GAO-01-802R Regulatory Issues for Medicare Providers

United States General Accounting Office

Washington, DC 20548

June 11, 2001

The Honorable Max Baucus

Chairman

The Honorable Charles E. Grassley

Ranking Minority Member

Committee on Finance

United States Senate

Subject: Regulatory Issues for Medicare Providers

With services delivered by hundreds of thousands of providers to nearly 40 million

beneficiaries and payments of about $220 billion in fiscal year 2000, Medicare is highly

vulnerable to fraud, waste, and abuse.1 The process of enforcing program payment rules,

however, has raised concerns that the impact of these safeguard activities has imposed too

great a burden on health care providers. Concerns about the regulatory burden facing

providers include perceptions of unreasonable or unclear demands for documentation from

the Health Care Financing Administration's (HCFA) payment contractors, excessive

paperwork, and a belief that Medicare contractors unfairly pursue and investigate physicians

who have made innocent billing errors. The Medicare Education and Regulatory Fairness Act

(MERFA)—S. 452 and H.R. 868—has been introduced to address some of these concerns.

The bills would provide expedited procedures for provider appeals, new options for

providers to use in repaying Medicare overpayments, protections for providers who

voluntarily return overpayments or ask for a review of their claims, and new requirements for

provider education.

This letter responds to your May 16, 2001, request that we provide information on several

issues addressed in S. 452. You asked us 18 specific questions about how the proposed

legislation would affect Medicare policies and procedures in the following areas: (1) provider

education and participation, (2) medical reviews, audits, and appeals, (3) recovery of

overpayments, and (4) related legal issues. You also asked that we identify alternative

solutions that could address provider concerns while maintaining program integrity.

To address these issues, we collected information from HCFA, the Department of Health and

Human Services’ Office of the Inspector General (HHS/OIG), and the Department of Justice

(DOJ) about their roles and responsibilities. We also compared the proposed legislation to

current laws and regulations and examined relevant agency materials. Regarding alternative

approaches to these issues, we reviewed suggested modifications to specific provisions of

 1

High Risk Series: An Update (GAO-01-263, January 2001).
2 GAO-01-802R Regulatory Issues for Medicare Providers

MERFA from the American Medical Association and Taxpayers Against Fraud.2 According to

the bill’s sponsors, these groups have taken the lead in recommending revisions to MERFA.

We conducted our review during May and June 2001, in accordance with generally accepted

government auditing standards. Enclosure I contains our responses to the 18 specific

questions.

A draft of this correspondence was sent to HHS and DOJ for their review. HHS was unable to

provide comments in the time allotted. However, program officials informally provided

technical comments, which we incorporated where appropriate. In its written comments,

DOJ generally agreed with the substance of our report. DOJ indicated that it expects to

submit official views on the bills—including MERFA’s likely effect on use of the False Claims

Act in pursuing Medicare fraud—to the Committee on Finance. DOJ also stated that funds

collected and returned to the Medicare Trust Fund are one of the most important measures

of the effort to control health care fraud, noting that over $2 billion has been recovered since

fiscal year 1997. (See enclosure II.) We incorporated DOJ's technical comments as

appropriate.

As agreed with your offices, unless you publicly announce its contents earlier, we plan no

further distribution of this letter for 30 days. At that time, we will send copies to the

Secretary of Health and Human Services, and others who are interested. The

correspondence will also be available on GAO’s home page at www.gao.gov. If you would

like to discuss the information further, please contact me at (312) 220-7600 or Rosamond

Katz, Assistant Director, at (202) 512-7148. Other key contributors to this correspondence

were Jenny Grover and Craig Winslow.

Leslie G. Aronovitz, Director

Health Care—Program Administration

 and Integrity Issues

Enclosures – 2

 2

Taxpayers Against Fraud is a nonprofit, public interest organization that promotes the use of the False Claims Act

to combat fraud against the federal government.
Enclosure I Enclosure I

3 GAO-01-802R Regulatory Issues for Medicare Providers

INFORMATION RELATED TO S.452

1. What educational services are currently offered to Medicare providers and

how can providers access these services?

Educational services aim to help providers become more aware of Medicare coverage and

billing policies and are provided by the Department of Health and Human Services' (HHS)

Health Care Financing Administration (HCFA) and its claims administration contractors—

known as fiscal intermediaries and carriers--and by HHS’ Office of Inspector General (OIG).3

HCFA offers information on its website and has also established the web-based Medicare

Learning Network (MedLearn) to provide information about Medicare coverage and payment

policies. Agency officials also identify provider education needs and develop training

materials to be used by contractors.

Medicare claims administration contractors are responsible for planning and conducting

most education activities for providers. Examples of these activities include:

• Issuing bulletins. These bulletins are issued at least quarterly and outline changes in

national and local Medicare policy and payment, report upcoming training events, inform

providers of billing system changes, and address frequently asked questions. Bulletins

are mailed to every enrolled provider and are also available at the contractors’ web sites.

• Organizing planned events. Contractors conduct seminars, workshops, and

teleconferences to educate providers on billing and service issues. They also work

closely in a partnership with professional and specialty societies or state agencies to

deliver training.

• Responding to individual provider inquiries. Since fiscal year 2000, HCFA has required

contractors to maintain toll-free telephone lines for health care providers. Although

many calls relate to claims status, contractors also answer questions pertaining to

Medicare regulations, billing, and local medical review policies. If a provider inquiry may

be more appropriately answered by another entity, the contractors are expected to refer

the provider to the appropriate source of information. For example, a coding question

regarding the American Medical Association’s (AMA) clinical classification of services

would be referred to the AMA.

