An improper payment is any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. This definition includes any payment to an ineligible recipient, any payment for an ineligible good or service, any duplicate payment, any payment for a good or service not received (except where authorized by law), and any payment that does not account for credit for applicable discounts. Improper Payments Elimination and Recovery Act of 2010, Pub. L. No. 111- 204, § 2(e), 124 Stat. 2224, 2227 (2010) (codified at 31 U.S.C. § 3321 note). Office of Management and Budget guidance also instructs agencies to report as improper payments any payments for which insufficient or no documentation was found. the greatest financial risk to Medicare (see Table 1). However, the contractors have varying roles and levels of CMS direction and oversight in identifying claims for review. MACs process and pay claims and conduct prepayment and postpayment reviews for their established geographic regions. As of January, 2016, 12 MACs—referred to as A/B MACs—processed and reviewed Medicare Part A and Part B claims, and 4 MACs—referred to as DME MACs— processed and reviewed DME claims. MACs are responsible for identifying both high-risk providers and services for claim reviews, and CMS has generally given the MACs broad discretion to identify claims for review. Each individual MAC is responsible for developing a claim review strategy to target high-risk claims.20 In their role of processing and paying claims, the MACs also take action based on claim review findings. The MACs deny payment on claims when they or other contractors identify payment errors during prepayment claim reviews. When MACs or other claim review contractors identify overpayments using postpayment reviews, the MACs seek to recover the overpayment by sending providers what is referred to as a demand letter. In the event of underpayments, the MACs return the balance to the provider in a future reimbursement. For additional information on the MAC roles and responsibilities, see GAO, Medicare Administrative Contractors: CMS Should Consider Whether Alternative Approaches Could Enhance Contractor Performance, GAO-15-372 (Washington, D.C.: Apr. 2015). Congress established per beneficiary Medicare limits for therapy services, which took effect in 1999. However, Congress imposed temporary moratoria on the limits several times until 2006, when it required CMS to implement an exceptions process in which exceptions to the limits are allowed for reasonable and necessary therapy services. Starting in 2012, the exceptions process has applied a claim review requirement on claims after a beneficiary’s annual incurred expenses reach certain thresholds. For additional information on the therapy service limits, see GAO, Medicare Outpatient Therapy: Implementation of the 2012 Manual Medical Review Process, GAO-13-613 (Washington, D.C.: July, 2013). As required by law, the RAs are paid on a contingent basis from recovered overpayments. The contingency fees generally range from 9.0 percent to 17.5 percent, and vary by RA region, the type of service reviewed, and the way in which the provider remits the overpayment. Because the RAs are paid from recovered funds rather than appropriated funds, the use of RAs expands CMS’s capacity for claim reviews without placing additional demands on the agency’s budget. The RAs are allowed to target high-dollar claims that they believe have a high risk of improper payments, though they are not allowed to identify claims for review solely because they are high-dollar claims. The RAs are also subject to limits that only allow them to review a certain percentage or number of a given provider’s claims. The RAs initially identified high rates of error for short inpatient hospital stays and targeted those claims for review. Certain hospital services, particularly services that require short hospital stays, can be provided in both an inpatient and outpatient setting, though inpatient services generally have higher Medicare reimbursement amounts. The RAs found that many inpatient services should have been provided on an outpatient basis and denied many claims for having been rendered in a medically unnecessary setting.23 Medicare has a process that allows for the appeal of claim denials, and hospitals appealed many of the short inpatient stay claims denied by RAs. Hospital appeals of RA claim denials helped contribute to a significant backlog in the Medicare appeals system. determining whether RA prepayment reviews could prevent fraud and the resulting improper payments and, in turn, lower the FFS improper payment rate. From 2012 through 2014, operating under this waiver authority, CMS conducted the RA Prepayment Review Demonstration in 11 states. In these states, CMS directed the RAs to conduct prepayment claim reviews for specific inpatient hospital services. Additionally, the RAs conducted prepayment reviews of therapy claims that exceeded the