MEDICARE 

OUTPATIENT 

THERAPY

Implementation of the 

2012 Manual Medical 

Review Process

Report to Congressional Committees

July 2013

GAO-13-613

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-613, a report to 

congressional committees

July 2013

MEDICARE OUTPATIENT THERAPY

Implementation of the 2012 Manual Medical Review 

Process

Why GAO Did This Study

In 2011, Medicare paid about 

$5.7 billion to provide outpatient 

therapy services for 48 million 

beneficiaries. Rising Medicare 

spending for outpatient therapy 

services—physical therapy, 

occupational therapy, and speechlanguage pathology—has long been of 

concern. Congress established per 

person spending limits, or “therapy 

caps,” for nonhospital outpatient 

therapy, which took effect in 1999. In 

response to concerns that some 

beneficiaries needing extensive 

services might be affected adversely, 

Congress imposed temporary 

moratoria on the caps several times 

until 2006, when it required CMS to 

implement an exceptions process. The 

Middle Class Tax Relief and Job 

Creation Act of 2012, in addition to 

extending the exceptions process, 

required CMS to conduct MMRs of 

requests for exceptions for outpatient 

services provided on or after 

October 1, 2012, over an annual 

threshold of $3,700. The act also 

mandated that GAO report on the 

implementation of the MMR process.

This report describes (1) CMS’s 

implementation of the 2012 MMR 

process, and (2) the number of 

individuals and claims subject to 

MMRs and the outcomes of these 

reviews. GAO reviewed relevant 

statutes, CMS policies and guidance, 

and CMS data on these reviews. GAO 

also interviewed CMS staff and officials 

from three MACs that accounted for 

almost 50 percent of the MMR 

workload and that processed claims for 

states previously determined to be at a 

higher risk for outpatient therapy 

improper payments.

What GAO Found

The Centers for Medicare & Medicaid Services (CMS) implemented two types of 

manual medical reviews (MMR)—reviews of preapproval requests and reviews of 

claims submitted without preapproval—for all outpatient therapy services that 

were above a $3,700 per-beneficiary threshold provided during the last 3 months 

of 2012. However, CMS did not issue complete guidance on how to process 

preapproval requests before the implementation of the MMR process in October 

2012, and the Medicare Administrative Contractors (MAC) that conducted the 

MMRs were unable to fully automate systems for tracking preapproval requests 

in the time allotted. CMS required the MACs to manually review preapproval 

requests within 10 business days of receipt of all supporting documentation to 

determine whether the services were medically necessary, and to automatically 

approve any requests they were unable to review within that time frame. CMS 

officials told GAO that the purpose of the preapproval process was to protect 

beneficiaries from being liable for payment for nonaffirmed services by giving the 

provider and beneficiary guidance as to whether Medicare would pay for the 

requested services. If a provider delivered services without submitting a 

preapproval request, the MACs were required to manually review submitted 

claims above the $3,700 threshold prior to payment within 60 days of receiving 

the needed documentation. The MACs faced particular challenges with 

implementing reviews of preapproval requests because CMS continued to issue 

new guidance on how to manage preapproval requests after the MMR process 

started. For example, CMS did not inform the MACs how to process incomplete 

requests or count the 10-day preapproval request review time frame until 

November 7, 2012, and the MACs initially handled requests differently. In 

addition, all three MACs GAO interviewed told GAO that MMRs of preapproval 

requests were especially challenging because they did not have time to fully 

automate systems for tracking and processing the requests before the start of the 

MMR process, although they adapted their systems to manage the requests in 

different ways.

CMS officials estimated that the MACs reviewed an estimated total of 167,000 

preapproval requests and claims for outpatient therapy service above the 

$3,700 threshold provided from October 1, 2012, through December 31, 2012. Of 

these reviews, CMS estimated that 110,000 were for preapproval requests and 

57,000 were for claims submitted without prior approval. However, due in part to 

the lack of automation, CMS officials reported that the total number of reviews 

should be considered estimates of the results of the MMR process at the time of 

this report. CMS estimated that the MACs affirmed about two-thirds of the 

preapproval requests and about one-third of the claims submitted without 

preapproval. Because providers can appeal denials of payment, the final 

outcome of the MMRs remains uncertain. CMS also estimated that by 

December 31, 2012, over 115,000 beneficiaries were affected by the reviews in 

2012, a number that will rise as more claims subject to review are submitted 

throughout 2013.

In its comments on a draft of this report, HHS emphasized that CMS managed 

the 2012 MMR process without additional funding and within a short time frame. 

HHS noted that the MMR process was extended for 2013 and CMS transitioned 

the responsibility for these reviews to other contractors as of April 1, 2013.

View GAO-13-613. For more information, 

contact Kathleen M. King at (202) 512-7114 or 

kingk@gao.gov.
Page i GAO-13-613 Outpatient Therapy Manual Reviews

Letter 1 

Background 4

CMS Implemented Two Types of MMRs, but the Process Lacked 

Timely Guidance and Fully Automated Systems 9

CMS Estimates That Preapproval Requests and Claims for over 

115,000 Beneficiaries Were Subject to MMRs, but the Final 

Outcomes of These Reviews Remain Uncertain 17

Agency Comments 22

Appendix I Comments from the Department of Health and Human 

Services 24

Appendix II GAO Contact and Staff Acknowledgments 26

Figures

Figure 1: Medicare Part B Outpatient Therapy Spending 1999–2011 7

Figure 2: Outpatient Therapy Manual Medical Reviews (MMR), 

October–December 2012 12

Figure 3: Estimated Total Manual Medical Reviews (MMR) 

Conducted for Outpatient Therapy Services Provided 

October 1, 2012–December 31, 2012 18

Figure 4: Estimated Outpatient Therapy Requests Received and 

Completed by Month, October–December, 2012 20

Contents 
Page ii GAO-13-613 Outpatient Therapy Manual Reviews

Abbreviations

ABN Advance Beneficiary Notice of Noncoverage

ADR additional documentation request 

BBA Balanced Budget Act of 1997

CMS Centers for Medicare & Medicaid Services 

DRA Deficit Reduction Act of 2005

HHS Department of Health and Human Services 

MAC Medicare Administrative Contractor 

MedPAC Medicare Payment Advisory Commission 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003