The HHS/OIG’s primary education effort for providers has been the development

(with industry input) of written guidance on compliance with Medicare program

 3

HCFA has contracted with about 50 insurance companies to serve as fiscal intermediaries (that process part A

claims) and carriers (that process part B claims).
Enclosure I Enclosure I

4 GAO-01-802R Regulatory Issues for Medicare Providers

billing requirements.4 In addition, it issues fraud alerts, advisory bulletins, and

advisory opinions. It also makes presentations to industry groups on areas of

suspected fraud and abuse.

2. How much is currently spent on Medicare provider education programs by

HCFA and its fiscal intermediaries and carriers? Would S. 452, section

301(b), designate education funding for all Medicare providers or only a

selected group?

Funding for Medicare provider education comes from two sources. In fiscal year 2000, about

$43 million was allocated for provider education from HCFA’s regular program management

appropriation and about $12 million came from the Provider Education and Training

component of the Medicare Integrity Program (MIP).5

 Although HCFA's Center for Health

Plans and Providers also supports provider education, the vast majority of these funds are

passed on to Medicare contractors. Table 1 shows the amounts and proportions of Medicare

fiscal intermediary and carrier funds devoted to provider education.

Table 1: Medicare Contractor Spending for Provider Education and Training Activities, Fiscal

Years 2000 and 2001

Fiscal year 2000 Fiscal year 2001

Millions of

dollars

Percent of

contractor

expenditures

Millions of

dollars

Percent of

budgeted

funds

Carriers $37.3 3.7 $37.9 3.7

Fiscal intermediaries 17.5 3.1 19.4 3.4

 Total 54.8 3.5 57.3 3.6

Source: HCFA

S. 452, section 301(b), would amend current law to require that at least 10 percent of MIP

funds must be designated to educate physicians, providers of ambulance services, and other

providers covered in the bill. As applied to the fiscal year 2001 MIP budget, the new levels

would represent a significant increase in provider education spending—from $16.1 million

(2.9 percent) to $60.7 million (10 percent). Section 301(b) would also establish minimum

spending requirements for contractors’ provider education programs. Overall, 1 percent of

total fiscal intermediary funds and 2 percent of total carrier funds would have to be used for

provider education. As shown in table 1, the bill’s target levels are actually below current

spending by contractors—3.4 percent for fiscal intermediaries and 3.7 percent for carriers.

S. 452, section 301(b), would apply to the funding of educational programs for certain groups.

These include physicians, providers of services (hospitals, critical access hospitals, skilled

 4

To date, compliance guidance has been issued for hospitals, hospices, Medicare+Choice organizations offering

coordinated care plans, nursing facilities, individual and small group physician practices, durable medical

equipment suppliers, clinical laboratories, home health agencies, and third-party billing companies.

5

Established by the Congress as part of the Health Insurance Portability and Accountability Act of 1996, MIP

provides dedicated funding for Medicare program safeguard activities. Total MIP funding was $539.1 million in FY

2000 and $606.7 million in fiscal year 2001.
Enclosure I Enclosure I

5 GAO-01-802R Regulatory Issues for Medicare Providers

nursing facilities, comprehensive outpatient rehabilitation facilities, home health agencies,

and hospice programs), and providers of ambulance services. However, there are other

entities that provide services or supplies to Medicare beneficiaries that are not included in

these groups, such as occupational and physical therapists, nurse practitioners,

psychologists, laboratories, facilities providing treatment for end-stage renal disease, and

suppliers of durable medical equipment.

3. What proportion of Medicare claims were billed correctly in fiscal year 2000

and how does this compare with previous years?

HCFA data on part A and part B claims processed during fiscal year 1999 indicate that about

81 percent of claims processed were paid as “clean” claims. (HCFA defines a clean claim as

one that did not require the contractor to request additional information from the provider

prior to payment.) In further analysis of part B denied claims from that year, HCFA found

that over 70 percent were denied because they were duplicate, incomplete, or for services

that were not medically necessary or covered by Medicare.

Although some claims are not paid the first time they are processed, other claims are paid

that should not be. Contractors have made payments in error for claims that lack appropriate

documentation, are incorrectly coded, are not for Medicare covered services, or are for

services that were deemed not to be medically necessary. As part of its audit of HCFA’s

annual financial statements, the HHS/OIG estimates a national overpayment error rate from

all claims processed for a sample of Medicare beneficiaries. In fiscal year 2000, the HHS/OIG

found that $11.9 billion, or 6.8 percent of the $173.6 billion in Medicare fee-for-service

payments, were paid improperly. This error rate compares with rates for fiscal years 1998

and 1999 of 7.1 percent and 7.9 percent, respectively.

We have previously reported that the HHS/OIG error rate does not distinguish between

benign paperwork mistakes and abusive billing practices, nor does it identify the volume of

erroneous payments at each contractor.6

 Because the HHS/OIG methodology generally

assumes that medical records received for review are valid, and thus represent actual

services provided, improper payments supported by falsified documentation may go

undetected. Furthermore, the claims identified as improperly paid had successfully passed

through contractors’ automated claims processing systems because they were valid on their

face. They were disputed only after the underlying medical records were obtained from

providers and reviewed in detail or providers failed to supply those records.

