United States General Accounting Office

GAO Report to the Chairman, Human

Resources and Intergovernmental

Relations Subcommittee, Committee on

Government Reform and Oversight,

House of Representatives

January 1996 MEDICARE

Millions Can Be Saved

by Screening Claims

for Overused Services

GAO/HEHS-96-49

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-258099 

January 30, 1996

The Honorable Christopher Shays

Chairman, Human Resources and

 Intergovernmental Relations Subcommittee

Committee on Government Reform and Oversight

House of Representatives

Dear Mr. Chairman:

Medicare is the nation’s largest health care insurer. Medicare spending

totalled $162 billion in 1994, about 14 percent of the federal budget.

Without additional controls over this spending, the Congressional Budget

Office estimated in December 1995 that total Medicare outlays will reach

$336 billion in 2002.

Restraining the growth in Medicare spending has proven difficult. This is

in part because the fee-for-service payment system1

 provides little

financial incentive for physicians or patients to consider whether

diagnostic tests and some routine services are medically necessary.

Moreover, physicians paid on a fee-for-service basis may have a financial

incentive to increase their income by providing more services than are

necessary. In addition, patients often lack the information and expertise

necessary to question the medical necessity of services ordered by

physicians. As a result of these two factors, preventing Medicare payments

for unnecessary services calls for program safeguards to check the

accuracy and medical necessity of claims.

One type of program safeguard is the use of medical policies that define

the diagnostic criteria for a service. For example, a medical policy for

echocardiography may allow payment if the patient’s diagnosis is chronic

pulmonary heart disease but deny payment if the diagnosis is indigestion.

Most medical policies and diagnostic criteria are established and applied

locally by each of the 29 contractors (also called carriers) that the Health

Care Financing Administration (HCFA) uses to process and pay claims

submitted by physicians.2

 Including these diagnostic criteria in Medicare

1

Fee-for-service has been the traditional and predominant method of paying for health care services in

both the private and public sectors. The Medicare fee-for-service payment system, which currently

covers more than 90 percent of all Medicare enrollees, pays physicians a fixed amount for each service

delivered. In contrast, Medicare enrollees in managed care plans receive all services in exchange for an

annual prepaid fee.

2

The 29 carriers that process Medicare part B payments for physician services are referred to as

contractors in this report. Four additional carriers process Medicare claims for durable medical

equipment, but those carriers were not included in this study.

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claims processing systems can enable checking all claims for the service

against the criteria before payment. For claims that do not meet the

criteria, the claims processing systems can deny payment automatically.

Diagnostic criteria implemented this way are referred to as

autoadjudicated medical necessity prepayment screens. Providers may

resubmit claims denied by these screens with additional or corrected

information to clarify the patient’s medical symptoms. Also, providers may

appeal contractors’ decisions to deny their claims.

In discussions with your staff, we agreed to examine (1) the extent to

which contractors employ medical necessity prepayment screens for

procedures that are likely to be overused nationally, (2) the potential

impact of autoadjudicated prepayment screens on Medicare spending, and

(3) the role that the federal government should play in reducing

widespread overuse of medical procedures billed to Medicare.

To address these objectives, we reviewed payments to physicians for six

groups of high-volume medical procedures,3

 which accounted for almost

$3 billion in Medicare payments in 1994.4

 These procedures are considered

to be widely overused: Evidence from the Office of the Inspector General

(OIG) in the Department of Health and Human Services (HHS) and

contractors’ analyses and views indicate that providers commonly bill for

these procedures when they are not warranted by medical symptoms.

We also surveyed 17 contractors to determine if they used medical

necessity criteria in their claims processing systems to screen claims for

the six groups of procedures in our study. For seven of the largest

contractors we also used computer programs to review a sample of the

claims they paid for the six groups of procedures.5

 If the contractors’

claims processing systems did not screen these claims against medical

necessity criteria, our programs compared the patient diagnoses on the

paid claims to diagnostic criteria used in prepayment screens by various

other Medicare contractors. We performed our work between August 1994

and November 1995 in accordance with generally accepted auditing

3

We reviewed claims for the following procedures: echocardiography, eye examinations, chest X rays,

colonoscopy, yttrium aluminum garnet (YAG) laser surgery, and duplex scan of extracranial arteries.

See table 1 for the specific procedure codes included in our study.

4

We limited our review to Medicare part B payments, which generally cover services provided by

physicians and suppliers. In the part B program, Medicare pays 80 percent of the total charge allowed

and the patient is responsible for the remainder. In this report, the total payment allowed under

Medicare is referred to as the Medicare payment.

5

Some contractors process Medicare claims from more than one state, a portion of a state, or both. Our

review covered claims processed by the seven contractors in six states.

Page 2 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

standards. Appendix I further describes our scope, data sources, and

methodology.

Results in Brief Medicare contractors routinely pay hundreds of millions of dollars in

Medicare claims without first determining if the services provided are

medically necessary. For each of the six groups of medical procedures we

reviewed, more than half of the 17 contractors we surveyed were not using

prepayment screens to check these claims for medical necessity. Even

when evidence points to overuse nationwide, each of the Medicare

contractors usually decides on its own which procedures to screen. For

example, although HHS’ OIG advised HCFA and the contractors in 1991 to

monitor the use of colonoscopies and deny claims that were not indicated

by medical symptoms or supported with documentation, only 6 of the 17

contractors were screening colonoscopy claims by the end of 1994.

Millions of dollars in Medicare claims for these six groups of procedures

would have been denied if all contractors had screened the claims for

medical necessity. Our review of just 7 of the 17 contractors revealed that

between $29 million and $150 million was paid for claims that may have

been medically unnecessary. The range of these estimates reflects the

variation in contractors’ criteria for identifying medically unnecessary

services. Because the remaining contractors also were not using medical

necessity screens for some of these procedures, they also may have paid

millions of dollars in Medicare claims for services that should have been

denied.

