The Medicare program utilizes a variety of payment methods to reimburse providers for the services it covers. Hospital insurance, or Part A, covers inpatient hospital, skilled nursing facility, and hospice care, and certain home health services. Supplemental medical insurance, or Part B, covers physician and outpatient hospital services, diagnostic tests, and other medical services and supplies. Depending on the service, HCFA pays Part A providers based on their costs, or on a prospective payment basis designed to cover the cost of providing a bundle of services related to a particular medical condition. In contrast, Part B providers are typically paid for each individual service, based on a fee schedule. To ensure that only services the statute specifies are covered, Medicare has extensive policies and rules about what constitutes covered services. It is not surprising, therefore, that providers are sometimes overpaid for their services. Medicare claims are paid by a network of private health insurance companies hired by HCFA, such as Blue Cross and Blue Shield plans, Mutual of Omaha, and CIGNA. Contractors that process Part A claims are referred to as fiscal intermediaries, while those that process Part B claims are called carriers. In fiscal year 1999, fiscal intermediaries processed about 133 million claims representing $124 billion in payments, while carriers processed about 721 million claims and paid benefits of about $43 billion. Fiscal intermediaries and carriers also perform activities related to safeguarding Medicare payments. These include using prepayment computer edits to prevent potential overpayments, conducting postpayment medical reviews, determining whether other insurers should pay before Medicare, and auditing reports of providers’ costs to determine if any costs are overstated or not allowed by Medicare. HCFA uses specialized contractors to supplement these program safeguard efforts. Claims administration contractors have principal responsibility for claims processing and administration. Specifically, they contract with HCFA to (1) receive claims; (2) judge their appropriateness; (3) pay appropriate claims promptly; (4) identify potentially incorrect or fraudulent claims or fraudulent providers, and withhold payment if justified; and (5) identify and recover overpayments. The contractors are expected to manage Medicare’s funds in a fiscally responsible way, effectively address provider and beneficiary inquiries, and establish a process for handling provider and beneficiary appeals of claims decisions. Until the HIPAA of 1996 established the Medicare Integrity Program (MIP), only claims administration contractors performed program safeguard activities. Under HIPAA, HCFA has the authority to enter into contracts with a variety of firms not just insurance companies safeguard-related functions or undertake specific program initiatives to promote Medicare’s integrity. For example, one such initiative is aimed at the early detection of fraudulent and abusive billing in three Midwestern states. Under MIP, HCFA has contracted with 12 firms known as program safeguard contractors (PSCs) that compete among themselves to perform program safeguard work detailed in individual task orders. These MIP contractors can subcontract with other companies that may have special expertise to help them perform particular task orders. As of June 2000, HCFA had issued a total of 10 task orders—each for a defined set of program safeguard services provided over a specified time period. In addition to providing HCFA with new contracting authority, HIPAA provided HCFA with predictable increases in program safeguard funding. Before HIPAA, contractor program safeguard activities were funded from contractors’ general program management budgets, which also covered contractors’ costs for processing claims. This meant that program safeguard activities had to compete for funding with other contractor activities that might have higher priority. For example, funding system improvements to ensure that claims were paid promptly might require a shift in funding allocations, as would emergencies or new HCFA initiatives. By contrast, HIPAA provides HCFA with assured funding levels for program safeguard activities. Program safeguard expenditures totaled $438 million the first year of MIP increased funding in each subsequent year through fiscal year 2003, when the program safeguard appropriation is expected to total $720 million. Most of HCFA’s accounts receivable are the result of overpayments that have yet to be recovered from providers. Overpayments to providers result from a variety of inadvertent errors or intentional misrepresentations. The following are the four main categories of Medicare overpayments: Coverage, medical necessity, or documentation issues Medicare should pay claims only for services that are medically necessary, meet Medicare coverage requirements, and are properly documented to indicate that the service took place as reflected in the claim. Claims can appear to be correct even though they do not meet these conditions. For example, a home health agency may receive reimbursement for services on behalf of a beneficiary who did not meet the program requirements of being homebound. Provider billing errors Providers make manual or automated billing errors, either of which can lead to overpayments. For example, if a physician’s billing clerk enters the wrong procedure code on a claim, the physician may receive a larger reimbursement for a more comprehensive office visit than the visit that actually occurred. Cost reporting errors For