4. What are the implications for program integrity of having Medicare

contractors disclose claims processing screens as part of provider education?

Prior to payment, all Medicare claims are screened by two sets of computerized medical

review edits. The first set of edits—completed with no manual review by contractor staff—

allows claims to be denied automatically for coverage or coding reasons. The second set of

edits—which identify claims for manual review by contractor staff—focuses on questionable

billing patterns for individual providers, groups of providers, or specific services. (These

manual review edits change often.)

 6

Medicare Improper Payments: While Enhancements Hold Promise for Measuring Potential Fraud and Abuse,

Challenges Remain, (GAO/AIMD/OSI-00-281, Sept. 15, 2000).
Enclosure I Enclosure I

6 GAO-01-802R Regulatory Issues for Medicare Providers

S. 452, section 202, would amend current law to require that all edits used to identify or flag

claims for medical review be included in education programs for physicians, providers of

services, and providers of ambulance services. HCFA officials noted that, although the

agency has not disclosed most automated review edits in the past (those resulting in

automatic denials), it would not be opposed to doing so. However, HCFA, HHS/OIG, and the

Department of Justice (DOJ) agreed that manual review edits (used to identify aberrant

providers for more focused review of their claims) should not be shared. The HHS/OIG noted

that revealing such edits would give dishonest providers information to avoid detection and

exploit the Medicare program. Program integrity would be at risk if unscrupulous providers

were alerted to the safeguards being used and could therefore target their efforts accordingly.

In its proposed modifications to the bill, the AMA suggested eliminating the requirement that

all medical review edits, per se, be disclosed to providers. Rather, it stated that information

about medical review edits should be used more generally to create education programs on

Medicare policy and proper coding. This modification would reduce the risk to HCFA’s

program integrity activities while improving the focus of provider education efforts.

5. Is there evidence that physicians are cutting back their participation in the

Medicare program?

Although HCFA officials acknowledge reports that physicians are considering leaving the

Medicare program, they noted that their data do not support such a trend. As shown in table

2, relative to the number of physicians nationwide, the number of participating physicians in

fee-for-service Medicare has increased in each of the past several years.7

 However, it is

unclear whether some physicians have decided to no longer accept new Medicare

beneficiaries. Furthermore, HCFA cannot say whether access problems exist for

beneficiaries in specific geographic areas.

Table 2: Fee-for-Service Physicians in the Medicare Program, 1996-2000

Fiscal year

Participating physiciansa

 as a

percent of all physicians

Physiciansb per 1,000 fee-forservice Medicare beneficiaries

1996 74.8 14.5

1997 77.5 15.0

1998 80.4 15.4

1999 82.3 15.7

2000 86.3 c

a

Includes fee-for-service physicians who accept assignment on claims for Medicare payment.

b

Includes all fee-for-service physicians who bill Medicare.

c

Data are not available.

Source: HCFA

6. What proportion of Medicare providers were subject to medical review in

fiscal year 2000 and how has this percentage changed over the past 3 years?

HCFA guidance to Medicare contractors notes that a provider should be placed on manual

prepayment review (which results in payments being delayed while claims are examined)

 7

Participating providers agree to accept assignment for all services provided to Medicare patients. Such providers

accept the Medicare payment and agree not to charge the patient any additional amount.
Enclosure I Enclosure I

7 GAO-01-802R Regulatory Issues for Medicare Providers

only when data suggest a pattern of billing problems. Data are not available on the number of

providers under review each year. HCFA conducted a one-time limited survey of contractors

to determine the number of physicians subject to complex medical review—a small subset of

all manual reviews—in fiscal year 2000.8

 It found that 1,891, or 0.3 percent of all physicians

who bill the Medicare program, were under complex medical review that year.

HCFA provides contractors with direction as to the rates of manual medical review they are

expected to perform. The suggested rates of review vary by contractor type and type of

review. Table 3 shows HCFA’s goals for manual review levels as a percentage of total claims

processed, for fiscal year 2000.

Table 3: Manual Medical Review Goals for HCFA Contractors, Fiscal Year 2000

Percent of claims by type of contractor

Type of

review Carriers

Fiscal

intermediaries

Durable medical

equipment

regional carriersa

Regional home

health

intermediariesb

Prepay

routine

4.8

Prepay

complex

0.35

At least 2.05

(combined)

Up to 14.0

(combined)

At least 2.05

(combined)

Prepay

random

0.01 to

0.02

0.01 to 0.02 0.01 to 0.02 0.01 to 0.02

Postpay 0.04 0.04 0.1 0.04

a

Four health insurance companies that make payments to durable medical equipment

suppliers.

b

Four fiscal intermediaries that make payments to home health agencies and hospices.

Source: HCFA

7. Under current procedures, are there limits on the length of time a provider

may be subject to prepayment review?

Medicare contractors analyze aggregate claims data to identify potential billing problems,

such as claims for services that are not covered by Medicare or for services that are not

coded correctly. When data analysis indicates that a limited problem may exist (that is,

billing errors by a small group of providers), the contractor conducts a review of a small

number of claims from that group, on either a prepayment or postpayment basis. A more

comprehensive prepayment claims review may be conducted if a pattern of billing problems

is identified. In this case, for a certain period of time, contractor staff review a portion (or

all) of a provider's claims prior to payment.