MMR manual medical review 

OIG Office of Inspector General

OT occupational therapy

PT physical therapy

RAC recovery audit contractor

SLP speech-language pathology

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Page 1 GAO-13-613 Outpatient Therapy Manual Reviews

441 G St. N.W.

Washington, DC 20548

July 10, 2013

Congressional Committees

In 2011, Medicare, the federal health program insuring 48 million people 

who are age 65 and older or disabled, paid about $5.7 billion to provide 

three outpatient therapy services—physical therapy (PT), occupational 

therapy (OT), and speech-language pathology (SLP)—for 4.9 million 

beneficiaries.1 Medicare’s total spending was approximately $565 billion 

that year. Therapy services help treat a range of conditions from stroke 

recovery to the effects of Parkinson’s disease, and are provided in a 

variety of settings including hospital outpatient departments, skilled 

nursing facilities, and outpatient rehabilitation facilities.2

 

1

Medicare also covers individuals with end stage renal disease. Outpatient therapy 

services are covered under Medicare Part B, which also covers physician, outpatient 

hospital, laboratory, and other services, and medical equipment and supplies. Unless 

otherwise specified, throughout this report the terms outpatient therapy and outpatient 

therapy services refer to all three therapy categories collectively: PT, OT, and SLP. 

PT includes services that restore and maintain physical function and treat or prevent 

impairments that result from disease or injury. OT services improve and compensate for a 

patient’s ability to conduct activities of daily living, such as getting dressed after the loss of 

a limb. SLP services help patients with difficulties communicating as a result of disease, 

injury, or surgery.

The Centers for 

Medicare & Medicaid Services (CMS)—the agency within the Department 

of Health and Human Services (HHS) that administers the Medicare 

program—applies financial limits, known as therapy caps, to help control 

growth in expenditures for and discourage medically unnecessary use of 

outpatient therapy services. According to CMS, between 1998 and 2008, 

Medicare expenditures for outpatient therapy increased at a rate of 

10.1 percent per year while the number of Medicare beneficiaries 

receiving therapy services increased by 2.9 percent per year. In addition, 

we and the HHS Office of Inspector General (OIG) have previously 

2

To receive outpatient therapy services, a beneficiary must be treated or referred by a 

physician or nonphysician practitioner. In addition, Medicare regulations and coverage 

rules require that the medical record of the beneficiary receiving outpatient therapy include 

a written treatment plan with information on the diagnosis and therapy goals.

 
 

Page 2 GAO-13-613 Outpatient Therapy Manual Reviews

reported that outpatient therapy is susceptible to improper payments and 

fraud.3

Although Medicare therapy caps, which originally took effect beginning in 

1999 under the Balanced Budget Act of 1997 (BBA),4 are set annually at 

a level exceeding that used by most beneficiaries receiving therapy 

services, concerns had been raised that patients with extensive need for 

outpatient therapy services might be affected adversely.5 As a result, 

Congress imposed temporary moratoria on the caps several times from 

1999 through 2006,6 when it required the agency to implement an 

exceptions process to provide coverage for beneficiaries in need of 

services above the caps.7

 

3

An improper payment is any payment that should not have been made or that was made 

in an incorrect amount (including overpayments and underpayments) under statutory, 

contractual, administrative, or other legally applicable requirements. Fraud represents 

intentional acts of deception with knowledge that the action or representation could result 

in inappropriate gain. See GAO, Medicare: Little Progress Made in Targeting Outpatient 

Therapy Payments to Beneficiaries’ Needs,

The Middle Class Tax Relief and Job Creation 

GAO-06-59 (Washington, D.C.: Nov. 10, 

2005), and Department of Health and Human Services, Office of Inspector General, 

Questionable Billing for Medicare Outpatient Therapy Services, OEI-04-09-00540 

(Washington, D.C.: December 2010).

4

See BBA, Pub. L. No. 105-33, § 4541, 111 Stat. 251, 454.

5

BBA established one $1,500 therapy cap for OT and a combined cap of $1,500 for PT 

and SLP for calendar year 1999. The amount of the therapy caps is calculated annually to 

account for increases in the Medicare economic index, and has increased to $1,900 in 

2013.

6

See Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. 

No. 106-113, App. F, § 221(a), 113 Stat. 1501, 1501A-351; Medicare, Medicaid, and 

SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. No. 106-554, App. F., 

§ 421(a), 114, Stat. 2763, 2763A-516; Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), Pub. L. No. 108-173, 117 Stat. 2066, § 624(a), 

117 Stat. 2066, 2317. 

7

The exceptions process was first required by the Deficit Reduction Act of 2005 (DRA) 

and has been extended by law numerous times through 2013. See DRA, Pub. L. No. 109-

171, § 5107, 120 Stat. 4, 42 (2006); Tax Relief and Health Care Act of 2006, Pub. L. 

No. 109-432, § 201, 120 Stat. 2922, 2986; Medicare, Medicaid, and SCHIP Extension Act 

of 2007, Pub. L. No. 110-173, § 105, 121 Stat. 2492, 2496; Medicare Improvements for 

Patients and Providers Act of 2008, Pub. L. No. 110-275, § 141, 122 Stat. 2494, 2542; 

Temporary Extension Act of 2010, Pub. L. No. 111-144, § 6, 124 Stat. 42, 46; Patient 

Protection and Affordable Care Act, Pub. L. No. 111-148, § 3103, 124 Stat. 119, 417 

(2010); Medicare and Medicaid Extenders Act of 2010, Pub. L. No. 111-309, § 104, 

124 Stat. 3285, 3287; Temporary Payroll Tax Cut Continuation Act of 2011, Pub. L. 

No. 112-78, § 304, 125 Stat. 1280, 1284; Middle Class Tax Relief and Job Creation Act of 

2012, Pub. L. No. 112-96, § 3005, 126 Stat. 156, 187; American Taxpayer Relief Act of 

2012, Pub. L. No. 112-240, § 603(a), 126 Stat. 2313, 2347 (2013).
 

