United States General Accounting Office

GAO Testimony

Before the Permanent Subcommittee on Investigations,

Committee on Governmental Affairs, U.S. Senate

For Release on Delivery

Expected at 9:00 a.m.

Thursday, June 26, 1997

MEDICARE

Control Over Fraud and

Abuse Remains Elusive

Statement of Leslie G. Aronovitz, Associate Director

Health Financing and Systems Issues

Health, Education, and Human Services Division

GAO/T-HEHS-97-165

Medicare: Control Over Fraud and Abuse

Remains Elusive

Madam Chairman and Members of the Subcommittee:

We are pleased to be here today as you discuss the problem of fraud and

abuse in the Medicare program. Because Medicare is one of the largest,

most expensive programs in the federal budget, its spending has been the

subject of numerous legislative proposals in recent years by the Congress

and the administration. In fiscal year 1996, Medicare expenditures totaled

about $200 billion, and the program’s Hospital Insurance Trust Fund is

expected to be depleted by 2001. At the same time, millions of dollars are

being spent inappropriately because of the fraudulent and abusive billing

practices of health care providers, thus prompting congressional concern

about program vulnerabilities.

My comments today will focus on both the fee-for-service and managed

care programs. Specifically, I would like to highlight the

anti-fraud-and-abuse tools available to Medicare; the extent to which and

how effectively they are used by the Health Care Financing Administration

(HCFA), the agency responsible for administering the program; and recent

legislative activity aimed at improving program safeguards.

The information I am presenting today is based on recent GAO studies and

the three High Risk Series reports on Medicare we have issued since 1992.

The high-risk reports are the products of GAO’s special effort, begun in 1990

and supported by the Senate Committee on Governmental Affairs, to

review federal program areas identified as high risk because of

vulnerabilities to waste, fraud, abuse, and mismanagement. (See Related

GAO Products at the end of this statement.)

In brief, we selected Medicare as one of the initial programs to be included

in our high-risk efforts because of the program’s size, complexity, and

rapid growth. In addition, HCFA’s efforts to fight Medicare fraud and abuse

have not been adequate to prevent substantial losses because the tools

available over the years have been underutilized or not deployed as

effectively as possible.

Because of budget constraints, the number of reviews of claims and

related medical documentation and the site audits of providers’ records

have dwindled significantly. This means, for example, that a home health

provider has only a slim chance of having its claims, its year-end cost

reports, or its actual provision of services carefully scrutinized by

Medicare. In addition, HCFA’s management of its claims processing controls

and Medicare’s automated information systems has been unsatisfactory.

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As a result, Medicare’s information systems and the staff monitoring

claims have been less than effective at spotting indicators of potential

fraud, such as suspiciously large increases in reimbursements, improbable

quantities of services claimed, or duplicate bills submitted to different

contractors for the same service or supply. Because of acknowledged

system weaknesses, HCFA is in the process of acquiring a new

multimillion-dollar automated system called the Medicare Transaction

System (MTS). MTS is intended to replace Medicare’s multiple automated

systems and is expected to enhance significantly its fraud and abuse

detection capabilities. However, HCFA has not effectively managed the

process for acquiring this system. Now schedule delays and growing cost

projections—from a $151 million estimate made in 1992 to about a

$1 billion estimate this year—have forced HCFA to halt much of the

system’s development while the agency reassesses its acquisition plans.

Less than adequate oversight has also resulted in little meaningful action

taken against Medicare health maintenance organizations (HMO) found to

be out of compliance with federal law and regulations. Other than

requiring corrective action plans, HCFA has not sanctioned poor performing

HMOs, using such tools as excluding these HMOs from the program,

prohibiting continued enrollment until deficiencies are corrected, or

notifying beneficiaries of the HMOs cited for violations. Accumulated

evidence of in-home sales abuses coupled with high rates of rapid

disenrollment for certain HMOs also indicate that some beneficiaries are

confused about or are being misled during the enrollment process and are

dissatisfied once they become plan members. In addition, consumer

information that could help beneficiaries distinguish the good plans from

the poor performers is not made publicly available, limiting the ability of

beneficiaries to make informed choices about competing plans. This in

turn limits the ability of consumer choice to drive out poor quality.

Recent and proposed legislation—chiefly the Kassebaum-Kennedy

legislation, also known as the Health Insurance Portability and

Accountability Act of 1996 (HIPAA), and the budget reconciliation

legislation now being considered by the Congress—refocus attention on

various aspects of Medicare fraud and abuse. The implementation of the

enacted provisions, such as additional funding for special antifraud

initiatives and the promise of proposed legislation, such as the authority to

prevent all convicted felons from becoming Medicare providers, offer the

potential to reduce Medicare losses attributable to unwarranted payments.

But HCFA’s history of lengthy delays in implementing legislation gives cause

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for concern about whether the authorities granted will be acted on

promptly and effectively.