Currently, HCFA guidance to contractors does not set a specific time limit on how long

prepayment review can continue. Instead, HCFA specifies that contractors must "remove

 8

HCFA requires that clinically trained staff carry out complex medical reviews based on examination of medical

records. In contrast, routine medical review may be carried out by nonclinical staff and does not involve review

of patient records.
Enclosure I Enclosure I

8 GAO-01-802R Regulatory Issues for Medicare Providers

providers from medical review as soon as possible when they demonstrate compliance with

Medicare billing requirements."9

 However, HCFA's guidance to contractors goes on to state

that “we recognize that some providers may remain on medical review for long periods of

time . . . . In the case of extended medical review activities, provide written notification [to

the provider under review] at least every 6 months."

S. 452, section 202, would amend current law to limit the duration of prepayment reviews

except when a referral has been made to the HHS/OIG or DOJ. Under the provision,

prepayment reviews must end whenever a fiscal intermediary or carrier finds that claims for

the same services that were the basis for instituting the prepayment review are proper over a

specified time period (180 days) or for a specified volume of claims processed (at least 75

percent of the number of claims received in the full month preceding the start of the

prepayment review).

Proposals offered by the AMA and Taxpayers Against Fraud (TAF) would provide that the

limit on the duration of prepayment reviews would not apply to an act giving rise to liability

under the False Claims Act (FCA), even if no referral had yet been made to DOJ or the

HHS/OIG. Commenting on this modification, HHS/OIG officials noted that cases where other

sanctions may apply (such as monetary and civil penalties and criminal sanctions) should

also be covered by this exemption.

8. What are the respective roles and activity levels of Medicare contractors,

DOJ, and the HHS/OIG in conducting Medicare audits and investigations?

Medicare contractors have lead responsibility for preventing and detecting Medicare

overpayments.10 They have broad discretion in conducting program safeguard activities,

which include:

• Medical review. Contractors review claims to identify those that should not be paid

because the service provided was not covered or was medically unnecessary. Medical

review may be conducted manually or automatically by computer, and it may be done

prior to payment or after payment has been made. In fiscal year 1998, 1 in 8 claims were

medically reviewed prior to payment, and 1 in 16 were subject to manual prepayment

review.

• Medicare secondary payer review. Contractors identify other primary sources of

payment for claims, such as employer-sponsored health insurance or third-party liability

settlements.

• Audit of provider cost reports. Fiscal intermediaries audit providers’ cost reports to

determine if the costs cited are allowable and reasonable.

• Fraud unit investigations. Special contractor fraud units identify potential cases of fraud

by sampling claims, verifying delivery of services or medical necessity, and analyzing

local billing trends. Based on the results of these activities, they may further investigate

 9

HCFA Program Memorandum to Intermediaries/Carriers, Medical Review Progressive Corrective Action,

Transmittal AB-00-72, #6, August 7, 2000.

10HCFA is supplementing regular contractor oversight activities through agreements with 12 special program

safeguard contractors. For a discussion of HCFA's management of these contractors, see Medicare: Opportunities

and Challenges in Contracting for Program Safeguards (GAO-01-616, May 18, 2001).
Enclosure I Enclosure I

9 GAO-01-802R Regulatory Issues for Medicare Providers

or refer cases to law enforcement agencies. Medicare contractors referred over 820 cases

annually to law enforcement agencies in 1998 and 1999.

Independent of HCFA, the HHS/OIG conducts investigations, audits and inspections related

to the Medicare program. It pursues potential fraud brought to its attention by the

contractors and from sources such as beneficiaries, competitors, and qui tam

(whistleblower) complaints. For example, of the approximately 650,000 physicians

participating in the Medicare program, the HHS/OIG investigates roughly 250 to 300

physicians each year. In fiscal year 2000, the HHS/OIG received $119.3 million for its

activities related to the Medicare and Medicaid programs, and had 1,003 full-time equivalent

staff devoted to such activities.11

DOJ primarily investigates cases that have been referred by the HHS/OIG or other sources to

determine if health care providers have engaged in fraudulent activity, and it pursues civil

actions or criminal prosecutions, as appropriate. In fiscal year 2000, DOJ received $159.5

million for its health care antifraud activities from direct appropriations and the Health Care

Fraud and Abuse Control program. Most of these funds were allocated to the Federal Bureau

of Investigation ($101.9 million) and DOJ’s 94 U.S. Attorney’s offices ($38.2 million). That

year, DOJ had 1,939 criminal health care matters pending (involving 3,049 defendants), 457

criminal cases filed, and 233 civil cases filed. Department wide, it had 1,228 full-time

equivalent staff involved in health care fraud control activities.

9. What is the status of cases currently in the fee-for-service appeals process?

How would S. 542 affect the appeals process and Medicare providers’

eligibility for appeals?

Appeals of denied claims may be made by the provider--on its own behalf or as a

representative of the beneficiary—and may be made by the beneficiary directly. In part B

appeals (involving claims for physicians and other outpatient provider services), there are

two stages of appeal at the carrier level—an informal carrier review and a carrier fair hearing

before a hearing officer.12 For part A appeals (involving claims for inpatient hospital care and

skilled nursing care), the sequence of steps is a reconsideration by the fiscal intermediary

followed by appeal to an administrative law judge (ALJ), the Departmental Appeals Board

(DAB), and federal court. Only about 3 percent of denied claims under both part A and part

B were appealed in fiscal year 2000.

