United States General Accounting Office

GAO Testimony

Before the Subcommittee on Oversight, Committee on

Ways and Means, House of Representatives

For Release on Delivery

Expected at 10 a.m.

Tuesday, March 4, 1997

MEDICARE

Inherent Program Risks and

Management Challenges

Require Continued Federal

Attention

Statement of Leslie G. Aronovitz, Associate Director

Health Financing and Systems Issues

Health, Education, and Human Services Division

GAO/T-HEHS-97-89

Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

Madam Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss efforts to fight fraud and abuse

in the Medicare program, one of the largest entitlement programs in the

federal budget. In fiscal year 1996, federal spending for Medicare was

$197 billion. Program expenditures have been growing at about 9 percent

per year. Moreover, the trust fund that pays for hospital and other

institutional services is projected to be depleted within 5 years. As you

know, while changes to Medicare are being sought to help control

program costs, the Congress is concerned that billions of dollars of these

costs are lost to fraudulent and wasteful claims.

Today, I would like to address Medicare’s fee-for-service and managed

care programs. More specifically, with regard to these two programs, I’d

like to highlight the problems bearing on protecting taxpayer and

beneficiary interests in Medicare, initiatives recently taken by the

Congress and federal agencies addressing these problems, and several

remaining concerns.

In summary, it is not surprising that because of the program’s size,

complexity, and rapid growth, Medicare is a charter member of our high

risk series. (See the list of related GAO products at the end of this

statement.) In this year’s report on Medicare, we are pleased to note that

both the Congress and the Health Care Financing Administration (HCFA),

the Department of Health and Human Services’ (HHS) agency responsible

for running Medicare, have made important legislative and administrative

changes addressing chronic payment safeguard problems that we and

others have identified. However, because of the significant amount of

money at stake, we believe that the government will need to exercise

constant vigilance and effective management to keep the program

protected from financial exploitation.

Background In 1996, Medicare’s fee-for-service program covered almost 90 percent, or

33 million, of Medicare’s beneficiaries. Physicians, hospitals, and other

providers submit claims to Medicare to receive reimbursement. HCFA

administers Medicare’s fee-for-service program largely through an

administrative structure of claims processing contractors. In 1965, when

the Medicare program was enacted, the law called for insurance

companies—like Blue Cross and Blue Shield, Travelers, and Aetna—to

process and pay claims because of their expertise in performing these

functions. As Medicare contractors, these companies use federal funds to

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

pay health care providers and beneficiaries and are reimbursed for their

administrative expenses incurred in performing the work. Over the years,

HCFA has consolidated some of Medicare’s operations, and the number of

contractors has fallen from a peak of about 130 to about 70 in 1996.

Generally, intermediaries are the contractors that handle part A claims

submitted by “institutional providers” (hospitals, skilled nursing facilities,

hospices, and home health agencies); carriers are those handling part B

claims submitted by physicians, laboratories, equipment suppliers, and

other practitioners.

HCFA’s efforts to guard against inappropriate payments have been largely

contractor-managed operations, leaving the fiscal intermediaries and

carriers broad discretion over how to protect Medicare program dollars.

As a result, there are significant variations in contractors’ implementation

of Medicare’s payment safeguard policies.

Medicare’s managed care program covers a growing number of

beneficiaries—nearly 5 million in 1996—who have chosen to enroll in a

health maintenance organization (HMO) to receive their medical care rather

than purchasing services from individual providers. The managed care

program, which is funded from both the part A and part B trust funds,

consists mostly of risk contract HMOs and enrolled about 4 million

Medicare beneficiaries in 1996.1

 The HMOs are paid a monthly amount,

fixed in advance, by Medicare for each beneficiary enrolled. In this sense,

the HMO has a “risk” contract because regardless of what it spends for each

enrollee’s care, the HMO assumes the financial risk of providing health care

within a fixed budget. HMOs profit if their cost of providing services is

lower than the predetermined payment but lose if their cost is higher than

the payment.

Recent Funding,

Other Initiatives

Revitalize Waning

Efforts to Review

Claims, Deter Abuse

Over the last 7 years, HCFA and its claims processing contractors have

struggled to carry out critical claims review and provider audit activities

with a budget that, on a per-claim basis, was seriously declining. For

example, between 1989 and 1996, the number of Medicare claims climbed

70 percent to 822 million, while during that same period, claims review

resources grew less than 11 percent. Adjusting for inflation and claims

growth, the amount contractors could spend on review shrank from 74

cents to 38 cents per claim.