Problems with controlling payments for widely overused procedures

persist because HCFA lacks an effective national strategy. Although the

need for national leadership is compelling, HCFA has not exercised its

statutory authority to take an active role in promoting more local medical

policies and prepayment screens for widely overused procedures. Instead,

HCFA has relied on contractors’ abilities to focus their prepayment screens

on procedures where local use exceeds the national average. While this

approach helps reduce local overuse of some procedures, it is not

designed to control overuse of a procedure nationwide. We believe that

HCFA should take several approaches to help prevent Medicare spending

for unnecessary services.

Background Medicare provides health insurance for about 37 million elderly and

disabled individuals. This insurance is available in two parts: Part A covers

Page 3 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

inpatient hospital care and is financed exclusively from a payroll tax. Part

B coverage includes physician services, outpatient hospital services, and

durable medical equipment. Part B services are financed from an

earmarked payroll tax and from general revenues.

The Social Security Act requires that Medicare pay only for services that

are reasonable and necessary for the diagnosis and treatment of a medical

condition.6 HCFA contracts with private insurers such as Blue Cross and

Blue Shield plans, Aetna, and CIGNA insurance companies to process

Medicare claims and determine whether the services are reasonable and

necessary. The program was designed this way in part to protect against

undue government interference in medical practice.7

 Thus, despite

Medicare’s image as a national program, each of the 29 Medicare

contractors that process part B claims for physicians’ services generally

establishes its own medical necessity criteria for deciding when a service

is reasonable and necessary.

Contractors do not review each of the millions of Medicare claims they

process each year to determine if the services are medically necessary.

Instead, contractors review a small percentage of claims, trying to focus

on medical procedures they consider at high risk for excessive use.

Contractor budgets limit the number of claims contractors can review, and

over the last several years, both contractor budgets and HCFA requirements

for prepayment review have been decreasing. In 1991, HCFA required

contractors to review 15 percent of all claims before payment, while in

1995, contractors are only required to review 4.6 percent.

Since 1993, HCFA has required contractors to use a process called focused

medical review (FMR) to help them decide which claims to review. Under

the FMR process, each contractor analyzes its claims to identify procedures

where local use is aberrant from the national average use.8

 Beginning in

fiscal year 1995, HCFA has required each contractor to select at least 10

aberrant procedures identified through FMR and develop medical policies

for those procedures. The contractors are required to work with their local

physician community to define appropriate medical necessity criteria. This

6

Medicare generally does not pay for routine screening tests such as eye examinations, hearing tests,

and routine chest X rays. However, the Congress has enacted legislation allowing Medicare payment

for some routine services, such as a screening mammography.

7

Section 1801 of the Social Security Act (42 U.S.C. 1395) prohibits federal interference in the practice

of medicine.

8

Some contractors receive permission from HCFA to identify aberrant procedures using alternative

methods, such as trend analysis.

Page 4 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

arrangement allows contractors to take local medical practices into

consideration when establishing criteria for reviewing claims. Once

physicians have had an opportunity to comment on a medical policy, the

contractor publishes the final criteria.

Each contractor generally decides which medical procedures to target for

review and what types of corrective actions to implement to prevent

payments for unnecessary services. Contractors currently concentrate on

educating physicians about local medical policies, hoping to decrease the

number of claims submitted that do not meet the published medical

necessity criteria. Contractors also use computerized prepayment reviews,

called screens, to check claims against the medical necessity criteria in

medical policies. When screens identify claims that do not meet the

criteria, two alternative actions are possible: first, autoadjudicated screens

may deny the claim automatically; second, all other screens may suspend

the claim for review by claims examiners, who may request additional

documentation from the physician before deciding to pay or deny the

claim.

Autoadjudicated screens usually compare the diagnosis on the claim with

the acceptable diagnostic conditions specified in the corresponding

medical policy. For example, an autoadjudicated screen for a chest X ray

would pay the claim if the patient diagnosis was pneumonia but deny the

claim if the only patient diagnosis was a sprained ankle. Because this type

of screen is entirely automated, it can be applied to all the claims for a

specific procedure at a lesser cost than reviewing claims manually. This

type of screen is most effective for denying claims that do not meet some

basic set of medical necessity criteria. Claims denied by these screens can

be resubmitted by providers or appealed. As shown in figure 1, claims that

pass these basic criteria may be further screened against more complex

medical criteria to identify claims that warrant manual review.

Page 5 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

Figure 1: Overview of Prepayment Medical Review Process

Deny

Claim

Pay

Claim

Pay

Claim

Deny

Claim

Pay

Claim

Claims

Submitted

Y

Y

Y

Y

N

N

N

N

Autoadjudicated Review Other Prepayment Reviews

Computer

Application

of Diagnostic

Criteria

Computer

Application

of Additional Medical

Review Criteria

Suspend

Claim

for Manual

Review

Pass

Criteria

?

Pass

Criteria

?

Claim

Subject to Further

Review?

Pass

Criteria

?

Page 6 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

Many Contractors Do

Not Screen Claims for

Overused Services

Most of the contractors we surveyed routinely pay claims for procedures

suspected to be widely overused without first screening those claims

against medical necessity criteria. We looked at six groups of procedures

that providers frequently perform on patients who lack medical symptoms

appropriate for the procedures. These procedures also rank among the 200

most costly services in terms of total Medicare payments and accounted

for almost $3 billion in Medicare payments in 1994.9

 (See table 1 below.)

Four of the procedures—echocardiography, eye examinations, chest X

rays, and duplex scans of extracranial arteries—are noninvasive

diagnostic tests. Colonoscopy can be either diagnostic or therapeutic, and

YAG laser surgery is sometimes used to correct cloudy vision following

cataract surgery.

Table 1: Medicare Services and

Payments for Six Medical Procedures

(1994) 

Procedure (procedure codes)

Medicare services

(in thousands)

Medicare

paymentsa

(in millions)

Echocardiography (93307, 93320, 93325,

93350) 8,976 $851

Eye exams (92002, 92004, 92012, 92014) 14,400 686

Chest X rays (71010, 71020) 34,597 507

Colonoscopy (45378, 45380, 45385) 1,416 478

YAG laser surgery (66821) 895 325

Duplex scan of extracranial arteries (93880) 1,513 143

Total 61,797 $2,990

aThe total payments allowed under Medicare for each procedure code.