Page 3 GAO-13-613 Outpatient Therapy Manual Reviews

Act of 2012, enacted in February 2012, in addition to extending the 

exceptions process through December 31, 2012, made several changes 

affecting the processing of claims for outpatient therapy services. In 

particular, the act required CMS to conduct manual medical reviews 

(MMR) of requests for exceptions for therapy claims over an annual 

threshold of $3,700 for OT and $3,700 for a combination of PT/SLP for 

services provided on or after October 1, 2012.8

To describe CMS’s implementation of the MMR process, we reviewed 

relevant statutes, including the Middle Class Tax Relief and Job Creation 

Act of 2012, the Deficit Reduction Act of 2005 (DRA), and the BBA; CMS 

policies and guidance for the MMR of Medicare outpatient therapy claims; 

and CMS data on MMRs for services provided during this 3-month period. 

We also interviewed CMS staff responsible for implementation and 

oversight of the mandated MMR process as well as staff from the 

Medicare Payment Advisory Commission (MedPAC) and representatives 

from three professional associations for providers of outpatient therapy. 

Further, we interviewed officials from three Medicare Administrative 

Contractors (MAC) selected from among the 15 MACs responsible for 

Medicare therapy claims processing in order to learn how they 

implemented and collected data on the MMR process. The three MACs 

interviewed accounted for nearly 50 percent of the MMR workload and 

processed claims for states previously determined by the HHS OIG to be 

at a higher risk for outpatient therapy improper payments and fraud. The 

information collected from these interviews is not generalizable to all 

MACs.

The act also mandated 

that GAO report on the implementation of the 2012 MMR process. In this 

report, we discuss (1) CMS’s implementation of the MMR process for 

outpatient therapy services conducted from October 1, 2012, through 

December 31, 2012, and (2) the number of individuals and claims subject 

to MMRs during the 3-month process and the outcomes of these reviews.

To report on the number of individuals and claims subject to MMRs during 

the last 3 months of 2012 and the outcomes of these reviews, we 

analyzed CMS’s Therapy Cap Weekly Workload reports. These weekly 

reports were compiled by CMS with aggregate data from all 15 MACs 

implementing the mandated MMR process. We interviewed both CMS 

 

8

The $3,700 threshold applied to all outpatient therapy claims with dates of service 

provided during calendar year 2012. This threshold was chosen because it represented 

the spending level of the top 5 percent of outpatient therapy beneficiaries in 2011.
 

Page 4 GAO-13-613 Outpatient Therapy Manual Reviews

and MAC officials responsible for the collection of these data to learn 

about the data collection process and to assess the reliability of the data. 

Those officials acknowledged that data from the weekly reports provide 

an estimate of the number of individuals and claims subject to MMR, but 

are not an accurate and exact count. We believe that the data are 

sufficiently reliable to provide a reasonable estimate of the scope of the 

MMR process.

We conducted this performance audit from December 2012 to June 2013 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and

conclusions based on our audit objectives.

Health care providers submit claims to the Medicare program in order to 

receive payment for services provided to beneficiaries. Financial limits 

known as therapy caps are one tool used to better manage spending on 

outpatient therapy services. Congress directed CMS, beginning in 2006, 

to establish an exceptions process for beneficiaries in need of services 

above the therapy caps.

Since the program was created in 1965, CMS has administered Medicare 

through private contractors, currently known as MACs.9 The MACs are 

responsible for reviewing and paying claims in accordance with Medicare 

policy, and conducting provider outreach and education on correct billing 

practices. The MACs process more than 1.2 billion claims per year (the 

equivalent of 4.5 million claims per work day). The MACs use electronic 

payment systems, and they transfer any claims submitted on paper into 

electronic format for processing.

 

9

The MMA consolidated Medicare contracting functions—such as claims payment and 

other administrative activities—in MACs. Pub. L. No. 108-173, § 911, 117, 2378. Entities 

that previously carried out these functions were known as fiscal intermediaries and 

carriers. 

Background 

Medicare Claims Payment 

Overview
 

Page 5 GAO-13-613 Outpatient Therapy Manual Reviews

The computer systems that the MACs use for processing and paying 

claims execute automated prepayment “edits,” which are instructions 

programmed into the system software to identify errors on individual 

claims and to prevent payment of incomplete or incorrect claims.10 The

system edits also help ensure that payments are made only for claims 

submitted by appropriate providers for medically necessary goods or 

services covered by Medicare for eligible individuals.11 Edits may result in 

automatic rejection of claims due to missing information or data errors, or 

in payment denial for ineligible services. In addition to this automated 

process, the MACs may conduct MMRs when they are unable to 

determine whether the services provided were medically necessary on 

the basis of the information on the claim.12 The MACs solicit 

documentation of medical necessity from the provider by issuing an 

additional documentation request (ADR) for the medical records 

associated with a service; providers are required to submit the records to 

the MACs within 45 days. Upon receipt, the MMRs are performed within 

60 days by licensed health care professionals. Providers and 

beneficiaries may appeal denials of services that are based on these 

reviews.13

Manual reviews can be conducted either before or after a claim is paid 

and are referred to as prepayment or postpayment reviews, respectively. 

CMS reports that although the MACs have the authority to review any 

claim at any time, the volume of claims prohibits manual review of most 

 

10Medicare claims include data such as beneficiary and provider identification numbers 

and demographic information, as well as codes assigned for every task and service a 

medical practitioner may provide to a beneficiary. These codes may require the use of 

modifiers to improve accuracy. Modifiers may include units of service, functional 

limitations, or discharge status.

11CMS uses the terms providers and suppliers to differentiate between entities that 

provide health care services and entities that provide medical equipment to Medicare 

beneficiaries. In this report we use the term providers to refer collectively to providers and 

suppliers.

12The MACs and other Medicare contractors conduct manual reviews to determine 

whether the services provided meet medical necessity standards and are (1) reasonable 

and necessary; (2) for the diagnosis or treatment of an illness or injury or to improve the 

functioning of a malformed body member; and (3) not excluded under another requirement 

of the Medicare program.

13If a provider or beneficiary appeals a decision, the Medicare appeals process may take 

up to 2 years.
 

