Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

SUMMARY OF OIG ACTIVITIES ON 

MEDICARE 

JUNE 1993 OEI-12-93-00010 
EXECUTIVE SUMMARY 

PURPOSE 

This report consolidates information obtained during the course of Office of Inspector 

General (OIG) reviews of the Medicare program and offers solutions to long standing 

problems. This is not an assessmentof the Health Care Financing Administration’s 

(HCFA) effectiveness in managing Medicare. We focus on problems which have not 

been resolved. As policymakers consider ways to reform the health care system, 

lessons drawn from the Medicare program can be instructive. 

BACKGROUND 

Medicare is a large and rapidly growing program. In 1992, Medicare had 36 million 

elderly and disabled beneficiaries. It issued $129 billion in payments. The number of 

beneficiaries has almost doubled since 1967. Current Medicare expenditures are 

almost triple the entire nation’s health care spending in 1967. 

Medicare is a complex program. Paying for medical care is complicated by the 

multifaceted nature of medicine. Additionally, paying for health care is a three step 

process. First, beneficiaries are treated by health care providers. Second, those 

providers describe their services on claims they submit for payment (593 million claims 

were processed in 1991). Finally, 81 private insurance companies (under contract to 

the Government) determine how much should be paid and make the payments. 

ISSUES 

llae Medicare program must ensure that payments to providers are fair while reducing 

&inirtraZive burdens. Three basic problems cause excessivepayments: inaccurate 

claims, payment rates, and other insurers not paying their share. The challenge of 

reducing administrative burden while ensuring that payments are accurate is a 

substantial one, discussed more fully in the OIG report, “Electronic Data Interchange: 

Issues and Challenges.” 

b Inaccurate CZuirns: Medicare can lose money when claims submitted by 

providers do not accurately reflect the services they performed. The coding 

systems (which identify medical services) are gamed via unbundling (submitting 

separate bills for each component of a service). Medical services are 

sometimes exaggerated through upcoding. Actual charges are misrepresented 

through the waiver of coinsurance and deductibles. In other situations, the 

coding systems do not accurately reflect the service performed. 

b Payment Rates: When Medicare started, it paid most health care providers 

their reasonable charges or costs. New rate setting methods for a variety of 

providers have been established. While these changes have been an 

i 
improvement, some payments are still too high. Many of the adjustments and 

exemptions to the hospital payment methodology are not justified by higher 

hospital costs. Additionally, the new physician fee schedule does not properly 

reflect the overhead costs of efficient providers of medical services. 

b Other Insurers: Finally, other insurers bear primary responsibility to pay for the 

health care of some Medicare beneficiaries. Some of these beneficiaries are 

covered through employee health plans (if they or their spouse are still 

working), and automobile insurance (if they are accident victims). In many 

cases,the contractors that Medicare hires to handle its claims are the insurance 

companies that are liable as primary insurers. We found that billions of dollars 

were being wasted because the secondary payer statute was not being properly 

implemented. 

5% Medicare program must ensure that the servicesprovided to benejkiati are 

necessary,appropriate, and high quality. Inconsistent coverage decisions, lack of 

controls, and limited quality oversight hamper the program’s ability to fulfill this 

responsibility. 

Ihe Medicare progiam must addressjZnuncia1con$?ictsof interest which may lead to 

abuse. Financial conflicts of interest exacerbate concerns about the quality and cost of 

services. Physicians can profit from referring patients to facilities or other providers in 

which they have a financial interest. Providers can be offered kickbacks, or seek them, 

in exchange for patient referrals. We reported on this issue in 1989 and 1991. We 

have also opened over 850 investigations on kickback issues and have obtained close 

to 570 convictions, settlements and other sanctions, and almost $16 million in 

recoveries. 

TIheMedicare program must examine i& payment systemsto ensure that they are not 

vzdnerabk to j?aud and abuse. Medicare’s reliance on private insurance carriers carries 

with it inherent conflicts of interest and opportunities for problems. Additional 

reliance on computer systems and the electronic submission of claims may create new 

vulnerabilities to fraud, waste, and abuse. 

As discussed in this report, the problems and challenges facing the Medicare program 

are substantial. During the course of our audits, inspections, and investigations in the 

Medicare program, we have made numerous specific recommendations for change. 

Many of these recommendations have been accepted by the Health Care Financing 

Administration and some have not. Some require legislative changes; others can be 

accomplished through administrative action. 

All significant unimplemented OIG recommendations are included in one of two 

documents. The Office of Inspector General Cost-Saver Handbook (the Red Book) is 

a compendium of recent OIG recommendations to reduce unnecessary spending by 

ii 
the Department through administrative or regulatory change, or by the Congress and 

Administration through legislative change. The Office of Inspector General Program 

and Management Improvement Handbook (Orange Book) contains recent 

recommendations for strengthening program and management efficiency and 

effectiveness. For our readers’ convenience, we have reproduced our listing of 

recommendations to improve the Medicare program in the appendices to this report. 

To reduce the level of fraud, waste, and abuse in Medicare, policymakers should: 

improve coding systems, 

base fee schedules on the reasonable costs of efficient providers, 

aggressively enforce the secondary payer statute, 

identify and eliminate unnecessary and inappropriate coverage variations, 

ensure the quality of medical services, 

discourage financial conflicts of interest, 

strengthen Medicare systems, and 

develop payment alternatives. 

... 111 
TABLE OF CONTENTS 

EXECUTIVE SUMMARY 

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 

Preventing and Identifying 

Excessive Payments . . . . . . . . . ....... . . . . . . . . . . . . . .......... 4 

Ensuring Quality of Care . . . . . ....... . . . . . . . . . . . . ......... 12 

Addressing Financial Conflicts 

of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 

Improving Medicare Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 

Appendix A. Unimplemented OIG Recommendations: Cost Savers 

Appendix B. Unimplemented OIG Recommendations: Program Improvements 

Appendix C. Endnotes 
INTRODUCTION 

PURPOSE 

This report consolidates information obtained during the course of Office of Inspector 

General (OIG) reviews of the Medicare program and offers solutions to long standing 

problems. This is not an assessmentof the Health Care Financing Administration’s 

(HCFA) effectiveness in managing Medicare. We focus on problems which have not 

been resolved. As policymakers consider ways to reform the health care system, 

lessons drawn from the Medicare program can be instructive. 

BACKGROUND 

While the private sector finances most health care, public spending is substantial as 

well. In 1992, the Federal government accounted for 30 percent of health spending. 

Payments for the 36 million Medicare beneficiaries (this program finances health care 

for the elderly and disabled) were $129 billion. The Federal share of Medicaid 

payments (this program finances health care for low-income persons) was $70 billion. 

The HCFA runs both of these programs and absorbed 12 percent of the Federal 

budget in Fiscal Year (FY) 1991. 

The enormous size of the Medicare system could have barely been foreseen by its 

creators. In 1967, Medicare covered 20 million people. National health spending was 

$51 billion, a third of what Medicare alone now pays out for health care. The number 

of providers doing business with Medicare has increased dramatically. In 1975, 2,254 

home health agencies billed the program. In 1992, that number was 5,963. In 1975, 

almost 3,000 independent laboratories did business with the program. In 1992, that 

number was 7,509. In 1975, there were no end stage renal disease (ESRD) facilities 

billing the program. In 1992, 2,211 ESRD facilities were billing Medicare. 

Medicare contracts with private health insurance companies called fiscal intermediaries 

and carriers to handle day-to-day claims processing and related operations. Fiscal 

intermediaries process claims under Part A of the program, which includes hospitals, 

nursing homes, home health agencies and other institutional providers. Intermediaries 

processed 92 million claims in 1991, at a cost of $1.64 per claim. Carriers process 

claims under Part B of the program, which includes physicians, laboratories, and other 

noninstitutional providers. Carriers processed 501 million claims in 1991, at a cost of 

$1.13 per claim. The HCFA has introduced major changes to the claims processing 

system and plans more. A new electronic bridge links all Medicare systems and allows 

for cross checks of eligibility and payment information. In order to encourage 

electronic submission of claims by providers, which reduces administrative costs of 

handling the claim, new payment rules allow HCFA to pay electronic claims more 

quickly than paper files. The HCFA plans to reduce the number of carriers that 

process claims for durable medical equipment, prosthetics and orthotics supplies, in 

order to obtain more control over payment for these claims. Finally, and perhaps 

1 
most significantly, HCFA has proposed the development of a standard Medicare 

Transaction System, replacing the 14 different systems currently used by Medicare 

contractors. 

