Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

MEDICARE PREPAYMENT REVIEW: 

MSP PROCEDURES AT CARRIERS 

Richard P. Kusserow 

INSPECTOR GENERAL 

OEI-07-89-01683 
EXECUTIVE SUMMARY 

PURPOSE 

To evaluate the procedures used by Medicare carriers to identify primary payment 

sources other than Medicare. 

BACKGROUND 

This inspection is part of an initiative to examine the effectiveness of Medicare 

carriers’ prepayment utilization review processes. 

Until 1980, Medicare was the primary payer of health care costs for Medicare 

beneficiaries except when the beneficiary is covered by a worker’s compensation 

program or the Veterans Administration. Congress became concerned about 

significant increases in the cost of the Medicare program. As a result, between 1980 

and 1986 Congress passed a series of statutory provisions requiring certain private 

insurers to pay medical claims before Medicare (See Appendix A). 

These provisions created new functions for Medicare contractors. They are 

responsible for screening, identifying, and verifying claims for other insurance 

involvement. In addition, contractors are required to make recoveries when 

Medicare has paid improperly. 

In line with Health Care Financing Administration (HCFA) efforts to reduce 

program administrative costs, the budget for MSP functions at Medicare Carriers was 

reduced by approximately 37% from FY 1989 to FY 1990. 

METHODOLOGY 

We selected a sample of seven Medicare carriers for review based on high and low 

volumes of claims processed. An inspection team conducted field visits to each 

carrier. We interviewed the manager and/or supervisor of the MSP units of each 

carrier in our sample. Additional documentation collected during this review was 

used to support and verify information gathered during these interviews. This 

documentation included published materials, claims forms, monthly in-house MSP 

savings reports, and HCFA-1564 savings reports. 

FINDINGS 

Carried budgetsfor MSP activitk were reduced by 37% for FY 1990. 

Can-km made signijicant staff reductions to cope with the MSP budget reduction. 

i 
Most carriers do not recover overpaymenl~folhvhg identi&ation of MSP sihatkms. 

Representatives from five of seven carriers in this review told the review team that 

they are conducting no MSP recovery activities. Representatives from the two 

remaining sample carriers indicated that they are recovering overpayments on a 

selective basis. These carriers recover those cases that have greatest potential for 

savings and only do so within their current operating budget. 

Ihe HCFA’S “required hz.# list does not inc& the recovery of MSP overpaymena. 

Incoruk%n&3 exist in metho& used to iZen@ and calctdde savings. 

RECOMMENDATIONS 

lk HCFA should conhhue to pursue ditionul j&ding to ensure that can&m restore 

operations of the MSP units to a level at least equivalent to FY 1989. 

llae HCFA should con&h the development of a kkgidutiveproposal that would allow 

them to conhct demonstration programs to evaluate incentives designed to enhance the 

idendjkation and recovery of inappropriate MSP payments. 

We present several options for how these demonstration programs could be 

structured. By implementing one of these options we estimate that additional savings 

could range from $199 million to $361 million. 

The HCFA should modij, the CPEP standad to evaluate caniem on their MSP 

idedjication and recovery @or&. 

Tlze HCFA should provide clear and un$om proceduresfor counthg MSP savings. 

The HCFA did not concur with the recommendations presented in the draft report. 

In response to the first recommendation, the HCFA points out that they will fund 

the MSP units as much as the current budget allows. Also, previous proposals for 

legislative changes to allow incentive programs have been unsuccessful, and they feel 

the CPEP is appropriate for evaluating MSP functions. 

We continue to believe a higher level of funding is necessary. However, we have 

modified the first and second recommendations to encourage HCFA to continue to 

pursue additional funding and an initiative to test an incentive program. Also, the 

HCFA should evaluate the carriers’ MSP units on more specific criteria. 

The HCFA’s verbatim comments are included in Appendix E. 

ii 
TABLE OF CONTENTS 

EXECUTIVE SUMMARY ....................................... i 

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

Purpose .................................................. 1 

Background.. .............................................. 1 

Methodology ............................................... 3 

FINDINGS ................................................... 4 

RECOMMENDATIONS ......................................... 8 

AGENCY COMMENTS ........................................ 11 

APPENDIX A: MSP LEGISLATION .............................. A-l 

APPENDIX B: PREVIOUSLY PUBLISHED REPORTS ................ B-l 

APPENDIX C: PRIORITY LISTS ................................ C-l 

APPENDIX D: INCENTIVE PROGRAM OPTIONS ................... D-l 

APPENDIX E: AGENCY COMMENTS ............................ E-l 
INTRODUCTION 

PURPOSE 

To evaluate the procedures used by Medicare carriers to identify primary payment 

sources other than Medicare. 

BACKGROUND 

This inspection is part of an initiative to examine the effectiveness of Medicare 

carriers’ prepayment utilization review processes. 

History of M&are Secondary Pqer (MSP) Rxwbions 

Medicare helps pay medical costs for approximately 28 million people aged 65 and 

older and approximately 3 million disabled people. Medicare Part A covers inpatient 

hospital services, home health services, and other institution-based services. 

Physician, outpatient hospital, and various other health services are covered by 

Medicare Part B. 

