Medicare provides health insurance coverage for approximately 37 million elderly and disabled people under two parts: part A, primarily hospital insurance, and part B, supplementary insurance. HCFA, which administers the Medicare program, contracts with insurance companies (called “fiscal intermediaries” for part A and “carriers” for part B) to process, review, and pay claims for covered services. Payments for medical supplies are made under either of Medicare’s two parts. Medical supply claims submitted by hospitals or other institutions, such as nursing homes or home health agencies, are paid by 43 local fiscal intermediaries. Medical supply claims submitted by noninstitutional providers, such as physicians or medical supply companies, are paid by carriers. Thus, the same supply item can be billed to Medicare for an individual under two completely different payment systems, one for part A and another for part B. Under part A, the payment is generally made on the basis of reasonable costs. Under part B, the payment is made using a fee schedule established by HCFA. Historically, part B fraud and abuse have plagued Medicare, and HCFA has recently reformed its operations. In October 1993, acting under specific statutory authority, HCFA started transferring carrier claims processing responsibility for durable medical equipment (DME); prosthetics; orthotics; and medical supplies, including surgical dressings, from 32 local carriers to 4 regional carriers. These carriers are commonly referred to as durable medical equipment regional carriers (DMERC). In March 1994, after lobbying by suppliers and manufacturers, among others, HCFA greatly expanded its surgical dressing benefit, broadening the types of dressings covered and the conditions under which they would be covered. For example, the benefit was expanded to cover payment for various types and sizes of gauze pads that Medicare previously did not cover. Also, the duration of coverage was extended from 2 weeks to whatever is considered medically necessary. DME claims have long been abused, in part, because of fundamental weaknesses in Medicare payment controls. In response to these weaknesses, HCFA has recently implemented significant changes in the processing of DME claims to reduce Medicare’s vulnerability to this particular fraud and abuse. Before DME claims processing was transferred to the 4 regional carriers in 1993, each of the 32 carriers paid DME claims, which represented a small part of the total claims each carrier processed. Under this process, HCFA did not require its contractors to implement basic controls before payment that would identify and set aside for review those claims with unusually high per-patient expenditures or improbably large quantities of supplies. Without such controls, some DME suppliers billed for equipment never delivered, higher cost equipment than delivered, or totally unnecessary equipment or supplies. Further, suppliers frequently engaged in contractor shopping. Although, they might deliver equipment or supplies to beneficiaries in one state, they would bill a contractor in another state because that contractor paid more for the items delivered or had relatively weak payment controls for the equipment or supply items. These weaknesses explain why Medicare contractors processed, without questioning, claims that later proved to be fraudulent or abusive. For example, as reported by the OIG, Medicare paid an estimated $20 million in claims for unneeded nutritional supplements approximately $5.2 million in claims for oxygen concentrators, nebulizers, medications, and tests either not needed or not delivered; approximately $500,000 in claims for unneeded transcutaneous electrical $7 million in claims for orthotic body jackets that should not have been paid. Establishing four regional carriers to process and oversee DME claims, including surgical dressings, eliminated some of the weaknesses that allowed prior abuses to flourish. The regional carriers are better able to prevent Medicare payments for unusually high medical supply claims for two key reasons. First, the ability of suppliers to shop for contractors with the highest payments and weakest controls has been eliminated. With only four regional carriers, HCFA has better standardized the amount that Medicare pays for medical supplies and the controls used to detect and prevent payment of problem claims. Claims must be submitted to the regional carrier responsible for payments in the state where the beneficiary resides rather than the carrier allowing the highest payment. Second, medical supply and surgical dressing claims can receive more attention from regional carriers than local carriers because these claims are a larger portion of the regional carriers’ workloads. As a result, the regional carriers should be better able to detect and prevent inappropriate payments for abnormally expensive surgical dressing claims. HCFA’s recent efforts to prevent abuses in medical supply claims apply only to part B claims submitted to regional carriers, which represent half of Medicare’s total medical supply payments. Claims processed by fiscal intermediaries are still subject to some of the same fraud and abuse problems that have historically plagued medical supply claims. Further, despite the improvements, medical supply claims submitted to the regional carriers are still subject to significant abuse. Fiscal intermediaries pay medical supply claims without knowing specifically what they are being asked to pay for on behalf of beneficiaries. The claims submitted by providers have no detailed information that would allow fiscal intermediaries to assess the claims’ reasonableness. This lack of detail exists because HCFA guidance allows providers to bill all medical supplies under 10 broad codes; billed items are not listed by type or amount. A