Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

SUMMARY OF OIG ACTIVITIES ON 

MEDICAID 

JmIE 1993 
OFFICE OF INSPE(XOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Services’ (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three OIG operating components: the Office of Audit Services, the 

Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program, and management problems, and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICES 

The OIG’S Office of Audit Services (OAS) provides all auditing services for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIG’S Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions, 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECTIONS 

The OIG’S Office of Evaluation and Inspections (OEI) conducts short-term management and 

program evaluations (called inspections) that focus on issues of concern to the Department, 

the Congress, and the public. The findings and recommendations contained in these inspection 

reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability, 

and effectiveness of departmental programs. 
I 

Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

SUMMARY OF OIG ACTIVITIES ON 

MEDICAID 

JUNE 1993 OEI-12-92-00550° 

L 
EXECUTIVE SUMMARY


PURPOSE 

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

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

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

(HCFA) effectiveness in managing Medicaid. We focus on problems that have not 

been resolved. Apolicpakers consider ways toreform thehealth care system, 

lessons drawn from the Medicaid program can be instructive. 

BACKGROUND 

The Medicaid program is the major vehicle through which the Federal and State 

governments provide health care to low income persons and long term care to the 

disabled and low income elderly. 

In Fiscal Year (FY) 1991,28.2million Medicaid beneficiaries were eligible for 

services. Thirteen million of those were children; another 6.8 million were their 

parents. While the nonelderly poor comprise the great majority of Medicaid 

beneficiaries, they use proportionately far fewer of Medicaid’s dollars than the 3.4 

million elderly beneficiaries or the 4.1 million blind or disabled beneficiaries. In 

reality, a few beneficiaries requiring intensive services consume most of the dollars 

spent by the Medicaid program. Elderly persons receiving long term care represent 6 

percent of beneficiaries, using 30 percent of program spending. Nonelderly disabled 

persons represent 15 percent of Medicaid beneficiaries, using 38 percent of program 

spending. Of $76.9 billion in vendor payments made in fiscal year 1991, 28 percent 

went to hospitals for inpatient services, 27 percent went to nursing facilities, and 10 

percent went for intermediate care services for the mentally retarded. 

ISSUES 

The Medicaid program must successjidly implement major new legiriktion tzrpanding 

eli~ility for SW”CW and imp~emenh”ngcost containment measures, such as service 

expansions for pregnant women and children. 

l%e Medicaid program must aggressive~ identfj pdicim which are outdated and waste 

precious rerounxr, such as overly generous payments to institutions for mentally 

retarded persons and enhanced Federal matching for family planning services. 

% Medicaid program must identijj new stratq”er to rruuimke & health care dolhm, 

such as managed care and cost sharing. 

States must ensure that paymenti made to providers are fair while reducing admhuktrative 

burdens, through operational changes to ensure claims are accurate and overpayments 

i 
are recovered, scrutiny of payment rates which might be too generous to some 

providers and too skimpy to others, aggressive pursuit of third party liability, review of 

claims to ensure services are medically necessary, and more extensive use of electronic 

claims, review and payment. 

l%e Jkiicaid program must ensure that long term care expenditures, which account for a 

huge proportion of Medicaid outkzys, are managed wke&, through tighter limits on 

transfers of assets and tougher asset recovery laws. 

The Medicaid program must ensure that qualiq of care is berng delivered to beneficiaries, 

including effective implementation of new rules for nursing homes, development of an 

effective system of quality assurance for Medicaid managed care settings, and 

implemention of new rules for review of drug use. 

l’he Medicaid program must electively protect i~e~fiom jiaud and abuse, taking full 

advantage of Medicaid Fraud Control Units, identifying questionable patterns of care 

and billings, and designing strategies to prevent fraud. 

Final&, Federal and State relikions must be improved, thus avoiding unconstructive 

attempts by the Federal government to save money or accomplish its objectives at the 

expense of States and unproductive attempts by the States to increase the amount of 

Federal funds they receive without instituting real changes in their own programs. 

RECOMMENDATIONS 

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

are substantial. We are aware, of course, that many policymakers are arguing for a 

fundamental restructuring or elimination of the Medicaid program. 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 require action by the States. 

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 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 recommendations 

for strengthening program and management efficiency and effectiveness. For our 

readers’ convenience, we have reproduced our listing of recommendations to improve 

the Medicaid program in the appendices to this report. 

We are pleased to see that the Administration supports our recommendations for 

extending the ban on self-referral, for lifting the ban on drug formularies, and for 

tightening loopholes on transfers of assets and strengthening asset recovery laws. 

ii 
TABLE OF CONTENTS


EXECUTIVE SUMMARY


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


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


Implementing Major Newkgislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...4


Identi~ing Outdated Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...7


Identifying New Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...8


Ensuring Fair Payments and Reducing Burdens . . . . . . . . . . . . . . . . . . . . . . . 10


Managing LongTerm Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...14


Ensuring QualityofCare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...15


Guarding Against Fraud and Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...16


Improving Federal-State Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...18


RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...20


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 Medicaid program and offers solutions to longstanding 

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

(HCFA)effectiveness inmanaging Medicaid. We focus onproblems thathave not 

been resolved. As policymakers consider waysto reform the health care system, . lessons drawn from the Medicaid program can be instructive. 

BACKGROUND 

The Medicaid program is the major vehicle through which the Federal and State 

governments provide health care tolow income persons and long term careto the 

disabled and low income elderly. Persons receiving grants from the Aid to Families 

with Dependent Children (AFDC) program, and the aged, blind or disabled receiving 

cash assistance through Supplemental Security Income (SS1), are “categorically” 

eligible for Medicaid. Asset and income tests are also applied. States can, at their 

option, expand eligibility under Medicaid to the “medically needy,” those who are 

categorically eligible but don’t meet the income and asset tests. 

In Fiscal Year (FY) 1991, 28.2 million Medicaid beneficiaries were eligible for 

services. Thirteen million of those were children; another 6.8 million were their 

parents. While the nonelderly poor comprise the great majority of Medicaid 

beneficiaries, they use proportionately far fewer of Medicaid’s dollars than the 3.4 

million elderly beneficiaries or the 4.1 million blind or disabled beneficiaries. In 

reality, a few beneficiaries requiring intensive services consume most of the dollars 

spent by the Medicaid program. Elderly persons receiving long term care represent 6 

percent of beneficiaries, using 30 percent of program spending. Nonelderly disabled 

persons represent 15 percent of Medicaid beneficiaries, using 38 percent of program 

spending. Of $76.9 billion in vendor payments made in fiscal year 1991, 28 percent 

went to hospitals for inpatient services, 27 percent went to nursing facilities, and 10 

percent went for intermediate care services for the mentally retarded. 

Administration of the Program 

States administer their Medicaid programs within broad Federal requirements and 

guidelines. These requirements allow States considerable discretion in determining 

income and other resource criteria for eligibility, covered benefits, and provider 

payment mechanisms. As a result, Medicaid programs vary considerably from State to 

State. 

Within the Federal government, the Health Care Financing Administration is 

responsible for reviewing State plans for their Medicaid programs and approving 

1

waivers from Federal rules. The Medicaid Bureau was established in order to give 

proper attention to the role of the Federal government in overseeing States’ 

implementation of Federal requirements. 

