Medicare falls within the administrative jurisdiction of the Health Care Financing Administration (HCFA) of the Department of Health and Human Services (HHS). HCFA establishes regulations and guidance for the program and contracts with about 72 private companies—such as Blue Cross and Aetna—to handle claims screening and processing and to audit providers. Each of these commercial contractors works with its local medical community to set coverage policies and payment controls. As a result, billing problems are handled, for the most part, by contractors, and they are the primary referral parties to law enforcement agencies for suspected fraud. Medicare’s basic nursing home benefit covers up to 100 days of certain posthospital stays in a skilled nursing facility. Skilled nursing facilities submit bills for which they receive interim payment; final payments are based on costs within a cost-limit cap. This benefit is paid under part A, Hospital Insurance, which also pays for hospital stays and care provided by home health agencies and hospices. Even if Medicare beneficiaries do not meet the conditions for Medicare coverage of a skilled nursing facility stay, they are still eligible for the full range of part B benefits. Although Medicaid or the resident may be paying for the nursing home, Medicare will pay for ancillary services and items such as physical and other types of therapy, prosthetics, and surgical dressings. Part B is voluntary part of the Medicare program that beneficiaries may elect and for which they pay monthly premiums. Part B also pays for physician care and diagnostic testing. About 6 million people have both Medicare and Medicaid coverage, and, of these, over 4.8 million represent state “buy-ins” for Medicare coverage.Dually eligible beneficiaries are among the most vulnerable Medicare beneficiaries. They are generally poor, have a greater incidence of serious and chronic conditions, and are much more likely to be institutionalized. As a matter of fact, about 1.4 million reside in institutions, while only 600,000 of the approximately 31 million Medicare beneficiaries without Medicaid coverage are in institutions. Over half of all dually eligible patients over 85 reside in nursing facilities. When a copayment is required, a Medicare beneficiary or a representative designated by the beneficiary, receives an “Explanation of Medicare Benefits” (EOMB), which specifies the services billed on behalf of the individual. The EOMB is an important document because beneficiaries and their families can use it to verify that the services were actually performed. The dually eligible population, however, often does not have a representative in the community to receive and review this document. In fact, many nursing home patients actually have the nursing home itself receive the EOMBs on their behalf. In 1996, Medicare spent $11.3 billion on skilled nursing facility benefits and an undetermined amount on part B ancillary services and items. The providers of these services and items can bill Medicare in a variety of ways. With this variety comes the opportunity to blur the transactions that actually took place and inflate charges for services rendered. Ancillary services and items for Medicare beneficiaries in nursing facilities can be provided by the nursing facility itself, a company wholly or partially owned by the nursing facility, or an independent supplier or practitioner. Our work has shown that independent providers and suppliers can bill Medicare directly for services or supplies without the knowledge of the beneficiary or the facility and companies that provide therapy are able to inflate their billings. Nursing facilities often do not have the in-house capability to provide all the services and supplies that patients need. Accordingly, outside providers market their services and supplies to nursing facilities to meet the needs of the facilities’ patients. HCFA’s reimbursement system allows these providers to bill Medicare directly without confirmation from the nursing facility or a physician that the care or items were necessary or delivered as claimed. As a result, the program is vulnerable to exploitation. representatives gain access to records not because they have any responsibility for the direct care of these patients, but solely to market their services or supplies. From these records, unscrupulous providers can obtain all the information necessary to order, bill, and be reimbursed by Medicare for services and supplies that are in many instances not necessary or even provided. In 1996, we reported the following examples: A group optometric practice performed routine eye examinations on nursing facility patients, a service not covered by Medicare. The optometrist was always preceded by a sales person who targeted the nursing facility’s director of nursing or its social worker and claimed the group was offering eye examinations at no cost to the facility or the patient. The nursing facility gave the sales person access to patients’ records, and this person then obtained the information necessary to file claims. Nursing staff would obtain physicians’ orders for the “free” examinations, and an optometrist would later arrive to conduct the examinations. The billings to Medicare, however, were for services other than eye examinations—services that were never furnished or were unnecessary. The owner of a medical supply company approached nursing facility administrators in several states and offered to provide supplies for Medicare patients at no cost to the facility. After reviewing nursing facility records, this