57

$7.5 billion, mostly by preventing inappropriate payments, through
audits, medical reviews and other integrity efforts. Also, nearly $1
billion was returned to the Medicare trust fund, thanks to our law
enforcement partners and the Inspector General.

Now, the President is proposing several additional tools we need,
such as user fees, that will boost efforts to prevent improper pay-
ments. These new proposals, plus initiatives that were imple-
mented after the period covered by the audit report, obviously
aren’t reflected in today’s audit findings. As Ms. Brown said, the
auditors estimate that improper Medicare payments were 11 per-
cent, or $20.3 billion. This suggests a $3 billion step in the right
direction from last year’s 14 percent error rate and $23 billion im-
proper payment estimate, and I believe corrective actions that we
are taking are beginning to have an effect. But, as Ms. Brown said,
we must be careful not to overinterpret these hopeful estimates,
and I want to be clear, Mr. Chairman, that an 11 percent error
rate still is not acceptable to me or to Secretary Shalala or, I am
sure, to you.

We are pleased that the auditors issued a qualified opinion rath-
er than a disclaimer of opinion this year. We have corrected two
items disclaimed in last year’s audit and I think all of this dem-
onstrates substantial progress on operational and financial report-
ing issues since last years audit. But I would just echo what others
here have said, which is that much remains to be done.

Last year the Inspector General recommended, and again this
year she recommended, that we expand payment safeguard activi-
ties and, if necessary, seek additional funding. We did that last
year and we are doing it again this year, and we need your help.

e President's budget proposes to allow us to collect $395 million
in user fees. We will dedicate these funds to doubling the number
of audits, and increasing medical reviews and other efforts to fight
waste, fraud and abuse that will improve our claims error rate.

We also need your help in passing contractor reform legislation.
We have requested these reforms, I think, for the past 4 years, and
they would help increase competition for Medicare contractor busi-
ness, they would give us much needed leverage to negotiate with
contractors, and they would allow us to hold contractors account-
able in the way that we are not able to now. Legislation for both
of these proposals was sent to Congress in February.

I think it is important for me to stress that we cannot determine
what portion of improper payments that you are hearing about
today identified in this audit were due to fraud and abuse. Many
of them, as Ms. Brown testified, were due to inadequate docu-
mentation, which, as you know, is not synonymous with fraud and
abuse. It doesn’t necessarily mean that the service was not ren-
dered or that it was not appropriate, although there are some cases
of that, but what it does mean is that we must continue working
aggressively with our providers to improve documentation. Success
in improving documentation will help bring the error rate down,
and we are committed to doing that.

We have taken a number of corrective actions focused on im-
proper payments. First of all, I think you will be glad to know that
we recovered 95 percent of the overpayments that were identified
in last year’s audit, and we immediately began collecting those


‘As described in note 1, HCFA prepared its financial statements in conformity with the hierarchy
of accounting principles and standards approved by the Federal Accounting Standards Advisory
Board. The hierarchy is a comprehensive basis of accounting other than generally accepted

accounting principles.

In our opinion, except for the effects on the financial statements of adjustments, if any, related to
the amounts recorded for Medicare/Medicaid accounts receivable and cost report settlements as a
result of the matters noted above, the accompanying financial statements present fairly, in all
material respects, HCFA’s financial position at September 30, 1997, and the results of operations
and changes to net position for the year then ended in accordance with the accounting principles
described in note | to those financial statements.

(Our audit was conducted for the purpose of forming an opinion on the statement of financial
Position as of September 30, 1997, and related statement of operations and changes in net
Position for the year then ended. The financial information presented in HCFA 's FY 1997
Financial Report, including the management overview, is supplemental information required by
‘OMB Bulletin 94-01 and is not a required part of the principal financial statements. We assessed
‘whether this information, and the manner of its presentation, is materially inconsistent with the
information, and the manner of its presentation, in HCFA’s financial statements. This
information, which includes trust fund projections, has not been subjected to audit procedures.
Accordingly, we express no opinion on it. *

REPORT ON INTERNAL CONTROLS.

Except for the matters discussed on pages 1 and 2 of our report on the financial statements, we
conducted our audit in accordance with generally accepted auditing standards; Government
Auditing Standards, issued by the Comptroller General of the United States; and OMB Bulletin
93-06, Audit Requirements for Federal Financial Statements. These standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements
referred to above are free of material misstatement.

In planning and performing our audit of HCFA’s financial statements as of and for the year
ended September 30, 1997, we obtained an understanding of internal controls, except controls
relating to performance measurement data, to determine our auditing procedures for the purpose
cof expressing our opinion on the financial statements and to determine whether the internal
controls meet the objectives identified below. Our consideration included obtaining an
‘understanding of the significant intemal control policies and procedures; assessing the level of
control risk relevant to all significant cycles, classes of transactions, or account balances; and, for
those significant control policies and procedures that have been properly designed and placed in
‘operation, performing sufficient tests to assess more fully whether the controls are effective and
working as designed to determine our auditing procedures for the purpose of expressing our
opinion on the financial statements and not to provide an opinion on internal control.
Accordingly, we do not express such an opinion.

Auditor's Report Inspector General's Report on the HICFA Financial Satements for FY 1997 Page 336



COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman

W.J. “BILLY” TAUZIN, Louisiana
MICHAEL G. OXLEY, Ohio
MICHAEL BILIRAKIS, Florida
DAN SCHAEFER, Colorado
JOE BARTON, Texas
J. DENNIS HASTERT, Ilinois
FRED UPTON, Michigan
CLIFF STEARNS, Florida
BILL PAXON, New York
PAUL E. GILLMOR, Ohio

Vice Chairman
SCOTT L. KLUG, Wisconsin
JAMES C. GREENWOOD, Pennsylvania
MICHAEL D. CRAPO, Idaho
CHRISTOPHER COX, California
NATHAN DEAL, Georgia
STEVE LARGENT, Oklahoma
RICHARD BURR, North Carolina
BRIAN P. BILBRAY, California
ED WHITFIELD, Kentucky
GREG GANSKE, Iowa
CHARLIE NORWOOD, Georgia
RICK WHITE, Washington
TOM COBURN, Oklahoma
RICK LAZIO, New York
BARBARA CUBIN, Wyoming
JAMES E. ROGAN, California
JOHN SHIMKUS, Illinois

JOHN D. DINGELL, Michigan
HENRY A. WAXMAN, California
EDWARD J. MARKEY, Massachusetts
RALPH M. HALL, Texas

RICK BOUCHER, Virginia
THOMAS J. MANTON, New York
EDOLPHUS TOWNS, New York
FRANK PALLONE, Jr., New Jersey
SHERROD BROWN, Ohio

BART GORDON, Tennessee
ELIZABETH FURSE, Oregon
PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York
THOMAS C. SAWYER, Ohio
ALBERT R. WYNN, Maryland
GENE GREEN, Texas

KAREN McCARTHY, Missouri
TED STRICKLAND, Ohio

DIANA DrGETTE, Colorado

James E. DERDERIAN, Chief of Staff
CHARLES L. INGEBRETSON, General Counsel
Rew P.F. Stuntz, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON HEALTH AND ENVIRONMENT
MICHAEL BILIRAKIS, Florida, Chairman

J. DENNIS HASTERT, Illinois,
Vice Chairman
JOE BARTON, Texas
FRED UPTON, Michigan
SCOTT L. KLUG, Wisconsin
JAMES C. GREENWOOD, Pennsylvania
NATHAN DEAL, Georgia
RICHARD BURR, North Carolina
BRIAN P. BILBRAY, California
ED WHITFIELD, Kentucky
GREG GANSKE, Iowa
CHARLIE NORWOOD, Georgia
TOM COBURN, Oklahoma
RICK LAZIO, New York
BARBARA CUBIN, Wyoming
TOM BLILEY, Virginia,
(Ex Officio)

SHERROD BROWN, Ohio
HENRY A. WAXMAN, California
EDOLPHUS TOWNS, New York
FRANK PALLONE, Jr., New Jersey
PETER DEUTSCH, Florida
ANNA G. ESHOO, California
BART STUPAK, Michigan
GENE GREEN, Texas
TED STRICKLAND, Ohio
DIANA DrGETTE, Colorado
RALPH M. HALL, Texas
ELIZABETH FURSE, Oregon
JOHN D. DINGELL, Michigan,
(Ex Officio)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California
Vice Chairman
JAMES C. GREENWOOD, Pennsylvania
MICHAEL D. CRAPO, Idaho
RICHARD BURR, North Carolina
BRIAN P. BILBRAY, California
GREG GANSKE, Iowa
TOM COBURN, Oklahoma
TOM BLILEY, Virginia,
(Ex Officio)

RON KLINK, Pennsylvania
HENRY A. WAXMAN, California
PETER DEUTSCH, Florida
BART STUPAK, Michigan
ELIOT L. ENGEL, New York
THOMAS C. SAWYER, Ohio
JOHN D. DINGELL, Michigan,
(Ex Officio)

(m)


66

Mr. Norwoop. Would you please prepare for this committee
third document which will fn so th 7

ld blend those two? For example, you say
physician, 5.9. Lay out the percent for us on the type of error, all

the way down, for the physician and for the inpatient hospital.
Could you do that, please, ma’am?
Ms. Brown. Yes, we will.
(The information referred to follows:]

“Types of Errors (dollars in mullions)

Percentage of the overall estimate of $20,282 billion by the type of clas.

[Documents nor Non
Lock of provided due 1 covered | | ait Percenteee|

Type ot | medical | insufficient [incorrect] extenuaning vo cornet | | other ‘mpropen
Provider won} codine non! lerrors|Torat

Paysician $376) $2413] $1,658) 360 sia saa7} | s290[ ssis0s] zor

inpauent PPS | 2319) 360{ 1.001 368 a 4061] 20.02"

tA 2 aRa om D 2553] _ 12.59%

[Outpatieat 35 iat * z a S]1987] 9.654

[OME 100) Cm 1009. Tol 5 Tf 1939] 9.36:

Transportation! 197) 7 r} 716 Tal A arf say see

Subeotas Sean sasoa $29: 32547 ‘seal sara} [$299] si7ssq 86.36

[SNF a 1 n es] 3.10%

[Hospice 129) 13 By ea} 3.00%

End Stare

Renal Disease als us | 22794

Tnpaticat

Now-PPS a3 sas{ 221%

[Laboratory 76 Dopo ° r 3 tol ais] 207d

[Ambetatory

Surnery 4s so} ts 19} ty

Total S780! 35203] $2,975 BX Sasol ss30[ $303] 190.004

Percentage of

traproper

Payments 36.80%] 25.65%) 14.67%] 14.50% 420%] 2.61% | 1.4994

‘Cases in winch the providers were under snvesugalion, and we were prohibited trom requesting medical records. Because we
‘ould not test the validity ofthese claims, we considered them snvaid for determining whether total (ee-or-service
expenditures were fairly presented. It should be noted these claims could be valid or erroneous including fraudulend,

Negative dollars represent claims for which the numberof services billed was less than ihe number of services provided.

‘The range of improper paymenis atthe 95 percent contidence level is $12.129 billion to $28.434 bullion. Each dollar
sumate 15 computed consistent with the sampling methodology. The sum of all dollars equals the overall estimate of
520.222 billion,



77

Ms. Brown. I don’t have the amount that has been written off.
There wasn’t detail to support the total amount that was counted
as accounts receivable; so we couldn’t go back and really add up
the specific claims and come to that figure. We are worried about
the accuracy of them.

As far as the claims process goes, though, one relevant thing, I
think, is that 95 percent of those payments in our sample last year
that were identified as improper payments have been recovered by
HCFA through their contractors.

Mr. Horn. How much did that amount to?

Ms. DEPARLE. It is around $400,000.

Mr. Horn. That is all, nationwide?

Ms. DEPARLE. Remember, the way this is done, it is a statistical
sample. So that is what is extrapolated to the $23 billion; but itself,
it only represented $400,000.

Mr. Horn. But what does that extrapolate to in terms of billions
of dollars?

Ms. Brown. Well, unfortunately, of course, those projected im-
proper payments that weren’t in the sample were not specifically
identified, so those have not been collected.

Mr. Horn. Well, are there recommendations the Inspector Gen-
eral has made on collections at all, even though it is through con-
tractors already?

Ms. Brown. Yes, we have. There are several things we have
worked out with HCFA, and they are implementing these new con-
trols.

Mr. Horn. They are implementing them. How far along are we
on implementation?

Ms. DEPARLE. This is the second year it has been an area of con-
cern to the Inspector General, so we have not solved the problem,
but it is one of the things we will be the most aggressive about
next year.

Mr. Horn. And that will spread beyond the $400,000, which is
a drop in the bucket?

Ms. DEPARLE. Yes. But my goal, again this year, is to begin im-
mediately collecting these dollars. Again, though, because it is a
statistical sample, it won’t be the entire $20 billion; it will just be
those claims. But as we get better at this, I hope our collections
will improve.

Mr. Horn. Well, beside offset, for the ones that are into bank-
ruptcy or moving around, fly by-night operations of one sort or an-
other, what are we doing to track those people down by some, say,
identifier number that the IRS might use and you might use so we
can get the money owed the taxpayers?

Ms. DEPARLE. We are doing a number of things. One thing is
that last year Congress passed a requirement for surety bonds that
will, we think, help us have sort of a filter before new providers
get into the system. If they have to post a surety bond, a company
will have to check them out and make sure they are a going con-
cern, because that has been a problem. If they owe Medicare
money, then we will have something to collect against.

We have a proposal up here again this year to try to do some-
thing about the situation where providers go bankrupt and leave


13

implement these recommendations and to significantly reduce the
error rate, we offer no additional recommendations.

Before discussing HCF4A’s fiscal year 1997 financial statements,
I would like to touch on two pivotal issues which resulted in our
disclaimer of opinion last year on the fiscal year 1996 statements.
Specifically, we were not able to gather sufficient evidence on the
validity and reasonableness of Medicare accounts payable; that is,
the amounts HCFA owes to Medicare providers, or of supple-
mentary medical insurance revenue, which represents Part B Medi-
care premiums.

This year, Mr. Chairman, we are pleased to report that HCFA
has revised its methodology for estimating Medicare accounts pay-
able, and our auditors were satisfied with the resulting estimate.
Also, we were able to audit the supplementary medical insurance
revenue this year by working with GAO and the Social Securit;
Administration Office of Inspector General. As a result, our overall
opinion on HCF4A’s financial statements has advanced from a dis-

laimer for fiscal year 1996 to a qualification for 1997, a significant
improvement in accounting terms.

lowever, we noted continuing documentation problems. First, we
could not determine if the reported $2.5 billion in Medicare ac-
counts receivable balance; that is, what Medicare providers owe to
HCFA, was fairly presented, because contractors did not maintain
sufficient documentation to support reported activity and to provide
adequate audit trails. Our report also discusses our concern that
contractors do not have uniform accounting systems to record, clas-
sify, and summarize financial information.

in addition, our qualified opinion relates to cost report settle-
ments, the Medicare process for determining final payments to
about 45,000 institutional providers, such as hospitals. While
HCFA audited about 5,000 providers, the limited scope of these au-
dits provided little assurance that amounts eventually paid to pro-
viders meet Medicare guidelines for reasonableness and appro-
priateness. Therefore, we were unable to determine what adjust-
ments, if any, were necessary to the $2.4 billion in cost settlement
payments or the impact of such adjustments on the $5 billion year-
end cost settlement estimate.

To briefly summarize, Mr. Chairman, unnecessary or improper
benefit payments continue to plague the Medicare program. I am
pleased that HCFA and the Department’s Chief Financial Officer
are aggressively pursuing a corrective action plan to address our
concerns.

I would also like to note that we have already begun our audit
of HCFA’s fiscal year 1998 financial statements. Determining
whether HCFA has established an adequate internal control struc-
ture for Medicare accounts receivable will receive a very high prior-
ity. I appreciate the opportunity to appear before you today, and
I welcome your questions.

[The prepared statement of Hon. June Gibbs Brown follows:]

PREPARED STATEMENT OF HON, JUNE GIBBS BROWN, INSPECTOR GENERAL,
DEPARTMENT OF HEALTH AND HUMAN SERVICES

Good morning , Mr. Chairman. I am June Gibbs Brown, Inspector General of the
Department of Health and Human Services (HHS), and I am pleased to report to
you on our audit of the Health Care Financing Administration's (HCFA) Fiscal Year


72

intermediaries. It seems to me there needs to be an incentive for
intermediaries to do audits before paying your claim.

I would like to know, Ms. DeParle, are there financial incentives
for financial intermediaries to pay claims and not to ask too many
questions?

Ms. DEPARLE. Yes, there are, because the way this system is set
up right now, they are paid to process claims quickly. And we have
not had the amount of funding that we need to devote to audits
and to medical reviews. We need to increase that side and probably
look at the other side to make sure that they are not just getting
claims out the door.

Mr. KUCINICH. They pay claims quickly. So what happens the
quicker they pay the claims? What happens for them?

Ms. DEPARLE. They get paid for that. They have to meet certain
standards. And as Ms. Brown indicated, the claims that come in to
them look okay, it is only when you go behind the claim that you
see the problems.

Mr. KucinIicu. Let us slow this down a bit. They pay the claims
quickly, don’t ask too many questions. But if you started asking
questions, it slows down their processing, and then they don’t make
as much money.

Ms. DEPAaRLE. That is true. Although if there are problems with
the claims, they are supposed to investigate them. But we don’t
have a problem with claims being paid quickly.

Mr. KucINICH. I understand that.

Ms. DEPARLE. That is the point you are making.

Mr. KucinicH. But there is a problem with sometimes not
enough questions being asked.

Ms. DEPARLE. That’s correct. And that’s why-——

Mr. KUCINICH. So reconcile that for me.

Ms. DEPARLE. Well, we need to put more emphasis—and this is
a conversation that Ms. Brown and I have been having—we need
to put more emphasis on making sure that the contractors have the
funding to do audits and medical reviews of claims. We are increas-
ing that. We have increased it this year through the Medicare In-
tegrity Program. But we need to do even more.

With our claims volume being as high as you noted, and Chair-
man Barton noted, and others have noted, we need to do more.

Mr. KUCINICH. Have you discharged any contractors because they
are apparently not asking enough questions?

Ms. DEPARLE. I don’t believe so. We have had some contractors
leave the business over the past year, and there have been some
problems, but I don’t believe we have discharged anyone for that
reason.

Mr. KUCINICH. Would it be unfair to say in this system you are
describing that you are throwing money at the private contractors?

Ms. DEPARLE. Well, I think what we are seeing here is the way
this system was set up, we were required to pay insurance compa-
nies to process these claims, and there was a big premium put on
getting the claims through quickly.

I think what you are now seeing, and what we are wrestling with
ourselves, is should we change that paradigm. And that is some-
thing we are looking at as well.


30

Each dollar estimate in the previous chart was computed using a method similar to that used in
projecting the overall dollar error rate. However, the precision of the dollar estimate by specific
type of claim and type of error is not sufficient to use for benchmarking purposes. This would
have required an expenditure of audit resources outside the scope of a financial statement audit.
‘As noted in the chart on the following page, a comparison of the FYs 1996 and 1997 sample
results demonstrated that over 70 percent of our point estimate of improper payments in both
years occurred in four provider types: physician, inpatient prospective payment system, home
health agency, and outpatient services. The chart also shows that most of the errors in both
years’ samples fell into four general categories:

© documentation errors, including insufficient documentation, documents not provided
due to extenuating circumstances, and no documentation;

= lack of medical necessity;
“= incorrect coding; and

‘© noncovered/unallowable services.

Auditor's Report Inspector Ganaral's Report oa tha HCFA Financial Saiomants for FY TOT — Page 100 36



101

Question 3: Are these contractors required to have reviews done of their internal
control, in accordance with General: cepted Governmental Auditing Standards?
If so, did HCFA management or the Inspector General review these audits to ensure
that controls were effective? If this is not done or studies are done but not reviewed,
how did the Inspector General assure that contractors’ internal controls were effec-
tive to reduce to a relatively low level the risk that errors or irregularities in
amounts that would be material to in relation to the financial statement being au-
dited may occur and not be detected?

‘Answer: Medicare contractors, acting only as agents of the Federal Government,
are not subject to GAGAS requirements. However, as part of its oversight respon-
sibilities, HCFA requires Medicare contractors to perform self-assessments of their
operations, to certify to their completion, and to report to HCFA annually the re-
sults and corrective actions taken. As part of our internal control testing for the FY
1997 HCFA financial statement audit, we reviewed the results of all prior audit re-
ports. We do not believe that HCFA’s monitoring activities provide adequate assur-
ance that benefit payment internal controls are properly established and function
as designed. Our 1997 financial statement audit also included reviews of elec-
tronic data processing (EDP) internal controls at the Medicare contractors. These re-
views, which were limited to general and application controls, identified numerous
control weaknesses at the Medicare contractors, including deficiencies in entity-wide
security programs and access controls.

Government auditing standards require that we plan and perform sufficient audit
work to obtain reasonable assurance about whether the financial statements are
free of material misstatement. Due to the inherent risk of the Medicare contractors’
internal control environment and the results of the EDP internal control reviews,
we did not rely on the Medicare contractors’ internal controls to reduce to a rel-
atively low level the risk that errors or irregularities in amounts may occur and not

detected. As a result, our claims sample was designed such that very little reli-
ance could be placed on the contractors’ internal controls. We performed numerous
substantive tests of Medicare claims. Our detailed testing of the sampled fee-for-
service claims included numerous steps to determine if the claims were paid, re-
corded, and reported correctly, We tested for Medicare eligibility for both the bene-
ficiary and the provider, as well as other pricing and compliance issues.

oO


37

numerous errors for services that were not medically necessary, upcoded to obtain higher
Medicare payment than the appropriate code would permit, or noncovered or unallowable.

We believe that the FY 1997 audit results confirm that unnecessary or improper payments
continue to plague the Medicare program. Without prompt and continued effort in monitoring
improper payments, these conditions will continue. However, we acknowledge that too little
time has elapsed for HCFA to fully implement our prior year’s recommendations and to
significantly reduce the error rate.

Specifically, we recommended last year that HCFA:

+ Develop a system that estimates improper payments objectively and periodically and
disclose the range of such payments in its financial statements.

+ Develop a national error rate to focus corrective actions and measure performance in
reducing improper payments.

+ Report the lack of a national error rate process as a material intemal control weakness
in the HHS FY 1997 FMFIA report.

‘+ Continue to update its systems’ cApabilities to keep pace with questionable billing
practices.

+ Develop and implement stronger deterrents to reduce improper Medicare benefit
payments.

+ Enhance prepayment and postpayment controls by updating computer systems and
related software technology to better detect improper Medicare claims.

+ Expand payment safeguard activities and, if necessary, seek additional funding.

+ Direct contractors to expand provider training to further emphasize the need to maintain
medical records that contain sufficient documentation and the penalties for not doing
50.

‘+ Ensure that contractors recover improper payments identified in our review.

+ Direct that contractors follow up with specific providers identified in our sample to
address documentation and medical necessity concems and to determine whether other
systemic problems need to be corrected.

+ Direct contractors to make follow-up evaluations of specific procedure codes with high
error rates,

i adie Tspecior Generals Report on the HCFA Financial Saionents ar FY 1997 Page 17 of 36



62

unnecessary admissions, unnecessary readmissions, and the necessity of billings for
specific cardiac procedures.

Third, HCFA is emphasizing the need for clear and complete documentation.
HCFA is working to engage the provider community in a campaign to promote cor-
rect coding and documentation. We have held meetings with the professional pro-
vider organizations to explain the audit findings and to enlist their help in address-
ing problems identified in the CFO audit, including publication of information on
provider documentation guidelines and on the CFO audit in their materials and
newsletters.

We are working with the AMA and medical societies throughout the country to
refine the documentation guidance so it is easier to use. We will participate in a
meeting the AMA is hosting on April 27 with leaders and billing experts from the
national medical specialty societies on how to improve these revised guidelines be-
fore they are implemented.

We have increased by 15 percent the number of physician medical directors at our
claims processing contractors. These physicians help develop medical review policies
and educate the providers about coding, billing and payment policies.

Fourth, HCFA will support the use of existing technology and explore new tech-
nology to aid our contractors in identifying improper claims. These efforts include
our Correct Coding Initiative, our ‘enhanced Customer Information System, and hir-
ing of special statistical analysis contractors.

Correct Coding—Implemented in 1996, the Correct Coding Initiative is a package
of more than 93,000 automated edits we require contractors to have in their claims
processing systems. This initiative saved almost $217 million in the first year of im-
plementation alone. HCFA will continue to develop coding and produce additional
edits to enhance contractor databases.

Enhanced HCFA Customer Information System (HCIS)—The HCIS, which was
first used as a part of Operation Restore Trust, enables HCFA and its contractors
to view provider or service utilization data at several levels including the national,
the state, contractor, provider type, or individual provider. For example, if I were
trying to find out how many times a certain service had been billed in a state, I
could obtain that information through the HCIS database. As a result, audits or re-
views can be focused, rapidly and inexpensively, on a particular level. HCFA will
continue to refine the HCIS which has been particularly helpful in providing rapid
access to beneficiary and provider utilization data.

Statistical Analysis Contractor—HCFA is procuring new statistical analysis con-
tractors who wilf provide comprehensive ongoing snalysis of trends, utilization
rates, billing patterns, referral patterns and related information. These contracts
will be modeled after our successful work with Palmetto Government Benefits Ad-
ministrator, Inc., the statistical analysis contractor who has supported our four Du-
rable Medical Equipment ional Contractors (DMERCs) in detecting specific
areas of fraudulent behavior. As an example, through their analysis the contractor
has identified fraudulent billing practices for nebulizers and related drugs, and
many abusive practices for incontinence supplies, surgical dressings, parenteral &
enteral nutrition and urological supplies.

We estimate the DMERCs have made changes in their payment licies that have
saved the Medicare program in excess of $200 million. They have also used this data
i ider reviews, support fraud investigations, and target enrollment ver-
ification activities.

‘We hope to have a statistical analysis contractor in place this year. We published
a Proposed regulation on March 28, 1998 outlining parameters for hiring this and
other special program integrity contractors.

MEDICARE ANTI-FRAUD INITIATIVES

The Clinton Administration has focused unprecedented attention on the fight
against fraud and abuse, and we continue to step up these efforts. These actions
complement our CFO Audit corrective actions and help in the effort to stop improper
payments, even though many are not reflected in this year’s OIG audit report.

r Medicare Integrity Program system of payment, safeguards identifies and in-
vestigates suspicious claims throughout Medicare, and ensures that Medicare does
not pay claims that other insurers should pay. These safeguards comprise a com-
prehensive system which attempts to identify improper claims before they are paid,
to prevent the need to “pay and chase.” HCFA’s current strategy for program integ-
rity focuses on prevention and early detection. Activities inclu (edicare Second.
ary Payer, medical review, cost report audits and anti-fraud activities. These safe-
guards return $17 for every $1 spent, and saved $7.6 billion in FY 1997 by prevent-



33

fee-for-service expenditures were fairly presented. It should be noted that these claims could be
valid or erroneous (including fraudulent).

‘Some examples of documentation problems follow:

GQ Physician. Medicare paid a physician $42 for an office visit made by a beneficiary with
back problems. The physician’s office submitted a copy of the claim and a copy of the
financial ledger but, even after numerous written and telephone requests, did not submit
any medical records.

Q Outpatient. A hospital outpatient department was paid $785 for eight outpatient
physical therapy services provided during a 24-day period. The medical records supplied
by the hospital contained support for three of the eight visits. The medical reviewers
concluded that the payments for the other five physical therapy services were not
supported, resulting in a $491 overpayment.

Q DME. A Medicare contractor paid almost $3,000 to a DME supplier for 4 months’ rental
of an electric hospital bed with pressure pad, as well as wound care supplies. The DME
supplier did not respond to our requests for medical records. We subsequently went to
the supplier's address and found that the office had been vacated. Although the building
owner stated that the DME supplier'had a 3-month lease which was still current, we were
not able to contact the lessors. As a result, we referred the supplier to our Office of
Investigations and notified the contractor of our actions.

GQ SNF. ASNF received $1,967 for a beneficiary’s 19-day stay for skilled nursing care.
However, there was no indication in the nurse’s notes or elsewhere in the records that
skilled nursing care was provided during the period. Because providers may receive
reimbursement for SNF services only if skilled care is provided on a daily basis, the
$1,967 payment was denied.

© Lack of Medical Necessity

A lack of medical necessity was the second highest error category for both FYs 1996 and 1997.
In both years, such errors in inpatient hospital and HHA claims accounted for over 60 percent of
this error category (FY 1996 - $5.236 billion of the total $8.529 billion; FY 1997 - $4.803 billion
of the total $7.480 billion).

Decisions on medical necessity were made by the contractor or PRO medical staff using

Medicare reimbursement rules and regulations. They followed their normal claims review
to determine whether the medical records supported the Medicare claims. As

illustrated below, the services as billed were often found not medically necessary.

dependent huditor’s Report Tnspactor General's Report on the HCFA Financial Statements for FY 1997 — Page 13 of 36



65

term corrective actions will focus on using the contractors’ existing subsidiary sys-
tems to improve the quality of data, and to identify and document the audit trails
necessary to support and validate the data reported to HCFA.

Cost Report Settlements

The OIG was unable to determine an appropriate way to audit the cost settlement
process, in which our contractors audit cost reports submitted by providers. Desk
reviews are done for all cost reports, and some providers’ cost reports are audited

ing either a full or limited scope approach.

HCF4A’s approach has been to focus our limited audit resources on those providers
that have a greater potential for overpayment in order to recover misspent Medicare
funds and to Provide a sentinel effect on all providers. The OIG has not challenged
the quality of the current process and, in fact, has recognized its high cost-savings
ratio.

Government audit standards would allow the OIG to rely on HCFA’s provider
audit process if it were based upon a methodology that would select a representative
sample of cost re] to be audited. Presently, it is not possible for the OIG to re-
view a sub-sample of the HCFA audits and develop a statistically valid national
error rate, or to ensure that the number reported on the financial statement is “fair-
ly represented” as an accurate reflection of HCFA’s liability.

HCFA plans to work with the OIG further to address this. However, it is impor-
tant to note that the advent of more Medicare prospective payment systems will
greatly reduce cost reporting.

Internal Controls

Internal controls provide reasonable assurance that transactions are properly re-
corded and accounted for, safeguarded against loss, and in compliance with laws
and regulations. They include such things as separation of duties, delegation of au-
thorities, and access to and accountability for resources. For example, HCFA is up-
dating instructions for financial reporting, as well requiring that components de-
velop internal operating procedures that cl early identify controls.

For electronic data processing (EDP), HCFA has introduced a systems security
initiative to aggressively address vulnerabilities found through the OIG'’s and our
own reviews. Our goal is to be able to maintain the tightest security as the business
environment in which we operate changes, and to integrate security into every as-
pect of our information technology management activities.

CONCLUSION

While there is work to be done for HCFA to improve the results of the CFO audit,
I am pleased with the progress the agency has made in one year in both reducing
the estimate of improper payments and getting its financial statements in order. We
have made tremendous strides, and with your help and support, we will continue
to make needed improvements that will ensure that the Medicare program is well
managed, financially sound, and free from waste, fraud, and abuse.

Mr. BarTON. Thank you, and your entire written statement will
be included in the record.

We recognized questioners in order of appearance. Mr. Bilirakis
was the first one in the hearing room. We recognize them in order
of seniority. Mr. Bilirakis is the senior member in the hearing
room, and we recognize them in order of the importance of the sub-
committee, and his Health and Environment Subcommittee is the
most important subcommittee of the Commerce Committee that is
here. So for those three reasons, we are going to recognize Mr. Bili-
rakis for the first 10 minutes of questions.

Mr. Biuirakis. I appreciate that, Mr. Chairman, and after that,
I would yield to Dr. Norwood, because he has an important hearing
he must attend.

Mr. BarTON. So he owes you big time.

Mr. Norwoop. Don’t worry, he'll collect, too. Thank you, Mr.
Chairman, both of you. I appreciate this opportunity. My first ques-
tion is, who prepared these documents?

Ms. BRowN. The Office of Inspector General.


43

overstating the cash on hand and letter of credit draws. This matter was not detected
until we brought it to the contractor's attention.

Although we noted similar weaknesses in our prior intemal control reports issued to HCFA,
contractors have not effectively implemented the controls necessary to ensure adequate financial
reporting.

3(4) Financial Reporting - HCFA Central Office

The CFO Act imposes important requirements on all Federal agencies, including HCFA. Many
of these requirements center around the development of annual financial statements in
accordance with generally accepted accounting principles. Since Federal agency financial
statements are prepared only annually, significant accounting issues are not addressed throughout
the year. While HCFA, especially the Division of Accounting, is faced with significant staffing
constraints, preparing the financial statements once a year taxes the accounting function beyond
its capabilities and is at least partially responsible for certain conditions that were noted this year.