code frequently used to record medical supplies is code 270 (medical/surgical supplies and devices-general classification), which we found included many different items, such as a $21,437 pacemaker, a $.75 sterile sponge, and even daily rental charges of $59 for an aqua pad. Consequently, unless fiscal intermediaries identify these claims for review and request additional documentation before payment, they will pay for the claims without knowing what the specific purchase was or whether it was covered or medically necessary. For example, a fiscal intermediary processed a code 270 claim for more than $21,000 without any review. At our request, the fiscal intermediary asked the provider to submit medical records and a list of items billed under this claim. After the fiscal intermediary reviewed the documentation to support this claim, it denied more than $13,000 in charges because the medical records contained no doctor’s orders for the billed items. In total, we requested the fiscal intermediary to obtain the medical records and an itemized list of supplies supporting 85 high-dollar medical supply claims submitted by 38 providers during a 1-month period. All of these claims had been processed without any review. The results of the fiscal intermediary’s subsequent review are as follows: Eighty-nine percent of the claims for which documentation was received and reviewed (42 of 47) should have been totally or partially denied. Almost 61 percent of the dollars billed for medical supplies ($193,147 of $316,824) should have been denied for various reasons, including, among others, items not medically necessary, items not covered by Medicare or covered as part of routine or administrative costs, no documentation of supplies used, no doctor’s orders, and no itemized list of supplies. (See app. II for detailed information.) Forty-five percent of the claims for which documentation was not returned (38 of 85), totaling $487,412, was subsequently denied. One claim was determined to be potentially fraudulent because the beneficiary’s condition required none of the $2,404 in medical supplies billed. A further review, by the fiscal intermediary’s fraud and abuse unit, of the same provider’s claims for this beneficiary for the previous 5 months resulted in the identification of an additional $20,393 in potentially fraudulent medical supply charges. Fiscal intermediaries obtain similar or better results when they conduct their own prepayment reviews of medical supply claims. For example, a fiscal intermediary used a computerized payment control to identify all medical supply claims (code 270) in excess of $500 submitted between October and December 1993. After reviewing documentation supporting the claims, the fiscal intermediary denied 69 percent of the dollars billed ($59,542 of $86,046). The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) partially addressed the problem of providers not submitting documentation that would allow fiscal intermediaries to adequately assess medical supply claims. OBRA 1993 provided essentially for certain supplies, including surgical dressings, to be paid on the basis of the fee schedule that regional carriers use for the part B program. As a result, providers must submit to fiscal intermediaries claims that itemize the specific supplies and quantities being billed. Because the provision does not apply to all medical supplies, many other types of medical supplies are still billed using broad codes that do not adequately describe the type and amount of such supplies. The provision does not at all apply to surgical dressings supplied by a home health agency. As a result, home health agencies, which billed Medicare for almost half a billion dollars of medical supplies in fiscal year 1994, can continue to submit claims for surgical dressings without the detailed itemization required of other types of providers billing for these items. For Medicare part B claims, the regional carriers have not adopted important fraud and abuse controls for many surgical dressing items. Specifically, the 29 surgical dressings covered by the expanded Medicare surgical dressing benefit have no formal medical policies specifying the conditions under which payment is to be made. Without these policies, regional carriers cannot implement systematic controls to identify questionable claims for review. As a result, they pay many high-dollar, high-volume claims without review. We found that the utilization level—the number of dressings billed per beneficiary—was, on average, nearly three times higher for the newly covered dressings—that is, those for which no formal medical policies apply. Moreover, on average, the dressings that have no medical policies exceeded the expected utilization level, as determined by recommended industry and draft regional carrier standards. In some cases, the average number of dressings billed per beneficiary was four times greater than expected. Formal medical policies for the newly covered dressings cannot be adopted until the surgical dressing industry and others have been allowed to comment on them. HCFA expanded surgical dressing coverage and instructed regional carriers to pay for newly covered surgical dressings before the carriers had a chance to develop new medical policies. As a result, most claims for surgical dressings for which no medical policies apply are being paid and will continue to be paid without a routine review to determine whether the amount of dressings billed is reasonable or medically necessary. HHS estimates that this process will be completed and medical policies will be effective October 1, 1995. We asked officials at one regional carrier to identify high-dollar claims it paid. While the claims the carrier identified for us were subject to some review before payment, the review only applied to those dressings