Page 1 GAO-03-151R Medicare Financial Management

United States General Accounting Office

Washington, D.C. 20548

A

October 31, 2002

The Honorable Stephen Horn

Chairman, Subcommittee on Government Efficiency, 

Financial Management and Intergovernmental Relations

Committee on Government Reform

House of Representatives

Subject: Medicare Financial Management: Significant Progress Made to 

Enhance Financial Accountability 

Dear Mr. Chairman:

Medicare provided health care coverage to 40 million people age 65 and 

over and to qualifying disabled persons at a cost of about $240 billion in 

fiscal year 2001. In 1990, GAO designated the program as “high risk” for 

fraud and abuse because of its vast size, complex structure, and program 

management weaknesses.1

 In March and September 2000, we issued two 

reports, one on Medicare financial management and the other on Medicare 

improper payments.2

 These reports discussed weaknesses in the Centers 

for Medicare and Medicaid Services’ (CMS) oversight of Medicare 

contractors’ financial operations and the guidance it provides contractors 

in carrying out Medicare financial activities. We also cited CMS for 

deficiencies in its accounting procedures and improper payment 

measurement projects. We made eight recommendations for CMS to 

improve its performance in these areas and establish better financial 

control over the Medicare program.

At your request, we assessed CMS’s progress in addressing these 

recommendations. This letter summarizes the information provided during 

our briefing to your staff on September 6, 2002. The enclosed briefing 

slides highlight the results of our work and the information provided at the 

briefing. 

1

U.S. General Accounting Office, High-Risk Series: An Update, GAO-01-263 (Washington, 

D.C: January 2001).

2

U.S. General Accounting Office, Medicare Financial Management: Further Improvements 

Needed to Establish Adequate Financial Control and Accountability, GAO-AIMD-00-66

(Washington, D.C.: Mar. 15, 2000) and Medicare Improper Payments: While Enhancements 

Hold Promise for Measuring Potential Fraud and Abuse, Challenges Remain, GAOAIMD/OSI-00-281 (Washington, D.C.: Sept. 15, 2000).
Page 2 GAO-03-151R Medicare Financial Management

Results in Brief CMS has implemented corrective actions to substantially address four of 

the eight recommendations and has made good progress in addressing the 

remaining four. Actions taken by CMS include the implementation of more 

in-depth internal control reviews at Medicare contractors as well as the 

development of an accounting procedures manual to guide its financial 

management staff in consistent accounting and reporting for Medicare. 

CMS has also tested several innovative analysis techniques for identifying 

improper payments. These actions have helped CMS address some 

significant, long-standing financial management issues. Despite this 

progress, CMS needs to take further steps to fully address the remaining 

four recommendations. These steps include expanding its analysis of 

contractor financial data, ensuring resolution of audit findings, and 

enhancing detection of fraudulent and abusive Medicare payments. CMS is 

in the process of developing and implementing such actions. 

Scope and 

Methodology

To fulfill our objectives of assessing CMS’s progress in addressing our prior 

recommendations, we 

• reviewed CMS’s audited financial statements for fiscal year 2000 and 

2001, other financial reports, fiscal year 2001-2003 Annual Performance 

Plans, and the Comprehensive Plan for Financial Management to 

identify initiatives that address previously identified financial 

management weaknesses, determine if plans included actions to 

address our recommendations, and determine if the actions included 

were sufficient to address our recommendations; 

• obtained documentation on procedures implemented to address our 

recommendations and observed CMS Office of Financial Management 

staff while performing these procedures to determine if the procedures 

were in place and operating effectively;

• performed tests of audit resolution activities to confirm that procedures 

implemented to address our recommendations were in place and 

operating effectively;
Page 3 GAO-03-151R Medicare Financial Management

• used the Comptroller General’s Standards for Internal Control in the 

Federal Government3 to assess policies and procedures that CMS 

developed to address our recommendations;

• used our guide on Strategies to Manage Improper Payments4

 to 

evaluate the three improper payment measurement projects and other 

initiatives that CMS had under way or planned; and 

• held numerous interviews with the CMS Chief Financial Officer (CFO), 

Deputy CFO, program integrity officials, and staff members in the 

Department of Health and Human Services’ Office of the Inspector 

General to obtain an understanding of the actions taken to address our 

recommendations. 

We conducted our work from January 2002 through July 2002 in 

accordance with generally accepted government auditing standards. We 

requested comments on a draft of this report from the CMS CFO, Deputy 

CFO, and senior Medicare program integrity officials. These officials 

generally agreed with our findings as presented in the enclosed briefing 

slides, and the oral comments that they provided have been incorporated, 

as appropriate. 