In the first quarter of fiscal year 1995 (Oct. 1-Dec. 31, 1994), we surveyed

17 contractors to determine whether they were using any type of medical

necessity prepayment screens to review claims for these six groups of

procedures. As shown in table 2, the use of prepayment screens among the

contractors was not uniform, and for each of the six procedures fewer

than half the 17 contractors were using such screens.

9

All procedure codes for these six medical services ranked among the top 200 most costly services in

1994, except code 92002 (eye examination for a new patient).

Page 7 GAO/HEHS-96-49 Screening Claims for Overused Services
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Table 2: Use of Medical Necessity Screens for Six Procedures by 17 Medicare Contractors (Oct. 1-Dec. 31, 1994) 

Contractor Echocardiography Eye exams Chest X ray Colonoscopy

YAG laser

surgery

Duplex scan of

extracranial arteries

1 X X X

2 X X X

3 X X

4 X X X

5 X

6 X X

7 X X

8 X X

9 X X X X

10

11 X X

12 X X X

13

14 X X

15 X X

16

17 X X X X X

Total 7 6 6 6 3 8

For each group of products in our study, we found the following:

• Only 7 of the 17 contractors we surveyed had prepayment screens to

review echocardiography for medical necessity, even though

echocardiography is often performed on patients with no specific

cardiovascular disorders. Ten contractors lacked such screens, even

though echocardiography is the most costly diagnostic test in terms of

total Medicare payments and despite an increase of over 50 percent in the

use of the echocardiography procedures listed in table 1 between 1992 and

1994.

• Only 6 of the 17 contractors used prepayment screens to prevent payment

for medically unnecessary eye examinations. These contractors have

medical necessity criteria to deny claims for routine eye examinations and

to allow payments only for certain conditions, such as cataracts, diabetes,

and hypertension.

• Only 6 of the 17 contractors had prepayment screens to review chest X ray

claims for medical necessity, although HCFA had alerted Medicare

Page 8 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

contractors that providers frequently bill for chest X rays that are not

warranted by medical symptoms and are thus medically unnecessary.

• Only 6 of the 17 contractors had medical necessity prepayment screens to

review colonoscopy claims. In 1991, HHS’ OIG reported that nationwide

almost 8 percent of colonoscopies paid by Medicare were not indicated by

diagnosis or medical documentation.

• Only 3 of the 17 contractors had prepayment screens for YAG laser surgery

even though federal guidelines exist that indicate the diagnostic conditions

for performing this surgery. Also, at a national meeting of Medicare

contractors in 1994, HCFA officials discussed the need to avoid paying for

unnecessary YAG laser surgery following cataract removal.10

• Only 8 of the 17 contractors had implemented prepayment screens for

duplex scans even though HCFA had alerted Medicare contractors that

providers commonly bill for noninvasive vascular tests such as duplex

scans without adequately documenting the patient’s medical symptoms.

A primary reason all contractors do not screen claims for nationally

overused procedures is that, following HCFA’s instructions for FMR,

contractors have been targeting procedures that are overused locally,

based on comparisons with national average use. The shortcomings of this

approach are discussed later in this report.

Our survey of the 17 contractors represents a snapshot of the use of

prepayment screens for these procedures in the first quarter of fiscal year

1995. Typically, contractors turn screens on and off depending on their

local circumstances. For example, one contractor began using a screen for

echocardiography in March 1995, and another contractor implemented

screens for chest X rays and eye examinations in January 1995 because

these procedures were overused locally. By contrast, one contractor

discontinued using an autoadjudicated screen for eye examinations in

February 1995 because the diagnostic criteria for payment in the screen

were considered too narrow.11 Nonetheless, these fluctuations in

contractors’ use of screens do not reflect a coordinated approach to

screening nationally overused procedures.

10On October 6, 1995, HCFA published a draft national medical policy that specifies the Medicare

medical criteria for payment of YAG laser surgery claims.

11The discontinued autoadjudicated screen was not among those used in our tests.

Page 9 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

Contractors Without

Screens Pay Millions

for Services That May

Be Unnecessary

Seven large Medicare contractors12 paid millions of dollars in claims for

services that may have been unnecessary. These contractors did not use

diagnostic medical criteria to screen claims for some of the six groups of

procedures in our study. The claims paid for these services included a

range of patient diagnoses that did not meet the criteria established by

other contractors. For example, a chest X ray was paid for a patient with a

diagnosis of injuries to the hand and wrist, an echocardiogram was paid

for a patient with a diagnosis of chronic conjunctivitis, and a therapeutic

colonoscopy examination was paid for a patient with a mental health

diagnosis of hysteria. If the seven contractors had used autoadjudicated

diagnostic screens for the six groups of procedures, they would have

denied between $38 million and $200 million in claims for services in 1993,

as shown in table 3.

Table 3: Medicare Payments That

Would Have Been Denied by

Autoadjudicated Screensa

Dollars in thousands

Procedure (procedure code) Lowest estimate Highest estimate

Echocardiography (93307, 93320, 93325,

93350)b $10,475 $74,632

Eye exams (92002, 92004, 92012, 92014) 611 931

Chest X rays (71010, 71020) 819 37,166

Colonoscopy (45378, 45380, 45385) 5,798 61,886

YAG laser surgery (66821) 14,934c 14,934c

Duplex scan of extracranial arteries

(93880) 5,971 10,710

Total $38,608 $200,259

aMedicare payments were calculated by multiplying the estimated number of denied services by

the average allowance under Medicare for the procedure at the contractor. The estimates are

based on a 5-percent sample of beneficiaries at each of seven contractors. We used claims paid

for services provided in 1993.

bWe combined the results from two echocardiography screens to estimate payments that would

have been denied for all four echocardiography procedure codes.

cWe used only one prepayment screen for YAG laser surgery. Therefore, the lowest and highest

estimates are the same for payments that would have been denied.