‘The HCFA’s process for preparing annual financial statements is manually intensive, involving a
series of spreadsheets which start with general ledger data and adjustments to incorporate
‘Treasury information and contractor information which HCFA has determined is needed as the
financial reporting process has evolved. While HCFA’s FACS is a dual-entry system, extensive
adjustments are made outside this internal control system to prepare the annual financial
statements. This increases the risk that material errors may not be detected in a timely manner.

Specifically, we found that:

+ The HCFA’s primary accounting system, FACS, does not capture all financial data
reported by HCFA. For example, Treasury data is reported to HCFA outside of FACS
and has a significant impact on the financial statements.

+ The HCFA does not have formal written policies and procedures for preparing,
approving, or retaining journal entries.

+ Controls over the safeguarding of financial reporting spreadsheets, including
verification of calculations and password protection, were not adequate. In addition,
these spreadsheets, which include prior and current period entries, are not posted to the
general ledger. For example, the ending balance in net position at September 30, 1996,
did not initially roll forward to the beginning balance for the following year.

auditor's Report ‘General's Report on the HCFA Financial SatemanisJor FY 1997 Page 23 07 36



85

licans are against it, Democrats are against it, health care provider
community is against it.

When I talk to my hospitals and doctors and physicians and
home health care people, they are not for waste, fraud and abuse.
They want to be compensated fairly and, as Ms. DeParle pointed
out, on time. So we really need to focus on what the real problems

are.

I noticed in the Inspector General’s testimony that you have been
working with HCFA, and that HCFA has agreed to cut their error
rate to 10 percent by the year 2002. That is not acceptable. I mean,
it was 14 percent, plus or minus, last year, and it is 11 percent,
plus or minus, this year.

What would you all think if I said my error rate in my congres-
sional election is plus or minus 10 percent of the vote? We
200,000 people voting, so plus or minus 10 percent is 20,000 votes.
So if I don’t beat my opponent by more than 10 percent, he can,
or she can, claim a recount because it is within the error rate. You
only won by 19,000 votes, Congressman.

Mr. Kucinicu. Mr. Chairman, if you used that approach, I think
we would be running the Congress.

Mr. BARTON. Well, that may be good, I am not sure. There are
days, I think, Mr. Bilirakis and Mr. Horn and I would let you run
the Congress, but not today, by the way.

So my first question, and this would also, I guess, go to Secretary
Shalala, who is not with us, shouldn’t we come up with a plan that,
if it is successful, would get the error rate down to like 2 percent,
1 percent?

mean, Visa and American Express, I have talked to them, their
acceptable error rate is a half of 1 percent. So why should we have
an error rate for Medicare that is 10 percent?

Ms. DEPARLE. I knew you were going to ask me that question.
T have thought about it.

Mr. BarTON. Great minds think alike.

Ms. DEPARLE. The 10 percent goal was something that was stat-
ed last year at the first audit.

Mr. Barton. And I complained about it last year.

Ms. DEPARLE. You did, and I wasn’t here then, but I have heard
about your comments, and you and I have talked about this.

To be honest with you, I thought it would be much worse this
year. We added durable medical equipment claims to the set of
claims that the Inspector General analyzed, and, based on what I
knew about that, the problem with that provider community, and
actually if you look at page 9 in their report, you will see what I
mean, there are problems there. I expected it to be worse.

I don’t think 10 percent is a good enough goal now, especially not
with the progress we are making. I don’t know that I want to set
a number sitting here. I need to talk to Secretary Shalala about it
as well. But I can tell you I am committed to making progress
every year, and we need to work together to do that.

Mr. BarTON. Well, we can set a number in law. We can’t meet
it, but we can give you a mandate, and I think we will have bipar-
tisan support on that. We don’t want to be unrealistic, but you
have a better chance of hitting something if you aim at it.

Ms. DEPARLE. I understand.


6

in 1997 and cracked down on documented fraud and abuse by home
health care, skilled nursing facilities, and durable medical equip-
ment providers nationwide. In 1997, HCFA saved an estimated
$7.5 billion by identifying inappropriate payments through in-
creased medical reviews, audits, and antifraud efforts.

I want to stress that one of the areas that I am concerned about
is the decreasing number of medical record reviews that Medicare’s
private contractors conduct. These contractors should be reviewing
medical records regularly. Currently they review only 2 percent of
the Medicare claims they receive. These private companies have no
economic incentive to conduct more frequent or intensive record re-
views unless they get paid per review. This is troubling. And HCFA
is searching for alternative mechanisms to fund further medical re-
views.

I want to say to the Administrators here today, I look forward
to your presentation, and I know that some of the serious problems
that have already been identified you are trying to work to resolve,
so let’s get on with the show. Thanks.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

PREPARED STATEMENT OF Hon. DENNIS J. KUCINICH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO

The Subcommittee on Government Management, Information, and Technology has
been holding an important series of hearings on Federal financial management. Last
week, we reviewed the financial management of the Internal Revenue Service, De-
partment of Defense, and the Social Security Administration. Now we will turn our
attention to the Health Care Financin, inistration in this joint hearing with
two Commerce subcommittees. I would like to thank Chairman Horn for his leader-
ship on these issues and for the statesmanlike manner in which he consistently con-
ducts his hearings. I enjoy the opportunity to work with him.

Congress ized as early as 1990 with the passage of the Chief Financial Offi-
cers Act that the federal government should produce reliable financial information
that can be audited. The Act directed 10 Federal agencies to conduct independ-
ent financial audits. In 1994, Congress expanded the requirement of an audited fi-
nancial statements to all 24 major agencies. Today, we have the opportunity to dis-
cuss some of the tangible results of this process with the HCFA 1997 financial
audit.

I would like to welcome the Administrator of HCFA and the Inspector General
of HHS who are here to discuss the results of the 1997 HCFA audit. In the 1996
audit of HHS, the IG found that the agency’s financial information was so unreliable
that the IG could not draw any conclusions about the agency’s financial statements.
This year the HCFA audit received a qualified opinion, which means that the IG
could determine where HCFA’s financial and accounting vulnerabilities exist. This
is a step in the right direction. However, the auditors raise several serious concerns,
and I look forward to learning how HCFA is addressing them.

T'd like to talk for just a minute about the Medicare program, and what it means
to so many ‘Americans. The Medicare program provides health insurance for 38 mil-
lion elderly or disabled citizens. Without it, many of these Americans would be de-
prived of adequate medical care—an unacceptable situation for a wealthy civilized
society. Medicare provides Americans with the security that, as they get older and
increasingly more vulnerable to serious—even dehabilitating—medical problems,
they will have access to the best medical care in the world, and it will not bankrupt
them or their families. Receiving your Medicare card is a rite of passage in this
country. It’s an affirmation of our concern as a society for the wellbeing of our elder-
ly citizens. It is, in essence, part of our compact with each other in our American
community.

We can see Medicare's importance. That’s why we must also assure that it runs
well. Last year, the Medicare Program processed over 800 billion Medicare claims
and paid more than $200 billion. HCFA is effectively stemming the rise in Medicare
spending. Health care spending as a share of the gross domestic product has re-
mained constant since 1993.


CONTENTS

‘Testimony of:
Brown, Hon. June Gibbs, Inepector General, Department of Hoalth and
Human Services; accompanied by Joseph E. Vengrin, Assistant Inspec-

tor General for Audit Operations and Pr ancial Statement Activities ....
DeParle, _Hon. Nancy-Ann Min, Administrator, Health Care Financing

tion ...
Material submitted for the record
DeParle, Hon, Nancy-Ann Min, Administrator, Health Care Financing
‘Administration, letter dated June 23, 1998, to Hon. Joe Barton, enclos-
ing responses for the record ...
Inspector General, Department of Health and Human Services, esponses
to Questions of Hon. Steve Horn ...

w)

Page

11
56

98


40

> Assess the availability of insurance industry and provider data to establish benchmarks
and use this information to assess the reasonableness of the estimate for other
governmental liabilities.

» Reconcile its estimate to the National Claims History File monthly processing reports.
> Perform a trend analysis of the accounts payable estimate to expenditure history.
> Periodically validate key information, such as data from contractor 750 reports.

3. Financial Management Controls for Contractors and Preparation of HCFA Financial
Reports

The OMB Bulletin 94-01 requires that financial statements be the culmination of a systematic
accounting process. The statements are to result from an accounting system that is an integral
part of a total financial management system containing sufficient structure, effective intemal
controls, and reliable data. However, HCFA does not have an integrated accounting system to
capture expenditures at the Medicare contractor level. Instead, it relies on a complex system of.
reporting and ad hoc reports to accumulate data for financial reporting. Our review of the
internal control structure at selected Medicare contractors disclosed numerous weakmesses in
their ability to report accurate financial inférmation. ‘These weaknesses may be partly due to the
absence of certain components of a fully-integrated financial management system, including full
accrual accounting, a double-entry general ledger system, proper cut-off procedures, and
adequate source documentation. These weaknesses increase the risk of material misstatement in
the financial statements. In addition, contractors do not have uniform accounting systems that
record, classify, and summarize information for the preparation of financial statements.
Moreover, HCFA’s central and regional office oversight of contractor operations and financial
‘Tmanagement controls has not provided reasonable assurance that material errors would be
detected in a timely manner.

3(a) Medicare Accounts Recetvable

Medicare accounts reczivable represent funds owed by providers to HCFA due to overpayments
reported by Medicare contractors. These accounts receivable are stated as $2.5 billion at
September 30, 1997, net of the allowance for uncollectible accounts. Medicare contractors were
not able to provide sufficient detailed records to support accounts receivable balances reported to
HCFA to prepare the yearend financial statements. Many of the deficiencies reported in previous
years continued to exist throughout FY 1997, as noted below:

+ Wecould not obtain reasonable assurance of the completeness and support for
{$266 million in accounts receivable that a contractor reported as transferred to other
Medicare Fis during its transition from the Medicare program. In addition, HCFA has
bbeen unable to reconcile, through its 750/751 quarterly contractor financial reports, the

Auditor's Report Tnspectar General's Report on the HCFA Financial Statements for FY 1957 Page 30 of 36



71

would take, looking at millions of claims to get a statistically valid
error rate on a contractor. So we don’t know what their error rates
are.

Mr. GREEN. You only estimated on this 8,000 claims?

Ms. DEPARLE. We looked at 8,000 claims.

Mr. GREEN. Why can’t you use the same methodology for looking
at the contractors that you use for looking at what you are report-
ing to us today?

Mr. VENGRIN. It would be most difficult to go down to a contrac-
tor; you would have to quadruple the sample size or probably need
a multiplier of about 50 to get the error rate by contractor. More-
over—

Mr. GREEN. Let me, because I have to leave too. I understand
that, but I am concerned that we have $177 billion of, and we are
using this same methodology for saying that we have X amount of
money for waste, fraud and abuse, which is almost more than half
of it may be for documentation questions. But again, using the
same methodology, what I am trying to say is that are we doing
such a bad job on the Federal level because of our law as compare
to the private sector? And that ought to be able to get to that with-
out having to multiply it by 50 times unless you want to multiply
this methodology by 50 times and maybe we could get a better
number.

Ms. DEPARLE. We can discuss this some more. It is something
that I was interested in, and the numbers that Joe gave me about
how much this would cost were awfully big, but it is certainly
something I can discuss with you. On the private sector side
though, sir, based on what I have learned from talking with them
and from talking to experts in this field, many folks feel that we
are doing a better job than the private sector, and the important
thing is that because of this law, we have to analyze it, and we
know what our error rate is. I think that is an important step, be-
cause then we can set goals and try to do something about it. The
private sector doesn’t do that.

Mr. GREEN. Well, isn’t it true that the fiscal intermediaries only
audit about 2 percent of the Medicare? Do you know if the 2 per-
cent is the same they audit for their own private sector business,
for example, the Federal Government’s insurance program that a
lot of them are also contractors for that or providers of?

Ms. DEPARLE. I believe the audits, sir, are around 10 percent.
We audit about 10 percent of our claims.

Mr. GREEN. Okay. Our information is 2 percent, but you might
check on that.

Thank you, Mr. Chairman.

I yield the balance of my time to my colleague from Ohio.

Mr. BARTON. The gentleman yields the balance of his time to Mr.
Kucinich.

Mr. Kucinicu. Thank you very much, Mr. Chairman, appreciate
it.

I thought earlier the point Mr. Norwood was making was very
important because we are talking about financial intermediaries
here, private insurance companies. And they appear to be a large
part of the problem, because there needs to be an incentive for


80

that I think what this audit demonstrates is the only way to do a
better job of making sure that Medicare gets what it pays for, or
the best way, is that you have to have time to look behind the
claims, because the claims that are coming in look okay. And to do
that we need to spend more on audits and medical reviews. And
you know that our budget right now is very small in relationship
to the amount of claims and the amount of dollars that come
through.

My recommendation to the Congress is that we need to have
more funding to spend on doing these audits and medical reviews.
That is the only way we will be able to address this problem. That
is why we are seeking the user fees. And as I said, I understand
and appreciate your concerns about them, but I want to make clear
that they do, I think, relate to a commitment that we both share.

Mr. Bivirakis. Well, I think we have provided $400 million to-
ward this overall effort.

Ms. DEPARLE. You did, and that Health Insurance Portability
and Accountability Act, which went through your committee, has
made some important contributions to the effort, I think.

Mr. BiuirAKIs. Do you think that the Justice Department is
being overzealous?

Ms. DEPARLE. Well, I don’t think it’s really appropriate for me
to comment on their Prosecutions. I am not familiar with exactly
what they have done. I can tell you from my perspective I want to
be sure we set tough and clear rules for providers and then expect
them to live by them. It is the Justice Department’s role to then
enforce them.

Mr. BILiRAKIS. I have endorsed that statement. I have said that
more than once. And, again, I don’t know about Mr. Barton’s opin-
ion on the way the False Claims Act is being used by the Justice
Department, but I know how tough he is on waste, fraud and
abuse. But I am here to say to you that what we must be clear in
terms of what the rules should be for these providers and then hit
them hard if they don’t abide by those rules. But that is not the
sort of picture I am getting from people out there.

Thank you very much. Thank you, Mr. Chairman, you have been
more than fair.

Mr. BarTON. Thank you, Congressman.

Before I introduce Mr. Kucinich for really his first round of ques-
tioning—on the False Claims Act, I am not a cosponsor of the
McCollum bill. I think that goes way too far. I do think the Justice
Department, in some instances, has been overzealous in the way
they have used the False Claims Act, and I have got a number of
options under consideration, and, quite frankly, I want to talk to
you about those privately.

Mr. BILIRAKIS. We will have to do that, Joe. Thank you.

Mr. Barton. Mr. Kucinich.

Mr. Kucinicu. Thank you very much, Mr. Chairman.

Picking up from what Mr. Bilirakis was asking of Ms. DeParle,
is it true there is about 4,700 hospitals across the country that
have received demand letters, referred from your department to the
Department of Justice, claiming each has fraudulently billed the
government?


HHS INSPECTOR GENERAL'S AUDIT OF THE
HCFA’S FY 1997 FINANCIAL STATEMENTS

HEARING

BEFORE THE

SUBCOMMITTEES ON HEALTH AND ENVIRONMENT

AND

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON COMMERCE

AND THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

APRIL 24, 1998

Committee on Commerce Serial No. 105-127
Committee on Government Reform and Oversight Serial No. 105-104

Printed for the use of the Committee on Commerce and the
Committee on Government Reform and Oversight

ae

U.S. GOVERNMENT PRINTING OFFICE
48-388CC WASHINGTON : 1998

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-057740-3
a





28

selected providers, we made onsite visits to collect requested documentation. Throughout the
medical review, we coordinated OIG and medical review efforts to ensure consistency and
accuracy. Concurrent with the medical review, we made additional detailed claims reviews,
focusing on past improper billing practices, to determine whether:

+ the contractor paid, recorded, and reported the claim correctly;
+ the beneficiary and the provider met all Medicare eligibility requirements;

‘+ the contractor did not make duplicate payments or payments for which another primary
insurer should have been responsible (Medicare secondary payer (MSP)); and

+ all services were subjected to applicable deductible and co-insurance amounts and were
priced in accordance with Medicare payment regulations.

Results of Review

‘Our review confirmed prior findings that the Medicare program is inherently vulnerable to
incorrect provider billing practices. Through detailed medical and audit reviews of a statistical
selection of 600 beneficiaries nationwide with 8,048 fee-for-service claims processed for
payment during FY 1997, we found 1,907 élaims that did not comply with Medicare laws and
regulations, The contractors have disallowed and already recovered many of the overpayments
identified in our sample, consistent with their normal claims adjudication process.

‘We estimate that the point estimate dollar value of improper Medicare benefit payments made
during FY 1997 was $20.3 billion, or about 11 percent of the $177.4 billion in processed fee-for-
service payments reported by HCFA. The estimated range of the improper payments at the 95
percent confidence level is $12.1 billion to $28.4 billion, or about 7 percent to 16 percent. While
this year’s point estimate is $3 billion less than last year’s point estimate $23.2 billion, we cannot
conclude that the current error rate is statistically different. The difference may be due to
sampling variability or HCFA’s and the OIG’s efforts toward obtaining better documentation.
The year’s results could differ from last year’s because selecting different claims with different
dollar values and errors will inevitably produce a different estimate of improper payments.

‘The following table shows the types of errors and provider claims included in our $20.3 billion
improper payment estimate for FY 1997. About 87 percent of these improper payments occurred
within the first six provider types highlighted on the following page:

Auditor's Report Tnspector Ps Report on the HCFA Financial. Pape OF



87

they are going to help pick the places around the country. I believe
their first meeting is next week to begin picking the places. And
then in each of the areas that are selected, there will be a local
group of people who will work on moving that forward, because it
is so hard to make these kinds of changes in the Medicare program
without the community’s support.

So tam hoping that will be going forward by the end of the year
as well.

Mr. BarToNn. You mention in your testimony that you have re-
quested additional authority to go out and do basically a competi-
tion for who is going to be the intermediary. Do you want to elabo-
rate on that?

Ms. DEPARLE. Yes, I would like to. I think for the past 4 years
we have sought legislation to allow us to change the way we do
business with contractors. The original Medicare law said we had
to use certain types of companies, insurance companies, to pay the
claims. And that was set up that way because of the dynamic, I
guess, at the time of how Medicare could be passed. We think now
that it would be a good idea to have more competition in this
claims | payment area. rd

in the payment safeguard or program integrity area, you gave us
that authority a couple of years ago in the Health Insurance Port-
ability and ‘Accountability Act, and we have just put out a regula-
tion in March to start doing some competitive bidding there to get
some new kinds of program integrity contractors in, because there
are other folks in addition to insurance companies who could do
this kind of work, and we would like to make it competitive and
create some incentives for better performance.

Mr. BARTON. Under the current law, is it legally possible to give
your intermediaries a bonus if they have fewer bad claims, if we
created some incentives to do it right the first time? I mean all the
way down the line, including maybe the physicians and the hos-

itals.
P Do you have that authority now—not you personally, but the ex-
ecutive branch—or would that have to take an act of Congress?

Ms. DEPARLE. On the claims processing side, our contracts are
not the typical FAR contracts. They are special contracts under
Medicare, and we pay them on a cost basis only to process the
claims. I don’t believe we have the authority to give them incentive
payments, and certainly an important point to Mr. Kucinich’s ques-
tion is that we are uired to pay these claims, clean claims,
which as the Inspector General said, 98 percent of the claims that
came in were clean. We have to pay those within 2 weeks, basi-
cally.

So there isn’t any incentive. These claims just go through the
door. And that is why I have asked for more funding to do audits
and medical reviews, because that is the only thing that gets be-
hind the claims, looks at them, and then we know where these er-
rors are. Otherwise, the money just goes out the door, as you all
have seen.

Mr. BARTON. My time has expired. I will recognize Mr. Horn for
this second round, but, before I do, one final question.

I am one of the proponents of medical savings accounts for senior
citizens. I think if you put the money in their name and reestablish


82

Mr. KucINIcH. Do you have any idea how much of the $20 bil-
lion, that number that has been thrown around in overpayments,
is fraud and how much of it is incomplete paperwork?

Ms. Brown. No, there is no way I could determine that.

Mr. Kucinicu. Has anybody tried to determine it?

Ms. Brown. No. This has just been completed, and we know that
there was some reason that that bill came in——

Mr. KucINIcu. Here is where I have a problem. If we haven’t
really tried to make that determination, then hospitals are receiv-
ing letters which, in effect, accuse them of fraud.

is. BROWN. There are no letters in connection with this audit at
this time. Now, the previous year there was ample opportunity for
them to make a determination or justify why this service was per-
formed when it shouldn’t have been. If they can provide that evi-
dence why ——

Mr. KUCINICH. Let me give you an example. Mr. Chairman, you
might find this instructive. Again, this isn’t taken as criticism, I
want to illuminate a problem here which I think I have found in
the 10th Congressional District.

We have Parma Community General Hospital. It is an independ-
ent hospital. It has a reputation of serving the community honestly
and ethically. And they received a letter in 1996 which basically
threatened huge fines if they didn’t voluntary settle. And the sub-
sequent findings of an audit over a 6-year period found an error
rate of only 0.6 percent.

By exercising its legal rights, instead of voluntarily settling, they
could have been exposed to an adverse finding of nearly $100 mil-
lion under the False Claims Act. You know, this I consider to be
a serious matter, because how many hospitals are out there getting
slammed with demands for payment or accusations, when the truth
is they may not actually be doing anything that is wrong, and they
might have a very low error rate?

How do you explain that?

Ms. Brown. Well, in order to use the False Claims Act, we have
to show that there was deliberate disregard of the law. I don’t
know what happened in the case of the Parma hospital. I would be
glad to see if that is a case that we had participated in and get
some answers.

Mr. KuciNIcu. Here is what I am concerned about. I am sure you
can appreciate this concern. It seems we are paying for-profit inter-
mediaries, insurance companies to process claims, which they effec-
tively rubber stamp, and then turn around and audit hospitals an-
nually for payments they have, in fact, approved and been reim-
bursed for. Yet HCFA and the Department of Justice are using the
False Claims Act to force hospitals into making payments when
they have been given virtually no choice but to pony up.

I just wonder how particularly helpful this is to the Medicare
program.

Ms. BROWN. Well, again, each one of those cases is separate. I
would be glad to have my staff work with yours or get some an-
swers for you on the particular case you are speaking of.

Mr. BarTON. Will the gentleman yield?

Mr. Kucinicu. Gladly yield to the Chair.


10

What I find most disheartening about this whole process is that so many portions
of the report could not be determined with any degree of certainty. The fair presen-
tation edicare accounts receivable, the accuracy of Medicaid accounts receivable,
and the need for an adjustment to the FY 1997 cost report settlement payments
were all in question. In the future I would like to see a plan that helps eliminate
these uncertainties and that provides more concrete information. I understand that
documentation continues to be a problem, and thus Brevents anyone from being
completely certain about the findings. This reflects problems within HCFA. We
uni ormity and clarity, then maybe this dog can hunt.

T am also very concerned that there are so many potential problems with data
security in the HCFA central office. The thought that someone could break into the
computer system and alter files is extremely unsettling, and definitely needs to be
corrected.

Similarly, HCFA definitely needs to take action to correct the year 2000 problem
as that year rapidly approaches. If HCFA does not become compliant our current
problems will be dwarfed by the payment errors created with that situation.

Though some of the findings may be troubling, the methods HCFA is using to re-
duce costs are more troubling. We have to first correct them. This report signifies
a step in the right direction in eliminating incorrect Medicare payments, but does
so the wrong way. We must continue to improve the accuracy an dependability of
health care claims without punishing doctors as scapegoats for problems at HCFA
and within the regional carriers.

Mr. BarTON. Thank you. Mr. Greenwood?

Mr. GREENWOOD. I will submit it for the record.

Mr. BaRTON. Mr. Greenwood apparently has been trained by his
chairman. I didn’t realize that, but I appreciate that.

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. ELIZABETH FURSE, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF OREGON

I want to thank all my colleagues and our witnesses for taking the time to appear
today regarding the HCFA financial audit. In particular, I want to thank Nancy-
Ann Min DeParle, HCFA Administrator, for her hard work at that agency. She has
been responsive to my inquiries about HCFA’s current work on diabetes, We are
also lucky to have June Gibbs Brown as Inspector General at HHS. Both women
are making extraordinary contributions to our society and I want to publicly recog-
nize them for their efforts.

Like most of my colleagues, it is my sincere hope that the results of today’s hear-
ing do not get mischaracterized our colleagues or members of the media. The
work that has been done by the office of Inspector General identifies improper pay-
ments. Something that is “improper” is not necessarily waste, fraud, or abuse. In
many situations, I am certain the Medicare system worked as it should: a senior
who needed health care obtained the necessary covered service. While the provider
may have neglected to fill out the proper paperwork—and this should not be con-
doned—it does not automatically mean that the taxpayers were bilked out of any
funds.

The work done at HCFA affects the health-care of millions of Americans. We must
use caution when examining the testimony today and using it in our future delibera-
tions. With that in mind, I look forward to hearing the testimony of our witnesses.

Mr. BaRTON. We would now like to hear from our witnesses. We
have the Honorable June Gibbs Brown, who is the Inspector Gen-
eral for the Department of Health and Human Services, if she
would come forward; and we have the Honorable Nancy-Ann Min
DeParle, Administrator of the Health Care Financing Administra-
tion. Would she please come forward.

If the Honorable Ms. Gibbs Brown would introduce the gen-
tleman who is Rei g to assist her.

Ms. Brown. With me is Joe Vengrin, who is the person who has
the supervisory responsibility over all of the preparation of the fi-
nancial statement audit.

Mr. Barton. And what is his official title in the Department.

Mr. VENGRIN. Assistant Inspector General.


52

Recommendations
‘We recommend that HCFA:
> Increase their oversight of Medicare contractors’ financial reporting data.

+ Periodically test the validity of submitted financial information and obtain supporting
documentation.

» Ensure that the contractors reconcile various financial reports, such as the 750/751 to
POR and PSOR and the 1522 to the paid claims file.

+ Develop corrective action plans for resolving past as well as current OIG financial
statement findings and recommendations and follow up to determine effective
implementation.

2. Federal Share of Medicaid Accounts Payable and Accounts Receivable

Federal financial accounting standards require that the Federal portion of Medicaid accounts
payable and accounts receivable recorded by the States be recorded in the Medicaid program’s
financial statements. In an attempt to accunulate this information, HCFA distributed a survey
form to the States in 1996 and 1997. Based on the survey results, HCFA estimated the net
liability as of the end of each fiscal year and recorded these amounts in the financial statements.

‘The survey information on the Federal share of accounts receivable received by HCFA was very
limited. In addition, most of the information received was as of June 30, 1996 and 1997. Our
testing showed that the accounts receivable balances can be fairly volatile from State to State and
from month to month within a State, Since HCFA received only limited information and did not
receive the information as of the fiscal yearend, accurately estimating the total Federal share of
accounts receivable is very difficult.

Recommendation

We recommend that HCFA improve its estimate of the Federal share of Medicaid accounts
payable and receivable through the following procedures:

> The HCFA should continue its annual survey but should send the survey well in
advance of the due date and include clear, comprehensive instructions.

+ Survey responses should be carefully monitored and procedures implemented for
second requests, telephone follow-ups, and guidance to State personnel in completing
the survey.

Auditor's Report Tnspecior Generals Report on the HCFA Financial Satamants or FY 1097 Page 32 of 36



94

So in answer to the question, more postpayment review is need-
ed. The problems that were identified by this audit were detected
this way. So that was the strongest action I could recommend.

Mr. BARTON. Okay. We have danced around this question, and I
have to ask it for the record, both Ms. DeParle and Ms. Brown. In
your opening statements, you point out an error rate, and then you
say it could be plus or minus so much percent. You talked about
wanting to work on waste, fraud and abuse, and then you say, we
don’t necessarily say that all of these problems are attributed to
fraud and abuse, but are due to insufficient documentation, lack of
medical necessity.

What is your educated opinion as to the percent of fraud?

Ms. Brown. Lack of documentation can indicate fraud. For ex-
ample, we went out at least three times and even made personal
site visits in order to get documentation. So it isn’t a matter of the
documentation not just being put back in the file or something like
that. These are things where there is no record of a service being
performed. And so those aren’t as vague as they might appear up
there.

I can’t come up with a number, but I think that a reasonably
large proportion of those are due to some type of fraud and abuse.

I might also, if I may, just mention that these are only the fee-
for-service claims, and the percentage of the fee-for-service. There
are other types of fraud as well. So if somebody is creating docu-
mentation in a fraudulent manner, if they are——

Mr. BARTON. Well, what about the lack of medical necessity?
Does that lend itself to a fraudulent interpretation?

Ms. BRowN. It could, because if somebody goes to their doctor
and wants something done that may be cosmetic in nature or some
other thing that isn’t covered by Medicare, and the record doesn’t
show that there is a necessity for the type of service being per-
formed, then it could be fraud. On the other hand, it could be some
other interpretation.

Mr. BARTON. Well, if you took no documentation, no documenta-
tion due to investigation and lack of medical necessity, that is over
50 percent, so that would be over $10 billion is fraudulent. Would
I be irrational if I said half of the error rate that you found is prob-
ably because of fraud?

Ms. Brown. I couldn’t contest that figure.

Mr. BaRTON. You would not contest it?

Ms. Brown. I could not contest that figure.

Mr. BARTON. What about you, Ms. DeParle? What is your best
guess as to what percentage of this is fraud?

Ms. DEPARLE. Well, I think maybe I would say you were a little
bit high, just in thinking about it. I think the category, that trou-
bles me the most is the one that Ms. Brown just ig! lighted, no
documentation due to investigation. If you look at that chart on
page 9 of her report, the claims in the durable medical equipment
area, more than half of the dollar amount of the claims they looked
at is in that category of documentation not provided due to extenu-
ating circumstances. What that means is there is a review going
on, perhaps an investigation going on, and I think those are the
categories that I am most concerned about that could be actual

ud.


73

Mr. Kucinicu. Let’s talk about this now. What percentage of
claims do the private contractors actually audit?

Ms. DEPARLE. I believe it’s around 10 percent, sir.

Mr. Kucinicu. Is there a distinction between an audit and a
medical review?

Ms. DEPARLE. Yes. A medical review is more intense, generally.
And there are desk audits and also site audits. So there are dif-
ferent types of audits.

Mr. RocINIcH, Let me ask the Inspector General, is there a dis-
tinction between the audit that she is talking about with respect
to the medical contractors and the kind of audit that you do?

Mr. VENGRIN. Yes.

Ms. BROWN. Yes.

Mr. Kucinicy. Is their medical review closer to the kind of audit
you do?

Mr. VENGRIN. They do both. They do what they call screens, and
they do focused medical reviews.

Mr. BARTON. Will the gentleman suspend?

Those documents in the back of the room are going to be there
after the hearing is over. I think we owe the courtesy to the ques-
tioner and to the respondents for the audience to be seated. We are
not going to take the documents away, so they will be there.

Mr. Kucinich.

Mr. KuciNicH. Thank you very much, Mr. Chairman.

Please.

Mr. VENGRIN. The Administrator is correct. They do both, sir.
They do a focused medical review, and they do automated comput-
erized screens of the claim. That is what is referred to at 9 or 10

reent, Ours included a full-blown medical review on those claims.

ey were more geared to the focused medical reviews.

Mr. Kucinicu. Tell me for a moment about how much of the re-
view of the private contracting do you get into?

Mr. VENGRIN, Could you expand your question, sir?

Mr. KucinicuH. We are talking here about the private contrac-
tors——

Mr. VENGRIN. Yes, sir.

Mr. Kucinicu. [continuing] and the auditing they do. How much
checking in of the private contractors do you do? Do you check
them that much?

Mr. VENGRIN. Yes. We have reviewed all the internal control
structure at the contractor level. But I would like to clarify, the
majority of these claims, again on the surface, the physician and
medical individuals bill a code. You don’t find this type of docu-
mentation until you get into—

Mr. Kucinicu. I will wrap up this part so it will go back to Mr.
Horn, but one quick follow-up. Why doesn’t the private contractor
go beneath the surface?

Mr. VENGRIN. in, sir, we gave an example. The bill is for an
intermediate visit, but, in fact, they performed a full-blown medical
examination, an annual physical. That was not on the claim form.
The contractor wouldn’t have fleshed that thing out when they
processed it initially to review it.

Mr. KucInicu. I thank the gentleman and I thank the Chair, and
we will get back to that. Thank you.


Q Hospital inpatient. A beneficiary who had suffered a stroke 5 years earlier was admitted
toa hospital to increase her strength. Rehabilitation therapies included occupational,
physical, and speech therapies, as well as continuation of routine medications. Based on
a review of the medical records, the PRO concluded that the documentation did not
support the medical necessity for 37 days ($38,672) of inpatient hospital care.

