United States General Accounting Office

GAO Report to the Chairman, Human

Resources and Intergovernmental

Relations Subcommittee, Committee on

Government Reform and Oversight,

House of Representatives

September 1995 MEDICARE

SPENDING

Modern Management

Strategies Needed to

Curb Billions in

Unnecessary Payments

GAO/HEHS-95-210

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-261052 

September 19, 1995

The Honorable Christopher Shays

Chairman, Human Resources and

 Intergovernmental Relations Subcommittee

Committee on Government Reform and Oversight

House of Representatives

Dear Mr. Chairman:

The 104th Congress has been examining ways for Medicare to avoid

spending billions of dollars in unnecessary payments. Specifically, your

Subcommittee has been exploring the legal and administrative

enforcement tools available to Medicare to act against those providers

who defraud or abuse the program, the beneficiary, and the taxpayer.

Although strengthening enforcement is critical, an earlier phase of fraud

fighting—identifying the program’s vulnerabilities and the measures

needed to curb losses—is an equally vital component. Therefore, you

asked us to examine the weaknesses responsible for Medicare’s

vulnerability to provider exploitation and ways to remedy them.

To develop this information, we drew from an extensive body of GAO work

over the last few years focusing on Medicare fraud and abuse. (See the list

of related GAO products at the end of this report.) We supplemented this

work with interviews of officials in various offices of the Health Care

Financing Administration (HCFA), including the Bureau of Policy

Development, Bureau of Program Operations, Office of Legislative and

Intergovernmental Affairs, and the Office of the Administrator, and with

HCFA contractors.

Results in Brief Medicare’s vulnerability to billions of dollars in unnecessary payments

stems from a combination of factors. First, Medicare pays higher than

market rates for certain services and supplies. For example, Medicare pays

more than the lowest suggested retail price for more than 40 types of

surgical dressings. (In one case, Medicare pays 86 cents for a 36-cent gauze

pad.) Second, Medicare’s collection of anti-fraud-and-abuse controls does

not systematically prevent the unquestioned payment of claims for

improbably high charges or manipulated billing codes. Third, Medicare’s

checks on the legitimacy of providers are too superficial to detect the

potential for scams. These weaknesses are aggravated by the fact that

Medicare’s efforts to address them, as well as its efforts to penalize

Page 1 GAO/HEHS-95-210 Medicare Spending
B-261052 

wrongdoers, are too slow to be effective in curbing avoidable costs or

deterring further fraud and abuse.

Various health care management strategies help private payers alleviate

these problems, but these strategies are not generally used in Medicare.

The program’s pricing methods and controls over utilization, consistent

with health care financing and delivery 30 years ago, are not well aligned

with today’s major financing and delivery changes. To some extent, the

predicament inherent in public programs—the uncertain line between

adequate managerial control and excessive government

intervention—helps explain the dissimilarity in the ways Medicare and

private health insurers administer their respective “plans.”

We believe a viable strategy for remedying the program’s weaknesses

consists of adapting the health care management approach of private

payers to Medicare’s public payer role. Such a strategy would focus on

pre-enforcement efforts and would include (1) more competitively

developed payment rates, (2) enhanced fraud and abuse detection efforts

through modernized information systems, and (3) more rigorous criteria

for granting authorization to bill the program.

Background Medicare is the nation’s largest single payer of health care costs. In 1994, it

spent $162 billion, or 14 percent of the federal budget, on behalf of about

37 million elderly and disabled people. Approximately 90 percent of

Medicare beneficiaries obtained services on an unrestricted fee-for-service

basis; that is, patients chose their own physicians or other health care

providers, with charges sent to the program for payment. This set-up

mirrored the nation’s private health insurance indemnity plans, which

prevailed until the 1980s.

Since then, revolutionary changes have taken place in the financing and

delivery of health care. Greater competition among hospitals and other

providers has enabled health care buyers to be more cost-conscious.

Private payers, including large employers, use an aggressive management

approach to control health care costs. HCFA, within the Department of

Health and Human Services (HHS), is Medicare’s health care buyer. HCFA’s

pricing of services and controls over utilization have been carefully

prescribed by interrelated statute, regulation, and agency policy.

HCFA contracts with about 72 private companies—such as Blue Cross and

Aetna—to handle claims screening and processing and to audit providers.

Page 2 GAO/HEHS-95-210 Medicare Spending
B-261052 

Each of these commercial contractors works with its local medical

community to set coverage policies and payment controls in addition to

those that have been established nationally by HCFA. As a result, billing

problems involving waste, fraud, and abuse are handled, for the most part,

at the contractor level. This arrangement was prompted when the program

was established in the mid-1960s by concerns that the federal government,

which lacked extensive claims processing expertise and experience,

would prove incapable of providing service comparable to that of private

insurers.

Several Factors Make

Medicare Appealing

Target for Abuse

Most observers agree that the majority of Medicare providers seek to

abide by program rules and strive to meet beneficiaries’ needs. But certain

characteristics of the program and the way it is administered create a

climate ripe for abuse by some providers. For many supplies and services,

Medicare reimbursement far exceeds market rates. Scrutiny of incoming

claims is often inadequate to reveal overpricing or oversupply. And

providers are allowed to participate in the program without sufficient

examination of their qualifications and their business and professional

practices.

Above-Market Rates for

Many Services Encourage

Oversupply

Unlike the more prudent payers, Medicare pays substantially higher than

market rates for many services. For example:

• The HHS Office of Inspector General reported in 1992 that Medicare paid

$144 to $211 each for home blood glucose monitors when drug stores

across the country sold them for under $50 (or offered them free as a

marketing ploy).1 HCFA took nearly 3 years to reduce the price to $59.

• For one type of gauze pad, the lowest suggested retail price is currently 36

cents. The Department of Veterans Affairs (VA) pays only 4 cents.