In addition to having their claims processed by different contractors, different types of 

providers are paid based on different payment methodologies. Initially, all providers 

were paid based on their “reasonable and customary” charges. This gave providers 

very little incentive to be prudent and their charges frequently bore little relationship 

to the cost of delivering services. Hospitals were reimbursed for their “reasonable 

costs” and physicians received their “reasonable charges.” Beneficiaries were given 

incentives to control costs in the form of coinsurance, deductibles, exclusions, and the 

responsibility to pay for any charges above what Medicare determined to be 

reasonable. 

Since the inception of the program, several new approaches to pricing Medicare 

payments for health care services have been developed. The prospective payment 

system (PPS) for inpatient hospitals was introduced in 1984. It pays a predetermined 

amount for treating beneficiaries with specific illnesses. Hospitals report the diagnosis 

of the patient and procedures performed; based on this information, a diagnosisrelated group (DRG) is assigned. Medicare pays the hospital based on the DRG 

assigned and makes adjustments which take the hospital’s location, patient mix, and 

other factors into account. Because the amount per patient is fixed and known in 

advance, hospitals ‘have an incentive to be efficient in serving patients. In the past, 

efficiency could have cost the hospital money, since the more services it provided the 

more it was paid. 

The Medicare program has instituted fee schedules for a number of other services. 

For example, a fee schedule was implemented for medical equipment and supplies in 

1989 which prescribed a set range of acceptable payments that could be made for 

various types of medical equipment and supplies. Carriers then retained some 

flexibility to pay suppliers differently depending on past practice and geographic 

considerations, but variation in payment amounts was reduced to a fixed range. This 

fee schedule was based on average historical charges of medical equipment and supply 

providers. 

The most extensive fee schedule implemented to date is for physician services. This 

new system will be phased in over time and began in 1992. The new Medicare Fee 

Schedule is based on extensive efforts by researchers at Harvard University to identify 

the amount of work involved in physician services. Before the implementation of the 

Medicare Fee Schedule, we and other analysts frequently identified overpriced 

services. Congress would respond by passing legislation to mandate reductions in 

payment rates. The new resource-based physician fee schedule attempts to correct 

past mistakes by basing fees on the resource costs of providing a service rather than 

on past charges, which tended to overcompensate surgeons and encourage high-tech 

procedures. 

2 
The HCFA plans future reforms in payment methodology. Since 1986, HCFA has 

been working on developing methods to reimburse outpatient surgery facilities in a 

prospective manner. Currently, hospital outpatient departments are reimbursed 

largely on costs. Developing an appropriate methodology for the reimbursement of 

outpatient surgery in hospitals and free-standing facilities is important to the program 

because more services than ever are being provided on an outpatient basis. 

Role of the Qfice of Inspector General 

The OIG’s mandate is to protect the integrity of the United States Department of 

Health and Human Service’s (DHHS) programs and the beneficiaries of those 

programs by reducing fraud, waste, and abuse and by promoting the effectiveness and 

efficiency of the department’s programs. About one-third of our resources are 

devoted to oversight of the Medicare program. 

The OIG accomplishes its mission through a series of audits, evaluations (inspections) 

of program operations, and investigations of possible criminal or civil violations. The 

OIG also reviews all regulatory and legislative proposals developed by the Department 

to assesstheir effect on fraud, waste, and abuse. 

During the past four years the OIG has issued more than 187 audit and inspection 

reports on the Medicare program identifying more than $20 billion in potential 

savings.’ We have recommended numerous improvements in program operations. In 

FY 1991, we were’involved in 1,238 successful criminal and civil health care actions 

against those who defrauded or abused the Medicare and Medicaid programs. 

MEXHODOLOGY 

The issues presented in this report are based on inspection, audit and investigative 

work of the OIG. 

Rather than present findings, as we normally do, this report describes the challenges 

facing the Medicare program. We describe how program managers must determine 

the appropriate payment for services and supplies, must ensure that care provided to 

beneficiaries is necessary and appropriate, must face the increasing problem of 

financial conflicts of interest for providers, and must improve systems. 

3 
ISSUES 

PREVENTING AND IDENTIFYIN G EXCESSIVE PAYMENTS 

The Medicare program must ensure that payments to providers are fair while reducing 

administrative burdens. 

Three basic problems cause excessivepayments: inaccurate claims, inappropriate 

payment rates, and other insurers not paying their share. Each of these are discussed 

below. The challenge of reducing administrative burdens is discussedin a separate 

OIG report, “Electronic Data Interchange: Issues and Challenges.” 

b HCFA must ensure that claimr submitted for servik~ are accurate. 

The Medicare program loses money when providers submit inaccurate claims that 

don’t reflect the services actually performed or the supplies actually delivered. 

Providers can also,be disadvantaged by being paid too little when inaccurate claims 

are submitted. 

Hospitals’ billings must be scrutinized to ensure that proper diagnosis, which 

determine the DRG payment, are reported to the program. In addition, the cost 

reports of home health providers and nursing homes must be audited to ensure that 

only proper amounts are included and reimbursed. 

For noninstitutional providers, the task of ensuring appropriate billings is even more 

difficult, although less total dollars are at stake. In 1991, $45 billion was paid for 501 

million medical claims submitted by about 600,000 health care providers and suppliers. 

Seven thousand procedure codes were used by physicians and 3,000 codes were used 

by suppliers. Procedure codes identify the specific services or items provided and are 

used by Medicare to determine payments. Medicare uses computerized prepayment 

edits to identify potential problems before claims are paid. Postpayment reviews help 

carriers recover improper payments by identifying possible fraud, waste, and abuse. 

However, “gaming”’ by providers, as described below, still costs the program millions of 

dollars each year. 

Gaming can take the form of unbundling (submitting separate bills for each 

component of a service, rather than one claim for the overall procedure or item) and 

upcoding (billing for a more intensive service than the one actually delivered). Other 

fraudulent activities, such as the routine waiver of coinsurance and deductibles, 

contribute to overuse of services. Finally, loopholes in the coding system may allow or 

even encourage inaccurate claims. 

Unbzuding: Unbundling allows providers to inflate charges far above the appropriate 

levels. Instead of billing for a complete service or item, the provider bills for all of the 

subcomponent parts. As an example, an OIG audit of physician claims in 

4 
Pennsylvania estimated that there were potentially $12.2 million in such questionable 

payments annually in that State alone. Procedures were unbundled or in some cases 

physicians billed for mutually exclusive procedures.2 Medicare is paying more than 

twice as much as physicians for some clinical laboratory tests because it is paying for 

test “profiles” or “batteries” on an al-a-carte basis3 Another OIG review found 

physicians receiving $12 million in overpayments for biopsies and/or explorations which 

were a part of another surgical procedure.4 

HCFA has developed a limited number of edits for carriers to use in identifying and 

dealing with unbundling. As an illustration, one of these edits is designed to prevent 

payment for both a total abdominal hysterectomy and removal of the ovaries at the 

same time because, by definition, the first procedure includes the second. Additional 

edits may well be needed. Some private payers have as many as 3,000 edits in their 

claims processing systems, as compared to about 300 in the Medicare payment system. 

Upcoding: Under Medicare’s prospective payment system (PPS) for hospitals, 

hospitals benefit financially from billing for more intensive and costly diseases. An 

OIG study of 1985 medical records found 21 percent of hospital claims were 

improperly coded, generally to the favor of hospitals and resulting in a $308 million 

overpayment. 5 We recently replicated this study and found as many underpayments 

to hospitals as a result of errors as overpayments.’ As a general matter, this means 

that Medicare paid the right amount to hospitals as a group for services they provided 

to Medicare beneficiaries. However, some individual hospitals may be paid too much 

or too little. 

A 1989 OIG report showed wide discrepancies in the way that physicians bill for 

evaluation and management visits and recommended numerous coding reforms.7 This 

variation in coding suggeststhat some physicians may have been upcoding their claims, 

claiming a higher level of service was performed than was correct. In implementing 

the new Medicare Fee Schedule, HCFA has drawn samples of claims to determine the 

accuracy of claims submitted and to educate physicians on proper reporting. The new 

fee schedule will not accomplish its goals if physicians inaccurately report their services 

and claim that services were performed when they were not. 