1

Other Medicare HMOs include cost contract HMOs and health care prepayment plans. Cost contract

HMOs allow beneficiaries to choose health services from their HMO network or outside providers.

Health care prepayment plans may cover only part B services. Together, both types of plans enroll

fewer than 2 percent of the Medicare population.

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

Implications of Reduced

Funding for Payment

Safeguards

Consider the effect of inadequate funding on reviewing home health

claims. After legislation in 1985 more than doubled claims review funding,

contractors did medical necessity reviews for 62 percent of the home

health claims processed in 1986 and 1987. By 1989, however, contractors’

claims review target had been lowered to 3.2 percent. One HCFA official

noted that home health agencies are aware that their Medicare

intermediary reviews only a small number of claims and, therefore, they

can take chances billing for noncovered services.

The plunge in the number of cost report audits has also weakened

Medicare’s efforts to avoid paying excessive costs. Providers subject to

these audits are those paid under Medicare’s cost-based reimbursement

systems—such as hospital outpatient departments, skilled nursing

facilities, and home health agencies. These providers are reimbursed on

the basis of the actual costs of providing services, rather than on charges.

Each year, cost-based providers submit reports that detail their operating

costs throughout the preceding year and specify the share related to the

provision of Medicare services. Using this information, the intermediaries

determine how much Medicare should reimburse the provider institutions,

some of which have received interim Medicare payments throughout the

year based on estimates of expected costs. Without an audit of the

provider’s cost report, however, the intermediary can only reconcile the

figures provided and cannot determine the appropriateness of the costs

reported. In practice, only a fraction of providers is subject to audits.

Between 1991 and 1996, the chances, on average, that an institutional

provider would be audited fell from about 1 in 6 to about 1 in 13.

The Impact of Recent

Legislation and Other

Initiatives

With the passage of the Health Insurance Portability and Accountability

Act of 1996 (HIPAA), the cycle of declining funding for anti-fraud-and-abuse

activities has been broken. For fiscal year 1997, the act boosts the

contractors’ budget for program safeguard activities to 10 percent higher

than it was in 1996; by 2003, the level will be 80 percent higher than in

1996, after which it remains constant. These additional amounts, however,

essentially stabilize per-claim safeguard expenditures at about 1996’s level.

For example, we project that payment safeguard spending for 2003 will be

just over one-half the level of 1989 spending after adjusting for inflation.

In addition to funding, the act has several other provisions to improve

vigilance over Medicare benefit dollars, including specifying the flexibility

to use contractors other than those processing claims to perform

utilization review, provider audit, and other safeguard activities;

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

establishing a program run jointly by the Department of Justice and HHS to

coordinate federal, state, and local law enforcement efforts against fraud

in Medicare and other health care payers; establishing a national health

care fraud data collection program; and enhancing penalties and

establishing health care fraud as a separate criminal offense.

Another important fraud-fighting effort is the 2-year, multiagency project

called Operation Restore Trust. Participating agencies include the HHS

Inspector General, HCFA, and the Administration on Aging, as well as the

Department of Justice and various state and local agencies. The project

targets Medicare abuse and misuse in the areas of home health, nursing

homes, and medical equipment and supplies. In its first year, Operation

Restore Trust reported recovering $42.3 million in inappropriate

payments: $38.6 million were returned to the Medicare trust fund and

$3.7 million to the Treasury as a result of these efforts. It also resulted in

46 convictions, imposed 42 fines, and excluded 119 fraudulent providers

from program participation. In addition, many of the targeted home health

agencies were decertified. Operation Restore Trust is scheduled to be

closed out as a demonstration project in May 1997. This effort, as well as

HCFA’s progress in adopting fraud and abuse detection software and its

development of a national provider tracking system, is discussed further in

our high risk report.