Background Established under the Social Security Amendments of 1965, Medicare is a

two-part program: “hospital insurance,” or part A, which covers inpatient

hospital, skilled nursing facility, hospice, and home health care services;

and “supplementary medical insurance,” or part B, which covers physician

and outpatient hospital services, diagnostic tests, and ambulance and

other health services and supplies. Medicare falls under the administrative

jurisdiction of HCFA, within the Department of Health and Human Services

(HHS). HCFA administers both traditional fee-for-service Medicare and HMOs

under contract that are permitted to enroll Medicare beneficiaries.

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

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

providers submit claims to Medicare to receive payment for services they

have provided to beneficiaries. HCFA administers Medicare’s fee-for-service

program largely through a network of about 70 claims processing

contractors, that is, insurance companies—like Blue Cross and Blue Shield

plans, Mutual of Omaha, and CIGNA—that process and pay Medicare

claims. In fiscal year 1996, contractors processed about 800 million

Medicare claims.

As Medicare contractors, these companies use federal funds to pay health

care providers and beneficiaries and are reimbursed for their

administrative costs incurred in performing the work. They are also

responsible for the payment safeguard activities intended to protect

Medicare from paying inappropriately.1

 The contractors have broad

discretion in conducting these activities, resulting in significant variations

across contractors in implementing payment safeguards.

Generally, intermediaries are the contractors that handle claims submitted

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

and home health agencies); carriers are those handling claims submitted

by physicians, laboratories, equipment suppliers, and other practitioners.

1

Although under section 202 of HIPAA, the HHS Secretary is authorized to enter into contracts with

entities other than its current contractors to perform payment safeguard activities, HCFA has not yet

awarded any contracts of this type.

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Managed Care Program Medicare’s managed care program covers a growing number of

beneficiaries—nearly 5 million at the end of 1996—who have chosen to

enroll in an HMO to receive their medical care rather than obtaining

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 that enrolled about 4 million Medicare beneficiaries as of

the end of 1996.2

 These HMOs are paid a monthly amount, fixed in advance,

by Medicare for each beneficiary enrolled rather than for each service

provided. 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 all needed health care in return for the payments

received. HMOs profit if their costs of providing services are lower than the

predetermined payment but lose if their costs are higher than the Medicare

payment.

Medicare Fraud Fraud and abuse encompass a wide range of improper billing practices

that include misrepresenting or overcharging with respect to services

delivered. Both result in unnecessary costs to Medicare; but a fraud

conviction requires proof of intent to defraud. Abuse typically involves

actions that are inconsistent with Medicare billing rules and policies. As a

practical matter, whether and how a wrongful act is addressed can depend

on the size of the financial loss incurred and the quality of the evidence

establishing intent. For example, small claims are generally not pursued as

fraudulent because of the cost involved in investigation and prosecution.

The pursuit of fraud often begins with the contractors, which conduct

reviews of submitted claims and respond to beneficiary complaints. They

develop cases for referral to the HHS Inspector General for possible

criminal or civil prosecution and administrative sanction. Potential fraud

cases referred to the Inspector General require careful documentation by

the contractor, entailing data analyses, claims audits, interviews with

patients, and reviews of medical records.

Inspector General investigations can involve, among other things,

additional interviews or analyses of medical records, and subpoena of

financial records. If satisfied that the evidence warrants prosecution, the

Inspector General forwards the case to a U.S. Attorney, within the

Department of Justice. The U.S. Attorney then decides whether to accept

2

Other Medicare managed care plans 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 cover only part B services. Together, both types of plans

enroll fewer than 2 percent of the Medicare population.

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the case for prosecution. If an indictment, and finally, a conviction are

obtained, further work is necessary to establish administrative sanctions

and recover overpayments. Thus, although the mechanics to pursue

Medicare fraud are in place, the high level of resources and interagency

coordination required for case development can stall the pursuit of a case

at many junctures and delay the resolution of a case for many years.

Medicare’s

Anti-Fraud-and-Abuse

Efforts Consist

Largely of

Contractors’ Payment

Safeguards

HCFA relies on payment safeguards that consist largely of contractors’

efforts to detect improprieties both before and after claims have been

paid. In addition to complaints contractors receive from beneficiaries,

detection efforts include prepayment reviews of providers’ claims, and

postpayment analyses, such as reviews of claims data and audits of

provider costs. (See table 1.)

Table 1: Medicare’s Controls to Detect Inappropriate Payments

Control How it works

Leads from beneficiaries Beneficiaries use Explanation of Medicare Benefits to alert Medicare of claims for services not

provided, suspiciously high charges, or other indications of potential fraud.

Prepayment review Computer edits check claims for compliance with such administrative requirements as the submission

of all necessary information.

Computer edits automatically deny claims that are duplicates of others already processed by that

system.

Computer screens suspend for manual review claims that do not appear to comply with medical

necessity or coverage criteria.