services paid on the basis of provider costs, providers receive interim payments based on their projected allowable costs. If costs are later disallowed, providers will have to return these overpayments. Medicare secondary payer (MSP) debt These debts occur when Medicare pays for a service that subsequently is determined to be the responsibility of another payer.These include certain cases in which beneficiaries (1) have other health insurance coverage provided by their employer or their spouse’s employer (2) have occupational injuries or illnesses that would be covered by workers’ compensation (3) have injuries which are covered by liability insurance or a settlement arising from an accident; or (4) are receiving care for end-stage renal disease during the first 30 months of their treatment and have other health insurance coverage. Recovery auditing has been used in various industries, including health care, to identify and collect overpayments for about the last 30 years. Recovery audit firms that specialize in health issues contract with private insurance companies, state Medicaid agencies, managed care plans, and employee group health plans. In some cases, clients rely exclusively on recovery audit firms to identify and collect overpayments. In other cases, they supplement their own internal capabilities with the services of recovery audit firms. These firms generally focus on overpayment identification but will also collect identified overpayments. Typically, they are paid a contingency fee based on a percentage of the overpayments that they or their clients collect. Fees vary depending on such factors as the type of overpayment involved and the degree of difficulty associated with identifying and collecting it. Recovery audit firms employ a variety of techniques to identify overpayments. For example, one firm may use proprietary software to analyze a large database of claims to identify potential overpayments while another may have specially trained staff review medical records for potentially inappropriately billed services. Recovery audit firms may also collect overpayments through such means as issuing demand letters to providers or negotiating an amount to be returned to the client. In the last several years, HCFA has increased its emphasis on prepayment activities that help contractors avoid payment errors. Correct payment involves several prepayment processing steps to determine whether the claim is for covered, medically necessary and reasonable services; is provided to an eligible beneficiary; and contains a valid provider number. All claims go through a variety of computerized prepayment edits designed to ensure they are correct on their face for example, to ensure that they are not duplicate payments. In addition, many claims go through prepayment medical reviews that are either automated or performed by contractor staff. However, the tremendous volume of Medicare claims processed by each contractor makes it impractical to manually review more than a small fraction of claims prior to payment. For example, in fiscal year 1998, only about 1 in 8 claims were medically reviewed prior to payment and only about 1 in 16 underwent any type of manual prepayment review. As a result, adequate postpayment review is critical to ensuring that overpayments are identified in a timely way. In conducting postpayment reviews to identify potential overpayments, contractors primarily focus on three program safeguard activities postpayment medical review, reviews and audits of cost-based reimbursement payments, and MSP reviews. These activities are described below: Postpayment medical review. Overpayments due to claims that are medically unnecessary, insufficiently documented, or for noncovered services and that were not identified through prepayment edits must generally be discovered through contractor postpayment medical review. By reviewing paid claims data, contractors identify patterns that could indicate potential abuse. For example, contractor staff may review billing patterns for certain procedure codes and find unusual increases in utilization over time or significant utilization differences among providers. Once a potential problem is identified, contractors typically sample a provider’s claims and request documentation from the provider for selected claims to determine if they were paid properly or if overpayments occurred. Peer review organizations (PROs) are independent physician organizations located in each state that work under contract to HCFA. They conduct postpayment medical review for Medicare claims involving inpatient services.PROs are primarily responsible for ensuring that care provided Medicare beneficiaries is medically necessary, reasonable, is provided in an appropriate setting, and meets professionally accepted standards of quality. If, in the course of their reviews, the PROs discover overpayments, they are supposed to refer the cases to the appropriate fiscal intermediary for payment adjustment. Interim rate reviews and cost report audits. These activities are performed by fiscal intermediaries to determine whether the payments made to providers paid on the basis of their costs accurately reflect their allowable costs. Interim rate reviews allow contractors to adjust payment rates during the fiscal year after comparing a provider’s interim payment rates with its previous cost information, its Medicare payments, and its audit history. These reviews may result in revisions to providers’ interim payment rates for the remainder of the year if it is found that the provider was being overpaid or underpaid.