The range of estimated payments for claims that would have been denied

reflects differences among contractors’ criteria for identifying medically

unnecessary services. Although different contractors had screens for the

same procedure, they used different diagnoses to determine medical

necessity. For example, a colonoscopy screen we used from one

12Of the 17 contractors we surveyed, we selected the 7 contractors that processed the most Medicare

claims. In table 2, the 7 contractors we selected are numbered 1 through 7.

Page 10 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

contractor paid claims with a diagnosis of gastritis, while another

contractor’s screen denied such claims. Because of these differences

among the contractors’ screens, we applied screens from two or three

different contractors for each group of procedures, except for YAG laser

surgery.13 Thus, our test results show a range of estimated payments for

claims that would have been denied, depending on the medical necessity

criteria used. The tables in appendix II list the estimated payments for

claims that would have been denied by each of the tested screens.

The seven contractors we reviewed were among the largest in terms of the

number of claims processed, accounting for about 37 percent of all

Medicare part B claims, and almost 38 percent of all the claims for the six

groups of procedures in our study. To estimate the paid claims that would

have been denied, we applied autoadjudicated screens developed by

several contractors in our survey to a sample of the 1993 claims paid by

the seven contractors.14 We only applied these screens if the tested

contractor did not have a medical necessity diagnostic screen of its own in

place in 1993 for the specific procedure tested. We used autoadjudicated

screens because decisions to pay and deny claims based on medical

necessity criteria are automated and, therefore, do not require additional

medical judgment. Appendix I provides additional details on our

methodology.

When claims are denied by prepayment screens, the billing physician can

(1) resubmit the claim with additional or corrected information or

(2) appeal the denial. In either case, the contractors may ultimately pay

claims that they have initially denied. Contractors’ claims processing

systems generally do not track the claims denied by autoadjudicated

prepayment screens to determine if they are resubmitted or appealed and

then paid. However, based on a limited analysis of claims denied by

contractors with autoadjudicated screens, we estimate that about 25

percent of the denied claims were ultimately paid.15 Assuming that the

25-percent rate is typical for autoadjudicated screens, about 75 percent of

the payments in table 3, or between $29 million and $150 million, were for

13For YAG laser surgery we only applied the one screen that we had identified at the time we began our

analysis.

14We obtained all the tested screens from some of the 17 contractors in our initial survey. Some of the

screens were obtained from one of the seven contractors included in our tests.

15As described in appendix I, we estimated the percentage of denied claims that would be ultimately

paid by analyzing claims for echocardiography processed by one contractor and claims for duplex

scans processed by another contractor. In each case, the contractors used autoadjudicated screens for

these services.

Page 11 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

services that would be considered unnecessary using the criteria

established by various contractors.

Our estimates of payments for unnecessary services involve only six

groups of procedures and cannot be statistically generalized beyond the 7

contractors included in our analysis. However, all 29 contractors—not just

the 7 whose claims we reviewed—operate under FMR requirements

designed to correct local rather than national overutilization problems.

Therefore, the other 22 contractors also may lack screens for some of

these procedures and, hence, may have paid millions of dollars in claims

for services that should have been denied.

For widely overused procedures such as the six we tested,

autoadjudicated screens can be a low-cost, efficient way to screen millions

of claims against basic medical necessity criteria. Contractor officials said

that these screens are much less expensive to implement than screens that

suspend claims for manual review. Consequently, as funding for program

safeguards declines, autoadjudicated screens can be used to maintain or

even increase the number of claims reviewed. Moreover, for procedures

where the medical review decisions can be automated, autoadjudicated

screens can quickly identify and deny claims where the patient diagnosis is

inconsistent with the procedure performed. In contrast, when claims

examiners manually review claims, the risk exists that the medical

necessity criteria may be misinterpreted and applied inconsistently.

However, for certain procedures or medical policies, autoadjudicated

screens may not be appropriate. For example, some medical policies are

not easily defined with diagnostic codes and require manual review of

documentation, such as medical records, to determine if a service is

medically necessary.

Denying claims using autoadjudicated or other prepayment screens can

increase administrative costs if providers frequently resubmit denied

claims or appeal the denials. Contractor officials said that these costs can

be minimized if providers are educated to bill appropriately in the first

place. By combining direct provider education with screens that enforce

agreed upon medical criteria, contractors can, over time, reduce the

number of claims submitted for unnecessary services.

Page 12 GAO/HEHS-96-49 Screening Claims for Overused Services
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Greater HCFA

Leadership Is Needed

HCFA does not have a national strategy for using prepayment screens to

deny payments for unnecessary services among Medicare’s most highly

overused procedures. HCFA does periodically alert contractors about some

of these procedures at semiannual national contractor meetings and

through occasional bulletins. However, the agency does not identify

widely overused procedures in a systematic manner. Moreover, the agency

does not ensure that contractors implement prepayment screens or other

corrective actions for these procedures.

Medicare legislation does not preclude HCFA from requiring its contractors

to screen claims for nationally overused procedures. However, HCFA has

chosen to avoid the appearance of interfering in local medical practice.

HCFA usually does not establish medical policies or tell the contractors

which procedures warrant medical policies or prepayment screens.16

Instead, HCFA relies primarily on the contractors’ local FMR efforts to

identify and prevent Medicare payments for unnecessary services. This

process, according to HCFA officials, allows contractors to take medical

practice into consideration when making medical necessity

determinations.

Although FMR can work well for overutilization problems that are truly

local, the process is not designed to address nationwide overutilization of

a medical procedure. The national average use of a procedure generally

serves as a benchmark for identifying local overutilization problems, but

the benchmark itself may already be inflated by millions of dollars in

payments for unnecessary services. For example, in several states the use

of echocardiograms greatly exceeded the 1992 national average of 101

services per 1,000 beneficiaries.17 Some of the contractors servicing those

states have designed and implemented prepayment screens for this

procedure. Meanwhile, other contractors targeted different procedures

and allowed unconstrained use of echocardiograms. This focus on local

overuse may be one of the factors that led to a national 12-percent

increase in echocardiography use by 1994—and a new benchmark of 113

echocardiograms per 1,000 beneficiaries.

