Medicare: Claim Review Programs Could Be Improved with Additional Prepayment Reviews and Better Data
Published: 2016-04-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: CMS uses several types of claim review contractors to help reduce improper payments and protect the integrity of the Medicare program. CMS pays its contractors differently—the agency is required by law to pay RAs contingency fees from recovered overpayments, while other contractors are paid based on cost. Questions have been raised about the focus of RA reviews because of the incentives associated with the contingency fees.
GAO was asked to examine the review activities of the different Medicare claim review contractors. This report examines (1) differences between prepayment and postpayment reviews and the extent to which contractors use them; (2) the extent to which the claim review contractors focus their reviews on different types of claims; and (3) CMS's cost per review and amount of improper payments identified by the claim review contractors per dollar paid by CMS. GAO reviewed CMS documents; analyzed CMS and contractor claim review and funding data for 2013 and 2014; interviewed CMS officials, claim review contractors, and health care provider organizations; and assessed CMS's oversight against federal internal control standards.
section_title: What GAO Found
paragraphs: The Centers for Medicare & Medicaid Services (CMS) uses different types of contractors to conduct prepayment and postpayment reviews of Medicare fee-for-service claims at high risk for improper payments. Medicare Administrative Contractors (MAC) conduct prepayment and postpayment reviews; Recovery Auditors (RA) generally conduct postpayment reviews; and the Supplemental Medical Review Contractor (SMRC) conducts postpayment reviews as part of studies directed by CMS. CMS, its contractors, and provider organizations identified few significant differences between conducting and responding to prepayment and postpayment reviews. Using prepayment reviews to deny improper claims and prevent overpayments is consistent with CMS's goal to pay claims correctly the first time and can better protect Medicare funds because not all overpayments can be collected. In 2013 and 2014, 98 percent of MAC claim reviews were prepayment, and 85 percent of RA claim reviews and 100 percent of SMRC reviews were postpayment. Because CMS is required by law to pay RAs contingency fees from recovered overpayments, the RAs can only conduct prepayment reviews under a demonstration. From 2012 through 2014, CMS conducted a demonstration in which the RAs conducted prepayment reviews and were paid contingency fees based on claim denial amounts. CMS officials considered the demonstration a success. However, CMS has not requested legislation that would allow for RA prepayment reviews by amending existing payment requirements and thus may be missing an opportunity to better protect Medicare funds.
The contractors focused their reviews on different types of claims. In 2013 and 2014, the RAs focused their reviews on inpatient claims, which represented about 30 percent of Medicare improper payments. In 2013 and 2014, inpatient claim reviews accounted for 78 and 47 percent, respectively, of all RA claim reviews. Inpatient claims had high average identified improper payment amounts, reflecting the costs of the services. The RAs' focus on inpatient claims was consistent with the financial incentives from their contingency fees, which are based on the amount of identified overpayments, but the focus was not consistent with CMS's expectations that RAs review all claim types. CMS has since taken steps to limit the RAs' focus on inpatient claims and broaden the types of claims being reviewed. The MACs focused their reviews on physician and durable medical equipment claims, the latter of which had the highest rate of improper payments. The focus of the SMRC's claim reviews varied.
In 2013 and 2014, the RAs had an average cost per review to CMS of $158 and identified $14 in improper payments per dollar paid by CMS to the RAs. The SMRC had an average cost per review of $256 and identified $7 in improper payments per dollar paid by CMS. GAO was unable to determine the cost per review and amount of improper payments identified by the MACs per dollar paid by CMS because of unreliable data on costs and claim review savings. Inconsistent with federal internal control standards, CMS has not provided written guidance on how the MACs should calculate savings from prepayment reviews. Without reliable savings data, CMS does not have the information it needs to evaluate the MACs' performance and cost effectiveness in preventing improper payments, and CMS cannot compare performance across contractors.
section_title: What GAO Recommends
paragraphs: GAO recommends that CMS (1) request legislation to allow the RAs to conduct prepayment claim reviews, and (2) provide written guidance on calculating savings from prepayment reviews. The Department of Health and Human Services disagreed with the first recommendation, but concurred with the second. GAO continues to believe the first recommendation is valid as discussed in the report.

section_title: Letter
paragraphs: In fiscal year 2014, Medicare fee-for-service (FFS) provided health  insurance for approximately 38 million elderly and disabled beneficiaries  at a cost of approximately $364 billion.1 Because of its size, complexity,  and susceptibility to mismanagement and improper payments, we have  designated Medicare a high-risk program.2 Improper Medicare payments  include payments made for treatments or services that are not covered by  program rules, not medically necessary, or not provided to beneficiaries in  the way that they were billed to Medicare. In fiscal year 2014, the Centers  for Medicare & Medicaid Services (CMS)—the agency within the  Department of Health and Human Services (HHS) that administers the  Medicare program—made payments for 1.2 billion FFS claims. CMS later  estimated that improper payments totaled nearly $46 billion in the  Medicare FFS program that year.
Medicare is the federally financed health insurance program for persons aged 65 and  over, certain individuals with disabilities, and individuals with end-stage renal disease.  Medicare Part A covers inpatient hospital services, skilled nursing facility services, some  home health services, and hospice services. Medicare Part B covers physician and  hospital outpatient services, and durable medical equipment, prosthetics, orthotics, and  supplies, among other things.  Together, Parts A and B are known as traditional Medicare  or Medicare FFS.
See GAO, High-Risk Series: An Update, GAO-15-290 (Washington, D.C.: Feb. 2015).