Routine Waiver of Coinsurance and Dedzdbks: For some types of services, 

beneficiaries must pay at least 20 percent of Medicare’s allowed amount for the 

services they receive. They must also pay an annual deductible before Medicare 

usually pays anything. The purpose of the coinsurance and deductibles is to involve 

beneficiaries in health care decisionmaking and provide an incentive for the prudent 

purchasing of services and supplies. 

The importance of this safeguard can be illustrated by a study in which the OIG 

identified provider abuse in selling medically unnecessary seat lift chairs to Medicare 

beneficiaries. Sixty percent of the recipients of seat lift chairs we surveyed said that 

the suppliers told them they wouldn’t have to pay anything for the chairs. Sixty-nine 

5 
percent said they never made payments for the coinsurance or deductibles8 Clearly, 

providers are more able to convince vulnerable beneficiaries to purchase their services 

and equipment, even if it is of marginal or no value, by telling them that they have 

nothing to lose by placing an order. Many of our investigations have shown that the 

routine waiver of coinsurance and deductibles is a key element in scams to bill for 

unnecessary or undelivered services and items. To highlight this problem, we issued a 

special fraud alert on routine waivers to over 800,000 health care providers.’ The 

alert describes what types of waivers are illegal and asks providers to report violators. 

Imprecise coding Systems: The Part B fee schedules tie payments to procedure and 

supply codes. For physician services, HCFA relies on a coding system developed and 

maintained by the American Medical Association for physician services. For durable 

medical equipment and supplies HCFA and representatives of the insurance industry 

have developed separate codes. These coding systems must differentiate between 

services and supplies with significantly different resource costs. This is not always the 

case. Some codes lump together vastly different services. Other codes do not 

accurately reflect the service performed or the item delivered. For example: 

F The procedure codes for some ultrasound services included vastly different 

procedures.” l1 I2 Included under the same procedure codes were: (1) 

one hour long procedures with $300,000 machines that provided color images of 

body parts, and (2) the use of a $300 “pocket doppler” that took only 5 minutes 

and provided audio feedback only on the flow of bodily fluids. 

b A study of liver biopsy procedures found that there was no accurate procedure 

code for needle biopsies that involve surgical incisions.13 Physicians used a 

code that implied that they had performed a surgical biopsy. 

b Suppliers sometimes provide foam rubber mattresses to beneficiaries and 

submit claims for more expensive “air fluidized beds.” These devices “use warm 

air under pressure to set small ceramic beads in motion which stimulate the 

movement of fluid” and can be useful for patients with serious skin problems. 

The coding manual contains no description of “air fluidized beds.“14 Another 

Medicare manual provides a detailed description of the type of air flotation 

mattress that is covered by Medicare but the coding manual’s lack of detail 

makes it difficult to support criminal fraud convictions of suppliers. 

We recently completed field work on a study to evaluate the successof the coding 

system in preventing fraud, waste, and abuse. We reviewed previous audits, studies 

and other analysis performed by the OIG and others, and interviewed representatives 

of the physician societies and carriers to gain a better understanding of the systems’ 

strengths and weaknesses. We have concluded that legitimate confusion, as much as 

provider abuse, can lead to inaccurate claims. Approximately 20 percent of physician 

respondents believe at least one-quarter of the codes have inadequate definitions; 40 

percent of coders and HCFA officials believe that to be true.15 

6 
b l%e HCFA must ensure that payment rates are fair. 

As discussed earlier, the Medicare program started with very weak cost controls, 

paying providers on the basis of their costs and charges. Such methodologies provided 

little incentive for providers to deliver care efficiently. Although the program has 

made much progress in this regard, problems remain in the reimbursement for 

inpatient hospitals, outpatient facilities, physician services, and supplies. 

Inpatient Hospitals: When Medicare implemented PPS, a number of adjustments and 

exemptions were included in the law. We analyzed those adjustments and suggest 

reforms. 

b The law gave teaching facilities an add-on payment amount called indirect 

medical education payments. We extensively analyzed the payment rates to, 

and the profit rates of, teaching facilities. We found that teaching hospitals 

were making excessiveprofits. Legislation in 1987 reduced the add-on to 7.6 

percent and $1.1 billion was saved in FYs 1989 through 1991.16 Additional 

analysis lead us to recommend that the indirect medical education payment be 

further reduced.17 The FY 1992 budget request recommended gradually 

reducing the indirect medical education add-on further to 3.2 percent. If 

enacted this would have saved more than $1 billion in FY 1992. 

b Medicare pays for most hospital capital costs on a pass-through basis. A 10 

year phase-in to prospective payment rates for these procedures has been 

enacted. Extensive audits show that past costs have been inflated by the 

inclusion of inappropriate items. We’ve estimated that excluding those 

inappropriate amounts could reduce payment rates by as much as $920 million 

annually.18 

b Medicare compensates hospitals for the bad debts caused by beneficiaries who 

fail to pay their coinsurance or deductibles. Hospitals have little incentive to 

collect bad debts because Medicare will cover the loss. Audits have found 

inadequate collection efforts. Medicare could save $400 million annually by 

eliminating this policy. The HCFA agrees with the OIG’s option to include a 

bad debt factor in DRG rates. This will require legislative action.” 

b Medicare could reduce its costs by selectively contracting for certain procedures 

(such as coronary artery bypass graft surgery.) An OIG review found that 

hospitals and surgical teams that perform a high volume of these procedures 

offered packages to health maintenance organizations that combined hospital 

and physician charges and were substantially less than Medicare’s payment. We 

concluded that there is a need for legislation that will allow the negotiation of 

fixed-price, package agreements with preferred providers so that high quality of 

care can be obtained at costs significantly less than the program is currently 

paying. The HCFA has selected four sites to serve as demonstration projects 

7 
to test our thesis. The results will be evaluated and serve as the basis for 

future legislation. We estimate that this approach could save $192 million 

annually.20 

Ozdpatient FadEties: As discussed earlier, a growing proportion of medical services 

are being performed in outpatient settings. Hospital outpatient services were not 

included in the prospective payment system and they continue to be reimbursed (at 

least partially) on a “reasonable cost” basis. Medicare pays more for services in 

hospital outpatient departments than it does for the same services in ambulatory 

surgical centers, which sometimes perform the same services. Several OIG reports 

have shown differing reimbursement amounts to different types of facilities for 

providing the same services.212223 Yet, we found no significant difference in the 

type of patients these facilities treat or in the quality of care delivered.24 

Differentiation in payment according to place of service may not encourage delivery of 

services in the most cost-effective setting. 

Physician Services: Although we applaud the work done so far to rationalize physician 

payments on the basis of resource costs, we and others recognize significant problems 

remain. The work of the Harvard team which developed the resource based, relative 

value system did not include estimates of the practice cost, or overhead, required to 

support each type of procedure. As a result, payments for practice expensesare still 

tied to historical costs. In addition, overhead costs are spread evenly among all of the 

procedures performed by a specialty. This is an important weakness because practice 

expenses are almost half of the cost of providing physician services. Both HCFA and 

the Physician Payment Review Commission are studying ways to identify and 

reimburse practice costs. 

A further challenge for HCFA is to assign relative values to services which were not 

studied by the Harvard team, or to update the relative values that have been assigned. 

We will be scrutinizing this process in the future to ensure that appropriate 

methodologies have been established and are being followed to maintain the validity 

of the fee schedule. 

Another area which has been extremely difficult for HCFA to address is the 

identification and assessmentof new technologies. We have pointed out that 

Medicare carriers make decisions about technologies differently, and consequently 

arrive at different decisions about what is covered or not covered. We have also 

pointed out that no system exists for ensuring that payments for new technologies 

decrease in response to decreasing costs for delivering an item or service.25 We plan 

to conduct a follow-up review to assessthe effectiveness of recent changes made to 

HCFA’s coverage and pricing process to determine if these vulnerabilities remain. 

Durable Medical li$z.u>ment and Other Items: The coverage and pricing for durable 

medical equipment, prosthetics, orthotics, and supplies has received a great deal of 

attention from the OIG and HCFA over the past several years. This may seem odd, 

since total allowed charges for these items are a modest portion of the total Medicare 

8 
budget, only $3.3 billion in 1991. Yet we have documented flagrant and consistent 

abuses in this area over time. 