The Health Care Financing Administration (HCFA) is responsible for ensuring 

compliance with Medicare legislation and regulations. Private insurance companies 

contract with HCFA to process and pay Medicare claims. These contractors are 

known as fiscal intermediaries (Part A) and carriers (Part B). 

Until 1980, Medicare was the primary payer of health care costs for Medicare 

beneficiaries except when the beneficiary is covered by a worker’s compensation 

program or the Veterans Administration. Congress became concerned about 

significant increases in the cost of the Medicare program. As a result, between 1980 

and 1986 Congress passed a series of statutory provisions requiring certain private 

insurers to pay medical claims before Medicare. 

These provisions require private insurers to pay medical claims primary to Medicare 

when the beneficiary has other health insurance coverage by an employer group 

health plan (EGHP), a disabled beneficiary’s LGHP, a spouse’s EGHP, or 

automobile, no-fault, or liability insurance (see Appendix A for details of these 

provisions). After the private insurance company pays up to its coverage limits, 

Medicare reimburses remaining covered services subject to coinsurance and 

deductible limits. 

1 
Implimmmionof MSPl?zwi&ns 

These provisions created new functions for Medicare contractors. They are 

responsrble for screening, identifying, and verifying claims for other insurance 

involvement. In addition, contractors are required to make recoveries when 

Medicare has paid improperly. 

The HCFA provides contractors with procedures and instructions to identify primary 

payment sources. When a Medicare claim is submitted, the contractor searches MSP 

history files for coverage by another insurer. The most widely used contractor 

procedures for identifying MSP situations include 

0 developing leads from HCFA’s “Y-trailer” codes; 

0 screening information included on the claim form; 

0 querying data in the Regional Data Exchange System (RDES); 

0 developing the first claim filed by or on behalf of a beneficiary; and 

0 reviewing all claims containing medical diagnosis codes indicating trauma--to 

identify injuries related to automobile or work-related accidents. 

These procedures helped save approximately $2.2 billion in FY 1989 by identifying 

primary insurers. However, HCFA actuary estimates, Office of Inspector General 

(OIG) inspections, and audits by the OIG and the General Accounting Office (see 

Appendix B for a list of previously published reports) have confirmed that additional 

savings are possible through improvements to current MSP identification and 

overpayment recovery systems. The OIG has estimated, based on a random sample 

of Medicare beneficiaries, that Medicare lost in excessof $600 million in FY 1988 

due to unidentified primary payment sources. 

The carriers’ FY 1990 budgets for MSP activities was significantly reduced from the 

FY 1989 level. The HCFA actuary estimates that the Medicare program lost 

approximately $900 million in FY 1990. The current estimate of Medicare program 

losses due to failure to identify primary payment sources and recover inappropriate 

Medicare payment has increased to $1.3 billion for FY 1991. 

Evaluation of Contractors 

The HCFA establishes MSP savings goals for all contractors. The carriers and 

intermediaries calculate and record all savings resulting from MSP situations. These 

savings are reported to HCFA on a monthly savings report (HCFA-1564). 

2 
Contractors are evaluated on achievement of the MSP savings goals as part of their 

Contractor Performance Evaluation Program (CPEP). 

The HCFA establishes four types of MSP savings. 

0 Cost avoided MSP claims are those the carrier returns without payment 

because there is strong evidence that another insurer is the primary payer. 

0 Full recoveries are defined as savings from claims that were paid by a private 

insurance company, relieving Medicare of all payment liability. 

0 Partial recoveries are those situations when the primary payer’s payment only 

covers part of the Medicare allowable charge. In this situation Medicare pays 

the remaining amount up to what Medicare has allowed. 

0 Pending claims are those where MSP has been verified but all funds have not 

been recovered. 

MEMODOLOGY 

We selected a sample of seven Medicare carriers for review based on the volume of 

claims processed. Six of the sample carriers have high volumes of claims processed 

and one is considered low volume. The sample carriers include: Blue Shield of 

Massachusetts-T&State; Blue Shield of Florida, Inc; Blue Shield of Indiana; Blue 

Shield of Texas, Inc.; Blue Shield of Colorado; Arkansas Blue Cross & Blue Shield, 

Inc.; and Blue Shield of Kansas City. 

We visited each carrier to obtain information about the effects of the FY 1990 

budget reduction. We obtained data about the effects the reduction had on staff size 

and numbers of claims processed. In order to learn what procedures the carriers 

have established to handle MSP claims with reduced resources, we conducted 

interviews with the manager and/or supervisor of the MSP unit at each carrier. A 

second interview was conducted with the staff member most familiar with the budget 

process and budget issues. 

In addition, we selected a random sample of 30 claims from the MSP savings log or 

equivalent computer generated report at each carrier. This sample was selected 

from the claims processed during the fourth quarter of FY 1989. These claims were 

analyzed and followed through the MSP development process to the HCFA-1564 

monthly savings report. The carriers provided documentation to support the MSP 

savings claimed on this report. 

3 
FINDINGS 

THE FY 1990 MSP BUDGET REDUCTlON 

caniers’ budgetsfor MSP acdvities were reduced by 37% for FY 1990. 