We are sending copies of this report to the Ranking Minority Member of 

your Subcommittee and the Chairmen and Ranking Minority Members of 

the Senate Committee on Governmental Affairs and House Committee on 

Government Reform. We are also sending copies of this report to the 

Secretary of Health and Human Services, Administrator of the Centers for 

Medicare and Medicaid Services, and other interested parties. 

This report is available at no charge on our home page at 

http://www.gao.gov. If you have any questions about this report, please 

contact me at (202) 512-8341 or Kimberly Brooks, Assistant Director, at 

(202) 512-9038. You may also reach us by E-mail at calboml@gao.gov or 

3

U.S. General Accounting Office, Standards for Internal Control in the Federal 

Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

4

U.S. General Accounting Office, Strategies to Manage Improper Payments: Learning from 

Public and Private Sector Organizations, GAO-02-69G (Washington, D.C.: October 2001).
Page 4 GAO-03-151R Medicare Financial Management

brooksk@gao.gov. Key contributors to this assignment were Johnny Clark, 

Lisa Crye, Suzanne Murphy, Cynthia Teddleton, and Lisa Willett.

Sincerely yours,

Linda M. Calbom

Director

Financial Management and Assurance

Enclosure
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Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

10/31/2002 1

Medicare Financial Management

Significant Progress Made to Enhance

Financial Accountability

Briefing to the staff of the

Subcommittee on Government Efficiency, Financial Management and

Intergovernmental Relations

House Committee on Government Reform

September 2002
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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10/31/2002 2

This briefing provides the results of our review based on your

request that we assess the Centers for Medicare and Medicaid

Services’ (CMS) progress in establishing accountability for the

Medicare program, including progress in addressing our prior

recommendations to

• correct internal control weaknesses and other financial

management issues, and

• enhance efforts for identifying and measuring Medicare feefor-service improper payments, including those attributable

to potential fraud and abuse.

Briefing Purpose
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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10/31/2002 3

Results in Brief

• In March and September 2000, we reported on Medicare financial

management and improper payments, finding weaknesses in oversight

of contractor financial activities, accounting procedures, and improper

payment measurement projects. We made eight recommendations for

CMS to improve its performance in these areas. CMS has implemented

corrective actions to substantially address four of the eight

recommendations and has made good progress in addressing the

remaining four recommendations. These actions have helped CMS

correct some significant, long-standing financial management issues.

Additional actions are needed to fully address the remaining

recommendations and CMS has either developed or partially

implemented such actions. Our report recommendations and the

specific results of our review are included in table 1.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Results in Brief—Status of

Recommendations

* Develop comprehensive accounting policies

and procedures.

Develop a comprehensive strategy for

Medicare financial management.

Develop analysis and risk assessment

procedures.

Develop, document, and implement

procedures for evaluating and resolving

audit findings and coordinate implementation

between central and regional staff.

Refine and expand review procedures to

improve oversight of contractor financial

activities.

Improve guidance to contractors for

executing financial activities.

GAO/AIMD-00-66—Medicare Financial

Management: Further Improvements Needed

to Establish Adequate Financial Control and

Accountability (March 2000)

 Recommendations

*

*

*

*

*

Medicare

financial

management

Additional actions

needed

Substantial

progress made

Table 1 – Status of Recommendations
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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10/31/2002 5

Results in Brief—Status of

Recommendations

GAO/AIMD/OSI-00-281—Medicare Improper

Payments: While Enhancements Hold Promise

for Measuring Potential Fraud and Abuse,

Challenges Remain (September 2000)

Medicare

improper

payments

* Include sufficient scope and evaluation in the

design of measurement methodologies to more

effectively identify underlying causes of improper

payments, including potential fraud and abuse,

in order to develop appropriate corrective

actions.

*

Experiment with incorporating additional

techniques for detecting potential fraud and

abuse into methodologies used to identify

improper payments and evaluate their

effectiveness.

Additional actions

needed

Substantial

progress made

Recommendations
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Scope and Methodology

For this review we did the following:

• Reviewed CMS’s audited FY 2000 and FY 2001 financial statements;

Department of Health and Human Services (HHS) accountability reports;

and GAO, HHS’s Office of Inspector General (OIG), and other financial

reports to determine the status of previously identified financial

management weaknesses.