The legislation that was enacted in 1990 to mandate national floors and ceilings for 

prices narrowed the variations in pricing among carriers. It also mandated specific 

reduction in payments for some types of equipment and supplies that the OIG had 

identified as overpriced. However, additional refinement of the fee schedule may well 

be needed because the schedule was not based on the cost of manufacturing an item 

but on historical charge data. Examples follow: 

b We found that Medicare was overpaying for intraocular lenses and 

recommended a reduction in payments to $200 per lens.2627 HCFA 

implemented our recommendation in some settings and $60 million was 

saved.28 Subsequent work has found many providers paying less than $200 for 

lenses and we’ve recommended that HCFA drop its reimbursement rate to 

$150 or lessF9 This recommendation could save $100 million annually.% 

We are now conducting another review of intraocular lens purchase costs.31 

b Supplying oxygen to Medicare beneficiaries accounts for almost half of 

Medicare’s durable medical equipment expenditures. In 1987, we compared 

Medicare reimbursement for home oxygen and oxygen equipment with amounts 

paid by non-Medicare payers. We found that all 122 Veterans Administration 

hospitals paid less for each type of oxygen equipment than Medicare.32 We 

re-evaluated payment rates in 1991, after implementation of the fee schedule, 

and found that Medicare was still paying 178 percent more than the Veterans 

Administration for oxygen services.33 The Department is seeking legislative 

authority to move to a competitive bidding system for the delivery of oxygen 

services (and other durable medical equipment) in large urban areas. 

b Despite congressionally-mandated reductions in the price of transcutaneous 

electrical nerve stimulation (TENS) devices, the 1993 fee schedule amount is 

$429. Some of these devices can be purchased wholesale for $35. We have 

previously testified on our concerns about the cost of these items and the 

amount paid by Medicare in testimony before the Congress. 

Other areas also need attention. For example, a study of rapidly rising payments for 

ambulance services found that the reasonable charge methodology for controlling 

increases in supplier charges had been ineffective. 34 Although HCFA technically has 

the authority to reduce payment amounts when they are inherently unreasonable, this 

authority is rarely used. 

9 
b l%e HCFA must ensure that other insurempay their share of the cost of services 

for Medicare benejkiaries. 

Medicare contractors are responsible for ensuring that a Medicare payment is made as 

a secondary source to certain types of private insurance coverage. The Medicare 

program initially paid for most health services provided to beneficiaries. Beginning in 

1980, however, the Congress began enacting legislation that made Medicare the 

secondary payer in certain cases. By 1987, legislative changes had been enacted that 

made Medicare the secondary payer to Employer Group Health Plans for those 

beneficiaries who are working aged, disabled, or have end stage renal disease. 

We have issued numerous reports on Medicare secondary payer (MSP) issues. Our 

reviews continue to show a need to recover past overpayments, avoid future 

overpayments, and expand the definition of MSP to more beneficiaries. 

Recover Past overpayment We have issued six reports that describes the need for 

adequate resources and financial management systems to ensure that all past MSP 

mistaken payments (estimated to be approximately $961.6 million) are 

recovered 35363738394o As of September 1992, HCFA reported about 

$961.6 million in past MSP overpayments that had not been collected. About $681.6 

million of this total were backlogged claims. 

To recover past MSP overpayments we recommend that HCFA take the following 

actions: (1) ensure that contractors resources are sufficient and instruct contractors to 

recover improper primary payments, (2) insure that contractors take sufficient action 

to preclude the loss of backlogged MSP cases(i.e., claims where contractors are more 

than one quarter behind in sending a demand letter) because the recovery period 

lapsed, (3) implement financial management systems to ensure all overpayments 

(receivables) are accurately recorded, and (4) pursue alternative strategies such as 

contingent contracts, demonstration and incentive programs, or fund collection 

activities from recovery proceeds. 

During FY 1992, HCFA provided the contractors an additional $20 million in 

administrative funding to reduce the MSP backlog, however, the backlog continues. 

The HCFA has also developed a MSP overpayment tracking system. However, it is 

not considered a financial management system. In addition, DHHS submitted a FY 

1994 legislative proposal to establish a payment safeguards revolving fund to provide 

smoother and more certain funding levels which could result in more consistent and 

efficient contractor MSP operations. HCFA will consider the question of 

demonstration projects in the department’s legislative development process. 

Improve Future Colkction Efforts: Collection of accurate and timely information on 

other primary payers is needed to reduce Medicare overpayments in the future which 

result from unidentified MSP casesand help the recovery process for overpayments. 

We have issued four reports that describes the need for collection of accurate and 

timely information to reduce Medicare overpayments by $900 million per annum in 

10 
future years.4142434445 Identification of MSP situations occurs through a 

variety of means: beneficiary questionnaires, provider identification of coverage when 

services are provided, and the statutorily authorized Data Match Project with the 

Social Security Administration and the Internal Revenue Service. 

The HCFA should: (1) revise the justification for a FY 1990 legislative proposal, 

which would require insurance companies, underwriters and third-party administrators 

to periodically submit Employer Group Health Plan (EGHP) coverage data directly to 

HCFA, and resubmit it for FY 1994, (2) require that employers report EGHP 

coverage on the Wage and Tax Statement (W-2), (3) revise all Medicare claims forms 

to require a positive or negative response pertaining to other health insurance 

coverage, (4) request that the Social Security Administration maintain beneficiary 

spousal information in it’s Master Beneficiary Record system for use by HCFA, (5) 

establish a national data bank system containing primary insurance information, and 

(6) assure compliance with all first claim development procedures and collect health 

insurance information for disabled beneficiaries during the required disability waiting 

period. 

The HCFA is considering these recommendations and supports the establishment of a 

national clearinghouse of health insurance information as an alternative to some of 

our recommendations. Implementation plans and policies have not been developed 

and corrective action has not been implemented. Legislative action is required. 

@ati Dejinition of MSP: Medicare should be the secondary payer for all State and 

local government employees hired before April 1, 1986. This proposal has been 

included in previous Presidential budgets. Although this proposal was not enacted, we 

continue to advocate this legislation. As an alternative HCFA could seek legislation 

making Medicare the secondary payor for retirees of exempt State and local agencies. 

These include additional Medicare program cost savings of about $2 billion per year 

that could be achieved, if certain provisions of the legislation were expanded. 

We have issued two reports that promote additional cost savings if the MSP provisions 

were extended to include beneficiaries with end-stage renal disease (ESRD) without 

limitation and those retirees of exempt State and local entities.46 47 While 

legislation extended the ESRD provision from 12 to 18 months, we continue to believe 

that legislative acti,on is appropriate. In the 102nd Congress, H.R. 11 (as passed by 

the Senate) continued a provision to extend the MSP ESRD provision from 18 to 24 

months. However, this provision was not enacted. 

11 
ENSURING QUALITY OF CARE 

l%e Medicare program must ensure that the servicesprovided to benejkiati are 

newssay, appropriate, and high quality. 

For the sake of the program’s financial integrity and beneficiaries’ protection, the 

Medicare program has a responsibility to ensure that care it pays for is necessary and 

appropriate. Inconsistent coverage decisions, lack of controls, and limited oversight of 

quality hamper the program’s ability to fulfill this responsibility. 

Inconsistent Coverage: Medicare delegates most coverage decisions to local carriers, 

which leads to inconsistencies in coverage. We have repeatedly pointed out that this 

delegation causes services to be covered in one jurisdiction but not covered in another, 

duplication of efforts by carriers to collect and analyze the information necessary to 

make coverage decisions, and provider confusion. HCFA believes that this diversity is 

consistent with congressional intent and that it is usually appropriate. We have issued 

several reports on this issue: 

b Medicare carriers surveyed for a 1990 report48 found that carriers perceived 

numerous problems with Medicare’s coverage decisionmaking process. They 

sought additional guidance from HCFA. HCFA maintained that they were 

solving these problems through ongoing administrative reforms. 

b Another OIG study shows that carriers have been inconsistent in deciding when 

to withdraw coverage of obsolete technologies.49 

b A recent case study of one procedure (transcranial dopplers) found that 

carriers continue to make inconsistent coverage decisions, base their decisions 

on questionable criteria and sometimes fail to implement the decisions that they 

do make .5o We are concerned that HCFA’s efforts to improve the coverage 

decisionmaking process have not been successful. We are planning additional 

work on this issue.” 