The carriers’ FY 1990 budget for MSP activities was significantly reduced from the 

FY 1989 level. Table 1 presents a summary of contractors’ budgets for the last three 

fiscal years. The entire budget reduction was applied to carriers. In fact, the 

intermediaries budget actually increased by 5.7%. 

The return on investment (ROI) figures calculated by HCFA represent the ratio of 

program dollars saved as compared to administrative dollars spent. These figures 

illustrate that MSP activities are cost effective. 

Table 1 

Contractor Budgets and Return on Investment 

for MSP Activities 

FY 1988 m* FY 1989 ROI Fy1990 m** 

INTERMEDIARIES $31,508,823 45:l $32,800,966 so:1 $34,672,890 52:l 

CARRIERS $34,598,000 13:1 $38,300,000 14:1 $28,1oo,ooo 22:l -----------------------------~~~~--~~~-~~~~~ ------_----------------------

TOTAL $66,106,823 $71,100,966 $62,772,890 

* ROI = Return on Investment 

** The ROI figures for 1990 represent eight months 

Carriers made sign$cant staff reductions to cope with the MSP budget reduction. 

The most visible result of the reduced MSP budget is that it forced carriers to make 

significant staff reductions. These reductions made it impossible to maintain all MSP 

activities at the levels of prior years. 

The following graph illustrates the staff reductions at the seven sample carriers for 

FY 1989 to 1990. These carriers reduced their Medicare-funded full time equivalents 

(FIEs) for MSP functions by 63%. In order to maintain adequate operating levels, 

4 
FINDINGS 

THE FY 1990 MSP BUDGET REDUCTION 

caniers’ budgetsfor MSP activih were redked by 37% for FY 1990. 

The carriers’ FY 1990 budget for MSP activities was significantly reduced from the 

FY 1989 level. Table 1 presents a summary of contractors’ budgets for the last three 

fiscal years. The entire budget reduction was applied to carriers. In fact, the 

intermediaries budget actually increased by 5.7%. 

The return on investment (ROI) figures calculated by HCFA represent the ratio of 

program dollars saved as compared to administrative dollars spent. These figures 

illustrate that MSP activities are cost effective. 

Table 1 

Contractor Budgets and Return on Investment 

for MSP Activities 

FY 1988 JuJI* FY 1989 ROI Ey1990 ROI** 

INTERMEDIARIES $31,508,823 45:l $32,800,966 5O:l $34,672,890 52:l 

CARRIERS $34,598,000 13:1 $38,300,000 14:l $28,100@0 22:l 

======================--------- -------__-------------

TOTAL $66,106,823 $71,100,966 $62,772,890 

* ROI = Return on Investment 

** The ROI figures for 1990 represent eight months 

Canien made significant staff reductions to cope with the MSP budget reduction. 

The most visible result of the reduced MSP budget is that it forced carriers to make 

significant staff reductions. These reductions made it impossible to maintain all MSP 

activities at the levels of prior years. 

The following graph illustrates the staff reductions at the seven sample carriers for 

FY 1989 to 1990. These carriers reduced their Medicare-funded full time equivalents 

(FTEs) for MSP functions by 63%. In order to maintain adequate operating levels, 

4 
employees from two sampled carriers told us that they were receiving financial 

support from their private business. The data presented in the graph below does not 

reflect this support. 

Staff Reduct ions for MSP Operat ions 

Tota I FTE ‘S at 7 Sampled Carr iers 

,40 -.___________________..................... 12;____________________.................................................................................

120 

100 

80 

60 

40 

20 

0 

1989 1990 

I FTE'S IN km UNIT 

63% reduction in MSP staff 

The budget reduction in FY 1990 will have long term effects on the operation of the 

carriers’ MSP units. The budget proposal for FY 1991 includes a five million dollar 

increase for carrier MSP activities. Respondents indicated that this increase will not 

allow the carrier to “catch up” on a year’s backlog created from operating without 

sufficient personnel. Carriers would use additional funds to recruit and train new 

personnel. 

When questioned about the effect of the budget cut, one typical manager said, “It 

will be several years before we rebound from this budget cut. Recruiting and 

training someone from off the street takes a long time.” Another typical manager 

commented, “We were forced to lay off efficient employees. The work we do in the 

MSP unit is complicated and the learning curve for these tasks is very large.” We 

heard these and many similar comments at all sample carriers. 

Most carriers do not recover overpaymentsfollowingidentijicationof MSPsituutions. 

5 
When carriers identify and develop potential MSP situations through the usual 

sources (i.e. first claim development, RDES, “Y-trailer” codes, etc), they deny MSP 

claims and count the MSP savings from this denial on the HCFA-1564 savings 

report. However due to the budget and staff reductions for FY 1990, the carriers do 

not conduct further MSP development or initiate recoveries on claims previously paid 

by Medicare. These unassessedprogram losses are in addition to the OIG’s current 

estimate of losses due to the MSP provisions. These new losses have been created 

by the carriers’ inability to continue MSP operations at the same levels prior to the 

budget reduction. 

Representatives from five of seven carriers in this review told the review team that 

they are conducting no MSP recovery activities. Representatives from the two 

remaining sample carriers indicated that they are recovering overpayments on a 

selective basis. These carriers recover those cases that have greatest potential for 

savings and only do so within their current operating budget. 