I%ogram Cosk3 

The Medicaid program is financed jointly with State and Federal funds. Federal 

contributions vary from State to State and currently range from 50 percent to 83 

percent of program medical expenditures. Administrative costs are financed at other 

rates. 

Medicaid is a major source of budget pressures for both the Federal and State 

governments. Expenditures have grown dramatically in recent years. Total Medicaid 

expenditures were $88 billion in 1991, compared to $38 billion in 1988. For States, 

this means that Medicaid threatens to break the bank. It is the second largest or 

largest State budgetary item in most States, surpassed only by education. Some States 

have responded by cutting services or limiting eligibility. The pressures that are placed 

on the Federal government are also serious. If current trends continue, Federal 

expenditures for Medicaid will match Federal expenditures for Medicare sometime 

around 1997. The Congressional Budget Office projects that Medicaid will represent 

seven percent of all Federal spending in 1996, compared to three percent in 1990. 

Recent Initiatives 

In recent years, two competing pressures have been placed upon the Medicaid 

program. First, the program has been called upon to provide more services or provide 

existing services to more beneficiaries. New Federal mandates were placed upon 

States to expand coverage for pregnant women and children. At the same time, the 

Federal government has called upon States to reduce their costs. 

Because of their frustration with the program’s rising costs, administrative 

requirements, and new mandates, States have taken action. Some States have 

attempted to implement new and innovative ways of providing health care for their 

low-income and disabled populations, but face losing Federal financial support if 

existing Medicaid rules aren’t waived. Many States have instituted measures, such as 

provider taxes, to increase the amount of the Federal match. Other States weigh 

reducing services or limiting eligibility to portions of their Medicaid populations. 

Role of the OjJice of Ihspector General 

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

Health and Human Services’ (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. 

2

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

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

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

to assess their effect on fraud, waste and abuse. 

Methodology 

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

work of the OIG. 

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

facing the Medicaid program. We describe how program managers must implement 

new requirements successfully, identi~ outdated and wasteful policies, identify new 

strategies to maximize its health care dollars, ensure that providers are paid fairly 

while reducing administrative burdens, ensure that long term care dollars are managed 

wisely, ensure that services provided are of high quality, protect the program from 

fraud and abuse, and ensure a constructive relationship between the Federal and State 

governments. 

3

ISSUES


IMPLEMENTING MAJOR NEW LEGISLATION 

The Medicaid program must successfully implement major new legislation expanding 

eligibility for services and implementing cost containment measures. 

�	 HCFA and the States must succewjidly implement program expansions for 

pregnant women and chikken. 

Eligibility levels for the Medicaid program have recently been extended beyond the 

traditional “welfare” populations previously served by Medicaid. Medicaid programs 

must now cover all pregnancy related services for pregnant women, and medical 

services for children under age six, whose income exceeds the States’ AFDC income 

level but is less than 133 percent of the Federal poverty level. At their option, States 

can receive Federal matching for such sefices provided for pregnant women and 

children up to 185 percent of the Federal poverty level. By 2001, all children under 

age 19 in families living under the Federal poverty level must be covered by Medicaid. 

Our 1992 report on the Medicaid expansions for pregnant women found that many 

States have endorsed the optional eligibility expansions, with some States innovatively 

implementing the expansions. However, significant problems still prevent newly 

eligible women from receiving prenatal care. These problems include inadequate 

client outreach, cumbersome application processes, insufficient prenatal providers, 

difficulties with presumptive eligibility, staffing shortages, lack of timeliness in 

providing information and training for States to implement the expansions, and 

inadequate data collection systems and evaluation processes to measure progress and 

outcomes.1 The OIG plans periodic reports on States’ efforts in these areas. 

�	 HCFA and the States must succemj%llyhnpkment program e.rpansionsfor EPSDT 

inundated in OBRA 1989. 

OBRA 1989 enacted major changes to the Early and Periodic Screening, Diagnosis, 

and Treatment (EPSDT) program, which is the mandatory program to provide 

comprehensive health services to those under 21. Children must be screened 

periodically for health and developmental problems. If potential problems are found, 

the child must be referred for further services or treatment. 

OBRA 1989 instituted new major changes to the EPSDT program. Among other 

things, it required HHS to establish goals for States to meet and mandated coverage 

of any service found to be necessary as a result of screenings. 

The HHS set a yearly participation goal for each State, by the end of FY 1995, to 

screen at least 80 percent of EPSDT-eligible children and to provide at least 80 

percent of screenings recommended for children. States report on their performance 

4

to the Federal government. An OIG inspection completed in August 1992 examined 

State reports from the period April 1, 1990 to September 1, 1990. We found that the 

screening and participation ratios used to measure States’ performance in the EPSDT 

program are essentially inaccurate. According to their own reporting, some States 

screen more than 100 percent of eligible children. At the same time we conducted 

our study, HCFA had formed a task group to evaluate the EPSDT reporting system. 

We recommended that HCFA modify the methods by which it measures screening and 

participation rates so that they are meaningful and accurate reflections of 

performance.2 The HCFA agreed with our recommendations. We are awaiting final 

action to implement the necessary changes. Once these changes are place, it will be 

both possible and important to monitor State performance, understand why some 

States may be performing better than others, and take necessary corrective action so 

that all States may reach the goals set by OBRA. 

A second major change under OBRA 1989 is that States must now pay for any service 

that is necessary to treat a condition a screening identifies, whether or not the State 

Medicaid plan covers the service (as long as the service is one for which Federal 

matching payments would be allowed). In a future study, the OIG plans to evaluate 

what kinds of treatments are being provided and how referrals for treatment are being 

made under the EPSDT program. 

b	 HCFA and the States must succewfidly implement new programs designed to limit 

M2dicaid costi numdhted in OBRA 1990. 

OBRA 1990 included provisions for two new programs designed to control Medicaid 

costs: a rebate program for prescription drugs, and a buy-in provision for private 

insurance by Medicaid for some beneficiaries. 

Drug Rebate Rqyanz: Though an optional service (not required to be provided by 

Federal rules), nearly all States cover prescription drugs. Due to concerns that costs 

of prescription drugs for Medicaid were rising faster than both the non-medical and 

medical inflation rate, and that Medicaid programs were paying more than other 

purchasers for such drugs, the Congress enacted legislation in OBRA 1990 requiring 

drug manufacturers to give rebates to Medicaid programs as a condition for 

participation in Medicaid payments for their drugs. 

Section 4401 of OBRA 1990 established a detailed process for the payment of rebates 

under Medicaid by drug manufacturers to the States and HCFA. As a condition for 

payment by the Medicaid program to pharmacies for a manufacturer’s drugs, the drug 

manufacturer must enter into a contractual arrangement with HHS (acting for the 

States), whereby the manufacturer will offer rebates to the States in exchange for the 

States agreeing to cover all of the manufacturer’s drugs under Medicaid (the law 

nearly eliminated the use of drug formularies). 

The rebates are calculated using formulas based on manufacturer pricing data. The 

law requires manufacturers to report quarterly to the Secretary on their average 

5

manufacturer price (AMP) and their “best price” for each covered drug (the lowest 

price offered to any buyer). The HCFA provides this information to the States. 