Q HBA. A $2,915 HHA claim for home care visits, including skilled nursing services, was
denied because the skilled services were medically unnecessary. Our interview with the
beneficiary determined that he left home daily and therefore did not meet the definition of
“homebound” and was not entitled to Medicare coverage of home health services. Also,
we did not find a plan of care signed by the physician in the medical documentation for
this care.

Q Another HHA received payment of $1,484 for home health and skilled services. The
medical files did not contain any information supporting that the beneficiary was unable
to leave the home without assistance. After reviewing the Medicare homebound criteria,
the prescribing physician stated that the beneficiary was not homebound. Therefore, the
medical reviewer denied the entire claim.

Q Transportation. An ambulance service billed $7,844 for transporting a beneficiary from
nursing home to a dialysis center.’ The medical reviewer determined that the medical
diagnosis included in the ambulance claim was not supported by medical records and that
the beneficiary could have traveled safely by other means.

Q Another ambulance company was paid $190 for transporting a beneficiary for services
that were not medically necessary. In this case, the beneficiary was diagnosed with
alcohol dependency. Accordingly, the medical reviewer disallowed the entire payment.

a SNF. A SNF was paid $4,742 for 17 days of care that were not medically necessary.
According to the medical records provided by the SNF, the patient received only nominal
assistance with daily living. Therefore, the medical reviewer determined that the
beneficiary’s daily therapy in a SNF was not medically justified.

‘© Incorrect Coding

Incorrect coding is the third highest error category this year, representing 14.67 percent of the
total improper payments. Inpatient PPS and physician provider types accounted for over 90
percent of the coding errors for both FY 1996 and 1997.

The medical industry uses a standard coding system to bill Medicare for services provided. For
most of the coding errors, the contractor medical review staff determined that the documentation

‘Independent Audltor"s Report Inspector General's Report on the HCFA Financial Statements for FY 1097 Page 14 of 36



46

Background

For FY 1997, HCFA relied on extensive data processing operations at its own offices and at
contractors that process and account for $212 billion in Medicare expenditures. The HCFA.
central office computer center primarily maintains administrative data, such as Medicare
enrollment, eligibility, and paid claims data, but it also processes all payments for managed care.

Medicare contractors use one of several “shared” systems to process and pay Medicare fee-for-
service claims. The shared systems interface with the Common Working File (CWF) to obtain:
authorization to pay claims. The CWF uses nine distributed databases to coordinate Medicare
Part A and Part B benefits and to approve claims for payment. These databases are maintained
by contractors referred to as CWF hosts, while the shared systems and CWF are designed and
maintained by separate contractors referred to as systems maintainers.

Our review of EDP internal controls was limited to general and application controls and did not
include management or operations controls. Controls associated with the general data processing
environment (general controls) are critical to ensuring the reliability, confidentiality, and
availability of HCFA data. These EDP general controls involve the entity-wide security
program, access controls, application development and change controls, segregation of duties,
‘operating system software, and service continuity. They affect the integrity of all applications
operating within a single data processing ficility.

HCFA Central Office

‘The EDP general controls at the HCFA central office continue to be ineffective. Our assessment
disclosed a material intemal control weakness over access as well as other weaknesses in the five
EDP general control areas.

Specifically, we found deficiencies in entity-wide security programs, access controls, application
evelopment and change controls, segregation of duties, systems software, and service continuity
planning at the HCFA central office and/or multiple contractor sites. Each of these areas merits
additional attention. For example, data security remains a major concem at the HCFA central
office, Our prior-year review demonstrated weaknesses in EDP general controls through a
system penetration test in which we obtained access privileges to read or modify sensitive
‘Medicare enrollment, beneficiary, provider, and payment information. Although HCFA
immediately corrected the prior-year vulnerabilities, our current-year tests resulted in penetrating
the mainframe data base. We obtained the capability to modify managed care production files.

Furthermore, we found that data center users without specific authorization to the managed care
system have the potential to gain update access to those same files. Although HCFA had already
‘made enhancements in this area during FY 1996, additional effort is necessary to fully secure the
‘mainframe data base. Moreover, our system penetration test revealed additional control
problems, including the existence of an unknown bulletin board, the presence of various network

Auor's Report General's Report on the HCFA Financial Statements for FY THI? — Page 260736



51

offices. The regional offices, however, perform either no onsite reviews or very limited
reviews of these reports, and the reviews that are conducted do not include testing the
validity, accuracy, or completeness of the reported data.

+ New regulations effective January 2, 1997, require regional office concurrence before
suspending payments to a provider on the basis of fraud or abuse. To properly oversee
and ensure that proper sanctions are imposed, the regional offices need accurate data on
all contractor referrals of fraud and abuse cases. But the regional offices are not
tracking new and pending fraud and abuse cases filed by contractors directly with the
OG.

+ The regional offices review the contractor MSP program in accordance with a protocol
that meets requirements specified in the regional office manual. However, not all
procedures in the protocol are applied to each contractor each year, nor is there a
documented risk assessment of contractor MSP operations for deciding which
contractors and contractor functions to review.

+ Two major on-line reporting systems are used to track the status of Medicare
‘overpayments identified by the contractors. The Provider Overpayment Report (POR)
is used by Fis (Part A), and the Physician/Supplier Overpayment Report (PSOR) is
used by carriers (Part B). The regional office oversight responsibility includes
‘monitoring and evaluating contractor overpayment identification and collection
activities. ‘The regional offices we reviewed did not make any Part A onsite reviews of
the accuracy of the contractors’ input into the POR system, and the Part B reviews were
not adequately documented to support the procedures performed and the findings.

* Contractors are required to submit annual certifications of their internal controls for
compliance with certain laws and regulations. However, the regional offices do not
evaluate the accuracy and reliability of the documentation supporting the certifications.

+ Change management plans (formerly task management plans) are prioritized changes
mandated by the HCFA central office to be completed by contractors on a quarterly
basis. The majority of these changes involve edit changes to the claims processing
systems. A shared system maintainer is responsible for implementing the changes and
disseminating information to system users. The regional offices do not make systems
tests to ensure that the change management plans are properly and timely implemented.

+ Contractors enter cost report settlement data into the System Tracking of Audit and
Reimbursement (STAR) report. The regional offices are responsible for monitoring the
contractors’ timely settlement of cost reports by reviewing the STAR reports, However,
the regional offices have not made any recent onsite reviews of the contractors’
supporting documentation to verify the accuracy of the data entered into the STAR,
system.

‘Independent Auditor's Report Tnspacior Generals Report on the HCFA Financial Staiements for FY 1997 Page 31 of 36



47

vulnerabilities such as open host sites and available services, and the availability of HCFA’s
network information unblocked and obtainable from HCFA’s Intemet service provider. These
network-related vulnerabilities could be exploited by unauthorized individuals to compromise
‘one or more of HCFA’s computer systems. In addition, subsequent to our field work, HCFA
initiated an in-depth security self-assessment, including a sophisticated network penetration test
disclosing several weaknesses. The HCFA is actively developing an appropriate corrective
action plan.

‘The entity-wide security program should provide a framework for managing risk, developing
security policies, assigning responsibility, and monitoring the adequacy of computer-related
controls. However, our 1997 work disciosed that HCFA had not performed risk analyses,
developed security plans, or ensured that proper corrective action was taken for its general
support systems, including the computer center, telecommunications, and networks, and
‘significant applications. As a result, HCFA management has no assurance that cost-effective
controls are implemented to manage risks associated with the systems. In addition, the security
structure was not adequate fo ensure that security program objectives are achieved.

Serious weaknesses in application development and change controls are still outstanding from
the FY 1996 andit. The centralized production control group controlled only about 15 percent of
the production batch programs. In addition, HCFA did not use its library management software
to provide version control over the application source code or ensure that the executable program.
code was created from the appropriate source code. Because of these weaknesses, HCFA risks
implementing unauthorized programs, which could result in improper processing of Medicare
claims or eligibility information or allow malicious programming changes that could interrupt
data processing or destroy data files and programs.

‘The HCFA also has not addressed the prior segregation of duties issue. We noted that electronic
data processing functions were not adequately separated to prevent one individual from
controlling key aspects of computer-related operations.

Controls over operating system software integrity remain ineffective. As noted in our FY 1996
audit, this software was not adequately restricted, and HCFA still allows an excessive number of
contractors and systems personnel to have update access to the software. This excessive access
increases the risk of accidental corruption of the operating system. In addition, the operating
system software parameters could be overridden during system generation or “reboots,” which
could result in a different mainframe configuration.

Finally, serious weaknesses in service continuity controls have not been resolved. Continuity

HCFA has not updated its critical application list in the contingency planing document since
1992. Because several applications have been developed, modified, or combined since then,

Tndependani Auditor = Report Tnapector General's Report on the HCFA Financial Statements for FY 1997 Page 17 f 36



76

do we have in Medicare to collect moneys that are owed the govern-
ment, either because they have been miscoded or whatever? How
do we deal with that?

And I would like both your comments on that.

Mr. VENGRIN. Chairman Horn, the Inspector General has, for 3

ears now, raised concerns about this receivable issue. They do

ave a process at the contractor level to try to recoup these over-
payments, but in the last 2 years, as you know, we have had to
qualify our opinion because we go out there and test these systems
out, and, in one case, one system has $10 million; in another case,
another system has $12 million. The auditors really can’t get com-
fortable with their process.

Health Care Financing is going to have an aggressive program
this year to see if we can’t get to the bottom of this problem since
we have now reported it for several years.

Mr. Horn. Now, do you decentralize this as, say, the Department
of Education does to a region or an area with its own system of col-
lection?

Mr. VENGRIN. Yes, sir.

Ms. DEPARLE. Contractors do it, just like they pay the claims.

Mr. Horn. That is their responsibility?

Ms. DEPARLE. Yes.

Mr. Horn. Are these private contractors or government employ-
ees?

Ms. DEPARLE. They are all private contractors. Under the law,
as you may remember, it was stipulated that we would use these
contractors that would be insurance companies that would pay the
claims. So that is who does it.

Mr. Horn. Now, do the insurance companies use private collec-
tors, or how do they handle the actual collection?

Mr. VENGRIN. Usually through offset claims coming in, sir.

Mr. Horn. Okay. Offset against future?

Mr. VENGRIN. Yes, sir.

Ms. DEPARLE. And one problem we have on that is we have had
some problems in areas like home health, with providers going
bankrupt or skipping out, and it was hard for us to get at them.
And we may need to discuss with you some changes that would
need to be made there.

Mr. Horn. That, obviously, concerns me. That is what started us
on this, when the Internal Revenue Service said they had written
off $100 billion between 1990 and 1995. And needless to say, we
were unhappy, feeling that is a national scandal. What is the
write-off in Medicare?

Ms. DEPARLE. I don’t know that, sir, but I can get that for you
for the record.

Mr. Horn. Could we?

[The following was received for the record:]

For FY 1997, the total write-off of overpayments that were not recouped by HCFA
was approximately $59 million: $29 million for Part A and $30 million for Part B.
Under Part A, about 50% of overpayments that HCFA is unable to collect are in
home health.

put. Horn. Does the Inspector General have any thoughts on
that?


86

Mr. BarRTON. And if you aim at 10 percent, you will probably
make 10 percent, because you are in that ballpark now. But 10 per-
cent in the year 2002 is probably going to be over $20 billion be-
cause the program is growing.

Ms. DEPARLE. Right.

If I can say another word, too, Mr. Chairman, about the folks at
Visa and MasterCard and those places. I have met with them, too,
and the key difference that I see between the way they run their
business and the way we run the Medicare business is they have
much tighter control over their network. You don’t get into Visa as
a bank or as an institution without bein; thorough ly checked out,
without being responsible and accountable for whatever happens.
They have a very tight network. Well, we need to do some
more—

Mr. BARTON. Why can’t we do the same thing?

Ms. DEPARLE. We are doing some things like that, and some of
them are hard, but we are doing them.

Mr. BarTON. I know that. But we start these programs and let
them grow topsy-turvy. Home health care is an excellent example
of that; a good idea, good intentions, but not a lot of requirements
to get into the business. Now we are trying to reverse it.

ut I would think you would want to be more strict on who pro-
vides health care and is paid by Medicare than you would on who
is eligible to be reimbursed by Visa for buying gasoline.

Ms. DEPARLE. You and I don’t disagree about that, but as you
know, when the program was set up, there was a concern there
wouldn’t be enough providers. Chairman Horn talked about the
concern that there be home health, because it wasn’t really out
there. So there weren’t very many requirements, and now we are
trying to put some of those in to deal with this problem.

Mr. BarTON. Let’s talk about some solutions. In last year’s Bal-
anced Budget Act, myself in the House and Senator Graham in the
Senate were able to get in some requirements for a competitive bid-
ding test program for durable medical equipment, and we have
given the Secretary of Health and Human Services approximately
a year to set it up. And I think there is going to be test programs
in six regions of the country for a 2- to 3-year period.

I don’t know if Ms. Brown would be the one or you would be the
one. Can you give us an update on what Secretary Shalala is doin;
to implement this competitive bidding test program pilot project?

Ms. DEPARLE. I sure can. There are two of them, two major com-
ponents of it: One is in the durable medical equipment area, and
we are almost ready to go forward with that. I think it will be in
the next few weeks. What we are doing right now is preparing the
letters and the kinds of contacts that we are going to need to make
with the beneficiary community in the areas where we do the dem-
onstration, because, obviously, we don’t want them to be worried
about how it is going to affect them.

The other major area of competitive bidding is in the purchase
of HMO services, and this was something that HCFA had tried to
go forward with but it didn’t work out. However with the Congress’
support I think we will be able to do something there.

the Balanced Budget Act you set up an advisory committee
that operates almost like a base closure commission, I guess, and


4l

$266 million to the acquiring Medicare contractors. Based on our review, procedures
were either not established or not followed among HCFA and the Medicare contractors
to confirm and reconcile the transferred accounts receivable.

+ At9 of the 11 contractors selected for testing, we were unable to obtain assurance of the
completeness of accounts receivable. Specifically, detailed subsidiary ledgers could not
‘support accounts receivable balances and/or adjustments reported to HCFA on the
750/751 reports. For example, one contractor could not provide subsidiary ledgers for
‘$21 million of the $86 million balance reported to HCFA. Another contractor adjusted
(plugged) the “reclassified/adjusted” amount by $757,821 to reconcile the ending
subsidiary balance to the balances reported on the HCFA 750/751. The contractor was
unable to explain the variance.

‘+ One contractor reported a $3 million accounts receivable balance on its MSP tracking
report and $5.5 million on its HCFA 750/751 report as of September 30, 1997. Without
extensive audit work, we could not determine which amount was correct.

+ Three contractors did not record accounts receivable overpayments in a timely manner.
One contractor did not record receivables for final settlement until the payment was
received, instead of when it was identified. Contractors took over 50 days to record
these overpayments as actual receivables.

As a result of these accounts receivable control weaknesses, HCFA may not be collecting
millions of dollars in overpayments from providers. These problems have been addressed in
HCFA’s current corrective action plan.

3(b) Controls Over Cash

‘We reviewed the contractors’ cash procedures to determine whether adequate safeguards and
records were in place and whether duties were properly segregated. These controls typically are
designed to protect assets against theft, loss, misuse, or unauthorized alteration and to reduce the
‘opportunities for the occurrence and concealment of errors or irregularities, We identified the
following weaknesses:

+ Seven of 11 contractors reviewed did not maintain general ledgers or subsidiary ledgers
supporting cash balances,

‘+ Four contractors did not properly segregate duties in that the same individuals were
responsible for receiving end endorsing checks, preparing and recording deposits, and
performing bank reconciliations.

+ Five contractors did not apply accounts receivable collections in a timely manner.

"5 Report Inspector General's Report on the HCFA for FY TWIT Page 31 of 36



COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida PAUL E. KANJORSKI, Pennsylvania
JOHN M. McHUGH, New York GARY A. CONDIT, California
STEPHEN HORN, California CAROLYN B. MALONEY, New York
JOHN L. MICA, Florida THOMAS M. BARRETT, Wisconsin
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
DAVID M. McINTOSH, Indiana DC
MARK E. SOUDER, Indiana CHAKA FATTAH, Pennsylvania
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona DENNIS J. KUCINICH, Ohio
STEVEN C. LaTOURETTE, Ohio ROD R. BLAGOJEVICH, Illinois
MARSHALL “MARK” SANFORD, South DANNY K. DAVIS, Illinois

Carolina JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire JIM TURNER, Texas
PETE SESSIONS, Texas THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey HAROLD E. FORD, JR., Tennessee
VINCE SNOWBARGER, Kansas
BOB BARR, Georgia BERNARD SANDERS, Vermont
DAN MILLER, Florida (Independent)

KEVIN BINGER, Staff Director
DawteL R. MOLL, Deputy Staff Director
WILLIAM MOSCHELLA, Deputy Counsel and Parliamentarian
dJupit McCoy, Chief Clerk
Putt. ScHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY
STEPHEN HORN, California, Chairman

PETE SESSIONS, Texas DENNIS J. KUCINICH, Ohio
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
JOE SCARBOROUGH, Florida MAJOR R. OWENS, New York
MARSHALL “MARK” SANFORD, South CAROLYN B. MALONEY, New York

Carolina JIM TURNER, Texas.
JOHN E. SUNUNU, New Hampshire

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J, RUSSELL GEORGE, Staff Director and Chief Counsel
JOHN HyNES, Professional Staff Member
MATTHEW Epert, Clerk
MARK STEPHENSON, Minority Professional Staff Member

(qm)


64

Through additional tools provided in the Balanced Budget Act, new anti-fraud ini-
tiatives and our corrective action plan, I believe HCFA will continue to take steps
in the ight direction to reduce the national error rate of improper claims identified
in the CFO Audit.

President Clinton’s budget includes several proposals to continue our success in
fighting health care fraud, waste, and abuse. These measures would save an addi-
tional §2 billion in health care expenditures over five years, and help pay for the
expansion of Medicare eligibility to the near-elderly. The proposals include:

* more subpoena and injunction authority;

© penalties for physicians who falsely certify that an individual meets Medicare re-
quirements;

eliminating fraudulent use of bankruptcy protections that allow providers engag-
ing in fraudulent practices to avoid paying penalties and returning the money

ey owe;

establishing fines for providers who pay kickbacks to induce referrals;

stopping providers from pretending to furnish partial hospitalization services in

a beneficiary's home or in an inpatient or residential setting.
and user fees to fund important activities such as audits, reviews, provider enroll-

ment, and survey and certification efforts.

Obviously, the President’s budget proposals and the Balanced Budget Act provi-
sions have not been implemented and are not reflected in the OIG audit report. We
are confident that those actions will be reflected in next year’s OIG report.

.

oe

FINANCIAL STATEMENTS:

The other function of the CFO Audit is to determine whether HCFA’s internal ac-
counting mechanisms are in order. In public accounting terms, the purpose of an
audit is to permit the auditors to issue a report as to whether the financial state-
ments are presented fairly and in conformity with generally accepted accountin,
principles. There are four types of audit reports: 1) an unqualified opinion, whi
means the financial statements are fairly presented; 2) a qualified opinion, which
means the financial statements are fairly presented except for the effects of a mat-
ter or matters as described in the auditor's report: 3) an adverse opinion, which
means the financial statements are not presented fairly; and, (4) a disclaimer of
opinion, which states that the auditor does not express an opinion on the financial
statements and gives all the substantive reasons for the disclaimer.

I am very pleased to say that HCFA has resolved two major financial statement
shortcomings on which we received a disclaimer in last year’s audit. The Medicare
accounts payables estimating methodology was successfully revised, and the Supple-
mental ical Insurance premium withholding by the Social Security Administra-
tion was successfully audited.

Accounts payable ($27.4 billion) represents costs incurred but not paid as of the
end of the fiscal year. In previous years, the payable was a byproduct of the trust
fund projections. With advice froma national public accounting firm, HCFA devel-
oped a revised methodology, collected data, and this allowed the OIG to estimate
a revised Medicare payable.

Also, importantly, we have gotten our books in order with the Social Security Ad-
ministration. The majority of Su glemental Medical Insurance premiums ($19.1 bil-
lion) are withheld by the Social urity Administration (SSA) from beneficiaries’
Social Security checks and transferred to the Part B trust fund. This year auditing
was possible at both the Social Security Administration and HCFA.

The FY 1997 OIG audit does highlight areas where HCFA must focus attention
in financial reporting. These include constructing a uniform audit trail for Medicare
and Medicaid accounts receivable, developing an auditing methodology for the cost
report settlement process, and establishing internal controls for Medicare liabilities,
financial management controls and electronic data processing controls.

Medicare / Medicaid Accounts Receivable

_Of HCFA’s $225 billion annual expenditures, the OIG disclaimed a total of $2.5
billion for Medicare and $450 million for Medicaid. The auditors could not be sure
the receivable number was correct due to the lack of general ledgers and other docu-
mentation at most Medicare contractors. Concerns were also expressed about inter-
nal controls. Because states’ use different accounting systems, their reporting of re-
ceivables is inconsistent.

HCFA’s long range goal is to standardize contractors’ claims processing systems
making it possible to have an integrated accounting system. However, these require
extensive system changes which will not be possible with the resources currently al-
located to making the agency and its contractors Year 2000 compliant. Our short

rt
Pe



For the Medicare contractor EDP controls, we recommend that HCFA coordinate with
contractors to ensure that:

The FSS changes are authorized, documented, and tested to maintain the integrity of the
application. Additionally, override libraries should be further examined to determine
the necessity of their use.

Carriers do not modify mandated edits and essential audits in the MCS application, and
claims are processed in accordance with existing Medicare regulations.

An entity-wide security structure is implemented to achieve security program
objectives, access controls are adequate to protect data and other resources from
‘nauthorized modification or destruction, application development and program change
control procedures protect against unauthorized changes, assigned responsibilities
adequately segregate computer-related duties, controls over system software integrity
and changes properly restrict access to authorized personnel and protect against
unauthorized changes, and service continuity plans are current and periodically tested.

REPORTABLE CONDITIONS
1. HCFA Regional Office Oversight of Medicare

‘The HCFA regional offices have oversight responsibility for Medicare contractors. A majority
of the oversight efforts are conducted under the Contractor Performance Evaluation (CPE)
review process. The purpose of CPE is to evaluate Medicare contractors’ compliance with
contracts, laws, and regulations.

Contractors prepare and submit periodic financial reports to HCFA for use in preparing HCFA’s
financial statements. However, at the three regional offices we visited, oversight activities were
not adequate to ensure that financial data provided by contractors is reliable, accurate, and
complete. Specifically, our review identified the following problems:

Contractors report benefit payments on the HCFA 1521/1522 forms and are responsible
for reconciling these amounts to their accounting records. The regional offices do not
censure that the contractors perform this reconciliation and do not verify the validity of
the benefit payment data

‘The Audit Quality Review Program, designed to evaluate contractors’ performance in
the auditing and settlement of Medicare cost reports, is not being applied to enough cost
reports to provide adequate assurance of the validity of the total cost settlements.

‘On a quarterly basis, contractors are required to submit HCFA 750A/B (Statement of
Financial Position) and HCFA 751A/B (Status of Accounts Receivable) to the regional

‘Auditor's Report Taspecior General's Report on the HCFA Fin Jor FY TDT Page 3056



99

in” meeting today. We look forward to discussions about implementation issues, as
well as the content of the Guidelines themselves.

In December 1997, HCFA agreed to your request that carriers use both the 1995
and 1997 versions of the Documentation Guidelines to evaluate claims until July 1,
1998, When we set that July 1 date, neither the AMA nor HCFA fully understood
the magnitude of the problems with the 1997 Guidelines. I find it is unrealistic to
expect that the revisions can be completed by that date and it is clear that an addi-
tional period is needed for testing the Guidelines as well as for education of physi-
cians and carriers.

Therefore, I am directing carriers to continue to use both the 1995 and 1997
Guidelines, whichever is more advantageous to the physician, until the revisions
have been completed and there has been an adequate period of time for testing and
education. Since there is still uncertainty about how quickly that work can be done,
I think it is premature to set an implementation date now. Dr. Berenson and his
staff will rey to me in the early fall on the status of the revision efforts and the
projected schedule for testing, refinement, and physician education. I anticipate
using that information to set a final date for implementation of the revised Guide-
lines that will allow ample time for completion of the pre-implementation activities.

We believe the final product will be st ened by the broad physician partici-
pation in the revision process. Working together, we can make the Guidelines easier
to understand and we can sharpen the focus so that only documentation directly re-
lated to the care provided is required.

Let me turn to the broader issue of the emphasis on fraud and abuse, particularly
the provisions in the Health Insurance Portability and Accountabilit; t of 1996
(HIPAA) regarding sanctions for coding errors. Civil monetary y pe ities may now
be assessed for coding that the person knows, or should know, result in greater
payments than appropriate. However, the statute is very clear that there must be
a pattern or practice of such behavior.

want to assure you that physicians will not be punished for honest mistakes and
we will not make referrals to the Office of the Inspector General for occasional er-
rors. To be certain there is no misunderstanding about this, I have asked my staff
to issue an instruction to the carriers reminding them of our long standing policy
that referrals are to be made to the Office of the Inspector General for possible sanc-
tions only after the carrier determines the situation was not caused by error and
there is evidence of intentional improper billing practices. We have to believe there
is some level of fraudulent intent before we mal referrals. Sanctions are in-
tended for physicians who act in “deliberate ignorance” or with “reckless disregard”
of the truth or falsity of information. For criminal penalties, the standard is that
the provider had “knowing and willful” intent to defraud the government. =

fe are at a critical juncture in the development of the Documentation Guidelines.
I am confident that by working together we can develop revised Documentation
Guidelines that will meet our needs to assure that Medicare payments are appro-
Briate without imposing undue burden on physicians. I hope your meeting is a pro-

luctive one that will move us closer to that goal.
Sincerely,

Nancy-ANN MIN DEPARLE
Administrator

QUESTIONS FOR THE INSPECTOR GENERAL OF THE DEPARTMENT OF HEALTH AND
HUMAN SERVICES

QUESTIONS FROM THE HONORABLE STEVE HORN

Health Insurance Portability and Accountability Act

Question: I understand that the Health Insurance Portability and Accountability
Act allows the Inspector General's office to be reimbursed for the cost of investiga-
tions in some cases. Has your office received reimbursement under the Act? If so,
how much has your office received and what circumstances led to the reimburse-
ment? Has this reimbursement authority assisted in your efforts to combat waste
and abuse?

Answer: In Fiscal Year 1997, we received reimbursement of $526,899 for the costs
of health care related investigations. We do not have a total figure thus far in Fiscal
Year 1998, but expect the amount to be similar to last year's reimbursement, The
Health Insurance Portability and Accountability Act, of 1996 (HIPAA) authorizes
OIG to receive and retain such funds when “ordered by a court, voluntarily agree
to by the payor, or otherwise.” HIPAA also requires us to obligate such funds within
one year of their deposit.


24

Because of inherent limitations in any internal control structure, errors or irregularities may occur
without detection, Also, projecting any evaluation of the intemal control structure to future
periods is subject to the risk that procedures may become inadequate if conditions change or if
the effectiveness of the design and operation of policies and procedures deteriorates.

‘The HCFA management is responsible for establishing and maintaining an intemal control
structure. In fulfilling this responsibility, management makes estimates and judgments of the
‘expected benefits and costs of intemal control structure policies and procedures. The objectives
of an internal control structure are to provide management with reasonable, but not absolute,
assurance that:

+ Transactions are properly recorded and accounted for to permit the preparation of
reliable financial statements and to maintain accountability over assets;

+ Funds, property, and other assets are safeguarded against loss from unauthorized use or
disposition; and

‘+ Transactions, including those related to obligations and costs, are executed in
compliance with laws and regulations that could have a direct and material effect on the
principal financial statements and that OMB, HCFA, or we have identified as being
‘significant for which compliance can be objectively measured and evaluated.

Reportable conditions involve matters coming to our attention relating to significant deficiencies
in the design or operation of the internal control structure, that, in our judgment, could adversely
affect the entity's ability to record, process, summarize, and report financial data consistent with

‘management's assertions in the financial statements.

Material weaknesses are reportable conditions in which the design or operation of one or more
internal contro! structure elements does not reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material in the financial statements may occur and not be
detected within a timely period by employees in the normal course of performing their assigned
functions.

‘We noted four internal control weaknesses that we consider to be material weaknesses under
standards established by the American Institute of Certified Public Accountants and OMB
Bulletin 93-06, as well as three reportable conditions:

Independent Auditor's Report "General's Report on the HCFA Financial Svatements for FY 1997 Page @ of 36



Department of Health and Human Services

OFFICE OF
INSPECTOR GENERAL

REPORT ON THE
FINANCIAL STATEMENT AUDIT OF
THE HEALTH CARE FINANCING
ADMINISTRATION
FOR FISCAL YEAR 1997

wtatry,
sont,

JUNE GIBBS BROWN
C Inspector General
“eeevera

APRIL 1, 1998
A-17-97-00097



32

Problems with documentation, medical necessity, and coding errors are consistently systemic
problems noted in both fiscal years. Details on these matters follow:

© Documentation

Medicare regulation, 42 CFR 482.24(c), specifically requires providers to maintain medical
records that contain sufficient documentation to justify diagnoses, admissions, treatments
performed, and continued care: However, documentation problems represented the most
pervasive error category in our sample. This was the largest problem noted in our FY 1996 audit
as well. Physician and outpatient services accounted for 52 percent of this error category in

FY 1997 and 47 percent in FY 1996.

The overall error category of documentation includes three components: (1) insufficient
documentation, (2) no documentation due to extenuating circumstances (under investigation),
and (3) no documentation provided after repeated attempts, These three components accounted
for about $9 billion ($5.203 billion for insufficient documentation, $2.941 billion for documents
not provided due to extenuating circumstances, and $850 million for no documentation), or about
‘44 percent of the $20.3 billion in improper payments.

‘The no documentation category was $3.250 billion for FY 1996 and $850 million for FY 1997.
‘There was clearly a reduction in this error category due to the OIG and HCFA outreach efforts to
inform providers of our FY 1996 audit results and aggressive action to obtain requested medical
records. We obtained almost 98 percent of the medical records requested for sample claims for
providers that were not under investigation. As a result of last year's audit, HCFA hosted
informational meetings with major provider professional organizations representing various
physician specialties, the home health care industry, the DME industry, skilled nursing facilites,
chiropractors, hospitals, and other providers. The purpose of these meetings was to familiarize
the organizations with our findings and to explore opportunities for collaborating on educational
efforts. As a result, various organizations agreed to publicize our audit findings and
documentation guidelines in newsletters and other materials issued to their members.

As previously indicated, if providers failed to furnish supporting medical records or submitted
insufficient records after the initial request, the reviewers generally requested such
documentation numerous times before determining the payment to be improper. In addition, we
made repeated contacts with certain providers and even visited some to collect the requested

‘With respect to the extenuating circumstances component, these are cases in which the providers
‘were under investigation, and we were prohibited from requesting medical records. Specifically,
our sample included 151 claims being investigated by the OIG Office of Investigations and 16
claims being investigated by the Medicare contractors’ fraud and abuse units. Because we could
not test the validity of these claims, we considered them invalid for determining whether total

audivor Ps Report on Staamenia for FY 1097 Page 12 of 36



56

This report, which incorporates HCFA’s informal comments where appropriate, 1s intended for
the information of HCFA. the Secretary, and OMB. However, this reports a matter of public
record, and its distnbution 1s not limited,

Inspector General
Department of Health and Human Services

Tndependaat Auditor + Report Inspector Generals Report on the HCFA Financial Statements for FY 1087 Page 360f 36

Mr. BarTON. Thank you. Your entire written statement will be
included in the record.
Ms. DeParle.

STATEMENT OF HON. NANCY-ANN MIN DePARLE

Ms. DEPARLE. Thank you, Mr. Chairman. I am pleased to be
here today to discuss the findings of the fiscal year 1997 CFO
audit, and I want to thank all of you for staying here and being
here for this, because it is one of the most important things that
we do at HCFA, together with the Inspector General.

I want to begin by thanking my colleague, June Gibbs Brown
and the rest of her team, especially Joe Vengrin, for the cooperative
and collegial approach that they took in helping us get through this
audit. They did many, many days of hard work. It is a true public
service, and I want to thank them for what they have done.

I am pleased to report that this year’s audit demonstrates that
aggressive corrective actions are beginning to have an impact. I
think we are getting our books in order and we are trying to get
our house in order. We have cleaned up our accounts payables, we
have corrected our accounting problem with the Social Security Ad-
ministration, and we are making progress on our accounts receiv-
able. This is only the second year, as you know, that this type of
comprehensive audit has been done. The results of the fiscal year
1996 audit helped improve our accounting systems and highlighted
areas in which our systems and operations could be tightened. The
results of the fiscal year 1997 audit will once again sharpen our
focus.