TJmece,ssayServices: It is difficult for any payer to determine whether services 

rendered by a medical professional are necessary. Such decisions are made implicitly 

by all payers in determining the extent of the coverage afforded to beneficiaries. 

However, even within the coverage guidelines set by any payer, providers may engage 

in abuse. While individual casesof ordering or providing medically unnecessary 

services may be difficult to demonstrate, systems can either encourage or discourage 

providers in this regard. It is one of the significant problems associated with fee for 

service medicine, in which the more services a physician supplies the more he or she is 

paid. 

A key way for Medicare to avoid paying for unnecessary services is strict adherence to 

coverage decisions: We have not always found that Medicare adheres to its own rules. 

For example, a random sample of medical records (primarily cataract surgeries) found 

12 
that many monitored (or local) anesthesia services did not meet Medicare’s coverage 

guidelines and that other insurance carriers had more restrictive coverage policies for 

this procedure. 52 A more recent study, in which we examined payments made for 

total parenteral nutrition (TPN), found that half of the $148 million paid out in 1991 

was for services that did not meet the coverage guidelines. This is especially troubling 

since only two carriers process claims for TPN, the coverage guidelines are quite strict 

and specific, and a certificate of medical necessity is required in order for a claim to 

be paid. Further, TPN therapy is extremely invasive and should only be administered 

in specific instances of demonstrated need. Our findings suggest that carrier 

specialization and use of certificates of medical necessity or other documentation of 

medical need, by themselves, will not assure proper payment. 

When a service is covered, it is more difficult to assessif the service was medically 

unnecessary in the particular case at hand. For example, claims for outpatient clinical 

laboratory services account for about 25 percent of all Part B line items but less than 

10 percent of allowed charges. Total payments for clinical laboratory tests have been 

rising rapidly despite reductions in per service payments. Many inappropriate factors 

(such as defensive medicine) encourage the ordering of lab tests. The sheer volume 

and small dollar amount of these tests renders utilization review cost ineffective. In 

this case, we believe that the current reimbursement system encourages overuse of 

laboratory services. Beneficiaries have little incentive to curtail their utilization of 

these tests because they do not pay coinsurance or deductible amounts on clinical 

laboratory tests. We have recommended that HCFA study ways to prospectively pay 

for (or roll-in) clinical laboratory services through payments for physician office 

visits.53 We estimate that reductions in inappropriate utilization, administrative costs, 

and the collection of coinsurance would result in savings of over $12 billion in 5 

years.54 One large medical laboratory chain recently plead guilty to two felony 

counts because they performed and billed for tests that physicians considered 

unnecessary. The company will pay $110 million in fines and restitution. 

Durable medical equipment has also been a concern to us in this regard. We have 

documented many instances where medically unnecessary medical equipment or 

supplies were provided to Medicare beneficiaries. In our work on seat lift chairs, 

discussed earlier, we found that many seat lift chairs were not being used for medical 

purposes, that 85 percent of the beneficiaries were initiating the request for the item, 

and that most were learning of these items through aggressive mass marketing.55 

Similar problems were identified with oxygen,56TENS devices,57and poweroperated vehicles.58 Subsequent legislation withdrew coverage of seat-lift chairs and 

reduced payment rates for TENS. Legislation also required the use of certificates of 

medical necessity, filled out by the physician rather than the supplier, in order to 

better ensure the medical necessity of these items. We will be reviewing the success 

of this initiative in ensuring that only medically necessary medical equipment and 

supplies are provided to Medicare beneficiaries. 

13 
Qzuz&y Concerns: ,The Medicare program relies on Peer Review Organizations 

(PROS), survey and certification, accreditation and licensing to ensure the quality of 

care provided to Medicare beneficiaries. Over time, we have expressed concern about 

the effectiveness of PRO review and the system “gaps” which leave many settings 

unregulated. For example: 

b In one study, we reviewed a random sample of Medicare hospital discharges 

and found that 6.6 percent of the patients received poor quality care.59 This 

compared to the PROS’ finding that only 0.8 percent of casespresented quality 

of care concerns. We recommended strengthening the PRO program and 

issuing regulations to implement a 1985 law giving PROS the authority to deny 

Medicare reimbursement for patients receiving substandard medical care. This 

regulation has still not been published. 

PROS have reviewed millions of inpatient medical records to confirm the 

necessity, quality, and appropriateness of care rendered to Medicare 

beneficiaries. The law requires PROS to refer casesto the OIG for sanctions. 

This rarely occurs. Only 12 caseswere referred to the OIG in fiscal year 

1992!’ 

b We have identified quality of care problems when physicians travel to small 

rural hospitals to perform surgery. These “itinerant” surgeons are typically not 

available for follow-up care. Our contract physicians found poor quality care 

26.6 percent of the time.61 

b Many surgeries are now being performed in physician offices. We reviewed a 

sample of these procedures and found that medical records did not document 

reasonable quality of care for 20 percent of the surgeries.62 

b Medicare has no quality standards for independent physiological laboratories 

that perform ultrasound, cardiac monitoring and other non-invasive tests. In 

many states these facilities are not regulated. We found that concerns about 

the quality of these tests is pervasive.63 We recommended that HCFA 

promote stronger quality assurance but HCFA declined, believing that we did 

not present convincing evidence of poor quality. 

b In recent years, we among many others have expressed concern about the 

quality of laboratory testing. The Clinical Laboratory Improvement 

Amendments of 1988 (CLIA) significantly expanded Federal oversight of 

laboratory testing. The responsibility for implementing CLIA falls to HCFA 

along with the Public Health Service. We plan a series of studies to assessthe 

impact of CLIA on laboratory testing and HCFA’s enforcement of the statute. 

14 
ADDRE!SSlNG FINANCIAL CONFLICI’S OF INTEREST 

lk Medicare program must addressjinancial conjZc~ of interest which may lead to 

abuse. 

Physician ownership of and compensation from entities to which they make referrals is 

a practice that has received increasing attention and concern. In 1989, in the first 

national study of its kind, we reported that patients of referring physicians who own or 

invest in independent clinical laboratories receive 45 percent more clinical laboratory 

services than all Medicare patients in general.64 Another OIG report identified 

suspect financial arrangements between hospitals and hospital-based physicians.65 

We found that some hospitals are requiring kickbacks from these hospital-based 

physicians because they depend on hospitals for their referral of patients. 

Inappropriate incentives can also be present in the financial arrangements between 

different physician specialties such as optometrists and ophthalmologists.66 

Some steps have been taken to curtail these financial conflicts of interest and more 

have been proposed. Legislation has banned Medicare payment for clinical laboratory 

services ordered by physicians with financial ties to the laboratory. Legislation has 

been proposed to extend this ban to other types of providers. 

Under the Medicare and Medicaid anti-kickback statute, section 1128B(b) of the 

Social Security Act, it is illegal to offer or pay a profit distribution to physicians to 

deliberately induce them to refer business payable under Medicare or any State health 

care program. Since 1987, we have received more than 1,300 allegations of violations 

of the anti-kickback statute, and have opened over 850 cases. Close to 570 

convictions, settlements, and exclusions have been obtained as a result of our 

investigations, as well as almost $16 million in recoveries. As an illustration, our 

office initiated civil proceedings against three limited partnership laboratories and its 

principals in The Inspector General v. The Hanlester Network, et. al. In this case, for 

the first time, it has been established that a joint venture scheme can violate the antikickback statute. 

In 1991, the OIG promulgated final “safe harbor” regulations. These regulations 

define for health care providers specific non-abusive business arrangements that will 

not be subject to prosecution under the anti-kickback statute. These safe harbors may 

lead to a restructuring of many joint ventures. We are in the process of sampling a 

variety of entities to identify the effect of this regulation on their ownership and 

referral patterns.67 

15 
IMPROVING MEDICARE PAYMENT SYSTEMS 

llze Medicare program must examine ia payment systemsto ensure that they are not 

vdnemble to fraud and abuse. 

Medicare’s payment systems, implemented by a network of contractors, lead to some 

of the problems cited above. Other examples bring home this point. In one study, we 

found that carriers were failing to properly verify the credentials or identity of 

providers billing Medicare and that some ineligible providers were receiving Medicare 

reimbursement.@ 69 We recommended that HCFA: 

specify a minimum framework for provider number assignment to be followed 

by all carriers; 

consider implementation of a system of user fees to defray the costs of provider 

number assignment and maintenance; 

expand the Physician Registry to include nonphysician practitioners; 

require the Physician Registry to provide feedback to carriers concerning all 

active practice records; 

ensure carrier implementation of HCFA provider number assignment 

directives; 

require carriers to update files regularly, deactivate all provider numbers 

without current billing history, and establish adequate controls to assure that 

providers not legally authorized to practice are identified and their provider 

numbers deactivated. 