company identified Medicare beneficiaries, obtained their Medicare numbers, developed lists of supplies on the basis of diagnoses, identified attending physicians, and made copies of signed physician orders in the files. The supplier then billed Medicare for items it actually delivered but also submitted 4,000 fraudulent claims for items never delivered. As part of the 1994 judgment, the owner forfeited $328,000 and was imprisoned and ordered to make restitution of $971,000 to Medicare and $60,000 to Medicaid. A supplier obtained a list of Medicare patients and their Medicare numbers from another supplier who had access to this information. The first supplier billed Medicare for large quantities of supplies that were never provided to these patients, and both suppliers shared in the approximately $814,000 in reimbursements. We found that nursing home staff’s giving providers or their representatives inappropriate access to patient medical records was a major contributing cause to the fraud and abuse cases we reviewed. Many nursing facilities rely on specialized rehabilitation agencies—also termed outpatient therapy agencies—to provide therapy services. These agencies can be multilayered, interconnected organizations—each layer adding costs to the basic therapy charge—that use outside billing services, which can also add to the cost. In those situations in which the nursing facility contracts and pays for occupational and speech therapy services for a Medicare-eligible stay, Medicare might pay the nursing facility what it was charged because of the limited amount of review conducted by claims processing contractors. In practice, however, because of the difficulty in determining what are reasonable costs and the limited resources available for auditing provider cost reports, there is little assurance that inflated charges are not actually being billed and paid. Until recently, HCFA had not established salary guidelines, which are needed to define reasonable costs for occupational or speech therapy. Without such benchmarks, it is difficult for Medicare contractors to judge whether therapy providers overstate their costs. Even for physical therapy, for which salary guidelines do exist, the Medicare-established limits do not apply if the therapy company bills Medicare directly. This is why Medicare has been charged $150 for 15 minutes of therapy when surveys show that average statewide salaries for therapists employed by hospitals and nursing facilities range from $12 to $25 per hour. Our analysis of a sample drawn from a survey of five contractors found that over half of the claims they received for occupational and speech therapy from 1988 to 1993 exceeded $172 in charges per service. Assuming this was the charge for 15 minutes of treatment—which industry representatives described as the standard billing unit—the hourly rate charged for these claims would have been more than $688. It should be noted that neither HCFA nor its contractors could accurately tell us what Medicare actually paid the providers in response to these claims. The amount Medicare actually pays is not known until long after the service is rendered and the claim processed. Although aggregate payments are eventually determinable, existing databases do not provide actual payment data for any individual claim. HCFA pays contractors to process claims and to identify and investigate potentially fraudulent or abusive claims. We have long been critical of the unstable funding support HCFA’s contractors have to carry out these program integrity activities. We recently reported that funding for Medicare contractor program safeguard activities declined from 74 cents to 48 cents per claim between 1989 and 1996. During that same period, the number of Medicare claims climbed 70 percent to 822 million. Such budgetary constraints have placed HCFA and its contractors in the untenable position of needing to review more claims with fewer resources. While Medicare contractors do employ a number of effective automated controls to prevent some inappropriate payments, such as suspending claims that do not meet certain conditions for payment for further review, our 1996 report on 70 fraud and abuse cases showed that atypical charges or very large reimbursements routinely escaped those controls and typically went unquestioned. The contractors we reviewed had not put any “triggers” in place that would halt payments when cumulative claims exceeded reasonable thresholds. Consequently, Medicare reimbursed providers, who were subsequently found guilty of fraud or billing abuses, large sums of money over a short period without the contractor’s becoming suspicious. The following examples highlight the problem: A supplier submitted claims to a Medicare contractor for surgical dressings furnished to nursing facility patients. In the fourth quarter of 1992, the contractor paid the supplier $211,900 for surgical dressing claims. For the same quarter a year later, the contractor paid this same supplier more than $6 million without becoming suspicious, despite the 2,800-percent increase in the amount paid. A contractor paid claims for a supplier’s body jackets that averaged about $2,300 per quarter for five consecutive quarters and then jumped to $32,000, $95,000, $235,000, and $889,000 over the next four quarters, with no questions asked. A contractor reimbursed a clinical psychology group practice for individual psychotherapy visits lasting 45 to 50 minutes when the top three billing psychologists in the group were allegedly seeing from 17 to 42 nursing facility patients per day.