Postpayment review Focused medical review. Provider-targeted: Examining historical data, analysts compare providers’

claims against those of their peers to identify high billers; past or future claims of high billers may be

targeted for more extensive review. Service-targeted: Analysts examine expenditure data to identify

medical services for which spending has been unusually high; past or future claims for these services

may be subjected to more intensive reviews.

Comprehensive claims audit. Reviewers examine in greater depth providers’ billings found through

leads from beneficiaries, focused medical review, or other sources to show irregularities. 

Audit of cost reports. Auditors verify the reasonableness of costs reported annually by institutional

providers that are reimbursed on a cost basis.

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Beneficiary Leads

Generated From Payment

Notices

The Explanation of Medicare Benefits (EOMB), which is a notice to

beneficiaries detailing the services their provider billed for and Medicare

payment decisions, is one type of payment safeguard. Many fraud cases

begin with beneficiary calls to Medicare contractors, HCFA, the HHS

Inspector General, the Federal Bureau of Investigation, state licensing

agencies, and professional associations. These calls, officially termed

complaints, are often triggered by EOMBs that show providers’ bills for

services never received, items never ordered, or suspiciously high charges

for services or supplies received.

Prepayment Claims

Screening

One of Medicare’s key payment safeguard activities—performed by the

claims processing contractors—is the prepayment screening of claims for

compliance with administrative billing procedures and medical coverage

policies. Edits and screens are programmed into claims processing

software that trigger the suspension of incomplete or erroneous claims.

For example, if a provider’s billing number or beneficiary identification

number is incomplete or otherwise incorrect, the computer automatically

holds the claim until the data are corrected. Edits automatically deny

duplicate claims. Screens will also halt processing when claims do not

meet certain medical necessity or coverage conditions for payment. For

example, a screen developed for echocardiography might suspend the

processing of a claim for which the documented diagnosis was indigestion;

in such a case, the claim would receive further review by contractor staff.

Postpayment Review Another payment safeguard performed by contractor staff is postpayment

review, which consists of efforts to detect irregularities. These efforts

include (1) focused medical reviews, in which an examination of claims

data focuses on either the billings of a particular provider or the

expenditures for a particular service; (2) comprehensive audits of claims

submitted by suspect providers; and (3) audits of providers’ cost reports.

Postpayment reviews can lead to the strengthening of payment policies

that in the future will disallow or reduce unwarranted Medicare

reimbursements for certain services.

Focused medical reviews involve reviewers examining claims data to find

patterns that deviate from a norm. For example, they look for aberrancies

in an individual provider’s billing patterns by profiling, or identifying

providers who bill for many more services per patient than their peers.

Reviewers also look for aberrancies in expenditure data for a specific

service or procedure largely by comparing the total amounts the

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contractor spent for a particular service with spending in previous periods

and with other contractors’ spending for that service. The outcome of

focused medical reviews can include more comprehensive reviews, also

called audits, of providers’ claims.

Claims audits are typically conducted for providers whose billings have

shown irregularities. In these cases, contractors review a sample of claims

for the provider’s patients to determine whether services were

appropriate—that is, medically necessary, covered by Medicare, and

actually provided—and whether they were billed in compliance with

Medicare rules. Audits are resource-intensive, often involving medical

record reviews and patient and provider interviews. If audits disclose that

Medicare has paid for unnecessary or inappropriate services, the

contractor attempts to recover overpayments.

Focused medical review also generates the information contractors need

to decide which services need medical review policies, which in turn

typically serve as the basis for developing a computerized medical

necessity screen, as discussed earlier. With the exception of some national

policies, contractors develop their own medical review policies to address

“local” payment issues. For example, after examining several years of data

on spending for foot care services, a contractor determined that total

spending for foot care services increased fourfold—from about $470,000 to

about $1.8 million in a 3-year period. From this and other postpayment

review information, the contractor developed a medical review policy

covering foot care under certain conditions. This policy served as the basis

for the contractor’s development of a computer software screen for foot

care services. Within a year, the contractor’s payments for foot care

procedures dropped to about $620,000, or a third of what had been paid

the previous year.

Audits of cost reports submitted by providers paid under cost-based

reimbursement are another postpayment review tool. Such

providers—including hospital outpatient departments, skilled nursing

facilities, and home health agencies—are reimbursed not on the basis of a

fee schedule or the charge for a service but on the basis of the

“reasonable” cost to provide the service.

Reimbursement to such institutional providers occurs in several steps.

First, Medicare contractors make “interim” payments based on the

provider’s historical costs and current cost estimates. These payments

help defray the ongoing costs of providing services to Medicare

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beneficiaries. Second, at the end of each year, the 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, intermediaries make interim adjustments to the payments

made to the provider. Third, the intermediary can conduct either “desk

audits” or more detailed reviews of the cost reports, including “field

audits,” to determine the appropriate final payment amounts.

Budget Constraints

Have Weakened

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 declining substantially. For

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

70 percent to over 800 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 48 cents per claim. (See fig I.1.)