In this report, the term provider includes entities such as hospitals and physicians,  entities that provide laboratory, ambulance, home health, hospice, therapy, and skilled  nursing services, as well as entities that supply Medicare beneficiaries with durable  medical equipment. coverage, payment, and coding policies. Many improper claims can be  identified only by manually reviewing associated medical records and a  beneficiary’s claim history, and exercising clinical judgment to determine  whether a service is reasonable and necessary. Less than one percent of  claims undergo manual reviews.4 Claim reviews can occur either before or after payments are made— known as prepayment and postpayment claim reviews, respectively—and  CMS uses both to identify improper payments. When potential payment  errors are identified during prepayment claim reviews, the claims are  denied or partially denied and providers are not paid the denied  amounts.5 With postpayment claim reviews, CMS attempts to identify and  recover overpayments, or remediate underpayments, for claims that have  already been paid. CMS has stated that one of its key strategies to  reduce improper payments is to pay claims properly the first time to  prevent the agency from having to recover overpayments.
CMS uses several different types of contractors to review claims at high  risk for improper payment and claims that pose the greatest financial risk  to Medicare. Medicare Administrative Contractors (MAC) process and pay  claims and conduct prepayment and postpayment reviews. Recovery  Auditors (RA) generally conduct postpayment claim reviews, though CMS  conducted a demonstration from 2012 through 2014 during which RAs  conducted prepayment reviews for certain services. The Supplemental  Medical Review Contractor (SMRC) conducts postpayment claim reviews  as part of CMS-directed studies on specific high-risk claims.
In this report we use the term “claim review” to refer to manual claim reviews. CMS and  others sometimes refer to these claim reviews as “audits” or “medical reviews.” In addition  to manual claim reviews, CMS also uses automated prepayment reviews—called  prepayment “edits”— that use computer programming logic to ensure that payments are  made correctly. Whereas manual claim reviews are conducted on very few claims, all  claims are subject to automated edits. For additional information on prepayment edits, see  GAO, Medicare Program Integrity: Greater Prepayment Control Efforts Could Increase  Savings and Better Ensure Proper Payment, GAO-13-102 (Washington, D.C.: Nov. 2012).
Partially denied claims include claims in which certain billed services are denied, while  other services are paid, and claims in which services are “downcoded” to services with  lower reimbursement rates. based on their costs to review claims. Some stakeholders have  questioned whether the RAs focus their reviews on certain types of claims  because of the financial incentives associated with the contingency fees.
You asked us to examine the activities of the Medicare claim review  contractors. This report examines:  1.  the differences, if any, between prepayment and postpayment  reviews, and the extent to which the contractors utilize these types of  reviews;   2.  the extent to which the Medicare claim review contractors focus their  reviews on different types of claims; and   3.  CMS’s cost per review and the amount of improper payments  identified by the claim review contractors per dollar paid by CMS.
Each year the MACs submit medical review strategies to CMS that include a prioritized  list of the specific improper payment vulnerabilities deemed most critical by each MAC to  address and a description of plans to address them. reviews. To examine CMS’s ability to collect overpayments, we reviewed  Department of Health and Human Services Office of Inspector General  (HHS OIG) reports on Medicare “currently not collectible”  overpayments—overpayments for which a provider has not made a  repayment for at least 6 months after the due date. We also obtained data  from CMS on the number of prepayment and postpayment claim reviews  conducted by the RAs. We obtained data from each of the 16 MACs on  the number of prepayment and postpayment claim reviews they  completed.9 We obtained study reports generated by the SMRC from  CMS, which provided data on the number of claims reviewed by the  contractor. We obtained data on the number of MAC and RA claim  reviews conducted in calendar years 2013 and 2014, and SMRC claim  reviews for completed studies initiated in fiscal years 2013 and 2014. At  the time of our review, data for 2013 and 2014 were the most recent  complete years of data available.
During the period of our review, CMS executed three MAC contracts that incorporated  work associated with different, outgoing MAC contractors. Our data from these three  MACs do not include claim reviews conducted under the outgoing contracts and,  accordingly, our MAC data do not include all MAC claim reviews conducted during this  time period.
Our analysis included CMS claim review contractors that are responsible for reviewing  claims at high risk for improper payment. We excluded several other CMS contractors that  may review claims that have different responsibilities, such as Zone Program Integrity  Contractors and Quality Improvement Organizations. Zone Program Integrity Contractors,  who investigate potential Medicare fraud, may review provider claims as part of their  investigations. Quality Improvement Organizations, who conduct activities to improve the  quality of care for Medicare beneficiaries, review claims to ensure that care meets quality  standards. carrier.11 We obtained data from each of the 16 MACs on the number of  claim reviews that they completed by the same seven types of Medicare  claims. We reviewed the study reports generated by the SMRC, and  categorized the claim reviews conducted by the contractor according to  the same seven types of Medicare claims. We examined the RA, MAC,  and SMRC claim review data in light of published Medicare  Comprehensive Error Rate Testing (CERT) data on the rates and  amounts of improper payments by claim type for fiscal years 2012 and  2013.12 Because claim review contractors use prior year CERT findings  to focus their reviews on claims at high risk for improper payment, we  compared the contractors’ claim review data in 2013 and 2014 to fiscal  year 2012 and 2013 CERT data. Additionally, we obtained data on CMS  approvals of RA “audit issues”—the types of claims the RAs intend to  review—from the inception of the program to May 2015.
Inpatient and outpatient claims include claims for both hospitals and other institutional  providers, such as inpatient and outpatient rehabilitation facilities. Physician and other  carrier claims include claims for non-institutional providers, such as physicians,  ambulances, and free-standing facilities, such as clinical laboratories. For the purposes of  this report, we refer to this type of claim as “physician claims.”