Medicare, however, pays 86 cents for this pad. Indeed, Medicare pays

more than the lowest suggested retail price for more than 40 other surgical

dressings. Medicare pays more than VA for each of the nine types of

dressing purchased by both VA and Medicare. For all practical purposes,

1

Home blood glucose monitors enable individuals to determine the adequacy of their blood glucose

levels. The manufacturers have an incentive to promote the sale of their brand of monitor to ensure

future sale of related test strips. According to HCFA, the income generated in 1 month by the sale of

test strips can exceed the total income generated from the sale of the monitors.

Page 3 GAO/HEHS-95-210 Medicare Spending
B-261052 

HCFA is prohibited from adjusting the prices for these and similar

supplies.2

• Medicare was billed $8,415 for therapy to one nursing home resident, of

which over half—$4,580—was for charges added by the billing service for

submitting the claim. This bill-padding is permissible because, for

institutional providers, Medicare allows almost any patient-related costs

that can be documented.

HCFA contacts told us that resources are not available to routinely check

market prices for items covered by Medicare. Yet excessive payment rates

unnecessarily increase Medicare costs and can encourage an oversupply

of services. Further, our work has shown how costly technology

proliferates when HCFA does not review payment rates during the time that

a technology matures, its procedures become more widely used, and

providers’ costs per procedure decline. Magnetic resonance imaging (MRI)

equipment is a case in point, as we reported in 1992.3

 High Medicare

payments for MRI scans supported a proliferation of MRI machines in some

states. In the absence of systematic adjustment, the Congress has had to

act several times, specifically reducing rates for various covered benefits,

such as overpriced procedures, selected durable medical equipment items,

clinical lab tests, intraocular lenses, CT scans, and MRIs.

Medicare Does Not

Adequately Check Claims

to Prevent Inappropriate

Payments

Medicare’s claims processing contractors employ a number of automated

controls, some highly sophisticated, to prevent or remedy inappropriate

payments.4

 Although these measures are effective in some instances, our

work shows that improbable charges or unlikely payments sometimes

escape the controls and go unquestioned.

For example, contractors who process Medicare claims for medical

equipment and supplies do not necessarily review high-dollar claims for

2

42 U.S.C. 1395m(i) required HCFA to establish a fee schedule for surgical dressings based on average

historical charges. However, when the benefit was expanded to cover new categories of dressings,

HCFA did not have data on the charges for these categories. HCFA used as a proxy the median price in

supply catalogs. The median is necessarily higher than the lowest price (given any variation at all).

HCFA cannot change the methodology for determining the fee schedule, nor can it adjust the schedule

if retail prices decrease. While HCFA is authorized to increase payments annually based on the

consumer price index, it lacks authority to reduce such payments.

3

Medicare: Excessive Payments Support the Proliferation of Costly Technology (GAO/HRD-92-59,

May 27, 1992).

4

Some controls are designed to stop processing when claims do not meet certain conditions for

payment. For example, one control flags claims that exceed the allowed threshold of 12 chiropractic

manipulations a year per beneficiary. Other controls automatically deny claims or recalculate payment

amounts. A third kind of control, postpayment review of data, is intended to enable Medicare to spot

patterns and trends of unusually high spending.

Page 4 GAO/HEHS-95-210 Medicare Spending
B-261052 

newly covered surgical dressings.5 One contractor paid $23,000 when the

appropriate payment was $1,650. Similarly, Medicare paid a psychiatrist

over a prolonged period for claims that represented, on average, nearly 24

hours a day of services. The contractors’ automated controls, however, did

not flag either of these questionable billings.

In addition, Medicare controls to detect code manipulation, a type of

billing abuse that affects all insurers, are limited. In congressional

testimony in May 1995, we reported the results of our study of private

sector computer software controls used to detect coding abuses.6

 We

compared what Medicare actually paid providers against what would have

been allowed by four commercial firms that market computerized systems

to detect miscoded claims.7

 We invited each firm to reprocess 200,000

statistically selected claims that Medicare paid in 1993. On the basis of this

sample, we estimated that, had Medicare used this commercial software,

the government would have realized substantial savings.8

Medicare Does Not

Adequately Screen

Providers for Credibility

For certain provider types, Medicare’s requirements to obtain

authorization to bill the program are so superficial that these providers’

credibility cannot be assumed. The result is that, too often, Medicare loses

large sums to providers and suppliers that never should have been

authorized to serve program beneficiaries. This problem has become more

acute as providers that are less scrutinized or more transient than doctors

and hospitals use elaborate, multilayered corporations to bill Medicare.

The following examples from our work and that of the HHS Inspector

General show instances in which wrongdoers obtained Medicare provider

numbers and billed the program extensively over the past several years:

• Five clinical labs (to which Medicare paid over $15 million in 1992) have

been under investigation since early 1993 for the alleged submission of

5

In March 1994, Medicare’s surgical dressing benefit was greatly expanded to include various types and

sizes of gauze pads not previously covered and to extend the duration of coverage to whatever is

considered medically necessary.

6

See Medicare Claims Billing Abuse: Commercial Software Could Save Hundreds of Millions Annually

(GAO/T-AIMD-95-133) and Medicare Claims: Commercial Technology Could Save Billions Lost to

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

7

Providers bill their charges to Medicare according to an official book of procedure codes. By

manipulating these codes, a provider can charge Medicare more than the appropriate code would

permit.

8

HCFA reports that new controls over claims processing, instituted since 1993, are also likely to help

Medicare avoid unnecessary costs.

Page 5 GAO/HEHS-95-210 Medicare Spending
B-261052 

false claims. The labs’ mode of operation was to bill Medicare large sums

over 6 to 9 months; whenever a lab received inquiries from Medicare, it

went out of business.