• Reviewed CMS’s FY 2001 through FY 2003 Annual Performance Plans

and the Comprehensive Plan for Financial Management to determine if

the plans included actions addressing our recommendations.

• Performed tests of CMS’s database of financial management

procedures to assess its effectiveness in providing guidance to

contractors.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Scope and Methodology (cont’d)

• Performed walk-throughs to observe Office of Financial Management

activities and tests of audit resolution activities to confirm that

procedures related to our recommendations were in place and

operating effectively.

• Used the Comptroller General’s Standards for Internal Control in the

Federal Government1 to assess policies and procedures that CMS

developed to address our recommendations.

• Used our guide on Strategies to Manage Improper Payments2 to

evaluate the three improper payment measurement projects and

other initiatives that CMS had under way or planned.

1U.S. General Accounting Office, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov.

2001)

2U.S. General Accounting Office, Strategies to Manage Improper Payments: Learning from Public and Private Sector Organizations, GAO-02

69G (Washington, D.C.: Oct. 2001)
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Scope and Methodology (cont’d)

• Held numerous interviews with CMS officials, including the Chief

Financial Officer (CFO), Deputy CFO, staff in the Office of Financial

Management’s Accounting Management Group and the Program

Integrity Group, CMS regional financial management staff, and the

HHS/OIG staff to obtain an understanding of the actions taken by

CMS to address our recommendations.

• Conducted our work from January 2002 through July 2002 in

accordance with generally accepted government auditing standards.

We requested comments on a draft of this briefing from the CMS

Chief Financial Officer (CFO), Deputy CFO, and senior Medicare

program integrity officials. These officials generally agreed with our

findings and the oral comments that they provided have been

incorporated.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Background

Medicare

• Annually, provides health care coverage to about 40 million people 65

and over and to qualifying disabled persons. Medicare costs were about

$240 billion in FY 2001.

• Is a program designated by GAO as “high risk” for fraud and abuse

because of its vast size, complex structure, and program management

weaknesses.3

CMS

• Has primary responsibility for administering the Medicare program.

• Employs about 50 Medicare claims contractors4 that are responsible for

processing fee-for-service claims, managing the billions of dollars used

to pay those claims, and protecting Medicare from fraud and abuse.

3U.S. General Accounting Office, High-Risk Series: An Update, GAO-01-263 (Washington, D.C: Jan. 2001). 4There are 37 companies that CMS contracts with to process claims. CMS counts them as 50 contractors because some have two contracts toprocess

both Part A and Part B Medicare claims.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Background (cont’d)

Medicare Financial Management

• CMS received a “clean” opinion on its FY 2001 financial statements.

This was the third consecutive unqualified opinion. However, the audit

of CMS’s financial statements cited material internal control weaknesses

including ineffective financial systems and processes, specifically the

lack of an integrated accounting system and inadequacies in CMS

oversight of contractors’ financial data

• CMS oversees contractors financial operations annually through four

types of reviews:

• Annual financial statement audits - which test expenditures and

internal controls for a sample of Medicare contractors.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Background (cont’d)

Medicare Financial Management (cont’d)

• Accounts receivable reviews - which validate completeness and

accuracy of contractors’ accounts receivable for the CFO audit.

• Statement of Auditing Standards (SAS) #70 reviews - which assess

contractors’ internal control environments and determine if stated

controls are in place and operating effectively.

• Internal control certification reviews - which validate contractors’

processes for annually assessing internal control and reporting

results to CMS.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Background (cont’d)

Medicare Financial Management (cont’d)

• In March 2000, we reported on CMS’s financial management, finding

that CMS had not addressed long-standing weaknesses. Specifically,

CMS had not improved its oversight of contractor financial activities,

documented its accounting policies and procedures, resolved audit

findings in a timely manner, or developed a financial management

strategy.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Background (cont’d)

Medicare Improper Payments

• Since 1996, the OIG has estimated the level of improper Medicare payments. In fiscal year 2001, the OIG reported an estimated

$12.1 billion of improper payments, which is 6.3 percent of total feefor-service payments.

• In 2000, CMS had three improper payment measurement projects designed to enhance its ability to measure and reduce the rate of

improper payments in various stages of development.

• The Comprehensive Error Rate Testing (CERT) project and the Payment Error Prevention Program (PEPP) were designed to

provide improper payment estimates by provider, contractor,

type of service, and geographic location.