The CERT rates and amounts we report may differ slightly from those in published  CERT reports. We analyzed reported CERT data to generate improper payment rates and  amounts for the seven types of Medicare claims, which did not necessarily align with the  categories in the CERT reports.  For example, the CERT reported the improper payment  rate for inpatient hospital services, while we are reporting on the improper payment rates  for inpatient claims broadly, which include inpatient rehabilitation services. the contractors based on reviews conducted in the same time periods.15  For the amount of improper payments identified by the MACs, we  obtained data from each of the 16 MACs. We obtained data on improper  payments identified by the RAs from CMS. For the amount of improper  payments identified by the SMRC, we obtained data from the contractor’s  study reports. We used the CMS cost per review and identified improper  payment data to calculate the amount of improper payments identified by  the claim review contractors per dollar paid by CMS, which allowed us to  examine the value provided by each contractor.
We obtained data on the amount of improper payments identified by each of the  contractors, which may differ from the amount that is ultimately collected by CMS. Our  data may differ from those published in CMS’s reports to Congress on the RA program.  The reports to Congress present data on the amount of overpayments collected each  fiscal year, which may include collections from overpayments identified in reviews  conducted in prior years. reviewed CMS’s oversight practices for these data and compared  them against federal internal controls standards.
We conducted this performance audit from June 2015 to February 2016  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.
subsections: section_title: Background
paragraphs: 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. This definition  includes any payment to an ineligible recipient, any payment for an ineligible good or  service, any duplicate payment, any payment for a good or service not received (except  where authorized by law), and any payment that does not account for credit for applicable  discounts. Improper Payments Elimination and Recovery Act of 2010, Pub. L. No. 111- 204, § 2(e), 124 Stat. 2224, 2227 (2010) (codified at 31 U.S.C. § 3321 note). Office of  Management and Budget guidance also instructs agencies to report as improper  payments any payments for which insufficient or no documentation was found. the greatest financial risk to Medicare (see Table 1).  However, the  contractors have varying roles and levels of CMS direction and oversight  in identifying claims for review.
MACs process and pay claims and conduct prepayment and postpayment  reviews for their established geographic regions. As of January, 2016, 12  MACs—referred to as A/B MACs—processed and reviewed Medicare  Part A and Part B claims, and 4 MACs—referred to as DME MACs— processed and reviewed DME claims. MACs are responsible for  identifying both high-risk providers and services for claim reviews, and  CMS has generally given the MACs broad discretion to identify claims for  review. Each individual MAC is responsible for developing a claim review  strategy to target high-risk claims.20 In their role of processing and paying claims, the MACs also take action  based on claim review findings. The MACs deny payment on claims when  they or other contractors identify payment errors during prepayment claim  reviews. When MACs or other claim review contractors identify  overpayments using postpayment reviews, the MACs seek to recover the  overpayment by sending providers what is referred to as a demand letter.  In the event of underpayments, the MACs return the balance to the  provider in a future reimbursement.
For additional information on the MAC roles and responsibilities, see GAO, Medicare  Administrative Contractors: CMS Should Consider Whether Alternative Approaches Could  Enhance Contractor Performance, GAO-15-372 (Washington, D.C.: Apr. 2015).
Congress established per beneficiary Medicare limits for therapy services, which took  effect in 1999. However, Congress imposed temporary moratoria on the limits several  times until 2006, when it required CMS to implement an exceptions process in which  exceptions to the limits are allowed for reasonable and necessary therapy services.  Starting in 2012, the exceptions process has applied a claim review requirement on claims  after a beneficiary’s annual incurred expenses reach certain thresholds. For additional  information on the therapy service limits, see GAO, Medicare Outpatient Therapy:  Implementation of the 2012 Manual Medical Review Process, GAO-13-613 (Washington,  D.C.: July, 2013).
As required by law, the RAs are paid on a contingent basis from  recovered overpayments. The contingency fees generally range from  9.0 percent to 17.5 percent, and vary by RA region, the type of service  reviewed, and the way in which the provider remits the overpayment.  Because the RAs are paid from recovered funds rather than appropriated  funds, the use of RAs expands CMS’s capacity for claim reviews without  placing additional demands on the agency’s budget. The RAs are allowed  to target high-dollar claims that they believe have a high risk of improper  payments, though they are not allowed to identify claims for review solely  because they are high-dollar claims. The RAs are also subject to limits  that only allow them to review a certain percentage or number of a given  provider’s claims.
The RAs initially identified high rates of error for short inpatient hospital  stays and targeted those claims for review. Certain hospital services,  particularly services that require short hospital stays, can be provided in  both an inpatient and outpatient setting, though inpatient services  generally have higher Medicare reimbursement amounts. The RAs found  that many inpatient services should have been provided on an outpatient  basis and denied many claims for having been rendered in a medically  unnecessary setting.23 Medicare has a process that allows for the appeal  of claim denials, and hospitals appealed many of the short inpatient stay  claims denied by RAs. Hospital appeals of RA claim denials helped  contribute to a significant backlog in the Medicare appeals system. determining whether RA prepayment reviews could prevent fraud and the  resulting improper payments and, in turn, lower the FFS improper  payment rate. From 2012 through 2014, operating under this waiver  authority, CMS conducted the RA Prepayment Review Demonstration in  11 states. In these states, CMS directed the RAs to conduct prepayment  claim reviews for specific inpatient hospital services. Additionally, the RAs  conducted prepayment reviews of therapy claims that exceeded the  annual per beneficiary limit in the 11 demonstration states. Under the  demonstration, instead of being paid a contingency fee based on  recovered overpayments, the RAs were paid contingency fees based on  claim denial amounts.