Page 6 GAO-13-613 Outpatient Therapy Manual Reviews

claims.14 In general, CMS directs the MACs to focus their MMRs on 

program integrity efforts targeting payment errors for services and items 

that pose the greatest financial risk to the Medicare program.15 We have 

previously reported that, overall, less than 1 percent of Medicare’s claims 

are subject to medical record review by trained personnel.16

Medicare spending for outpatient therapy has increased from $1.3 billion 

in 1999 to $5.7 billion in 2011. (See fig. 1.) During this 12-year period, 

mean per user spending on outpatient therapy grew threefold from about 

$400 to almost $1,200. In 2011, about 80 percent of the 4.9 million 

Medicare beneficiaries who used OT and PT/SLP did not exceed the 

annual cap of $1,870. Twenty percent of the Medicare beneficiaries using 

outpatient therapy (about 980,000 individuals) exceeded the cap that year 

and spent, on average, $3,000 on outpatient therapy. Therapy provided in 

nursing homes and private practice offices accounted for over 70 percent 

of outpatient therapy services in 2011, with the remaining services being 

provided in hospital outpatient departments and outpatient rehabilitation 

centers, and by home health agencies.

 

14MACs typically select a small sample of claims for manual reviews from providers or 

suppliers who demonstrate aberrant billing or practice patterns. The MACs are 

responsible for developing, implementing, and monitoring annual error reduction plans.

15See also GAO, Medicare: Improvements Needed to Address Improper Payments in 

Home Health, GAO-09-185 (Washington, D.C.: Feb. 27, 2009); and Medicare: Little 

Progress Made in Targeting Outpatient Therapy Payments to Beneficiaries’ Needs, 

GAO-06-59 (Washington, D.C.: Nov. 10, 2005). 

16See GAO, Improper Payments: Reported Medicare Estimates and Key Remediation 

Strategies, GAO-11-842T (Washington, D.C.: July 28, 2011).

Medicare Outpatient 

Therapy Spending
 

Page 7 GAO-13-613 Outpatient Therapy Manual Reviews

Figure 1: Medicare Part B Outpatient Therapy Spending 1999–2011

Note: Total outpatient therapy spending data are missing for 2005.

In addition, studies have found that utilization of outpatient therapy 

services is not evenly distributed across the country. For example, in 

2010, the HHS OIG reported on 20 counties with spending per beneficiary 

72 percent higher than the national average.17 MedPAC’s analysis of 

outpatient therapy claims data from 2011 showed that average perbeneficiary spending varied widely by county, ranging from $406 to 

$3,582.18

The therapy caps that were first imposed in 1999 to control spending 

growth raised concern that patients with extensive need of outpatient 

therapy services would be affected adversely, and the caps were only in 

effect in 1999 and for part of 2003 due to a series of temporary 

 

17Department of Health and Human Services, Office of Inspector General, Questionable 

Billing for Medicare Outpatient Therapy Services.

18Medicare Payment Advisory Commission, Mandated Report: Improving Medicare’s 

Payment System for Outpatient Therapy Services (Washington D.C.: Oct. 5, 2012).

The Therapy Caps 

Exceptions Process
 

Page 8 GAO-13-613 Outpatient Therapy Manual Reviews

congressional moratoria. As implemented in 2006, when the moratoria 

expired, Congress required CMS to implement a process to allow 

exceptions to the caps for certain medically necessary services.19 This 

exceptions process allowed for two types of exceptions. The first was an 

automatic exception for certain conditions or complexities, such as hip 

and knee replacements. The second—called a manual exceptions 

process by CMS— was a preapproval process whereby a provider could 

submit a letter and supporting documentation requesting an exception—

called a preapproval request—for up to 15 days of treatment above the 

annual cap, which would be manually reviewed by the MAC.20

An automatic exceptions process for claims with a KX modifier was 

extended through 2012 for claims over the annual cap of $1,880, with 

manual reviews required for claims above the threshold of $3,700.

If the 

services qualified for either an automatic or a manual exception, CMS 

guidance instructed the provider to include a “KX” modifier on each line of 

the resulting claim that contained a service above the cap. This modifier 

represented the provider’s attestation that the services rendered were 

medically necessary, and it triggered an exception in the Medicare claims 

processing system, which ensured payment for those outpatient therapy 

services above the cap.

21 The 

American Taxpayer Relief Act of 2012 extended the Medicare therapy 

caps exceptions process, including the requirement for the manual review 

of claims over $3,700, through December 31, 2013.22

According to CMS, in 2012, claims for services above the $1,880 cap 

without a KX modifier or above the $3,700 threshold were considered a 

benefit category denial, making the beneficiary liable for payment. To 

protect beneficiaries from unexpected liability for payment of denied 

 

19DRA, Pub. L. No. 109-171, § 5107, 120 Stat. 42 (2005). As previously noted, an 

exceptions process has remained in effect since then.

20CMS required the MACs to conduct MMRs of these preapproval requests within 10 

business days and determine whether treatment above the cap was medically necessary.

21See Pub. L. No. 112-96, § 3005(a), 126 Stat. 187.

22Pub. L. No. 112-240, § 603, 126 Stat. 2347. As of April 1, 2013, the responsibility for 

conducting prepayment MMRs in 11 states for claims above the $3,700 threshold was 

transitioned from the MACs to CMS’s Recovery Audit Contractors (RAC) as part of the 

agency’s Prepayment Review Demonstration. The RACs will conduct postpayment MMRs 

in the states that are not part of the demonstration.
 

Page 9 GAO-13-613 Outpatient Therapy Manual Reviews

claims above the threshold, CMS gave providers the option to send 

beneficiaries an Advance Beneficiary Notice of Noncoverage (ABN) 

informing them that Medicare might not pay for an item or service and 

that they might be liable for payment. An ABN enables the beneficiary to 

make an informed decision about whether to get services and accept 

financial responsibility for those services if Medicare does not pay.

CMS implemented two types of MMRs during the last 3 months of 2012—

reviews of preapproval requests and reviews of claims submitted without 

preapproval. CMS did not issue complete guidance at the start of the 

MMR process, causing implementation challenges for the MACs, and the 

MACs were unable to fully automate systems for tracking the reviews of 

preapproval requests in the time allotted.