States use claims data to determine the total number of doses of each drug dispensed 

in the previous quarter and the pricing data provided by the manufacturers through 

HCFA to arrive at a bill that is submitted to the manufacturer. This bill represents 

the difference between the AMP and the best price, multiplied by the number of 

doses paid for by the State Medicaid program. 

Since the law’s inception in January 1991, the OIG has been actively involved in 

monitoring the implementation of the drug rebate program. Certain significant 

problems have been identified, including: 

F Drug manufacturers are increasing the “best price” of Medicaid covered drugs? 

b	 States had no procedures to monitor the correct identification of either the 

drug product or number of units dispensed, as reported by pharmacists.4 

�	 Drug manufacturers vary in the methods they use to determine AMP and the 

length of time records should be retained.5 

�	 HCFA supplied inaccurate unit rebate data to the States for all new drugs that 

entered the market during the first quarter of 1991.6 

�	 HCFA supplied pricing data to the States that included errors in AMP, base 

AMP, and best price, resulting in unit rebate amounts being overstated.7 

b	 HCFA has hot ensured that States establish adequate accountability and 

control over the drug rebate program. Of $475 million in rebates billed in 

1991, $111 million remains uncollected.8 

In addition to concerns regarding the implementation of the drug rebate program, we 

are also concerned that the law may have “given away with the left hand what it took 

with the right” when it effectively eliminated formularies. 

In 1990, we studied the difference between Canada’s reimbursement for drugs and 

costs of the Medicaid program. We estimated that the Medicaid program paid $474 

million more for name brand drugs than would have been paid by Canadian 

prescription drug programs. Canada’s lower prices were attributable to negotiated 

price reductions between the drug manufacturers and provincial government, 

Centrally, the Federal government (Ottawa) sets prices through a price control board. 

Importantly, provinces can include or exclude drugs in their formularies (lists of 

covered drugs), and thus can decide that a given drug is too expensive and other 

options are available.9 

We recommended that HCFA address rising drug costs by pursuing strategies to limit 

payments for drugs. We suggested three options: drug formularies (which were 

6

eliminated by OBRA 1990), drug price limits, and negotiation with manufacturers. 

Relying solely on a rebate program as a form of negotiation, without the option of 

deciding what you’ll pay for, reduces the amount of cost savings available. In the 

course of our work on the drug rebate program, we attributed part of over $500 

million in increased drug costs by the Medicaid program to OBRA 1990’s requirement 

that States open drug formularies.l” 

Use of Employer Group Halth Ilnu.rance: Section 4402 of OBRA 1990 requires States 

to purchase (buy in) group health insurance for Medicaid clients when such purchases 

would be cost effective. The first step in implementing this mandate is for States to 

establish methodologies and systems for determining cost effectiveness. Currently only 

about 18 States have established some sort of program. Methodologies for measuring 

cost effectiveness (as a basis for deciding whether to buy into the private insurance 

plan) include diagnosis or disease based systems, demographically determined systems, 

or systems which include both approaches. We are currently gathering details on 

these systems and the savings they have generated for States, if any. 

IDENTIFYING OUTDATED POLICIES 

The Medicaid program must aggressively identi& policies which are outdated and 

waste precious resources. 

Over time, the Medicaid program has instituted policies designed to provide financial 

incentives for certain types of care, to increase the quality of care, or to maintain or 

improve access to care. In light of the scarce resources that are available to the 

Medicaid program, the continued justification for such policies must be reviewed once 

new information suggests a better course of action or the original objectives are met. 

In this regard, we would point to two examples: reimbursement policies for Stateoperated intermediate care facilities for the mentally retarded (ICF/MRs); and 

enhanced Federal financial participation (FFP) for family planning services. 

Reimbumement for State ICF’MRK At one time, the quality of care provided to most 

persons suffering from mental retardation ranged from poor to worse. In response, 

public financing and direct provision of care to the mentally retarded, often in the 

form of large State-run institutions, became quite popular. In 1971, the Medicaid 

program was amended to provide Federal reimbursement to States for caring for 

people with developmental disabilities living in institutions. As a result of public 

support for these institutions, the quality of care provided to persons who are mentally 

retarded improved quite dramatically. 

Today, however, the situation is different. The preferred setting for treating persons 

with developmental disabilities has shifted from the institutional to community based 

care. A number of studies have shown that clients with developmental disabilities 

make better progress toward independent functioning in community rather than 

institutional settings. Still, Medicaid policies favor institutions (the amount spent on 

services in the community can’t exceed the amount spent in the institutions) and 

7 
reimbursement rules for large State institutions are quite generous. Despite the policy


shift toward community-based treatment, most Federal Medicaid funds for the


developmentally disabled continue to be spent on large ICF/MRs.


Although Federal rules since 1980 require that reimbursement to State-run ICF/MRs


reflect the reasonable costs of an efficiently and economically operated facility, these


terms are not defined in regulation. Each State has considerable discretion in defining


these terms and setting ICF/MR payment methodology.


A 1993 inspection conducted by the OIG examined payments to large, State-run


ICF/MRs. We found that Medicaid reimbursement rates for large ICF/MRs are more


than five times greater in some states than in others. Average Medicaid


reimbursement in 1991 for large ICF/MRs ranged among States from $27,000 to


$158,000 per resident. This variation was unrelated to the patients’ severity of illness,


quality of service, facility characteristics, or resident demographics.*1


We have recommended that HCFA take action to reduce excessive spending of


Medicaid funds for ICF/MRs through administrative action, legislation to control


ICF/MR reimbursement, or comprehensive legislation to restructure Medicaid


reimbursement for both ICF/MR and Home and Community Based (HCB) waiver


services for people with developmental disabilities. In addition to saving wasted


dollars (we estimate that $683 million in Federal and State Medicaid funds could have


been saved in 1991 if costs were capped in ICF/MRs), such new policies would


provide incentives for community-based care rather than institutional care.


Enhanced FFP for Fan@ Pkmning Servkex States have been reimbursed at the


enhanced matching rate of 90 percent for family planning services since 1972. While


the higher FFP rate was originally needed to “jump start” the program, family planning


services are now a well established part of the States’ Medicaid programs and it is


time for this incentive to be eliminated. A 1992 OIG audit found that the 90 percent


rate is costly, unjustified, and may act as a disincentive to the States’ design and


maintenance of internal controls.12


In addition to examining program costs funded at special rates, we are also looking at


administrative costs for the AFDC, Medicaid and Food Stamp programs. We are


exploring the impact of a single block grant for these three programs’ administrative


costs on the States and Federal government. Reducing special matching rates is one


option that we are examining.


IDENTIFYING NEW STRATEGIES 

The Medicaid program must identifj new strategies to maximize its health care dollars. 

Like every other third party insurer, the Medicaid program must search for ways it can 

make the best use of its health care dollars. In the course of our work on the 

Medicaid program, two important strategies present themselves: increased use of 

8 
managed care or gatekeepers as a way to reduce the inappropriate use of semices and 

provide continuity ,of care; and cost-sharing by beneficiaries as a way to collect funds 

that can be used to maintain services. 