As a result of our reports, HCFA has developed an action plan to improve its 

management of the provider number system. We will be scrutinizing this process to 

ensure that actions taken address the problems identified in these reports. 

A further concern to us is the network of carriers and intermediaries itself which 

process claims on behalf of the Medicare program. Through our work on the 

Medicare secondary payer issue, and oversight of claims processing environment, we 

believe that this system carries with it inherent conflicts of interest. For example, a 

recent report we issued on contractors’ for-profit subsidiaries documents the practice 

of contractors requiring the use of their subsidiaries’ systems for the submission of 

claims to their private side of business, thereby disadvantaging other competitors 

marketing other systems for use in billing the Medicare program.70 In many MSP 

situations, the proper payer is the contractors’ private side of business, thereby 

reducing the incentive for the Medicare contractor to identify the proper primary 

payer. 

16 
The performance of Medicare contractors is key to the successof the Medicare 

program. Thus, HCFA’s oversight of its contractors is one of its highest priorities. 

Yet, as discussed in this report, we have documented numerous instances in which 

guidelines established by HCFA have not been adhered to. A report discussed earlier, 

in which we found half of the money paid out for total parenteral nutrition to have 

been improperly paid, is an example.71 Yet it is worth repeating that in this instance 

only two carriers are responsible for processing the claims and certificates of medical 

necessity are required to establish the medical need for the therapy. Here carrier 

personnel flagrantly ignored the coverage guidelines and authorized payments when 

the certificates of medical necessity were incomplete, contradictory, or clearly 

established need outside of the coverage guidelines. Despite these and other 

examples, the rating of Medicare contractors according to established performance 

indicators are almost always extremely high. We plan future work to assessthe 

performance reviews of Medicare contractors. 

Most providers are now submitting claims electronically and new incentives now make 

electronic submission of claims more attractive to providers. While we agree that the 

electronic submission of claims will reduce administrative burden and speed payment 

to providers, it may also create new opportunities for fraud and may make the 

detection and prosecution of fraud more difficult. When erroneous payments are 

made they can now be repeated with lightening speed. We will not have the original 

documents to prove a case, but rather a copy of the electronically-generated form. 

Admissability of this form in court, as well as manipulation of the form, may cause 

legal difficulties. More information on this subject can be found in our report, 

“Electronic Data Interchange: Issues and Challenges.” 

Finally, providers may find ways to use the current fragmented system to their 

advantage. When deciding where to submit their claims, some medical equipment 

suppliers have shopped among the various Medicare carriers to find the highest 

reimbursement rates or the most lax medical necessity standards. Medicare allows 

suppliers to submit claims wherever they receive the order. By using call forwarding 

and other techniques providers can locate their home office wherever they wish and 

bill the carrier of their choice. A 1991 report found that this policy cost Medicare at 

least $22 million in 1989.72 That report’s analysis was limited to a small portion of 

durable medical equipment. HCFA agreed with our recommendations and will base 

pricing and coverage decisions on the beneficiary’s residence. 

17 
RECOMMENDATIONS 

As discussed in this report, the problems and challenges facing the Medicare program 

are substantial. During the course of our audits, inspections, and investigations in the 

Medicaid program, we have made numerous specific recommendations for change. 

Many of these recommendations have been accepted by the Health Care Financing 

Administration and some have not. Some require legislative changes; others can be 

accomplished through administrative action. 

All significant unimplemented OIG recommendations are included in one of two 

documents. The Office of Inspector General Cost-Saver Handbook (the Red Book) is 

a compendium of recent OIG recommendations to reduce unnecessary spending by 

the Department through administrative or regulatory change, or by the Congress and 

Administration through legislative change. The Office of Inspector General Program 

and Management Improvement Handbook (Orange Book) contains recent 

recommendations for strengthening program and management efficiency and 

effectiveness. For our readers’ convenience, we have reproduced our listing of 

recommendations to improve the Medicare program in the appendices to this report. 

To reduce the level of Medicare fraud, waste, and abuse, the following initiatives 

should be prominent on policymakers’ lists: 

b Improve coding systems 

The coding systems for physician services, medical equipment and suppliers 

must accurately reflect the services or items provided and effectively combat 

gaming strategies such as unbundling. 

b Base fee scheduleson the reasonable costsof ejjkient providers 

b Reduce or eliminate adjustments to hospital payments that are not 

warranted by higher costs. 

b Implement a prospective payment system for outpatient facility services. 

b Base the practice cost portion of the physician fee schedule on the 

current overhead costs of efficient providers. 

b The durable medical equipment fee schedules should be based on the 

cost of efficiently providing items, not historical charges. 

b Aggressivelyenforce MSP statue 

b Provide more funding for secondary payer activities 

18 
b Improve data collection on spousal employment. 

b Authorize and mandate additional data matching programs. 

b Provide incentive programs for contractors to seek primary payers. 

b Identjj, and elbninate unnecessaryand inappropriate coveragevariations 

Coverage decisions should be more consistent. There is little reason to leave 

most decisions to local carriers. This is a duplication of effort. It can lead to 

inequities in coverage for beneficiaries as well as inappropriate payments. 

b Ensure the quality of medical services 

When existing Federal and State regulations do not ensure that Medicare 

beneficiaries are receiving high quality medical services, HCFA should take 

steps to assure quality. 

b Discourage jinancial conjlicts of interests 

When beneficiaries are being referred for additional medical care, the 

beneficiary needs to know that the reason for that service is their true medical 

need and that the physician has no financial incentive to order unnecessary 

services. In choosing where to refer patients, beneficiaries need to know that 

physician judgements will not be affected by financial conflicts of interest. 

F Strengthen Medicare systems 

The HCFA is considering implementation of a new claims processing 

environment, which we support. The current system may have fit the 

environment of the 196Os,but it needs to be revisited in light of technological 

changes which allow for electronic submission, adjudication, and payment, and 

medical advances which have reduced variations in medical practices. 

b Develop payment alternatives 

Medicare must aggressively pursue ways of financing care that create more 

incentives for the provision of only necessary and appropriate care. Among the 

methods chosen might be managed care, prospective payments, and payments 

for care conducted within established practice guidelines. 

19 
APPENDIX A 

UNIMPLJ3MENTED OIG RECOMMENDATIONS: 

COST SAVERS 

ANNUAL 

SAVINGS 

MILLIONS 

Medicare Reimbursement 

b Tighten Medicare Coverage of Noninvasive Tests of the Lower 

Limbs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14 

Limit Medicare Part B Reimbursement for Hospital Beds . . . . . . . . . 10 

Allow Payment for Nonemergency Advanced Life Support 

Ambulance Services Only When Medically Necessary . . . . . . . . . . . . . 16 

b Apply 190-Day Lifetime Limit for Medicare Inpatient 

Psychiatric Care and a 60-Day Annual Limit . . . . . . . . . . . . . . . . . . . 48 

Reduce Payments for Unnecessary and Poor Quality Upper GI 

Endoscopies and Colonoscopies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 

b Reduce Payments for Unnecessary and Poor Quality Cataract 

Surgeries, and Associated Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 

Reduce Monitored Anesthesia Care Payments . . . . . . . . . . . . . . . . . . 28 

Recover or Adjust Medicare Credit Balances in Skilled Nursing 

Facility Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13* 

Increase Fair Hearing Threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 

Raise the Medicare Entitlement Age to 67 . . . . . . . . . . . . . . . . . Billions** 

Medicare Secondary Payer 

F Recover Past MSP Overpayments . . . . . . . . . . . . . . . . . . . . . . . . . . 962* 

*One-time recovery of savings. 