• A therapy company added $170,000 to its Medicare reimbursements over a

6-month period, while providing no additional services, by creating a

“paper organization” with no space or employees. The company simply

reorganized its nursing home and therapy businesses to allocate a large

portion of its total administrative costs to Medicare.

• A medical supply company serving nursing facility patients obtained more

than 20 different Medicare provider numbers for companies that it

controlled. The companies, all in the same state, were nothing more than

shells that allowed the supplier to spread its billings over numerous

provider numbers to avoid detection of its overbillings.

The conditions of program participation for Medicare providers range

from stringent to minimal, according to the type of service or supply

provided. For most provider categories, these conditions are established

by statute.9

• For some professionals, such as physicians, state licensure is required.

Licensing boards typically perform background checks on the applicant’s

medical education, disciplinary actions, and related information.10

However, states are slow to take action to penalize health care providers

that engage in abusive billing practices.

• Institutional providers (hospitals, clinics, home health agencies,

rehabilitation agencies, and others) are surveyed and certified by state

agencies as meeting Medicare requirements (and perhaps additional state

conditions). However, unscrupulous institutions have found various ways

to circumvent these precautions.

• Nonmedical providers, such as suppliers of medical equipment, have

historically been subject to few such provisions. Even though HCFA has

recently taken steps to improve the application process in this area, where

the number of providers is growing rapidly, in some respects the

requirements remain superficial. In 1993, a newly established National

Supplier Clearinghouse began issuing supplier numbers to providers

submitting claims for durable medical equipment, prosthetics, orthotics,

and supplies. To apply for a supplier number, the provider must complete

9

While the Secretary of HHS may impose additional requirements—and has done so in some

instances—these must relate directly to patients’ health or safety. See, for example, 42 U.S.C.

1395x(e)(9) for hospitals and 1395x(o)(6) for home health agencies.

10This is done using sources such as the American Medical Association profile, kept on all licensed

physicians; the Federation of State Medical Boards’ data bank; and the National Practitioners Data

Bank.

Page 6 GAO/HEHS-95-210 Medicare Spending
B-261052 

a detailed application, but privacy concerns preclude the Clearinghouse

from verifying the accuracy of social security and tax identification

numbers required on the application. Also, the Clearinghouse does not

routinely perform background checks on the owners or verify that

supplier facilities really exist.

HCFA’s Program Integrity Group is currently examining ways of limiting

participation of suppliers and providers to those that appear to be

legitimate business entities. Medicare contractors are currently piloting

the use of commercial databases that compile information on the stability

and business histories of providers and suppliers as one way of screening

out those with high-risk potential.

Medicare’s Response

to Problems Too Slow

to Be Effective

Whether because of strict constraints imposed by statute or because of its

own burdensome regulatory and administrative procedures, HCFA is slow

and often ineffectual in addressing problems involving overpricing,

inadequate payment controls, or abusive providers.

Pricing Changes Slow or

Unworkable

In a recent letter to a congressional subcommittee, the HHS Inspector

General characterized as “absurd” the situation limiting HCFA’s ability to

make timely adjustments to payment levels.11 The Inspector General’s

Office identified home glucose monitors (the item cited earlier as being

sold for $50 while Medicare paid up to 4 times as much) as an overpriced

item in 1992. The final notice establishing special payment limits (about

$59) for this item was published in the Federal Register on January 1995.

HCFA documented that the process required to lower the reimbursement

for these monitors, under the agency’s “inherent reasonableness”

authority, took almost 3 years (see fig. 1). The Inspector General estimates

that this delay cost Medicare $10 million. Industry sources characterized

this response as “speedy,” noting that few suppliers commented on the

proposed rule, thus allowing it to become final with little change.

11Letter dated July 25, 1995, to the Chairman, Subcommittee on Oversight and Investigations,

Committee on Commerce, House of Representatives.

Page 7 GAO/HEHS-95-210 Medicare Spending
B-261052 

Figure 1: HCFA’s Process for Using Inherent Reasonableness Authority

Development

!

!

!

!

!

Collect payment information

Determine impact on:

- quality of care

- access

- beneficiary liability

- assignment rates

- participation rates

- must compare with physician services

Consult with appropriate supplier representatives

Proposed Notice developed

As an example, the notice for blood glucose monitors took

365 days to develop

Clearance Process

!

!

!

!

HCFA clearance process (60 days)

HHS clearance process (60 days)

OMB clearance process (90 days)

210 days

Final Notice Development

!

!

!

Development (80 days)

Draft, comments and resolution of issues (80 days)

160 days

Publication of Proposed Notice and Comment Period

! 60 days

Clearance Process

!

!

!

!

HCFA clearance process (50 days)

HHS clearance process (30-60 days)

OMB clearance process (limit 90 days)

Approximately 200 days

(Under statute, OMB

must clear regulations

within 90 days.)

995

Days

(Figure notes on next page)

Page 8 GAO/HEHS-95-210 Medicare Spending
B-261052 

Source: HCFA’s Bureau of Policy Development.

HCFA began investigating a second overpriced item, oxygen equipment, in

November 1994. The Inspector General estimates that, if Medicare were

able to pay the same price for oxygen concentrators as that paid by the

Department of Veterans Affairs, it could realize as much as $4.2 billion

over 5 years. As an immediate remedy, the Inspector General

recommended a congressionally mandated reduction of 25 to 50 percent in

Medicare’s payment rates for oxygen services and equipment.

A HCFA official explained that HCFA lacked resources to deal with questions

of reasonable pricing for more than one item at a time, though the agency

would like to compare prices for about 80 of the supplies and services that

are most costly overall. In December 1994, the Secretary of HHS announced

an initiative to “dramatically shorten” the time it takes to issue final

regulations to 24 months. The current regulatory process within HHS is

shown in figure 2. HCFA has not yet developed its implementation plan

under this initiative.