• The Model Fraud Rate Project was designed to test the use of a variety of investigative techniques and develop a methodology

for measuring fraud and abuse.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Background (cont’d)

Medicare Improper Payments (cont’d)

• In September 2000, we reported on the three measurement projects,

finding that CMS could improve its ability to determine underlying

causes of improper payments, including fraud and abuse, by

incorporating certain techniques such as data analysis that focuses on

provider and beneficiary billing histories, third party confirmations to

validate claims data with independent sources, and beneficiary and

provider contacts.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

The Following Are Actions CMS Has Taken to Address

Recommendations in our March 2000 Report

Medicare Financial Management: Further Improvements

Needed to Establish Adequate Financial Control

and Accountability (GAO/AIMD-00-66)
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Recommendation

To improve financial management and accountability in the Medicare

program, we recommended that the CMS Administrator:

• Improve guidance to contractors for executing Medicare financial

activities by ensuring that financial management policies are updated

and issued.

CMS Actions

• Updated and issued 19 program memorandums since we last reported

that provide contractors with policy guidance on several long-standing

financial reporting problems.

• FY 2001 financial statement audit findings, as compared to those of FY 2000, showed a reduction in findings related to untimely cost

reporting, untimely debt transfers, and inappropriate allocation of

funds between Medicare trust funds since guidance was issued.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

CMS Actions (cont’d)

• Developed an Internet-accessible database that consolidates all

financial management guidance, including recently issued program

memorandums.

• The database provides contractors with easier access to key

financial management regulations that were previously contained in

several different manuals.

• Held conferences to issue and discuss new policies on financial issues.

Contractors reported that the conferences helped clarify existing and

proposed guidance and allowed them to provide comments before

policies were finalized.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Progress Assessment

• Substantial progress made. Recommendation closed.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Recommendation

• Refine and expand review procedures to improve oversight of contractor

financial activities.

CMS Actions

• Expanded the internal control objectives used in evaluating contractors’

financial operations.

• The revised internal control objectives provide CMS with more

detailed criteria for evaluating whether contractors properly record

and document financial transactions and clarify internal control

requirements for contractors.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

CMS Actions (cont’d)

• Refined the types of internal control reviews conducted annually.

• Performed reviews at 13 of the 50 contractors that tested if internal

controls designed for Medicare activities were in place and

operating effectively as compared to previous reviews that only

assessed the design of internal controls.

• Instituted a review to verify the process contractors follow in their annual assessments of internal control. The number of internal

control weaknesses self-reported by contractors significantly

increased after this process was implemented.

• Medicare contractors reported 42 material weaknesses and 308 reportable conditions in their financial operations in FY 2000.

After the validation process, contractors reported 300 material

weaknesses and 1,300 reportable conditions in FY 2001.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Progress Assessment

• Additional action is needed. Recommendation remains open.

• While CMS has made significant improvements, its efforts to refine and expand review of contractors’ financial activities have not

included ongoing review at all contractors of monthly expenditure

reports that are an important control for monitoring contractor

financial operations.

• The monthly expenditure report includes a reconciliation of funds expended by each contractor that helps ensure that amounts

reported to CMS by contractors are accurate, supported, complete,

and properly classified.

• CMS has developed procedures for reviewing the monthly expenditure reports and recently applied the procedures in reviews

at six Medicare contractors. CMS expects to expand reviews to

more contractors in FY 2003.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Recommendation

• Develop, document, and implement procedures for evaluating and

resolving audit findings and coordinate with central and regional staff to

ensure that corrective actions are implemented in a timely manner.

CMS Actions

• Developed and issued written procedures that provide staff with

guidance for evaluating audit findings from all financial-related reviews

and steps to follow in resolving the weaknesses identified.

• The procedures clarify requirements that contractors must adhere to in submitting corrective action plans that address identified

weaknesses. They also provide CMS staff with instructions on how

to evaluate the adequacy of the contractors’ plans.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

CMS Actions (cont’d)

• Developed and implemented systems to track findings from the four

types of contractor financial oversight reviews conducted annually.

These systems have helped ensure that all findings reported to CMS are

being tracked.

• Established a work group of central and regional staff to develop a

strategy for ensuring that contractors take action to address weaknesses

identified from audits. This work group is responsible for developing

procedures for monitoring contractors’ actions and designating the

central and regional staff to carry out the procedures.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Progress Assessment

• Additional action is needed. Recommendation remains open.

• While improvements have been made, the current process for tracking audit findings is inefficient. Staff must manually enter audit

findings from different audits into s ability to obtain a comprehensive

summary of contractor problems and ensure resolution of all issues.