A@u.zged Care: Many health care policy analysts have suggested the use of managed 

care, whether in formal staff health maintenance organizations (HMOS) or in looser 

confederations of primary care case managers, as a way to reduce the inappropriate 

use of services by beneficiaries and provide better access to and continuity of care. 

While significant expansions in the use of managed care by Medicaid recipients will 

undoubtedly present new problems and challenges (such as the difficulty of recruiting 

case managers, as is now being faced by the Maryland Medicaid program), our work 

on nonurgent use of emergency rooms (ERs) suggests that managed care can indeed 

be an important strategy. 

The use of emergency departments for non-urgent care by Medicaid recipients has 

long been recognized by State and Federal policymakers as a problem. In 1983, the 

OIG reported that Medicaid recipients use ERs for non-urgent care largely because 

other sources of care are either unavailable or inaccessible to them. We estimated 

that at least half of Medicaid ER visits were non-urgent and could have been more 

appropriately treated in community care settings. 

Our 1992 study on use of ERs by Medicaid recipients found that non-urgent use of 

emergency rooms has remained a problem, for some of the same reasons we cited in 

1983. We estimate that over one-half to two-thirds of Medicaid emergency room visits 

in our nine sample states are non-urgent. 

We identified a number of ways that States are using to reduce non-urgent use of 

emergency rooms. These approaches include managed care, pre-paid plans, 24 hour 

telephone line to a nurse, tiered pricing, triage fees, emergency room claims review, 

co-payments, and lock-ins. The approach most frequently considered successful (by 

the states’ own self evaluations) addresses access to care through managed care or 

prepaid programs. One of the primary functions of managed care/pre-paid plans is to 

provide recipients ‘with an ongoing source of primary care and referral to other 

services. By having an individual or group act as a “gate keeper,” and directing care to 

the most appropriate setting, the number of non-urgent visits to the emergency room 

may be reduced. 

The success of state initiatives to control non-urgent use of ERs is difficult to 

document, but our sample states offered some evidence to indicate these controls have 

had a salutary effect. In Missouri, for example, ER visits by individuals enrolled in a 

managed care/pre-paid program have declined despite an increase in enrollment. In 

Wisconsin and Pennsylvania, the percent of non-urgent visits for Medicaid recipients 

enrolled in managed care is lower than that of Medicaid recipients in the traditional 

fee-for-service Medicaid program. For the years 1987 through 1989, seven states have 

reported savings of approximately $182 million from managed care and pre-paid 

programs which included controls placed on non-urgent use of ERs. Three of the 

9 
programs have reported savings of approximately $13.6 million that are directly 

attributable to ER controls,13 

Cost Sharing Section 1902(a)(14) of the Social Securi~Act provides that Medicaid 

may impose “enrollment fees, premiums, or similar charges, and deductions, costs 

sharing or similar charges.” Children, HMO enrollees, pregnancy services, emergency 

services, hospice services, and services provided to residents of nursing facilities or 

medical institutions are exempt from cost sharing. 

A 1993 study by the OIG found that 27 States use cost-sharing in their Medicaid 

programs. Copayments range from 50 cents to $3.00, with the exception of inpatient 

hospital copayments which range up to $50 per admission. Four States also use a 2 or 

5 percent coinsurance for certain services, and one State recently implemented a 

inpatient hospital deductible of $100, The cost of administering a cost-sharing 

program is minimal, since the charges are simply deducted from provider 

reimbursement, effectively requiring the provider to collect the copayment or accept a 

reduced fee. 

States without cost sharing could save between $167 and $355 million annually by 

applying cost sharing to just four services--inpatient hospital services, outpatient 

hospital services, physician visits, and prescription drugs. 

Although we did not find evidence to suggest that expanded cost-sharing in the 

Medicaid program will significantly reduce inappropriate use of services, neither did 

we find that cost-sharing created a barrier to the appropriate use of needed services. 

Essentially cost-sharing is a way for the program to offset some of its costs without 

undue burden on providers or beneficiaries, and in our view is certainly preferable to 

reducing services or eligible beneficiaries. As a result, we have recommended that 

HCFA promote the development of effective cost-sharing programs in the States.14 

ENSURING FAIR PAYMENTS AND REDUCING BURDENS 

States must make operational changes to ensure that payments made to providers of 

semice are fair and that payments are made only for services that are medically 

necessary, while reducing administrative burdens and streamlining claims processing. 

In the course of our extensive work on the Medicare program, we have identified 

numerous instances in which the program has made excessive payments to providers. 

Three basic problems cause excessive payments: inaccurate claims (caused by 

imprecise coding systems, unbundling and upcoding), inappropriate payment rates, and 

other insurers not paying their share. The Federal government, in administering the 

Medicare programj has also faced challenges in determining whether services delivered 

are medically necessary. Finally, in order to reduce its own costs as well as the costs 

of providers, the Medicare program has attempted to streamline claims processing. 

States administering the Medicaid program face similar problems, as discussed below. 

10

Inacczuate Claims: Under the Medicare program's prospective pa~ent system, 

inpatient hospital services are reimbursed a predetermined amount, depending on the 

illness and its classification under a diagnosis related group (DRG). Like Medicare, 

21 States use a DRG type reimbursement system for inpatient hospital costs. An OIG 

computer match found that $38.5 million in improper claims for outpatient physician 

services were made as a result of improper billing by hospitals.15 16 We’ve 

suggested that Medicaid programs using a DRG system may also be vulnerable to such 

improper claims.1’ Likewise, we have documented unbundling by physicians billing 

Medicare and Medicaid,18 unbundling of laboratory tests,19 and unbundling of 

surgical procedures. 20 Even when the vast majority of providers try to bill the system 

accurately, imprecise coding systems--absence of a code to accurately reflect the 

services being provided, overlapping codes, inadequate definitions--can prevent 

providers from billing the system accurately. 212223 2A Al third party payers who 

rely on providers to self-report the services they provide and pay for such services on 

a per claim basis face such problems. 

When overpayments are made, it is important that the program seek to recover them. 

This does not always occur. We have conducted reviews of in hospitals and nursing 

homes which document significant credit balances. Credit balances occur when 

reimbursement for services provided to a Medicaid beneficiary exceeds the charges 

billed. We estimate that nationally hospitals have received and retained $73.3 million 

in credit balances~ and nursing homes have received and retained $32 million in 

credit balances.~ 

Iizappropriate Payment Ratex Although for many types of providers, Medicaid 

payments rank low in comparison to Medicare and private payers, we have 

documented instances in which Medicaid payments may be too high. 

For example, the Omnibus Budget Reconciliation Act (OBRA) of 1981 required State 

Medicaid agencies to establish hospital payment rates that took into account hospitals 

serving a disproportionate number of low-income individuals with special needs. The 

law did not define the criteria to be used to identify disproportionate share hospitals 

or low income individuals with special needs. Therefore, State Medicaid agencies 

were allowed to develop their own criteria and methodologies for quali&ing and 

reimbursing hospitals. Subsequent legislation passed in 1986, 1987, 1990, and 1991 

expanded the program, established minimum criteria, and placed some limited controls 

on the program. Even so, disproportionate share payments to hospitals are growing at 

an substantial rate: we estimate that for 34 States, payments will increase from $763 

million in FY 1990 to $5.5 billion in FY 1993. Of most concern to us, however, are 

the results of our audit in South Carolina, where we found that such Medicaid 

payments contributed to total hospital profitability. When considering total hospital 

profits, the average South Carolina hospital receiving disproportionate share dollars 

earned profits of $3.1 million. On the average, these hospitals received Medicaid 

disproportionate share payments of $2.9 million. Current literature in the health care 

field indicates that hospitals in other States have increased their total profitability as a 

result of payments received under the disproportionate share program.27 Eliminating 

11

such payments in order to provide higher rates of payments to, for example,


obstetricians, might be a better use of these funds.