In anticipation of awarding new RA contracts, CMS began limiting the  number of RA claim reviews and discontinued the RA Prepayment  Review Demonstration in 2014. CMS required the RAs to stop sending  requests for medical documentation to providers in February 2014, so  that the RAs could complete all outstanding claim reviews by the end of  their contracts. However, in June 2015, CMS cancelled the procurement  for the next round of RA contracts, which had been delayed because of  bid protests. Instead, CMS modified the existing RA contracts to allow the  RAs to continue claim review activities through July 31, 2016. In  November 2015, CMS issued new requests for proposals for the next  round of RA contracts and, according to CMS officials, plans to award  them in 2016.
The SMRC conducts nationwide postpayment claim reviews as part of  CMS-directed studies aimed at lowering improper payment rates. The  SMRC studies often focus on issues related to specific services at high  risk for improper payments, and provide CMS with information on the  prevalence of the issues and recommendations on how to address them.  Although CMS directs the types of services and improper payment issues  that the SMRC examines, the SMRC identifies the specific claims that are  reviewed as part of the studies.
subsections: section_title: Medicare CERT Program
paragraphs: CMS’s CERT program annually estimates the amount and rate of  improper payments in the Medicare FFS program, and CMS uses the  CERT results, in part, to direct and oversee the work of claim review  contractors, including the MACs, RAs, and SMRC. CMS’s CERT program  develops its estimates by using a contractor to conduct postpayment  claim reviews on a statistically valid random sample of claims. The CERT  program develops the estimates as part of CMS’s efforts to comply with  the Improper Payments Information Act, which requires agencies to  annually identify programs susceptible to significant improper payments,  estimate amounts improperly paid, and report these estimates and  actions taken to reduce them.25 In addition, the CERT program estimates  improper payment rates specific to Medicare service and provider types  and identifies services that may be particularly at risk for improper  payments.
section_title: Few Differences Exist between Prepayment and Postpayment Reviews and Use Varies by Contractor, but Prepayment Reviews Better Protect Medicare Funds
subsections: section_title: Prepayment Reviews Better Protect Medicare Funds, and Stakeholders Report Few Differences between Prepayment and Postpayment Reviews
paragraphs: See Improper Payments Information Act of 2002 (IPIA), Pub. L. No. 107-300, 116 Stat.  2350 (2002) (codified, as amended, at 31 U.S.C. § 3321 note). The IPIA was  subsequently amended by the Improper Payments Elimination and Recovery Act of 2010,  Pub. L. No. 111-204, 124 Stat. 2224 (2010), and the Improper Payments Elimination and  Recovery Improvement Act of 2012, Pub. L. No. 112-248, 126 Stat. 2390 (2013).
We have also reported that prepayment controls are generally more cost-effective than  postpayment controls and help avoid costs associated with the “pay and chase” process.  See GAO, A Framework for Managing Fraud Risks in Federal Programs, GAO-15-593SP  (Washington, D.C.: July 28, 2015).
CMS is not always able to collect overpayments identified through  postpayment reviews. A 2013 HHS OIG study found that each year  over the period from fiscal year 2007 to fiscal year 2010,  approximately 6 to 9 percent of all overpayments identified by claim  review contractors were deemed not collectible.27
Postpayment reviews require more administrative resources  compared to prepayment reviews. Once overpayments are identified  on a postpayment basis, CMS requires contractors to take timely  efforts to collect the overpayments. HHS OIG reported that the  process for recovering overpayments can involve creating and  managing accounts receivables for the overpayments, tracking  provider invoices and payments, and managing extended repayment  plans for certain providers. In contrast, contractors do not need to  take these steps, and expend the associated resources, for  prepayment reviews, which deny claims before overpayments are  made.
Key stakeholders we interviewed identified few significant differences in  conducting and responding to prepayment and postpayment reviews.  Specifically, CMS, MAC, and RA officials stated that prepayment and  postpayment review activities are generally conducted by claim review  contractors in similar ways. Officials we interviewed from health care  provider organizations told us that providers generally respond to  prepayment and postpayment reviews similarly, as both types of review  occur after a service has been rendered, and involve similar medical  documentation requirements and appeal rights.
These statistics are based on CMS summary financial data, and the currently not  collectable classification for overpayments can vary based on when overpayments are  identified and demanded, and if overpayments are under appeal. See Department of  Health and Human Services, Office of Inspector General, Medicare’s Currently Not  Collectible Overpayments, OEI-03-11-00670 (Washington, D.C.: June 2013). hold discussions with the RAs for postpayment review findings, and CMS  recently implemented the option for SMRC findings as well. The  discussions offer providers the opportunity to give additional information  before payment determinations are made and before providers potentially  enter the Medicare claims appeals process. Several of the provider  organizations we interviewed found the RA discussions helpful, stating  that some providers have been able to get RA overpayment  determinations reversed. Such discussions are not available for RA  prepayment claim reviews or for MAC reviews. CMS officials stated that  the discussions are not feasible for prepayment claim reviews due to  timing difficulties, as the MACs and RAs are required to make payment  determinations within 30 days after receiving providers’ medical records.