** Savings would be first realized in the year 2003. 
b Avoid Future MSP Overpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 

b Expand MSP Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than 

$1 billion 

Hospitals 

b Consider Hospital Profitability in the Fourth Year of the 

Medicare Prospective Payment System . . . . . . . . . . . . . . . . . . . . . . . 610* 

b Reduce Hospital Capital Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 

b Reduce the Prospective Payment System Adjustment Factor for 

Indirect Medical Education Costs . . . . . . . . . . . . . . . . . . . . . . . More than 

$1 billion 

b Deny Medicare Reimbursement for Patients Who Receive 

Substandard Medical Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 

b Modify Payment Policy for Medicare Bad Debts . . . . . . . . . . . . . . . . . 400 

b Limit Prospective Payment System Reimbursement for Hospital 

Admissions Not Requiring an Overnight Stay . . . . . . . . . . . . . . . . . . . 210 

b Reduce Medicare Payments for Hospital Outpatient 

Department Services . . . . . . . . . . . . . . . . i . . . . . . . . . . . . . . . . . . . . 90 

F Review Admissions for Hospital Stays for Selected Diagnoses . . . . . . . 183 

b Recover Medicare Payments Made for Beneficiaries Eligible for 

Other Government Health Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 40* 

b Recover Unallowable Hospital General and Administrative and 

Fringe Benefit Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2* 

Physicians’ Reimbursement 

b Adjust Physician Fee Schedule Payments Based on Site of 

Service Differentials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 

b Establish Mandatory Prepayment Edit Screens for Medicare 

and Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 

F Eliminate Fragmented Physician Claims . . . . . . . . . . . . . . . . . . . . . . . 13 

*One-time recovery of savings. 

A-2 
b Roll Reimbursement for Lab Services Into Charge for Physician 

Office Visit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than 

$1 billion 

End-Stage Renal Disease 

b Further Reduce Medicare’s End-Stage Renal Disease Rates . . . . . . . . 22 

b Disallow Bad Debts Reported by National Medical Care, Inc . . . . . . . . 3 

b Eliminate Inappropriate Payments for Total Parenteral 

Nutrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 

b Reduce the Reimbursement Rate for Epogen . . . . . . . . . . . . . . . . . . 28 

Ikmdzu~ and Use of Technology 

b Change the Way Medicare Pays for Clinical Laboratory Tests . . . . . . . 426 

b Selectively Contract for Coronary Artery Bypass Graft 

Surgery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...192 

b Exclude Medicare Coverage of Conventional Eye Wear for 

Beneficiaries Having an Intraocular Lens Implant . . . . . . . . . . . . . . . . 72 

b Revise Reimbursement Rates for Low-Cost Ultrasound . . . . . . . . . . . . 4 

A-3 
APPENDIX B 

UNIMPLEMENTETD OIG RECOMMENDATIONS: 

PROGRAM IMPROVEMENTS 

Medicare Contractor Operations 

b 

Prevent Duplicate Payments 

Review the Current Preprocedure Review Processto Determine 

Whether It is Cost-Effective 

Substitute a Targeted, More Intensive Review for the 

Mandatory Review of Cataract Surgery 

Document Medicare Part B Subcontract Procurements 

Reevaluate Procedures over Payment Safeguard Activities and 

Take Steps to Assure that Savings Reported Are Accurate 

Conduct a Study To Determine the Feasibility of a Reporting 

System which Would Distinguish Between Savings 

Conduct Demonstration Programs to Evaluate Incentives To 

Enhance the Recovery Medicare Secondary Payer Payments 

Target Working Spouses and the Disabled To Increase the 

Cost-Effectiveness of the MSP Efforts 

Strengthen Home Health Care Payment Controls 

Physician and Other Services 

b Require Equitable Distribution of Organs among Patients 

According to Established Medical Criteria 

b Require Carriers To Develop and Implement a Claims Review 

Process To Apply Existing Monitored Anesthesia Care 

Coverage Instructions 

b Issue Medicare Coverage Guidelines and Clarify Independent 

Physiological Laboratory Issues 

b Initiate Demonstration Projects to Address Problems of 

A- 1 
Noncompliance with Prescription Medications among the 

Ambulatory Elderly 

b Develop National Guidelines for Allocating a Global Fee for 

Cataract Surgery and Postoperative Care 

b Add Upper GI Endoscopies to the Peer Review Organization 

List of Recommended Review Procedures 

b Intensify Review of High Volume Ophthalmologists 

b Notify Hospitals and Hospital-based Physicians about Potential 

Legal Liability Regarding Other than Fair Market Value 

Agreements 

Inpatient Hospital Services 

b Test the Effect of the Essential Access Community Hospital 

Program on Access to Care 

b Determine Quality of Care of Itinerant Surgery 

b Recover Overpayments to Itinerant Surgeons for Postoperative 

Care 

b Develop Quality of Care Criteria for Coronary Artery Bypass 

Graft Surgery 

Accounting System Controli 

b Obtain Guidance on Establishing a Proper Cost Allocation 

System 

b Improve the Cost Allocation System 

HCFA Administration 

b Foster Greater Consistency Among Carriers on New Health 

Care Technologies 

b Strengthen the Monetary Sanctions in PRO Program 

b Exercise Greater Fiscal Accountability and Cost-Consciousness 

in the Kidney Acquisition System 

b Prepare the Foundation for a DRG Incorporating Kidney 

B-2 
Acquisition and Transplantation 

Assisting States in Referring Possible Fraud Cases to Medicaid 

Fraud Control Units 

Establish Standards for Health Maintenance Organization 

Marketing and Enrollment Practices 

Require Ongoing Training of Nurse’s Aides and Orderlies, 

Regarding Recognizing and Reporting Abuse 

Establish a Statewide Network To Resolve and Follow Up on 

Abuse in Nursing Homes 

Require Carriers to Periodically Review and Update Provider 

Records 

Develop a Disaster Recovery Plan Identifying HCRIS as a 

Critical Application to be Recovered 

Resubmit a Legislative Proposal to Facilitate the Collection of 

Medicare Secondary Payer Information 

Require Employers to Report Group Health Plan Coverage on 

Form W-2 

Revise Instructions and Medicare Claim Forms to Collect More 

Information from Beneficiaries 

Maintain Accurate Beneficiary Spousal Information for Use in 

MSP Activities 

Report the Noncollection of Timely and Accurate Information 

on Primary Insurers of Medicare Beneficiaries under MSP as a 

Material Internal Control Weakness 

Work with DOJ to Implement Controls To Combat Drug 

Diversion 

B-3 
APPENDIX C 

ENDNOTES 

1. Office of Inspector General “Compendium of Office of Inspector General Reports 

on the Health Care Financing Administration,” 1992. 

2. Office of Inspector General, “Management Advisory Report: Manipulation of 

Procedure Codes by Physicians to Maximize Medicare and Medicaid 

Reimbursements,” A-03-91-00019, September 1991. 

3. Office of Inspector General, “Changes are needed in the way Medicare Pays for 

Clinical Laboratory Tests,” A-09-89-00031 (Revised). 

4. Office of Inspector General, “Fragmented Physician Claims,” OEI-12-88-00901, 

September 1992. 

5. Office of Inspector General, “National DRG Validation Study: Special Report on 

Coding Accuracy,” OAI-12-88-01010, February 1988. 

6. Office of Inspector General, “National DRG Validation Study Update: Summary 

Report,” OEI-12-89-00190, February 1992. 

7. Office of Inspector General, “Problems with the Coding of Physicians Services: 

Medicare Part B,” OAI-04-88-00700, January 1989. 

8. Office of Inspector General “Medicare Coverage of Seat Lift Chairs,” OAI-02-88-

00100, February 1989. 

9. Office of Inspector General, “Memorandum for the Honorable Richard G. 

Darman, Director, Office of Management and Budget,” May 14, 1992, p. 5. 

10. Office of Inspector General, “Pocket Dopplers: Management Advisory Report,” 

OEI-03-91-00461, May 1991. 

11. Office of Inspector General, “Low Cost Ultrasound,” OEI-03-88-01401, August 

1991. 

12. Office of Inspector General, “Zero Crossers,” OEI-03-91-00460, August 1991. 

13. Office of Inspector General, “Liver Biopsies,” OEI-12-88-00900, September 1992. 

14. Health Care Financing Administration, “1992 HCPCS Alpha-numeric codes,” 

(E0194), 1992, p. 80. 

C-l 
15. Office of Inspector General, “Coding of Physician Services,” OEI-03-91-00920 [An 

ongoing study.] 

16. Office of Inspector General, “Semiannual Report: October 1, 1986 - March 31, 

1987,” p. 49. 