The deterioration of Medicare’s controls over home health payments

exemplifies the effect of the inadequate funding of payment safeguards.

Between 1988 and 1996, Medicare spending for home health care grew

from $2.1 billion to $18 billion and by the year 2000 is projected to exceed

$21 billion (see fig. I.2). Along with increasing expenditures, the number of

home health agencies has also increased—from about 5,800 to over 9,000.

However, as we reported in 1996, Medicare’s review of home health claims

greatly decreased in the 1990s, despite the dramatic rise in home health

care expenditures.3

 Because of budgetary constraints in recent years,

contractors’ reviews of home health claims plummeted from 62 percent in

1987 to a target of 3 percent in 1996.4

 The infrequency of the

intermediaries’ medical review of claims and limited physician

involvement in overseeing home health agencies’ plans of care have made

it nearly impossible to determine whether the beneficiary receiving home

health services qualified for the benefit, needed the care being delivered,

or even received the services being billed to Medicare. Also, because of

the small percentage of claims selected for review, home health agencies

that billed for noncovered services are much less likely to be identified

than was the case a decade earlier.

3

Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16,

Mar. 27, 1996).

4

Because the 3-percent target applied to all part A claims, the actual proportion of home health claims

reviewed, which are a subset of part A claims, could actually be as low as 1 percent.

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Similarly, the percentage of cost reports audited has declined; between

1991 and 1996, the chances that any institutional provider’s cost report

would be subject to a detailed review fell from about 1 in 6 to about 1 in

13. Because of the time needed to schedule and conduct audits,

intermediaries can take 2 years or more to reach a final settlement.

Tentative settlements that differ substantially from the amount ultimately

determined to be due a provider cause underpayments or excessive

payments that can remain outstanding for 2 years or more.

Concern about home health fraud and abuse is not new. Nearly two

decades ago, HCFA began gathering information that this Subcommittee

used to launch a review in 1981 of certain home health agencies operating

in the Chicago metropolitan area. The findings and recommendations of

the Subcommittee’s 1981 report still resonate today. Among the

recommendations made in 1981, several are particularly germane in light

of current anti-fraud-and-abuse legislative activity, namely the

Kassebaum-Kennedy legislation, and budget reconciliation provisions

currently being considered by both houses of Congress:

• The Subcommittee recommended not reducing intermediaries’

budgets for auditing home health agencies to keep pace with

program growth. Medicare payment safeguard funding nevertheless did

decline since 1989 until the passage of the Kassebaum-Kennedy legislation,

which now ensures stable funding for program safeguards through 2003

and allows HCFA to count on stable funding in the coming years. However,

per-claim expenditures for medical review and other controls will remain

below the 1989 level after adjusting for inflation.

• The Subcommittee noted that the government had no viable

mechanism by which it could recoup overpayments. In a report just

released, we suggested that the Congress consider directing HCFA to start a

demonstration that would assess home health agencies found to be

habitual abusive billers for the costs of performing the follow-up audit

work required to estimate overpayment amounts.5

• The Subcommittee recommended that, to recoup overpayments,

HCFA regulations require bonding of new agencies and agencies

found to be habitual abusers and that HCFA expedite its

promulgation of these regulations. The regulations, however, were

never finalized. The budget reconciliation bill proposes that certain

providers billing Medicare, including home health agencies, post a surety

5

See Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings

(GAO/HEHS-97-108, June 13, 1997).

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bond for at least $50,000. This would make bonding a statutory

requirement rather than an option left to HCFA’s discretion.

Management

Problems Also Affect

Payments and

Operations

Independent of the question of adequate funding is the issue of whether

available safeguard dollars are being used as effectively as possible. HCFA

has not taken full advantage of the controls contractors could use to

screen for inappropriate claims. Moreover, despite deficiencies that might

have been corrected in Medicare’s current claims processing systems, HCFA

has concentrated its management efforts on the development of a new

system.

HCFA Has Not Routinely

Made Available to

Contractors Information

on Effective Payment

Controls

One chronic problem is that HCFA has not coordinated contractors’

payment safeguard activities. For example, as was planned 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 effective in helping some Medicare carriers avoid making

unnecessary or inappropriate payments. However, the potential savings

from having these policies and screens used by other carriers have been

lost, as HCFA has not adequately coordinated their use among carriers. For

example, as we reported in 1996, for just 6 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 millions to hundreds of

millions of dollars annually.6

 However, HCFA has not led in this area and

the opportunity to avoid significant Medicare expenditures has been lost.

(See fig. I.3.)

Information Management

Problems Slow Efforts to

Uncover Fraud and Abuse

HCFA’s unsatisfactory management of a major systems acquisition

project—MTS—has serious consequences for the ability of HCFA and its

contractors to improve fraud and abuse monitoring activities. Ideally, as

we reported in 1994,7

 a system like MTS would allow “on-line” claims

processing, enabling contractors’ systems to compare claims against other

claims already submitted on behalf of the beneficiary, other claims

submitted by the provider, and other claims for the same procedure or

item. Without this capability, contractors’ processing systems are not

6

Medicare: Millions Can Be Saved by Screening for Overused Services (GAO/HEHS-96-49, Jan. 30,

1996).