Page 9 GAO/HEHS-95-210 Medicare Spending
B-261052 

Figure 2: HCFA’s Regulatory Process

Development HCFA Clearance OS/OMB Clearance

RS Drafts/Revises Regulations HCFA Comments to ORM

Sent to Lead and RS

Lead Office Submits

Specs to RS

ORM Circulates Regulations for

HCFA Review

RS Clears Draft & Sends

to Lead Office/OGC &

Appropriate Components

RS Revises & Sends to Lead

ORM Submits to OS/ES for

Department Clearance

Comments to RS Lead Office Reviews

and Returns to RS

OS/ES Circulates to STAFFDIVS

(9 offices) & OPDIVS (3 offices)

RS Sends to Lead for Clearance RS Finalizes and Sends to

Lead to Clear

OS/ES Forwards to Immediate

Office of Secretary

Administrator Signs

OS/ES Forwards to OFR

OFR Publishes Regulation

Lead AA Signs & Forwards to

Regs. Mgmt. (ORM)

Lead Sends to AA:

AA Sends to ORM

Secretary Signs

OIRA Circulates Reg. to OMB

Budget Office

ORM Sends to Administrator

OS/ES Forwards to OMB

(OIRA)

OIRA Forwards OMB Response

(OIRA or Budget Office Comments)

to OS/ES

Revisions?

Revisions?

Revisions? Revisions?

Revisions?

Legend

RS - Regulations Staff

ORM - Office of Regulations

Management

OGC - Office of the General Counsel

AA - Associate Administrator

OS/ES- Office of the Secretary,

Executive Secretariat

OMB - Office of Management

and Budget

OIRA - Office of Information and

Regulatory Affairs

OFR - Office of the Federal Register

OS/ES

Forwards

Comments

to ORM

No No

No

No

No

Yes Yes

Yes

Yes

Yes

(Figure notes on next page)

Page 10 GAO/HEHS-95-210 Medicare Spending
B-261052 

Source: HCFA’s Bureau of Policy Development.

We have stated repeatedly in congressional testimony that, in pricing

services more competitively, Medicare should streamline the processes

required to revise excessive payment rates. Consistent with this

conclusion, the Inspector General states that HCFA “[...] should not have to

spend valuable resources conducting studies and issuing formal rules just

to adjust its payments to the going rate.” Possible remedies suggested by

the Inspector General include allowing the HHS Secretary to set maximum

prices on the basis of simple market surveys, or, if the formal rulemaking

process is preserved, allowing the Secretary to make an interim

adjustment in fees while the studies and rulemaking take place.

Resource and Automation

Limitations Hinder Fraud

and Abuse Detection

Efforts

Despite HCFA’s awareness of weaknesses in its controls over payment of

claims—the program’s chief administrative function—its enhancement of

these controls is problematic. In the current fiscal environment, resources

are particularly scarce. In addition, Medicare’s existing computer systems

and related software for processing and paying claims do not adequately

detect Medicare billing abuses.

Effective monitoring and analysis of claims both before and after payment

often demand the investment of time by qualified professionals.12 For

example, claims control activities carried out by Medicare’s claims

processing contractors include singling out individual claims for review in

the course of automated checks and determining whether denial is

appropriate. Payments may be delayed while claims undergo further

review or attempts are made to recover previous overpayments.

Contractor staff also conduct postpayment analyses to detect aberrant

patterns of billing.

In recent years, contractor funding on a per claim basis has declined, as

shown in table 1. As a consequence, contractors have had to shut off

automated controls, or screens, that screen claims for coding errors and

billing abuses. When running, the screens flag questionable claims that are

suspended for further review. Several contractors short on qualified staff

to review suspended claims therefore shut off some screens to avoid

12Some controls, such as those included in the commercial software discussed earlier, deny or adjust

claims payments “automatically,” that is, without human intervention. These controls, however, are

not applicable to all claims.

Page 11 GAO/HEHS-95-210 Medicare Spending
B-261052 

accumulating a backlog of unpaid claims that would compromise their

ability to meet prompt payment standards.

Table 1: Per Claim Funding of

Medicare Contractors for Selected

Activities

Percent decrease

Activity

1989

budget

(actual)

1995

budget

(estimated)

Not

adjusted

for inflation

Adjusted

for inflation

Medical review of claim $0.32 $0.15 54.4 61.8

All payment safeguards 0.74 0.50 32.7 43.6

Total contractor budget 2.74 2.05 25.1 37.2

In the past, we have recommended augmenting anti-fraud-and-abuse

activity funding by exempting Medicare’s safeguard activities from the

discretionary spending cap imposed by the Budget Enforcement Act of

1990. Although this proposal has its advocates, scorekeeping rules

preclude the Congressional Budget Office from scoring the anticipated

savings from enhanced safeguard activities as an offset to their cost. HHS

has proposed a funding alternative that would entail the creation of a

revolving trust fund for Medicare safeguard activities. At this time

information on the HHS proposal is incomplete, making it too soon to

determine the extent to which the revolving fund approach would produce

scorable savings.13

In addition to funding declines, automation limitations impair Medicare’s

efforts to curb abuses. Improvements lie ahead in the form of the Medicare

Transaction System (MTS), but this system is not scheduled to be fully

implemented until September 1999. MTS is intended to replace the 10

existing automated systems used by contractors at 56 sites for processing

and paying claims. With a single, integrated system, HCFA hopes to improve

administrative efficiency, enhance its ability to manage contractors, and

place greater emphasis on safeguarding program dollars. According to the

HCFA Administrator, MTS will track all claims for each beneficiary and be

able to identify suspicious activities.

We have recommended that, in the interim, HCFA take advantage of

available off-the-shelf software. The agency is currently evaluating certain

software packages to determine their potential utility for the Medicare

program. HCFA officials said that they have to resolve three key issues:

whether commercial system rules match or can be modified to match

Medicare payment policies; to what extent commercial firms would be

13For a detailed discussion of alternatives for funding anti-fraud-and-abuse activities, see

GAO/HEHS-95-263R (forthcoming).