Second, providers stated that they may face certain cash flow burdens  with prepayment claim reviews that they do not face with postpayment  reviews due to how the claims are treated in the Medicare appeals  process.29 When appealing postpayment review overpayment  determinations, providers keep their Medicare payment through the first  two levels of appeal before CMS recovers the identified overpayment. If  the overpayment determinations are overturned at a higher appeal level,  CMS must pay back the recovered amount with interest accrued for the  period in which the amount was recouped. In contrast, providers do not  receive payment for claims denied on a prepayment basis and, if  prepayment denials are overturned on appeal, providers do not receive  interest on the payments for the duration the payments were held by  CMS.
section_title: MACs Generally Use Prepayment Reviews, while RAs and the SMRC Use Postpayment Reviews
paragraphs: The Medicare FFS appeals process consists of five levels of review that include CMS  contractors, staff divisions within HHS, and ultimately, the federal judicial system, allowing  appellants who are dissatisfied with the decision at one level to appeal to the next level. claims deemed most critical by each MAC to address and a description of  plans to address them.
During the same time period, the MACs conducted approximately 76,000  postpayment claim reviews, though some MACs did not conduct any  postpayment claims reviews. Prior to the establishment of the national RA  program, the MACs conducted a greater proportion of postpayment  reviews. However, the MACs have shifted nearly all of their focus to  conducting prepayment reviews, as responsibility for conducting  postpayment reviews has generally shifted to the RAs. According to CMS  officials, the MACs currently use postpayment reviews to analyze billing  patterns to inform other review activities, including future prepayment  reviews, and to help determine where to conduct educational outreach for  specific providers. CMS has also encouraged the MACs to use  postpayment reviews to perform extrapolation, a process in which the  MACs estimate an overpayment amount for a large number of claims  based on a sample of claim reviews. According to CMS officials,  extrapolation is not used often but is an effective strategy for providers  that submit large volumes of low-dollar claims with high improper  payment rates.
The SMRC is focused on examining Medicare billing and payment issues  at the direction of CMS, and all of its approximately 178,000 reviews in  2013 and 2014 were postpayment reviews. The SMRC uses postpayment  reviews because its studies involve developing sampling methodologies  to examine issues with specific services or specific providers. For  example, in 2013, CMS directed the SMRC to complete a national review  of home health agencies, which involved reviewing five claims from every  home health agency in the country. CMS had the SMRC conduct this  study to examine issues arising from a new coverage requirement that  raised the improper payment rate for home health services.30 Additionally,  a number of SMRC studies used postpayment sampling to perform  extrapolation to determine overpayment amounts for certain providers.
The RAs generally conducted postpayment reviews, though they  conducted prepayment reviews under the Prepayment Review  Demonstration. The RAs conducted approximately 85 percent of their  claim reviews on a postpayment basis in 2013 and 2014—accounting for  approximately 1.7 million postpayment claim reviews—with the other 15  percent being prepayment reviews conducted under the demonstration.  CMS is no longer using the RAs to conduct prepayment reviews because  the demonstration ended. Outside of a demonstration, CMS must pay the  RAs from recovered overpayments, which effectively limits the RAs to  postpayment reviews. CMS and RA officials who we interviewed  generally considered the demonstration a success, and CMS officials told  us that they included prepayment reviews as a potential work activity in  the requests for proposals for the next round of RA contracts, in the event  that the agency is given the authority to pay RAs on a different basis.  However, the President’s fiscal year budget proposals for 2015 through  2017 did not contain any legislative proposals that CMS be provided such  authority. Obtaining the authority to allow the RAs to conduct prepayment  reviews would align with CMS’s strategy to pay claims properly the first  time. In not seeking the authority, CMS may be missing an opportunity to  reduce the amount of uncollectable overpayments from RA reviews and  save administrative resources associated with recovering overpayments.
The rate of improper payments for home health services rose from 6.1 percent in fiscal  year 2012 to 17.3 percent in fiscal year 2013and to 51.4 percent in fiscal year 2014.  According to CMS, the increase in improper payments occurred primarily because of  CMS’s implementation of a requirement that home health agencies have documentation  showing that referring providers conducted a face-to-face examination of beneficiaries  before certifying them as eligible for home health services.
section_title: Contractors Focused on Different Types of Claims in 2013 and 2014
subsections: section_title: RAs Focused on Inpatient Claim Reviews, Though CMS Has Taken Steps to Ensure RAs Review All Claim Types
paragraphs: Our analysis of RA claim review data shows that the RAs focused on  reviewing inpatient claims in 2013 and 2014, though this focus was not  consistent with the degree to which inpatient services constituted  improper payments, or with CMS’s expectation that the RAs review all  claim types. In 2013, a significant majority—78 percent—of all RA claim  reviews were for inpatient claims, and in 2014, nearly half—47 percent— of all RA claim reviews were for inpatient claims (see Table 3). For RA  postpayment reviews specifically, which excludes reviews conducted as  part of the RA Prepayment Review Demonstration, 87 percent of RA  reviews were for inpatient claims in 2013, and 64 percent were for  inpatient claims in 2014. Inpatient services had high amounts of  improper payments relative to other types of services—with over $8 billion  in improper payments in fiscal year 2012 and over $10 billion in fiscal  year 2013—which reflect the costs of providing these services. However,  inpatient services did not have a high improper payment rate relative to  other services and constituted about 30 percent of overall Medicare FFS  improper payments in both years.
As will be discussed, the proportion of inpatient reviews in 2014 would  likely have been higher if CMS—first under its own authority and then as  required by law—had not prohibited the RAs from conducting reviews of  claims for short inpatient hospital stays at the beginning of fiscal year  2014. The RAs conducted about 1 million fewer claim reviews in 2014  compared to 2013, and nearly all of the decrease can be attributed to  fewer reviews of inpatient claims.