 11HHS/OIG health care fraud and abuse control activities are funded through the Health Care Fraud and Abuse

Control Program. This program, under the joint direction of HHS/OIG and the DOJ, coordinates federal, state, and

local law enforcement activities with respect to health care fraud and abuse.

12Fair hearing decisions may be appealed to an administrative law judge, assigned to the Social Security

Administration, then to the Medicare Operations Divisions, where the appeals are decided by Administrative

Appeals Judges of the Medicare Appeals Council located within the Departmental Appeals Board, and finally to

federal court.
Enclosure I Enclosure I

10 GAO-01-802R Regulatory Issues for Medicare Providers

Table 4: Medicare Fee-for-Service Appeals, Fiscal Year 2000

All Medicare

(millions)

Part A

(millions)

Part B

(millions)

Claims processed 899.0 154.8 744.2

Claims denied 171.5 12.0 159.5

Claims appealed 5.7 0.3 5.4

Source: HCFA

According to HCFA, roughly half of appealed claims are resolved in favor of the provider, and

paid, each year. Also, most are resolved at the contractor level. In fiscal year 2000, at the

carrier fair hearing level, 965,000 appealed part B claims were bundled into 106,835 cases. In

those, 57.6 percent of contractors’ decisions were upheld, while the remaining 42.4 percent of

cases were overturned, resulting in payment of the claims involved. In fiscal year 1999 (the

latest year for which Social Security Administration (SSA) data were available), about 60

percent of the roughly 67,000 part A and part B cases heard at the ALJ level involved the

contractor decision being overturned and the claims paid, while in the remainder, the

contractor decision was upheld.

HCFA noted that the vast majority of contractor appeals are processed on a timely basis.

However, the agency has identified appreciable short-term claims appeals backlogs at two

carriers (for example, more than 1,000 cases with reviews pending for over 60 days) and has

taken steps to allocate available funds to these carriers to reduce these backlogs. In addition,

there continue to be substantial long-term backlogs at the higher levels of the claims appeals

process—the ALJ and DAB. The most recent data available from the SSA’s Office of Hearings

and Appeals indicate that the average adjudication time for a Medicare appeal is 382 days at

the ALJ, with even longer delays at the DAB.

The Medicare appeals process was revised by section 521 of the Medicare, Medicaid, and

SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). BIPA imposes deadlines at

each step of the appeals process, with the right to bypass most appeals steps if the deadlines

are not met. The following revisions are scheduled to take effect October 1, 2002:

• Generally, initial determinations of a claim must be concluded within 45 days from the

date of claim.

• If the individual requests a redetermination, it must be completed within 30 days of

receipt of the request.

• If still dissatisfied, the individual has 180 days from receipt of notice of redetermination

to request reconsideration through a qualified contractor independent of any organization

under contract to make initial determinations. This contractor would have 30 days to

conclude the reconsideration.

• If a timely decision is not made and the amount at issue is $100 or more, the individual

may then request a hearing by the Secretary (before an SSA ALJ). Such hearings must be

held and decisions issued within 90 days.
Enclosure I Enclosure I

11 GAO-01-802R Regulatory Issues for Medicare Providers

• If the 90-day limit is not met, individuals may go directly to the DAB. The Medicare

Appeals Council of the DAB must conduct a review of an ALJ decision on an escalated

appeal within 90 days, or individuals may go directly to federal district court.

• If the dispute is not satisfactorily resolved through this administrative process, and if

contested amounts are $1,000 or more, the individual could request judicial review of the

Secretary's final decision.

S. 452 would grant new Medicare appeals rights to physicians and certain other providers.

Section 201 would amend current law to provide that a decision by a carrier to not approve

or renew a physician's Medicare enrollment would constitute an initial determination subject

to the same full appeals process as coverage and payment determinations, including the right

to judicial review.13 In addition, under section 204, physicians, providers of services, and

ambulance service providers would be entitled to appeal claims determinations on behalf of

deceased beneficiaries where no substitute party is available.

Section 102(b) of S. 452 would modify the Medicare appeals process that applies to nursing

homes, home health agencies, or other health care institutions or agencies. Currently, a

nursing home or home health agency may challenge a determination by HHS to deny its

Medicare participation. The bill would subject such hearings to new timelines.14

Section 102(b) would also establish a new right to appeal deficiencies identified in

inspections prior to the imposition of a sanction. It would also provide a right to a formal

hearing or reconsideration before any corrective action or other type of sanction could be

imposed on a nursing home or home health agency found out of compliance with any

standard or condition of participation. This requirement appears to apply even in cases

where a patient’s health is found to be in immediate jeopardy.

In commenting on S. 452, section 102(b), the HHS/OIG noted that the DAB and federal courts

are not well equipped to develop the facts of such cases and are accustomed to having a full

record upon which to review an agency’s decision. HCFA officials were similarly concerned

that the courts would decide disputes that otherwise would have been resolved at the

administrative level by officials most knowledgeable about the subject matter.

10. How many providers were prosecuted for fraud in fiscal year 2000 and how

has this number changed over the past 3 years?

DOJ is primarily responsible for Medicare fraud prosecutions, including the application of

civil or criminal actions, fines, civil money penalties, or other restitution. Criminal health

care fraud cases are most often referred to DOJ by the HHS/OIG. As shown in Table 5, the

number of civil health care fraud cases filed more than doubled from fiscal year 1998 to 2000.