Management Problems

Also Affect Medicare

Payments and Operations

Notwithstanding funding increases, several problems independent of

adequate funding and related to HCFA’s oversight of Medicare have

implications for curbing unnecessary spending and conducting program

operations effectively. One chronic problem is that HCFA has not

coordinated contractors’ payment safeguard activities. For example, as

was anticipated when the program was set up, part B carriers establish

their own medical policies and screens, which are the criteria used to

identify claims that may not be eligible for payment. Certain policies and

the screens used to enforce them have been highly effective in helping

some Medicare carriers avoid making unnecessary or inappropriate

payments. However, the potential savings from having these policies and

screens used by all carriers have been lost, as HCFA has not adequately

coordinated their use among carriers. For example, for just six of

Medicare’s top 200 most costly services in 1994, the use of certain carriers’

medical policy screens by all of Medicare’s carriers could have saved in

the millions to hundreds of millions of dollars annually. However, HCFA’s

leadership has been absent in this area, resulting in the loss of opportunity

to avoid significant Medicare expenditures.

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

In addition, several technical and management problems have hampered

HCFA’s acquisition of the Medicare Transaction System (MTS), a major

claims processing system that aims at consolidating the nine different

claims processing systems Medicare currently uses. First, HCFA had not

completely defined its requirements 2 years after awarding a systems

development contract. Second, HCFA’s MTS development schedule has had

significant overlap among the various system-development phases,

increasing the risk that incompatibilities and delays will occur. Finally,

HCFA has conducted the MTS project without adequate information about

the system’s costs and benefits.

Before MTS is completed, HCFA must oversee several essential information

management transitions in the Medicare claims processing environment.

One involves the shifting of claims processing workloads from contractors

who leave the program to other remaining contractors. Similar workload

shifts in the past have produced serious disruptions in processing claims

promptly and accurately, delays in paying physicians, and the mishandling

of some payment controls. A second issue involves HCFA’s plan to

consolidate Medicare’s three part A and six part B systems into a single

system for each part. This plan will require several major software

conversions. A third issue involves the “millennium” problem—revising

computerized systems to accommodate the year-digit change to 2000. HCFA

does not yet have plans for monitoring contractors’ progress in making

their systems “millennium compliant.”

Medicare Managed

Care Incurs Separate

Risks

Risk contract HMOs, Medicare’s principal managed care option, bear their

own set of risks for taxpayers and beneficiaries. These plans currently

enroll about 10 percent of Medicare’s population and have shown rapid

enrollment growth in recent years. Because HMOs have helped private

sector payers contain health care costs and limit the excess utilization

encouraged by fee-for-service reimbursement, these HMOs have

cost-control appeal for Medicare, while offering potential advantages to

beneficiaries.

However, as we recently testified, a methodological flaw in HCFA’s

approach to paying HMOs has produced excess payments for some plans.

Moreover, because higher HMO enrollment produces higher excess

payments, enrolling more beneficiaries in managed care could increase

rather than lower Medicare spending unless the method of setting HMO

rates is revised.

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

A second problem, of particular concern to beneficiaries, is that HCFA has

been lax in enforcing HMO compliance with program standards, while not

keeping beneficiaries adequately informed of the benefits, costs, and

performance of competing HMOs. In 1995, we reported that, despite efforts

to improve its HMO monitoring, HCFA conducted only paper reviews of

HMOs’ quality assurance plans, examining only the description rather than

the implementation of HMOs’ quality assurance processes. Moreover, the

agency was reluctant to take action against noncompliant HMOs, even

when there was a history of abusive sales practices, delays in processing

beneficiaries’ appeals of HMO decisions to deny coverage, or patterns of

poor quality care.

HCFA also misses the opportunity to supplement its HMO regulatory efforts

by not keeping the Medicare beneficiary population well-informed about

competing HMOs. As we reported in 1996, HCFA has a wealth of data,

collected for program administration and contract oversight purposes, that

it does not package or disseminate for consumer use. For example, HCFA

does not provide beneficiaries with any of the comparative consumer

guides that the federal government and other employer-based health

insurance programs routinely distribute to their employees and retirees.

Instead, HCFA collects information only for its internal use—records of

each HMO’s premium requirements and benefit offerings, enrollment and

disenrollment data (monthly reports specifying for each HMO the number

of beneficiaries that joined and left that month), records of enrollees’

complaints, and results of certification visits to HMOs. By not publishing

disenrollment rates or other comparative performance measures, HCFA

misses an opportunity to show beneficiaries which plans have a good

record and hinders HMOs’ efforts to benchmark their own performance.