When asked what development and recovery action is taken on claims that may have 

been inappropriately paid by Medicare, respondents indicated that they were being 

stored in boxes and file cabinets. The inspection team observed these claims 

firsthand at alI seven sample carriers. Carrier representatives said that these 

recoveries will be made when, or if, additional funding and development staff 

become available. 

We asked respondents from the carrier’s MSP staff if they knew or could estimate 

the value of the inappropriately paid claims waiting to be recovered. No one could 

provide an adequate count or estimate of the number and/or value of these claims. 

However, all indicated that if this substantial amount was recovered, it would 

accelerate the carriers’ progress toward their MSP savings goal. 

A recent audit conducted by the OIG Office of Audit Services has also verified this 

backlog of claims. Additional inspection work could provide an accurate estimate of 

the lost savings. 

Ilk HCFA ‘s ‘required task” lid does not include the recovq of MP ov~is. 

The aggressive collection of debts due the United States Government is required by 

statute and regulations, these regulations include the Federal Claims Collection Act 

and 4 CFR 102.1. Despite these requirements, HCFA has not placed emphasis on 

the recovery of overpayments resulting from previously unidentified primary payment 

sources. 

In November 1989, correspondence from HCFA provided carriers with MSP claims 

processing and development priorities for coping with the budget reduction. These 

priorities are divided into two lists (see Appendix C). The first list contains 

6 
“required tasks” and the second includes those tasks that should be undertaken “to 

the extent that funds are available.” Recovery of MSP overpayments is not included 

on the “required task” list and is the third of four items on the second list. The 

decision on how much time and effort the carriers expend to make recoveries is left 

to the carrier’s discretion. 

The carriers are not directly evaluated on the various methods used to identify and 

recover overpayments. This is evidenced by the absence of a CPEP performance 

standard to specifically evaluate the carriers’ effectiveness in implementing the 

various procedures for identifying MSP situations or recovering MSP overpayments. 

Currently, the only criteria used to evaluate the performance and effectiveness of the 

MSP units are based on achievement of the pre-established MSP goals. 

MSP SAVINGS ISSUES 

Incorzsirt~ exist in meti used to identif and calcuh-ztesavihgs. 

The HCFA calculates MSP savings goals for all contractors at the beginning of each 

fiscal year. The HCFA has issued instructions and procedures explaining the 

methods that should be used to calculate MSP savings. However, carriers are not 

counting and calculating these savings uniformly, and some of the savings being 

counted are questionable. 

0 The HCFA procedures do not require carriers to query for deductible status 

when calculating savings. This allows carriers to count a deductible amount 

paid by the beneficiary as MSP savings. The deductible amount is not savings 

because the beneficiary would pay this amount in any situation. Four sample 

carriers were not completing such queries but were claiming deductible 

amounts as savings. Three sample carriers were querying for deductible status 

but were not counting the deductible as savings. 

0 The HCFA allows carriers to count savings when an outside source pays a 

claim as the primary payer and the carrier is informed of this payment by an 

outside source (i.e. insurance company or physician’s office). These savings 

are counted by some carriers even though no claim is submitted to the carrier. 

In this situation, savings amounts must be estimated by the carrier because 

they do not pass through the carrier’s system. Four of the sample carriers 

were counting these situations as savings. Three sample carriers were not 

counting these situations as savings. 

7 
RECOMMENDATIONS 

Y%eHCFA shouhi conthe to pursue ackdithnul fiurding to ensure that caniers restore 

operations of the MSP units to a kvel at kast equivalent to FY 1989. 

The FY 1990 budget reduction for MSP activities has affected carriers’ ability to 

handle the MSP workload. Carriers face a huge backlog of potential MSP recovery 

cases with reduced staffing and funding. In order to effectively identify and recover 

all possible MSP situations, the carriers must use all procedures available to them. 

Restoring the MSP unit’s operational efforts to the levels of the prior year will help 

carriers utilize current procedures to identify and recover as many MSP savings as 

possible. 

To accomplish this, it might be necessary to restore appropriations to previous levels. 

An alternative would be to provide the funding out of savings captured by each 

contractor. The next recommendation provides details of this option. 

Ihe HCFA should cons&~ the dkveibpment of a legislam)eproposal that wou.kZallow 

them to conahct denwnstration program to evaluate incentives des@ed to enhance the 

idbijicaation and recovery of inappropriate MSP payments. 

Many sources have established that Medicare funds continue to be lost due to 

unidentified primary payment sources. An incentive program would provide the 

carriers an opportunity to increase Medicare savings while supplementing their 

operating budget. This incentive program should not supercede current MSP 

requirements and procedures. Carriers would be required to maintain all educational 

efforts at the current level. 

For implementation of this type of program, a legislative change is necessary. 

Sections 1814 (b) (1) and 1814 (b) (3) (A) of the Social Security Act require 

contractors be reimbursed only for the “reasonable cost” or “customary charge” for 

the services rendered. If an incentive program is implemented as a demonstration 

project, it might be necessary to modify this law. 