In general, the RAs have discretion to select the claims they review, and  their focus on reviewing inpatient claims is consistent with the financial  incentives associated with the contingency fees they receive, as inpatient  claims generally have higher payment amounts compared to other claim  types. By law, RAs receive a portion of the recovered overpayments they  identify, and RA officials told us that they generally focus their claim  reviews on audit issues that have the greatest potential returns. Our  analysis found that RA claim reviews for inpatient services had higher  average identified improper payment amounts per postpayment claim  review relative to other claim types in 2013 and 2014 (see Table 4). For  example, in 2013, the RAs identified about 10 times the amount per  postpayment claim review for inpatient claims compared to claim reviews  for physicians.
Although CMS expects the RAs to review all claim types, CMS’s oversight  of the RAs did not ensure that the RAs distributed their reviews across  claim types in 2013 and 2014. According to CMS officials, the agency’s  approval of RA audit issues is the primary way in which CMS controls the  type of claims that the RAs review. However, the officials said they  generally focus on the appropriateness of the review methodology when  determining whether to approve the audit issues, instead of on whether  the RA’s claim review strategy encompasses all claim types. The RAs  generally determine the types of audit issues that they present to CMS for  approval, and based on our analysis of RA audit issues data, we found  that from the inception of the RA program to May 2015, 80 percent of the  audit issues approved by CMS were for inpatient claims. Additionally,  CMS generally gives RAs discretion regarding the claims that they select  for review among approved audit issues.
Effective October 1, 2013, CMS changed the coverage requirements for short inpatient  hospital stays. As a result, CMS prohibited RA claim reviews related to the  appropriateness of inpatient admissions for claims with dates of admission between  October 1, 2013 and September 30, 2014. In April 2014 and April 2015, Congress  enacted legislation directing CMS to continue the prohibition of RA claim reviews related  to the appropriateness of inpatient admissions for claims with dates of admission through  September 30, 2015, unless there was evidence of fraud and abuse. Protecting Access to  Medicare Act of 2014, Pub. L. No. 113-93, § 111, 128 Stat.1040, 1044 (2014); Medicare  Access and CHIP Reauthorization Act of 2015, Pub. L. No. 114-10, § 521, 129 Stat. 87,  176 (2015). In July 2015, CMS announced that it would not allow such RA claim reviews  for claims with dates of admission of October 1, 2015 through December 31, 2015. The  RAs were allowed to continue reviews of short stay inpatient claims for reasons other than  reviewing inpatient status, such as reviews related to coding requirements.
Beginning on October 1, 2015, Quality Improvement Organizations assumed  responsibility for conducting initial claim reviews related to the appropriateness of inpatient  hospital admissions. Starting January 1, 2016, the Quality Improvement Organizations will  refer providers exhibiting persistent noncompliance with Medicare policies to the RAs for  potential further review.
CMS stated that it will monitor the extent to which the RAs are reviewing  all claim types, may impose a minimum percentage of reviews by claim  type, and may take corrective action against RAs that do not review all  claim types.
CMS has also taken steps to provide incentives for the RAs to review  other types of claims. To encourage the RAs to review DME claims— which had the highest rates of improper payments in fiscal years 2012  and 2013—CMS officials stated that they increased the contingency fee  percentage paid to the RAs for DME claims. Further, in the requests for  proposals for the next round of RA contracts, CMS included a request for  a national RA that will specifically review DME, home health agency, and  hospice claims. CMS officials told us that they are procuring this new RA  because the existing four regional RAs reviewed a relatively small  number of these types of claims. Although DME, home health agency,  and hospice claims combined represented more than 25 percent of  improper payments in both 2013 and 2014, they constituted 5 percent of  RA reviews in 2013 and 6 percent of reviews in 2014.
section_title: MAC Claim Reviews Focused on Physician and DME Claims
paragraphs: In 2013 and 2014, the MACs focused their claim reviews on physician  and DME claims. Physician claims accounted for 49 percent of MAC  claim reviews in 2013 and 55 percent of reviews in 2014, while  representing 30 percent of improper payments in fiscal year 2012 and 26  percent in fiscal year 2013 (see Table 5). DME claims accounted for 29  percent of their reviews in 2013 and 26 percent in 2014, while  representing 22 percent of total improper payments in fiscal year 2013  and 16 percent of improper payments in fiscal year 2014. DME claims  also had the highest rates of improper payments in both years.
According to CMS officials, the MACs focused their claim reviews on  physician claims—a category which encompasses a large variety of  provider types, including labs, ambulances, and individual physician  offices—because they constitute a significant majority of all Medicare  claims. CMS officials also told us that they direct MAC claim review  resources to DME claims in particular because of their high improper  payment rate. Further CMS officials told us that the MACs’ focus on  reviewing physician and DME claims was in part due to how CMS  structures the MAC claim review workload. CMS official noted that each  A/B MAC is responsible for addressing improper payments for both  Medicare Part A and Part B, and MAC Part B claim reviews largely focus  on physician claims. Additionally, 4 of the 16 MACs are DME MACs that  focus their reviews solely on DME claims. CMS officials also noted that  MAC reviews of inpatient claims were likely lowered during this period  because of CMS’s implementation of new coverage policies for inpatient  admissions. Similar to the RAs, the MACs were limited in conducting  reviews for short inpatient hospital stays after October 1, 2013.
section_title: The Focus of SMRC Claim Reviews Varied between 2013 and 2014 Based on CMS’s Direction
paragraphs: The focus of the SMRC’s claim reviews depended on the studies that  CMS directed the contractor to conduct in 2013 and 2014. In 2013, the  SMRC focused its claim reviews on outpatient and physician claims, with  physician claims accounting for half of all SMRC reviews (see Table 6).  Physician claims accounted for 30 percent—the largest percentage—of  the total amount of estimated improper payments in fiscal year 2012. In  2014, the SMRC focused 46 percent of its reviews on home health  agency claims and 44 percent of its claim reviews on DME claims, which  had the two highest improper payment rates in fiscal year 2013.