CMS implemented two types of MMRs during the last 3 months of 2012—

reviews of preapproval requests and reviews of claims submitted without 

preapproval. First, CMS directed the MACs to manually review 

preapproval requests for outpatient therapy services above the 

$3,700 threshold—one for OT and one for PT/SLP combined—before the 

services were provided. Providers were permitted to request up to 

20 days of treatment up to 15 days before providing medically necessary 

outpatient therapy services above $3,700. In contrast to the MMR 

process as implemented in 2006, CMS guidance did not allow any 

automatic exceptions for certain conditions; the MACs had to manually 

review preapproval requests for any services above $3,700. CMS officials 

told us that they included the preapproval request process in 2012 in 

order to help protect beneficiaries from being held liable for payment of 

claims not affirmed by the MMR, as the process would give the provider 

and beneficiary guidance as to whether the MACs would affirm or not 

affirm payment for the requested outpatient therapy services.23

In order to manage the expected volume of preapproval requests 

submitted to MACs at the start of the MMR process, CMS divided all 

 

23CMS used the terms affirmed and nonaffirmed to indicate whether outpatient therapy 

services were approved or denied as part of the MMR process. 

CMS Implemented 

Two Types of MMRs, 

but the Process 

Lacked Timely 

Guidance and Fully 

Automated Systems

CMS Implemented MMRs 

of Preapproval Requests 

and of Claims Submitted 

without Preapproval
 

Page 10 GAO-13-613 Outpatient Therapy Manual Reviews

outpatient therapy providers among three phases, based primarily on 

their past billing practices.24 Providers were instructed to submit 

preapproval requests during their assigned phase.25 CMS assigned 

providers with the highest average billing per patient for outpatient 

therapy services in 2011 to the first phase, which began on October 1, 

2012. According to CMS, these high billers accounted for approximately 

25 percent of all outpatient therapy providers and were subject to MMR 

for the full 3 months of the MMR process during 2012. The second phase 

began on November 1 and included providers with the next highest billing 

(also about 25 percent of the total number of providers). The third phase, 

which included the remaining 50 percent of outpatient therapy providers, 

generally the lowest billers, began on December 1.26

CMS notified providers about the preapproval request process and 

assignment of phases by letter and provided further information through 

three conference calls and additional agency communications. CMS 

instructed providers to submit preapproval requests by mail or fax, 

including key information such as provider and beneficiary identification 

numbers as well as supporting documentation including treatment notes 

and progress reports.

CMS officials 

explained that providers with historically low billing were less likely to 

have patients who would reach the threshold. CMS also included 

providers identified by law enforcement or the HHS OIG as being involved 

in active fraud investigations in the third phase. CMS officials stated that 

they did not include these providers until the third phase to avoid conflicts 

with ongoing investigations. As of December 1, all outpatient therapy 

providers were included in the MMR process. 

27

 

24Approximately 91,000 outpatient therapy providers were divided into these phases. CMS 

officials noted that they implemented the MMR process in phases because they did not 

want to overwhelm the MACs with a large volume of preapproval requests at the 

beginning of the process, as occurred during the preapproval process in 2006.

CMS also instructed the MACs to post guidelines 

on their websites to educate providers about these requirements. In 

25CMS instructed the MACs to review requests no sooner than 15 days in advance of the 

phase to which providers were assigned. 

26CMS officials stated that they also included new outpatient therapy providers and those 

who had not billed Medicare for outpatient therapy in 2011 in the third phase. CMS made 

additional adjustments to the assignment of providers to each phase in order to 

accommodate MACs whose contracts were in transition due to the consolidation of 

contractors resulting from Medicare contracting reform.

27Providers did not have an option to submit requests electronically.
 

Page 11 GAO-13-613 Outpatient Therapy Manual Reviews

addition, CMS sent letters in mid-September 2012 to all Medicare 

beneficiaries who had received therapy services totaling over $1,700 by 

that date informing them that they might have to pay for services over the 

cap should the MACs determine that the services were not medically 

necessary.

To expedite the preapproval process, CMS instructed the MACs to review 

preapproval requests within 10 business days of receipt of all requested 

documentation to determine whether the services were medically 

necessary.28 After reviewing the requests, the MACs were required to 

notify providers and beneficiaries of the number of treatment days 

affirmed or provide detailed reasons for not affirming a request.29 In 

addition, CMS instructed the MACs to automatically approve any requests 

they were unable to review within 10 business days.30

 

28CMS instructed the MACs to review preapproval requests in accordance with Medicare 

coverage and payment policies, including applicable local coverage policies. The relevant 

coverage and payment policies are contained in Centers for Medicare & Medicaid 

Services, Medicare Benefit Policy Manual, CMS Pub. 100-02, section 220 (June 8, 2012).

The MACs had to 

inform providers of their decisions by telephone, fax, or letter, and 

postmark all letters by the 10th day after receipt of all requested 

documentation. Providers were allowed to resubmit nonaffirmed requests 

with additional documentation for consideration by the MAC, at which 

point the MAC would have another 10 days within which to review the 

new request. (See fig. 2.)

29Beneficiaries could elect to receive services even if a preapproval request was not 

affirmed. If they did so, the beneficiaries would be liable for payment for those services. In 

addition, providers could submit a claim for nonpreapproved services after providing the 

services. According to CMS instructions, the claim would then be denied in accordance 

with the preapproval decision. At that point, the provider or beneficiary could file an appeal 

seeking Medicare payment for the services.

30In a CMS Open Door Forum on October 22, 2012, providers noted that they sometimes 

waited more than 10 business days to receive a response, and were concerned that they 

had to delay needed services as a result.
 

Page 12 GAO-13-613 Outpatient Therapy Manual Reviews

Figure 2: Outpatient Therapy Manual Medical Reviews (MMR), October–December 2012

a

Providers could submit preapproval requests up to 15 days before the intended dates of service.
 