Over the same period, the number of criminal cases filed rose 43 percent and the number of

defendants increased by 53 percent. A total of 467 defendants were convicted for health care

 13During fiscal year 2000, over 3,300 individuals and entities were excluded from participation in Medicare,

Medicaid, and other federal health care programs.

14Under the bill, unless waived by the appealing party, ALJs would be required to decide appeals within 90 days.

ALJ decisions could be appealed to the DAB, which must issue a decision or remand the case within 90 days. If an

ALJ did not meet the initial 90-day decision deadline, the matter could be directly appealed to the DAB for

determination of the facts and decision within 60 days.
Enclosure I Enclosure I

12 GAO-01-802R Regulatory Issues for Medicare Providers

fraud-related crimes in fiscal year 2000. (DOJ does not maintain data on the proportion of

providers convicted of fraud who were participating in Medicare.)

Table 5: Civil and Criminal Health Care Fraud Enforcement Actions at DOJ, Fiscal Years

1998-2000

Fiscal year 1998 Fiscal year 1999 Fiscal year 2000

Civil cases filed 107 91 233

Criminal prosecutions filed

 Cases 319 371 457

 Defendants 436 506 668

Criminal convictions

 Cases 219 263 343

 Defendants 326 398 467

Source: DOJ

11. In auditing samples of claims from which to extrapolate overpayment

amounts, do Medicare contractors always draw statistically valid random

samples?

HCFA requires that contractors validate a provider’s potential billing problems by conducting

a “probe” review of roughly 20 to 40 claims. If the probe sample indicates improper billing,

then one remedy can be the selection of a statistically valid random sample of claims to

extrapolate the provider’s overpayment amount.15

However, overpayment amounts are sometimes based on the probe sample or other small

sample which is not statistically representative of a provider’s claims. HCFA permits

contractors to offer providers the option of entering into a consent settlement, whereby the

provider accepts the results of the review and agrees to an extrapolated “potential”

overpayment amount based on the small sample.16 Alternatively, providers may choose to

accept the settlement but submit additional documentation on specific claims, to potentially

adjust downward the amount of the projected overpayment. A provider that believes that the

claims reviewed are not representative of the claims in question may decline a consent

settlement and require the Medicare contractor to use a statistically valid random sample to

extrapolate the overpayment amount.

Although providers have the option of choosing a statistically valid random sampling of

claims, consent settlements are less burdensome for both Medicare contractors and

providers, as fewer claims have to be documented and reviewed. However, because the

limited sample is not statistically representative of the provider’s claims in question, the

amount repaid by the provider may not be an accurate representation of the overpayment

amount.

 15HCFA provides guidance to the contractors on how to conduct the statistically valid random sample, including

how to draw the sample, how to determine the period of review, and the required criteria for confidence and

precision levels.

16As part of a consent settlement, the provider also agrees to relinquish the right to appeal the denied claims.
Enclosure I Enclosure I

13 GAO-01-802R Regulatory Issues for Medicare Providers

12. How does the standard of “clear and convincing evidence of fraud” in S. 452,

section 103, differ from the standard of proof currently required to

determine provider fraud? What impact could this standard have on the

ability of the federal government to collect overpayments?

Because it is a regulatory rather than a law enforcement agency, HCFA does not have the

authority to make a legal finding of fraud. Agency officials stated that when a provider is

suspected of engaging in egregious activities, contractors suspend payment if there is

“reliable evidence of fraud” stemming from an investigation of the provider’s billing pattern.

Contractors may refer the case to the HHS/OIG or DOJ for further investigation and possible

prosecution. In civil fraud litigation, however, the standard of proof established by the False

Claims Act (FCA) is a “preponderance of the evidence.”

17 That is, the government must show

that its characterization of the facts is more likely to be true than not.

S. 452, section 103, would require that the agency prove “clear and convincing evidence of

fraud” prior to disallowing the option of extended repayments. This standard is the highest

burden of proof used in civil cases and would require the Secretary of HHS to prove its

allegations of false claims much more conclusively than is now required.18 Even where the

liability of a provider to repay Medicare funds was satisfactorily established through civil

litigation, unless HCFA found there to be clear and convincing evidence of fraud, it would be

required to give covered providers up to 3 years to make those repayments through offsets

against future Medicare payments or other repayment plan.

An HHS/OIG official told us that this standard may be unworkable. He noted that it would be

impractical to apply such a rigorous standard so early in the process, when the facts of the

case have not been developed. The DOJ commented that section 103 would require the

Secretary of HHS to meet a higher standard of proof to recoup overpayments than the

Department of Justice is currently required to show in order to impose treble damages and

penalties for the same conduct under the FCA.

In its proposal to modify the bill, the AMA suggested that the standard of “clear and

convincing evidence of fraud” be lowered to a standard of “sufficient evidence of fraud to

warrant an investigation.”

13. What procedures are currently in place for providers to voluntarily return

overpayments? Could S. 452, section 103, allow providers to return only a

portion of an overpayment and be held harmless for the remainder?

HCFA’s current procedures generally allow providers to submit voluntary refunds to the

fiscal intermediaries and carriers. There are different methods of handling overpayments for

part A and part B. If a part A provider is erroneously paid for services not performed or is

incorrectly paid for any other reason, overpayments can be resolved through the credit

 1731 USC section 3731(c). For a discussion regarding the standard of proof applicable under the FCA, see John

Terrence A. Rosenthal and Robert T. Atler, "Clear and Convincing to Whom? The False Claims Act and its Burden

of Proof Standard: Why the Government Needs a Big Stick", Notre Dame Law Review, Vol. 75, p. 1409 (2000).