17. Office of Inspector General, “OIG Recommendations Affecting the Solvency of 

the Medicare Trust Funds,” A-09-91-00099, June 1991, p. 10; (see also ACN: 14-

52018, ACN: 09-62003, A-09-87-00100 & A-07-88-001 11). 

18. Office of Inspector General, “OIG Recommendations Affecting the Solvency of 

the Medicare Trust Funds,” A-09-91-00099, June 1991, p. 10 (see also ACN: 14-

52083). 

19. Office of Inspector General, “OIG Recommendations Affecting the Solvency of 

the Medicare Trust Funds,” A-09-91-00099, June 1991, pp. 11 - 12 (or A-14-90-00339). 

20. Office of Inspector General, “OIG Recommendations Affecting the Solvency of 

the Medicare Trust Funds,” A-09-91-00099, June 1991, p. 12; (or OAI-09-86-00076). 

21. Office of Inspector General, “Medicare Cataract Implant Surgery,” OAI-85-1X046, March 1986. 

22. Office of Inspector General, “Medicare Reimbursement for Hospital Outpatient 

Department Services,” A-14-89-00221, March 1991. 

23. Office of Inspector General, “Reimbursement for Outpatient Facility Services,” 

OEI-09-88-01003, June 1991. 

24. Office of Inspector General, “Outpatient Surgery Medical Necessity and Quality of 

Care,” OEI-09-88-01000, February 1991. 

25. Office of Inspector General, “Medicare Carrier Assessment of New Technologies,” 

OEI-01-88-00010, April 1990. 

26. Office of Inspector General, “Medicare Cataract Implant Surgery,” OAI-85-1X046, March 1986. 

27. Office of Inspector General, “Medicare Certified Ambulatory Surgical Centers: 

Cataract Surgery Costs and Related Issues,” OAI-09-88-00490, March 1988. 

28. Office of Inspector General, “Semiannual Report: October 1, 1989 - March 31, 

1990,” p. A-2. 

29. Office of Inspector General, “An Overview of Intraocular Lens Costs,” OEI-07-89-

01664, June 1990. 

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30. Office of Inspector General, “Cost-Saver Handbook: The Red Book,” 1992, p. G2. 

31. Office of Inspector General, “OEI Workplan: Fiscal Years 1993-1994,” 1992 p. 

11. 

32. Office of Inspector General, “Medicare Reimbursements for At-Home Oxygen 

Care,” OEI-04-87-00017, December 1987. 

33. Office of Inspector General “Oxygen Concentrator Reimbursement: Medicare 

and the Department of Veterans Affairs, Management Advisory Report,” OEI-03-91-

00711, August 1991. 

34. Office of Inspector General, “Medicare Part B Ambulance Services,” OAI-03-86-

00012, March 1987. 

35. Office of Inspector General, “Review of Backlog of Medicare Secondary Claims,” 

A-04-92-02057, December 1992 (Draft Report). 

36. Office of Inspector General, “Review of the Accounts Receivable Balances for the 

Hospital Insurance and Supplementary Medical Insurance Trust Funds as September 

30, 1991,” A-01-91-00525, September 1992 (Draft Report). 

37. Office of Inspector General, “Corrective Action Review of the Health Care 

Financing Administration’s Medicare Payment Safeguards Program,” A-04-92-02037, 

August 1992. 

38. Office of Inspector General, “Review of Selected Part B Medicare Secondary 

Payer Activities at Blue Shield of Florida,” A-04-91-02004, April 1992. 

39. Office of Inspector General, “Review of AEtna Life Insurance Company’s 

Compliance With Working Aged Provisions of the Medicare Secondary Payer 

Program,” A-01-90,00509, February 1992. 

40. Office of Inspector General, “Medicare Secondary Payer: Effectiveness of First 

Claim Development,” OEI-07-89-01683, August 1991. 

41. Office of Inspector General, “Medicare as a Secondary Payer - Review of the 

Health Care Financing Administration’s Efforts to Implement the Data Match 

Project,” A-09-91-00103, August 1992. 

42. Office of Inspector General, “Medicare Secondary Payer: Effectiveness of First 

Claim Development,” OEI-07-90-00763, November 1991. 

43. Office of Inspector, “Extent of Unrecovered Medicare Secondary Payer Funds,” 

OEI-07-90-00760, August 1991. 

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44. Office of Inspector General, “More Complete Employer Group Health Plan 

Information is needed to Administer the Secondary Payer Program,” A-09-91-00100, 

March 1990. 

45. Office of Inspector General, “Medicare Secondary Payer: Effectiveness of 

Current Procedures,” OEI-07-90-00761, August 1991. 

46. Office of Inspector General, “Retirees of Exempt Government Agencies Are A 

Financial Drain on Medicare Part A Funds,” A-09-88-00072, February 1989. 

47. Office of Inspector General, “Amending the Medicare Secondary Payer Provision 

for ESRD Beneficiaries Could Save the Medicare Program $3 Billion Over the Next 5 

Years,” A-10-86-62016, December 1987. 

48. Office of Inspector General, “Medicare Carrier Assessment of New Technologies,” 

OEI-88-00010, April 1990. 

49. Office of Inspector General, “OIG Management Advisory Report: Medicare 

Payments for Outmoded Procedures,” OAI-12-89-01170, November 1989. 

50. Office of Inspector General, “Transcranial Dopplers,” OEI-03-91-00950, October 

1992 (Draft Report). 

51. Office of Inspector General, “Identification of New Technologies,” OEI-Ol-91-

00230, (A planned study.) 

52. Office of Inspector General, “Medicare Coverage and Reimbursement for 

Monitored Anesthesia Care,” OEI-02-89-00050, November 1990. 

53. Office of Inspector General, “Ensuring Appropriate Use of Laboratory Service: A 

Monograph,” OEI-05-89-89150, October 1990. 

54. Office of Inspector General, “Impact of a Laboratory Roll In on Medicare 

Expenditures,” OEI-05-89-89151, June 1991. 

55. Office of Inspector General “Medicare Coverage of Seat Lift Chairs,” OAI-02-88-

00100, February 1989. 

56. Office of Inspector General, ” Office of Inspector General,” A-04-88-02058, March 

1990. 

57. Office of Inspector General “Transcutaneous Electrical Nerve Stimulation (TENS) 

Devices,” OAI-02-88-00060, July 1989. 

58. Office of Inspector General “Medicare Coverage of Power-Operated Vehicles,” 

OAI-02-89-01110, August 1989. 

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59. Office of Inspector General, “National DRG Validation Study: Quality of Patient 

Care in Hospitals,” OAI-09-88-00870, August 1989, p. 4. 

60. Office of Inspector General, “The Sanction Authority of Peer Review 

Organizations,” OEI-01-92-00250, August, 1992 (Draft Report). 

61. Office of Inspector General, “Itinerant Surgery,” OAI-07-88-00850, April 1989, p. 

11. 

62. Office of Inspector General, “Physician Office Surgery,” OEI-07-91-00680, January 

1993 (Draft Report). 

63. Office of Inspector General, “Quality Assurance in Independent Physiological 

Laboratories,” OEI-03-88-01400, October 1990. 

64. Office of Inspector General, “Financial Arrangements Between Physicians and 

Health Care Businesses: Report to Congress,” OAI-12-88-01410, April 1989. 

65. Office of Inspector General, “Financial Arrangements Between Hospitals and 

Hospital-based Physicians,” OEI-09-89-00330, October 1991. 

66. Office of Inspector General, “Ophthalmology/Optometry Relationships Involved in 

Cataract Surgery,” OAI-07-88-00460, April 1989. 

67. Office of Inspector General, “Compliance with the Safe Harbor Regulations,” 

OEI-04-92-00220 (Ongoing study with a final report expected in the last half of 1993.) 

68. Office of Inspector General, “Carrier Maintenance of Medicare and Provider 

Numbers,” OEI-06-89-00970, May 1991. 

69. Office of Inspector General, “Carrier Assignment of Medicare and Provider 

Numbers,” OEI-06-89-00971, April 1992. 

70. Office of Inspector General, “Electronic Media Claims and Contractors’ For-Profit 

Subsidiaries: A Management Advisory Report,” OEI-12-91-01410, July 1992. 

71. Office of Inspector General, “Inappropriate Payments for Total Parenteral 

Nutrition (TPN),” OEI-12-92-00460, December 1992 (Draft Report). 

72. Office of Inspector General, “Carrier Shopping,” OEI-05-91-00043, November 

1991. 

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