Page 13 GAO-13-613 Outpatient Therapy Manual Reviews

b

Centers for Medicare & Medicaid Services (CMS) required the Medicare Administrative Contractors 

(MAC) to review preapproval requests within 10 business days of receipt of all requested 

documentation and automatically affirm requests they were unable to review within that time frame.

c

If the submitted claim did not match the related preapproval request, the MAC would request 

additional supporting documentation and conduct further review before determining how to pay the 

claim, as it would for claims submitted without a preapproval request.

d

Providers had to submit requested documentation within 45 days.

e

Second, CMS instructed the MACs to develop a mechanism for tracking 

preapproval requests in order to match the requests with submitted 

claims. Because preapproval requests were received by fax or mail, not 

through the automated claims payment systems, the MACs had to 

manually match the claim with the corresponding preapproval request. If 

the services included on the claim matched those affirmed during the 

preapproval process, the MAC would pay the claim; if not, the MAC would 

issue an ADR for the medical records associated with the services and 

conduct further manual review, which could extend the review process 

more than 3 months.

The MACs had to review all supporting documentation within 60 days. If the MAC requested 

additional documentation, the review time frames would reset. Providers and beneficiaries could 

appeal denied claims.

The MACs were also required to manually review submitted claims before 

providing payment for therapy services provided above $3,700 without a 

preapproval request.31 Effective for dates of service on or after October 1, 

2012, CMS required the MACs to implement an edit in part of the claims 

processing system to stop claims that reached the $3,700 threshold and 

to trigger MMRs by the MACs.32

 

31Providers were advised, but not required, to submit preapproval requests.

To manually review claims without 

preapprovals, the MACs requested and reviewed supporting 

documentation from providers to determine whether the services were 

medically necessary. As with typical prepayment manual reviews, 

providers had 45 days to provide documentation of medical necessity, 

and the MACs had 60 days to review the supporting materials and notify 

providers and beneficiaries of their decisions. (See fig. 2.) If a MAC 

requested additional documentation, the review time frames would begin 

again. In contrast to preapproval request decisions, the MACs’ claims 

32A MAC could choose to conduct MMRs of outpatient therapy claims for services above 

the 2012 annual cap of $1,880 and below the mandatory review threshold of $3,700 if it 

was concerned about potential fraud or aberrant billing patterns by a provider.
 

Page 14 GAO-13-613 Outpatient Therapy Manual Reviews

payment systems automatically send letters notifying providers and 

beneficiaries of payment determinations.

The MACs did not receive complete CMS guidance before the start of the 

3-month MMR process regarding how the MACs should manage 

incomplete preapproval requests, how they should count the 10-day 

review time frame, and how they should handle preapproval requests 

received in the wrong phase. In addition, the MACs did not have enough 

time to fully automate systems for tracking and processing preapproval 

requests before the start of the MMR process.

CMS did not issue complete guidance at the start of the MMR effort and 

changed the process throughout the 3-month period, which created 

implementation challenges. CMS provided instruction to the MACs 

through various forms of written guidance, as well as twice-weekly 

conference calls beginning in August 2012.33 However, CMS did not issue 

instructions on how the MACs should conduct MMRs of preapproval 

requests until August 31, 2012.34

 

33CMS issues guidance in the form of change requests and technical direction letters, 

among other things. CMS issues a change request when the agency wants an addition or 

alteration to the agreed-upon deliverables for a project carried out by a contractor. 

Technical direction letters provide supplementary guidance to contractors regarding tasks 

contained in their statements of work or change requests.

The MACs we interviewed stated that 

receiving this guidance 1 month before the October 1st start of the MMR 

process made it difficult for them to adequately prepare and establish 

systems for reviews of preapproval requests. For example, one MAC said 

that because of the short turnaround time for implementation, it was not 

prepared for the high volume of preapproval requests received in the 

early weeks of the process, which caused it to approve requests without 

reviewing them. Another stated that it could have better managed the 

volume of preapproval requests received if it had more time to develop 

needed support systems. This late guidance also made it difficult for the 

MACs to train temporary staff assigned to the MMR process in a timely 

way; two MACs noted that they were still training temporary staff in 

October, after the start of the process, and one added that this made it 

34CMS began conducting conference calls with the MACs in early August to help them 

prepare for the process. According to CMS, the MACs are not allowed to devote 

resources to a new project, including hiring new or temporary staff, until a change request 

is issued.

MACs Did Not Receive 

Timely Guidance from 

CMS and Could Not Fully 

Automate Systems for 

Processing Preapproval 

Requests

Lack of Timely CMS Guidance
 

Page 15 GAO-13-613 Outpatient Therapy Manual Reviews

difficult to manage the volume of preapproval requests received in 

October.

Further, CMS did not provide guidance on how the MACs should process 

incomplete preapproval requests, which accounted for approximately 

23 percent of the total requests submitted, until November 7, 2012. CMS 

officials told us they did not initially issue such guidance because they did 

not anticipate receiving a high volume of incomplete submissions. As a 

result, the MACs handled incomplete requests in different ways. For 

example, one MAC held incomplete requests—as many as several 

thousand—as pending without making a determination or providing a 

response to providers and beneficiaries within 10 business days. Another 

initially determined that incomplete requests would be rejected and 

returned to the provider for additional information.

In addition, CMS did not initially issue clear instruction about how the 

MACs were to count the 10-day time frame for provider and beneficiary 

notification, which may have caused notification delays. CMS initially 

instructed the MACs to make decisions on preapproval requests and 

inform providers and beneficiaries of their decisions within 10 business 

days of receipt of all requested documentation, and to automatically 

approve requests they were unable to review within 10 days. The MACs 

stated that they were unclear, however, about how to count the 10-day 

time frame. On November 7, 2012, CMS clarified that the count was to 

begin on the day the MAC received the preapproval request in its 

mailroom, not in its MMR department. The MACs we interviewed stated 

that they received a large volume of requests per day—at times several 

hundred. In addition, two noted that providers often sent in additional 

supporting documentation for prior requests, which added to the volume 

of paper files the MACs had to manage and may have created a further 

lag between when the complete requests were received and when the 

paperwork was given to MMR staff for review. Before CMS issued this 

clarifying guidance, providers and beneficiaries may have experienced a 

longer wait time than expected if a MAC counted the 10 days beginning 

when the MMR department, rather than the mailroom, received the 

completed requests.