that had a formal medical policy. As a result, thousands of dollars were paid for surgical dressings that were not needed and the claims for which were not subject to review because they did not have formal medical policies. For example, in the case of one beneficiary, the carrier—over 3 months and on the basis of a formal medical policy—had denied over $8,500 worth of claims for dressings and sterile saline before paying $23,000. However, in performing the review we requested, the carrier determined that only $1,650 of the $23,000 for dressings should have been paid because the beneficiary’s condition did not appear to justify the use of large quantities of dressings. The $23,000 had been paid without review for medical necessity because no formal medical policies applied to most of the surgical dressings. Therefore, no internal policies were in place to trigger a review of these dressings. Without such policies, suppliers have exploited Medicare with little risk of ever having to repay the program. Following are examples of this exploitation: One supplier regularly billed Medicare for 60 or more transparent films per beneficiary per month. For some beneficiaries the supplier billed for 120 or more films a month. Recommended industry standards suggest the need for no more than 24 films per beneficiary per month. Another supplier billed Medicare an average of 268 units of tape per beneficiary during a 15-month period. The average for all suppliers was 60 units during the 15-month period. Some beneficiaries received between 180 to 720 units of tape in 1 month. Using a 10-yard roll of tape, a common industry length, these beneficiaries would have been wrapped in 60 to 240 yards of tape per day. Supplier abuse is not limited to surgical dressings; other medical supply items for which no formal policies or systematic controls apply have also been exploited: At least four suppliers regularly billed Medicare for 30 or more drainage bottles a month for each beneficiary. This is 90 times more than the proposed standard of one bottle every 3 months. The number of drainage bottles billed by these suppliers was 79 percent of all bottles billed to the regional carrier. One supplier billed Medicare an average of nine urinary leg bags per beneficiary a month. For some beneficiaries, the supplier billed for one leg bag a day or 15 times more than the proposed standard of two leg bags a month. In total, this supplier billed Medicare for 50,834 leg bags or 21 percent of all leg bags billed to the regional carrier over 15 months. Medicare can pay for the same item twice because it does not have effective tests to determine whether both regional carriers and fiscal intermediaries are paying for the same surgical dressings, medical supplies, and other items. Surgical dressings and many medical supplies can be billed to either fiscal intermediaries or regional carriers. If suppliers submit claims for the same items to both types of contractors, only one should pay the claim. For example, if a fiscal intermediary pays a nursing home for surgical dressings, a regional carrier should not pay the supplier for the same dressings. Conversely, if a regional carrier pays a supplier for surgical dressings, the fiscal intermediary should not pay the nursing home that used the dressings. Medicare does not have an effective control to prevent both types of contractors from paying for the same medical supplies or surgical dressings. As part of Medicare’s claims processing system, all claims received by contractors are compared with historical beneficiary data to verify eligibility for payment and benefits. HCFA uses this system to conduct many types of computerized controls to determine if payment for the claims should be approved or rejected. The system does not check, however, to see if items paid by regional carriers have already been paid by fiscal intermediaries or whether items paid by fiscal intermediaries have already been paid by regional carriers. We identified a case in which a computerized control for duplicate items would have prevented Medicare from paying twice for the same item. In this case, the fiscal intermediary paid a nursing home for two bedside drainage bags used by a patient during a 1-month stay. A regional carrier also paid a supplier for 30 drainage bags allegedly provided to the same patient while in the nursing home. If a duplicate payment control had existed, the regional carrier would not have made the duplicate payment. Medicare’s fee schedule payments for surgical dressings are generally excessive when compared with wholesale prices, prices paid by the Department of Veterans Affairs (VA), and even retail prices. Overall, we estimate that HCFA could save substantial amounts if its fee schedule was calculated on the basis of lower available prices. For example, as shown in table 1, if HCFA paid wholesale prices for 44 surgical dressings, total savings would be almost $20 million or almost 35 percent of what it now pays. Potential savings for just nine dressings would be more than $9 million if HCFA paid at the lowest rate, that which VA paid for dressings. We even identified potential savings of more than $2 million for nine surgical dressings if HCFA paid at the lowest retail rates found at four Los Angeles-area drug stores. HCFA’s method of calculating the fee schedule for surgical dressings caused these high payments. OBRA 1993 required HCFA to establish a fee schedule for surgical dressings by computing the average historical charges for the dressings. Because of the expansion of the surgical dressing benefit, however, HCFA did not have data on historical charges. Instead, HCFA used a gap-filling process to establish the fee schedule: HCFA used retail surgical dressing supply catalogs to create a price list for each type of covered surgical dressing. The