CMS generally directs the SMRC to conduct studies examining specific  services, and the number of claims reviewed by claim type is highly  dependent on the methodologies of the studies. For example, one SMRC  study involved reviewing nearly 50,000 DME claims for suppliers deemed  high risk for having improperly billed for diabetic test strips. In 2014, the  claim reviews for this study accounted for all of the SMRC’s DME claim  reviews and nearly half of all the SMRC claim reviews. Additionally, in  2014, the SMRC reviewed more than 50,000 claims as part of its study  that examined five claims from every home health agency. The study  followed a significant increase in the improper payment rate for home  health agencies from 2012 to 2013, from 6 percent to 17 percent. In some  cases, SMRC studies focused on specific providers. For example, a 2013  SMRC study reviewed claims for a single hospital to follow up on billing  issues previously identified by the HHS OIG.
section_title: Both RAs and the SMRC Generated Savings for CMS, but Unreliable Data Prevent Comparison to MACs
subsections: section_title: CMS Paid the RAs an Average of $158 per Review, and the RAs Averaged $14 in Identified Improper Payments per Dollar Paid by CMS in 2013 and 2014
paragraphs: The RAs were paid an average of $158 per claim review conducted in  2013 and 2014 and identified $14 in improper payments, on average, per  dollar paid by CMS in contingency fees (see Table 7). The cost to CMS in  RA contingency fees per review decreased from $178 in 2013 to $101 in  2014 because the average identified improper payment amount per  review decreased from $2,549 to $1,509. The decrease in the average  identified improper payment amount per review likely resulted from the  RAs conducting proportionately fewer reviews of inpatient claims in 2014  compared to 2013.
section_title: CMS Paid the SMRC an Average of $256 per Review, and the SMRC Averaged $7 in Identified Improper Payments per Dollar Paid in 2013 and 2014
paragraphs: The SMRC was paid an average of $256 per claim review conducted in  studies initiated in fiscal years 2013 and 2014, though the amount paid  per claim review varied by study and varied between years (see Table 8).  In particular, the amount paid to the SMRC is significantly higher for  studies that involve extrapolation for providers who had their claims  reviewed as part of the studies and were found to have a high error rate.  Based on our analysis, the higher average amount paid per review in  2014—$346 compared to $110 in 2013—can in part be attributed to the  SMRC conducting proportionally more studies involving extrapolation in  2014. As well as increasing study costs, the use of extrapolation can  significantly increase the associated amounts of identified improper  payments per study. For example, the SMRC study on diabetic test strips  involved extrapolation and included reviews of nearly 50,000 claims from  500 providers. It cost CMS more than $23 million to complete, but the  SMRC identified more than $63 million in extrapolated improper  payments. According to CMS officials, the agency has the SMRC perform  extrapolation as part of its studies when it is cost effective—that is, when  anticipated extrapolated overpayment amounts are greater than the costs  associated with having the SMRC conduct the extrapolations.
The amount the SMRC was paid per review also varied based on the type  of service being reviewed and the number of reviews conducted. CMS  pays the SMRC more for claim reviews for Part A services, such as  inpatient and home health claims, than for claim reviews for Part B  services, such as physician and DME claims, because CMS officials said  that claim reviews of Part A services are generally more resource- intensive. Additionally, CMS gets a volume discount on SMRC claim  reviews, with the cost per review decreasing once the SMRC reaches  certain thresholds for the number of claim reviews in a given year.
The SMRC identified $7 in improper payments per dollar paid by the  agency, on average, in 2013 and 2014, though the average amount  varied considerably by study and varied for 2013 and 2014. In 2013, the  SMRC averaged $25 in improper payments per dollar paid, while in 2014,  it averaged $4. The larger figure for 2013 is primarily attributed to two  SMRC studies that involved claim reviews of inpatient claims that  identified more than $160 million in improper payments but cost CMS less  than $1 million in total to conduct.
section_title: CMS’s Lack of Reliable MAC Cost and Savings Data Precludes Analysis of the Cost per Review and the Amount of Improper Payments Identified per Dollar Paid by CMS
paragraphs: We were unable to determine the cost per review and the amount of  improper payments identified by the MACs per dollar paid by CMS  because the agency does not have reliable data on funding of MAC claim  reviews for 2013 and 2014, and the agency collects inconsistent data on  the savings from prepayment claim denials. For an agency to achieve its  objectives, federal internal control standards provide that an agency must  obtain relevant data to evaluate performance towards achieving agency  goals.38 By not collecting reliable data on claim review funding and by not  having consistent data on identified improper payments, CMS does not  have the information it needs to evaluate MAC cost effectiveness and  performance in protecting Medicare funds.
GAO/AIMD-00-21.3.1. higher-level, broader contractual work activities. CMS officials told us that  they have not required the MACs to report data on specific funds spent to  conduct prepayment and postpayment claim reviews. However, as of  February 2016, CMS officials told us that all MACs are either currently  reporting specific data on prepayment and postpayment claim review  costs or planning to do so soon.