Page 12 GAO/HEHS-95-210 Medicare Spending
B-261052 

willing to disclose information about their systems in order to allow

physicians and other interested parties to comment on Medicare policies;

and what would be the cost and technical feasibility of installing the

commercial software on existing contractor claims processing systems,

especially in light of their pending replacement by MTS. On the basis of our

discussions with commercial firms, we believe that these reservations can

be resolved.

Penalties for Wrongdoing

Unduly Delayed

Currently, providers who defraud or otherwise abuse health care payers

have little chance of being prosecuted or having to repay fraudulently

obtained money. Few cases are pursued as fraud. Even when they are,

many are settled without conviction, penalties are often light, and

providers frequently continue in business. These are characteristics of

health care fraud (and of white-collar crime in general) and are not

confined to Medicare. They are variously attributed to the complexity of

cases, lack of resources, necessity for interagency coordination, and

uncertainty of outcome. In recent testimony before this Subcommittee, the

Special Counsel for Health Care Fraud at the Department of Justice noted

that health care fraud cases are extremely resource-intensive and are

among the most document-intensive of all white-collar crime.14

Ironically, incentives for certain providers to challenge HCFA’s pursuit of

wrongdoing are embedded in Medicare law. Under 42 U.S.C. 1395x(v),

certain provider types, such as home health agencies and skilled nursing

facilities, are able to sue HCFA and its contractors and have their legal

expenses reimbursed by Medicare—even if the provider’s suit is

unsuccessful. In one case, Medicare allowed a home health agency under

investigation for defrauding Medicare to receive reimbursement for legal

expenses of nearly $3 million. Contractor officials believe that there is a

direct relationship between the home health agency’s history of litigious

behavior and Medicare’s practice of reimbursing legal expenses in this

manner.

Case Development Various entities are involved in the identification and pursuit of potentially

fraudulent activities, including not only Medicare contractors and HHS but

also law enforcement agencies at all levels. The lack of resources hampers

investigations and leads to extended delays in case resolution. Our recent

investigation of inappropriate therapy billings for Medicare beneficiaries

14Statement of Gerald M. Stern, Special Counsel, Health Care Fraud, Department of Justice, concerning

Medicare and Medicaid fraud and abuse, June 15, 1995.

Page 13 GAO/HEHS-95-210 Medicare Spending
B-261052 

in nursing homes15 traced one case from the initial beneficiary complaint

through its close-out by the HHS Inspector General. This case took almost 3

years, and the resolution was inconclusive.

Pursuit of Medicare fraud typically involves Medicare’s claims processing

contractors and the HHS Inspector General’s headquarters and regional

offices. As the first line of defense, the contractors are the recipients of

beneficiary complaints, a significant source of fraud case leads, and of

referrals made by HCFA. Fraud units at each contractor site investigate

leads and refer persuasive cases to the HHS Inspector General, whose

regional and headquarters offices decide whether to become further

involved and whether to seek civil or administrative sanctions.16 The

California region’s Inspector General said that his region’s practice is to

seek civil monetary penalties only in those cases with significant potential

for financial recovery in terms of both amount of fraud and collectibility.

In 10 to 20 percent of cases a year, the provider declares bankruptcy or

has no identifiable assets. The Inspector General does not—and cannot

afford to—pursue those cases. We were told “this is a cash-based industry,

and it is very hard to recover assets.”

Many fraud cases are negotiated among the various parties involved before

going to trial to explore possible plea bargains. While the cases are

developed at regional Inspector General offices, which are also

empowered to negotiate lower-dollar cases (those with settlement values

under $100,000), they must still be reviewed and approved by

headquarters, which has only three qualified and available negotiators for

the entire country. Cases settled through such negotiation offer providers

an opportunity to avoid being excluded from (prohibited from billing)

Medicare. Ninety percent of cases judged by the Inspector General to have

merit are settled through negotiation.

Exclusion The Secretary of HHS has the authority to exclude health care providers

from Medicare for a number of reasons, and has delegated these

authorities to the HHS Inspector General. Program exclusion is mandatory

following convictions for Medicare or Medicaid program-related crimes or

15Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in Nursing Homes

(GAO/HEHS-95-23, Mar. 30, 1995).

16The HHS Inspector General has no authority to pursue criminal action; this is the province of the

Department of Justice, which can also initiate civil actions in federal court. In Medicare cases,

Inspector General investigators provide the information on which the Department of Justice bases its

decision. The Inspector General may also refer cases to local or state law enforcement agencies if the

cases are declined by the Department of Justice.

Page 14 GAO/HEHS-95-210 Medicare Spending
B-261052 

for patient abuse and neglect. Under other conditions, the Inspector

General can exercise judgment as to whether exclusion is appropriate.

Despite egregious cases of Medicare fraud, however, corporate providers

have been allowed to continue their program participation. In one of the

more significant federal health care fraud prosecutions to date, a clinical

laboratory company acknowledged over $100 million in fraud committed

as part of a nationwide scheme against Medicare, Medicaid, and the

Civilian Health and Medical Program of the Uniformed Services

(CHAMPUS)17 over a 4-year period. The lab was allowed to negotiate a civil

settlement including language that specifically permitted its continued

participation in all three programs.

According to the Inspector General, very few companies or other entities

are excluded from the program: over the past 10 years, 90 percent of the

exclusions have targeted individuals. In fiscal year 1994, there were 1,265

exclusions, of which 471 were mandatory and 794 permissive. However,

almost one-half (566) were for failure to repay student loans; only 289

were for Medicare-related convictions.