18Like other criminal violations, criminal fraud convictions related to Medicare require guilt to be proven beyond a

reasonable doubt.
Enclosure I Enclosure I

14 GAO-01-802R Regulatory Issues for Medicare Providers

balance reports (quarterly reports that identify whether the provider owes Medicare money).

Any part B provider that is overpaid must return the money to Medicare within 30 days to

avoid interest and penalties.

S. 452, section 202, would amend current law to permit a physician or an ambulance service

provider to return an overpayment without penalty or interest within 1 year from the date of

receipt of the overpayment, if (1) the fiscal intermediary or carrier has not requested “any

relevant record or file,” or (2) the case has not been referred before the date of repayment to

DOJ or the HHS/OIG. Thus, if a covered provider returned an overpayment within a year

from the time it was received, subsequent investigations of claims related to the voluntary

repayment would be prohibited. Under this provision, it appears that a provider could return

a portion of an overpayment and essentially be held harmless for the remainder.

The AMA and TAF have offered several revisions to this provision. First, they propose an

additional circumstance—when an FCA investigation is imminent or has already begun—

under which a provider would not be allowed to make a voluntary repayment without

incurring penalty or interest. Second, they propose that the overpayment must be returned in

full. Finally, the prohibition on investigations would apply to contractors but not to law

enforcement agencies.

14. What are the implications of offering extended provider repayment periods

on the federal government’s ability to fully recover overpayments?

When a billing error is detected, Medicare contractors send a letter listing the services at

issue, the basis for the overpayment, and the amount being requested as repayment. If the

refund is not received within 30 days, a second letter will be sent and the balance due will be

satisfied by withholding future claim payments (otherwise known as offset). Contractors

commonly recover overpayments automatically through offsets. According to HCFA,

contractors allow providers to arrange extended repayment schedules for large

overpayments, if a provider demonstrates financial hardship and an ability to repay over the

course of the extended repayment schedule.

Under S. 452, section 103, overpayments to providers covered under the bill could not be

automatically offset against future payments. Instead, providers would have the option of

paying back any overpayment exceeding $5,000 over a 3-year period, even when liability has

been established through civil litigation and the provider has the ability to pay. (This would

not apply to cases where HHS finds “clear and convincing evidence of fraud or similar fault,”

a very high standard.) In addition, S. 452, section 104, would protect providers from offset or

other repayment during an appeal.

We reported last year that whenever the recovery of Medicare overpayments is delayed, the

chances that the amounts will not be fully recovered are increased.19 HCFA’s practice of

offsetting overpayments with future payments has given it leverage that accounts for much of

its collection success. The HHS/OIG noted that changes under section 103 of S. 452 would

most likely result in reduced collections of overpayments, as some providers under extended

repayment agreements would file for bankruptcy, leave Medicare, or cease operations—

making it unlikely that the amounts due would be collected.

 19Medicare: HCFA Could Do More to Identify and Collect Overpayments (GAO/HEHS/AIMD-00-304, Sept. 7, 2000).
Enclosure I Enclosure I

15 GAO-01-802R Regulatory Issues for Medicare Providers

The AMA and TAF have suggested significant changes to this provision. They propose that

the option of entering into an extended repayment schedule apply only to providers covered

under the bill with 25 or fewer employees. They also clarify that the provider would have to

pay interest on the alleged overpayment. Most importantly, this option would not be

available in cases where (1) the overpayment was attributed to improper billing under the

FCA, (2) there is sufficient evidence of fraud to warrant an investigation, or (3) an offset

arrangement is already in place.

15. What rate of interest does HHS charge providers on outstanding payments

and how does this compare with interest rates charged by the Internal

Revenue Service (IRS) and other federal agencies? Under S. 452, section

104, would HHS be allowed to assess an interest penalty while an appeal is in

process?

Medicare is required to collect interest on overpayments not satisfied within 30 days of its

request for a provider refund. HCFA charges providers and suppliers the higher of the

private consumer rate or the current value of funds rate that is in effect on the date of the

initial demand for payment.20 The private consumer rate is historically higher than the

current value of funds rate, which is used by many federal agencies. According to HCFA

officials, it is also higher than the IRS underpayment rate but lower than some IRS penalty

rates. They noted that the private consumer rate is currently 13.75 percent and is adjusted

quarterly.

S. 452, section 104, would prohibit HCFA from recovering overpayments or imposing

penalties while an appeal is pending. Whether HCFA could assess interest while an appeal is

pending would depend on whether such interest would be characterized as a penalty.

16. How does S.452, section 3, define a “provider of services”? Are there

provisions in the bill that provide differential treatment for some Medicare

providers?

The entities covered by the bill include providers of services, physicians and providers of

ambulance services. S. 452, section 3, paragraph (9), specifies that “provider of services” has

the same meaning as it does in section 1861(u) of the Social Security Act. Under that

definition, provider of services includes hospitals, critical access hospitals, skilled nursing

facilities, comprehensive outpatient rehabilitation facilities, home health agencies, and

hospice programs.