Chairman Horn, I would like to thank you in particular for your
leadership in making this audit a reality. As you can see, it is be-
ginning to yield some tangible results and it certainly provides a
valuable road map in directing us to areas that crucially need at-
tention. It has become one of the most important tools that we

ave,

We are continuing to step up efforts to stop improper payments.
Since the beginning of this administration, we have taken unprece-
dented steps to fight fraud, waste and abuse. We are achieving
record increases in investigations, indictments, convictions, fines,
penalties and restitutions. Last year, Medicare saved an estimated


74

Mr. BARTON. You will have 10 minutes of your own time.

We recognize the distinguished chairman of the Government
Management, Information, and Technology Subcommittee of the
Government Reform and Oversight Committee, Mr. Horn, for 10
minutes.

Mr. Horn. Thank you very much, Chairman Barton, and I appre-
ciate having all of you here. I know you are doing a fine job.

lam going to first ask you, before getting into any details on the
audit, just a couple of questions that have come to mind that I
have always been curious about.

One is, I didn’t know until this morning that a physical exam
was not covered by Medicare. Is that by congressional language?

Ms. DEPARLE. It is by the statute, the way it was written.

Mr. Horn. Back in 1965?

Ms. DEPARLE. Yes, sir.

Mr. Horn. That escaped me. I don’t know how that escaped me.

Ms. DEPARLE. This year the Balanced Budget Act made some
changes. It did not cover routine physical exams, but you started
covering some preventive treatments. But under the old Medicare
statute, it requires us to only cover things reasonable and nec-
essary to treat an illness, so someone really has to be sick.

Mr. Horn. I would think since we all believe in preventive medi-
cine that we would encourage physical exams.

Ms. DEPARLE. They have not been covered. And as I said, we did
make some changes in the Balanced Budget Act, so we are making
changes in that direction.

Mr. Horn. Are you moving toward giving everyone at least one
physical exam annually?

Ma. DEPAaRLE. No, we are not. That is not part of the statute, but
it is something I would like to discuss with you, because I have ac-
tually thought myself that that might be useful, although the doc-
tors that I have spoken with have said that some of these other
things are more useful to them than a routine physical.

Mr. Horn. Well, I am glad you brought that up. We learn some-
thing every day.

Now, of the various categories of medicine, doctors, hospitals,
home care, and so forth, which area causes you the most difficulty
when it comes to fraudulent records? And I would ask both of you
that question.

Ms. BRowN. Well, the highest percentage of improper payments
in this audit was with the physicians.

Mr. Horn. Home care is in there after the hospitals?

Ms. Brown. Yes.

Mr. Horn. I have heard a lot of complaints about home care,
where people don’t put in a full hour, but they bill for that, and
they might have been there for 10 minutes. I am told there is a
1-800 number.

I don’t know if that is your operation or not, but I thought it was
a great idea that they check in when they get to the home and they
check in when they leave, which is one way of at least what we
would call, I guess, when you talk about bar association education
or doctor education, “see time.” Doesn’t mean you have done any-
thing constructive, but at least you know you are there.

at do you think of that? Is that a problem?


26

nationwide, or about 11 percent of total Medicare fee-for-service benefit payments. The
estimated range of the improper payments at the 95 percent confidence level is $12.1 billion to
$28.4 billion, or about 7 percent to 16 percent. ‘These improper payments primarily resulted from
provider billings for services that were medically unnecessary, insufficiently documented,
noncovered, or incorrectly coded. As was the case last year, these improper payments could
range from inadvertent mistakes to outright fraud and abuse. We cannot quantify what portion of
the error rate is attributable to fraud. Specifically, 98 percent of the improper payments in our
sample were detected through medical record reviews coordinated by the OIG in conjunction
with medical personnel. When these claims were submitted for payment to Medicare
contractors, they contained no visible errors. It should be noted that the HCFA contractors?
claims processing controls were generally adequate for (1) ensuring beneficiary and provider
Medicare eligibility, (2) pricing claims based on information submitted, and (3) ensuring the
services as billed were allowable under Medicare rules and regulations. However, these controls
were not effective in detecting the types of errors discussed on page 9.

While this year’s point estimate is $3 billion less than last year's point estimate $23.2 billion, we
cannot conclude that the current error rate is statistically different. The difference may be due to
sampling variability or HCFA’s and the OIG’s efforts toward obtaining better documentation.
‘The year's results could differ from last year’s because selecting different claims with different
dollar values and errors will inevitably produce a different estimate of improper payments.

In view of Medicare's 38 million beneficiaries, 853 million claims processed and paid annually,
complex reimbursement rules, decentralized operations, and the current estimate of $20.3 billion
in improper payments, the Medicare program remains inherently at high risk for payment errors.
Therefore, HCFA needs to continue its efforts to reduce improper payments.

Audit Objective
Our primary objective was to determine whether Medicare benefit payments were made in
accordance with the provisions of Title XVIII and implementing regulations in 42 Code of
Federal Regulations (CFR) for services that were:

+ Fumished by certified Medicare providers to eligible beneficiaries;

+ Reimbursed by Medicare contractors in accordance with Medicare laws and
regulations; and

+ Medically necessary, accurately coded, and sufficiently documented in the
beneficiaries’ medical records.

‘Auditor's Report Ihapecior General's Report on the HCFA Financial Staiemanis for FY 1997 — Page 6 of 36



92

‘Thursday, April 23, 1998

‘National Journa’s CongressDaily/A.M. &

Congress v. HCFA: Bureaucracy Bashing 101

By Julie Rovner

Im FRusTRATED POLITICIANS LIKE TO POINT OUT how hard it can
beto please constituents who simultaneously demand con-
‘tradictory things — lke those voters who all at once want
increased spending, tax cuts, and no new additions to the
deficit. But sometimes. the politicians themselves behave
just as inconsistently.

‘Take the Health Care Financing Administration, known
—and almost universally derided — as HCFA (pronounced
Hickfa). The HHS subunit that oversees Medicare, Medicaid,
and, since last year, the new children’s health insurance pro-
‘gram, HCFA is the agency politicians most love to hate. In
1992, when he was running for president, candidate Clinton
in his “Putting People First” manifesto vowed to “scrap [HCFA]
and replace it with a health standards board made up of con-
ssumers, providers, business, labor and government.”

{In short, anybody except bureaucrats.

During the heated Medicare debate of 1995, Speaker
Gingrich claimed he never meant to: ‘Medicare would
“wither on the vine" under the GOP's budget plan, merely
HCFA.

But Congress’ second favorite pastime, after beating up
OnHCFA, seems to be giving the agency even more workto
do. Since 1996, three different bills have increased HCFA’s
responsibilities exponentially.

“tts the greatest workload in the history of the agency,”
said Harvard Professor Joseph Newhouse, vice chairman
of the Medicare Payment Advisory Commission.

‘And itis not like HCFA was a sleepy bureaucratic back-
water: Running Medicare and Medicaid already required itto
supervise the healthcare programs that will serve nearly 75
million Americans in 1998 and cost the federal government
$300 billion in 1997, 18 percent of the entire federal budget.

MLHCFA’s tarts onsiavcttt began in 1996, with passage of
the Health Insurance Portabllity and Accountability Act.
Not only did HIPAA give the agency broad new respons
bility to root out fraud and abuse in Medicare (the ac-
countability part), it also made HCFA the fallback enforce:
‘ment agency for states that failed to pass their own laws
to implement the portability part, As of now, that includes
five states: Rhode Island, Massachusetts, Missour!, Mich
gan, and California.

Later that fall, Congress ordered HCFA to implement
provisions tacked onto the VA-HUD appropriations bill bar-
ring “drive through” baby deliveries and requiring limited
parity for mental health coverage.

But that was only an appetizer. Last year's Balanced

Budget Act, according to HCFA Administrator Nancy-Ann
Min DeParle, gave the agency about 300 new tasks.

In Medicare alone, the agency is expected to devise new
payment systems for home heaith, hospital outpatient, and
nursing home care; a new “risk adjuster” and new payment
methodologies for managed care plans; and rules for new
‘“provider-sponsored orgenizations.” And that is not to men-
‘tion devising how to inform Medicare's 39 milion beneficiaries,
about a vast array of new “choices” available to them this fal.

At the same time, HCFA Is responsible for approving
‘each state's new children's health insurance program, and
for helping states locate and enroll the millions of chil-
dren eligible but not yet signed up for Medicaid.

With that much more to do, you might think Congress
‘would also give HCFA more money to dott with. But itis so,
easy to bash the bureaucracy that the Senate could not
resist striking HCFA’s request for an additional $16 mil-
lion for FY98 during consideration of the supplemental
appropriations bill last month.

HCFA olfcials said $6 million of that request was to hire
workers to enforce HIPAA in states that have yet to pass their
‘own legislation. The states in question contain a total of 54
‘million citizens. “The work requires imowledge and expertise
in the area of health insurance regulation at the state level,”
said the inits request. “The nature of
this work totally unlike that performed by HCFA's work
force.”

But that plea fell on deaf ears. “Do we want to tum that
much additional bureaucracy over to HCFA, that much more
‘money, or can't they borrow some more of those employees
that they now have who are probably reading through re-
ports that are obsolete and maybe not doing so much good?”
asked Senate Majority Whip Nickles on the floor March 25.

Evidently they can, according to the Senate. Members
adopted Nickles’ amendment to strip the funding from the
Dill after defeating, 51-49, an attempt by Senate Labor and
Human Resources ranking member Edward Kennedy,
DMass.,to keep only half the money.

The result of all this, says former CBO Director Reis-
chauer, is “setting HCFA up” for failure. “I's classic Con-
ress,” he said. “There's no way HCFA can accomplish the
changes Congress has asked [it] to do. Then (Congress
will be back in two years having oversight hearings about
how HCFA tailed to do its job.”

‘Mark your calendars now.

— HEALTHMATTERS CW BE CONTACTED BY Et AT
“ROVRER@ UOC CO


7

__ The IG audit estimates the size of Medicare payments that lack adequate support-
ing documentation or that otherwise fail to meet HCFA’s requirements. HCFA has
been actively trying to reduce the amount of improper or inappropriate s payments
made by the Medicare program. This has two aspects: On one hand, HCFA. and
Medicare providers must work together to decrease sloppy record-keeping and inad-
vertent noncompliance with documentation requirements. On the other hand, the
Medicare program must combat fraud and abuse aggressively. The agency realizes
that it must reduce the size of improper or inappropriate Medicare payments, which
currently appear to range from 11-14% of all Medicare payments.

HCFA’s efforts to combat fraud and abuse are impressive. Through Operation Re-
store Trust, HCFA recouy nearly $1 billion in 1997 and cracked down on docu-
mented fraud and abuse by home health care, skilled nursing facilities, and durable
medical equipment providers nationwide. Also in 1997, HCFA saved an estimated
$7.5 billion by identifying inappropriate payments through increased medical re-
views, audits, and anti-fraud efforts.

HCFA opened anti-fraud field offices in Florida and Louisiana. It implemented
new regulations to prevent fraud by home health care providers, including requirin;
large bonds and increased accountability. HCFA doubled its audits of home healt
care companies and increased claim reviews. The agency also issued new regulations
to decrease fraud and abuse by durable medical equipment suppliers.

In 1997, HCFA barred over 2,700 individuals and entities from doing business
with Medicare, Medicaid, and other state and federal programs because they en-
gaged in fraud and misconduct (that is a 93% increase from 1996); HHS increased
convictions for health care fraud by 20% and pursued over 4,000 civil health care
fraud cases, an increase of 61% from 1996. actively sought, and obtained, sig-
nificant funding for fraud and abuse control activities—$107 million for 1997 and
$120 million for 1998. Recently, HHS awarded $3 million in grants to fight Medi-
care fraud and abuse.

It is clear that HCFA is actively pursuing both enforcement and regulatory op-
tions, and I would commend Administrator Min DeParle for HCFA’s ssive ef-
forts to tackle fraud and abuse in the Medicare program and in particular her lead-
ership in this regard.

However, I am concerned with the decreasing number of medical record reviews
that Medicare's private contractors conduct. These contractors should be reviewing
medical records regularly. Currently, they only review about 2% of the Medicare
claims they receive. These private companies have no economic incentives to conduct
more frequent or intensive record reviews unless they get paid per review. This is
troubling, and HCFA is searching for alternative mechanisms to fund medical
record reviews.

The IG audit also indicates that the procedures and practices of HCFA contractors
who process Medicare claims prevent RGra from producing reliable financial infor-
mation. HCFA cannot fine these contractors or use mechanisms available to other
federal agencies to ensure contractor compliance. Many of the most serious problems
identified in the financial audit are attributed to Medicare contractors—and HCFA
can do little about it short of terminating them.

HCFA also faces obstacles aggressively pursuing its Year 2000 conversion, be-
cause it Jacks the authority over Medicare contractors to ensure their compliance
with Y2K conversion. Medicare contractors can walk away from their Y2K respon-
sibilities by canceling their contracts at the last minute, jeopardizing Medicare pay-
ments for services provided to millions of elderly or disabled individuals—and suffer
no consequences.

HCFA cannot conduct competitive bidding for medical equipment and non-physi-
cian services nationally to contro] costs, because it lacks legislative authorization.
‘The agency cannot contract with entities other than insurance companies to process
Medicare claims, also because of outdated statutory limitations. HCFA should have
the ability to hire ita own contractors and to fire without the severe financial,
logistical, and operational repercussions that flow from current law.

Mr. BARTON. Thank you, Congressman.

We would now like to hear from the distinguished chairman of
the Subcommittee on Health and Environment, one of my mentors
on the Commerce Committee, Congressman Bilirakis.

Mr. Bruirakis. Thank you, Mr. Chairman. As is true with all of
us, even though it is a day when it turns out we don’t have any
votes, and I know many would like to be on their way home, or be
home——



75

Ms. Brown. Home health care has been a problem area. It is a
problem because it grew very, very quickly, and visits didn’t nec-
essarily get made at all, let alone a short visit.

I don’t think we have focused on things where the visit was half
the length of time as much as when visits weren’t made or where
they weren’t necessary because the person wasn’t home-bound and
didn’t qualify.

Mr. Horn. Interesting. Any comment on that?

Ms. DEPARLE. Well, I can’t resist. I’m an optimist. I think we can
make this better. And I’m not saying that blindly, because I think
we are taking some actions to make it better.

One area where I found some reason to be optimistic is in home
health. It has been a major problem, but we have taken actions in
conjunction with the Inspector General over the last 2 or 3 years
to crack down on it, and with Congress’ support.

And in speaking with Mr. Vengrin about the analysis of the
audit, it appears that in the fourth quarter of 1997, things started
to slow down. The error rate in home health at the contractor they
were reviewing, which is one of the largest ones, looked better. So
I am hoping some of the things we have been doing are beginning
to have an effect there, but it has been a major problem.

Mr. Horn. Back in 1965, I did strongly back home health care.
I believe in it. I think it’s better for the senior citizen. But we only
knew of one city at that time, Detroit, that had a decent program.
So it is rather fascinating what the growth of that area has been.

Ms. BROWN. We did a report recently, sir, and looked at home
health care in four different States, and we found a 40 percent rate
of visits that should have been made or paid for where either the
visit wasn’t made, or the person wasn’t qualified to get that visit,
or there was some error in it. Those States were California, New
York, Texas and Illinois.

Mr. Horn. The big ones.

Ms. BRown. That’s right.

Mr. Horn. I happen to have a Medicare card. I pay faithfully in
my doctor’s service bill of, I don’t know, $500 a quarter, something
like that. And, of course, it is never used because I’m a Federal em-
ployee, and that is what is charged against and not Medicare.

How many people are in a similar situation, and how many bil-
lions of dollars does that work up to, where we are putting money
in Medicare and we are eligible for it, but we never use it because
we are covered by other health plans? How much is at stake here,
in billions? Do we know that?

Ms. DEPARLE. I don’t know that, but I would like to get back to
you for the record.

Mr. Horn. Would you? We would appreciate it.

(The following was received for the record:]

Our 1995 Medicare Current Beneficiary Survey suggests that about 1 million of
the 37.5 million beneficiaries enrolled at that time, or 2.6 percent, had received
Medicare-covered services but had not billed Medicare, suggesting that they may
have another, primary insurer. Efforts we take to make sure we not pay bills that
should be paid by beneficiaries’ primary insurers saved approximately $3.4 billion
in 1997.

Mr. Horn. Collections interest me, since I’m the author of the
Debt Collection Act a few years ago. What kind of collection system


81

Ms. DEPARLE. Sir, those demand letters would be from the De-
partment of Justice. I don’t know the number of them.

Mr. Kucinicu. You make the referrals, don’t you? Don’t you in-
form them?

Ms. DEPARLE. We don’t make those referrals. This is, I be-
lieve——

Mr. Kucinicu. What is the connection, then, between your de-
partment and the Department of Justice when it comes to deter-
mining whether or not billing has been fraudulent or not?

Ms. Brown. Mr. Kucinich, if I could give you an example, our 72-
hour window project. We did four audits over a period of years and
found that people were getting treatments within 72 hours of the
time they were admitted to the hospital, something like a test that
would have to do with their admission to the hospital. And if it is
within 72 hours of their admission, those tests are included in the
overall cost of that hospitalization. But they were being billed sepa-
rately.

We found some hospitals, even after being audited several times,
were still carrying on this practice. So the penalties, which we
worked out very carefully with the Department of Justice, and we
worked with the hospital associations, too, were based in part on
the number of times they had been audited. We warned that this
was something that had to be paid back and was inappropriate.

Mr. KucINnicu. Where does that come on the chart there?

Ms. Brown. That is not part of this at all. This is a separate
audit. It isn’t part of this financial statement audit.

Mr. KucInicu. So what I’m trying to find out, though, is how is
it that hospitals are notified that they have fraudulently billed the
government? .

Ms, BROWN. They are notified in various ways, but it could be
by letter.

Mr. KucINICH. Where does it start, though? Where does the proc-
ess start? I want to have an understanding of this process. ere
does the process start?

Ms. Brown. Well, I have to use one audit as an example, because
they are all different. In the 72-hour window project, we would
start by going in and examining whether billings were within 72
hours of the admission for the tests that were required as part of
their admission.

When we discovered that these were being billed over and over
again, the same way, even though the hospital had been previously
audited and knew that was not proper and had to repay in the
past, if they continued that, we came up with a penalty based on
the number of times they had been warned. So those who had been
found to have committed this offense in all four audits over a pe-
riod of about 6 or 7 years had to pay a much greater penalty. Those
who only were found to have done it for the first time would just
have to repay the dollar amount and interest.

Mr. KUCINICH. Now, where fines are threatened, is that usually
in the case where somebody has been warned a number of times,
or is that for the first infraction?

Ms, BROWN. It is usually when they have been warned a number
of times, or when there is documentation which proved that they
had an intent to defraud.


3

cept that some problems, which the Inspector General will be de-
scribing in the testimony, do still exist.

Again, I would like to say that I believe this audit of HCFA’s fi-
nancial statements provides a valuable tool for the Congress in re-
viewing the financial status of HCFA and how it spends taxpayers
dollars. This subcommittee has, and will continue to work closely
with HCFA and the Office of Inspector General in protecting Medi-
care dollars from being improperly paid out, while trying to pre-
serve the solvency of the Medicare program.

That said, I am pleased that we are going to have the Inspector
General with us today, Ms. June Gibbs Brown. I am also pleased
that we will hear from the new Administrator of HCFA, Ms.
Nancy-Ann Min DeParle. We will be very interested to hear these
two people’s testimony and their response to this year’s findings.

With that, I am going to recognize Mr. Green for an opening
statement. He says he is representing three entire subcommittees
of the Democratic side of the aisle, and I notice he has now been
joined by another member of the Democratic Party, so he is rep-
resenting half of the three subcommittees. Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman. I am glad my collea:
from Ohio joined us today. I have a dozen opening statements that
my colleagues have asked me to provide this morning, but I won't
read them all, we will just submit them for the record. I thank the
chairman for scheduling this hearing today, and since votes were
canceled today, I am disappointed that so many members from
both sides of the aisle could not participate.

For the second year, the Inspector General’s audit of HCFA prac-
tices have come up with very disturbing news highlighting that
HCFA’s controls over the Medicare program need improvement. Ac-
cording to an IG report, HCFA processed and paid $477.4 billion
in processed claims in fiscal year 1997. Approximately 90 percent
of those claims, or $20.3 billion, were spent on questionable or in-
appropriate claims that should not have been paid.

It is very troubling that in the same year that Congress had to
vote to cut billions of dollars in Medicare spending, such a large
amount of money was not appropriately accounted for by HCFA. It
seems like every time Congress passes health care legislation, we
include new and improved provisions to reduce the fraud, waste
and abuse; in fact, some of us could say that in our sleep, because
of the concern over the last few years. Unfortunately, this latest re-
port indicates that our efforts may not be as much as we had hoped
for, although it is a step in the right direction, and hopefully, we
can look at the legislation.

Mr. Chairman, I am a new member of the Commerce Committee,
but I served before that on Government Reform and Oversight and
on the Oversight and Investigations Subcommittee that Congress-
man Shays was the ranking member of—or the chairman of it, and
so I know the frustration of a number of committees in Congress
who continue to work on this problem. I am looking forward to the
distinguished witnesses to identify the causes of the overpayments
and what exactly they represent, and how we can reduce this in
the future, and particularly address the percentage, that 11 per-
cent, and how that compares to the private sector of, “waste, fraud


79

Now, the False Claims Act. Mr. Barton and I have probably
placed more emphasis on waste, fraud and abuse in the first part
of this Congress, and particularly in the last Con; s, than any
other Member of Congress. Joe and I haven’t talked about the
False Claims Act, so I’m not sure how he feels about that, but I
think that we are concerned about justice and fairness.

You have heard these claims of overzealousness, particularly
from the providing hospitals, and the misuse of the False Claims
Act. Do you have any opinion about that? I’m going to ask both of
you about that, but it may not be appropriate for you, Ms. Brown.
If it isn’t, you might speak up. Why don’t we start off with you. Do
you have any feeling about that?

Ms. BROWN. I think my office tries to be very careful in making
any assessment on these institutions. We recognize that they are
necessary in their community and made up, for the most part, of
highly ethical, dedicated people. But the things that we have inves-
tigated, the 72-hour window. , the PATH project and so on, we have
tried to bend over backwards to make sure that the hospital had
information either from the carrier or in their own records that
showed what the procedures should be and that it was in violation
of those procedures that were known to them.

Mr. Bivirakis. If the hospital has been advised by the contract
carrier and has abided by the advice and the counseling they re-
ceived from them snould they be subject to the tremendous fines?

Ms. BRowN. If they have abided by those procedures, they are
not subject to those fines.

Mr. BILIRAKIS. They are not subject to them?

Ms. BROWN. They are not, no.

Mr. BILIRAKIS. They tell us differently.

Ms. Brown. If we find there are errors that they've made, which
we would consider a normal rate of error, because some go in one
direction and some go in the other, we offset those to make sure
that they aren’t accused in some way of a deliberate error when,
in fact, it was a normal range of mistakes that people make. And
hospitals such as Dartmouth did not have to pay anything, because
theirs was——

Mr. BILIRAKIS. All right, but you are not speaking for the Justice
Department.

Ms. BROWN. I can’t speak for the Justice Department.

Mr. BILiraKIs. Of course you can’t. I realize that.

I have not decided to endorse or cosponsor the particular piece
of legislation that is trying to address this problem because I want
to make sure that we don’t undo what we have really wanted to
do here for a long time, and that is get tough on waste, fraud and
abuse. But we need to know more about that.

Miss DeParle?

Ms. DEPARLE. Yes, sir. I can’t speak for the Justice Department
or the Inspector General either, but I can tell you what my goal
is, and that is to make sure Medicare gets what it pays for. And
I think that is the thing that you and others in this committee and
the other committees have also spoken to.

Tf I could just make a comment about how the user fees relate
to that. I understand and appreciate all your concerns, and I know
that you are frustrated by this, as well as I am. The problem is


90

Mr. Horn. If you are doing it specialty by specialty, which I
think is the only way to do it, personally, are you just taking a ran-
dom sample of particular specialties and their billing experience
and their cost? Obviously, there are regional differentials here, we

ll recognize. And I would appreciate the Inspector General's
thoughts on this also.

Ms. DEPARLE. Well, what we are considering are some data that
we have received from the American Medical Association, and we
are also considering other data we have received from specialty so-
cieties. So that is how we are looking at it.

Mr. Horn. How about it, Inspector General?

Ms. Brown. I have not looked at this area, so I would rather not
comment.

Mr. Horn. Well, I think you should look at the area, frankly. I
think it is a very important one because there is going to be bil-
lions of dollars here at stake on how those costs are figured. So 1
don’t know if anybody in your shop has followed some of the prede-
cessor approaches here, but, obviously, I think it makes sense to
do what you are doing, if you are doing it specialty by specialty.

But then the question is how are you arriving at those particular
numbers? Are these simply a random sample, or are you depending
upon the professional societies, as you mentioned them?

Ms. DEPARLE. What I want to do, Mr. Chairman, is get the doc-
tors who have worked on this to do a briefing for you.

Mr. Horn. Good, I would appreciate that.

Mr. Chairman, in light of your desire to return to that great
State, the State of Texas, I will file a number of questions with
you, if you don’t mind, and we will put them in the record at this
point.

{The questions and responses appear at the end of the hearing.]

Mr. BARTON. We assume you may want to go to the great State
of California.

Mr. Horn. No, this is the weekend I am not. I have been there
5 weekends in the last 5 weeks.

Mr. BaRTON. Too much of a good thing is just too much.

Mr. Horn. That’s right.

aaa BarTON. Mr. Kucinich, the gentleman from the great State
of Ohio.

Mr. Kucinicu. Thanks, Mr. Chairman. I want to cover a few
things here very quickly that I started at the beginning of the
hearing, and I would just like to continue.

Today, the Inspector General announced that we have a $20.3
billion problem in the Medicare program, and my question is ex-
actly why isn’t the private contractor that we are paying to safe-
guard this program doing the same kind of audit which the Inspec-
tor General just did to discover these problems, because if we are
saying that $20.3 billion worth of losses is not acceptable, then
aren’t we really saying the way the private contractors are over-
seeing the Medicare program is not acceptable? And if the private
contractors are so expeditiously processing and paying claims, real-
ly rubber-stamping the claims, then why do we have them?

The government itself could just rubber-stamp the claims and
throw them out within 2 weeks. What is the point of this? En-
lighten me.


58

identified this year. We have already given the list out to our con-
tractors.

We have increased medical review funding by $53 million over
the fiscal year 1997 levels. We are conducting thorough prepay-
ment reviews of documentation, which is the biggest area identified
in the Inspector General’s report, through prepayment reviews of
documentation on a random sample of physician office visit claims
and working with providers to refine documentation guidelines,
and I expect some of you have heard from the physician community
and others about these activities.

We are developing a substantive testing process to help deter-
mine whether services are actually rendered and medically nec-
essary, and our peer review organizations in the States are devel-
oping pilot programs to test ways to ensure the medical necessity
of inpatient hospital claims, which is another area that the Inspec-
tor General identified.

We have increased by 15 percent the number of physician medi-
cal directors at our claims processing contractors, and we are ex-
ploring new technologies like our existing correct coding initiative
system and some others, Mr. Chairman, that we have talked to you

out to use computer edits to help identify improper claims.

We also expect the error rate to decrease because of other steps
we are taking. For example, in March of this year we published a
regulation allowing us to hire special program safeguard contrac-
tors, who will bring a new energy, we hope, to our program integ-
rity efforts, and that was a result of something that Congress did
in the Health Insurance Accountability and Portability Act. We
have tightened entry standards and required surety bonds for
home health agencies and durable medical equipment suppliers,
and we have obtained authority to bar felons from participating in
Medicare and Medicaid, and I think all of these things will begin
to have results,

So while there is still much work to be done for HCFA to im-
prove the results of its CFO audit, I would say that I am pleased
with the progress that we have been able to make in 1 year, and
I want to say that a lot of that is due to the help and support and
commitment that I have received from those of you in the Con-
gress. With your help and support, I think we will continue to
make the improvements that we need to make to ensure that the
Medicare program is well managed, financially sound and free from
waste, fraud and abuse and that is my goal, and I know that it is
yours as well. Thank you.

1 (The prepared statement of Hon. Nancy-Ann Min DeParle fol-
lows:

PREPARED STATEMENT OF HON. NANCY-ANN MIN DEPARLE, ADMINISTRATOR, HEALTH
CARE FINANCING ADMINISTRATION

INTRODUCTION

Chairman Barton, Chairman Bilirakis, Chairman Horn, and Members of the dis-
tinguished Subcommittees here today, I am pleased to have this opportunity to dis
cuss with you the findings of the Fiscal Year (FY) 1997 Chief Financial Officers
(CFO) audit by the Department of Health and Human Services Office of the Inspec-
tor General (OIG). As you know, this is the second year that the OIG conducted this
comprehensive audit, which looks at our financial statements and whether we pay
claims properly.


REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS:

Except for the matters discussed on pages 1 and 2 of our report on the financial statements, we
conducted our audit in accordance with generally accepted auditing standards; Government
Auditing Standards, issued by the Comptroller General of the United States; and OMB Bulletin
93-06, Audit Requirements for Federal Financial Statements. These standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements
referred to above are free of material misstatement.

‘The HCFA management is responsible for complying with applicable laws and regulations. As
part of obtaining reasonable assurance about whether HCFA’s financial statements are free of
material misstatement, we performed tests of its compliance with certain provisions of laws and
regulations, noncompliance with which could have a direct and material effect on the
determination of financial statement amounts and certain other laws and regulations specified in
‘OMB Bulletin 93-06, including the requirements referred to in the Federal Financial
‘Management Improvement Act (FFMIA) of 1996, We also obtained an understanding of
management's process for evaluating and reporting on internal control and accounting systems as
required by the FMFIA and compared the material weaknesses reported in HCFA’s FMFIA
report that relate to the financial statements under audit with the material weaknesses and other
reportable conditions found during our evaluation of HCFA’s intemal controls. In evaluating
HCFA's intemal controls and conducting substantive audit procedures, we identified certain
reportable conditions that were not included in HCFA's FMFIA report.

Material instances of noncompliance are failures to follow applicable laws and regulations to the
extent that the effects of such noncompliance, in the aggregate, cause the financial statements to
bbe misstated. The results of our tests of compliance disclosed a material instance of
noncompliance. Specifically, as discussed on page 5 of this report, through detailed medical and
audit review of a statistical selection of 600 beneficiaries nationwide with 8,048 fee-for-service
claims processed for payment during FY 1997, we found that 1,907 claims did not comply with
Medicare laws and regulations. By projecting these sample results, we estimated that FY 1997
net overpayments totaled about $20.3 billion nationwide, or about 11 percent of total Medicare
fee-for-service benefit payments. The estimated range of the improper payments at the 95
percent confidence level is $12.1 billion to $28.4 billion, or about 7 percent to 16 percent. The
estimated effect of the material Medicare fee-for-service noncompliance has been reflected in
HCFA's FY 1997 financial statements.

‘We performed tests of compliance to determine whether HCFA’s financial management systems
substantially comply with the Federal financial management systems requirements, applicable
accounting standards, and the United States Standard General Ledger at the transaction level. To
‘meet this requirement, we performed tests of compliance using the implementation guidance for
FFMIA issued by OMB on September 9, 1997. Our tests of HCFA"s Year 2000 planning were
limited to obtaining and reading the applicable Year 2000 progress reports submitted to HHS.

i ‘Auditor's Report Inspector General's Report on the HCFA Financial Statements for FY TO5? ~Page 34 of 36



16

The next chart shows the types of errors found as a percentage of the total im-
proper payments.

Estimated Improper Payments by Type of Error in FY 1997

Percent
Type of Err $20.3 Bil-

No Documentation...
No Documentation Ove to Investigations
Insutficient Documentation
Subtotal: Documentation Errors
Lack of Medical Necessity
Incorrect Coding ..

Further details on these error categories follow.

Documentation Problems. Two types of providers, physicians and outpatient serv-
ices, consistently had the most documentation problems; they accounted for 52 per-
cent of this error ootegory in FY 1997 and 47 percent in FY 1996. Medicare regula-
tion, 42 CFR 482.24(c), specificall; requires providers to maintain medical records
that contain sufficient documentation to justify diagnoses, admissions, treatments,
and continued care. However, documentation problems represented the most perva-
sive error category in both years’ samples.

The overall error category of documentation includes three components: (1) no doc-
umentation provided after repeated attempts, (2) no documentation due to extenuat-
ing circumstances (under investigation), and (3) insufficient documentation. These
three components accounted for about $9 billion, or 44 percent of the $20.3 billion
in improper payments.

The “no documentation” category dropped from $3.26 billion for FY 1996 to $850
million for FY 1997. This reduction, we believe, was attributable to the OIG and
HCFA outreach efforts to inform providers of our FY 1996 audit results and a
sive action to obtain requested medical records. In fact, we obtained almost 98 per-
cent of the medical records requested for sample claims for providers that were not

under investigation,
With respect to the providers that were under investigation, we were prohibited
from requesting medical records. Our sample included 151 claims being investigated

by the OIG Office of Investigations and 16 claims being investigated by the Medi-

care contractors’ fraud and abuse units. Because we could not test the validity of

these claims, we considered them invalid for determining whether total fee-for-serv-
ice expenditures were fairly presented. It should be noted that these claims could
be valid or erroneous (including fraudulent).