price of the median-priced dressing for each type became the fee schedule price. For example, HCFA identified 13 different alginate dressings 16 square inches or less (HCFA Common Procedure Code K0196). The retail prices of the dressings ranged from $3.14 to $19.07. The fee schedule price was set at $6.62, the median-priced or sixth dressing on HCFA’s list. The lowest wholesale price for this type of dressing is $1.88. If HCFA makes a mistake in calculating the fee schedule, it can correct the mistake (for example, by using wholesale prices instead of retail prices). However, HCFA may not change the methodology for determining the fee schedule nor may it adjust the fee schedule if dressing prices decrease. Therefore, if, as one HCFA official told us, the prices of surgical dressings fall as more manufacturers produce the many types of surgical dressings that HCFA now pays for, HCFA cannot lower the fee schedule to reflect the change in market condition. Instead, Medicare will pay a price that is even higher, relative to the market prices, than it pays today. For certain DME items—but not for surgical dressings and other medical supplies—the Secretary of HHS may adjust prices that are inherently unreasonable. In these cases, the authority is very limited and involves a complex set of procedures that can take a long time to complete. For example, it took HCFA nearly 3 years to reduce the price it was paying for home blood glucose monitors from a nationwide range of $144 to $211 to $58.71, even though they were widely available for about $50 and, in some cases, provided free as a means of obtaining customers for the disposable items associated with this test equipment. Because of the time and resources involved, HCFA only uses this process for one item at a time. Before 1987, individual Medicare carriers had the authority to increase or decrease prices to reflect local market conditions. The process for doing so, which included notifying area suppliers and publishing the new prices, could be completed in less than 90 days. If HCFA or the carriers had the authority to adjust excessive prices in a timely manner, they could save millions in program dollars. A HCFA official told us, however, that it devotes no resources to routine monitoring of medical equipment and supply prices. As a result, discrepancies in price between what Medicare pays and what other large-volume buyers pay go undetected. HCFA recently created a framework that eventually will allow it to identify and begin addressing fraud and abuse associated with medical supply claims. For the first time, HCFA will have data to begin assessing the size and scope of fraud and abuse and its contractors’ performance in addressing them. In addition, these data will allow HCFA to assess options for addressing program weaknesses. HCFA’s consolidation of DME and medical supply claims processing at four regional carriers provides comprehensive national data—that were not available previously—on utilization and payments. These data will allow HCFA to identify, on a nationwide basis, DME and medical supplies that may be subject to overutilization and inappropriate billing. In 1993, HCFA also developed a programwide emphasis on data analysis. Calling its approach focused medical review, HCFA required contractors to begin identifying general spending patterns and trends that would allow them to identify potential problems. Fiscal intermediaries have started implementing this approach and have recently begun compiling and analyzing claims payment and utilization data. So far, some intermediaries have identified the different types and number of claims that Medicare may be inappropriately paying. For example, one type of review conducted by an intermediary we visited resulted in 85 percent of the claims reviewed during a 1-month period being denied—a total of $5.8 million in program savings. Moreover, some intermediaries have estimated the dollars that Medicare can potentially save by tightening prepayment review controls. The intermediary we visited identified eight other problem areas, in addition to those that it was already reviewing, that should be reviewed because of such things as precipitous increases in utilization rates. This intermediary estimated potential savings of $57 million by implementing the additional reviews, but it did not have the resources to do so. Armed with its new information from DMERCs and focused medical review program reports, HCFA is now much better positioned than in past years to provide HHS, the Office of Management and Budget, and the Congress with concrete information on contractor activities that save program dollars. This information could include, for example, explicit documentation on the savings achievable from efforts to stop paying unwarranted or overpriced claims. HCFA has taken some initial steps to address Medicare medical supply and surgical dressing payment abuses. Transferring the processing to regional carriers—and the accompanying greater standardization of payment policies and better information to detect problem claims—are important steps in combatting fraud and abuse. Medicare’s vulnerability to overpaying for surgical dressing claims will persist, however, for several reasons: Many claims for surgical dressings lack sufficient detail for Medicare fiscal intermediaries to assess what they are being asked to pay for. Medicare contractors have not yet developed the administrative capabilities to detect questionable claims for many surgical dressings. Though the same patient may receive surgical dressings paid by either a part A intermediary or part B carrier, HCFA has no controls to detect duplicate bills. Medicare’s payment rates for dressings are high compared with wholesale and many retail prices. The Secretary should direct the Administrator of HCFA to require