Payments to HMOS are another area where we have concerns based on an audit of a


major provider in Pennsylvania. Here again, we found substantial profits being


enjoyed by a HMO servicing Medicaid patients, suggesting that the Medicaid payment


rate is too generous. Rate setting for HMOS is an area we expect to focus on in the


coming year.


l%tid Parfy Liabil@: Third party liability refers to the responsibility of other parties


other than the Medicaid program or the beneficiary to pay the costs of care obtained


by the beneficiary. The Medicaid program is the payer of last resort, meaning that


any other responsible insurer must pay for services before Medicaid does. The OIG


has performed third party liability reviews in several States. One survey of six


agencies showed that five States do not have adequate systems to record and follow-up


on outstanding billings to third parties .% In another State, our survey showed that


although the State agency’s system identified liable third parties, it did not bill all third


parties.29


J&zlical Necewity: OIG audits of Medicare home oxygen therapy claims and 

ambulance services found numerous instances in which claims were submitted and 

paid for services that were not medically necessary. 3031 We’ve suggested that State 

Medicaid programs, which also reimburse providers for oxygen and ambulance 

services, may also be vulnerable to such claims and have suggested joint audits with 

State agencies to examine the question.32 

Electronic Clizirn+,RevI”ewand Payment: The increased use of electronic claims, point 

of service or point of sale technology, and electronic funds transfer holds promise for 

reducing administrative costs while at the same time improving relations with program 

providers. 

Physicians contend that the “hassle factor”-- administrative red tape associated with 

participating in Medicaid--discourages many doctors from treating patients who are 

covered by Medicaid. When providers refer to the administrative burden, they 

generally are referring to such problems as slow payments; rejection of claims because 

the billing form was completed incorrectly; difficulties in correcting claims that contain 

errors; inability to verify recipients’ Medicaid eligibility, leading to claim denials; 

frequent changes in policies, covered procedures, and required documentation; and 

confusing provider manuals. Physicians often cite administrative burdens as one 

reason, in addition to low payment rates, that they don’t participate in Medicaid. 

In 1992, the OIG conducted a study to examine promising approaches being used by 

State Medicaid programs to be responsive to physician complaints about Medicaid’s 

administrative burden. Particular complaints about claims processing center around 

frustration with the process of submitting and getting claims paid. For example, one 

physician told us, “Even the most intelligent neurosurgeon gets hung up on what needs 

12 
to be done.” Another, expressing a common complaint, said, “Physicians aren’t given 

an explanation for rejected claims. It is the doctor’s responsibility to track the claim 

and find out why it was denied, which takes extra staff time and financial resources.” 

In an attempt to address these types of complaints, at least 28 States have instituted 

electronic claims systems for physician services. The proportion of claims in each of 

these states that are submitted electronically ranges from 3 percent in North Dakota 

to 66 percent in Georgia. 

Staff at several state Medicaid agencies we spoke with stressed their commitment to 

electronic claims submission. Advantages of using electronic claims submission include 

faster payment compared to submission of paper claims and reduced cost to the 

provider for clerical services, since paperwork is decreased and the physician’s 

signature is not required on each claim. Despite the advantages of electronic claims 

processing, most physician claims are still submitted on paper. One reason is that 

many physician offices do not have available the computer hardware necessary for 

electronic submission of claims. 

In Florida, the Medicaid agency had developed software that enables any provider to 

submit claims electronically. (The software, as well as claims submission, is free of 

charge to the provider.) Using the system, physicians can tailor the software to meet 

their particular needs when it is installed. For example, some information, such as the 

physician’s name and address and the date of the claim, may be automatically inserted 

each time a claim is prepared, and diagnostic, procedure, or billing codes (for common 

illnesses that physicians may treat) can be inserted with a single keystroke. 

Several states have also developed automated telephone inquiry systems to answer 

physician inquiries. These systems can be accessed with a touch-tone phone, Since 

most calls to Medicaid concern eligibility or claims status, these can be handled quickly 

and systematically, freeing staff to deal with the more difficult situations and questions. 

For example, Maryland’s automated voice response system operates continuously, and 

permits providers to verify dates of program eligibility for services rendered up to one 

year previously.33 

Point of service systems have great potential for improving the administration of 

Medicaid programs across the country. They can perform eligibility verification, claims 

submission, claims. adjudication, and utilization review on a real-time basis. New 

York’s point of service system is savings millions a year by performing eligibility 

verification and utilization review. Massachusetts uses its point of service system for 

eligibility verification only. It is also saving millions of dollars annually. Even so, few 

States have developed or plan to develop point of service systems.34 

Likewise, our inspection on electronic funds transfer found that only eight States are 

using this electronic method to reimburse Medicaid providers. A number of factors 

are preventing additional States from using electronic funds transfer: concerns 

regarding loss of cash flow, potential fraud, and initial cost. We consider these 

13 
problems to be easily surmountable, although others (provider populations that change 

banks frequently, inadequate capabilities of local banks) may be more difficult to 

overcome. It is also true that electronic funds transfer will only save money if 

remittance advisories, the notifications sent to physicians regarding their payments, are 

also sent electronically. If remittance advisories are sent by paper, program 

administrators might as well include the check in the same envelope and forgo 

electronic funds transfer.35 

MANAGING LONG TERM CARE 

The Medicaid program must ensure that long term care expenditures, which account 

for a large proportion of Medicaid outlays and are growing precipitously, are managed 

wisely. 

As discussed earlier, the funds paid out for long term care under Medicaid represent a 

substantial portion of the program’s total dollars. Yet, in many respects, here the 

Medicaid program acts more as an open checkbook than a payor of last resort for the 

needy. 

In 1989, the OIG completed work on a case study of transfer of assets in the 

Washington State Medicaid program. We found that 58 percent of the elderly 

applying for assistance who were denied because they exceeded the resource eligibility 

threshold became eligible in a few months by transferring or sheltering their assets. In 

order to qualify for Medicaid, beneficiaries used various--and completely legal--means 

to appear as though they had access to no resources. For example: 

�	 One beneficiary transferred $153,500 to adult children using an irrevocable 

trust. 

�	 One beneficiary used $50,000 to pay off a note on the family home, which is 

exempt under Medicaid rules from asset tests. 

�	 One beneficiary removed his name from bank accounts and certificates of 

deposits (totaling $206,363) and from the family residence ($40,000). 