16HCFA has mandated that contractors use medical necessity prepayment screens for four procedures

(routine foot care, mycotic nails, chiropractic visits, inpatient rehabilitation medicine visits) and an

injection (Epoetin Alpha). Contractors can request a waiver to alter or eliminate mandated screens,

except screens for mycotic nails and inpatient rehabilitation medicine visits.

17This example is based on echocardiography procedure code 93307, complete real-time

echocardiography with two dimensional image documentation, with or without M-mode recording (a

form of ultrasound).

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HCFA can take a more active role in controlling spending for widely

overused procedures without intruding on the contractors’ responsibilities

to establish their own prepayment screens. HCFA has an oversight

responsibility to monitor and evaluate contractors’ screens and other

efforts to prevent payments for unnecessary services. Yet HCFA does not

know (1) which contractors have diagnostic screens for which medical

procedures, (2) the medical necessity criteria used in these screens, or

(3) the effectiveness of the screens in denying claims for unnecessary

services. Furthermore, without this information HCFA cannot identify best

practices and promote approaches such as autoadjudicated medical

necessity screens where they can be a cost-effective alternative or

complement to screens that flag claims for manual review.

HCFA funded a central database on local medical policies, but this resource

is not being effectively used. HCFA has encouraged the contractors to use

the database to research other contractors’ medical policies before

drafting their own. However, according to some contractors, the

usefulness of the database is limited because it is not regularly updated.

Moreover, HCFA has not taken the initiative to use the database to evaluate

the contractors’ medical policies and identify those worthy of

consideration by all contractors for controlling widely overused

procedures.

HCFA can also encourage greater use of medical necessity criteria for

widely overused procedures by providing contractors with more model

medical policies. About 2 years ago, HCFA established clinical workgroups

composed of contractor medical directors to develop model medical

policies that the contractors can adapt for local use. Specifically,

contractors can work with their local medical community to review model

policies, adapt them to reflect local medical practice, and implement them

in prepayment screens. This has been an important step in promoting

greater efficiency in developing local medical policies. However, since the

workgroups’ inception, only one model policy has been published.18

According to HCFA and contractor officials, progress has been limited in

part because HCFA often takes longer to review draft model policies than

its goal of 45 days.

HCFA officials said that they are considering provisions for greater use of

autoadjudicated screens in a new, national claims processing system.

However, full implementation of that system is scheduled for late in 1999.

In addition, what types of screens will be included in the system remains

18The model policy covers noninvasive vascular studies.

Page 14 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

unclear, as well as how the contractors will chose which screens to

modify, implement, and use and how HCFA will monitor and evaluate the

effectiveness of the screens. Meanwhile, HCFA continues to allow

contractors to pay millions of dollars for services that may be

unnecessary.

Conclusions While the rapid increase in Medicare costs threatens the long-term viability

of the Medicare program, many Medicare part B contractors continue to

routinely pay claims for widely overused services, without first

determining if the services are reasonable and necessary. Even when

evidence indicates that problems with payments for specific medical

procedures are widespread, HCFA has not ensured that contractors help

correct national problems as well as local aberrancies. More specifically,

HCFA policies do not encourage contractors to reduce a national norm

already inflated by millions of dollars in payments for unnecessary

services.

Our tests of paid claims against criteria used by some of the contractors

show that millions of dollars are being paid for services that do not meet

basic medical necessity criteria. Although our tests were limited to seven

contractors, our survey of 17 contractors indicates that nationally,

additional millions of Medicare dollars may have been paid for claims that

should have been denied.

Prepayment screens are an important tool in preventing payments for

unnecessary services. Funding for program safeguards, such as medical

policies and prepayment screens, has been declining, however, while the

volume of Medicare claims is increasing. In this environment,

autoadjudicated diagnostic screens offer a low-cost way to ensure that all

claims for selected procedures pass a basic medical necessity test before

payment. Greater use of autoadjudicated screens could complement,

rather than replace, the contractors’ efforts to use FMR and other types of

prepayment screens to address local overutilization problems.

To forestall widespread overuse of specific medical procedures, HCFA can

help the contractors much more than it has. HCFA has begun to capitalize

on the knowledge and skills of the contractor medical directors by using

contractor workgroups to develop model medical policies. More model

policies can help contractors control spending for nationally overused

procedures by providing them with generally accepted criteria for

identifying and denying claims for unnecessary services. However, HCFA

Page 15 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

needs to support the efforts of the workgroups and review model policies

on a more timely basis so that these efforts can succeed. Also, to exercise

stronger leadership by promoting best practices, HCFA needs to collect and

evaluate information on the medical criteria and prepayment screens now

being used by the contractors.

Recommendations To help prevent Medicare payments for unnecessary services, we

recommend that the Secretary of HHS direct the Administrator of HCFA to

• systematically analyze national Medicare claims data and use analyses

conducted by HHS’ OIG and Medicare contractors to identify medical

procedures that are subject to overuse nationwide;

• gather information on all contractors’ local medical policies and

prepayment screens for widely overused procedures, evaluate their cost

and effectiveness, and disseminate information on model policies and

effective prepayment screens to all the contractors; and

• hold the contractors accountable for implementing local policies,

prepayment screens (including autoadjudicated screens), or other

corrective actions to control payments for procedures that are highly

overused nationwide.

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

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

we did discuss the contents of this report with HCFA officials from the

Bureau of Program Operations, including the Director of Medical Review

and the Medical Officer. In general, they agreed with our findings.

We obtained written comments on our draft report from several part B

contractor medical directors who serve on the Contractor Medical

Director Steering Committee. We selected this committee as a focal point

for obtaining contractor comments because of its role as a liaison between

the contractors and HCFA and the communication network for the

contractor medical directors. Their comments support our conclusions

(see app. III). In summary, they suggested the development of contractor

workgroups to rapidly produce model medical policies for the six groups

of procedures in our study.