Some examples of documentation problems follow:

« A hospital outpatient department was paid $785 for eight outpatient physical ther-
apy services. Because the hospital's medical records supported only of the
eight visits, the medical reviewers concluded that Medicare had overpaid $491.

« A durable medical equipment supplier received almost $3,000 for renting an elec-
tric hospital bed with pressure pad, as well as wound care supplies. The sup-
Plier did not respond to our requests for medical records, and we found that its
office, which had a current lease, had been vacated. As a result, we referred the
supplier to our Office of Investigations and notified the contractor of our ac-

ions.

* A skilled nursing facility received $1,967 for a beneficiary’s 19-day stay, but the
medical records rontained no indication that skilled nursing care had been pro-
vided. As a result, the entire payment was denied.

Lack of Medical Necessity. In both years, errors in inpatient hospital and home
health agency claims accounted for over 60 percent of this error category. A lack
of medical necessity was the second highest error category for both F¥s 1996 and

Decisions on medical necessity were made by the contractor or PRO medical staff
using Medicare reimbursement rules and regulations. They followed their normal
claim review procedures to determine whether the medical records supported the
claims, as illustrated in the examples below:

* A beneficiary who had been hospitalized 5 years earlier was admitted to a hos-
pital to increase her strength. Rehabilitation therapies included occupational,



45

office and/or multiple contractor sites. Access controls, as well as application controls, are being
reported as material weaknesses.

General Controls

Entity-wide security 5 15

Access controls 5 i 31 4 l
Application development and

program change controls 3 7 3

Segregation of duties 1 3

System software 2 4 1

Service continuity 1 9 4

GHP, FACS, EDB, and APPS

applications? 14

Application controls

‘Specific to Florida shared

system(FSS) 2 NIA 2
Specific to MCS 2 NA 1
Specific to CWF 2 NA

Input, processing, and

output controls 5 NA

* Statements on Auditing Standards (SAS) 70 reviews are made by independent public accountants
under contract to HCFA.

+ GHPS is Group Health Plan System, FACS is Financial Accounting Control System, EDB is
Enrollment Data Base, and APPS is Automated Payment Plan System.

Independant Auditor's Report Inspector General's Report on the HCFA Financial Sataments for FY 1997 — Page 75 of 36



49

Further, as evidenced by the varied findings among the Medicare contractors, HCFA does not
have a consistent set of policies to oversee and review the effectiveness of general controls at its
contractors. As such, HCFA has not adequately monitored these contractors in prior years.
However, in response to prior recommendations, in FY 1996 HCFA began a program to contract,
EDP control assessments at selected contractors.

Conclusion and Recommendations

Medicare relies on automated systems to administer virtually all aspects of the program.
However, material weaknesses exist at the HCFA central office system, two of the Medicare
contractors, and two of three shared processing systems.

For the central office EDP controls, we recommend that HCFA implement cost-effective
improvements to ensure that:

> Amentity-wide security structure is developed to achieve security program objectives.
Specifically, HCFA should ensure that easily guessed passwords (e.g., system
passwords used by installers and passwords related to functions being performed) are
not used, enforce periodic password changes, and record and track access to sensitive
data with a hard copy report sent to the responsible system manager.

> Access controls are adequate to protect data and other resources from unauthorized
modification or destruction.

» Application development and program change control procedures protect against
unauthorized changes.

+ Assigned responsibilities adequately segregate computer-related duties.

+ Controls over system software integrity and changes properly restrict access to
authorized personnel and protect against unauthorized changes.

> Service continuity plans are current and periodically tested.

» The material weaknesses associated with the HCFA central office and Medicare
contractors are reported in the HHS FY 1998 FMFIA report.

> The periodic evaluation of contractor EDP controls continues, and all findings and
recommendations are tracked through final implementation.

‘Auditor's Report Tnipector GeneraVs Report on he HCFA Fi ni for FY TOOT — Page 29 of 36



78

Medicare holding the bag. and we would like to work with you on
that. So those are two things we are doing to try to address this.

Mr. Horn. Good. Thank you, Mr. Chairman.

The next round I will get to the more serious questions.

Mr. BARTON. Okay. The Chair is going to recognize Mr. Bilirakis
for 10 minutes.

Mr. Bitirakis. Thank you very much, Mr. Chairman. I may not
take all of that time. I appreciate the courtesy.

Now, you have indicated, Madam Administrator, that HCFA has
collected about 95 percent of the claims of the overpayments from
providers that have been made known to them.

Ms. DEPARLE. From last year’s audit, yes.

Mr. BILIRAKIS. The Inspector General’s audit?

Ms. DEPARLE. Yes, sir.

Mr. BILIRAKIS. Would you have a self-audit? In other words, if
Inspector General were not auditing you, would you have known
that there are excessive overpayments that you should be collect-
ing?

Ms. DEPARLE. I think that there were some audit activities going
on, but, no, sir, I don’t think it was anything nearly as significant
or as reliable a tool as what this CFO Act and the Government
Management Reform Act did. That is why I think it is such a ter-
rific tool.

As you said in the beginning of the hearing, it is not a pleasant
thing to hear what your error rate is, but I also think it is terrific,
though, that we know what our problems are, and now we can go
about attacking them. So I don’t think we would have known that
if it had not been for this audit.

Mr. Binirakis. We are talking about more than $20 billion, ap-
parently, that is wasted here. And yet, you referred to the user fees
of the President’s budget and your need for more money, but, we
don’t hear as much on how you are trying to correct the inadequa-
cies and inefficiencies.

We are insisting on proper documentation from providers, when
apparently 44 percent of the waste is attributed. We are going back
to the providers, the magicians in our society, who we depend upon
so very, very much, and who we are driving out of the business,
I might add. And Dr. Norwood is over here saying this; a person
who is not a medical provider is making that comment. And yet all
of these problems take place.

In my opening statement, I referred to the NIH budget. How
must NIH feel, that just a little more research and we may be com-
ing up with something regarding Parkinson’s, for instance, and
some of these other illnesses. An extra $1- or $2- or $3 billion
might do wonders. How does NIH feel about so much of this money
is going basically out the window at HCFA?

T talked about the medical necessity, I know how very strongly
doctors feel about somebody in an ivory tower making the decisions
on what is a medical necessity and what isn’t. When you testified
before my committee before, we have basically confirmed that peo-
ple who never see the patient are making the determination of
what is a medical necessity and what is not. You can’t have those
people see every one of those patients, obviously, but somehow that
has to be worked out.


11

Mr. BaRTON. Each of you understands that it is the tradition of
the Oversight Subcommittee to take all testimony under oath. Are
any of you opposed to testifying under oath? You also have the
right to be advised by counsel under the rules of the subcommittee
and the Constitution of the United States. Do any of you wish to
use counsel during your testimony?

(Negative responses.]

Mr. BARTON. Would you please stand and raise your right hand.

[Witnesses sworn.]

Mr. BARTON. We are going to start with you, Ms. Brown, and we
ask you to turn the microphone on. There is a little switch there.
That was Congressman Green’s suggestion, and it is an excellent
suggestion, so that we can hear you. We are going to recognize you
for such time as you may consume. Mr. Vengrin, are you going to

ive an opening statement or just answer questions? So we will go

om Ms. Brown to Ms. DeParle. So you are recognized for such
time as you may consume.

TESTIMONY OF HON. JUNE GIBBS BROWN, INSPECTOR GEN-
ERAL, DEPARTMENT OF HEALTH AND HUMAN SERVICES, AC-
COMPANIED BY JOSEPH E. VENGRIN, ASSISTANT INSPEC-
TOR GENERAL FOR AUDIT OPERATIONS AND FINANCIAL
STATEMENT ACTIVITIES; AND HON. NANCY-ANN MIN
DePARLE, ADMINISTRATOR, HEALTH CARE FINANCING AD-
MINISTRATION

Ms. BROowN. Thank you, Mr. Chairman. I am pleased to report
to you on the audit of the Health Care Financing Administration’s
fiscal year 1997 financial statements. I would like to begin by ac-
knowledging the cooperation and support we received from the De-
partment, from HCFA and from the General Accounting Office. A
review of this magnitude and complexity would not have been pos-
sible without HCFA’s assistance in making available medical re-
view staff of the Medicare contractors and the peer review organi-
zations. We also worked closely with GAO, which is responsible for
auditing the consolidated financial statements of the Federal Gov-
ernment.

Let me also add that the financial statement audit process, in
and of itself, has been extremely valuable in identifying control
weaknesses that directly affect the government’s ability to protect
our tax dollars. I intend to continue our collaboration with GAO
and the department to ensure that identified weaknesses are cor-
rected. My statement. today will focus first on our Medicare claim
testing, and then on HCFA’s financial reporting.

Our review included a statistical selection of 8,048 medical
claims from a population of $177.4 billion in fiscal year 1997 fee-
for-service claim expenditures. Payments to providers for 1,907 of
these claims did not comply with the Medicare laws and regulation.
By projecting these sample results, we estimated that fiscal year
1997 net improper payments totaled about $20.3 billion nation-
wide, or about 11 percent of the total Medicare fee-for-service bene-
fit payments. This is the midpoint of the estimated range, at the
95 percent confidence level, of the $12.1 billion to $28.4 billion, or
about 7 to 16 percent.


» Trend data of accounts receivable and accounts payable over time should be developed
for each State and used to improve and further refine the estimation model.

3. HCFA Regional Office Oversight of Medicaid

One of the primary responsibilities of the regional offices is to ensure that the States submit
timely, accurate financial reports and comply with various laws and regulations. However, as
noted below, many oversight procedures previously performed by the regional offices have been
severely reduced or eliminated in recent years:

+ The regional offices have reduced their emphasis on reviews of the quarterly HCFA 64
packages and have placed increased reliance on systems and controls verified by other
agencies or States and less emphasis on detecting errors and irregularities.

+ Effective in June 1996, HCFA eliminated ali Federal requirements for using the Claims
Processing Assessment System for those States operating on the approved Medicaid
Management Information System (MMIS). However, the regional offices have not
instituted procedures to determine whether programs developed by the States are
sufficient to properly examine and evaluate the accuracy of claims processing.

«Pursuant to section 4753 of the Balanced Budget Act of 1997, HCFA no longer has
authority to perform system performance reviews of each State's MMIS.

‘+ The regional offices have been unable to devote sufficient resources to reviewing and
reporting on the States’ procedures for identifying fraud and abuse and collecting
recoveries.

‘+The regional offices have not been able to review all States for compliance with
regulations relating to disproportionate share payments.

Recommendation

‘We recommend that HCFA review the entire regional office oversight process and develop or
reenact policies to provide sufficient oversight of the States’ Medicaid claims processing and
reporting.

In addition to the reportable conditions described above, we noted certain matters involving
intemal control weaknesses which we reported to HCFA management in a separate letter dated
March 4, 1998.

‘ndependeni Auditor's Report Inspecior General's Report on the HCFA Financial Statomant or FY 1907 Page 33 0f 36





70

Mr. Barton. That will have to be the last question.

Mr. Norwoop. That is a shame. How often do they examine the
patient when they say, oh, no, that is not medically necessary?

Ms. DEPARLE. They don’t look at them at all, sir. Can I explain
one thing? I want to be sure that it is clear that we are talking
about two separate processes here. One is the process that nor-
mally happens, and I understand you have some concerns about
that, and that is when the claims come in to our contractors from
a physician, and it is a piece of paper where they checked off
things, the contractor looks at that and under the way the process
works right now, they have 14 days, if it looks okay, to pay the
claim, and that is what happens. Unless there is a medical review
later or an audit of that claim or that provider, then we would not
know that things might fall into these categories. That is why we
have stepped up the numbers of medical reviews and audits and
those sorts of things. What the Inspector General did was they
came in and they looked behind those claims that have been paid
and they did those medical reviews, and they found where these er-
rors are, and I guess the moral of that is——

Mr. Barton. Mr. Green has a plane to catch and he wants to ask
one or two questions, so we can obviously submit this.

Mr. NoRwoon. Mr. Chairman, hundreds of questions I would like
to submit.

ol: Barton. Okay. The gentleman from Houston, Texas, Mr.
reen.

Mr. GREEN. Thank you, Mr. Chairman. My line of questioning
will follow up on what both Chairman Bilirakis and my friend from
Georgia talked about. Ms. DeParle, the United States pays these
financial intermediaries for processing the work for paying the
claims, and is there—we pay them a substantial sum obviously to
administer it, like some of our private businesses pay inter-
mediaries to administer their programs. And we pay these financial
intermediaries to process the claims because they have that exper-
tise, and I know in Texas it is Blue Cross, for example, and it is
different entities around the country.

In addition to conducting business for the government, these fis-
cal intermediaries also have their own insurance companies that
they do. Again, not picking on Blue Cross, that is the one I am fa-
miliar with because of the Texas experience. The error rate be-
tween these fiscal intermediaries that process their own claims ver-
sus the error rate that they process for HCFA, or to the Medicare
program, have you been able to see if there is a difference in error
rate between those two?

Ms. DEPARLE. No, sir. And at this point, as you know, the law
requires us to use these insurance companies to process the claims,
and there are certain requirements I was trying to explain with
Representative Norwood—that they are required to pay claims
within 14 days if they look okay, and as the Inspector General said,
a lot of them do look okay. It is only when you look behind them
that we find these problems. We don’t have information about the
contractors’ individual error rates. There are about 70 contractors,
and we have actually, Joe Vengrin and I and June, discussed this,
whether it would make sense to get an error rate on each contrac-
tor, and the problem is, Joe may remember the numbers, but it


25

INTERNAL CONTROL WEAKNESSES

Material Weaknesses

Monitoring National Compiiance
Medicare Other Governmental Liabilities
Financial Management Controls
Electronic Data Processing Controls

(General and Application Control Weaknesses)
Reportable Conditions
HCFA Regional Office Oversight of Medicare

Federal Share of Medicaid Accounts Payable and Accounts Receivable
HCFA Regional Office Oversight of Medicaid

Material weaknesses 2 and 4 were not identified as such by HCFA in the Department of Health
and Human Services (HHS) FY 1997 Federal Managers Financial Integrity Act (FMFIA) report.
Significant components of each of these material weaknesses were reported in previous Chief
Financial Officers (CFO) audit reports and remain uncorrected.

MATERIAL WEAKNESSES
1, Monitoring National Compliance - Medicare Fee-for-Service Error Rate

Our FY 1996 audit of HCFA’s financial statements, dated July 17, 1997, disclosed an estimated
$23.2 billion in improper payments, or about 14 percent of the total Medicare fee-for-service
payments. Considering the significance of the error rate, we concluded that HCFA’s oversight of
the Medicare program did not provide reasonable assurance of detecting and prev
Medicare payments. This constituted a material weakness which required prompt action by
HCFA, including the development of a national error rate and increasing its oversight of
Medicare expenditures. While HCFA has begun to implement a corrective action plan, it has not
had sufficient time to develop its own process for establishing a national error rate or to
significantly reduce the amount of improper payments. It was therefore necessary for the Office
of Inspector General (OIG) to perform similar sampling of fee-for-service claims in FY 1997.

FY 1997 Medicare Claim Testing Overview

‘Through detailed medical and audit review of a statistical selection of 600 beneficiaries
nationwide with 8,048 fee-for-service claims processed for payment during FY 1997, we found
that 1,907 cisims did not comply with Medicare laws and regulations. By projecting these
sample results, we estimated that FY 1997 net overpayments totaled about $20.3 billion

Auditor's Report Inspector General's Report on the HCFA Financial Statements for FY 1997 Page 30136



68

Mr. Norwoop. Can anybody guess? Can any of you guys guess?

Ms. Kanor. In terms of paper?

Mr. Norwoop. Yeah, how many pages in that?

Ms. Kanor. So big.

Mr. Norwoon. A foot high?

Ms. KanorF. I think.

Mr. Norwoop. Has that been distributed to the providers yet?

Ms. KANoF. Yes.

Mr. Norwoon. It has.

Mr. BaRTON. The witness that has been sworn is Ms. DeParle.

Mr. Norwoop. The document we are told is about a foot high.
Could you agree with that?

Ms. DEPARLE. Sir, from what I understand, the Correct Coding
Initiative is a software program that has edits, and I think there
are about 93,000 edits, so I suppose if you put them on paper it
would be a lot of pages. I don’t know how many pages it is.

Mr. Norwoon. It is a lot, isn’t it? How long have our providers
had that?

Ms. DEPARLE. Well, it was implemented I believe 2 years ago
and I would assume our providers—I know it was provided to the
physician community and I assume they have had it at least a
year, because no one has brought it up to me since I have been
there and I have been there about 6 or 7 months now.

Mr. Norwoop. Do you know and realize, and I am sure you do,
that the cost of documentation to satisfy the Federal Government
is generally longer than anyone else’s documentation, and it re-
quires a great deal of time from staff to document, according to
your, needs, in order for people to be paid? Would you agree with
that?

Ms. DEPARLE. Yes, sir, I do. I have spoken with physicians about
it, but if I could make one point about your point. The kind of docu-
mentation errors that I believe that the Inspector General found
here, and I guess actually she should speak to that, but I asked
that very question when they did this presentation for me, because
I had been with some doctors who are telling me just what you are
saying, and I said well, is this that they didn’t dictate enough notes
for the file or what are we talking about here? They told me, and
they have given some examples in their report, that the kind of
thing they were seeing in the category of “no documentation” or
“insufficient” was they would repeatedly ask the physician whose
claims were in that sample, you know, give us some documentation
for this claim, and when the paper came in, it looked okay, but
they were trying to look behind it and they would get somethin;
back like a piece of paper that said “stable” on it. So I understan
your concern and I am concerned about that as well, but I think
what they are speaking to is something that is really almost non-
existent.

Mr. Norwoop. Well, my real concern is about the documenta-
tion. I have no doubt in my mind you ask for too much, but that
is beside the point.

My concern is that the cost of that requirement is not shared by
you at all; it is simply passed on. That probably has as much to
do with the difficulty in documentation as any other part, which
would then go to the contractors, who have no incentive to check


61

health waste, fraud, and abuse, including tougher standards for agencies to
enter the program, increased scrutiny for those already in, and a new payment
system with incentives to provide only medically necessary care.

Incorrect Coding

Incorrect coding is another significant problem that we are addressing. Payment
for services is based in part on how complex a service is. A provider receives a larg-
er payment for more intensive services. Providers use the medical industry's stand.
ard coding system to indicate the intensity of the medical treatment on a claim. In
14 percent of the improper payments, medical professionals who reviewed the docu-
mentation concluded that the service was not as complex as the provider claimed,
and that Medicare had therefore paid too much. Submitting claims for a higher level
than actually provided is known as “upcoding.” It is also important to note that the
OIG found a handful of cases in which the provider down-coded and so was under-
paid for the services performed. The audit, however, reports the net improper pay-
ment.

Noncovered Services

Finally, about 2 percent of the improper payments were for services not covered
under Medicare benefits. Such claims were carefully disguised to look like Medicare-
covered services, but upon review of the documentation, medical professionals con-
cluded they were for services that fee-for-service Medicare by law does not cover,
such as routine physical examinations, routine ear and eye examinations and most
routine foot care.

Durable Medical Equipment

Durable Medical Equipment (DME) is one of the most problematic areas in Medi-
care in terms of program integrity. It was not included in last year’s CFO aud
but is included this year. Therefore, caution is in order before any direct compai
sons are made between this year’s results and last year's. The audit found that
nearly 10 percent of the error rate was due to DME claims, suggesting that we are
concentrating our efforts through Operation Restore Trust and other initiatives to
address DME waste, fraud and abuse in the right places.

CORRECTIVE ACTIONS

More than 80 percent of the incorrect payments found in the 1997 audit occurred
in five areas: physician services (29 percent), inpatient hospital services (20 per-
cent), home health agencies (13 percent), outpatient hospital services (10 percent)
and durable medical equipment (10 percent). The remaining 28 percent were made
in other categories. Two of these categories, home health and skilled nursing facili-
ties are, along with (DME), high-priority areas for investigation as part of our Oper-
ation Restore Trust anti-fraud initiative. Several additional initiatives, discussed
later in this testimony, are underway to address home health and DME issues.

Even before last year’s audit was released, HCFA began a set of aggressive correc-
tive actions that address problems outlined in the audit and help stop im-
proper payments, including: recouping identified overpayments, increasing claims
review and audits, stepping up efforts to educate providers, working to revise docu-
mentation guidelines so they are more comprehensive and easier to use, and devel-
oping and adopting more sophisticated technologies for detecting fraud, waste and
abuse.

First and foremost, we are recovering the improper payments identified by the
OIG. We have already recovered 95 percent of the overpayments identified in the
FY 1996 sample. We have intensified payment recovery efforts overall, and our con-
tractors will immediately begin collecting the improperly paid Medicare monies
identified in the FY 1997 audit. And we will instruct our contractors to evaluate
providers identified in the OIG audit report for more extensive review.

Second, we are increasing the level of medical review from 80 million in FY 1997
to 89 million in FY 1998. We also are asking for authority to collect user fees that
will allow us to do even more. We have increased funding by $53 million over FY
1997 levels for medical review. We also are conducting thorough prepayment re-
views of documentation on a random sample of physician office visit claims through-
out this fiscal yeer, So far about five thousand of these claims have been denied or
reduced because physicians failed to adequately document the claim. We are now
working to develop a substantive testing process which will help determine whether
services are actually rendered and medically necessary, allow for projection of a na-
tional claims error rate, and help to spot areas for improvement. HCFA and our
Peer Review Organizations are developing pilot programs to test ways to ensure the
medical necessity of inpatient hospital claims. The projects will focus on identifying


18

3. Enhance prepayment and postpayment controls by updating computer systems to

better detect improper Medicare claims.

4. Direct contractors to expand provider training to further emphasize the need to
maintain medical records that contain sufficient documentation and the pen-
alties for not doing so.

5. Direct contractors to make follow-up evaluations of specific procedure codes we
identified with high error rates and consider whether identified providers
should be placed on prepayment medical review.

6. Ensure that contractors adjust their Medicare accounts for improper payments we
identified, initiate recovery from the identified providers, and follow up with the
providers to correct deficiencies and to determine whether other systemic prob-

lems need to be co1 .

The HCFA generally concurred with these recommendations and has developed a
corrective action plan to reduce the Medicare payment error rate to 10 percent by
the year 2002. Accordingly, we offer no additional recommendations. We expect that
HCBA’s testimony today will address the specific corrective actions being taken,

Fiscal Year 1996 Disclaimer Issues

Before discussing HCFA’s FY 1997 financial statements, I would like to touch on
two pivotal issues resulting in our disclaimer of opinion on the FY 1996 financial
statements. Specifically, we were not able to gather sufficient evidence on the valid-
ity or reasonableness of:

«Medicare Accounts Payable. As of September 30, 1996, reported Medicare accounts
payable totaled $36.1 billion and comprised 71 percent of total liabilities. These
payables represented HCFA’s estimate of actual or Potential claims for services
provided to beneficiaries but not paid at the end of the FY. The HCFA did not
provide adequate support for this estimate. Additionally, we were unable to de-
termine, through alternative audit procedures, if the September 30, 1996, Medi-
care accounts payable balance was fairly presented,

. supplementary adel Insurance (SMI) Revenue (Part B Medicare). The Social

ity Administration (SSA) is responsible for withholding premiums from
SMI beneficiaries’ Social Security ch and for transferring these funds to the
SMI trust fund each month. Because the SMI revenue was not audited by SSA
and because we lack statutory authority to do this work, we were unable to de-
termine the validity and completeness of the SMI revenue account of $18.9 bil-
lion. Therefore, we could not determine whether the corresponding Federal
match of $61.7 billion was appropriate.

Fiscal Year 1997 Qualification Issues
This year, we are pleased to report that HCFA has revised its methodology for
estimating Medicare accounts payable, and our auditors were satisfied as to the rea-
sonableness of the resulting estimate. With respect to the SMI issue, we were able
to audit this revenue for FY 1997 by working in coordination with GAO and the
SSA's OIG. As a result, our overall opinion on HCFA’s financial statements has ad-
vanced from a disclaimer for FY 1996 to a qualification for FY 1997. In accounting
terms, a disclaimer of opinion means that we were not able to determine whether
the financial statements were fairly presented because the documentation was not
adequate or available to support the reported amounts. A qualification indicates
that we still found documentation problems, as discussed below, but not to the ex-
tent that would necessitate a disclaimer:
Medicare/Medicaid Accounts Receivable. Medicare contractors did not maintain
adequate documentation to support reported accounts receivable activity and to pro-
vide adequate audit trails. As a result, we could not determine if the reported $2.5
billion Medicare accounts receivable balance was fairly presented. For instance:
¢ We could not obtain reasonable assurance of the completeness and support for
$266 million in accounts receivable that a contractor reported as transferred to
other Medicare contractors during its transition from the Medicare program. In
addition, HCFA has been unable to reconcile, through its quarterly contractor
financial reports, the $266 million to the acquiring contractors. Based on our
review, procedures were either not established or not followed among HCFA
and the contractors to confirm and reconcile the transferred accounts receivable.

* At 9 of the 11 contractors reviewed, we were unable to obtain assurance of the
completeness of accounts receivable balances because detailed subsidiary ledg-
ers could not support the balances reported to HCFA. For example, one contrac-
tor could not, provide subsidiary ledgers for $21 million of the $86 million bal-
ance reported to HCFA, Another contractor “plugged” the ‘“reclassified/adjusted”
amount by almost $758,000 to reconcile the ending subsidiary balance to the
balances reported to HCFA but was unable to explain the variance.


35

submitted by the providers supported a lower reimbursement code. However, we did find a few
instances of downcoding which were offset against identified upcoding situations.

Some examples of incorrect coding follow:

Physician. A physician was paid $162 for providing critical care, evaluation, and
‘management of an unstable, criticaly ill patient requiring the constant attendance of the
physician in a hospital inpatient setting. According to the medical reviewer, the records
submitted by the provider did not support this level of care but rather a nonecritical, high-
complexity hospital visit valued at $60. This resulted in a $102 overpayment.

Q A physician was paid $96 for an initial patient consultation which required a
comprehensive history, a comprehensive examination, and medical decisionmaking of
moderate complexity. However, the carrier's medical review staff determined that the
physical examination was not comprehensive, as documented by the provider, and that
the provider should have billed a lower level of care. An overpayment of $43 resulted.

Q A physician was paid $73 for an initial patient consultation which required a
comprehensive history, a comprehensive examination, and medical decisionmaking of
moderate complexity. However, the carrier’s medical review staff determined that the
provider's documentation supported a detailed history, detailed exam, and moderate
complexity decisionmaking. Because the provider should have billed a lower level of
care, a $24 overpayment occurred,

Q Hospital inpatient. A hospital was paid $22,229 for a surgical procedure based on the
principal and secondary diagnosis codes on the claim. In reviewing the medical
documentation, the PRO found that the secondary diagnosis code, which indicated
complications, was not supported. The PRO’s deletion of this code produced a lesser
valued diagnosis related group of $10,151, resulting in a $12,078 overpayment.

Q DME. A Medicare DME supplies was paid $535 for a gel pressure pad for a
beneficiary's mattress. Based on the medical records, the medical reviewer concluded
that the supplier had actually provided a pressure pad for a wheelchair, which is
reimbursed at $123. This error resulted in an overpayment of $412.

© —_Noncovered or Unallowable Services
‘Medicare unallowable services are defined as those that Medicare will not reimburse because the

services do not meet Medicare reimbursement rules and regulations. About 73 percent of the
errors in this category are attributable to physician claims.

Independent Auditor's Report Taspecior General's Report on the HCFA Financial Satemants for FY 1007 Page 15 of 36



‘An audit of financial statements conducted in accordance with generally accepted auditing
standards, Government Auditing Standards issued by the Comptroller General of the United
States, and OMB Bulletin 93-06 is not designed to determine HCFA’s readiness for Year 2000.
Further, we have no responsibility with regard to HCFA’s efforts to make its systems, or any
other systems, such as those of HCFA’s vendors, service providers, or any other third parties,
‘Year 2000 ready or to provide assurance on whether HCFA has addressed or will be able to
address all of the affected systems on a timely basis. These are responsibilities of HCFA’s
management.

The results of our tests disclosed instances in which HCFA’s financial management systems did
not substantially comply with some of the requirements discussed in the second preceding
paragraph. The Report of Independent Auditors on Internal Control includes information related
to the financial management systems that were found not to comply with the requirements,
relevant facts on the noncompliance, our recommendations related to the specific issues
presented, and relevant comments from HCFA management responsible for the noncompliance,
including management's proposed action plan. These instances of noncompliance relate to
accounting and EDP systems at the HCFA central office and at Medicare contractors and are
presented below:

+ The HCFA does not have an integrated accounting system to capture expenditures at
the Medicare contractor level. *

+ The HCFA’s process for preparing annual financial statements is manually intensive,
involving a series of spreadsheets that incorporate general ledger data as well as,
Treasury information, contractor information, and adjustments determined by HCFA.

+ The HCFA central office and Medicare contractor access and application control
‘weaknesses are significant departures from requirements in OMB Circulars, A-127,
Financial Management Systems, and A-130, Management of Federal Information
Resources.

Providing an opinion on compliance with certain provisions of laws and regulations was not an
objective of our audit and, accordingly, we do not express such an opinion.



21

INDEPENDENT AUDITOR’S REPORT
INSPECTOR GENERAL'S REPORT ON THE
HEALTH CARE FINANCING ADMINISTRATION'S.
FINANCIAL STATEMENTS FOR FISCAL YEAR 1997

To: — Naney-Ann Min DeParle
‘Administrator
Health Care Financing Administration

We have audited the accompanying statement of financial position of the Health Care Financing
Administration (HCFA) as of September 30, 1997, and statement of operations and changes in
net position for the year then ended. These financial statements are the responsibility of HCFA's
management and include the accounts of all funds it administers, including the Medicare hospital

Except as discussed in the following paragraphs, we conducted our audit in accordance with
generally accepted auditing standards; Government Auditing Standards issued by the
‘Comptroller General of the United States; and Office of Management and Budget (OMB)
Bulletin 93-06, Audit Requirements for Federal Financial Statements. These standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.

Medicare/Medicaid Accounts Receivable. Medicare accounts receivable are stated at

$2.5 billion, net of the allowance for uncollectible accounts, at September 30, 1997. Such
accounts receivable represent amounts providers owe to HCFA due to overpayments reported by
‘Medicare contractors. Some of the contractors visited were unable to provide subsidiary ledgers
and other documentation to support reported accounts receivable activity or to reconcile
subsidiary records to amounts reported to HCFA. It was not practical to extend our procedures
to enable us to conclude on the Medicare accounts receivable balance or related activity. In
addition, estimates of Medicaid accounts receivable, stated at approximately $450 million and
netted against the Federal share of Medicaid accounts payable, were developed through a survey
process using unaudited information provided by States to HCFA. Such estimates varied
significantly by State and by month and were generally not provided at September 30, 1997, but
rather were based on carlier reporting dates. Without consistently prepared survey responses and

‘on the HCFA Financial Siatamenis for FY 1997 Page Tf 36


88

a direct relationship between the health care provider and the pa-
tient, where the patient has got control over the funding, that it
might go a long way to eliminating some of the complexities and
some of the problems that Inspector Brown has uncovered.

Do you have a comment on that?

Ms. DEPARLE. As you know, we are doing a demonstration on
that. That will be starting later this year. That was part of the Bal-
anced Budget Act.

I guess you and I have discussed this. I do think medical savings
accounts pose some other potential problems, but we are going to
see how it goes. And I think you have made a good suggestion that
we look at the beneficiaries’ experience in terms of claims error
rates, if you will. Perhaps if they will be getting the statements
themselves, and they will be paying them themselves, maybe they
will have a greater incentive to make sure they are accurate.

Mr. BARTON. Well, there is kind of a law of diminishing returns.
If you determine the only way to correct this problem is through
more regulation, as Congressman Norwood was pointing out, you
get to a point where the regulations themselves become so incom-
prehensible or complicated that even honest people can’t comply
with them. So the way to cut that knot is to do away with the regu-
latory model and go to a competitive model and then allow the
marketplace, ice., the provider and the recipient, to negotiate for
themselves. It is just a different thought, different theory.

Mr. Horn for 10 minutes.

Mr. Horn. Thank you very much.

First, I would just like for the record, what is the policy as to
what you pay the insurance provider, or rather the insurance inter-
mediary between the provider and Medicare? How do we reimburse
them and pay for their services?

Ms. DEPARLE. As I said, these are special contracts, Mr. Chair-
man, that are not in the regular government contracting authority.
It is Title 18, and they can be paid on a cost basis only, not like
the other contracts. And what that means is we have often less
ability to do anything about it if they are not meeting the require-
ments.