Current MSP procedures are cost effective. This is illustrated by the data presented 

in Table 1 on page 4 of this report. Medicare is currently saving 13 to 22 dollars for 

every dollar spent for operations at the carriers’ MSP units. As long as these return 

on investment figures remain positive, an incentive program will be cost effective for 

the Medicare program. 

The following options describe some of the many possibilities for this incentive 

program. By implementing one of these options, we estimate that additional savings 

could range from $199 million to $361 million. We suggest that HCFA evaluate 

8 
these options for demonstration programs and determine appropriate reimbursement 

percentages for these incentives. 

OPTION AZ The HCFA could allow participating carriers to use five percent of all 

savings they identify during the year to increase their ability to identify MSP 

situations. These payments would not be included as part of the carriers’ contract 

budgets. 

OPTION B: The HCFA could allow participating carriers to use five percent of all 

savings identified during the year plus an additional two percent of all savings from 

recoveries made on claims that were previously paid inappropriately. As in Option 

A, these payments would be used by the carrier’s MSP unit to finance part of their 

activities. This option would provide additional funding to aggressively collect 

inappropriate payments. 

OPTION C: The HCFA could allow participating carriers to keep a total of five 

percent of identified savings. Three percent would be used by the carrier’s MSP unit 

to finance collection efforts. ~The remaining two percent could be an incentive 

payment used in any area of the Medicare operation or be retained as profit. This 

option could provide an even greater incentive to the carriers because they would 

have more flexibility in utilizing these incentive payments. 

OPTION D: The HCFA could allow participating carriers to keep twenty-five 

percent of the savings carriers identify and/or collect above their established MSP 

savings goal. This option provides an incentive for carriers to continue to 

aggressively pursue all potential MSP caseseven after the yearly MSP savings goal is 

achieved. As in Option C, 60 percent of these payments would be used to finance 

collection efforts, the remaining 40% would be an incentive payment. 

[See Appendix D for an estimate of potential savings to the Medicare program 

should one of these incentive options be implemented.] 

In order for any of these incentive systems to be effective, the method of measuring 

achieved savings must be reliable. The next two recommendations address this 

problem. 

l%e HCFA should mod@ the CPEP stand&& to evaluate camkrs on their MSP 

ident@ication, recovery, and educational ej$orts. 

The only criteria for the MSP portion of the CPEP evaluation is the achievement of 

their MSP savings goal. If the carriers achieve 90 percent of their savings goal, they 

receive 100 points toward their CPEP evaluation. However, the carriers are not 

evaluated on their compliance and efficiency in conducting MSP identification and 

recovery activities. 

9 
The recovery of overpayments created by not properly identifying primary payment 

sources other than Medicare is not a priority for the carriers. This results in a 

substantial loss to the Medicare program. The CPEP standards should be modified 

to emphasize the importance of identifying and recovering these overpayments. 

Ihe HCFA should prvvide clear and un$om pm&a for counting iUSP savihgc 

We found inconsistencies in the methods used to identify, count, and report MSP 

savings. We recommend that HCFA clarify the procedures currently used to count 

and report these savings. 

We are not recommending a specific method, but we do recommend that the 

procedures used by all carriers be consistent. 

10 
AGENCY COMMENTS 

The HCFA did not concur with the recommendations presented in this report. The 

HCFA’s verbatim comments can be found in Appendix E. 

We believe it is necessary that carriers operate at a level at least equivalent to FY 

1989. We understand that this requires additional funding and that this decision is 

not completely in HCFA’s control. However, we feel the HCFA should continue to 

actively and aggressively pursue this additional funding. We have modified the first 

recommendation to clarify our position. 

We believe that an incentive program would enhance the carrier’s motivation to 

aggressively identify MSP situations and recover overpayments. We recognize the 

legislative implications for establishing a program such as this, but feel the potential 

benefits in the form of savings to the Medicare program would justify the efforts in 

this area. We have modified the second recommendation to encourage HCFA to 

pursue the necessary legislative changes to make such a demonstration program 

possible. 

We realize that 10 percent of the carriers’ CPEP evaluation is devoted to MSP 

functions. However, the only criteria for this evaluation is the percentage of the 

savings goal that is achieved by the carrier. The carriers are not evaluated on the 

efficiency and/or compliance with the MSP procedures described in the carriers’ 

manual. We continue to believe that a percentage of the CPEP evaluation should 

be devoted to areas other than simply achieving their MSP savings goals. 

The fifth finding in this report discussesinconsistencies in methods of counting and 

reporting savings. These inconsistencies are partially due to differing interpretations 

of the procedures. The HCFA should assure that all procedures are conducted 

uniformly among the carriers. 

The report has been modified to agree with HCFA’s FY 1989 and 1990 budget 

figures for MSP activities. 

11 
AGENCY COMMENTS 

The HCFA did not concur with the recommendations presented in this report. The 

HCFA’s verbatim comments can be found in Appendix E. 

We believe it is necess carriers operate at a level at least equivalent to FY 

1989. We understand requires additional funding and that this decision is 

not completely in HCFA’s 01. However, we feel the HCFA should continue to 

actively and aggressively pur this additional funding. We have modified the first 

recommendation to clarify o 

We believe that an incentive pro would enhance the carrier’s motivation to 

aggressively identify MSP situations recover overpayments. We recognize the 

legislative implications for establishi program such as this, but feel the potential 

benefits in the form of savings to the icare program would justify the efforts in 

this area. We have modified the set commendation to encourage HCFA to 

pursue the necessary legislative changes t ke such a demonstration program 

possible. 