7

Medicare: New Claims Processing System Benefits and Acquisition Risks (GAO/HEHS/AIMD-94-79,

Jan. 25, 1994).

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programmed to screen for suspiciously large increases in reimbursements

over a short period or improbable quantities of services claimed for a

single day of care. The following examples cited in our previous work

highlight the problem:

• In the fourth quarter of 1992, a Medicare contractor paid a supplier

$211,900 for surgical dressing claims. For the same quarter a year later, the

contractor paid the same supplier more than $6 million without becoming

suspicious, despite the 2,800-percent increase in the amount paid.

• A contractor paid claims for a supplier’s body jackets8—with no questions

asked—that averaged about $2,300 per quarter for five consecutive

quarters and then jumped to $32,000, $95,000, $235,000, and $889,000 over

the next four quarters.

• A contractor reimbursed a clinical psychology group practice for

individual psychotherapy visits of 45 to 50 minutes. Three psychologists in

the group were billing for, and allegedly seeing, from 17 to 42 nursing

facility patients per day. On many days, the leading biller of this group

would have had to work more than 24 uninterrupted hours to provide the

services he claimed.

• A contractor paid a podiatrist $143,580 for performing surgical procedures

on at least 4,400 nursing facility patients during a 6-month period. For

these services to be legitimate, the podiatrist would have had to serve at

least 34 patients a day, 5 days a week.

In the last two cases cited, the contractors did not become suspicious until

they received complaints from family members and beneficiaries

themselves. This failure to discover unusual increases or unusually high

amounts billed by a particular provider or for a particular service or

supply item makes Medicare vulnerable to billing schemes.

MTS was also expected to, among other things, provide on-line access to

beneficiary patient histories. Currently, Medicare’s part A and part B

systems are incompatible, making it difficult to spot schemes that involve

billing both parts for the same service. Specifically, Medicare’s discrete

part A and part B processing systems are not designed to easily identify,

on-line, all of the medical services and devices billed on behalf of an

individual beneficiary. As a result, providers can improperly bill both parts

with little danger of detection. In our 1995 review of medical supply

payments, for example, we noted that the same supply item can be billed

on behalf of an individual beneficiary to both an intermediary and a

8

A body jacket is a custom-fitted spinal brace made of a rigid plastic material that conforms to the

body and largely immobilizes it.

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carrier.9 We found instances of duplicate payments and noted that

contractors lacked effective tests to determine whether both carriers and

intermediaries paid for the same items. The HHS Inspector General has

reported similar problems with payments for other services, such as

ambulance transportation and diagnostic laboratory tests.10

The promise of MTS, however, could be delayed indefinitely. We recently

reported that, in the 5 years between 1992 and 1997, estimated MTS

development and implementation costs have jumped sevenfold from

$151 million to about $1 billion.11 This is symptomatic of various project

management weaknesses we have previously reported, namely, that HCFA

had not completely defined its requirements 2 years after awarding a

systems development contract; HCFA’s MTS development schedule has had

significant overlap among the various system-development phases,

increasing the risk that incompatibilities and delays will occur; and HCFA

has not adequately managed MTS as an investment as evidenced by the lack

of a satisfactory cost-benefit analysis or consideration of viable

alternatives. After major problems and delays with its MTS development

contract, HCFA announced on April 4, 1997, that it was halting all MTS

fee-for-service software development for 90 days.

As a transitional step to MTS, HCFA has begun consolidating its three

intermediary part A systems and six carrier part B systems into one part A

claims system and one part B claims system. Having a single system for

each part will allow better editing of claims, but it does not provide some

of the benefits that were expected from MTS. Among these are the on-line

capability to identify, before payment is made, whether (1) an item or

service billed to part A has also been billed to part B and vice versa and

(2) a billed item or service is consistent with the other items and services

billed on behalf of an individual. The fate of MTS remains uncertain. HCFA

officials said they would use the 90-day period to examine alternative

methods for achieving their MTS goals.

9

Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements

(GAO/HEHS-95-171, Aug. 8, 1995).

10Ambulance Services for Medicare End-Stage Renal Disease Beneficiaries: Medical Necessity,

OEI-03-90-02130 (Washington, D.C.: HHS Office of Inspector General, Aug. 17, 1994); Ambulance

Services for Medicare End-Stage Renal Disease Beneficiaries: Payment Practices, OEI-03-90-02131

(Washington, D.C.: HHS Office of Inspector General, Mar. 9, 1994); and Review of Separately Billable

End-Stage Renal Disease Laboratory Tests, #A-01-96-00513 (Washington, D.C.: HHS Office of Inspector

General, Oct. 1, 1996).