that bills submitted to fiscal intermediaries itemize supplies; develop and implement prepayment review policies as part of the process of implementing any new or expanded Medicare coverage; and establish procedures to prevent duplicate payments by fiscal intermediaries and carriers. The fee schedule approach to setting prices provides a good starting point for setting appropriate Medicare prices. HCFA, however, needs greater authority and flexibility to quickly adjust fee schedule prices when market conditions warrant such changes. To allow Medicare to take advantage of competitive prices, the Congress should consider authorizing HCFA or its carriers to promptly modify prices for DME and other medical supplies. For this to work effectively, however, HCFA or the carriers must devote adequate resources to routine price monitoring. HHS commented on a draft of our report in a letter dated July 18, 1995 (see app. VI). In an overall comment, HHS stated that several ongoing Medicare initiatives involving the four regional carriers are already addressing the problems highlighted in this report. Specifically mentioned were the use of information from processed claims to identify for prepayment review suspicious suppliers and high-dollar, high-volume claims; prepayment screens to detect egregious utilization of a supply item; and comprehensive medical reviews of suppliers whose billing patterns indicate possible overutilization. As we have stated in this report, a number of HCFA initiatives show promise. We specifically mentioned that transferring the claims processing for DME and supplies to four regional carriers gives HCFA the ability to identify overutilization and inappropriate billing. We also mentioned that the programwide emphasis on data analysis through focused medical review identifies potential problem areas. While such initiatives are promising, we do not believe that they or the other promising activities of the four regional carriers address all the problems identified in this report. For example, HHS disagreed with our first recommendation that bills submitted to fiscal intermediaries itemize supplies. HHS stated that it had assessed the benefit of requiring providers to itemize home health supply bills and found that the additional contractor and provider cost and burden outweighed the value of the itemization. As an alternative, HHS stated that it is assessing the benefit of requiring fiscal intermediaries to suspend for prepayment review those bills with excessive charges. Also, HHS believed that it was important to note that HCFA does not pay billed charges for this type of claim. Without itemized bills, fiscal intermediaries cannot determine what type or amount of supplies they pay for. While it is true that HCFA does not pay the billed charges for this type of claim, to conclude that the cost settlement process will somehow account for all overpayments is inaccurate. Overpayments will still be made for unnecessary or excessive supplies or those not covered by Medicare. HHS concurred with our second recommendation and said that it had acted to implement it. The action described, however, appears to be in response to the past expansion of surgical dressing benefits rather than plans for new or expanded Medicare coverage. For example, although agreeing that prepayment edits should be used to prevent inappropriate payment when coverage policy changes, HHS stated that a revised regional medical review policy for the recently expanded surgical benefits will be effective October 1, 1995. HHS also stated that it is important to ensure that the regional carriers have the flexibility to establish their own edits based on aberrancies found in their region. While the policies on the expanded surgical dressing benefit need to be implemented as soon as possible to protect benefit dollars, our recommendation would require that medical policies be developed and approved before any further changes in benefit coverage are made. Without medical policies, carriers cannot establish prepayment edits for items newly covered because of changes in Medicare benefits. As we discussed, regional carriers have been paying claims for 29 newly covered dressings for nearly a year and a half without medical policy or prepayment edits—that is, without a review of the claims’ reasonableness or medical necessity. Concerning our recommendation that procedures be established to prevent duplicate payments by carriers and intermediaries, HHS stated that identifying duplicate claims is difficult when they are sent to different part A and part B contractors because the claims are submitted with different codes and supplier numbers and then processed using different payment schedules and processing systems. In what it described as an effective alternative, HHS stated that HCFA currently uses “conflict edits” through the Common Working File system to alert contractors to conflicting payment situations. For example, if part B is being billed for outpatient supplies for a specific date and part A receives an inpatient claim for the same patient covering the same period, the system generates an alert. Questionable claims are then manually reviewed before payment, according to HHS. In the future, with Medicare’s new claims processing system, the Medicare Transaction System, HHS stated that it will be simpler to identify duplicate claims because the same system will process part A and part B claims in the same format. As a result of OBRA 1993, surgical dressings can be identified with the same codes regardless of which contractor, part A or part B, processes and pays a claim. Combining a common identification code with the Common Working File’s ability to identify claims for which part A and part B contractors both receive a claim for the same beneficiary covering the same time period allows