We realize that 10 percent of the carriers’ CP valuation is devoted to MSP 

functions. However, the only criteria for this n is the percentage of the 

savings goal that is achieved by the carrier. The c are not evaluated on the 

efficiency and/or compliance with the MSP procedur scribed in the carriers’ 

manual. We continue to believe that a percentage o PEP evaluation should 

be devoted to areas other than simply achieving thei 

The fifth finding in this report discussesinconsistencies in 

reporting savings. These inconsistencies are partially due 

of the procedures. The HCFA should assure that all proce 

uniformly among the carriers. 

The report has been 

figures for MSP activities. 

11 

thods of counting and 

ring interpretations 

s are conducted 
APPENDIX A 

MEDICARE SECONDARY PAYER LEGISLATION 

TITLE OF PUBLIC ENAcThlENT EFFECTIVE 

LAW LAW DATE DATE DESCRIPTION 

Tax Equity 97-248 09-03-82 01-01-83 TEFRA made Medicare 

and Fiscal benefits secondary 

Responsibility if the employee or 

Act of 1982 spouse is age 65 

through 69 covered 

by an EGHP and the 

employer has at 

least 20 employees. 

Deficit 98-369 07-18-84 01-01-85 DEFRA broadened the 

Reduction Act definition of 

of 1984 working spouse by 

WFRA) including spouses 

age 65-69 of 

employed individuals 

under age 65, thereby 

removing the lower 

age limit. 

Consolidated 98-272 04-06-86 05-01-86 COBRA further 

Omnibus Budget broadened the 

Reconciliation definition of 

Act of 1985 working aged by 

(COBRA) removing the 

limitation of age 

70 and older. 

Omnibus 99-509 10-21-86 01-01-87 OBRA made Medicare 

Budget items and services 

Reconciliation secondary for 

Act of 1986 payment if the dis-

(OJ=4 abled beneficiary or 

spouse is working 

and covered under an 

EGHP. 

A -1 

0 
APPENDIX B 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

11. 

12. 

PREVIOUSLY PUBLISHED REPORTS 

Priority Audit Memorandum - Survey of the Tax Equity and Fiscal Responsibility Act 

of 1982 - March 7, 1984, Control Number: ACN-03-42009 

Medicare Secondary Payer Provision End-Stage Renal Disease - Program Inspection 

Report - August 24, 1984, Control Number: l-07-4001-14 

Medicare Secondary Payer Provision End-Stage Renal Disease - South Dakota -

November 20, 1984, Control Number: l-08-4009-14 

Medicare Secondary Payer Provision End-Stage Renal Disease - Colorado - December 

4, 1984, Control Number: l-08-4001-14 

Medicare Secondary Payer Provision End-Stage Renal Disease - Program Inspection 

Report - April 3, 1985, Control Number: l-07/08-4002-14 

Medicare Secondary Payer Provision Automobile Medical and No-Fault Insurance -

North Dakota - May 1, 1985, Inspection Control Number: 03-08-5001-14 

Program Inspection of Medicare as a Secondary Payment Source for Beneficiaries 

with End-Stage Renal Disease in the State of Oregon - May 10, 1985, Inspection 

Control Number: 3-10-4008-14 

Medicare as Secondary Payer for Medical Services Related to Automobile Accidents 

in Massachusetts -June 1985, Control Number: l-01-4105-31 

Medicare as a Secondary Payer for Medical Services Related to Automobile Accidents 

in Massachusetts - Boston - June 1985, Control Number: l-01-4105-32 

Report by the Comptroller General of the United States. The Congress Should 

Consider Amending the Medicare Secondary Payer Provisions to Include Disability 

Beneficiaries - September 30, 1985, Control Number: GAO/HRD-85-102 

Medicare Secondary Payer Provision Automobile Liability and Medical Insurance -

State of Missouri -Program Inspection Report - December 1985, Control Number: 3-

07-5001-32 

Medicare Secondary Payer Provision Automobile Medical and No-Fault Insurance -

State of Colorado - Program Inspection Report - December 1985, Control Number: 

3-08-5002-14 

B-l 
-- 

13. 

14. 

15. 

16. 

17. 

18. 

19. 

20. 

21. 

22. 

23. 

24. 

25. 

26. 