The dissemination of excluded provider information is not always prompt,

despite recent improvements in the process of notifying contractors and

other affected parties. California’s Regional Inspector General for

Investigations also told us that providers who continue to bill after

exclusion are not always caught right away. Nor is exclusion necessarily

effective—providers who move from state to state or who use more than

one provider number may continue to obtain Medicare reimbursement.

The HHS Inspector General is working with HCFA to seek a nationwide

uniform provider agreement that prohibits paying excluded individuals.

They are also seeking expanded authority to act against culpable owners

of excluded companies. Currently, the owner of such a company is free to

reincorporate or start another business without fear of exclusion.

17CHAMPUS is a federal medical program for military dependents and retirees that pays for care

received from civilian hospitals, physicians, and other providers.

Page 15 GAO/HEHS-95-210 Medicare Spending
B-261052 

Private Payer

Management

Strategies Are Not

Generally Used by

Medicare

Medicare does not use (or in some cases use widely enough) private sector

strategies to manage three of the factors that attract unscrupulous

providers—excessive payment rates, inadequate safeguards over billing,

and ineffective controls over providers. For example, private insurers and

managed care organizations commonly use pricing strategies that take

advantage of their buying power and of the competitive marketplace.

These private payers also employ a range of techniques focusing on

utilization: they examine tests and procedures for their appropriateness

and their volume, and they screen providers for their practice styles and

quality of care. Some price and utilization strategies that could have

applicability to Medicare are detailed in table 2.

Page 16 GAO/HEHS-95-210 Medicare Spending
B-261052 

Table 2: Commonly Used Private Sector Strategies and Applicability to Medicare

Private sector strategy Description HCFA’s current practice HCFA explanation

Prompt reaction to market prices Change prices quickly

when paying more than

competitively necessary

Prices generally not

adjusted for declines in the

price of product or servicea

Pertinent statute generally

permits appropriate

adjustments only after a

complex administrative

processb

Negotiate with select providers Selectively contract with

providers to deliver certain

services, such as hip

replacements, at a specific

price

Same payments generally

made to any provider

selected by beneficiary to

provide services

Statute does not permit

providers to be excluded

unless they engage in

certain prohibited practicesc

Competitive bidding and negotiations Set prices for services or

service packages based on

competitive process

Prices are set under

complex formulas, but

demonstration involving

competitive procedures is

proposed

Statute generally provides

only for all area providers to

be paid the same amount

for service;d legislation

prohibits proposed

demonstratione

Preferred provider network Promote use of a network of

selected providers meeting

price, practice style, and

quality criteria

Payments generally made

to any provider selected by

beneficiary to provide

medical services

Statute guarantees

beneficiary freedom to

choose providers;f

 limited

statutory authority to

contract with managed care

networksg

Preadmission review Require prior approval of

hospitalization for select

procedures

No prior approval of

hospitalizations for any

procedures

No viable statutory authority

for requiring prior approval;

statute prohibits

interference with practice of

medicineh

Case management Assist high-cost patients in

selecting appropriate

services efficiently

Assistance not provided to

patients in selecting

services efficiently

Statute prohibits

interference with practice of

medicinei

Contract with utilization review companies Use companies specializing

in utilization review to

monitor and adjudicate

claims

HCFA contracts with private

entities—generally

insurance companies—to

process claimsj

Statute provides no specific

authority for contracting

with utilization control

organizationsk

Greater use of commercial technology to

detect billing abuses

Use off-the-shelf software

that flags billing problems

and automatically adjusts

payments

HCFA directs contractors to

develop system

capabilities, without

guidance on use of specific

technologies

HCFA concerned about

adaptability and relevance

to Medicare

aFor example, although 42 U.S.C. 1395u(b)(8) and (9) provide HCFA with authority to adjust

payments when the established rates under a fee schedule are found to be inherently

unreasonable, detailed procedures are mandated that include a lengthy notice and comment

period.

Page 17 GAO/HEHS-95-210 Medicare Spending
B-261052 

bFor example, 42 U.S.C. 1395m(a)(10)(B) provides HCFA with authority to adjust prices for

durable medical equipment, excluding surgical dressings, but only after completion of a

cumbersome administrative process. The one time this process was used, it took 3 years to

complete.

c42 U.S.C. 1320a-7 provides for mandatory and permissive exclusion of providers who are, for

example, convicted of certain program-related crimes.

d42 U.S.C. 1395f establishes conditions of and limitations on payment for services.

eIn 1985, HCFA started the process to perform a demonstration of competitive bidding related to

laboratory services, and it was set to begin in 1987. That year and in several subsequent years,

however, provisions were included in the respective budget reconciliation laws specifically

prohibiting its implementation. Eventually, HCFA abandoned plans for the demonstration, but has

since requested authority to introduce competitive bidding, without success.

f

42 U.S.C. 1395a, the so-called freedom of choice provision, expressly provides that beneficiaries

may obtain health services from any willing provider.

g42 U.S.C. 1395mm authorizes HCFA to contract with certain managed care entities to provide

care to Medicare beneficiaries under prescribed circumstances.

h42 U.S.C. 1395.

i

42 U.S.C. 1395.

j

These companies may arrange for utilization review to be done under subcontract.

k

42 U.S.C. 1395h provides detailed authorization for HCFA to contract with private entities without

competitive procedures to handle part A claims, and 42 U.S.C. 1395u provides similar authority

for part B claims.

Several Factors Limit

HCFA’s Flexibility to

Adopt Private Sector

Strategies

Three principles on which Medicare was founded—as interpreted by HCFA,

providers, the courts, and the Congress—help explain why Medicare

practices and private payer management strategies are dissimilar:

• First, the government must not interfere in medical practice.

18 Medicare

legislation essentially delegated many day-to-day administrative decisions

to private insurers to further lessen the risk of undue federal interference

and to better ensure that Medicare would treat its beneficiaries no

differently than the privately insured.19 The functions delegated include

establishing policies to determine when services provided are medically

necessary—and today most such “medical policies” are still established by

Medicare’s private contractors.