For example, one area I know you are interested in is in the mil-
lennium, or Y2K. When I got there, one of the things I wanted to
do was to put an addendum to our contracts to require them to be
millennium-compliant by December 1998. My staff drafted some-
thing, but the contractors were all refusing to sign it. And under
Title 18 they argued, you pay us to pay claims on a cost basis.
There is no basis for any kind of addition like that.

Mr. Horn. Give me an example. Let’s say they clear 200,000
claims in a quarter. What are they getting for that, a dollar a
claim? Or is it a percent of the claims or what? How do you reim-
burse them?

Ms. DEPARLE. I think it does amount to somewhere around a dol-
lar a claim, but I am not positive, and I will get back to you for
the record.

Mr. Horn. Do that for the record. I am curious.

(The following was received for the record:]

Contractors who process hospital and most other Part A claims are paid on a cost
reimbursement basis for claims processing, as well as beneficiary and provider serv-


42

+ Three contractors did not prepare bank reconciliations in a timely manner and, when
prepared, the reconciliations were not adequately documented.

* Two contractors left Medicare checks unsecured.
3(c) Financial Reporting and Reconciliations - Medicare Contractors

The reconciliation of “total funds expended” on the HCFA 1522, Monthly Contractor Financial
Report, is an important control which ensures that all amounts reported to HCFA by Medicare
contractors are accurate, supported, complete, and properly classified. At the Medicare
contractor level, “total funds expended” is the sum of all checks drawn and electronic fund
transfer payments issued during the calendar month less voided checks and overpayment
recoveries. This amount is then further classified by component into the following categories:
benefit payments, PIP, accelerated payments, net suspense payments, audit reimbursement
adjustments, and interest income and expenses. The HCFA uses the information from this report
in preparing its financial statements.

‘Our analysis of the HCFA 1522 report at the 11 selected Medicare contractors identified the
following intemal controt weaknesses:

+ Paid claim activity and “total funds expended” were not formally reconciled at 7 of the
11 contractors. For example, ittook several months for these contractors to produce
payment tapes that reconciled with the monthly 1522 reports because adjusting entries
‘were not identified and proper cutoff periods were not used. Improvements were noted
at the remaining four contractors due to HCFA/OIG training ot prior participation in the
FY 1996 CFO audit.

+ Several contractors had no internal written policies or procedures for preparing the
HCFA 1522.

+ Inmany cases, readily available general ledgers and appropriate subsidiary records
‘were not maintained to support all components of “total funds expended” on the HCFA
1522. For example, to prepare the monthly HCFA 1522 reports, contractors had to
obtain data from various sources, such as the computerized claims processing system,
bank statements, manually prepared documents and ledgers, and estimates. This data
‘was then manually combined by contractors’ accountants into the HCFA reporting
formats. However, the source documents were not always maintained or accurate. For
example, based on our audit work, three contractors submitted revisions to properly
reflect the amounts reported to HCFA on their 1522s.

* Some contractors did not subject the HCFA 1522 to independent verification, For
example, one contractor double-counted $55 million of electronic fund transfers for
several months. This had a cumulative effect on subsequent monthly 1522s of

Independant Audisor’s Report Taapectar General's Report oa tha HCFA Statements Jor FY 1097 Page 72 of 36



83

Mr. BarTON. Is it possible to create some sort of escrow account
so that the intermediary is at risk if, in fact, the claim later proves
that it should not have been paid?

I think the gentleman has got an excellent point. Is it fair to the
hospital if the intermediary pays the claim? Shouldn’t the inter-
me lary bear some responsibility if at a later date, because they fe
into a background check, that, in fact, that claim perhaps should
not have been paid?

Could we create a contingency account or an escrow account so
that a certain percent was held back or that the intermediary
would be liable?

Ms. Brown. I don’t know off the top of my head whether that
could be done, but remember that what was submitted was not rep-
resentative of what was actually shown in the medical records.
it is like a tax return. Somebody could submit something that
seemed to be totally legitimate and would go through the auditing
at IRS, but they, in fact, didn’t have the deductions that they
claimed they had.

Mr. BARTON. But to use your example, if I take all my records
to my CPA and say, do my taxes, the CPA has to sign as a profes-
sional CPA, and then it goes in the IRS. So if the IRS kicks it back,
my CPA is liable.

Ms. BRowN. Under certain circumstances, being a CPA, I could
say, yes, that is true.

ir. BARTON. I sign my mother’s tax returns. I did hers, and I
signed hers, and I guess I’m liable if I screwed up.

is. BROWN. Well, if the CPA had falsified records from you, then
the CPA wouldn’t be liable. It would be the person who gave him
those falsified records, and that is what we are talking about.

We are saying there isn’t a record. The medical file on this indi-
vidual either didn’t show they had that service, or they weren’t eli-
gible for it, or it was an ineligible service and they charged for
something different.

Mr. BARTON. There are some proposals that are before the Con-

‘ess to allow HCFA to theoretically do some sort of competitive

idding for intermediary services. So there are some ways we can
begin to address some of these problems, but I think the gentleman
has an excellent point; that it is a little unfair to purely attack the
hospitals if somebody else has said it is okay.

r. KUCINICH. I will conclude this where I started off, by point-
ing out that Mr. Bilirakis has certainly raised what I think is an
important issue under False Claims, and I cited a local communit;
hospital that is a wonderful hospital that was basically hammered.
And when they stood up for their rights, they found out it was a
very low error rate.

Thave further been informed by staff, which went over to the De-
partment of Justice and began to review some of these cases, that
we have many hospitals that are being conscientious, and yet the
Department of Justice is really being extraordinarily aggressive.
Would they be so aggressive on antitrust matters—hello!—but they
are not.

I think it is important, Mr. Chairman, at some point, for us to
get the Department of Justice to explain how they get to this point;
what the methodology is for them to be so aggressive with hos-


60

Congress with complete, reliable, and timely information on the financial status of
the federal government.

Chairman Horn, your leadership in this area is yielding tangible results. Such au-
dits were never done before, and they provide a valuable roadmap directing us to
areas that need attention. The results of the FY 1996 audit helped im rove our ac-
counting systems and highlighted areas in which our operations could be tightened.
We have cleaned ‘up our accounts ayable problems, our Social Security Administra-
tion receivables are no longer disclaimed. And we are doubling the number of audits
for home health and increasing medical reviews by more than 10 percent.

The results of the FY 1997 audit will once again sharpen our focus on areas that
need prompt attention. Today I will first discuss the audit findings, and then focus
on the corrective actions HCFA is taking.

AUDIT FINDINGS:

In conducting this audit, the OIG found that, based on the information sent in
to us by providers on their claims, our contractors paid the claims correctly 98 per-
cent of the time. The true error rate was found only when the OIG invested a great
deal of resources into visiting HCFA contractors, requesting supporting documenta-
tion from providers, and actually reviewing the medical records of 8,048 fee-for-serv-
ice claims paid in FY 1997 for 600 beneficiaries. The error rate identified by the
OIG could only be found by requesting supporting documentation and medical
records from providers. Human review of medical documentation identified these er-
rors; automated review alone will not solve this problem. This is a very expensive,
labor intensive process, and we do not have resources to do this kind of extensive
investigation for every claim.

In the case of 1,907 of the claims, the auditors found that the provider's files could
not support that the claim was in accordance with Medicare laws and regulations.
By projecting these results to the general Medicare population, the OIG arrived at
a midpoint estimate of $20.3 billion in improper payments nationwide or about 11
percent of the total Medicare fee-for-service benefit payments. Due to the limited
size and variance of the sample, however, the true level of improper payments could
range from 7 to 16 percent. I remain committed to aggressively rooting out claims
for services which are medically unnecessary, insufficiently documented, noncovered
by Medicare, or incorrectly coded.

Documentation

Documentation problems are the single largest factor in our error rate. Like other
insurers, Medicare regulations require providers and suppliers to submit claims for
the services they bill and maintain documentation to substantiate the claim. When
the OIG requested documentation from the provider to back up a claim, documenta-
tion was not complete in 25 percent of cases.

In 4 percent of cases documentation was never furnished. That is down substan-
tially from 14 percent in FY 1996, and we would like to thank the provider groups
with whom we have worked since last year to educate their members on the impor-
tance of cooperating with this audit.

The OIG also noted that 14.5 percent of the error rate was attributable to docu-
mentation which was unavailable because of ongoing criminal or civil investigations.
I must caution that these cases are under investigation and we do not know for sure
whether they are actual cases of fraud or even improper payments.

I would also like to stress that these documentation problems do not appear to
be related to what some providers consider to be the complexity of documentation
requirements. If that were the case, more errors would be classified as incorrect cod-
ing where the provider billed for a different level of service than was actually pro-
vided, instead of as insufficient documentation where we find that the only docu-
mentation is a note stating that the patient is “stable.”

Lack of Medical Necessity

The second largest factor in improper payments is claims for services that are not
medically necessary. Thirty six percent of the improper claims were identified by
medical professionals who found that the documentation provided did not show that
the service was medically necessary. These cases include obvious abuses:

* A hospital which admitted a patient five xeare after a stroke to provide medica
tion and physical therapy for 37 days. Our Peer Review Organizations are de-
veloping pilot programs for detecting and preventing this kind of inappropriate
admission,

+ A home health agency which provided $9,000 in services to a beneficiary who did
not qualify for the benefit. We are taking many steps to crack down on home



84

pitals. And also it would be interesting to see what exactly the
error rate is at the hospitals, because it is my understanding that
thousands, and Mr. Bilirakis, you probably know this, since you
raised the issue, thousands of letters are being sent out.

Now, that doesn’t mean that HCFA isn’t doing its job. I under-
stand you are doing your job. And we are all concerned about fraud
and abuse. Every one of us on this committee, everyone in the Con-
press is concerned about that. But we de not want local hospitals

eing attacked under color of laws dealing with fraud and abuse
and scaring local hospitals to the point where they are ready to
fork over millions of dollars because they are afraid of basically
being debarred from this kind of work.

Thank you, Mr. Chairman.

Mr. BarTON. The gentleman’s time has expired.

I would simply say that the False Claims Act was passed in
1863, during the Civil War, when President Lincoln was pulling his
hair out with all the government contractors providing insufficient
equipment and supplies for the Union cause. It was revitalized dur-
ing the Reagan Administration and used extensively in defense
contracting and saved billions and billions of dollars.

So the answer is not to repeal the False Claims Act or to gut it.
The answer is to find out what the underlying problem is and work
with the Justice Department and the health care community so
that it is only used when it is appropriate.

Before I ask my questions, does the gentleman from Florida wish
to make a statement on this?

Mr. BILiRAKIs. Well, Mr. Chairman, yes. I think there is what I
interpret as a real concern on all of our parts regarding this imme-
diate subject that we are talking about. I would like to propose,
with your able leadership, that we maybe set up a gathering. It
doesn’t have to be a hearing, but a meeting with the Justice De-
partment, possibly maybe with some of their records.

Mr. BARTON. Well, I have a pending request from Congressman
Klink, the ranking minority member of the Oversight and Inves-
tigations Subcommittee, to do something similar to that.

Mr. BILIRAKIS. We have to be careful because we don’t want to
undo all of the good that we have done in terms of the waste, fraud
and abuse situation. So it is a very sensitive area, there is no ques-
tion about that, but there is great concern on our part.

Thank you very much, Mr. Chairman.

Mr. BaRTON. Just a second.

I am just talking about flight arrangements here. This hearing
has gone a little more expeditiously, so I am being encouraged to
take a 12:15 flight, but I don’t think I’m going to be able to do that.

The Chair is going to recognize himself for 10 minutes and try
to refocus the hearing away from the False Claims Act, which is
an important issue in and of itself. Is there anybody in the room
who is for waste, fraud and abuse? Anybody who thinks it is ac-
ceptable? No?

We are all agreed that we are against this problem. The Con-
gress could Ress a law saying, you shall not pay for waste, fraud
and abuse. Would that solve the problem if we just passed a law
and said you can’t pay for it? That wouldn’t solve the problem. So
we have to work together on this. This is a bipartisan issue. Repub-



‘520282 billion.

ould not test the validity of these claims, we: them invalid whether total
‘expenditures were furly presented. It should be noted these claims could be valid or erroneous (including fraudulent)

+ Percentage ofthe overall estimate of $20.282 billion bythe type of claim.

[ ‘Types of Errors (dollars ta millions)
{Documents nc Non-

Lack of promided due covered | | ar | Percentane
typeot | medical | Innficienr [ncorec] extenuating | No | ornoe | | other lef imprope
Provider | necessity |documentaion| coding lerrors| Tout

[Paysicinw $376] $2413] $1,698 560] si7a|__ 3387] [s2o1[ sss0s| _a9.i1ed
fspatient PPS | 2.319 460] 1.001 264) a7 4061] 20.0294
HHA 2484 a i 2,553] _ 12.59%
[Outpatient 35 17s] 2{ 32 [2 t9s7[— sc6sed
[DME 100 w]e 7,009, ei___33) [1] 1958] 9.800
Transportation] 397 ry 714 v7 [ay] star] _ seed
Sabor séini[_sasoa] sagas] S847 seoe]_ sana] [S03 [ sins taser
SNF m7 1 B aa]__310%4
Hospice 329] 154 3 ai] 3.068

ena Stage

Renal Disease a] 31s 46022704
Ispatient

Now-PPS 44s) us| 22104
Laboratory 76] 2o|__23 3) r s] ol asl 20794
lAmbattory

Surgery 4s | ts 19|__ se
Total sino] __ssa0s| $2975] __s2.9e1 ‘sas0]__ss30| s303|s70.282{ _100.00%
Perceatage of

proper and

Pa s6snml asesm] scrm| _resorl __aoel_2erm| rased

‘Cases in which the providers were under and we were from medical records. we

+ The range of improper payments atthe 95 percent confidence level is $12.129 billion to $28.434 billion. Each dollar
‘esimate is computed consistent withthe sampling metnodology. The sum of all dollars equals the overall estimate of

+ Negative dollars represent claims for which the number of vervices billed was less than the numberof services provided.

‘General's Report on the HCFA Financial Statements for FY 1997 Page of 36



5

The Inspector General of the Department of Health and Human
Services has done much to expose the waste that has been allowed
to flourish in the Medicare program and is working, I understand,
with more than half the States to expose similar problems in the
Medicaid program. It is disturbing to note that the Inspector Gen-
eral’s estimate of $20.3 billion in Medicare waste does not even in-
clude fraudulent and abusive schemes that have been perpetrated
by unscrupulous individuals in order to exploit the program.

Medicare, and I happened to serve on the drafting committee
when it came to the Senate in 1965, is critical to the security of
millions of elderly Americans. We cannot afford to continue to
waste nearly $1 out of every $10 that goes to the program. We need
dramatic improvements in the management of the Health Care Fi-
nancing Administration’s programs, and I hope the two key wit-
nesses today can describe how that will be accomplished.

Mr. BarTON. We thank you, Congressman Horn.

We would now like to welcome the ranking member of the Sub-
committee on Government Management, Information, and Tech-
nology, the former Mayor of Cleveland, Congressman Kucinich.

Mr. Kucinicu. Thank you, Mr. Chairman, members of the com-
mittee. It is a pleasure to be here with my colleagues and with the
chairman of our committee, Mr. Horn. I would like to welcome the
Administrator of HCFA and the Inspector General of HHS, who are
here to discuss the results of the 1997 HCFA audit.

In the 1996 audit of HHS, the Inspector General found that the
agency's financial information was not reliable, and this year the

(CFA audit received a qualified opinion, which means that the In-
spector General could determine where the financial accounting
vulnerabilities exist. So obviously, this is a step in the right direc-
tion. The auditors did raise several concerns which J think the com-
mittee is going to be interested in getting into.

I would like to talk for a minute about the Medicare program
and what it means to so many Americans. The Medicare program
provides health insurance for 38 million elderly and disabled citi-
zens. Without it, many of these Americans would be deprived of
adequate health care. That is unacceptable in a wealthy, civilized
society. Medicare provides Americans with the security that, as
they get older and increasingly more vulnerable to serious and
even debilitating medical problems, it assures them they will have
access to the best medical care in the world and that medical ill-
ness will not bankrupt their families. Receiving a Medicare card is
a rite of passage in this country. The card is an affirmation of our
concern as a society for the well-being of our citizens. In essence,
it reflects that social compact which we have in America that we
recognize the responsibility for each other.

We can see Medicare’s importance. That is why we need to as-
sure that it runs well. Last year, the Medicare program processed
over 800 billion Medicare claims and—is that billion or million—
800 billion Medicare claims and paid more than $200 billion. HCFA
is effectively stemming the rise in Medicare spending. Health care
spending as a share of the gross domestic product, which has re-
mained constant since 1993.

Now, HCFA’s efforts to combat fraud and abuse are impressive.
Through Operation Restore Trust, HCFA recouped nearly $1 billion


44

Recommendations
To improve financial management controls and financial reporting, we recommend that HCFA:

» Review and monitor the accounts receivable internal control structure to provide
reasonable assurance that reported amounts are valid and documented.

» Establish an integrated financial management system to promote consistency and
reliability in recording and reporting accounts receivable information.

» Ensure that all contractors establish a general ledger system that incorporates double-
entry bookkeeping.

* Enhance contractor cash controls by emphasizing the importance of segregation of
duties, reconciliation processes, and other cash control techniques.

» Ensure that all contractors develop control procedures to provide independent checks of
the validity, accuracy, and completeness of the amounts reported to HCFA, including a
reconciliation with the contractors’ supporting documentation, and periodically review
contractors’ control procedures over the reconciliation.

» Ensure that contractors receive ongoing training on HCFA 750/751 reports.

» Develop appropriate input/output controls for routinely reviewing the HCFA 750/751
and other reports received from contractors to identify unusual items and
inconsistencies and emphasize HCFA’s reliance on these reports.

+ Revise reporting requirements to reflect HCFA’s expectation and need to retain,
support, in an auditable format, for significant accounts at each contractor.

» Explore obtaining software to reduce the manual manipulation of data necessary to
develop financial statements, and develop procedures to provide an audit trail and
approval of entries and assumptions made.

» Include the issues relating to financial management discussed in this report in the HHS
FY 1998 FMFIA report.

4, Medicare Electronic Data Processing (EDP) Controls

Numerous EDP control weaknesses, as noted on the following page, were found at the HCFA
central office and selected Medicare contractors. Specifically, we found deficiencies in entity-
wide security programs, access controls, application development and change controls,

segregation of duties, systems software, and service continuity planning at the HCFA central

Independent hudisors Report Generals Raper on tha HCFA Financial Satamants for FYI — Page 436



4

and abuse,” or documentation questions and how that relates to
that.

So Mr. Chairman, again, thank you. I am glad we are having the
hearing, and hopefully we will be able to follow up on this in all
of our subcommittees.

Mr. BarTon. I want to thank you, Congressman Green.

I would now recognize the distinguished subcommittee chairman,
Mr. Horn from California, for an opening statement.

Mr. Horn. Thank you very much, Chairman Barton and Chair-
man Bilirakis. I appreciate the opportunity to join you.

We are here today to discuss the status of the financial manage-
ment practices and information at the Health Care Financing Ad-
ministration. This is the fifth in a series of hearings that the Gov-
ernment Reform and Oversight Subcommittee on Government
Management, Information, and Technology have been involved
with, and we are pleased to join in this effort.

Three weeks ago we held a hearing on the first ever government-
wide audit on financial statements and financial status. Not since
1789, they had one then, have we had such an audit, and we
learned a lot from it. On the 15th, we hit with our first agency,
that is the Internal Revenue Service; on the 16th, the Department
of Defense where they have had long standing problems in terms
of accounting for money in relation to purchase orders. On April 17,
we looked at the lessons learned at the Social Security Administra-
tion, where they have fairly good practices and management sys-
tems. Social Security was the first agency to complete this year’s
audit. It received a clean opinion on its financial statements for the
fourth year in a row. It has an effective system of internal controls
and these are commendable achievements.

I am Pleased we are having this joint hearing, because the
Health Care Financing Administration is tremendously important
to at least 50 million Americans and 100 million of their relatives
in terms of Medicare and Medicaid. These hearings have raised se-
rious issues affecting the soundness of fundamental management
information used by decisionmakers. In the balance are the quality
of our governmental services and the fiscal health of the Nation.
Congressional attention to financial management, therefore, is cru-
cial.

The amount of money that flows through the Health Care Fi-
nancing Administration is very large. It is third only to the Bureau
of Public Debt and the Social Security Administration in outlays,
accounting for 18 percent of the Federal budget, or about $300 bil-
lion. A third of all dollars spent on health care in the United States
is paid through the Health Care Financing Administration.

lore disturbing, however, is the explosive growth in Medicaid
and Medicare. The growth in these programs has far outpaced the
growth in the Consumer Price Index, almost 4 times faster than
the general Consumer Price Index and more than twice as fast as
the Consumer Price Index for medical goods and services. The Con-
gressional Budget Office’s projections of the cost of these entitle-
ment programs is very sobering. CBO Projects that by the year
2008, the cost of Medicare and Medicaid will grow to $658.3 billion.
In other words, the cost of these programs will more than double
over the next decade.


‘The HCFA generally concurred with our past recommendations and has developed a corrective
action plan to reduce the Medicare payment error rate to 10 percent by the year 2002.
Accordingly, we offer no additional recommendations. Specific corrective actions follow:

+ Imereasing the level of claims review. At the beginning of FY 1998, HCFA required
its contractors to make a prepayment review of the documentation supporting physician
claims for evaluation and management codes. The contractors were also asked to
increase their overall level of claims review (prepay and postpay), including review of
supporting documentation. In addition, pilot projects with the PROs are planned to
review 1-day hospital stays, short-term hospital readmissions, and other selected
provider procedures.

+ Increasing the number of contractor medical directors. Contractor medical
directors play an important role in medical review jes and provider education. To
increase medical director full-time equivalents by 15 percent, HCFA provided the Fis
$1 million in FY 1998 funding.

+ Improving the ase of technology and data. The HCFA is developing a system
architecture that will incorporate technological advances for detecting fraud, waste, and
abuse. Currently, all Medicare contractors use software to evaluate provider billing
patterns. The HCFA is evaluating the capabilities, strengths, and weaknesses of
analytical, off-the-shelf systems currently supporting the contractors’ medical review
and fraud and abuse activities. The information gathered will be used to assess the
adequacy of system capabilities and to fund improvernents as necessary.

In FY 1998, HCFA will continue developing and refining the HCFA Customer
Information System (HCIS) which provides rapid access to national provider and
beneficiary utilization data. The HCIS, in combination with various other software
tools, allows contractors to better focus review activities. Additionally, HCFA

ultimate goal is to improve prepayment reviews of claims.

+ Developing and implementing a substantive testing program. Pursuant to an
agreement with the OIG, HCFA will have a program fally operational by October 1,
1998, to conduct the substantive testing portion of the FY 1999 financial statement
andit and to produce a Medicare payment error rate. To date, HCFA has been working
very closely with the OIG to fully understand the audit protocol and methodology
applied during the FY 1997 audit The HCFA has also contracted with a statistician to
document the sampling and other methodologies used by the OIG so that HCFA can
replicate O1G's methodology in FY 1999.

Auditor's Report Taspector ron Statements for FY T 7



17

physical, and speech therapies, as well as continuation of routine medications.

jased on a review of the medical records, the PRO concluded that the docu-
mentation did not support the medical necessity for 37 days ($38,672) of inpa-
tient hospital care.

* A $2,915 home health agency claim for home care visits, including skilled nursing
services, was denied because the skilled services were medically unnecessary.
Our interview with the beneficiary determined that he left home daily and
therefore did not meet the definition of “homebound” necessary for Medicare
coverage of home health services.

Although an ambulance service billed $7,844 for transporting a beneficiary from
‘a nursing home to a dialysis center, the medical reviewer determined that the
beneficiary could have traveled safely by far less expensive means.

Incorrect Coding. Incorrect coding is the third highest error category this year,
representing 15 percent of the total improper payments. Over 90 percent of these
grrors pertained to inpatient hospital and physician claims for both FYs 1996 and
The medical industry uses a standard coding system to bill Medicare for services

rovided. For most of the coding errors, the medical review staff determined that
fhe documentation submitted by. the providers supported a lower reimbursement
code. However, we did find a few instances of downcoding which were offset against
identified upcoding situations.

Some examples of incorrect coding follow:

« A physician was paid $162 for providing critical care of an unstable, critically ill
patient requiring the constant attendance of the physician in a hospital inpa-
tient setting. According to the medical reviewer, the records submitted by the
provider did. not support this level of care but rather a noncritical, high-com-
plexity hospital visit valued at $60. This resulted in a $102 overpayment.

* A hospital was paid $22,229 for an inpatient’s surgical procedure based on the
principal and secondary diagnosis codes on the claim. The PRO found that the
Eecondary diagnosis code, which indicated complications, was not. sup; .
The PRO’s deletion of this code Produced a lesser valued diagnosis related group
of $10,151, resulting in a $12,078 oyetpayment.

° An equipment ‘supplier was paid $535 for a gel pressure pad for a beneficiary's
mattress. Based on the medical records, the medical reviewer concluded that
the supplier had actually provided a pressure pad for a wheelchair, which is re-
imbursed at $123. This error resulted in an overpayment of $412.

Noncovered /Unallowable Services. “Medicare unallowable services” are defined as
those that Medicare will not reimburse because the services do not meet Medicare
reimbursement rules and regulations. About 73 percent of the errors in this category
were attributable to physician claims in FY 1997.

Following are some examples of noncovered or unallowable services:

« A physician was paid $114 for a beneficiary's office visit, electrocardiogram, and
various other laboratory tests. Based on the medical records, the reviewer deter-
mined that payment should be denied because the services were performed as
part of a routine physical examination, which is not covered by Medicare.

A podiatrist was paid a total of $57 for two claims for providing routine foot care
clipping of toenails). Medicare pays for routine foot care only under limited cir-
cumstances, such as for the treatment of infected nails. The medical reviewer
concluded that the care provided was routine preventive care, which is not cov-
ered, and the claim was denied.

Conclusions and Recommendations: Claim Testing

To obtain Medicare reimbursement, providers are required to retain supporting
documentation and make it available upon request. As with last year’s results, the
majority of the improper claims in our sample did not contain any visible errors.
However, a significant portion of the errors we found were attributable to insuffi-
cient documentation on the part of providers that claimed payments. We also identi-
fied numerous errors for services that were not medically necessary, upcoded to ob-
tain higher Medicare payment than the appropriate code would permit, or non-
covered or unallowable.

We acknowledge that too little time has elapsed for HCFA to fully implement our
prior year’s recommendations and to significantly reduce the error rate. Specifically,
we recommended last year that HCFA:

1. Develop a system that objectively and periodically estimates improper payments
and disclose the range of such improper payments in its financial statements.

2. Develop a national error rate to focus corrective actions and measure performance
in reducing improper payments.


12

While this year’s point estimate is $3 billion less than last year’s
point estimate of $23.2 billion, we cannot conclude that the current
error rate is statistically different. However, there is persuasive
evidence that more medical documentation was obtained this year,
which had a substantial effect on reducing the midpoint estimate.
There is also evidence that some of the drop is due to the sampling
variability. As was the case last year, the improper payments coult
range from inadvertent mistakes to outright fraud and abuse.

It should be noted that medical personnel examination of patient
records detected almost all of the improper payments in our sam-
ple. When these claims were submitted for payment to Medicare
contractors, they contained no visible errors.

This year’s sample results confirm last year’s. As noted in my
first chart, which is also contained in my written testimony, sub-
stantial Medicare improper payments continue to be prevalent in
four types of health care providers: physicians, inpatient prospec-
tive payment system hospitals, home health agencies, and out-
patient hospitals. Specifically, these providers first did not ade-
quately document the bases for their claims; second, billed for serv-
ices that were not medically necessary; third, billed for higher
priced procedure codes than were supported by the beneficiary’s
medical records; and fourth, billed for services that were not al-
lowed by Medicare.

My second chart shows the types of errors found as a percentage
of the total improper payments: First, documentation problems.
This was the most pervasive error category, even though Medicare
regulations specifically require providers to maintain sufficient doc-
umentation to justify diagnosis, admissions and other services.
Physician and outpatient services accounted for 52 percent of the
documentation discrepancies in 1997 and 47 percent in 1996. A
lack of medical necessity was the second highest error category for
both years. Inpatient prospective payment system hospitals and
home health agency claims accounted for over 60 percent of these
errors. In our examination, decisions on medical necessity were
made by medical staff who followed their normal claim review pro-
cedures to determine whether the medical records supported the
claims.

Incorrect coding is the third highest error category. Physician
and inpatient PPS hospital claims accounted for over 90 percent of
both year’s coding errors. For most of the coding errors, medical re-
viewers determined that the documentation submitted by providers
supported a lower reimbursement code.

e final error category is unallowable services. This year, about

73 percent of these errors were attributed to physician claims. Un-

allowable services are those that Medicare will not reimburse be-

cause they do not meet Medicare reimbursement rules and regula-
ions,

In view of the current estimate of $20.3 billion in improper pay-
ment, the Medicare program remains at high risk for payment er-
rors. We want to point out, however, that in response to our prior
year’s recommendations, HCFA has developed and is aggressively
pursuing a corrective action plan to reduce the medical payment
error rate. Because too little time has elapsed for HCFA to fully


HHS INSPECTOR GENERAL’S AUDIT OF THE
HCFA’s FY 1997 FINANCIAL STATEMENTS

FRIDAY, APRIL 24, 1998

HOUSE OF REPRESENTATIVES, COMMITTEE ON COMMERCE,
SUBCOMMITTEE ON HEALTH AND ENVIRONMENT AND
THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGA-
TIONS, AND THE COMMITTEE ON GOVERNMENT REFORM
AND OVERSIGHT, SUBCOMMITTEE ON GOVERNMENT
MANAGEMENT, INFORMATION, AND TECHNOLOGY,

Washington, DC.

The subcommittees met, pursuant to notice, at 10 a.m., in room
2123, Rayburn House Office Building, Hon. Joe Barton (chairman,
Subcommittee on Oversight and Investigations) presiding.

Members present: Representatives Bilirakis, Barton, Horn,
Kucinich, Norwood, Greenwood, and Green.

Staff present: Matthew Saylor, majority counsel; Marc Wheat,
majority counsel; Chris Knauer, minority counsel; J. Russell
George, staff director and chief counsel; Dianne Guensberg, GAO
detailee; John Hynes, professional staff member; Matthew Ebert,
clerk; Mason Alinger, staff assistant; Kami White, intern; Faith
Weiss, minority counsel; Mark Stephenson, minority professional
staff member, and Earley Green, minority staff assistant.

Mr. BarRTON. The hearing will come to order.

Today we are holding a joint hearing on the Department of
Health and Human Service’s Office of the Inspector General audit
of the Health Care Financing Administration’s fiscal year 1997 fi-
nancial statements. I am pleased to say that this joint hearing is
with the Subcommittee on Oversight and Investigations, the Sub-
committee on Health and Environment of the House Commerce
Committee, as well as, the Subcommittee on Government Manage-
ment, Information, and Technology of the Committee on Govern-
ment Reform and Oversight that is so ably chaired by Congress-
man Horn of California. I want to welcome Congressman Horn and
other members of his subcommittee to this important hearing.

I understand that having an audit is not always a pleasant expe-
rience, but it is sometimes a necessary evil in disclosing the finan-
cial position of an agency and keeping track of where its money is
going in hopes of reducing waste and inefficiency. I and many of
the members here today know from firsthand experience. As you
will recall a few years ago, we had the first ever audit of the House
of Representatives. The findings of that audit were a wake-up call
that the House needed to improve its efficiency and keep a better
watch over our dollars.

co5)


67

Mr. Norwoop. Second, let me ask you to include when we are
looking for error that amount of error that is occurring through the
payment practices of HCFA through their contractors?

Brown. Sir, it was about 99 percent correct based on what
the contractor received in the claim.

Mr. Norwoob. The contractors got it right?

Ms. Brown. The contractors got it right. The only way ——

Mr. Norwoop. Then tell me how you can pay for noncovered
services.

Ms. Brown. Well, because the documentation sent to the contrac-
tors was either fraudulently or mistakenly coded wrong, so there
was no way we would have been able to—

ur Norwoop. Why wouldn’t that fall under incorrect coding
then.

Ms. BROWN. Well, incorrect coding means the code for the par-
ticular service given. Providers learn what kind of claim codes get
through the system, and they can submit those codes. The only way
we could identify this is by going back to the patient records and
having medical people examine the patient’s records and see if
What was submitted in the claim was proper based on the patient’s
record.

Mr. Norwoon. If it is not their job to examine the claim to see
if it needs to be paid, what is the job of the contractor? They aren’t
doing that. I know that, and I hope you do too. They are checking,
spot checking claims from time to time; therefore, there is a great
deal of payment incorrectly being made because your contractors
aren’t doing the job. and that is the only way I can understand how
you would pay for an unallowable service. You did it, you didn’t
mean to, the contractor didn’t pick up on it.