• CMS recently began developing a combined system for tracking audit findings and contractor corrective action plans that will address

current inefficiencies. Implementation is expected in 2003.

• CMS continues to formulate an agreement between central and regional staff on responsibility for overseeing contractors’

implementation of corrective action plans. The work group that CMS

formed to address this issue has not yet implemented a strategy.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Recommendation

• Develop analysis and risk assessment procedures to improve CMS’s

ability to detect irregular financial activities and identify high-risk

contractors.

CMS Actions

• Developed analytical tools to perform trend analysis of critical financial

data,including Medicare accounts receivable. Identified several

overstatements that would have significantly affected the accuracy of

the financial statements, including a $198 million overstatement in one

contractor’s accounts receivable balance.

• Developed risk assessment factors to use in identifying high-risk

contractors. The risk factors include dollar value of expenditures, dollar

value of accounts receivable, and the number of outstanding audit

findings. These procedures helped CMS target limited resources to test

internal controls of high-risk contractors.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Progress Assessment

• Additional action is needed. Recommendation remains open.

• The risk assessment procedures that CMS developed have been

effective in identifying certain high-risk contractors. However,

deficiencies in CMS’s financial/trending analysis procedures have

been cited. For example, the HHS-OIG noted in the FY 2001

Financial Statement Audit Report that CMS did not document its

trending analysis results and has not yet established mechanisms to

archive results and historical data for future analysis. CMS has

already begun taking action intended to improve it financial analysis

by issuing detailed instructions to Medicare contractors and regional

office staff for performing financial/trend analysis procedures. The

instructions were effective June 30, 2002.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Recommendation

• Develop comprehensive accounting policies and procedures to improve

internal financial reporting.

CMS Actions

• Developed a comprehensive accounting and financial reporting

procedures manual.

• Completed chapters of the manual related to accounting and reporting

for the Medicare program. These chapters are written in accordance

with federal accounting standards. As such, they help ensure that

accounting transactions are treated consistently and increase reliability

in CMS financial reporting. The procedures also help promote a uniform

understanding of accounting policy among CMS financial management

staff.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

CMS Actions (cont’d)

• Drafted chapters of the manual related to accounting and reporting for

the Medicaid program. These chapters are being written in accordance

with federal accounting standards and should also improve the reliability

of CMS financial data. Final issuance is expected by September 30,

2002.

Progress Assessment

• Substantial progress made. Recommendation closed.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Recommendation

• Develop a comprehensive strategy for Medicare financial management

that clearly defines goals and objectives, requirements for an integrated

financial management system, and human capital needs.

CMS Actions

• Developed a Comprehensive Plan and Strategy for Financial

Management and issued its second update of the plan in 2002.

• The plan defines financial management goals, objectives, and specific corrective actions to address financial management

weaknesses.

• The plan is supported by annual project plans that identify milestones for achieving goals and initiatives in the overall plan.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

CMS Actions (cont’d)

• Initiated a human capital needs assessment project that is scheduled to

be completed in 2003. This effort is supposed to determine the required

skills and competencies needed for Medicare financial management and

assist managers in developing a strategy for addressing deficiencies.

• Developed a detailed systems architecture and project plans for the

Healthcare Integrated General Ledger Accounting System (HIGLAS),

which is designed to eliminate the ad hoc spreadsheet applications used

to record and report financial information and fully integrate Medicare

contractor and CMS accounting systems. Implementation is expected by

2007.

• The HIGLAS project plans are being developed in accordance with Joint Financial Management Improvement Program’s Federal

Financial Management Systems Requirements. This should help

ensure that the system is properly designed and implemented to

promote consistency and reliability in Medicare financial information.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Financial Management

Progress Assessment

• Substantial progress Made. Recommendation closed.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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The Following Are Actions CMS Has Taken to Address

Recommendations in our September 2000 Report

Medicare Improper Payments: While Enhancements Hold

Promise for Measuring Potential Fraud and Abuse,

Challenges Remain (GAO/AIMD/OSI-00-281)

Review Results – Improper Payments
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Improper Payments

Recommendation

To improve the usefulness of measuring Medicare fee-for-service improper

payments, including those attributable to potential fraud and abuse, we

recommended that the CMS Administrator:

 Experiment with incorporating additional techniques for detecting

potential fraud and abuse into methodologies used to identify improper

payments and evaluate their effectiveness.