contractors to easily identify a potential duplicate payment. This ability applies to all medical supplies that use the same identification code. For example, we identified one case in which Medicare paid twice for a supply item using the same code for both the part A and part B contractor. The Common Working File duplicate payment alert, or conflict edit, does not entirely prevent Medicare from paying for the same item twice. The system generates an alert only when an institutional provider, such as a nursing home or home health agency, has billed the intermediary before the supplier has billed the regional carrier. More importantly, officials at the four DMERCs told us that they do not investigate or review claims identified by the duplicate payment alert. Instead, they pay the claims without reviewing for duplication. Concerning the matter for congressional consideration, HHS has stated that on several occasions since 1987, it has submitted legislative proposals to the Congress to simplify the process it may use to adjust or limit fee schedule amounts. HHS also made a number of technical and other comments that we considered in finalizing this report. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Secretary of Health and Human Services and other interested parties. Please call me on (202) 512-7119 if you or your staff have any questions about this report. Major contributors are listed in appendix VII. To identify the circumstances allowing the payment of unusually high surgical dressing claims, we interviewed OIG officials from HHS and reviewed past OIG and GAO reports on Medicare fraud and abuse problems. We also visited Transamerica, one of the many carriers that processed medical supply claims before the creation of the four regional carriers. This carrier was judgmentally selected. To determine the adequacy of Medicare’s internal controls, we visited Blue Cross of California, a fiscal intermediary that processes claims submitted by institutional providers; and CIGNA, one of the four regional carriers responsible for processing durable medical equipment (DME) and medical supply claims submitted by suppliers. These contractors were judgmentally selected. To supplement work performed at these locations and broaden our areas of analysis, we obtained information on medical supply and surgical dressing claims and payment safeguards from the remaining 42 fiscal intermediaries and three regional carriers. We also discussed the adequacy of contractors’ internal controls and obtained information about these controls from HCFA officials at HHS. In addition, we requested the two contractors that we visited, Blue Cross of California and CIGNA, to review medical records and other documentation for selected high-dollar medical supply claims to determine whether the records supported the need for services or items billed to Medicare. Further, we obtained recommended utilization standards from a trade association for medical supply distributors and a national association of specialty nurses for wound, ostomy, and continence care and compared the standards with actual utilization levels found on claims submitted by suppliers. We compared the fee schedule that Medicare uses to pay suppliers of surgical dressings with prices obtained from a wholesale surgical dressing supplier, four retail drugstores, the Department of Veterans Affairs, and a HCFA-generated surgical dressing price list. We also reviewed HCFA procedures to determine if any would prevent regional carriers and fiscal intermediaries from paying duplicate claims for medical supplies and surgical dressings. We performed our work between May 1994 and June 1995 in accordance with generally accepted government auditing standards. Elastic bandage, per roll (e.g., compression bandage) Alginate dressing, wound cover, pad size 16 square inches or less, each dressing Alginate dressing, wound cover, pad size more than 16 but less than or equal to 48 square inches, each dressing Alginate dressing, wound cover, pad size more than 48 square inches, each dressing Alginate dressing, wound filler, per 6 inches Composite dressing, pad size 16 square inches or less, with any size adhesive border, each dressing Composite dressing, pad size more than 16 but less than or equal to 48 square inches, with any size adhesive border, each dressing Composite dressing, pad size more than 48 square inches, with any size adhesive border, each dressing Contact layer, less than 16 square inches, each dressing Contact layer, more than 16 but less than or equal to 48 square inches, each dressing Contact layer, more than 48 square inches, each dressing Foam dressing, wound cover, pad size 16 square inches or less, without adhesive border, each dressing Foam dressing, wound cover, pad size more than 16 square inches but less than or equal to 48 square inches, without adhesive border, each dressing Foam dressing, wound cover, pad size more than 48 square inches, without adhesive border, each dressing (continued) Foam dressing, wound cover, pad size 16 square inches or less, with any size adhesive border, each dressing Foam dressing, wound cover, pad size more than 16 square inches but less than or equal to 48 square inches, with any size adhesive border, each dressing Foam dressing, wound cover, pad size more than 48 square inches, with any size adhesive border, each dressing Foam dressing, wound filler, per gram Gauze, nonimpregnated, pad size 16 square inches or less, without adhesive border, each dressing Gauze, nonimpregnated, pad size more than 16 square inches but less than or equal to 48 square inches, without adhesive border, each dressing Gauze, nonimpregnated, pad size more than 48 square inches, without adhesive border, each dressing Gauze, nonimpregnated, pad size 16 square inches or less, with any size adhesive border, each dressing