�	 One beneficiary transferred property with an assessed value of $433,000 to the 

well spouse “to qualify the incompetent for medical assistance benefits,” 

according to the court order.3G 

Much of what we found in 1989 still holds true today. Elder law attorneys advising 

clients on how to hide their affluence by buying exempt assets, transferring money or 

assets to others, purchasing trusts and other means, appear to be a growing legal 

specialty. Although no one knows the extent of transfers of assets (both legal and 

illegal) to qualify for Medicaid, we found over $4 million in assets of only 114 

originally denied, but subsequently approved, Medicaid nursing home cases. Currently, 

14

HCFA, the U.S. General Accounting Office, andthe OIGaredeveloping study plans 

in this area. 

ENSURING QUALITY OF CARE 

The Medicaid program must ensure quality of care of services that are delivered. 

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

Medicaid program had a responsibility to ensure that the care it pays for it necessary 

and appropriate. Inthisregard, three newinitiatives are critical: successful 

implementation of new nursing home quality standards; development of a workable 

system to ensure quality in managed care settings; and implementation of drug use 

review. 

Ntig Home QuaZ@: The Omnibus Reconciliation Act of 1987 chartered a new 

direction in survey and certification of nursing homes. Rather than focus on process, 

the new surveys would focus on resident quality of life and outcomes. We are 

currently completing a study to assess how States are implementing the new survey 

and certification process. 

One of the most significant requirements of OBRA 1987 was a new rule regarding the 

use of chemical and physical restraints. The OBRA 1987 established that nursing 

home residents have the right to be free from physical and chemical restraints not 

required to treat their medical symptoms. In 1992, we conducted a study to assess 

how average nursing homes were implementing this important provision. Our report 

described the lessons learned by nursing homes engaged in reducing the use of 

physical and chemical restraints. It presented the lessons in three areas that reflect 

the operational stages of restraint reduction: 1) establishing a commitment to restraint 

reduction; 2) reducing restraints; and 3) maintaining a restraint-free home. 

Quality Assurance in Medicaid HMOS: As discussed above, States have turned to 

managed care as their best alternative to ensure access and continuity of care. It is 

especially important to have quality assurance (QA) systems in place because the 

capitated payment in managed care systems may create a financial incentive to 

undertreat, and because Medicaid beneficiaries may have difficulty negotiating a new 

and different system. 

In 1992 we reported on HMO quality assurance standards required by Medicaid 

agencies. We found that all Medicaid agencies contacted the study use structural 

standards, such as ,requiring HMOS to have a written quality assurance plan. Most 

have carried over fee-for-service process standards to their HMO program, i.e., 

conducting episodic medical record reviews and requiring HMOS to verify provider 

credentials. Most rely on complaint standards more than patient satisfaction surveys 

and health outcome reviews to ensure quality. 

15

Ensuring compliance with required standards varies significantly among Medicaid 

agencies. Compliance with some required standards is never verified by some, others 

rely heavily on HMO self-assessments of compliance. When Medicaid agencies do 

their own compliance audits they focus on HMO compliance with structural and 

process standards.37 

Drug Use Revz”ew: OBRA 1990 required States, by January 1, 1993, to develop a drug 

use review program consisting of prospective and retrospective review to assure that 

prescriptions are appropriate, medically necessary, and not likely to result in adverse 

effects. 

Prospective drug review must provide for drug review before the prescription is filled, 

typically at the point of sale. Retrospective review must be performed through the 

mechanized drug claims system to identify fraud, abuse, or inappropriate care. The 

States must also establish a Drug Use Review Board. Each Board must report to the 

Secretary annually and the Secretary must use the reports to evaluate the effectiveness 

of the States’ programs. The OIG plans a study to assess State implementation of 

drug use review programs in 1993. 

Our report on ulcer treatment drugs demonstrates the program savings and quality of 

care issues that arise when reviewing prescription drug use. In a review of 1,600 

Medicaid beneficiaries, we found that 38 percent of the recipients received dosages of 

ulcer treatment products that were in excess of manufacturers’ recommendations. 

Limiting payment for the six ulcer treatment drugs under study to the dosages 

recommended by manufacturers would save the Medicaid program $112 million 

annually as well as help prevent inappropriate prescription drug use.38 

GUARDING AGAINST FRAUD AND ABUSE 

The Medicaid program must effectively protect itself from fkaud and abuse. 

�	 Medicaid Fraud Control Units stand as an essentialforce in the jiont lines 

combatting fi-aud and abuse in Medicaid. 

The Medicaid program must ensure that its system can identify and refer cases of 

fraud to appropriate authorities. In order to increase the quantity and quality of fraud 

referrals, the HCFA is encouraging close working relationships between Medicaid 

agency staff who review the use of services by beneficiaries and Medicaid Fraud 

Control Units (MFCU) staff, who investigate allegations of fraud in most States. We 

previously reported our concerns about the level of referrals from Medicaid agencies 

to the MFCUS and continue to support additional HCFA leadership in this area. 

16

�	 Identification of questionable patterns of care can provide important information 

in identijjing possible jiaud 

Several years ago, in response to concerns about the diversion and improper use of 

prescription drugs in Medicaid, the OIG developed software for use by Medicaid 

officials in identi&ing odd or unexpected patterns in the use, dispensing, or prescribing 

of prescription drugs. This program, called the Medicaid Abusable Drug Analysis 

System (MADAS), analyzes scripts for all drugs on Schedules 2 through 5 and targets 

potential diversion activity by Medicaid recipients and providers. It can be targeted to 

specific geographical areas, specific drugs, or an array of abusable drugs. Currently, 

17 State Medicaid agencies or Medicaid Fraud Control Units are utilizating MADAS 

data to track prescriptions for controlled substances. 

States utilizing MADAS have three basic objectives. They are (1) to restrict 

availability of prescription drugs to abusers through the use of lock-in programs, (2) 

the removal of physicians and pharmacies abusing the program and (3) the referral of 

physicians and pharmacies to law enforcement agencies for criminal prosecution. 

While some States did not maintain detailed statistics on the results achieved using 

MADAS, we do know that MADAS has been directly responsible for three successful 

prosecutions in New Mexico and there are currently 20 ongoing investigations in 

Pennsylvania. We are also aware of numerous referrals to the State Bureau of 

Narcotics and the State Police in Minnesota, Missouri and Oklahoma. 

E Strategies to prevent fraud on the jiont end are essential


While identification of providers and beneficiaries defrauding the system is crucial, it is


also important to reduce opportunities for fraud. We recently completed a study in


which we assessed the potential of Multiple Copy Prescription Programs (MCPPS) for


the prevention of fraud and abuse of prescription drugs. We found that MCPPS


reduce vulnerability to theft and forgery. While their effect on overall prescribing of


scheduled drugs is difficult to assess from existing studies, MCPPS appear to have


shown some effect on abuse of scheduled drugs and program officials associate


MCPPS with better targeting of investigator resources and more successful


prosecutions of offenders involved in drug diversion.39


Legal prohibitions on behavior or activities which can lend themselves to fraudulent


acts are also essential. For example, under the Medicare and Medicaid anti-kickback


statute, section 1128(B)(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.


17

IMPROVING FEDERAL-STATE RELATIONS 

Federal and State relationships must be improved. 

The Medicaid program is supported dually by the Federal and State governments. 

Rather than representing the best of both levels of governments, too frequently the 

interests of the State and Federal governments have been seen as opposing, rather 

than reinforcing, each other. The best, and most recent, example is the dispute over 

provider taxes and donations. 