11For a detailed account of MTS costs and development problems, see Medicare Transaction System:

Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78,

May 16, 1997).

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Ineffective Oversight

Leaves Beneficiaries

Vulnerable to HMO

Quality Problems

Some have argued that moving beneficiaries into managed care—that is,

into a “claimless” environment—would eliminate problems of fraud and

abuse. Unlike fee-for-service providers, physicians, hospitals, and other

providers do not submit a per-service claim for reimbursement. Instead,

they are paid by the HMO, which in turn is paid a monthly amount by

Medicare for each beneficiary enrolled. However, our work shows that

another set of problems exists in Medicare’s managed care program,

which enrolls more than 10 percent of Medicare’s 39 million beneficiaries

and is growing by about 85,000 beneficiaries per month.

Under managed care, where fixed monthly payments are made per

beneficiary rather than per service, strategies to exploit Medicare are

based on the incentive to underserve rather than overserve the

beneficiary. Risk contract HMOs, Medicare’s principal managed care option,

can offer an attractive alternative to the traditional fee-for-service program

because risk HMOs typically cover additional benefits and cost

beneficiaries less money. However, in recent years, we have reported that

some Medicare HMOs have not complied with federal standards and that

HCFA’s monitoring of these HMOs has been weak. For example, 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.12 Moreover, HCFA 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 poor-quality care.

In a 1996 report, we discussed the value of releasing HMO performance data

to Medicare beneficiaries as having the potential to reduce the occurrence

of abusive marketing practices.13 We found that cases developed from

beneficiary complaints and other HCFA documentation revealed violations

of Medicare regulations prohibiting certain marketing practices, such as

activities that mislead, confuse, or misrepresent. Some examples follow:

• At least 20 beneficiaries were inappropriately enrolled in an HMO after

attending the same sales seminar in August 1995. The beneficiaries

thought they were signing up to receive more information but later

discovered the sales agent had enrolled them in the plan.

12Medicare: Increased HMO Oversight Could Improve Quality and Access to Care (GAO/HEHS-95-155,

Aug. 3, 1995).

13Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO Performance

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

Page 13 GAO/T-HEHS-97-165
Medicare: Control Over Fraud and Abuse

Remains Elusive

• In January 1995, a beneficiary was notified by his medical group before an

appointment that he was now enrolled in another plan. The beneficiary

had no idea how this could be, as he had not intended to change plans.

Though the beneficiary signs with an “X,” the new enrollment application

was signed with a legible cursive signature. HCFA reenrolled the beneficiary

in his former plan but took no action against the plan or the sales agent.

• One plan’s marketing activities resulted in enrolling an 81-year-old woman.

In the first months of membership, she visited her doctor, who was in the

plan’s provider network. When she later visited a non-network physician

who had also been one of her regular providers, Medicare denied her

claims because of her HMO enrollment. She then requested to disenroll and

told HCFA that if she had understood the requirement to visit specific

providers, she would not have enrolled in the HMO. HCFA disenrolled her

from the plan effective with her use of non-network providers.

Despite many beneficiary complaints, HCFA does not take advantage of

opportunities to use market forces to prod competitors to offer better

quality services. HCFA collects, but does not systematically or routinely

analyze, data on HMO activities that could be used to measure performance.

Putting these data in the hands of beneficiaries could allow them to

identify and select plans with better records and give HMOs incentives to

improve their performance.

For example, in our 1996 study, we examined HCFA data on HMO

disenrollments—rates at which Medicare beneficiaries quit their HMOs and

join other plans or return to fee-for-service Medicare—as an indicator of

beneficiary satisfaction. In the Miami market, for example, we found that

in 1995 at one HMO only about 3 of every 25 beneficiaries disenrolled,

whereas at another HMO more than 3 of every 10 beneficiaries disenrolled.

We reported that these statistics, particularly in combination with

complaint data, could help identify HMOs whose sales agents mislead or fail

to adequately educate new enrollees. (See fig. I.4.)

In the case of one Florida HMO, for example, HCFA found—in 1991, 1992,

1994, and 1996—some combination of deficiencies in marketing,

enrollment, quality assurance systems, grievance and appeals procedures,

and access to health services. Despite the repeated findings of standards

violations at this HMO, HCFA’s strongest regulatory action was to require,

after each inspection, a corrective action plan. HCFA did not provide Miami

area beneficiaries with information on the inspection findings; at the same

time, Medicare beneficiaries continued to enroll and disenroll in this plan.

Page 14 GAO/T-HEHS-97-165
Medicare: Control Over Fraud and Abuse

Remains Elusive

Recent Legislative

Activity Addresses

Aspects of Medicare

Fraud and Abuse

With the passage of the Kassebaum-Kennedy legislation known as HIPAA,

the Congress recently provided important new resources and tools to fight

health care fraud and abuse. To inform the Congress on the progress of

HIPAA’s implementation, we have begun monitoring HCFA’s and the HHS

Inspector General’s efforts to implement the act. The Congress is currently

considering additional provisions, as part of the budget reconciliation

legislation, to further strengthen fraud reduction efforts.

