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. 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. 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. 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. 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. 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. 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 claims. 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. We have previously reported that, overall, less than 1 percent of Medicare’s claims are subject to medical record review by trained personnel. 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. 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. MedPAC’s analysis of outpatient therapy claims data from 2011 showed that average per- beneficiary spending varied widely by county, ranging from $406 to $3,582. 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 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. 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. 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. 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. 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. 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 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. In order to manage the expected volume of preapproval requests submitted to MACs at the start of the MMR process, CMS divided all outpatient therapy providers among three phases, based primarily on their past billing practices. Providers were instructed to submit preapproval requests during their assigned phase. 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. 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. 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 also instructed the MACs to post guidelines on their websites to educate providers about these requirements. In 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. 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. In addition, CMS instructed the MACs to automatically approve any requests they were unable to review within 10 business days. 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.) 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 were also required to manually review submitted claims before providing payment for therapy services provided above $3,700 without a preapproval request. 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. 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 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. However, CMS did not issue instructions on how the MACs should conduct MMRs of preapproval requests until August 31, 2012. 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 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 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 time- consuming 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 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 and 57,000 were for estimated 110,000 were for preapproval requestsclaims 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 nonaffirmed outpatient therapy services during the last quarter of 2012 (see fig. 3). 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. Overall, the MACs estimated they completed MMRs for about 52 percent of the total preapproval requests received within the 10 days required by CMS. (See fig. 4.) 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. 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. 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. 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.

Summary: 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 speech-language 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. 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.