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.