We also found that data on savings from MAC prepayment reviews were  not consistent across the MACs. In particular, the MACs use different  methods to calculate and report savings associated with prepayment  claim denials, which represented about 98 percent of MAC claim review  activity in 2013 and 2014. According to CMS and MAC officials, claims  that are denied on a prepayment basis are never fully processed, and the  Medicare payment amounts associated with the claims are never  calculated. In the absence of processed payment amounts, the MACs use  different methods for calculating prepayment savings. According to the  MACs:
Two MACs use the amount that providers bill to Medicare to calculate  savings from prepayment claim denials. However, the amount that  providers bill to Medicare is often significantly higher than and not  necessarily related to how much Medicare pays for particular  services. One MAC estimated that billed amounts can be, on average,  three to four times higher than allowable amounts. Accordingly,  calculated savings based on provider billed amounts can greatly  inflate the estimated amount that Medicare saves from claim denials.
Nine MACs calculate prepayment savings by using the Medicare  “allowed amount.” The allowed amount is the total amount that  providers are paid for claims for particular services, though it is  generally marginally higher than the amount that Medicare pays, as it  includes the amount Medicare pays, cost sharing that beneficiaries  are responsible for paying, and amounts that third parties are  responsible for paying. Additionally, the allowed amounts may not  account for Medicare payment policies that may reduce provider  payments, such as bundled payments.
Five MACs compare denied claims with similar claims that were paid  to estimate what Medicare would have paid.
CMS has not provided the MACs with documented guidance or other  instructions for how to calculate savings from prepayment reviews.  Federal internal controls standards provide that an agency must  document guidance that has a significant impact on the agency’s ability to  achieve its goals. In reviewing MAC claim review program  documentation, including the Medicare Program Integrity Manual and  MAC contract statements of work, we were unable to identify any  instructions on how the MACs should calculate savings from prepayment  claim denials. Further, several MACs we interviewed indicated that they  have not been provided guidance for calculating savings from  prepayment denials. CMS officials told us that they were under the  impression that all of the MACs were reporting prepayment savings data  based on the amount that providers bill to Medicare, which can  significantly overestimate the amount that Medicare saves from  prepayment claim denials. Because CMS has not provided documented  guidance on how to calculate savings from prepayment claim review, the  agency lacks consistent and reliable information on the performance of  MAC claim reviews. In particular, CMS does not have reliable information  on the extent to which MAC claim reviews protect Medicare funds or on  how the MACs’ performance compares to other contractors conducting  similar activities.
section_title: Conclusions
paragraphs: CMS contracts with claim review contractors that use varying degrees of  prepayment and postpayment reviews to identify improper payments and  protect the integrity of the Medicare program. Though we found few  differences in how contractors conduct and how providers respond to the  two review types, prepayment reviews are generally more cost-effective  because they prevent improper payments and limit the need to recover  overpayments through the “pay and chase” process, which requires  administrative resources and is not always successful. Although CMS  considered the Prepayment Review Demonstration a success, and  having the RAs conduct prepayment reviews would align with CMS’s  strategy to pay claims properly the first time, the agency has not  requested legislative authority to allow the RAs to do so. Accordingly,  CMS may be missing an opportunity to better protect Medicare funds and  agency resources.
Inconsistent with federal internal control standards, CMS has not provided  the MACs with documented guidance or other instructions for how to  calculate savings from prepayment reviews. As a result, CMS does not  have reliable data on the amount of improper payments identified by the  MACs, which limits CMS’s ability to evaluate MAC performance in  preventing improper payments. CMS uses claim review contractors that  have different roles and take different approaches to preventing improper  payments. However, the essential task of reviewing claims is similar  across the different contractors and, without better data, CMS is not in a  position to evaluate the performance and cost effectiveness of these  different approaches.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of HHS direct the Acting Administrator  of CMS to take the following two actions:  In order to better ensure proper Medicare payments and protect  Medicare funds, CMS should seek legislative authority to allow the  RAs to conduct prepayment claim reviews.
In order to ensure that CMS has the information it needs to evaluate  MAC effectiveness in preventing improper payments and to evaluate  and compare contractor performance across its Medicare claim  review program, CMS should provide the MACs with written guidance  on how to accurately calculate and report savings from prepayment  claim reviews.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a copy of a draft of this report to HHS for review and  comment. HHS provided written comments, which are reprinted in  appendix I. In its comments, HHS disagreed with our first  recommendation, but it concurred with our second recommendation. HHS  also provided us with technical comments, which we incorporated in the  report as appropriate.
HHS disagreed with our first recommendation that CMS seek legislative  authority to allow the RAs to conduct prepayment claim reviews. HHS  noted that other claim review contractors conduct prepayment reviews  and CMS has implemented other programs as part of its strategy to move  away from the “pay and chase” process of recovering overpayments,  such as prior authorization initiatives and enhanced provider enrollment  screening. However, we found that prepayment reviews better protect  agency funds compared with postpayment reviews, and believe that  seeking the authority to allow the RAs to conduct prepayment reviews is  consistent with CMS’s strategy.
HHS concurred with our second recommendation that CMS provide the  MACs with written guidance on how to accurately calculate and report  savings from prepayment claim reviews. HHS stated that it will develop a  uniform method to calculate savings from prepayment claim reviews and  issue guidance to the MACs.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Health  and Human Services, the Acting Administrator of CMS, appropriate  congressional requesters, and other interested parties. In addition, the  report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-7114 or at 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 that made key contributions to this  report are listed in appendix II.
section_title: Appendix I: Comments from the Department of Health and Human Services
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Kathleen M. King, (202) 512-7114, kingk@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Lori Achman, Assistant Director;  Michael Erhardt; Krister Friday; Richard Lipinski; Kate Tussey; and  Jennifer Whitworth made key contributions to this report.