Prior to 1985, States were not permitted to use donated funds except for training State 

personnel to administer Medicaid. In 1985, a new regulation permitted States to use 

public and private donations for the State FFP with limitations (if the funds were 

transferred to the Medicaid agency and were under its administrative control and if 

the funds do not revert to the donor (unless donor was a nonprofit organization and 

the Medicaid agency decided independently to use the donor’s facility)). 

Following issuance of this rule, some States under fiscal stress began to use the 

provision to maximize funds from the Federal government. Contributions to States 

from Medicaid providers (mostly hospitals and nursing homes) were used as part of 

the State’s share of spending for covered services and matched with Federal funds. 

Around the same time, some States imposed provider-specific taxes on health care 

providers. 

These revenue sources quickly became controversial. From the Federal perspective, 

the Federal government should not reimburse States for the amounts collected from 

Medicaid-only providers. They contend that these are not costs incurred by the State, 

and therefore are not eligible for the Federal match. Reports by the OIG 

recommended that HCFA take action to control thse provider tax and donation 

programs.40 From the States’ point of view, the Federal government should not care 

what sources of revenue the State uses to pay for its Medicaid program. 

From 1988 to 1990, Congress enacted measures prohibiting HCFA from implementing 

regulations banning the use of funds from taxes and donations except in certain cases. 

Then in November 1991, Congress passed the Medicaid Voluntary Contribution and 

Provider-Specific Tax Amendments of 1991. Effective January 1, 1992, States are 

prohibited from using most voluntary contributions to claim FFP. The law prohibits 

use of Federal funds to match revenues derived from provider-specific taxes unless 

these taxes are broad-based and apply uniformly to all providers of a given type and 

all business of the providers within a class of services. These broad-based, uniform 

taxes are considered acceptable since they are not unlike imposing a new property tax 

to raise State revenues. 

States budgets have also been strained by the introduction of unfunded Federal 

mandates, such as those introducing new requirements for setices that must be 

provided to pregnant women and children. Administrative rules and requirements 

18 
placed on States (such as those requiring that States apply for waivers from Federal 

rules to implement a new program which has previously been approved for another 

State) have also caused unnecessary and unproductive tension between the States and 

Federal government. The poor Federal-State relationship has led to what some have 

termed “irresponsibility at all levels” and led to calls for repeal of the Medicaid 

program and its current Federal-State structure. 

19

RECOMMENDATIONS


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

are substantial, We are aware, of course, that many policymakers are arguing for a 

fundamental restructuring or elimination of the Medicaid program. 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 require action by the States. 

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 Medicaid program in the appendices to this report. 

We are pleased to see that the Administration supports OIG recommendations made 

in various forums for extending the ban on self-referral, for lifting the ban on drug 

formularies, and for tightening loopholes on transfers of assets and strengthening asset 

recovery laws. 

20

APPENDIX A


UNIMPLEMENTED OIG RECOMMENDATIONS: COST SAVERS 

ANNUAL SAVINGS 

Establish Mandatory Prepayment Edit Screens $12 million 

Control Medicaid Payments to Institutions for 

Mentally Retarded People $683 million 

Reduce Non-urgent Use of Emergency Rooms $39.5 million 

Recover or Adjust Medicaid Credit Balances 

in Nursing Facility Accounts $32 million 

Recover or Adjust Medicaid Credit Balances


in Hospitals $73.3 million


A -1

APPENDIX B


UNIMPLEMENTED OIG RECOMMENDATIONS: 

PROGRAM IMPROVEMENTS 

Medicaid and Homeless Ilzdividud 

E	 The HCFA should work with SSA to develop a joint strategy to increase access 

to Medicaid for eligible homeless individuals. 

�	 The HCFA should consult with PHS and SSA to develop models to help 

homeless individuals apply for Medicaid. 

F	 The HCFA should provide technical assistance to States to promote the 

development of State strategies and linkages designed to use Medicaid more 

effectively to serve this population. 

F	 The HCFA should use the Interagency Council on the Homeless to provide 

technical assistance to other Federal agencies and McKinney providers to make 

Medicaid more accessible to homeless individuals. 

Medicaid Expansions for I?enatal Care--State and Local Implementation 

� The HCFA should develop a comprehensive outreach strategy. 

b The HCFA should simplify and streamline the application process. 

F The HCFA should develop incentives to increase provider participation. 

�	 The HCFA should clarify policy and monitor implementation of Medicaid 

expansions for prenatal care. 

F	 The HCFA should develop data collection systems and evaluation processes to 

measure progress of the eligibility expansions and future program effects. 

PoiM of Service Cikiins Management Systems for Medicaid 

�	 The HCFA should collect information on point-of-semice technology and 

regulatory distribute it to the States. 

Ekctronic Funds l’)ansfer for Medicaid l+owikm 

�	 The HCFA’ should work with State Medicaid agencies to identify problems with 

electronic funds transfer (EFT) and share other States’ solutions to these 

problems. 

B-1

F	 The HCFA should assist States in developing billing agreements for providers 

who use electronic claims, remittance advisories, and fund transfers. 

� The HCFA should develop guidelines for provider participation in EFT. 

Early and PeriOdic Screening Diagnosk and lleatment (EPSDT)--Peflomumce 

Measurement 

�	 The HCFA should modify the methods by which it measures rates to correctly 

reflect States’ progress in meeting goals. 

Controh over lkwnphon DIugs 

�	 The HCFA should direct its oversight reviews to States that do not participate 

with the OIG in implementing its program to identify prescription drug abuse 

and diversion. 

�	 The HCFA should incorporate into its review the OIG program to evaluate the 

effectiveness of the States’ internal controls over prescription drug abuse and 

diversion. 

Medicaid Dkpropmiionate Share 

�	 The HCFA should encourage South Carolina to explore alternative payment 

methodologies. 

�	 The HCFA should gather more detailed data on disproportionate share 

payments that could be used to performed a nationwide review of the program. 

Medicaid Dmg Rebate fiogram 

>	 The HCFA should require States to develop procedures to monitor the 

accuracy of reporting by pharmacists. 

F	 The HCFA should require States to perform tests of the dosage units reports 

and establish computer edits to detect and correct obvious errors. 

>	 The HCFA should contact the various national pharmacy associations and 

request their participation in alerting pharmacists to the program and its needs. 

�	 The HCFA should alert Congress of the impact of eliminating the best price 

from the existing rebate formula. 

F	 The HCFA should make a legislative proposal to redefine best prices based 

upon prices as they existed in October 1990 and adjust for increases in the 

Consmer Price Index. 

B-2

APPENDIX C


ENDNOTES 

1. Office of Inspector General, Office of Evaluation and Inspections, “Medicaid 

Expansions for Prenatal Care: State and Local Implementation,” 0EI-06-90-O0160. 

2. Office of Inspector General, Office of Evaluation and Inspections, “Early and 

Periodic Screening, Diagnosis, and Treatment (EPSDT)--Performance Measurement,” 

OEI-07-90-00130. 

3. Office of Inspector General, Office of Audit Services, “Impact of the Omnibus 

Budget Reconciliation Act of 1990 on Drug Expenditures Including Best Price,” A-14-

91-02057. 