Finally, CMS did not initially provide the MACs with instructions about 

how to handle preapproval requests and claims submitted in the wrong 

phase. In its written guidance issued on August 31, 2012, CMS instructed 

the MACs that they should not review preapproval requests any sooner 

than 15 days before the start of each phase for providers within that 

phase, but did not clarify whether requests received out of phase should 
 

Page 16 GAO-13-613 Outpatient Therapy Manual Reviews

be rejected and returned to providers, not affirmed, or held as pending 

until the start of the phase. As a result, one of the MACs we spoke with 

stated that it initially held requests received out of phase to be processed 

in the correct phase, but later in the process began rejecting such 

requests.

CMS and the three MACs we interviewed reported challenges with 

processing preapproval requests because they were not able to fully 

automate systems to receive and track them in the time allotted. MACs 

typically conduct either prepayment or postpayment reviews after claims 

have been submitted; they do not typically receive or conduct MMRs of 

preapproval requests before the provision of services. All three MACs 

interviewed told us that MMRs of preapproval requests were more timeconsuming and cumbersome because they had to process them outside 

of their claims processing systems. In addition, all three MACs told us 

they suspended some of their other medical review efforts in order to 

implement the mandated outpatient therapy MMRs. For example, the 

MACs we interviewed explained that they typically use automated edits in 

their claims processing systems to flag claims for prepayment review in 

areas identified to be at higher risk for improper payments, such as 

certain billing codes or service areas, but told us they turned off some 

other outpatient therapy edits while conducting the mandated MMRs.

All three MACs interviewed said that it was difficult to develop fully 

automated systems for processing preapproval requests at the start of the 

3-month process. Two noted that they would have required several 

months to develop the type of automated systems that, integrated with 

their regular claims processing systems, would have enhanced the 

efficiency and accuracy of their MMR efforts. However, CMS did not issue 

written guidance until August 31, 2012, instructing the MACs to develop 

processes for receiving and tracking preapproval requests.

The MACs we interviewed adapted their systems to manage the 

preapproval process in different ways with varying degrees of automation. 

Two of the MACs received requests by fax, scanned the requests and 

supporting documents, and saved them electronically by date or other 

identification numbers for tracking. One of these MACs also developed a 

database in which it manually entered and tracked its MMR decisions, 

which MAC staff then manually searched to match with submitted claims. 

The other, however, stated that it did not have time to establish such a 

database, and conducted reviews without any automation. A third MAC 

received all requests by mail and developed a database in which it 

entered its preapproval decisions. This MAC also developed an electronic 

Lack of Fully Automated 

Systems for Processing 

Preapproval Requests
 

Page 17 GAO-13-613 Outpatient Therapy Manual Reviews

edit in its claims processing system that tracked incoming therapy claims 

so they could be processed according to the preapproval decision. 

Though this MAC was able to automate this step in the preapproval 

process, staff explained that they were still in the process of testing the 

edit after the start of the MMR process, and continued to address system 

errors until December.

CMS officials estimate that preapproval requests and claims for over 

115,000 Medicare beneficiaries were subject to approximately 167,000 

MMRs conducted by the MACs as of March 1, 2013. Delays in claim 

submissions and pending appeals create uncertainty about the final 

outcomes of the 2012 MMR process.

CMS staff estimated that the MACs manually reviewed more than 

167,000 preapproval requests and claims without preapprovals for 

outpatient therapy from October 1, 2012, through December 31, 2012, 

affecting more than 115,000 Medicare beneficiaries. Of these MMRs, an 

estimated 110,000 were for preapproval requests35

 

35The total of 110,000 preapproval requests included the requests either affirmed or 

nonaffirmed.

and 57,000 were for 

claims for services that were not preapproved. Of the estimated 110,000 

preapproval requests reviewed, the MACs affirmed 80,500 (73 percent) 

and did not affirm 29,500 (27 percent). As of March 1, 2013, providers 

who did not request preapprovals submitted an estimated 57,000 claims 

for outpatient therapy services provided during the last quarter of 2012. 

The results of the MMRs of claims without preapprovals resulted in 

19,500 (34 percent) claims affirmed for payment and 37,000 claims 

(66 percent) not affirmed for payment. These estimates indicate that 

MMRs of both preapproval requests and claims resulted in a number of 

CMS Estimates That 

Preapproval Requests 

and Claims for over 

115,000 Beneficiaries 

Were Subject to 

MMRs, but the Final 

Outcomes of These 

Reviews Remain 

Uncertain 

MACs Reviewed an 

Estimated 167,000 

Preapproval Requests 

and Claims and Affirmed 

60 Percent
 

Page 18 GAO-13-613 Outpatient Therapy Manual Reviews

nonaffirmed outpatient therapy services during the last quarter of 2012 

(see fig. 3).

Figure 3: Estimated Total Manual Medical Reviews (MMR) Conducted for Outpatient Therapy Services Provided October 1, 

2012–December 31, 2012
 

Page 19 GAO-13-613 Outpatient Therapy Manual Reviews

Note: In total, of the 167,000 preapprovals requests and claims without preapprovals reviewed by the 

Medicare Administrative Contractors (MAC) as of March 1, 2013, 60 percent were affirmed and 

40 percent were not affirmed. The Centers for Medicare & Medicaid Services (CMS) and the MACs 

acknowledge that the estimates are not exact counts.

Both CMS officials and MAC staff acknowledged that the MACs were not 

able to process all the preapprovals submitted in a timely manner. The 

MACs do not usually conduct preapprovals of services, and the MACs 

stated that the high volume of preapproval requests outpaced the 

capacity of the MACs to review them. For example, the MACs we 

interviewed reported receiving thousands of preapproval requests by mail 

or fax prior to the start of the MMRs. By mid-October 2012, the MACs 

estimated they had received 46,000 preapproval requests for outpatient 

therapy services above the $3,700 threshold. In addition, the MACs 

rejected about 23 percent of all preapproval requests because they were 

incomplete. Incomplete requests could be resubmitted. In November 

2012, on average more than 24,000 preapproval requests were 

categorized as having not been reviewed at the end of each of the 

4 weeks.36 Overall, the MACs estimated they completed MMRs for about 

52 percent of the total preapproval requests received within the 10 days 

required by CMS.37

 

36CMS categorized requests that were not completed in a given week as pending review.