As agreed with your office, unless you release its contents earlier, we plan

no further distribution of this report for 30 days. At that time, we will send

Page 16 GAO/HEHS-96-49 Screening Claims for Overused Services
B-258099 

copies to other congressional committees and members with an interest in

this matter, the Secretary of Health and Human Services, and the

Administrator of the Health Care Financing Administration. We will also

make copies available to others upon request.

This report was prepared by William Reis, Assistant Director; Teruni

Rosengren; Stephen Licari; Michelle St. Pierre; and Vanessa Taylor under

the direction of Jonathan Ratner, Associate Director. Please call me on

(202) 512-7119 or Mr. Reis on (617) 565-7488 if you or your staff have any

questions about this report.

Sincerely yours,

Sarah F. Jaggar

Director, Health Financing

 and Public Health Issues

Page 17 GAO/HEHS-96-49 Screening Claims for Overused Services
Contents

Letter 1

Appendix I 

Scope, Data Sources,

and Methodology

20

Appendix II 

Estimated Payments

for Various

Procedures Denied by

Selected Prepayment

Screens (1993)

23

Appendix III 

Comments From the

Contractor Medical

Director Steering

Committee

29

Tables Table 1: Medicare Services and Payments for Six Medical

Procedures

7

Table 2: Use of Medical Necessity Screens for Six Procedures by

17 Medicare Contractors

8

Table 3: Medicare Payments That Would Have Been Denied by

Autoadjudicated Screens

10

Table II.1: Estimated Payments for Echocardiography 23

Table II.2: Estimated Payments for Eye Examinations 24

Table II.3: Estimated Payments for Chest X Rays 25

Table II.4: Estimated Payments for Colonoscopy 26

Table II.5: Estimated Payments for YAG Laser Surgery 27

Table II.6: Estimated Payments for Duplex Scans of Extracranial

Arteries

28

Figure Figure 1: Overview of Prepayment Medical Review Process 6

Page 18 GAO/HEHS-96-49 Screening Claims for Overused Services
Contents

Abbreviations

FMR focused medical review

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

OIG Office of the Inspector General

YAG yttrium aluminum garnet

Page 19 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix I 

Scope, Data Sources, and Methodology

We reviewed HCFA’s statutory authority and responsibilities for

administering the Medicare program and HCFA’s regulations and guidance

to contractors on the development of local medical policies and the

implementation of prepayment screens. We also discussed HCFA’s

oversight of these functions with officials at its Bureau of Program

Operations.

Before selecting the six groups of medical procedures included in our

study, we reviewed previous GAO and HHS OIG reports, HCFA guidance, and

other studies on overused medical services. We also reviewed HCFA’s list of

200 medical procedure codes, ranked by total Medicare-allowed charges,

and obtained Medicare contractors’ views on procedures that are likely to

be overused. Based on the information gathered from these sources, we

selected six groups of procedures generally considered widely overused.

Because little centralized information exists on Medicare contractors’ use

of prepayment screens or the medical necessity criteria included in those

screens, we contacted 17 of the 29 contractors that process Medicare part

B claims for physician services. We also visited three of the Medicare

contractors and attended two of the semiannual contractor medical

director conferences. In the course of these contacts, we decided to limit

our collection of detailed information on medical necessity criteria and

prepayment screens to 17 contractors who could provide us the

information we needed.

To estimate the Medicare payments for unnecessary services that could be

prevented by broader use of prepayment screens, we tested

autoadjudicated prepayment screens on claims paid by seven contractors

in six states. The seven contractors in our analysis were among the largest

contractors in terms of the number of claims processed in 1993 and they

did not use a medical necessity prepayment screen for some of the six

groups of procedures in our study.

We based our tests on data from the Medicare Physician Supplier

Component of the 1993 HCFA 5 Percent Sample Beneficiary Standard

Analytic File. The Physician Supplier Component contains all Medicare

part B claims for a random sample of beneficiaries. Our analysis is based

on all paid claims in the database for the seven contractors and the six

groups of procedures in our review.

For each screen and tested contractor, we estimated the services and

payments that would have been denied by

Page 20 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix I 

Scope, Data Sources, and Methodology

• simulating the screen using a computer algorithm to determine the number

of services in the sample that would have been denied by the screen,19

• weighing this number to reflect the universe of services, and

• multiplying this weighted number by the average Medicare allowance for

the procedure at the contractor.

The average Medicare-allowed amount for each procedure code at each

contractor in 1993 was calculated based on data from HCFA’s part B Extract

Summary System.

For five of the procedures, we applied two or three different

autoadjudicated diagnostic screens currently used by other contractors in

order to illustrate the impact of using different screens. By applying

multiple screens, we were able to examine the range of services that

would have been denied depending on the medical necessity criteria used.

For example, one of the colonoscopy screens paid claims with a diagnosis

of gastritis, while another did not. For YAG laser surgery, however, we only

applied the one screen that we had identified at the time we began our

analysis. We only applied a particular screen to a contractor’s claims if

that contractor did not have a medical necessity diagnostic screen in place

in 1993 for the specific procedure being tested. We obtained our tested

screens from several of the 17 contractors in our initial survey. Some of

the screens we used were obtained from one of the seven contractors that

we subsequently tested.

Because our estimates were based on a sample of claims, our estimates

are subject to sampling error. We calculated 95-percent confidence

intervals for each of our estimated payments for services that would have

been denied by the tested screens. This means the chances are about 19

out of 20 that the actual payments for services that would have been

denied at each of the tested contractors would fall within the range

covered by our estimate, plus or minus the sampling error. Sampling

errors for our estimates are included in appendix II.

Some of the payments that would have been denied by the tested screens

would eventually be paid if they were resubmitted with corrected or

additional information or successfully appealed. Because contractors’

claims processing systems generally do not track claims denied by

autoadjudicated screens to determine how many are ultimately paid, we

developed our own estimates. Using the 1993 HCFA 5 Percent Sample

19We consulted staff at the contractors whose screens we tested to ensure that we applied the screens

correctly. Also, we manually reviewed printouts of the claims that were denied by the tested screens to

ensure that only nonpayable diagnoses were denied.