Gauze, nonimpregnated, pad size more than 16 square inches but less than or equal to 48 square inches, with any size adhesive border, each dressing Gauze, nonimpregnated, pad size more than 48 square inches, with any size adhesive border, each dressing Gauze, impregnated, other than water or normal saline, pad size 16 square inches or less, without adhesive border, each dressing Gauze, impregnated, other than water or normal saline, pad size more than 16 square inches but less than or equal to 48 square inches, without adhesive border, each dressing Gauze, impregnated, other than water or normal saline, pad size more than 48 square inches, without adhesive border, each dressing (continued) Gauze, impregnated, water or normal saline, pad size 16 square inches or less, without adhesive border, each dressing Gauze, impregnated, water or normal saline, pad size more than 16 square inches but less than or equal to 48 square inches, without adhesive border, each dressing Gauze, impregnated, water or normal saline, pad size more than 48 square inches, without adhesive border, each dressing Hydrocolloid dressing, wound cover, pad size 16 square inches or less, without adhesive border, each dressing Hydrocolloid dressing, wound cover, pad size more than 16 square inches but less than or equal to 48 square inches, without adhesive border, each dressing Hydrocolloid dressing, wound cover, pad size more than 48 square inches, without adhesive border, each dressing Hydrocolloid dressing, wound cover, pad size 16 square inches or less, with any size adhesive border, each dressing Hydrocolloid dressing, wound cover, pad size more than 16 square inches but less than or equal to 48 square inches, with any size adhesive border, each dressing Hydrocolloid dressing, wound cover, pad size more than 48 square inches, with any size adhesive border, each dressing Hydrocolloid dressing, wound filler, paste, per fluid ounce Hydrocolloid dressing, wound filler, dry form, per pram Hydrogel dressing, wound cover, pad size 16 square inches or less, without adhesive border, each dressing Hydrogel dressing, wound cover, pad size more than 16 square inches but less than or equal to 48 square inches, without adhesive border, each dressing (continued) Hydrogel dressing, wound cover, pad size more than 48 square inches, without adhesive border, each dressing Hydrogel dressing, wound cover, pad size 16 square inches or less, with any size adhesive border, each dressing Hydrogel dressing, wound cover, pad size more than 16 square inches but less than or equal to 48 square inches, with any size adhesive border, each dressing Hydrogel dressing, wound cover, pad size more than 48 square inches, with any size adhesive border, each dressing Hydrogel dressing, wound filler, paste, per fluid ounce Hydrogel dressing, wound filler, dry form, per gram Specialty absorptive dressing, wound cover, pad size 16 square inches or less, without adhesive border, each dressing Specialty absorptive dressing, wound cover, pad size more than 16 square inches but less than or equal to 48 square inches, without adhesive border, each dressing Specialty absorptive dressing, wound cover, pad size more than 48 square inches, without adhesive border, each dressing Specialty absorptive dressing, wound cover, pad size 16 square inches or less, with any size adhesive border, each dressing Specialty absorptive dressing, wound cover, pad size more than 16 square inches but less than or equal to 48 square inches, with any size adhesive border, each dressing Specialty absorptive dressing, wound cover, pad size more than 48 square inches, with any size adhesive border, each dressing Transparent film, 16 square inches or less, each dressing (continued) To estimate total 1995 surgical dressings expenditures, we multiplied the number of surgical dressings purchased by the regional carriers in 1994 by the 1995 fee schedule prices and the other comparison prices. For each category of surgical dressing identified by HCFA Common Procedure Codes (HCPC), we obtained the total units of surgical dressings purchased by all four regional carriers from the regional carrier responsible for compiling and analyzing DME claim data for all four regional carriers. We used this information in conjunction with surgical dressing pricing data to make several pricing comparisons. For all comparisons, estimated expenditures under HCFA’s surgical dressing fee schedule were calculated by multiplying the number of units purchased in 1994 by the 1995 fee schedule price for that code. These calculations were done for each HCPC and then totaled to get overall expenditures. Table V.1 illustrates our comparison of fee schedule prices with wholesale prices. It ranks the categories of surgical dressings from the category in which the fee schedule is the furthest above the wholesale dressing price to the category in which the fee schedule is the furthest below the wholesale price. We obtained wholesale pricing information from a national medical supplier’s 1994-1995 mail order catalog. We identified a dressing in 44 of the HCPC surgical dressing categories. We calculated a per dressing, or unit, price for each of the 44 categories by taking the best wholesale price and dividing it by the number of dressings, or units, that would be provided at that price. The prices for each category were multiplied by the number of units of dressings purchased in that category in 1994 to get total expenditures in each category. We used these data to determine what total expenditures would be if HCFA paid wholesale prices rather than the fee schedule prices. As table V.1 indicates, HCFA would pay almost $20 million less for surgical dressings in the 44 categories if it paid the lower wholesale prices. Potential savings from lowest wholesale purchases (continued) Potential savings from