4. Office of Inspector General, Office of Audit Services, “Inaccurate Reporting of 

Medicaid Drug Data by Pharmacists,” A-06-91-00056. 

5. Office of Inspector General, Office of Audit Services, “The Health Care Financing 

Administration Needs to Provide Additional Guidance to Drug Manufacturers to 

Better Implement the Program,” A-06-91-00092. 

6.	 Office of Inspector General, Office of Audit Services, “Unit Rebate Amounts 

Inappropriately Calculate to Include an Additional Rebate for Newly Marketed Drugs 

in the First Quarter 1991,” A-O6-91-OO1OO. 

7. Office of Inspector General, Office of Audit Services, “Improvements Needed in 

the Health Care Financing Administration’s Procedures to Implement the Medicaid 

Drug Rebate Program,” A-O6-91-OO1O2. 

8. Office of Inspector General, Office of Audit Services, “Review of Management 

Controls Established Over the Medicaid Prescription Drug Rebate Program,” A-06-92-

00029. 

9. Office of Inspector General, Office of Evaluation and Inspections, “Strategies to 

Reduce Medicaid Drug Expenditures,” 0EI-12-90-O0800. 

10. Office of Inspector General, Office of Audit Services, “Escalating Outpatient 

Prescription Drug Costs are Severely Impacting Federal and State Budgets,” A-06-92-

00046. 

11. Office of Inspector General, Office of Evaluation and Inspections, “Medicaid 

Payments to Institutions for Mentally Retarded People,” OEI-O4-91-O1O1O. 

B-1

12. Office of Inspector General, Office of Audit Services, “Elimination of Enhanced 

Federal Financial Participation Rate for Family Planning Services under Medicaid,” A01052, December 1992. 

13. Office of Inspector General, Office of Evaluation and Inspections, “Use of 

Emergency Rooms by Medicaid Recipients,” OEI-06-90-00180. 

14. office of Inspector General, Office of Evaluation and Inspections, “Medicaid Cost 

Sharing,” OEI-03-91-01800. 

15. Office of Inspector General, Office of Audit Services, “Millions in Improper 

Payments to Hospitals for Nonphysician Services under The Prospective Payment 

System (PPS)--October 1983 Through January 1986,” A-01-86-62024, July 1988. 

16. Office of Inspector General, Office of Audit Services, “Improper Medicare 

Payments for Nonphysician Outpatient Services under the Prospective Payment 

System--February 1986 through November 1987,” A-01-90-00516, August 1990. 

17. Office of Inspector General, Office of Audit Services, “Audits of Health Care 

Expenditures and Related Issues: Potential for Joint Federal/State Reviews,” February 

1993. 

18. Office of Inspector General, Office of Audit Services, “Management Advisory 

Report: Manipulation of Procedure Codes by Physicians to Maximize Medicare and 

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

19. Office of Inspector General, Office of Audit Services, “Changes are Needed in the 

Way Medicare Pays for Clinical Laboratory Tests,” A-09-89-00031. 

20. Office of Inspector General, Office of Evaluation and Inspections, “Fragmented 

Physician Claims,” 0EI-12-88-O0901, September 1992. 

21. Office of Inspector General, Office of Evaluation and Inspections, “Pocket 

Dopplers: Management Advisory Report,” OEI-03-91-00461, May 1991. 

22. Office of Inspector General, Office of Evaluation and Inspections, “Low Cost 

Ultrasound,” OEI-O3-88-O141O,August 1991. 

23. Office of Inspector General, Office of Evaluation and Inspections, “Zero 

Crossers,” 0EI-903-91-O0460, August 1991. 

24. Office of Inspector General, Office of Evaluation and Inspections, “OEI-12-88-

00900, September 1992. 

25. Office of Inspector General, Office of Audit Services, “Nationwide Audit of 

Medicaid Credit Balances,” A-O4-92-O1O23. 

c-2 
26. Office of Inspector General, Office of Evaluation and Inspections, “Medicaid 

Credit Balances in Nursing Facility Patient Accounts,” OEI-07-90-00911, JUIY1992. 

27. Office of Inspector General, Office of Audit Services, “Growth of Medicaid 

Disproportionate Share Payments and Effect on Hospital Profitability,” A-O4-92-O1O25. 

28. Office of Inspector General, Office of Audit Services, “Early Alert on Medicaid 

Third Party Liability Issues,” A-01-91-00005, January 1992. 

29. Office of Inspector General, Office of Audit Services, “Early Alert on Third party 

Liability Identification and Collection--Florida Department of Health and 

Rehabilitative Services,” A-O4-92-O1O2O,July 1992. 

30. Office of Inspector General, Office of Audit Services, “Results of National Review 

of the Medical Necessity for Oxygen Concentrators--September 1, 1987 Through 

August 31, 1988,” A-04-88-02058, March 1990. 

31. Office of Inspector General, Office of Audit Services, “Review of Medical 

Necessity for Ambulance Services,” A-01-91-00513, October 1992. 

32. Office of Inspector General, Office of Audit Services, “Audits of Health Care 

Expenditures and Related Issues: Potential for Joint Federal/State Reviews,” February 

1993. 

33. Office of Inspector General, Office of Evaluation and Inspections, “Medicaid 

Hassle: State Responses to Physician Complaints,” OEI-O1-92-OO1OO. 

34. Office of Inspector General, Office of Evaluation and Inspections, “Point-ofService Claims Management Systems for Medicaid,” OEI-01-91-00820. 

35. Office of Inspector General, Office of Evaluation and Inspections, “Electronic 

Funds Transfer for Medicaid Providers,” OEI-01-91-00821. 

36. Office of Inspector General, Office of Evaluation and Inspections, “Transfer of 

Assets in the Medicaid Program: A Case Study in Washington State,” 0EI-09-88-

01340. 

37. Office of Inspector General, Office of Evaluation and Inspections, “A Review of 

HMO Quality Assurance Standards Required by Medicaid Agencies,” 0EI-05-92-

00110. 

38. Office of Inspector General, Office of Audit Services, “Nationwide Audit of Six 

Ulcer Treatment Drugs Reimbursed under the Medicaid Prescription Drug Program,” 

A-06-92-00003, November 1992. 

39. Office of Inspecto] General, Office of Evaluation and Inspections, “Multiple Copy 

Prescription Programs: State Experiences,” 0EI-12-91-O0490. 

c-3 
40. Office of Inspector General, Office of Audit Services, “MedicaidStateT axand 

Donation Programs,” A-14-91 -O1O1O;A-03-91-00203. 

c-4 
Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

SUMMARY OF OIG ACTIVITIES ON 

MEDICARE 

I 

JUNE 1993 
OFFICE OF INSPECTOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Services’ (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statuto~ mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three OIG operating components: the Office of Audit Services, the 

Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program, and management problems, and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICES 

The OIG’S Office of Audit Services (OAS) provides all auditing sexvices for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIG’S Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions, 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECTIONS 

The OIG’S Office of Evaluation and Inspections (OEI) conducts short-term management and 

program evaluations (called inspections) that focus on issues of concern to the Department, 

the Congress, and the public. The findings and recommendations contained in these inspection 

reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability, 

and effectiveness of departmental programs.