Medicare Secondary Payer Provision Credit Balances in Medicare Beneficiary Hospital 

Accounts, Control Number: OPI-85-070-040 

Medicare Secondary Payer Provision Working Aged in Missouri - July 1986, Control 

Number P-07-86-00079 

Medicare Secondary Payer Provision Working Aged in Colorado - July 1986, Control 

Number: P-07-86-00071 

OIG Audit Report - Medicare Overpayments for Services Provided to Beneficiaries 

with End-Stage Renal Disease - April 28, 1987, Control Number: A-10-86-62003 

OIG Audit Report - Retirees of Exempt State and Local Governments Could Cost 

Medicare $12.8 Billion over the Next 5 Years - September 10, 1987, Control Number: 

CIN A-09-86-62050 

Amending the Medicare Secondary Payer Provision for ESRD Beneficiaries Could 

Save the Medicare Program $3 Billion Over the Next 5 Years - December 1, 1987, 

Control Number: CIN-A-10-86-62016 

Medicare as a Secondary Payment Source - End-Stage Renal Disease - January 1988, 

Control Number: OAI-07-86-00092 

Medicare as a Secondary Payment Source - January 1988, Control Number: OAI-07-

86-00017 

Medicare as a Secondary Payment Source: Medicare Beneficiaries Covered By 

Employer Group Health Plans - February 1988, Control Number: OAI-07-86-00091 

Nationwide Review of Medicare as Secondary Payer for the Period September 1, 1983 

through November 30, 1985, Control Number: CIN A-10-86-62005 

Medicare: Incentives Needed to Assure Private Insurers Pay Before Medicare -

November 1988, Control Number: GAO/HRD-89-191 

Management Advisory Report: Medicare as Secondary Payer A Restitution 

Proposal, Control Number: AO-12-89-00002 

Management Advisory Report: More Complete Employer Group Health Plan 

Information is Needed to Administer the Medicare Secondary Payer Program, Control 

Number: A-09-89-00100 

Draft Management Advisory Report: MSP Survey - Contractors Questionnaire, 

Control Number: A-09-89-00151 

B-2 
27. Management Advisory Report: Medicare Secondary Payer: Unrecovered Funds (OEI07-90-00764) 

B-3 
APPENDIX C 

PRIORITY LISTS FOR CARRIERS’ MSP ACDVITIES” 

Required tasks 

1. Process prepayment recoveries. These recoveries should be processed for ongoing 

operations such as Working Aged, Workers’ Compensation, Automobile Medical, 

Liability and No-fault, End Stage Renal Disease, and disabled. 

2. Develop first claims submitted by a disabled individual and the first claim submitted 

by individuals ages 65 and 66. The results of the development must be incorporated 

into the regional data exchange system (RDES). 

3. Operate and maintain the standardized software systems, and participate fully and 

completely in the RDES. 

Tasks that should be comolete to the extent that funds are available 

1. Develop any new leads in any MSP area. 

2. Process suspected cost avoidance claims (claims with 7” trailers or indications of 

other insurance coverage from the RDES). 

3. Recover mistaken prior payments or provide recovery information to lead contractor 

as appropriate. 

4. Maintain outreach activities at the FY 1989 level. 

* These priorities were communicated to HCFA regional offices in November 1989. 

Carriers were often notified verbally of these priorities but written notification was not 

uniform. Some carriers were never provided with these priority lists. 

C-l 
APPENDIX D 

INCENTIVE PROGRAM OPTIONS 

The following example represents potential savings to the Medicare program if an incentive 

program is established. All calculations are based on national figures for FY 1989 (the most 

recent fiscal year). 

Return on Investment (ROI) for carriers (prior to FY 1990 reductions) = 14:l 

Total Savings by carriers = $554,920,413 

OPTION A: 

Total Savings X Reimbursement Rate = Payment to Carriers 

$554,920,413 X .05 (5%) = $27,746,020 

The savings of over $27 million would be used by the carriers to supplement their MSP 

activities. The following calculation illustrates total Medicare program savings that could be 

achieved if this program is implemented. 

Incentive payments to Carriers X ROI - Payment to Carriers = Potential Medicare 

Program Savings 

@27,746,020 X 14) - $27,746,020 = $360,698,269 

Even if the ROI decreased with increased expenditures, as long as it remains positive the 

program will remain cost effective. 

OF’TION B: 

This option would provide additional funding to encourage carriers to make recoveries on 

the backlog of claims created by the FY 1990 budget reduction. 

Savings for this option would equal the savings in Option A plus recoveries made on claims 

that were previously paid inappropriately. This potential savings is unknown because there is 

no accurate count or estimate of these potential recoveries. 

D-l 
OPTION c: 

This option provides an added incentive to the carriers to use a portion of the funds in any 

area of the corporate operation. 

Total Savings X Reimbursement Rate = Payment to Carriers 

$554,920,413 x .03 (3%) = $16,647,612 (to supplement MSP unit activities) 

$554,920,413 x .02 (2%) = $11,098,408 (incentive payment) 

Payment to Carrier X ROI - Payment to Carriers = Total Medicare Savings due to 

Incentives 

($16,647,612 X 14) - ($16,647,612 + $11,098,408) = $205,320,548 

OPTION D: 

Total Savings - FY 1989 Savings Goal = Amount Saved Above Goal 

$554,920,413 - $447,109,000 = $107,811,413 

Amt. Saved Above Goal X Reimbursement Rate = Payment to Carrier 

$107,811,413 X .15 (15%) = $16,171,712 (to supplement MSP unit activities) 

$107,811,413 X .lO (10%) = $10,781,141 (incentive payment) 

Payment to Carrier X ROI - Payment to Carrier = Total Medicare Savings due to 

Incentives 

(Sl6,171,712 X 14) - ($16,171,712 + $10,781,141) = $199,451,115 

D-2 
APPENDIX E 

AGENCY COMMENTS 

E-l 
.