Mr. VENGRIN. Explicitly, the bulk of those charges were for
physicals and on the claim, the physician——

r. NORWOOD. The bulk of whic! charges?

Mr. VENGRIN. The noncovered services that you are speaking of,
sir. Most of those on the claim, the physician would bill, for exam-
ple, an intermediate visit? And there is no evidence on that claim
that it was for an annual physical not covered by Medicare. It was
not until we went into the medical records and obtained the sup-
port for that that we found that type of documentation.

Mt. Norwoop. You cover an annual physical? You will pay for
that?

Mr. VENGRIN. Typically they do not.

Mr. Norwoop. Do not. Do you pay for a physical prior to the
Preparation for a patient for surgery?

ARLE. If it is medically necessary, sir, we do.

ea Ronee, Who decides that, the doctor or somebody else?

Ms. DEPARLE. The doctor.

Mr. Norwoop. The doctor. Besides that, let me ask you if you
have with you, madam, the correct coding initiative. Did you bring
that with you?

Ms. DEPARLE. No, sir, I didn’t.

Mr. Norwoop. How high is that? If you measured it, how many
pages in that thing?

Ms. DEPARLE. ie don’t know, sir. I can get an answer for you. It
is 90—


22

trend data to analyze the reasonableness of such estimates, it was not practical to extend our
auditing procedures to enable us to conclude on the adequacy of Medicaid estimates.

Cost Report Settlements. Medicare Part A providers are paid interim amounts throughout the
year and then file a cost report to reconcile actual costs to the interim payments received. In
addition to processing and reporting cost settlements made during the fiscal year (FY), HCFA
must develop an estimate for cost reports that have not yet been settled at yearend. Typically
these payments will not be settled for up to 2 years. Although HCFA has a cost report process,
because of limited resources, the provider audit activity is limited to specific issue areas or cost
report line items and covers only a limited number of providers. Due to the limited scope of the
contractors’ provider audit function, there is little assurance that amounts eventually paid to
providers through the final cost report settlement process meet Medicare guidelines for
reasonableness and appropriateness. We were unable to extend our procedures to determine what
adjustments, if any, were necessary to the FY 1997 cost settlement payments of $2.4 billion
recorded by HCFA or to determine the potential impact of such adjustments on the
approximately $5 billion yearend cost settlement estimate included as a component of the
Medicare other governmental liabilities.

As discussed in note 13, HCFA has devised a methodology that subjects all cost reports to an
automated uniform desk review process, Based on certain criteria, some providers and/or issues
are selected for focused, field, or onsite audits. Due to budget constraints, a limited number of
cost reports are audited in any given year. About one-third of these are onsite audits of a sample
number of providers that would not ordinarily be subject to audit. These onsite, “cyclical” audits
are used to ensure that cost and statistical records support the data shown on the cost report and
use a customized audit program. The remaining audits are selected to concentrate andit dollars in
areas of risk to the Medicare program and to provide sufficient return for the dollars spent.

In 1997, of 35,079 provider cost reports received, 33,000 were subject to desk review. Of that
total, just over 5,000 providers were selected for audit. Dollars disallowed averaged 1.5 percent.
This workload consisted of two primary groups: (1) hospitals paid based on prospective
payment system (PPS) rates and their provider-based facilities and (2) other facilities paid based
on costs incurred. The PPS facilities must submit cost reports if they have provider-based home
health agencies, outpatient clinics, or other provider-based facilities paid on a cost basis. These
cost reports are used both to validate the PPS rates and to ensure that services paid on a cost basis
are properly reimbursed. ‘The disallowance rate on these audits was low-—less than 1 percent.

‘The balance of the audits have a higher disallowance rate because they can be targeted toward
provider cost reports that have the highest risk to the Medicare program. Dollars disallowed for
all non-PPS facilities averaged 4 percent in FY 1997. However, since the uniform desk review
does not currently select those cost reports for audit that do not appear to have a significant
potential for disallowance, auditing all cost reports does not appear to be cost beneficial.

i Auditor's Repart Inspector General's Report on the HCFA Financial Satamants for FY 1997 Page? of 36



8

Mr. BARTON. May I be excused, Mr. Chairman?

Mr. BILIRAKIS. We are also pleased that we do have these three
subcommittees meeting to hear this testimony. It is certainly very
significant. Those of you who have testified before a committee or
committees previously know that we quite often don’t get too many
more Members at any one time. But the lack of Members here
today is not an indication of lack of interest, I assure you.

I am sorry to learn from today’s written testimony that the very
agency charged with financing the health care of millions of Ameri-
cans did not receive a clean bill of health on its own financial
records. This is no surprise inspection. Bight years ago Congress
passed, as you know, the Chief Financial Officers Act of 1990 to re-
quire of government agencies what publicly traded corporations
long have done, and that is prepare financial statements that fully
disclose their financial positions and the soundness of their inter-
nal financial controls. r nearly 8 years of advance notice and
over $100 billion of claims going out the door, this is what the In-
spector General found, and I paraphrase:

The Inspector General is still unable to give HCFA an unquali-
fied opinion, a stamp of quality that every investor in the private
enterprise would expect. The Inspector General found that $1 out
of every $10 is improperly Spent y HCFA. Of the $20.3 billion of
improper payments, fully $9 billion is spent paying alleged costs for
which no documentation or insufficient documentation exists. The
Ing) r General found that HCFA may not be collecting millions
of dollars in overpayments for providers. A statistical selection of
beneficiaries performed by the Inspector General found that of the
8,048 fee-for-service claims processed for payment 1,907 claims did
not comply with Medicare laws and regulations, a failure rate of
23.7 percent.

The amount of money that HCFA spends improperly, $20.3 bil-
lion is certainly staggering. Recently the Subcommittee on Health
and Environment held a hearing on the National Institutes of
Health and all the important work that it is doing, from the human
genome project to cancer research, to make us healthier and to in-
crease our longevity. The NIH has an annual budget of $13 billion
to study all of the ailments afflicting mankind. Today we learn that
HCFA improperly spends that amount of money, and more, much
more, every year. The entire NIH budget would only last through
August with HCFA’s spend-out rate and improper payments.

‘ou should have witnessed some of the testimony from the af-
flicted persons and from their parents. I can assure you there were
tears in the eyes of many Members of Congress and in the audi-
ence hearing some of those stories, when just a little more money
would really expedite and accelerate that research. And then we
find this misuse and waste of funds.

T have introduced legislation, H.R. 3563, which we are calling the
Biomedical Research Assistance Voluntary Option Act, or the
BRAVO Act. This \egislation will encourage private contributions
for NIH research. We cannot afford to waste valuable taxpayers’
dollars at a time when increasing medical research at NIH has be-
come one of Congress’ top priorities.

I do want to commend Administrator Min DeParle for her work
over the past few months. You don’t have an easy job and I know


Audit Methodology

Statistical Selection Method. To accomplish our objective, we used a stratified, multistage
sample design. Our sample frame consisted of 220 quarters (55 contractors x 4 quarters). We
stratified the contractors into two strata: stratum 1 included the first, second, and third quarters,
and stratum 2 included the fourth quarter. Selecting two contractors from the fourth quarter
controlled the amount of audit work required to review fourth quarter claims. We did not stratify
the contractor quarters for FY 1996, The selection within each stratum was based on probability-
proportional-to-size using Rao, Hartley, Cochran methodology. We used FY 1996 Medicare fee-
for-service benefit payments as the selection weighting factors. Ten contractor quarters were
selected from stratum 1, and two contractor quarters from stratum 2. ‘The 12 contractor quarters
included 11 contractors (1 contractor was included twice). Of the 11 contractors, 5 are both
fiscal intermediaries (FI) and carriers; 2 are Fls, carriers, and durable medical equipment regional
carriers (DMERC); 2 are Fis; and 2 are carriers. The Fis process payments for hospitals, skilled
nursing facilities (SNF), home health agencies (HHA), rural health clinics, hospices, end stage
renal disease facilities, and other institutional providers. Carriers process payments for
physicians, clinical laboratories, free-standing ambulatory surgical centers, and other
noninstitutional providers. The DMERCs process all claims from suppliers of durable medical
equipment (DME), prosthetics, orthotics, and supplies under the Medicare Part B program except
those for items incident to physician services in rural health clinics or included in payments to
such providers as hospitals, SNFs, and HHAs. A DMERC’s claims processing jurisdiction is
based on the beneficiary's State of permanent residence.

The second stage consisted of a random sample of 50 beneficiaries from each contractor quarter
stratified into 4 strata by total amount of payments for services. The random sample of 600
beneficiaries produced 8,048 claims valued at $5.4 million for review. To ensure the
completeness of the claims data, we reconciled Medicare contractor claims data to the HCFA.
1522 Monthly Financial Report for the 12 contractor quarters selected. The HCFA used this
report in its preparation of the FY 1997 financial statements,

‘We used a variable appraisal program to estimate the dollar impact of improper payments in the
total population. The population represented $177.4 billion in fee-for-service payments.

Audit Procedures, We reviewed all claims processed for payment for each selected beneficiary
during the 3-month period. Specifically, we used medical review personnel from HCFA's
Medicare contractors and peer review organizations (PRO) to assess the medical records and to
determine whether the services billed were reasonable, medically necessary, adequately
documented, and coded correctly in accordance with Medicare reimbursement rules and
regulations.

We contacted each provider in our sample by letter requesting copies of all medical records
supporting services billed. In the event that we did not receive a response from our initial letter,
we made numerous follow-up contacts by letter and, in most instances, by telephone calls. At

Independent Auditor's Repor "General's Report on the HCFA Financial Statements for FY 1997 Page 7 of 36



96

DEPARTMENT OF HEALTH & HUMAN SERVICES
HEALTH CARE FINANCING ADMINISTRATION
June 23, 1998
The Honorable Joz BARTON, Chairman
Subcommittee on Oversight and Investigations,
Commerce Committee
U.S. House of . Representa!
2125 Rayburn House
Washington, D.C. 2051.
DEAR CHAIRMAN BARTON: Attached are responses for the record to questions posed
by Representative Norwood in follow up to the April 24 hearing before the Commit-
tee on Commerce, Subcommittee on it and Investigations, on the Fiscal
year 1997 Chief Financial Officer Audit of the Health Care Financing Administra-
ion.
1 am forwarding a copy of these answers to Representative Norwood.
Sincerely,

NANCY-ANN MIN DEPARLE
Administrator

tives
Building

Enclosures

MATERIALS FOR THE RECORD

These are HCFA’s responses to questions Rep. Norwood submitted in follow-up to
the hearing.
Correct Coding Initiative

Question 1) Does HCFA plan on. addressing. the lack of information provided to
physicians via the carriers in regard to the CCI? ' :

jponse: We make our Correct Coding Initiative edits and the underlying cov-

erage > policy on which they are based available for review by anyone. Physicians
mi tain CCI edits by calling the National Technical Information Service at 1-
800-553-6847 and asking to purchase the “National Correct Coding Policy Manual
for Part B Medicare Carriers.” They may obtain the whole package of edits or indi-
vidual CPT chapters that pertain to their own practice.

Question 2) HCFA claims to have disseminated the requirements of the CCI to
providers, but physicians offer a contrary perspective. How does HCFA account for

s'

Response: Information on CCI edit availability was sent to each physician as part
of the Medicare participation request in 1995. The AMA was and continues to be
art of the review Process before the edits are implemented. Physicians may obtain
‘1 edits through the National Technical Information Service by calling 1-800-553-
6847 and asking to purchase the “National Correct Coding Policy Manual for Part
B Medicare Carriers.” They may obtain the whole package of edits or individual
CPT chapters that pertain to their own practice.

Question 3) How does HCFA plan to address the concerns of providers who make
honest mistakes?

Response: Most physicians are honest and conscientious, but we must have zero
tolerance for waste, fraud and abuse. If physicians do make honest errors, we do
want to find those errors, preferably before we make pay it. If we find errors
after we make payment, make no mistake about it, we do want the money back.
But we are not looking to put anyone in jail for honest mistakes, and we are not
poing to refer physicians to the Ins; r General for occasional errors. We have to

lieve there is some level of fraudulent intent before we make any referrals for fur-
ther investigation.

Question 4) How is HCFA addressing the local carriers unwilling to properly edu-
cate providers?

Response: Our contractors conduct regular training sessions and refresher courses
for providers and billing staff that providers hire. Bulletins are mailed out quarterly
to physicians about any change. We also work with provider groups, such as the

. which conduct their own training and provide other education on proper bill-
ing and documentation.
Evaluation & Management Documentation Guidelines

Question 1) Will HCFA make efforts to conduct uniform training of physicians
once the E&M guidelines have been revised?

Response: On April 24, 1998, I sent a letter to the AMA (copy attached) indicating
confidence that by working together we can revise Documentation Guidelines so
they meet our needs to assure that Medicare payments are appropriate without im-


89

ices. Annual budgets are negotiated, based in part on the number of claims that the
contractor is projected to process over the course of the year. For budgeting pur-
poses, we estimated the average cost to process an individual Part A Claim for Fis.
cal Year 1998 to be $1.07.

Mr. Horw. Is there an incentive, for example, for them to clear
a number of claims without looking at them too carefully because
that is how they are paid?

Ms. DEPARLE. I think, sir, there probably is, and I think also
Medicare is the largest processor of electronic claims. We have
moved heavily in that direction. That is good for the purposes of
efficiency, but for the purpose of taking time to actually look at
claims and go behind them and see whether they are right, it
might impose other incentives.

Mr. Horn. Yes, because I would think we would need to deal
with that in some way. If it is strictly competitive bid, is it that
you put these out, or how does this work? Or do they—once you

ire them, do they stay with you for all eternity or what?

Ms. DEPARLE. No, the contractors, under law, on the Part A side,
the providers get to designate who is going to be the fiscal inter-
mediary, and it is usually Blue Cross and Blue Shield they have
chosen around the country. And on the Part B side there are a
bunch of different contractors.

I wouldn’t say it is a competitive bid, because they are also re-
quired to be insurance companies, and most of them have been in
place for a long time. I should say many of them do a good job. We
need to work together with them and with the Congress to look at
how to make this situation better.

Mr. Horn. Let me move to the next question, which is, I think,
a policy under review. As I understand it, under the Balanced
Budget Act, HCFA was required to propose a rule for the Medicare
physicians’ fee schedule. This proposal was initially to be imple-
mented on January 1, 1998; however, because of difficulties in de-
veloping the proposed fee schedule, implementation was delayed
until January 1, 1999, that is my understanding. And I believe you
are now supposed to be publishing a new proposal on this on May
1, 1998, next week. Is the proposal going to be issued on May 1?

Ms. DEPaRLE. I don’t believe it is. My staff are still hopeful that
they will make the deadline, but it is still being reviewed by a
number of people. And I think what you are referring to is the new
practice expense component.

Mr. Horn. That is correct. And I want to hear your understand-
ing of the methodology being pursued to separate direct and indi-
rect cost of the practice expense. Are we just lumping it in on an
average nationwide? Are we going to look at it specialty by spe-
cialty?

Ms. DEPARLE. We are trying to look at it Specialty by specialty.
The Congress directed us in the Balanced Budget to go back
and look at our methodology again, and the GAO has also looked
at this. We have met countless times, with a number of the spe-
cialty societies. I myself have met with a number of them, and we
have a new proposal that we are going to be putting forth.

I think we will be a week or so late. As I said, my staff are still
hopeful we will make the deadline, but, as you say, it is next Fri-
day, so I am not confident we will make it.


9

you are working hard to try to correct these problems. Her commit-
ment has resulted in a solid beginning toward reducing fraud in
Medicare and other Federal health programs, but we must all ac-
knowledge that we have a long way to go before we can give HCFA
a clean bill of health.

Indeed, this matter is being taken very seriously, as I have al-
ready said, by the Congress. Today we have an unprecedented
hearing of the Commerce Committee Subcommittee on Health and
Environment and the Subcommittee on Oversight and Investiga-
tions, as well as our colleagues from the Government Reform and
Oversight Committee’s Government Management, Information, and
Technology Subcommittee. I can assure the Inspector General and
the HCFA Administrator and the American taxpayers that we will
get some straight answers from HCFA and we will get them on the
road to recovery as soon as possible. Again I would particularly like
to thank the Inspector General and her staff for bringing this infor-
mation to light.

Thank you, Mr. Chairman.

Mr. BARTON. Thank you, Chairman Bilirakis.

The gentleman from Ohio wants to correct his opening state-
ment.

Mr. Kucinicu. Yes. I just wanted to correct the record when I
said that the Medicare program process, a certain number of claims
as 800 million. It won’t be processing 800 billion until my genera-
tion is on Medicare, so.

Mr. Barton. It is only three zeros.

Mr. Norwood from Georgia.

Mr. Norwoop. Thank you, Mr. Chairman. I have been trained
very thoroughly by my chairman, Mr. Bilirakis, and so my very
lengthy statement will be submitted for the record.

[The prepared statement of Hon. Charlie Norwood follows:]

PREPARED STATEMENT OF HON. CHARLIE NORWOOD, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF GEORGIA

I would like to begin by saying how much I appreciate the hard work of the Office
of the Inspector General in conducting the audit of the HCFA’s financial statements.
It is always reassuring to see that we are making an effort to eliminate government
waste in any sector. I hope that this audit and the Inspector General's findings help
to encourage more fiscal responsibility on the part of the HCFA and foster an in-
creased awareness of improper Medicare payments.

As the largest division of the Department of Health and Human Services, HCFA
oversees a tremendous budget, thus running the risk of making many improper fi-
nancial transactions. Like any agency of this size, it necessitates a great de
scrutiny to prevent waste and encourage sound practices. I trust that the audit con-
ducted by the Tnspector General did an excellent job of identifying these improper
payments, and helped bring to light other flaws within HCFA that need to be cor-

rected.

‘According to the audit, the dollar amount of improper payments dropped by about
$3 billion between FY 1996 and FY 1997. I understand that it is too early to draw
definite conclusions on the issue. However, the lack of oversight by HCFA, the wide
variety of regional carrier interpretation of rule and regulations, and failure of
HCFA to ensure consistency results in the implementation of its policies is directly
responsible for a great deal of the so called fraud waste and abuse. Congress should
support programs to make government more efficient and less wasteful. But in
doing so we need to assure that we are equitable in our pursuits. If doctors and
other health care providers are to be held to high standards of accountability and
documentation without just compensation, so too should HCFA and the regional
contractors that implement policy.


95

Mr. BarTON. Okay. Well, you know, we can’t put a number on
it specifically, but we can get in the ballpark, and the problem that
those of us that are elected have, we hear the other side a lot more.
The doctors talk to us, the hospitals, the hospital boards, the home
health care providers, and their story is that they are just over-
whelmed with paperwork and bureaucracy and complexity, and so
we have to balance all of this out. And as I have told you, and Con-
gressman Bilirakis alluded to this, I want to throw the book at the
bad guys, but I got a lot of people that I don’t think are bad guys
who are going out of business right now.

Mr. KUCINICH. Would the gentleman yield?

Mr. BarTON. Sure.

Mr. KUCINICH. The chairman is absolutely right. My question is
where is the fraud here? You know, fraud involves intent, and I
don’t know in this report, have you covered that?

Ms. DEPARLE. There are some examples in here of things that I
think you would categorize as that, where there is no provider
there at all who has been billing us, that I view as fraud.

Mr. BarTON. I agree with Ms. Brown. I think HCFA is moving
in the right direction. I think there is an honest effort. I think you
give the Congress a lot of credit, and I think if you want to be a
little bit more partisan on this, I think you should give the Repub-
Hican leadership some credit in Congress for focusing attention on
this.

Medicare/health care waste, fraud and abuse 3 or 4 years ago
was a very low priority. You know, if you wanted to talk about
fraud, you looked at the Defense Department, you looked in the
narcotics area, you didn’t really focus on health care. And to our
credit we have done that with a lot of support from the Democratic
side on this committee and, I would assume, on Congressman
Horn’s committee. But we need to come up with ways to differen-
tiate between honest mistakes and intent. I can’t make those deci-
sions, but I am hopeful that what we are doing in our dialogs helps
that, and I certainly want to commend the Inspector General for
your efforts to put some methodology to this.

Ms. Brown. Thank you.

Mr. BaRTON. We know the numbers are not precise, but some
numbers with some degree of exactness are better than no num-
bers. I want to commend the Clinton Administration for focusing
attention in this area. I don’t do that very often, but in this case
I think it is deserved.

We will be doing follow-up questions. All members of all sub-
committees will have the requisite amount of time to present open-
ing statements for the record and written questions, and we would
hope when we get those to you and your staffs that you would reply
in an expeditious fashion.

Does anybody else have a final statement?

The hearing is adjourned.

{Whereupon, at 12:15 p.m., the subcommittees were adjourned.]

{Additional material submitted for the record follows:]


100

These recoveries have assisted our efforts by allowing OIG to devote resources to
combating fraud and abuse in addition to those funds received under our usual
budget allocation. As a matter of policy, neither we nor the Department of Justice
propose the recovery of i igative costs in exchange for a settlement or criminal
plea on a case. The recoveries thus allow OIG to replenish resources spent on a case
only when the terms of a settlement, plea, or judgment suggest the distribution of
funds for such purposes. We also receive such recoveries only after full restitution
is made to the government for the fraud and, in civil cases, certain other distribu-
tions are made fom the settlement or judgment proceeds.

Scope of Audit Work Performed

Question 1a: Given the requirement by OMB Bulletin 93-06 which states an audit
should be performed to “obtain reasonable assurance” in regards to representation
of agency's financial position, why did you not expand the scope of your audit when
you found a significant 8 in contractors Medicare and Medicaid accounts re-
ceivable subsidiary I ?

Answer: “Reasonable assurance,” as used in OMB Bulletin 93-06 and in our audit
report, refers to our responsibility to do sufficient testing to determine whether the
information used to prepare the agency's financial statements is reliable. In the case
of Medicare accounts receivable, we reported that Medicare contractors did not
maintain adequate documentation to support reported accounts receivable activity.
At several contractor locations, millions of dollars in reported accounts receivable
could not be reconciled to the contractors’ source documents. Because of the lack of
records and inconsistent application of HCFA’s accounts receivable accounting pol-
icy, it was not possible to perform extended audit procedures in this area.

uestion 1b: What actions are you taking to ensure that you can perform suffi-
cient work to audit the accounts receivable?

‘Answer: Accot ‘and reporting accurately the accounts receivable data are the
responsibility of HCFA man: ent. The HCFA has developed corrective plans to
address the accounts receivables deficiencies. Corrective actions include establishing
teams to visit the Medicare contractors and review their accounts receivable process
to ensure adequate documentation is retained. These visits are to prepare the con:
tractors for the upcoming financial statement reviews to be performed by the OIG
and its contract auditors.

Review of Internal Controls .

Question 1: In to Medicare’s reported “Other Governmental Liabilities”,
which totaled $27.4 billion in 1997, you stated some contractors did not provide suf-
ficient documentation to support claims paid, what—if any—internal controls were
employed by HCFA to insure government funding was used properly and for in-
tended purposes?

Answer: The term “Other Governmental Liabilities” is actually accounts payable.
As mentioned in our report (and as shown on page 109 of the HCFA FY 199° nan:
cial Report), this account is comprised of five major components. The component
that your question refers to is the “approved to paid claims’ component, which com-
prised about $2.9 billion of the $27.4 billion of accounts payable. This component
represents the sum of all claims already approved for payment for which the cor-
responding reimbursement has not been issued.

e obtained subsidiary ledgers for claims approved but not paid, i.e., the payment
floor component of the HCFA 750 accounts payable amount for the sampled contrac-
tors. We also traced a sample of transactions subsidiary ledgers to source docu-
mentation. We noted that 5 of the 10 sampled contractors not maintain detailed
subsidiary ledgers. However, we performed other analytical procedures to determine
that the “approved to paid” claims estimate was reasonable.

For the 1997 financial statements, HCFA made significant improvements in
estimat ting this liability, including the implementation of a revised estimation meth-
odology. The HCFA is continuing to work with its contractors to ensure that they
maintain supporting documentation and that the data is complete and accurate.

Question 2: What is HCFA. management's role in the review of contractor’s inter-
nal control processes and systems? Is this role clearly defined?

Answer: HCFA requires that Medicare contractors perform a self-assessment
and certification process of their internal controls. This process requires that the
contractor certify to its compliance with the Federal Managers’ Financial Integrity
Act and Chief Fi cers Act requirements by incorporating management
control standards into its operations. In addition, HCFA requires its regional offices
to look behind the contractor's self-assessment. Specifically, the regional office must
analyze the contractor's internal controls, test them or verify the contractor's tests,
and assess the result of the test performed against HCFA’s expectations.



63

ing inappropriate payments through audits, medical reviews and making sure that
Medicare does not pay for claims owed by private insurers.

Actions undertaken since the close of the FY 1997 CFO audit addressing durable
medical equipment fraud and abuse include:

Expanded On-Site Visits—Visits by Medicare staff as part of Operation Restore
Trust and studies by the HHS Inspector General show that many purported DME
suppliers have only mail drops and no actual offices. Site visits to two thousand sup-
pliers in five states with the most. suspected DME fraud problems resulted in 650
suppliers being ejected or rejected by Medicare in FY 1997. HCFA is expanding site
visits for DME suppliers nationwide this year.

Additional Sta: for DME Suppliers—Medicare ¢ proposed a regulation on
January 20 to make it more difficult for unscrupulous DME suppliers to enter Medi-
care and to strengthen enforcement against such suppliers. Among the new supplier
requirements are:
© a surety bond of at least $50,000,

* aban on DME telemarketing and a requirement for a physical location with work-
ing business phone at that location,

* a prohibition on reassigning supplier numbers, and

* criminal and civil sanctions for false information on billing number applications.

Other Medicare actions to assure that DME suppliers are legitimate include:

* requiring periodic training on billing procedures for new and existing suppliers,

eliminating 36,000 supplier billing numbers that had not been used for at least

one year, eliminating the chance they will be exploited by scam operators,

« modifying the DME application form to obtain additional information about pro-
spective DME suppliers, and

seeking authority to charge all applicants an application fee that will help us fund
increased enforcement efforts.

Home Health Initiatives—Several actions have been taken to fight home health

waste, fraud and abuse. On September 15, 1997 the President announced a morato-

rium on new home health agencies (HHAs) until Medicare could implement a range

of new rules and management tools that enhance oversight of HBAS and ensure

that new Medicare home health agencies are not “fly-by-night” or low quality pro-

viders, The moratorium was lifted earlier this year with the publication of a regula-

tion requiring all HHAs that participate in Medicare to:

* obtain a surety bond of at least $50,000, and

« have enough capital to fund operations for the first three months.

In addition, we have taken administrative steps to require HHAs to:

* reveal “related business interests” that can be the conduit for fraudulent and abu-
sive activities, and

serve at least 10 patients before they are admitted to the Medicare program so
that their quality of care can be reviewed.

We believe initiatives we have taken are already impacting home health spending.
We believe it is no coincidence that Medicare spending growth for home health care
has slowed to just 5.4 percent in FY 1997 from rates that had exceeded 25 percent
a year.
ter this year Medicare will issue regulations to require HHAs to re-enroll every
three years, which will help us weed out problem providers. And the President has
proposed assessing a fee on providers so we can do more audits that help ensure
that Medicare only pays appropriate provider costs.

Recent Laws and Legislative Proposals

Thanks to the work of these committees and this Congress we now have more
tools we need to fight fraud and abuse, many of which are not reflected in this
year’s OIG audit. These tools from the Balanced Budget Act let us:

* exclude providers convicted of felonies or health related crimes;

« levy new civil monetary penalties on hospitals who contract with providers who
have been excluded from Medicare;

« levy civil monetary penalties on providers who take kickbacks;

© require provider applicants to provide Social Security numbers and employer iden-
tification numbers so we can check the applicant histories; and

* tighten eligibility for home health services. so providers can no longer game the
‘ayatem by certifying that a patient is eligible for home health service simply be-
cause they need blood drawn. ;

The Health Insurance Portability and Accountability Act also for the first time
created a stable source of funding for fraud control, which in FY 1998 will total al-
most $120 million. It also gave us authority to contract with special program integ-
rity contractors.



69

either. As I understand it from talking to them, they simply aren’t
paid enough in order to check the documents which in the end
leads to the problems that we have. And I would like—my personal
opinion is that a big part of this problem isn’t just the providers
of health care out there, but it is the largesse and inefficiency that
operations that may not could ever do

gesse.

Mr. BILIRAKIS. Will the gentleman yield?

Mr. Norwoop. Yes, sir, of course.

Mr. BILIRAKIS. Before you get away from the medical necessity
portion, and I would ask this question of both of you, who deter-
mines lack of medical necessity? Does the Inspector General deter-
mine the figure that 37 percent of the improper payments are
made as a result of lack of medical necessity?

Ms. BRown. We have medical people reviewing the documenta-
tion to see whether it is a medically necessary service that is being
performed, and they make that determination. We accept their
analysis.

Mr. BILIRAKIs. All right. So they made that determination on the
basis of a certain percentage, and then you extrapolated that out,
and came up with the 37 percent?

Ms. Brown. Yes. That was 37 percent of those that we consider
to have in error.

If I could comment on the documentation, the American Medical
Association is the one who determines what kind of medical docu-
mentation is required for patients’ files, and HCFA accepts that
view. Then we look behind the claim that came in to see whether
indeed that documentation exists in the file that will show what
services were performed on a certain patient.

Mr. Norwoon. Are you saying to Mr. Bilirakis that the medical
necessity decision is made by medical personnel in your office or in
HCFA's office?

Mr. VENGRIN. No, sir. These are people at the Medicare contrac-
tors. These are physicians. On the hospital visits, these will be the
peer review organizations. These are doctors making these deci-
sions.

Mr. Norwoop. And they work for insurance companies you are
calling contractors, or administrative type people?

Mr. VENGRIN. That is correct.

Mr. BILIRAKIS. But those people have already approved the pay-
ment of those claims, have they not?

Mr. VENGRIN. These claims have indeed been paid. That is why
we examined them. They are on the financial statements.

Mr. BILIRAKIS. But it is those same people that will come back
and take another look at it and determine that the payment was
improper.

r. VENGRIN. There is a big difference, sir. When they processed
those claims initially, they went through an edit process. We did
not obtain the medical reviews until after those claims were pros-
essed.

Mr. Norwoop. When the medical necessity decision is made in
Pennsylvania for a patient being treated perhaps in Maryland, how
often does the physician who is deciding upon medica! necessity
ever touch the patient?

etter because of the lar-


14

(FY) 1997 financial statements. With me today is Joseph E. Vengrin, Assistant In-
spector General for Audit Operations and Financial Statement Activities.

‘This year marks our second comprehensive financial statement audit of HCFA.
We undertook this audit as part of our implementation of the Government Manage-
ment Reform Act of 1994 which requires audited financial statements. The purpose
of financial statements is to provide a complete picture of agencies, financial oper-
ations, including what they own (assets), what they owe (liabilities), and how they

nd taxpayer dollars. The purpose of our audit was to independently evaluate

[CFA’s statements. The full results of this year’s audit are provided in our report
which is being released at this hearing. My testimony today will highlight the sig-
nificant findings.

I would like to begin by acknowledging the cooperation and support we received
from the Department, HCFA, and the General Accounting Office (GAO). A review
of this magnitude and complexity would not have been possible without HCFA’s as-
sistance in making available medical review staff at the Medicare contractors and
the peer review organizations. Also, I want to point out that we worked closely with
GAO, which is responsible for auditing the consolidated financial statements of the
Federal Government. The HCFA is one of the most significant agencies included in
these Governmentwide statements.

Let me also add that the financial statement audit process, in and of itself, has
been extremely valuable in identifying control weaknesses that directly affect the
Government's ability to protect our tax dollars. 1 intend to continue our collabora-
tion with GAO and the Department to ensure that identified weaknesses are cor-

My testimony today will focus first on our Medicare claim testing and then on
HCFaA’s financial reporting.

Medicare Claim Testing Overview

The HCFA is the largest single payer of charges for health care goods and services
in the world. Like other insurers, Medicare makes payments based on a standard
claim form. Providers typically bill Medicare using standard procedure codes with-
out submitting detailed supporting medical records. However, Medicare regulations
specifically require providers to retain supporting documentation and to make it
available upon request. Because of the high risk in Medicare payments and the dol-
lar impact on the financial statements (i.e., $177.4 billion in fee-for-service claims
in FY 1997), we made a comprehensive review of claim expenditures and supporting
medical records.

Our primary objective was to determine whether Medicare benefit payments were
made in accordance with Title XVIII of the Social Security Act (Medicare) and im-
plementing regulations. Specifically, we examined whether services were (1) fur-
nished by certified Medicare providers to cligible beneficiaries; (2) reimbursed by
Medicare contractors in accordance with Medicare laws and regulations; and (3)

ically necessary, accurately coded, and sufficiently documented in the bene-
ficiaries’ medical records.