Initiatives Intended to

Address Risk Contract

Program Problems

HCFA acknowledges the problems we identified in Medicare’s risk contract

program. To tackle the difficulties in setting HMO payment rates, HCFA has

been conducting several demonstration projects that examine ways to

modify or replace the current method of determining HMO payment rates.

In addition, HIPAA gives HCFA more flexible sanction authority, such as

suspending an HMO’s right to enroll Medicare beneficiaries until

deficiencies are corrected, while providing HMOs the statutory right to

develop and implement a corrective action plan before HCFA imposes a

sanction.

Finally, HCFA is developing several consumer information efforts, including

plans to make HMO comparison charts available on the Internet. Providing

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

the information in an electronic format rather than in print, however, may

make it less accessible to the very individuals who would find it useful.

The information, according to HCFA, will have to be “downloaded and

customized for local consumption.” HCFA expects the primary users of this

information to be beneficiary advocates and Medicare insurance

counselors. HCFA is also planning a survey to obtain beneficiaries’

perceptions of their managed care plans and does not expect preliminary

results before the end of 1997. In another key initiative, HCFA is helping to

develop a new version of the Health Plan Employer Data and Information

Set (HEDIS 3.0) that will incorporate measures relevant to the elderly

population. The measures will enable comparisons to be made among

plans of the enrollees’ use of such prevention and screening services as flu

shots, mammography, and eye exams for diabetics. As of January 1997,

Medicare HMOs are required, from the time they renew their contract, to

report on HEDIS 3.0 clinical effectiveness measures. HCFA intends to

summarize the results and include them in comparability charts currently

being developed.

Conclusion Many of Medicare’s vulnerabilities are inherent in its size and mission,

making it a perpetually attractive target for exploitation. That wrongdoers

continue to find ways to dodge safeguards illustrates the dynamic nature

of fraud and abuse and the need for constant vigilance and increasingly

sophisticated ways to protect against gaming the system. Judicious

changes in Medicare’s day-to-day operations involving HCFA’s improved

oversight and leadership, its appropriate application of new

anti-fraud-and-abuse funds, and the mitigation of MTS acquisition risks are

necessary ingredients to reduce substantial future losses. Moreover, as

Medicare’s managed care enrollment grows, HCFA must work to ensure

that payments to HMOs better reflect the cost of beneficiaries’ care, that

beneficiaries receive information about HMOs sufficient to make informed

choices, and that the agency’s expanded authority to enforce HMO

compliance with federal standards is used. To adequately safeguard the

Medicare program, HCFA needs to meet these important challenges

promptly.

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

This concludes my statement. I am happy to take your questions.

Contributors For more information on this testimony, please call Donald C. Snyder,

Assistant Director, on (202) 512-7204. Other major contributors to this

statement included Thomas Dowdal and Hannah F. Fein.

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

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Medicare: Inherent Program Risks and

Management Challenges Require Continued

Federal Attention

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Page 11 GAO/T-HEHS-97-89
Related GAO Products

High Risk Series

Reports on Medicare

Medicare (GAO/HR-97-10).

Medicare Claims (GAO/HR-95-8).

Medicare Claims (GAO/HR-93-6).

Medicare

Fee-for-Service

Medicare: Home Health Utilization Expands While Program Controls

Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996).

Medicare: Millions Can Be Saved by Screening Claims for Overused

Services (GAO/HEHS-96-49, Jan. 30, 1996).

Medicare Transaction System: Strengthened Management and Sound

Development Approach Critical to Success (GAO/T-AIMD-96-12, Nov. 16, 1995).

Medicare: Allegations Against ABC Home Health Care (GAO/OSI-95-17,

July 19, 1995).

Medicare: Commercial Technology Could Save Billions Lost to Billing

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

Medicare: New Claims Processing System Benefits and Acquisition Risks

(GAO/HEHS/AIMD-94-79, Jan. 25, 1994).

Medicare Managed

Care

Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by

Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-78, Feb. 25,

1997).

Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO

Performance (GAO/HEHS-97-23, Oct. 22, 1996).

(101543) Page 12 GAO/T-HEHS-97-89
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