Legislative Activity Related

to Fee-for-Service Medicare

HIPAA ensures stable funding and provides for other antifraud efforts, while

pending budget reconciliation legislation addresses additional aspects of

fraud and abuse.

HIPAA A key HIPAA provision ensures stable and gradually increasing funds

earmarked for payment safeguard activities. HIPAA provides up to

$440 million for program safeguards for this fiscal year, with budget

increases scheduled in following years. For the year 2003 and beyond,

HIPAA ensures funding of between $710 million and $720 million. However,

as we have previously reported, by 2003, per-claim safeguard expenditures

will be at about one-half the level of 1989 expenditures, after adjusting for

inflation.14

Another HIPAA provision enables HCFA to contract with entities other than

the insurers serving as Medicare intermediaries and carriers to conduct

payment safeguard activities, including medical and utilization review and

audits of cost reports. These contracts, intended to be awarded to entities

with relevant expertise, may help improve the oversight of claims payment

operations by enhancing data analysis capabilities and avoiding potential

conflicts of interest with the contractor’s private business. HCFA does not

yet have a target date for awarding program safeguard contracts, nor has it

finalized related plans to implement this HIPAA provision.

HIPAA also provides funding to HHS and the Department of Justice for

combating health care fraud. For fiscal year 1997, the act provides an

additional $104 million to these two departments, $70 million of which was

specifically allocated to the Office of Inspector General. The remaining

$34 million was divided between Justice, which received $24 million, and

other HHS agencies, including HCFA, which received $1.8 million of these

funds.

14High-Risk Series: Medicare (GAO/HR-97-10, Feb. 1997).

Page 15 GAO/T-HEHS-97-165
Medicare: Control Over Fraud and Abuse

Remains Elusive

According to HHS Inspector General officials, the Office of Inspector

General will use its $70 million to, among other things, hire 250 additional

investigators, auditors, lawyers, and other analysts to pursue fraudulent

providers. The Office of Inspector General recently published its plan for

continuing Operation Restore Trust, an initiative begun in 1995 in response

to the rapid growth in Medicare’s spending for home health and nursing

home services and medical equipment and supplies. This effort, conducted

jointly by HHS and the Department of Justice, operated in five states and

reported identifying almost $188 million in inappropriate payments in its 2

years of operation. In expanding Operation Restore Trust, the Inspector

General has opened new investigative offices in six states this fiscal year.

Officials also told us that, depending on its final budget, the office is

planning to add another eight offices in fiscal year 1998.

According to Department of Justice officials, Justice will use its

$24 million to hire 120 new prosecutors who will devote their work

exclusively to prosecuting health care fraud. Ninety of the new

prosecutors will join U.S. Attorneys’ Offices nationwide. The remaining 30

will serve in Justice’s Civil and Criminal Divisions in Washington, D.C. The

Department also intends to hire additional support staff, including

paralegals, auditors, and other analysts.

HIPAA also mandates the creation of a national data collection system

reporting final adverse actions against health care providers. The system is

intended to enable greater information-sharing among federal and state

government agencies and health plans. According to Inspector General

officials, the system is not likely to be fully operational for at least another

2 years.

Pending Legislation Earlier we cited provisions in the pending budget reconciliation bill that

address concerns about Medicare’s payments for home health services. In

addition, the legislation contains various other provisions directed at

Medicare fraud and abuse. Among these are the following:

• A requirement to implement consolidated billing for nursing facility stays

not covered by the new prospective payment system. Under such an

arrangement, the nursing facility would have a greater incentive to

monitor the care provided and the charges claimed by outside providers

and suppliers. In past reports, we have also suggested consolidated billing

for ancillary services provided in skilled nursing facilities.15

15Fraud and Abuse: Providers Target Medicare Patients in Nursing Facilities (GAO/HEHS-96-18,

Jan. 24, 1996).

Page 16 GAO/T-HEHS-97-165
Medicare: Control Over Fraud and Abuse

Remains Elusive

• Authority to refuse to enter into Medicare agreements with individuals or

entities convicted of felonies. This gives the Inspector General the

opportunity to prevent convicted felons from becoming Medicare

providers.

• Requirement for providers to furnish key identification numbers. Medicare

providers must furnish HHS with the Social Security and employer

identification numbers for themselves and their owners, individuals with a

controlling interest, and subcontractors in which the provider has an

ownership interest. As we discussed in our March 1997 report on Medicaid

providers, this would allow HCFA to trace problem providers through

related health care organizations and better ensure that excluded

individuals are not paid by the program.16

Legislative Activity Related

to Medicare Managed Care

A recent legislative proposal, cosponsored by you, Madam Chairman,

would help make information about beneficiary satisfaction with Medicare

managed care plans publicly available. Among other things, the bill, S. 302,

would require Medicare HMOs to conduct consumer satisfaction surveys. It

would also authorize grants to states and other organizations to

disseminate information comparing benefits, quality and performance,

cost information, and the results of the satisfaction surveys of Medicare

managed care plans.