However, it appears that the bill generally would not cover other entities that provide

services or supplies to Medicare beneficiaries. For example, occupational and physical

therapists, nurse practitioners, psychologists, and other specialized providers of services

generally do not appear to be covered by the bill. Most institutional providers are covered

under the definition of providers of services, but laboratories and facilities providing

treatment for end-stage renal disease are not among them. Suppliers of durable medical

equipment are also not covered by the bill.

 20The requirement that providers of service must pay interest on overpayment amounts is set out in the Social

Security Act, section 1815(d).
Enclosure I Enclosure I

16 GAO-01-802R Regulatory Issues for Medicare Providers

17. Is it more difficult to challenge a Medicare regulation in court compared to

other federal regulations? How would S.452, section 102, affect an entity’s

ability to challenge Medicare regulations?

Parties generally must exhaust administrative remedies and obtain final agency action before

going into federal court. Under the Administrative Procedure Act, the promulgation of a final

regulation is generally considered a final agency action. Those adversely affected by a

regulation often challenge it in federal district court by invoking federal question jurisdiction.

Frequently, however, the statute under which a regulation was promulgated establishes

different grounds for obtaining judicial review, which must be followed instead.

That is essentially what has happened with respect to challenges to Medicare regulations.

The Social Security Act provides for a hearing before an ALJ (and, in some cases, the DAB),

as well as subsequent judicial review. However, federal question jurisdiction cannot be

invoked in the Medicare context. Thus, Medicare regulations generally cannot be challenged

in federal district court until after they have been channeled through the same administrative

process followed in other Medicare disputes.21

This makes challenging Medicare regulations more cumbersome than it would be if it were

possible to invoke federal question jurisdiction and go to federal district court as soon as a

regulation is finalized. Under HCFA regulations governing provider payment disputes,

parties can pursue judicial review when the sole issue in dispute is the constitutionality of a

statute or validity of a regulation.22 In addition, as noted in question 9, recent amendments in

BIPA that take effect October 1, 2002, establish deadlines at each step of the administrative

process and permit parties to bypass steps if these deadlines are missed.

S. 452 would make it easier to challenge a Medicare regulation. Essentially, section 102

would amend current law to provide that the administrative process followed in other

Medicare disputes would not have to be followed when challenging the constitutionality of a

Medicare provision or regulation, or the authority of HCFA to promulgate a regulation.

Instead, individuals adversely affected by a regulation could go directly to federal district

court to challenge HCFA’s application of the good cause exception to promulgate a rule

without providing notice and comment.23 It is also uncertain whether disputes would be

resolved more quickly in court than in the sometimes-backlogged administrative appeals

process.

 21For a complete discussion, see John Alysius Cogan, Jr. and Rodney A. Johnson, "Administrative Channeling

Under the Medicare Act Clarified: Illinois Council, Section [205(h)], and the Application of Congressional Intent,"

Annals of Health Law, vol. 9, p. 125 (2000).

22See, for example, 42 C.F.R., sections 405.718, 405.853, 405.1842. However, parties must still present a claim for

determination prior to pursuing expedited judicial review.

23Agencies do not have to provide for notice and comment if they determine that it would be impracticable,

unnecessary, or contrary to the public interest.
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17 GAO-01-802R Regulatory Issues for Medicare Providers

18. How might S. 452 affect the federal government’s ability to use the False

Claims Act in regard to Medicare payments?

The FCA is the federal government’s primary civil remedy for fraudulent claims.24 It covers

only offenses committed with actual knowledge that a claim is false or offenses by providers

who demonstrate a reckless disregard of the truth of the claim. The FCA allows for penalties

of between $5,500 and $11,000 for each false claim, plus damages of up to three times the

amount of the erroneous payment.25

S. 452 does not directly address the FCA, but includes a number of provisions that offer

health care providers immunity from investigation or other law enforcement activities. These

protections may adversely affect the federal government’s ability to use the FCA. For

example, under section 202, covered providers would be permitted to repay Medicare

overpayments for up to 1 year (without penalties or interest) and, in such circumstances, no

law enforcement agency would be permitted to initiate an investigation associated with the

Medicare claim involved. This would apparently prevent the government from pursuing an

investigation under the FCA even if the provider returned only a small portion of a disputed

Medicare payment.

S. 452 would also offer protections to covered providers who request written assistance from

HCFA or its contractors related to Medicare claims. Specifically, section 301 would disallow

extrapolation of overpayment amounts based on claims voluntarily submitted for review,

while section 303 would protect providers from future findings that the provider had received

an overpayment related to claims submitted.26 Since the amount of liability under the FCA is

often derived through extrapolation, it is unclear to what extent this would affect FCA

actions. In addition, HCFA noted that because S. 452, section 105, would prohibit requests

for documents from providers without cause and require notification of any postpayment

audits, it would make it more difficult to conduct the type of preliminary investigations often

necessary before pursing FCA claims.

The modifications proposed by the AMA and TAF would clarify that none of the provisions in

S. 452 are intended to limit, or in any way affect, investigations or provider liability under the

FCA.

 24In 1986, amendments to the FCA strengthened the government’s ability to identify and recover improper

payments by federal programs, including Medicare.

25Although an individual claim submitted by a provider to Medicare is not likely to be very large, because

providers submit hundreds of claims each year, high-volume providers could potentially incur substantial

penalties under the FCA.

26This would not apply in cases of fraudulent billing.
Enclosure II Enclosure II

18 GAO-01-802R Regulatory Issues for Medicare Providers
Enclosure II Enclosure II

19 GAO-01-802R Regulatory Issues for Medicare Providers

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