1842 U.S.C. 1395.

1942 U.S.C 1395h provides authority and detailed instructions for HCFA to contract with such entities

to handle part A claims, while 42 U.S.C. 1395u provides similar guidance related to part B.

Page 18 GAO/HEHS-95-210 Medicare Spending
B-261052 

• Second, Medicare beneficiaries should be free to choose their own health

care providers.

20 However, many of the private sector innovations credited

with cost savings rely on managed care approaches that structure and

constrain that choice. Staff- and group-model health maintenance

organizations (HMO) explicitly restrict a patient’s choice of health care

providers (for example, to a set of plan-approved physicians and

hospitals), while looser forms of managed care, such as preferred provider

networks, give financial disincentives to the patient who chooses

providers outside the plan-approved list. Although Medicare offers an HMO

option to beneficiaries, HCFA has only limited statutory authority to pursue

other managed care options.21

• Third, as a public program, Medicare changes require public input and

hence can be cumbersome and time-consuming. Past experience suggests

that changes made by HCFA will typically be contested. Given the high

stakes for providers, legal challenges are apt to be pursued vigorously by

those who fear that program changes would result in their receiving lower

payments. Although the ultimate outcome is always uncertain,

litigation—whatever the outcome—can take years to resolve.22

Consequently, in considering cost-saving initiatives, HCFA must weigh the

resulting expense and disruption as well as the risk of ultimate failure

against anticipated savings. These circumstances may foster HCFA’s

reluctance to act without specific statutory authority.23

2042 U.S.C. 1395a, the so-called freedom-of-choice provision, expressly provides that beneficiaries may

obtain health services from any willing provider.

2142 U.S.C. 1395mm authorizes HCFA to contract with certain managed care entities to provide care to

Medicare beneficiaries under prescribed circumstances. Our analysis suggests, however, that under

the current statutory prescriptions this has not harnessed the cost-saving potential of managed care.

See our recent testimony, Medicare Managed Care: Program Growth Highlights Need to Fix HMO

Payment Problems (GAO/T-HEHS-94-174, May 24, 1995).

22For example, HCFA has in recent years made a more diligent effort to recover payments made

mistakenly when other private insurers would have paid for a medical service. In 1989, the Congress

permitted HCFA to begin performing a data match with the Internal Revenue Service to help identify

such mistaken payments, with the result that millions have been recovered and millions more were

expected to be recovered. This effort was dealt a serious blow, however, when a federal court ruled in

1994 that HCFA is bound by the claims filing deadlines set by private insurers and may not recover

from third-party administrators who handle claims processing for private insurers (Health Ins. Ass’n of

America, Inc. v. Shalala, 23 F.3d 412 (D.C. Cir. 1994), cert. denied, 115 S.Ct. 1095 (1995). As a result,

HCFA may be unable to recover millions in mistaken payments and may have to repay some funds

previously recovered. See our testimony on this subject, Medicare’s Secondary Payer Program: Actions

Needed to Realize Savings (GAO/T-HEHS-95-92, Feb. 23, 1995).

23The courts are not the only forum where those questioning HCFA’s exercise of its Medicare

responsibilities might seek redress. In 1985, HCFA started the process to perform a demonstration of

competitive bidding for laboratory services, and it was set to begin in 1987. That year and for several

subsequent years, however, provisions were included in the respective budget reconciliation acts

prohibiting its implementation. Eventually, HCFA abandoned plans for the demonstration, but has

since requested authority to introduce competitive bidding without success.

Page 19 GAO/HEHS-95-210 Medicare Spending
B-261052 

These principles were consistent with the predominantly fee-for-service

and unmanaged method by which health care was delivered and paid for

three decades ago. Today, however, HCFA’s capabilities to manage

Medicare are misaligned with the state of the art in health care delivery

and financing. For example, HCFA and its contractors generally do not

• negotiate with providers for discounts; promptly change prices to match

those available in the market; or competitively bid prices for widely used

items or services, such as pacemakers, intraocular lenses, cataract

surgery, and wheelchairs. This has resulted in Medicare paying higher

prices than other large payers. The HHS Inspector General estimates that

the use of competitive bidding to price laboratory services, for example,

could save $1.4 billion over 5 years.24

• differentiate between providers who meet utilization, price, and quality

standards and those who do not, and provide incentives to encourage

beneficiaries to use the “preferred providers.” This has hampered

Medicare’s ability to encourage beneficiaries to use providers meeting

certain standards.

• use preadmission review or other utilization control practices to curb the

excessive or unnecessary provision of expensive procedures, or use case

management to coordinate and monitor high-cost patients’ multiple

services and specialists. This has limited Medicare’s ability to emphasize

cost efficiency in its dealings with those suppliers, physicians, and

institutions that habitually provide excessive services.

Conclusions Billions of Medicare dollars are spent on unnecessary payments. Despite

the current competitive health care market, Medicare often pays more

than the market price for medical services and supplies. In addition,

Medicare does not use available state-of-the art technology to screen

claims for overcharging or overutilization, even though payment of claims

for services provided constitutes the program’s chief administrative

function. Finally, while the number of nonmedical providers billing for

services and supplies is on the rise, Medicare does little to scrutinize the

legitimacy of these providers.

Constrained by statute, burdened by regulatory and administrative

procedures, or reluctant to engage in expensive litigation with an

uncertain outcome, Medicare’s response to problems is generally too slow

24For further discussion of competitive bidding and negotiation strategies, see Medicare Managed Care:

Program Growth Highlights Need to Fix HMO Payment Problems (GAO/T-HEHS-95-174, May 24, 1995).

Page 20 GAO/HEHS-95-210 Medicare Spending
B-261052 

to be effective. Pricing changes are slow or infeasible and penalties for

wrongdoers are weakened through delay. In addition, grim fiscal realities

dampen the prospect of HCFA’s ability to enhance payment controls.