Also, HIPAA gives HCFA more flexible sanction authority while providing

HMOs the statutory right to greater procedural safeguards. In addition to

existing authority to terminate an HMO’s contract if the HMO did not meet

requirements, HCFA now has the option of imposing lesser sanctions, such

as suspending the HMO’s right to enroll Medicare beneficiaries until the

deficiencies are corrected.

Conclusions 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, the mitigation of MTS acquisition risks, and HCFA’s

appropriate application of new anti-fraud-and-abuse funds are necessary

ingredients to reduce substantial future losses. Moreover, as Medicare’s

16Medicaid Fraud and Abuse: Stronger Action Needed to Remove Excluded Providers From Federal

Health Programs (GAO/HEHS-97-63, Mar. 31, 1997).

Page 17 GAO/T-HEHS-97-165
Medicare: Control Over Fraud and Abuse

Remains Elusive

managed care enrollment grows, HCFA must enhance its efforts to see that

beneficiaries receive sufficient information about HMOs to make informed

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

federal standards is used. To adequately safeguard the Medicare program,

HCFA needs to meet these important challenges promptly.

How HCFA will use the funding and authority provided under HIPAA to

improve its vigilance over Medicare benefit dollars has not yet been

determined. The outcome is largely dependent on how promptly and

effectively HCFA implements the act’s provisions. As we have highlighted

today, weak monitoring, poor coordination, and delays have characterized

HCFA’s past efforts to oversee fee-for-service contractors, the MTS

acquisition process, and Medicare managed care plans. Thus, even with

the promise of HIPAA and the potential enactment of additional legislation,

the prospects for HCFA’s success in combating Medicare fraud and abuse

remain uncertain.

Madam Chairman and Members of the Subcommittee, this concludes my

prepared remarks. I will be happy to answer any questions.

Page 18 GAO/T-HEHS-97-165
Page 19 GAO/T-HEHS-97-165
Appendix 

Additional Data on Medicare Spending and

Program Activities

Figure I.1: Claims Reviews Have Not Matched the Growth in Medicare Claims

1989 1990 1991 1992 1993 1994 1995 1996

0

200

400

600

800

1,000

486

537

599

651

685

736

790 808

Claims (in Millions)

Claims Reviewed

Percentage of Claims Reviewed Has Dropped From 17% to 9%

82 73 75 73 71 72 67 74

Page 20 GAO/T-HEHS-97-165
Appendix 

Additional Data on Medicare Spending and

Program Activities

Figure I.2: Rising Costs of Medicare Home Health Benefit

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

0

5

10

15

20

Year

Dollars in Billions

Hospital 

Prospective

Payment System

Issuance of

Revised 

Guidelines

Omnibus

Reconciliation

Act of 1980

Figure I.3: Many Contractors Do Not

Screen Claims for Costly Services

Procedures

Medicare payments 

(in millions)

Contractors that have 

screens for the listed 

medical procedures

(percentage)

Echocardiography $851 41%

Eye exams $686 35%

Chest x-rays $507 35%

Colonoscopy $478 35%

YAG laser surgery $325 18%

Duplex scan of extracranial arteries $143 47%

Based on a Review of 17 Contractors in 1994

Page 21 GAO/T-HEHS-97-165
Appendix 

Additional Data on Medicare Spending and

Program Activities

Figure I.4: Annual Disenrollment in Medicare HMOs in Miami, 1995

PCA

CareFlorida

Humana

Prudential

CAC-United

AV-Med

Health Options

0 10 20 30 40

Percentage of Members Disenrolling

Page 22 GAO/T-HEHS-97-165
Page 23 GAO/T-HEHS-97-165
Related GAO Products

Medicare: Need to Hold Home Health Agencies More Accountable for

Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997).

Medicare Transaction System: Success Depends Upon Correcting Critical

Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997) and

related testimony entitled Medicare Transaction System: Serious

Managerial and Technical Weaknesses Threaten Modernization

(GAO/T-AIMD-97-91, May 16, 1997).

Nursing Homes: Too Early to Assess New Efforts to Control Fraud and

Abuse (GAO/HEHS-97-114, Apr. 16, 1997).

Medicaid Fraud and Abuse: Stronger Action Needed to Remove Excluded

Providers From Federal Health Programs (GAO/HEHS-97-63, Mar. 31, 1997).

Medicare (GAO/HR-97-10, Feb. 1997) and related testimony entitled Medicare:

Inherent Program Risks and Management Challenges Require Continued

Federal Attention (GAO/T-HEHS-97-89, Mar. 4, 1997).

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

Medicare: New Claims Processing System Benefits and Acquisition Risks

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

Medicare Claims (GAO/HR-93-6, Dec. 1992).

(101577) Page 24 GAO/T-HEHS-97-165
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