Page 21 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix I 

Scope, Data Sources, and Methodology

Beneficiary Standard Analytic File, we analyzed echocardiography claims

processed by one contractor and duplex scan claims processed by another

contractor. In each case, the contractors used autoadjudicated screens for

these services. For each contractor, we used computer programs to

identify claims for the services that were denied for medical necessity in a

3-month period in 1993. We then determined whether another claim was

submitted and paid for the same service, provided on the same day, for the

same beneficiary, and by the same provider. Our analysis showed that 23

to 25 percent of the echocardiography and duplex scan claims denied for

medical necessity were subsequently paid. Based on these results we used

25 percent as our estimate of claims denied that would ultimately be paid.

The actual percentage will likely vary by type of medical procedure and

the diagnostic criteria used in the screen. However, because of the costs

and inefficiencies associated with denying a large percentage of services

and then later reprocessing and paying those services, we believe that

contractors would not be likely to continue using a prepayment screen

that inappropriately denies more than 25 percent of the services.

Page 22 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix II 

Estimated Payments for Various Procedures

Denied by Selected Prepayment Screens

(1993)

Table II.1: Estimated Payments for

Echocardiography

Prepayment screensa

and tested contractorsb

Paid

services

Denied

services

Payments for

denied

servicesc

Error range

for

paymentsd

Screen 1

Contractor A 388,200 40,600 $3,608,000 ±$146,300

Contractor B 363,900 271,900 18,949,700 ±163,600

Contractor D 104,800 14,600 900,400 ±57,700

Contractor F 161,200 114,700 9,883,000 ±139,700

Contractor G 213,500 149,600 11,836,200 ±153,000

Total 1,231,600 591,400 $45,177,300 ±$660,300

Screen 2

Contractor A 749,900 34,400 $5,885,600 ±$268,600

Contractor B 619,800 153,200 17,218,700 ±362,600

Contractor D 269,900 31,200 2,976,900 ±134,500

Contractor F 296,000 67,000 8,583,400 ±275,500

Contractor G 392,600 72,600 8,097,500 ±244,200

Total 2,328,200 358,400 $42,762,100 ±$1,285,400

Screen 3

Contractor A 749,900 3,800 $511,900 ±$70,800

Contractor B 619,800 73,200 8,051,300 ±265,700

Contractor D 269,900 3,300 271,900 ±40,000

Contractor F 296,000 2,600 321,600 ±53,500

Contractor G 392,600 11,800 1,317,900 ±107,100

Total 2,328,200 94,700 $10,474,600 ±$537,100

Notes: All numbers are rounded to hundreds.

The estimated number of and payments for denied services were derived from a 5-percent

beneficiary sample of 1993 claims for each contractor.

aThe prepayment screens presented in the table apply to different echocardiography codes.

Screen 1 was used for echocardiography codes 93320 and 93325. Screens 2 and 3 were used

for echocardiography codes 93307, 93320, 93325, and 93350. Therefore, screen 1 was applied

to a smaller number of paid services than the other screens.

bTwo of the seven contractors in our study had medical necessity screens to identify unnecessary

echocardiography tests, therefore, those two contractors were not included in this analysis.

cEstimated payments for denied services were calculated by multiplying the estimated number of

denied services by the average Medicare allowance for the procedure at the contractor.

dThe error range for estimated payments was based on a 95-percent confidence level.

Page 23 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix II 

Estimated Payments for Various Procedures

Denied by Selected Prepayment Screens

(1993)

Table II.2: Estimated Payments for Eye

Examinations

Prepayment screensa

and tested contractorb

Paid

services

Denied

services

Payments for

denied

servicesc

Error range

for

paymentsd

Screen 1

Contractor A 1,271,600 1,100 $51,000 ±$13,400

Contractor D 499,400 3,700 164,500 ±22,900

Contractor E 527,300 5,500 305,800 ±35,000

Contractor G 838,700 8,300 409,700 ±38,700

Total 3,137,000 18,600 $931,000 ±$110,000

Screen 2

Contractor A 1,271,600 600 $28,800 ±$10,100

Contractor D 499,400 300 15,000 ±6,900

Contractor E 527,300 3,800 212,400 ±29,300

Contractor G 838,700 7,200 355,100 ±35,700

Total 3,137,000 11,900 $611,300 ±$82,000

Notes: All numbers are rounded to hundreds.

The estimated number of and payments for denied services were derived from a 5-percent

beneficiary sample of 1993 claims for each contractor.

aThe prepayment screens presented in the table were used for eye examination codes 92002,

92004, 92012, and 92014.

bThree of the seven contractors in our study had medical necessity screens to identify

unnecessary eye examinations, therefore, those three contractors were not included in this

analysis.

cEstimated payments for denied services were calculated by multiplying the estimated number of

denied services by the average Medicare allowance for the procedure at the contractor.

dThe error range for the estimated payments was based on a 95-percent confidence level.

Page 24 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix II 

Estimated Payments for Various Procedures

Denied by Selected Prepayment Screens

(1993)

Table II.3: Estimated Payments for

Chest X Rays

Prepayment screensa

and tested contractorsb

Paid

services

Denied

services

Payments for

denied

servicesc

Error range

for

paymentsd

Screen 1

Contractor B 2,146,000 597,400 $7,708,300 ±$73,100

Contractor C 2,147,200 530,100 7,914,000 ±83,000

Contractor D 1,734,500 693,400 9,288,100 ±75,300

Contractor G 1,436,100 617,100 10,701,400 ±91,900

Total 7,463,800 2,438,000 $35,611,800 ±$323,300

Screen 2

Contractor B 2,146,000 654,900 $8,449,700 ±$75,100

Contractor C 2,147,200 521,400 7,743,600 ±82,200

Contractor D 1,734,500 441,900 6,017,500 ±67,400

Contractor G 1,436,100 669,500 11,514,200 ±92,600

Total 7,463,800 2,287,700 $33,725,000 ±$317,300

Screen 3

Contractor B 2,146,000 10,200 $136,400 ±$11,600

Contractor C 2,147,200 8,900 132,000 ±11,900

Contractor D 1,734,500 4,200 55,900 ±7,400

Contractor G 1,436,100 23,300 494,300 ±27,500

Total 7,463,800 46,600 $818,600 ±$58,400

Notes: All numbers are rounded to hundreds.