- . 

Date 

From 

Subjec: 

. 

. . 

Health Care 

DEP.QRTMENT OF h’EAL.TH 6 HCMAX SERVIC= Financing Administration 

Memorandum-. 

. WI? 181954 

Gd R. Wilertsky, Ph.D.+ 3 

Administrator 

OIG Dra5 Re?crt - “Medicare Prepayment Review: MSP Procedures at 

Carriers”, OEI-07-89-01683 

The Inspector GeneraI 

Office of the Secretary 

We have reviewed the subject draft report which concerns the 

efrtziveness ci Medicare carriers’ prepayment utiIiz3tion retiew processesused 

to Zen@ &k&are Szcandary Payer (X5P) situations. The report focxscd 

mainIy cn the Fkal Year (m) 1990 MSP budget redtxrion for &ie<icare 

Uriiers. 

OIG recsmmends that KCFX ensure that wrriers restore operatiocs cf 

MS? units to a Ieve! equiv&nt to Fk’ 1989, con&xc: e,@oratot-J dr.TocsZ3don 

projects to e *r-iuaze .= incentives to enhanc­0 carrier identificaricn and recovey

efforts, modi& the Contractor Pttiormance EvaIuation Program &PEP) 

standards to k;aluare wrrks on their MSP efforq and modiiy HCFA 

proctdures fcr counrin_eMS? savings. E=CF)\ does not cancur with 01:‘s 

recommendacicns. Our specific cammerits on the repcc’s recommendancns are 

attached for your consideration. 

Tnank you for the opportunity to review and comment on this drafi 

reporL Please advise us whe*Lheryou aFe,0 with our position on the repon’s 

recommendations at your earliest convenience. 

Attachment 

. . .I 

: ’ 
. _Commentsof the Health Care Financing Administration 

(HCFA) on the OIG Draft Remti - “Medicare Prenavment Review: 

pVrSPProcedures at Carxiers”. OEI-074961683 

Recommendation 1 

HCFA shouid ensure that carriers restore operations of the MSP units to a 

level at least tquivaIent to FI( 1989. 

Ruuonse . 

HCFA does not cmxr. Part B MSP funding was S3S.3 miXion for Fy 1989. 

FY 1990 Part B MSP funding was increased to $28.1 xnii~on from S22? miion 

when funds were allocated from )ICFA’s contingency fund. However, Parr B 

MSP fundizg fcr FY 1991 is $26.8 miXion. The MSP funding level reflects tie 

. budgetary cansrraints faced by HCFA and the entire Federal government. 

ECFA is ho& to be abie to more adequate!y fund the carrier MSP fuzczion 

in FY 1992 and 1993,but cannot enstire that this wiX happen. 

E=CFA should conduct demonstrarion progrms evaluating incentives to enhance 

tie idemificstion and recovery of inappropriate MSP payments. 

Resuonse 

HCFA dces not concur. The report included several suggestionsfor 

demonsrraticns, and all the suggestionsproposed that carriers keep a portion of 

the recovered funds. OIG correctly noted that the primary obstacIe to offering 

cash incentives is that this is contrary to current law. HCFA’s past attempts to 

cbtain the necessarylegislative changeto implement this recommendation have 

been unsuccessful. 

Recommendation 3 

HCFA SbouId modiQ the Contractor Performance Evaluation Program (CPEP) 

standards tc evafuate carriers on their pV[SPidentification, recovery, and 

educational efforts. 

. 
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, 4- :... . . . - -

i Page 2 

IiCFA does not concur. HCFA already evaluatescarriers’ procedures for 

identifying MSP situations. There is a total of 1000 points in CPEP. Of this 

total, 100 points of CPEP arc devoted solely to evaluating the COII~~~CZOK’ 

petiormanct of their MSP fimti~~~~. HCFA believes that to allocate more 

than 10 percent of CPEP to MSP would not be appropriate. The current 

criteria used in the CpJ3 review include the essenceof all of .the elements 

OIG has recommended be included in CPEP. We also wish to note that we 

plan to use the Common Working File reports to evaluatk Carrier identiEcation 

of MS? situations. . 

Recommendation 4 

ECFA shdd provide ckar and uniform procedures for counting MSP savings. 

: 0 Rtmonse 

ECFA aIr:zdy provides uniform proctdures for counring MS? SW&S. The 

instruc5ons are found in Section 13458cf the bledicare Cxier Manual, and in 

Section 3899 of the Lxe:incdiary IvfanuaI. Savingsare vaiidated during the 

annual perfcrmance of CPEP. If contractors are found to bc reporting sabtigs 

incorrectly, the CPEP scores are adjusted. Then, corrective action steps are 

cutlined and controIIed by HCFA regional offices. 

Technical Comment 

In Table 1 of page 4 of the repcn, OIG states that the carriers’ MSP budget . 

for FY 19E49was S37,579,565. Our figures show that $38.3 miXon was 

budgeted for the carriers’ MSP function for FY 19S9. Also the carriers’ b1SP 

budget for FY 1990 was $28.1 miXon, not $21,271,700. 

. 

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