Because Medicare’s anti-fraud-and-abuse efforts are funded out of the

government’s discretionary appropriations, funding must compete with

funding for other programs under the discretionary caps.

The problems facing Medicare confront private insurers as well, but they

are armed with a larger and more versatile arsenal of health care

management strategies than HCFA currently has. These strategies may not

be deployable in every aspect, but in general they offer a menu of options

for devising ways to make Medicare more cost effective. Commercial

contractors, which play a key role in administering Medicare, routinely

employ management-of-care approaches and use state-of-the-art

technology in their capacity as private insurers. If they applied similar

approaches to Medicare, the government might be able to avoid spending

substantial sums unnecessarily. A more businesslike approach for

Medicare would include the following features:

1. The ability to price services and procedures more competitively. This

could include streamlining processes required to revise excessive payment

rates, and competitively bidding and negotiating prices.

2. The enhancement of fraud and abuse detection efforts through better

data analysis. This could include completing the modernization of

Medicare’s claims processing and information systems and expanding the

use of state-of-the-art computerized controls.

3. Requirements for providers to demonstrate their suitability as Medicare

vendors before being given unrestricted billing rights. This could include

HCFA’s establishment of preferred provider networks, development of more

rigorous criteria for authorization to bill the program, and use of private

entities to provide accreditation or certification.

In general, HCFA has been reluctant to adopt private sector business

practices because its authority to do so is, in some cases, questionable. We

believe that, to redefine its role as prudent manager of health care costs,

HCFA would need to develop a plan specifying pricing and cost

management strategies and would need to seek explicit authority from the

Congress to carry out such strategies.

Page 21 GAO/HEHS-95-210 Medicare Spending
B-261052 

Recommendations We recommend that the Secretary of HHS direct the HCFA Administrator to:

• develop policies and revise practices so that Medicare can (1) price

services and procedures more competitively, (2) manage payments

through state-of-the-art data analysis methods and use of technology, and

(3) better scrutinize the credentials of vendors seeking to bill the program;

• examine the feasibility of allowing Medicare’s commercial contractors to

adopt for their Medicare business such managed care features as preferred

provider networks, case management, and enhanced utilization review;

and

• seek the authority necessary from the Congress to carry out these

activities.

Matters for

Congressional

Consideration

Given the urgency of expediting Medicare program changes that could

lead to substantial savings, the Congress may wish to consider directing

the Secretary of HHS to develop a proposal seeking the necessary

legislative relief that would allow Medicare to participate more fully in the

competitive health care marketplace. Such relief could include allowing

the Secretary of HHS to set maximum prices on the basis of market surveys,

or, if the formal rulemaking process is preserved, allowing the Secretary to

make an interim adjustment in fees while the studies and rulemaking take

place.

The Congress may also wish to consider options for granting relief for the

funding declines in Medicare’s anti-fraud-and-abuse activities.

Agency Comments We provided HHS an opportunity to comment on our draft report, but it did

not provide comments in time to be included in the final report.

Page 22 GAO/HEHS-95-210 Medicare Spending
B-261052 

Please call Jonathan Ratner, Associate Director, at (202) 512-7107, if you

or your staff have any questions about this report. Other major

contributors include Audrey Clayton, Hannah Fein, Edwin Stropko, and

Craig Winslow.

Sincerely yours,

Janet L. Shikles

Assistant Comptroller General

Page 23 GAO/HEHS-95-210 Medicare Spending
Related GAO Products

Medicare Antifraud Technology Offers Significant Opportunity to Reduce

Health Care Fraud (GAO/AIMD-95-77, Aug. 1995).

Medicare: Rapid Spending Growth Calls for More Prudent Purchasing

(GAO/T-HEHS-95-193, June 28, 1995)

Medicare Managed Care: Program Growth Highlights Need to Fix HMO

Payment Problems (GAO/T-HEHS-95-174, May 24, 1995).

Medicare: Reducing Fraud and Abuse Can Save Billions (GAO/T-HEHS-95-157,

May 16, 1995).

Medicare Claims Billing Abuse: Commercial Software Could Save

Hundreds of Millions Annually (GAO/T-AIMD-95-133, May 5, 1995). Medicare

Claims: Commercial Technology Could Save Billions Lost to Billing Abuse

(GAO/AIMD-95-135, May 5, 1995). Medicare: Tighter Rules Needed to Curtail

Overcharges for Therapy in Nursing Homes (GAO/HEHS-95-23, Mar. 30, 1995).

Medicare and Medicaid: Opportunities to Save Program Dollars by

Reducing Fraud and Abuse (GAO/T-HEHS-95-110, Mar. 22, 1995). Medicare’s

Secondary Payer Program: Actions Needed to Realize Savings

(GAO/T-HEHS-95-92, Feb. 23, 1995).

Medicare: High Spending Growth Calls for Aggressive Action

(GAO/T-HEHS-95-75, Feb. 6, 1995).

High-Risk Series: Medicare Claims (GAO/HR-95-8, Feb. 1995).

Medicare: Inadequate Review of Claims Payments Limits Ability to Control

Spending (GA0/HEHS-94-42, Apr. 28, 1994).

Health Care Reform: How Proposals Address Fraud and Abuse

(GAO/T-HEHS-94-124, Mar. 17, 1994).

Medicare: Greater Investment in Claims Review Would Save Millions

(GAO/HEHS-94-35, Mar. 2, 1994).

Medicare: New Claims Processing System Benefits and Acquisition Risks

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

Medicaid Drug Fraud: Federal Leadership Needed to Reduce Program

Vulnerabilities (GAO/HRD-93-118, Aug. 2, 1993)

(101339) Page 24 GAO/HEHS-95-210 Medicare Spending
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