The estimated number of and payments for denied services were derived from a 5-percent

beneficiary sample of 1993 claims for each contractor.

aThe prepayment screens presented in the table were used for chest X ray codes 71010 and

71020.

bThree of the seven contractors in our study had medical necessity screens for chest X rays,

therefore, those three contractors were not included in this analysis.

cEstimated payments for denied services were calculated by multiplying the estimated number of

denied services by the average Medicare allowance for the procedure at the contractor.

dThe error range for estimated payments was based on a 95-percent confidence level.

Page 25 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix II 

Estimated Payments for Various Procedures

Denied by Selected Prepayment Screens

(1993)

Table II.4: Estimated Payments for

Colonoscopy

Prepayment screensa

and tested contractors

Paid

services

Denied

services

Payments for

denied

servicesb

Error range

for

paymentsc

Screen 1

Contractor A 119,700 46,100 $13,291,700 ±$418,100

Contractor B 83,600 37,600 11,172,800 ±368,600

Contractor C 70,400 28,300 7,613,500 ±298,900

Contractor D 59,200 24,900 7,812,400 ±325,100

Contractor E 46,500 21,400 7,488,400 ±353,800

Contractor F 47,400 17,800 5,913,900 ±313,800

Contractor G 64,800 24,100 8,593,700 ±375,100

Total 491,600 200,200 $61,886,400 ±$2,453,400

Screen 2

Contractor A 119,700 25,600 $7,878,400 ±$396,300

Contractor B 83,600 23,100 7,050,400 ±348,000

Contractor C 70,400 17,500 4,875,700 ±282,100

Contractor D 59,200 15,000 4,829,200 ±298,500

Contractor E 46,500 14,500 5,231,800 ±336,600

Contractor F 47,400 12,300 4,218,300 ±294,100

Contractor G 64,800 15,300 5,658,500 ±353,200

Total 491,600 123,300 $39,742,300 ±$2,308,800

Screen 3

Contractor A 119,700 3,700 $1,332,200 ±$184,100

Contractor B 83,600 3,700 1,227,600 ±167,900

Contractor C 70,400 4,700 1,344,100 ±167,200

Contractor D 59,200 800 283,300 ±84,000

Contractor E 46,500 1,600 647,000 ±137,100

Contractor F 47,400 900 333,500 ±94,100

Contractor G 64,800 1,600 630,500 ±134,800

Total 491,600 17,000 $5,798,200 ±$969,300

Notes: All numbers are rounded to hundreds.

The estimated number of and payments for denied services were derived from a 5-percent

beneficiary sample of 1993 claims for each contractor.

aThe prepayment screens presented in the table were used for colonoscopy codes 45378, 45380,

and 45385.

bEstimated payments for denied services were calculated by multiplying the estimated number of

denied services by the average Medicare allowance for the procedure at the contractor.

cThe error range for estimated payments was based on a 95-percent confidence level.

Page 26 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix II 

Estimated Payments for Various Procedures

Denied by Selected Prepayment Screens

(1993)

Table II.5: Estimated Payments for

YAG Laser Surgery

Tested contractorsa

Paid

services

Denied

services

Payments for

denied

servicesb

Error range

for

paymentsc

Contractor A 57,700 9,000 $2,813,200 ±$239,700

Contractor B 31,100 2,900 1,054,900 ±159,000

Contractor C 67,100 23,600 4,355,000 ±200,900

Contractor D 25,300 2,400 1,094,700 ±183,400

Contractor E 26,100 3,300 2,134,300 ±304,700

Contractor F 23,900 2,900 1,314,500 ±200,000

Contractor G 19,100 3,200 2,167,800 ±302,200

Total 250,300 47,300 $14,934,400 ±$1,589,900

Notes: All numbers are rounded to hundreds.

The estimated number of and payments for denied services were derived from a 5-percent

beneficiary sample of 1993 claims for each contractor.

aOnly one prepayment screen was used.

bEstimated payments for denied services were calculated by multiplying the estimated number of

denied services by the average Medicare allowance for the procedure at the contractor.

cThe error range for estimated payments was based on a 95-percent confidence level.

Page 27 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix II 

Estimated Payments for Various Procedures

Denied by Selected Prepayment Screens

(1993)

Table II.6: Estimated Payments for

Duplex Scans of Extracranial Arteries

Prepayment screensa

and tested contractorsb

Paid

services

Denied

services

Payments for

denied

servicesc

Error range

for

paymentsd

Screen 1

Contractor B 101,200 53,000 $7,536,700 ±$193,700

Contractor F 55,800 25,400 3,173,000 ±126,700

Total 157,000 78,400 $10,709,700 ±$320,400

Screen 2

Contractor B 101,200 28,300 $4,021,600 ±$173,700

Contractor F 55,800 15,600 1,949,300 ±113,700

Total 157,000 43,900 $5,970,900 ±$287,400

Notes: All numbers are rounded to hundreds.

The estimated number of and payments for denied services were derived from a 5-percent

beneficiary sample of 1993 claims for each contractor.

aThe prepayment screens in the table were used for duplex scan code 93880.

bFive of the seven contractors in our study had medical necessity screens to identify unnecessary

duplex scans, therefore, those five contractors were not included in this analysis.

cEstimated payments for denied services were calculated by multiplying the estimated number of

denied services by the average Medicare allowance for the procedure at the contractor.

dThe error range for estimated payments was based on a 95-percent confidence level.

Page 28 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix III 

Comments From the Contractor Medical

Director Steering Committee

Page 29 GAO/HEHS-96-49 Screening Claims for Overused Services
Appendix III 

Comments From the Contractor Medical

Director Steering Committee

(101307) Page 30 GAO/HEHS-96-49 Screening Claims for Overused Services
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