CMS Actions

• Implemented the Statistical Analysis Center (SAC) pilot project that

employed experts in statistical analysis to identify suspicious Medicare

claims resulting from potentially fraudulent and abusive activities.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Improper Payments

CMS Actions (cont’d)

• Evaluated the effectiveness of techniques used in the SAC project and

determined that they would yield substantial findings when applied to

other claims data in the future.

• Accomplished the following through the SAC Project:

• Gained experience aggregating Medicare claims for doctor visits,

hospital services, and medical equipment into one database–claims

are usually maintained in separate databases by different claims

contractors across states.

• Gained experience applying data mining techniques to the database to identify questionable payments. Identified unusual billing patterns

of providers, claims that contain illogical data or conflicting

identifying information, and beneficiary claims for duplicate or similar

services.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Improper Payments

CMS Actions (cont’d)

• Gained experience using techniques such as data sharing to cross- reference claims data with independent sources, including Social

Security Administration records. Identified claims for services

provided after beneficiary date of death.

• Identified about $38.26 million in potentially fraudulent payments from the data mining and data sharing techniques applied, and

referred the results of the analysis to claims contractors for further

investigation and collection.

• Collected about $490,000 of the improper payment amounts identified by the end of our field work.

• Demonstrated the benefit of applying statistical analysis to rapidly assess whether a potential pattern of abuse exists, according to

program integrity officials.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

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Review Results – Improper Payments

CMS Actions (cont’d)

• Added to CMS’s experiences with employing companies that have

expertise in data mining, statistical analysis, and antifraud efforts.

• In addition,

• CMS plans to continue the type of analysis performed in the SAC

with Program Safeguard Contractors (PSC)4 that it plans to hire over

the next 2 years. PSCs are expected to have the data tools and

capabilities necessary to identify new program risks and expertise to

conduct fraud case development, follow up on tips, support law

enforcement, and perform innovative data analysis to combat fraud.

5The Health Insurance Portability and Accountability Act of 1996 (HIPAA) authorized CMS to contract with entities to perform certain program

safeguard functions.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

Page 41 GAO-03-151R Medicare Financial Management

10/31/2002 37

Review Results – Improper Payments

Progress Assessment

Substantial progress made. Recommendation closed.

• Through the SAC pilot, CMS successfully experimented with various

analysis techniques that we recommended for identifying claims

resulting from potentially fraudulent and abusive activities.

• The knowledge and experience gained from the SAC pilot provides

CMS with proven techniques that can be incorporated into its

measurement methodologies to further analyze claims data and

enhance future fraud and abuse detection.

• In addition, PSCs are to help ensure that the latest techniques are used

to identify potential fraud and that improper payments are investigated

and amounts inappropriately paid are collected.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

Page 42 GAO-03-151R Medicare Financial Management

10/31/2002 38

Review Results – Improper Payments

Recommendation

To improve the usefulness of measuring Medicare fee-for-service

improper payments, including those attributable to fraud and abuse,

we recommended that the CMS Administrator:

• Include sufficient scope and evaluation in the design of the

measurement methodologies to more effectively identify underlying

causes of improper payments, including potential fraud and abuse, in

order to develop appropriate corrective actions.

CMS Actions

• Revised the scope of the Model Fraud Rate Project to include fraud

detection techniques that we recommended, such as provider and

beneficiary contacts and third party confirmations. Project

implementation is planned for FY 2003 pending approval of CMS’s

budget request.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

Page 43 GAO-03-151R Medicare Financial Management

10/31/2002 39

Review Results – Improper Payments

CMS Actions (cont’d)

• Created databases of sampled claims through the Comprehensive Error

Rate Testing (CERT) project and the Payment Error Prevention Program

(PEPP). These databases include over 120,000 beneficiary claims for

physician services and medical equipment and over 60,000 claims for

inpatient hospital services that CMS can use to expand evaluation of

underlying causes.
Enclosure: September 2002 Briefing on 

Progress Made to Enhance Financial 

Accountability

Page 44 GAO-03-151R Medicare Financial Management

10/31/2002 40

Review Results – Improper Payments

Progress Assessment

• Additional action is needed. Recommendation remains open.

• While the Model Fraud Rate Project will include in its scope techniques such as provider and beneficiary contacts and third party

confirmations to evaluate claims, this project has not been

implemented.

• The CERT and PEPP projects provide CMS with valuable databases for applying data mining, data sharing, and statistical

analysis techniques similar to those proven effective by the SAC

project. However, CMS has not implemented procedures to perform

additional evaluation and analysis of the CERT and PEPP claims to

enhance future fraud and abuse detection.

(190079)

(190079)