lowest wholesale purchases (15,566) (9,042) (35,419) (201,759) (44,497) (1,044,294) (23,997) (3,806,405) (1,247,052) (1,745,932) Before 1995, tape was recorded as HCPC A4454 and the unit of purchase was a roll of tape. We used the pricing and utilization data for HCPC A4454 to estimate 1995 expenditures. Table V.2 illustrates our comparison of fee schedule prices with the lowest available retail prices. The table ranks the categories of surgical dressings from the dressing category in which the fee schedule is the furthest above the lowest retail dressing price to the category in which the fee schedule is the furthest below the lowest retail price. We used the surgical dressing price lists HCFA developed to establish the surgical dressing fee schedule prices. HCFA had a price list for 44 surgical dressing categories with prices stated at the 1992 base year price. We identified the lowest price dressing in each of the 44 surgical dressing categories and inflated the prices to 1995 levels using the inflation factors established by the Congress. We then multiplied the lowest retail prices for each category by the number of units purchased in those categories in 1994. We totaled the expenditures in all categories and compared this figure with what HCFA would pay using the 1995 fee schedule. As table V.2 illustrates, HCFA would pay over $22 million less for surgical dressings in the 44 categories if it paid the lowest retail price. Potential savings from lowest retail purchases (continued) Potential savings from lowest retail purchases (11,036) Table V.3 illustrates our comparison of fee schedule prices with the lowest retail drugstore prices for similar dressings. The table ranks the categories of surgical dressings from the category in which the fee schedule is the furthest above the lowest retail drugstore dressing price to the category in which the fee schedule is the furthest below the lowest retail drugstore price. We obtained the actual drugstore prices by visiting and pricing surgical dressings at four retail drugstores in the Los Angeles area. We identified and priced dressings in nine of the surgical dressing categories and determined the lowest per dressing price in each of the nine dressing categories. These figures were then multiplied by the number of units purchased in those categories in 1994. We totaled the expenditures in each category and compared this figure with what HCFA would pay using the 1995 fee schedule. As the table illustrates, HCFA would pay over $2 million less for surgical dressings in the nine categories if it paid the lower drugstore prices. Potential savings from actual retail purchases (19,186) (194,804) (2,379,003) (243,385) Before 1995, tape was recorded as HCPC A4454 and the unit of purchase was a roll of tape. However, in 1995 a new HCPC (K0265) and description of tape were developed. We used the pricing and utilization data for HCPC A4454 to estimate 1995 expenditures. Table V.4 illustrates our comparison of fee schedule prices with the price VA pays for similar dressings. The table ranks the categories of surgical dressings from the category in which the fee schedule is the furthest above the VA price to the category in which the fee schedule is the furthest below the VA price. We obtained surgical dressing supply and price lists from one of the VA’s Medical Centers in the Los Angeles area. We identified dressings and calculated per dressing, or unit, prices in nine of the surgical dressing categories. We multiplied the lowest per dressing price in each category by the number of units purchased in those categories in 1994. We totaled the expenditures in each category and compared this figure with what HCFA would pay using the 1995 fee schedule. As table V.4 illustrates, HCFA would pay over $9 million less for dressings in the nine categories if it paid VA’s lower prices. Before 1995, tape was recorded as HCPC A4454 and the unit of purchase was a roll of tape. However, in 1995 a new HCPC (K0265) and description of tape were developed. We used the pricing and utilization data for HCPC A4454 to estimate 1995 expenditures. Edwin P. Stropko, Assistant Director, (202) 512-7118 Donald J. Walthall, Assignment Manager Sam Mattes, Evaluator-in-Charge Timothy S. 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Summary: Pursuant to a congressional request, GAO reviewed Medicare payments for medical supplies, focusing on the: (1) circumstances surrounding payments for unusually high surgical dressing claims; and (2) adequacy of Medicare's internal controls to prevent paying such claims. GAO found that: (1) although the Health Care Financing Administration (HCFA) has eliminated medical suppliers' ability to select contractors with the highest payment rates, unwarranted expenditures still persist; (2) reasons for the unwarranted expenditures include inadequate systematic payment controls and noncompetitive payment rates for surgical dressings; (3) many Medicare contractors lack itemized bills, fail to automatically review high-dollar claims for newly covered surgical dressings, and lack a systematic method for detecting duplicate bills submitted to different types of Medicare carriers; (4) Medicare payment rates for new surgical dressings and other medical supplies are considerably higher than wholesale and retail prices; (5) HCFA could curtail these overpayments by establishing procedures to require itemized claims, preventing duplicate payments to Medicare suppliers, and identifying high-dollar, high-volume claims that should be reviewed before payment; (6) the initiative will provide comprehensive national payment data that will allow HCFA and its contractors to detect inappropriate billing and overutilization; and (7) HCFA needs legislative authority to set competitive payment rates that are favorable for high-volume purchasers.