(See fig. 4.)

37CMS advised but did not require the MACs to expedite the outpatient therapy 

prepayment reviews.
 

Page 20 GAO-13-613 Outpatient Therapy Manual Reviews

Figure 4: Estimated Outpatient Therapy Requests Received and Completed by 

Month, October–December, 2012

Note: CMS guidance did not include information on how the MACs should count “completed reviews” 

so the total number of requests completed does not equal the number of preapproval requests the 

MACs affirmed plus those not affirmed. The total number of preapprovals received included some 

rejected, duplicate, or resubmitted claims.

By the end of December 2012, the MACs had conducted MMRs on about 

15,000 claims submitted without preapproval requests. However, the 

MACs were not under the same time constraints when reviewing claims 

because, unlike the preapproval requests, CMS guidance permits the 

MACs 2 months to conduct MMRs after they receive the supporting 

documentation. In addition, claims for therapy provided during the last 

quarter of 2012 were submitted incrementally, increasing from about 

15,000 at the end of December to almost 57,000 by March 1, 2013. As a 

result, the MMRs of these claims are staggered over time. CMS officials 

indicated that the number of claims submitted and beneficiaries affected 

by these prepayment MMRs would continue to increase in 2013.
 

Page 21 GAO-13-613 Outpatient Therapy Manual Reviews

Although CMS was able to estimate the results of the MMRs conducted, 

the final outcomes of the 2012 MMRs remain uncertain due to 

inconsistencies among the MACs in how the data were collected, and 

errors in the calculation of the number of preapproval requests received 

and the MMR decisions made. In addition, the time lag for submitting 

claims and finalizing the appeals process means that the final outcome of 

the MMR process will not be known for months. CMS officials told us that 

MACs did the “best they could” and that the final numbers provided in the 

MMR weekly workload report were obtained outside the MACs’ 

computerized systems and should be considered approximate or an 

estimate of the results of the reviews at the time of this report.

The manual processes CMS and the MACs used to complete the weekly 

MMR workload reports resulted in inconsistencies in the data. Both the 

CMS and MAC officials interviewed acknowledged that human error may 

have contributed to discrepancies in the reported numbers because the 

reports were assembled manually. In addition, due to the timing of CMS 

guidance throughout the MMR, the MACs reported collecting key data 

elements differently. For example, one MAC included the number of 

requests rejected in the total number of requests completed while two 

others did not. CMS officials also reported that they identified gaps or 

errors in MACs’ weekly workload reports, but the agency did not require 

the MACs to go back to revise prior weeks’ data. As a result, the running 

totals included errors from prior weeks and the final numbers do not total 

correctly. For example, the total number of treatment days that CMS 

estimates were requested (2.4 million) is significantly greater than the 

estimated total number of treatment days affirmed plus days nonaffirmed 

(1.9 million).

The combination of potential delays in billing, the prepayment review of 

claims, and the appeals process also creates uncertainty about the final 

outcomes of the mandated MMRs associated with outpatient therapy 

services provided in 2012. Because claims for services provided from 

October 1, 2012, through December 31, 2012, may be submitted to the 

MACs as late as December 31, 2013, the total number of claims reviewed 

will not be known until 2014. In addition, CMS officials, some MAC staff, 

and outpatient therapy provider association representatives reported the 

filing of appeals for denials of payment for therapy provided during this 

period. The appeals process—which may involve five levels of review—

could take more than 2 years to reach a conclusion, and any reversals of 

prior therapy coverage denials will affect the final outcomes of the 2012 

MMR process.

Final Outcomes of MMRs 

Remain Uncertain Due to 

Data Limitations and 

Timing
 

Page 22 GAO-13-613 Outpatient Therapy Manual Reviews

HHS provided written comments on a draft of this report. HHS highlighted 

CMS’s 2012 efforts to review the medical records associated with 

requests for exceptions for outpatient therapy services in excess of the 

annual $3,700 threshold. The department noted that CMS managed the 

new workload without additional funding and within a short time frame, 

and that the MACs shifted staff from other responsibilities to the MMR 

process. Outpatient therapy manual reviews were extended for 2013 and, 

according to HHS, CMS streamlined the MMRs of therapy services by 

transitioning the responsibility for these reviews from the MACs to the 

agency’s RACs as of April 1, 2013. The RACs are conducting 

prepayment review of claims at the $3,700 threshold in California, Florida, 

Illinois, Louisiana, Michigan, Missouri, New York, North Carolina, Ohio, 

Pennsylvania, and Texas, and are conducting immediate postpayment 

reviews in all other states. HHS’s comments are printed in appendix I.

We are sending copies of this report to the Secretary of Health and 

Human Services, interested congressional committees, and others. In 

addition, the report is available at no charge on the GAO website at 

http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-7114 or kingk@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made key contributions to this report are 

listed in appendix II.

Kathleen M. King

Director, Health Care

Agency Comments
Page 23 GAO-13-613 Outpatient Therapy Manual Reviews

List of Committees

The Honorable Max Baucus

Chairman

The Honorable Orrin G. Hatch

Ranking Member

Committee on Finance

United States Senate

The Honorable Fred Upton

Chairman

The Honorable Henry A. Waxman

Ranking Member

Committee on Energy and Commerce

House of Representatives

The Honorable Dave Camp

Chairman

The Honorable Sander M. Levin

Ranking Member

Committee on Ways and Means

House of Representatives
Appendix I: Comments from the Department of 

Health and Human Services

Page 24 GAO-13-613 Outpatient Therapy Manual Reviews

Appendix I: Comments from the Department 

of Health and Human Services
Appendix I: Comments from the Department of 

Health and Human Services

Page 25 GAO-13-613 Outpatient Therapy Manual Reviews
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 26 GAO-13-613 Outpatient Therapy Manual Reviews

Kathleen M. King, (202) 512-7114 or kingk@gao.gov

In addition to the contact named above, Martin T. Gahart, Assistant 

Director; George Bogart; Anne Hopewell; and Sara Rudow made key 

contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(291096)
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