest below the lowest retail drugstore

price. We obtained the actual drugstore prices by visiting and pricing

surgical dressings at four retail drugstores in the Los Angeles area. We

identified and priced dressings in nine of the surgical dressing categories

and determined the lowest per dressing price in each of the nine dressing

categories. These figures were then multiplied by the number of units

purchased in those categories in 1994. We totaled the expenditures in each

category and compared this figure with what HCFA would pay using the

1995 fee schedule. As the table illustrates, HCFA would pay over $2 million

Page 34 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix V 

Fee Schedule Prices Compared With Other

Available Prices

less for surgical dressings in the nine categories if it paid the lower

drugstore prices.

Table V.3: Fee Schedule Compared With Lowest Retail Drugstore Prices

Number of dressings

compared

HCFA

Common

Procedure

Code

1995 fee

schedule

prices

Lowest

actual

retail

prices

Fee

schedule

relationship

to lowest

retail

drugstore

pricesa

Number of

units

purchased

in 1994

Estimated

fee schedule

expenditures

Estimated

lowest retail

expenditures

Potential

savings

from

actual

retail

purchases

1 K0222 $1.91 $0.51 3.74 170,527 $325,707 $86,969 $238,738

2 K0257 1.38 0.52 2.65 156,359 215,775 81,307 134,469

3 K0219 0.86 0.55 1.56 66,828 57,472 36,755 20,717

4 A4454b 2.18 1.47 1.48 6,248,901 13,622,604 9,185,884 4,436,720

5 K0252 0.49 0.47 1.04 1,103,586 540,757 518,685 22,072

6 K0217 0.39 0.40 0.97 1,918,607 748,257 767,443 (19,186)

7 K0263 0.26 0.33 0.78 2,782,913 723,557 918,361 (194,804)

8 K0216 0.07 0.17 0.41 23,790,031 1,665,302 4,044,305 (2,379,003)

9 A4460 1.00 3.87 0.25 84,803 84,803 328,188 (243,385)

Total 36,322,555 $17,984,235 $15,967,898 $2,016,337

aThe figures in this column compare the lowest drugstore prices with fee schedule prices. If the

figure in this column is 1, the lowest retail drugstore price and fee schedule price are the same.

Figures greater than 1 indicate the number of times that the fee schedule price is greater than the

lowest retail drugstore price. For example, the fee schedule price of K0222 ($1.91) is 3.74 times

greater than the lowest retail drugstore price ($.51). In contrast, figures less than 1 indicate that

the fee schedule is lower than the lowest retail drugstore price.

bBefore 1995, tape was recorded as HCPC A4454 and the unit of purchase was a roll of tape.

However, in 1995 a new HCPC (K0265) and description of tape were developed. We used the

pricing and utilization data for HCPC A4454 to estimate 1995 expenditures.

Table V.4 illustrates our comparison of fee schedule prices with the price

VA pays for similar dressings. The table ranks the categories of surgical

dressings from the category in which the fee schedule is the furthest above

the VA price to the category in which the fee schedule is the furthest below

the VA price. We obtained surgical dressing supply and price lists from one

of the VA’s Medical Centers in the Los Angeles area. We identified

dressings and calculated per dressing, or unit, prices in nine of the surgical

dressing categories. We multiplied the lowest per dressing price in each

category by the number of units purchased in those categories in 1994. We

totaled the expenditures in each category and compared this figure with

what HCFA would pay using the 1995 fee schedule. As table V.4 illustrates,

Page 35 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix V 

Fee Schedule Prices Compared With Other

Available Prices

HCFA would pay over $9 million less for dressings in the nine categories if it

paid VA’s lower prices.

Table V.4: Fee Schedule Compared With Department of Veterans Affairs Lowest Purchase Prices

Number of

dressings

compared

HCFA

Common

Procedure

Code

1995 fee

schedule

prices

Lowest

VA

purchase

prices

Fee schedule

relationship to

lowest VA

pricesa

Number of

units

purchased

in 1994

Estimated fee

schedule

expenditures

Estimated VA

expenditures

Potential

savings

from lowest

VA

purchases

1 K0220 $2.32 $0.04 58.00 26,655 $61,840 $1,066 $60,773

2 K0257 1.38 0.06 23.00 156,359 215,775 9,382 206,394

3 K0219 0.86 0.04 21.50 66,828 57,472 2,673 54,799

4 K0224 3.25 0.48 6.77 23,525 76,456 11,292 65,164

5 K0253 0.81 0.16 5.06 593,349 480,613 94,936 385,677

6 A4460 1.00 0.41 2.44 84,803 84,803 34,769 50,034

7 K0223 2.17 0.92 2.36 235,851 511,797 216,983 294,814

8 A4454b 2.18 1.05 2.08 6,248,901 13,622,604 6,561,346 7,061,258

9 K0258 3.87 1.87 2.07 502,244 1,943,684 939,196 1,004,488

Total 7,938,515 $17,055,044 $7,871,643 $9,183,401

aThe figures in this column compare the lowest VA prices with fee schedule prices. If the figure in

this column is 1, the lowest VA price and fee schedule price are the same. Figures greater than 1

indicate the number of times that the fee schedule price is greater than the lowest VA price. For

example, the fee schedule price of K0220 ($2.32) is 58 times greater than the lowest VA price

($.04).

bBefore 1995, tape was recorded as HCPC A4454 and the unit of purchase was a roll of tape.

However, in 1995 a new HCPC (K0265) and description of tape were developed. We used the

pricing and utilization data for HCPC A4454 to estimate 1995 expenditures.

Page 36 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix VI 

Comments From the Department of Health

and Human Services

Page 37 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix VI 

Comments From the Department of Health

and Human Services

Page 38 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix VI 

Comments From the Department of Health

and Human Services

Page 39 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix VI 

Comments From the Department of Health

and Human Services

Now on p. 13.

Page 40 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix VI 

Comments From the Department of Health

and Human Services

Now on p. 10.

Page 41 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix VI 

Comments From the Department of Health

and Human Services

Text revised. Now on p. 2.

Now on p. 5.

Now on p. 3.

Paragraph deleted.

Text revised. Now on p. 7.

Now on p. 11.

Page 42 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix VI 

Comments From the Department of Health

and Human Services

Text revised. Now on p.

13.

Text revised. Now on p.

13.

Page 43 GAO/HEHS-95-171 Excessive Medical Supply Payments
Appendix VII 

Major Contributors to This Report

Edwin P. Stropko, Assistant Director, (202) 512-7118

Donald J. Walthall, Assignment Manager

Sam Mattes, Evaluator-in-Charge

Timothy S. Bushfield, Evaluator

Craig H. Winslow, Senior Attorney

(101310) Page 44 GAO/HEHS-95-171 Excessive Medical Supply Payments
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