Sample Results

Through detailed medical and audit review of a statistical selection of 600 bene-
ficiaries nationwide with 8,048 fee-for-service claims processed for payment during
FY 1997, we found that 1,907 claims did not comply with Medicare laws and regula-
tions. By projecting these sample results, we estimated that FY 1997 net improper
payments totaled about $20.3 billion nationwide, or about 11 percent of total Medi-
care fee-for-service benefit payments. This is the mid-point of the estimated range, at
the, 36 percent confidence level, of $12.1 billion to $28.4 billion, or about 7 percent
to 16 percent.

While this year’s point estimate is $3 billion less than last year’s point estimate
of $23.2 billion, we cannot conclude that the current error rate is statistically dif-
ferent. However, there is persuasive evidence that more medical documentation was
obtained this year, which had a substantial effect on reducing the mid-point esti-
mate. There is also evidence that some of the drop is due to sampling variability.
Sampling variability means that this year’s results could differ from last year’s
ply because selecting different claims with different dollar values and errors will in-
evitably produce a different estimate of improper Payments,

Payment errors primarily resulted from provider billings for services that were in-
sufficiently documented, medically unnecessary, incot ly coded, or noncovered. As
was the case last year, the improper payments could range from inadvertent mis-
takes to outright fraud and abuse. We cannot quantify what portion of the error rate
is attributable to fraud.



97

posing undue burden on physicians. We will work with the AMA and other physi-
cian groups to educate physicians and their billing staff on how to use these guide-
lines. We all want these guidelines to work so that there is consistency across the
country, so we can promote high quality care and so we can help physicians avoid
honest billing errors.

Question 2) It is important that all physician groups receive the same message
on the use of the E&M guidelines. How will HCFA accomplish this?

Response: We will work with the AMA and other physician groups to educate phy-
sicians and their billing staff on how to use these guidelines.

Question 3) In order to receive payment, physicians are being held to a high
standard based on the manner in which they document. Will HCFA hold those who
review and audit physicians to the same standards?

Response: Reviewers and auditors are held to the same high standard, and in fact
must use the very same documentation guidelines in conducting their reviews and
audits.

uestion 4) Is HCFA taking into account the need for uniformity in creating and
utilizing a uniform educational program to train physicians, reviewers and auditors
regarding the E&M guidelines?

sponse: We recognize the need for uniformity in training physicians, reviewers

and auditors in use of the guidelines, since the guidelines are themselves designed
to promote uniformity in documentation requirements, reviews and audits. We most
definitely will take this into account as we work with our carriers, the AMA and
other physician groups to educate auditors, reviewers, physicians, and their billing
staff on how to use the guidelines.
Carrier Variability

Question 1) Individual carrier interpretation is expected to a degree. Is HCFA
doing anything to create more uniformity in the way its policies are interpreted at
the carrier level?

Response: HCFA has been working with the Carrier Medical Directors to promote
more uniformity and consistency in the interpretation of local medical review poli-
cies. The Carrier Medical Directors meet regularly to discuss medical policies and
how they are being applied in their area. Additionally, the Carrier Medical Directors
have developed a number of “templates” which serve as a uniform base for develop-
ing local policy. HCFA is also developing a database which provides contractors and
HCFA ready access to local medical review policies in effect at each contractor. This
database will further encourage Medivare carriers to share their local medical re-
view policies in order to promote uniformity among carriers who may have or may
be developing a similar Policy.

H uestion 2) Are there efforts underway to coordinate carrier interpretation of
policies?

Response: We realize that there is a need to create greater consistency in coverage
among the carriers. HCFA fosters greater consistency by prompting carriers to co-
ordinate their local policies. We also now plan to place.a greater reliance on national
coverage decisions. We are working to refine the national coverage Process to pro-
vide for more public participation from medical specialists, health industry rep-
resentatives, and other interested parties.

Question 3) When a carrier's interpretation of policy is contrary to a HCFA rule,
why doesn’t HCFA require the regional office to suspend the carrier ruling during
an investigation and determination period?

Response: The HCFA manual instructions require that local medical review policy
be clear, concise, and not restrict or conflict with national policy. If a carrier’s inter-
pretation of policy is possibly contrary to a HCFA rule, an investigation to deter-
mine whether it is in fact contrary to a HCFA rule is necessary before suspension

of carrier rulings.
Question 4) has HCFA not addressed the wide variation in regional carrier
interpretation of the rules and regulations in the Medicare Carrier Manual?

Response: As you know, when Medicare was enacted 33 years ago, Congress
sought to strike a balance between local medical decision making and practice, and
national policy. We have continued to try to maintain this balance. HCFA fosters
greater consistency by working with Carrier Medical Directors to coordinate and
share their local policies.

Question 5) How often are negative provider audits reversed in appeals?

Response: Audits are conducted for Part A providers, such as hospitals and home
health agencies. Of 59,689 Part A appeals completed through the contractor appeal
process in FY 1997, 30 percent of were decided in provider’s favor. Of the 12,465
appeals completed by independent Administrative Law Judges, 72% were decided in

e appellant's favor.


19

In addition, we were unable to perform sufficient procedures to satisfy ourselves
as to the reasonableness of the $450 million Medicaid accounts receivable balance.

Cost Report Settlements. In FY 1997, of 35,079 provider cost reports received,
33,000 were subjected to desk review. Of that total, just over 5,000 providers were
selected for audit. Although HCFA has a cost report audit process, the provider
audit function is limited to specific issue areas or cost report line items and covers
only a limited number of providers. Due to the limited scope of the contractors’ pro-
vider audit function, there is little assurance that amounts eventually paid to pro-
viders through the final cost report settlement process meet Medicare guidelines for
reasonableness and appropriateness. We were unable to extend our procedures to
determine what adjustments, if any, were necessary to the FY 1997 cost settlement
payments of $2.4 billion recorded by HCFA or to determine the potential impact of
such adjustments on the approximately $5 billion yearend cost settlement estimate
included in Medicare other governmental liabilities.

Conclusion

I appreciate the opportunity to appear before you today and to share our report
with you. As demonstrated in our review, unnecessary or improper benefit payments
continue to plague the Medicare program. Existing risks are sharply increased by
the significant growth in Medicare claims and expenditures. Our review has also
demonstrated the need for stronger oversight by HCFA to ensure provider compli-
ance with Medicare reimbursement rules and regulations and the necessity of sub-
Jecting additional claims to prepayment and postpayment medical review. I am
pleased that HCFA and the Department's Chief Financial Officer are aggressively
pursuing a corrective action plan addressing our concerns.

Finally, I would like to note that we have elready started our audit work on
HCFA’s FY 1998 financial statements. As we did in the last 2 years, we will conduct
comprehensive fee-for-service claim testing. In addition, we will place a high priority
on ensuring that HCFA has established an adequate internal control structure for
Medicare accounts receivable activity.

I welcome your questions,


48

HCFA's contingency plan cannot ensure that its critical applications would be promptly restored
in the event of a disaster.

Medicare Contractors

‘The EDP general controls were assessed at 14 Medicare contractors, including 3 systems
maintainers and the 6 SAS 70 locations. We concluded that four Medicare contractors and four
of the five CWF host sites had effective general controls. However, these locations had
significant weaknesses in many of the six areas of general controls. Specifically, we are
reporting application change controls to be a material internal control weakness, as discussed
below. In addition, although SAS 70 reports do not contain a separate conclusion on EDP
controls, five of the six SAS 70 locations had exceptions noted on EDP controls. Further, one
Medicare contractor and one CWF host site had ineffective general controls, and two of the three
shared systems had ineffective controls.

We noted material control weaknesses related to the FSS (Part A) and MCS (Part B) shared
systems. For the FSS, data centers had full access to the source code and could perform local
changes to FSS programs. These changes were not subjected to the same controls that exist in
the standard FSS change process. Additionally, one data center developed an override library to
give priority to locally modified FSS programs. Consequently, the local programs always
override the standard FSS programs provided by the maintainer. For the MCS, each individual
carrier could deactivate HCFA-mandated edits. The lack of a controlled modification process
over the shared systems does not ensure that only authorized programs are implemented and
executed by Fis and carriers.

For the entity-wide security program, two reportable conditions were common to most
contractors: entity-wide risk assessments were not performed, and organization-wide security
plans were not documented. Regarding access controls, we noted one material control weakness
related to inadequate physical security at a contractor facility. We were able to enter and exit
that facility without proper identification and verification. Also for the access control area, most
‘contractors visited had three reportable conditions: individuals were granted inappropriate access
to the data center, dial-up telephone numbers were not periodically changed, and data and
resource classifications were not available. Regarding application software development and
program change controls, most of the weaknesses related to library management.

For segregation of duties, the common reportable condition was the lack of documented policies
and procedures on separation of incompatible duties. For system software, four reportable
conditions were common: personnel had inappropriate access to and reporting of sensitive
utilities, inappropriate libraries were resident in the authorized program facility, logs or system
management facility data sets could be altered by systems personnel, and the systems
eavironment could be reconfigured by computer operators during initial program loads or by
“rebooting” the system. Pertaining to service continuity, two contractors did not have a current
disaster recovery plan. This issue is critical to the recoverability of Medicare systems.

Auditor's Report Inspector General's Report on the HCFA Financial Satements for FY 1987 Page 807 36



93

Mr. Horn. Mr. Chairman, if I might, I would just like to put in
the record here the staff who have worked on this for the Sub-
committee on Government Management. They are: J. Russell
George, staff director and chief counsel; Dianne Guensberg, the
GAO detailee we have working on audits; John Hynes, professional
staff member; Matthew Ebert, clerk; Mason Alinger, staff assistant;
Kami White, intern; Faith Weiss, counsel for the minority; Lisa
Chamberlain, also L.A. to Mr. Kucinich; Earley Green, staff assist-
ant for the minority; and our court reporters, Pam Garland and
Julie Bryan. Thank you very much.

Mr. BARTON. Without objection.

The Chair is going to recognize himself for the last 10 minutes
of ‘questions, and I don’t think it will take 10 minutes.

is. Brown, this is the second year that your department has
done this audit. Do you think that HCFA is moving in the right
direction or the wrong direction?

Ms. BRowN. I believe they are working in the right direction.
Just as we have already started the 1998 audit, by the time this
one was started and they got the results of the 1996 audit, most
of the year had passed, so it is going to take at least a second year
and sometimes even longer to see the results of the program that
they have embarked on to correct errors.

Mr. BARTON. Do you think they are making a good faith effort
and they are working with your staff?

Ms. Brown. Yes. We meet with them regularly and go over the
things that can be done and their suggestions as they review all
of those with us, so I think we are working together in a very pro-
ductive way.

Mr. BARTON. I noticed that last year—not you personally, but the
report made a number of specific recommendations, and this year
you basically say that you have no additional recommendations
that you wish to make. Of the recommendations that you made last
year that have not yet been fully implemented, which ones do you
think are most important that HCFA focus on this year?

Ms. Brown. Well, they are focusing on all of them; it is just that
I believe that they have not had time to see the results, because
they got those recommendations in the last quarter of the year we
just audited, and so they are at some stage of implementation on
all of those recommendations.

Mr. BARTON. There is not one particular action item that is more
important than the others that we would or that you would want
this subcommittee or subcommittees to focus their attention on
that would help solve these problems?

Mr. VENGRIN. Yes, Mr. Chairman. I would like to clarify. From
my perspective, I don’t necessarily see the contractors really doing
a poor job. I would like to, again, for the record say, based on these
claims that we examined this year, on the surface these claims ap-
peared correct. It was not until we went back and obtained the
medical evidence that problems were found. In some cases, Mr.
Chairman, the physicians were not wearing out a ballpoint pen in
preparing medical documentation. In some cases I have before me
one sentence to support of the services rendered. That is clearly
contrary to guidance AMA developed in coordination with HCFA.


31

‘Comparison of FYs 1996 and 1997 Types of Provider Categories
Estimated Dollars in Imy ‘Payments
ae
ee

i = es ymeats.as

‘Pereentot

: sola

1 29.11% $5,027 | 21.67%

[Documentation 15.55% 2,756 11.88%)

Medically unnecessary/ 3.76% 943 407%
noncovered

incorrectly coded 1698 337%, 1070 451%,

[Remaining errors 21 143% 258 1%

2 [Inpatient PPS 4061 70.02%. S339 | 2.59%

[Documentation 74 3.57% 1,040 449%

[Medically unnecessary/ 2336 11.52% 3,301 14.23%|
noncovered

[incorrectly coded 7,001 493% 300 3.88%

[Remaining errors Hl -0.01%

3 [Home Health Age 2553 159% 3650 | 15.74%.

[Documentation 68 0.34% 1,684 7.26%

Medically unnecessary 2485 12.25% 1935 334%
noncovered

[Remaining errors 3I 14%

“4 [Outpatient 1957 45% 2a10 [12.12%

Documentation 1,480 7.30% 2,286 9.86%

Medically unnecessary/ 467 2.30% a 190%
noncovered

[incorrectly coded 8 208% 1 001%

ing errors 2 0.01%. 2 035%

[Subtotal [ 14476 | 713TM%]_ 16,726] 72.12%

5 [Other Types of Providers 5306, Ban Cae | 27.88%

Documentation 3,569 17.60% 3,080 13.28%

Medically unnecessary/ 1,959 9.66% 3028 13.49%
noncovered

incorrectly coded 268 132%, 7 003%

[Remaining errors 10 0.05% 251 1.089%

Trotat it ‘$20,282 |___100.00% | $23,192 [10.00%

Tudltor's Report Taapecior Generals Raport on tha HCFA Financal Sticmants for FY 1987 Page IT of 36



15

Through medical record reviews which we coordinated, medical personnel detected
almost all of the improper payments in our sample, When these claims were submit-
ted for payment to Medicare contractors, they contained no visible errors. It should
be noted that the HCFA contractors’ claim processing controls were generally ade-
quate for (1) ensuring beneficiary and provider Medicare eligibility, (2) pricing

laims based on information submitted, and (3) ensuring the services as billed were
allowable under Medicare rules and regulations. However, these controls were not
effective in detecting the types of errors we found.

In view of Medicare's 38 million beneficiaries, 853 million claims processed and
paid annually, decentralized operations, and the current estimate of $20.3 billion in
improper payments, we have concluded that the Medicare program remains inher-
ently at high risk for payment errors.

Sampling Methodology

To accomplish our objective, we used a stratified, multistage sample design. The
first stage consisted of a selection of 12 contractor quarters during 1997 (10 from
the first, second, and third quarters and 2 from the fourth quarter). The selection
of the contractor quarters was based on probabilities proportional to the FY 1996
Medicare fee-for-service benefit payments. The second stage consisted of a stratified
random sample of 50 beneficiaries from each contractor quarter. The resulting sam-
ple of 600 beneficiaries produced 8,048 claims valued at $a million for review. The
population from which the sample was drawn represented $177.4 billion in fee-for-
service payments.

We reviewed all claims processed for payment for each selected beneficiary during
the 3-month period. Specifically, we used medical review personnel from HCFA’s
Medicare contractors (fiscal intermediaries and carriers) and peer review organiza-
tions (PRO) to assess the medical records and to determine whether the services
billed were reasonable, medically necessary, adequately documented, and coded in
accordance with Medicare reimbursement rules and regulations.

We contacted each provider in our sample by letter requesting copies of all medi-
cal records supporting services billed. In the event that we did not receive a re-
sponse, we made numerous follow-up contacts by letter, telephone calls, and/or on-
site visits. Concurrent with the medical review, we made additional detailed claim
reviews, focusing on previously identified improper billing practices, to determine
whether (1) the contractor paid, recorded, and reported the claim correctly; (2) the
beneficiary and the provider met all Medicare eligibility requirements; (3) the con-
tractor did not make duplicate payments or payments for which another primary
insurer should have been responsible (Medicare secondary payer); and (4) all serv-
ices were subjected to applicable deductible and co-insurance amounts and were
priced in accordance with Medicare payment regulations.

Problem Areas

This year’s sample results confirm our FY 1996 results. As noted in the chart on
the next page, substantial Medicare improper payments continue to be prevalent in
four types health care providers: physician, inpatient prospective Payment system
PPS) jospital, home health agency, and outpatient hospital. Specifically, these pro-
viders:

* Did not adequately document the basis for their claims or, in some cases, provided
no documentation;
* Billed for services that were not medically necessary;
Billed for higher priced procedure codes than supported by the beneficiaries’ medi-
5 a

cal records; an¢
* Billed for services that were not allowable by Medicare.

Estimated Improper Payments by Type of Provider in FY 1997

Type of Provider ae
Physician 59
Inpatient PPS Hospital. 4d
Home Health Agency .. 26
Outpatient Hospital. 19
Subtatal 45
Other Types of Providers. 58
Total... 203



59

Iam Pleased to report that this year's audit demonstrates that corrective actions
initiated following the first such audit last year are having an impact, We are get-
ting our books in order. We have cleaned up our accounts payables. We have cor-
rected our accounting problem with the Social Security Administration, and are
making progress on our accounts receivables.

Since the beginning of this Administration, we have taken unprecedented steps
to fight health care waste, fraud and abuse. We already are achieving record success
in increasing fraud and abuse investigations, indictments, convictions, fines, pen-
alties, and restitutions. Last year, Medicare alone saved an estimated $7.5 billion—
mostly by preventing inappropriate payments—through audits, medical reviews, and
making sure other insurers who cover our beneficiaries pay claims that are not
Medicare's responsibility. And, nearly $1 billion was returned to the Medicare Trust
Fund, thanks to our partnership with the HHS Inspector General, Department of
Justice, and state and local authorities. We have continued to step up our crack-
down on waste fraud and abuse, and many of these new initiatives are not reflected
in this year’s OIG audit report.

The OIG estimates that improper Medicare payments in FY 1997 ranged from 7
percent ($12.1 billion) to 16 percent ($28.4 billion), with a point estimate of 11 per-
cent ($20.3 billion). Although the FY 1997 point estimate of the error rate is $3 bil-
lion less than the FY 1996 point estimate, based on the limited sample of Medicare
claims reviewed in both FYs 1996 and 1997, the IG is unable to conclude that this
year’s error rate is statistically different from last year’s error rate.

The OIG issued a qualified opinion rather than a disclaimer of opinion. The
Health Care Financing Administration has corrected two items which were dis-
claimed in last year’s audit. All of these acts demonstrate that HCFA has made sub-
stantial progress in addressing both operational and financial reporting issues in
the short time since last year’s audit.

We believe that the actions we have taken are having an effect. Still, much re-
mains to be done. Clearly, a 7 to 16 percent for a claims error rate is not acceptable.
‘As you know, combating waste, fraud and abuse in Medicare is one of my top prior-
ities. We will continue to aggressively implement corrective actions to address the
error rate.

‘One area in which we need your help is in enacting the President’s budget propos-
als to allow us to collect user fees. The Administration has put forth a proposal to
collect $395 million in user fees that will be dedicated to doubling the number of
audits and increasing medical reviews and other efforts to fight waste, fraud and
abuse. An additional $264.5 million in user fees for provider enrollment, survey and
certification, and duplicate, unprocessable or paper claims are also needed to in-
crease scrutiny and promote program integrity.

We also need your help in passing contractor reform legislation that will increase
competition for Medicare contractor business, give us much-needed leverage to nego-
tiate with contractors, and allow us to hold contractors accountable. Legislation for
both these proposals was sent to Congress in February.

It is important to stress that we cannot determine what portion of the improper
payments identified in the audit were due to fraud and abuse. Many of the erro-
neous payments were due to inadequate documentation, which is not synonymous
with fraud and abuse. It does not necessarily mean the service was not rendered
or that it was not medically appropriate. It does mean we must continue working
diligently with providers to improve documentation. Success in improving docu-
mentation will help bring the error rate down.

We also expect the estimate of improper payments to decrease because of other
steps to increase the crackdown on fraud, waste and abuse begun by the Clinton
Administration in 1993. For example, in March of this year we published a regula-
tion allowing us to hire special program safeguard contractors who will bring a new
energy to our program integrity efforts. That is only one of several additional new
steps taken since the end of the fiscal year examined in the audit. Other steps taken
since the period covered by the audit include tightening entry standards and requir-
ing surety bonds for home health agencies, expanding on-site inspection for durable
medical equipment suppliers and community mental health centers, and obtaining
authority to felons from participating in Medicare and Medicaid.

The audit of HCFA’s financial statements was conducted in accordance with the
Chief Financial Officers Act. In 1994, President Clinton signed the Government Re-
form and Management Act, which made changes to the Chief Financial Officers Act
by requiring government-wide and department-wide financial statements. This legis-
lation, which originated in Chairman Horn’s Subcommittee, was meant to improve
systems of accounting, financial management, and internal controls throughout the

‘ederal government to help reduce waste and promote efficiency, and to provide


2

When looking at HCFA, the largest component of the Depart-
ment of Health and Human Services and the agency that is respon-
sible for administering Medicare, a program that accounts for 13
percent of all Federal spending, we are talking about an agency
that truly needs to know where its dollars are going and where
there may be weaknesses in how those dollars are being spent.
With more than 38 million beneficiaries and more than 800 million
claims being processed and paid annually, along with volumes and
volumes of very complex and confusing reimbursement regulations,
the Medicare program is inherently vulnerable to making improper
payments. Last year, we found out just how vulnerable the pro-
gram really was when the HHS Inspector General undertook its
first comprehensive financial statement audit of HCFA. The In-
spector General’s audit, which was released in July 1997, reported
a 14 percent error rate in paying fee-for-service claims that
amounted to approximately $23 billion. That is the number that
made the headlines and has been used ever since when we talk
about waste, fraud and abuse in Medicare.

Today we are going to hear from the Inspector General, who has
now completed their second audit of HCFA. This is for the fiscal
year 1997. We have a new number, and I am sure that this new
number is going to be referred to and quoted throughout the year.
This year the Inspector General estimates that improper payments
for fiscal year 1997 were $20.3 billion, or about 11 percent of the
total Medicare fee-for-service benefit payments. As the Inspector
General will say, though, when she testifies, this is a number that
has to be used with caution because it is not attributable solely to
waste, fraud and abuse. In fact, the Inspector General has never
attempted to quantify what portion of these improper payments are
attributable to fraud. Instead, the Inspector General has stated
that improper payments could range from inadvertent mistakes to
outright fraud and abuse.

I understand that the Inspector General does not know whether
we are dealing with outright fraud or mere mistakes. What we do
know, however, is that these are taxpayer dollars, and we do know
that if the audit is correct, those are dollars that should not have
been spent at all whether it was by mistake or because of inten-
tional fraud. We want our health care dollars in Medicare to go to
legitimate health care payments for senior citizens.

In addition, while it may sound somewhat encouraging that the
Inspector General’s point estimate is $3 billion less than Tost year’s
estimate, we cannot conclude, and the Inspector General does not
conclude, that the current error rate is statistically different. So we
all agree that we still have a long way to go when we are talking
about trying to find ways to prevent waste, fraud and abuse.

Also of great concern from last year’s audit findings was the fact
that due to HCFA’s poor accounting system, the Office of Inspector
General could not render an opinion on HCF4A’s financial state-
ments because the documentation was not adequate or available to
support the amounts reported in the financial statements. This
year, HCFA has improved its accounting system so that the Inspec-
tor General can issue a qualified opinion. What this means is that
the fiscal year 1997 financial statements were fairly presented, ex-


91

Ms. Brown. Well, it is a difficult problem because the look-be-
hind, the type that we did, is quite expensive to do. I think one of
you brought up 2 percent earlier, Reece type of review is only
done in very few of the cases by the contractor. As Ms. DeParle
mentioned, they are stepping up the number of reviews that they
are doing.

Mr. Kucinicu. I will bet they are. I would like to know, you
know, this is my first term in this Congress, and I am kind of in-
terested in what these private contractors do. Have you, Inspector
General, ever done a very deep and detailed analysis of the role of
private contractors and all the wonderful things they are doing?

Ms. BROWN. We have done many studies of the private contrac-
tors, and in one case, for instance, we found that they lied and had
turned off the edits in order to get-——

Mr. Kucinicu. They lied, is that when you said?

Ms. BROWN. They lied, and turned off edits in order to get all of
the claims processed much faster, and that contractor was forced
out of the program. So, you know, there are many ways contractors
can be either very reliable or unreliable, and we have a regular se-
ries of things going on, either ——

Mr. Kucinicu. Well, Ms. DeParle, why isn’t the government
more involved in this instead of less as far as doing the work the
private contractors are doing?

Ms. DEPARLE. We are getting more involved in it. What we need
to do is increase the number of audits we are doing and the num-
ber of medical reviews and the kinds of focused reviews you are
talking about, and we are seeking the funding to do that. What we
have the money to do right now is process and pay claims. You are
right, that is not the problem. The problem is in the error rate.

Mr. Kucinicu. Thank you.

I want to introduce for the record an article that was in the Na-
tional Journal of Congress Daily on Thursday, April 23, 1998, and
in the article they—I just was passed a note from staff, excuse me,
you know how that happens, Mr. Chairman. The note was, increase
the audits, why not just get rid of the private contractors? Actually,
T am all for that. Now, you know, just make a footnote of that.

I want to introduce this matter, this article that was in the Con-
gressional Daily, Congress Daily, and it is about the Health Care
Financing Administration. It is not particularly flattering to the
Congress, but what it does do is it points out the tremendous in-
crease in responsibilities which the Health Care Financing Admin-
istration has, and makes a case for the fact that you really do need
some additional resources in order to discharge your responsibil-
ities that you have been able to take upon you. I want to thank
you today. Thanks to the Chair and Mr. Horn for this hearing.

anks.

Mr. BaRTON. We will introduce this for the record, without objec-
tion. Is there objection to this being put into the record? Hearing
no objection, so ordered.

{The information referred to follows:]


According to the /996 Medicare Handbook, the following services are not covered by Medicare
Part B:

+ most routine physical examinations and tests directly related to such examinations;
+ eye and ear examinations to prescribe or to fit glasses or hearing aids;

+ most prescription drugs;

+ most routine foot care; and

+ chiropractic services, unless the services are for the manipulation of the spine to correct
a subluxation demonstrated by x-ray.

Following are some examples of noncovered or unallowable services identified during our
review:

GQ Physician. A physician was paid $114 for a beneficiary's office visit, electrocardiogram,
and various other laboratory tests. After reviewing the medical records submitted by the
provider, the medical reviewer determined that payment should be denied because the
services were performed as part of a foutine physical examination, which is not covered by
Medicare.

Q Another physician was paid $70 for an office visit with complex decisionmaking, as well
as three laboratory tests, The medical reviewer concluded that the billed services should be
denied because they were actually part of the beneficiary’s routine physical examination.

A podiatrist was paid a total of $57 for two claims for providing routine foot care (clipping
of toenails). Medicare pays for routine foot care only under limited circumstances, such as
for the treatment of infected nails. The medical reviewer concluded that the care provided
‘was routine preventive care, which is not covered, and the claim was denied.

Q_ Hospital outpatient. A physician was paid $58 for services which, according to the
medical records, were part of a routine physical examination. As stated above, Medicare
does not cover such examinations.

‘Conclusions and Recommendations

Medicare, like other insurers, makes payments based on a standard claim form. Providers are
required to retain supporting documentation and make it available upon request. As with last
year's results, the majority of the improper claims in our sample did not contain any visible

‘errors. However, a significant portion of the errors we found were attributable to a lack of or
‘insufficient documentation on the part of providers that claimed payments. We also identified

Audios Report ‘General's Report on the HCFA Financial Statements for FY 1997 Page 16 of 36



98

Medical reviews are conducted for Part B providers, such as phy icians and equip,
ment suppliers. Of 3,337,592 Part B appeals completed by Part B contractors in
1997, 70 percent were decided in provider's favor at the first level of review. Of
86,898 appeals completed at a second level of carrier appeal, 45 percent were de-
cided in the appellant’s favor. Of 4,701 appeals completed at the independent Ad-
ministrative Law Judge level, 51% were decided in the appellant's favor.

Question 6) How often are appeals of audits reversed Because of inappropriate in-
terpretations or actions by carriers?

sponse; Administrative Law Judges who hear appeals of carrier decisions gen-
erally are not bound by the manuals and instructions we issue to our carriers. They
are bound by statute, regulation, HCFA rulings, and National Coverage determina-
tions.

About 54 percent of administrative Law Ju reversals of carrier appeal deci-
sions are due to judges reaching a different conclusion than the carrier. Another 13
percent of reversals are due to judges changing the reimbursement methodology
used by the contractor; 11 percent of reversals are due to introduction of new evi-
dence; in 9 percent of reversals the judge's ruling contradicts contractor policy; and
in 7 percent of reversals the judge’s ruling contradicts Medicare policy.

Question 7) HCFA is supposed to utilize peer review. How often are nurses or
non-specialists used to conduct reviews under the guise of peer review?

Response: Nurses and non-specialists are not permitted to deny any claims subject
to peer review. They do perform the initial screen of all claims subject to the peer
review process. But any problem claims they identify are reviewed by at least two
physicians prior to denial.

Attachment
DEPARTMENT OF HEALTH & HUMAN SERVICES
HEALTH CARE FINANCING ADMINISTRATION
April 24, 1998
Percy Wooton, M.D.
President
American Medical Association
515 North State Street

Chicago, Illinois 60610

Dear Dr. Wooton: I am writing to you about the Documentation Guidelines for
Evaluation and Management Services em, because I continue to hear physicians
express concerns about them. I thought it would be helpful to provide you with the
Health Care Financing Administration’s (HCFA’s) views on the Guidelines, the proc-
ess for improving them, and the increased emphasis on accurate billing and proper
documentation. Understandably, physicians are reacting to flaws in the Documenta-
tion Guidelines that we are committed to fix. Also, many physicians fear they will
be unjustifiably targeted for fraud and abuse investigations as a result of simple
coding errors. I want to do what I can to slay, those fears.

‘As stewards of the Medicare program, HCFA must be sure the payments we make
on behalf of our beneficiaries are for medically necessary and BpPro} riate services,
and that the services have been accurately reported. Our FY 1997 CFO Audit, which
was released April 24, indicates that while we are making pro; in reducing in-
appropriate payments, we still have much work to do, particularly in the area of
enruriag documentation for physician claims is adequate, Inadequate or no docu-
mentation is the principal cause of the improper payments identified in the CFO
audit report.

HCFA needs to be confident that Medicare carriers are reviewing medical records
in a consistent manner. Physicians need assurances that they are billing appro-
priately and have adequate documentation in the event of an audit. A workable ver-
sion of the Documentation Guidelines is an essential tool for both physicians and
our carriers. Further, improving program integrity serves the interest of Medicare,
its beneficiaries, and its providers, including physicians.

T have heard that physicians believe the 1997 Documentation Guidelines that the
American Medical Association (AMA) and HCFA developed together are too complex
and burdensome. The most troubling concern is that some physicians believe the
new Guidelines will divert too much physician time and attention from patient care
to paperwork. I believe we can and must work together to improve the Guidelines
so they do not impose requirements in excess of those associated with clinically ap-
propriate medica) record-keeping practices.

I understand that the written comments you received in mid-March contained a
number of thoughtful suggestions. I have Robert A. Berenson, M.D., the new
director of HCFA’s Center for Health Plans and Providers, to participate in your “fly


39

2. Medicare Other Governmental Liabilities (ie., Accounts Payable)

Reported Medicare other governmental liabilities totaled $27.4 billion at September 30, 1997.
‘These liabilities represent the cost of services provided to Medicare beneficiaries but not paid at
the end of the fiscal year. The HCFA has made significant improvements in estimating this
liability, including the implementation of a revised estimation methodology.

‘The revised methodology identified the following five major components comprising other
governmental liabilities:

incurred to approved claims,
approved to paid claims,

paid to cleared claims,

cost settlements, and

periodic interim payments (PIP).

Data reliability concems were identified in the incurred to approved claims, approved to paid
claims, and cost settlement components of the liability estimation process. The extract program
for retrieving applicable data used in calculating incurred to approved claims incorrectly summed
payments for certain provider types. In addition, some contractors were not able to provide
detailed supporting documentation for the épproved to paid claims component. Finally, the
revised methodology had to be modified-to adjust for deficiencies in the data source used to
calculate the estimated liability related to the cost settlement component.

‘The HCFA’s review and approval process initially failed to detect the data reliability concerns
noted above. It did not ensure that there was adequate supporting documentation for each
component, and review and approval of the components were not clearly documented. This
process is still evolving.

Recommendations

Management should periodically analyze and review data to assess the reasonableness of their
estimate of other governmental liabilities. Specifically, we recommend that HCFA:

+ Periodically validate the data base to ensure the existence and completeness of test date.

> Use the results of the detailed claims testing to assess the reasonableness of the estimate

> Reconcile data obtained from Medicare contractors as part of the quarterly HCFA 1522
reporting process to other HCFA cost settlement data reports.

‘Independent Auditor's Report Inspector General's Report on the HCFA Financial Satemants for FY 1997 Page 19 of 36