annual per beneficiary limit in the 11 demonstration states. Under the demonstration, instead of being paid a contingency fee based on recovered overpayments, the RAs were paid contingency fees based on claim denial amounts. In anticipation of awarding new RA contracts, CMS began limiting the number of RA claim reviews and discontinued the RA Prepayment Review Demonstration in 2014. CMS required the RAs to stop sending requests for medical documentation to providers in February 2014, so that the RAs could complete all outstanding claim reviews by the end of their contracts. However, in June 2015, CMS cancelled the procurement for the next round of RA contracts, which had been delayed because of bid protests. Instead, CMS modified the existing RA contracts to allow the RAs to continue claim review activities through July 31, 2016. In November 2015, CMS issued new requests for proposals for the next round of RA contracts and, according to CMS officials, plans to award them in 2016. The SMRC conducts nationwide postpayment claim reviews as part of CMS-directed studies aimed at lowering improper payment rates. The SMRC studies often focus on issues related to specific services at high risk for improper payments, and provide CMS with information on the prevalence of the issues and recommendations on how to address them. Although CMS directs the types of services and improper payment issues that the SMRC examines, the SMRC identifies the specific claims that are reviewed as part of the studies. CMS’s CERT program annually estimates the amount and rate of improper payments in the Medicare FFS program, and CMS uses the CERT results, in part, to direct and oversee the work of claim review contractors, including the MACs, RAs, and SMRC. CMS’s CERT program develops its estimates by using a contractor to conduct postpayment claim reviews on a statistically valid random sample of claims. The CERT program develops the estimates as part of CMS’s efforts to comply with the Improper Payments Information Act, which requires agencies to annually identify programs susceptible to significant improper payments, estimate amounts improperly paid, and report these estimates and actions taken to reduce them.25 In addition, the CERT program estimates improper payment rates specific to Medicare service and provider types and identifies services that may be particularly at risk for improper payments. See Improper Payments Information Act of 2002 (IPIA), Pub. L. No. 107-300, 116 Stat. 2350 (2002) (codified, as amended, at 31 U.S.C. § 3321 note). The IPIA was subsequently amended by the Improper Payments Elimination and Recovery Act of 2010, Pub. L. No. 111-204, 124 Stat. 2224 (2010), and the Improper Payments Elimination and Recovery Improvement Act of 2012, Pub. L. No. 112-248, 126 Stat. 2390 (2013). We have also reported that prepayment controls are generally more cost-effective than postpayment controls and help avoid costs associated with the “pay and chase” process. See GAO, A Framework for Managing Fraud Risks in Federal Programs, GAO-15-593SP (Washington, D.C.: July 28, 2015). CMS is not always able to collect overpayments identified through postpayment reviews. A 2013 HHS OIG study found that each year over the period from fiscal year 2007 to fiscal year 2010, approximately 6 to 9 percent of all overpayments identified by claim review contractors were deemed not collectible.27 Postpayment reviews require more administrative resources compared to prepayment reviews. Once overpayments are identified on a postpayment basis, CMS requires contractors to take timely efforts to collect the overpayments. HHS OIG reported that the process for recovering overpayments can involve creating and managing accounts receivables for the overpayments, tracking provider invoices and payments, and managing extended repayment plans for certain providers. In contrast, contractors do not need to take these steps, and expend the associated resources, for prepayment reviews, which deny claims before overpayments are made. Key stakeholders we interviewed identified few significant differences in conducting and responding to prepayment and postpayment reviews. Specifically, CMS, MAC, and RA officials stated that prepayment and postpayment review activities are generally conducted by claim review contractors in similar ways. Officials we interviewed from health care provider organizations told us that providers generally respond to prepayment and postpayment reviews similarly, as both types of review occur after a service has been rendered, and involve similar medical documentation requirements and appeal rights. These statistics are based on CMS summary financial data, and the currently not collectable classification for overpayments can vary based on when overpayments are identified and demanded, and if overpayments are under appeal. See Department of Health and Human Services, Office of Inspector General, Medicare’s Currently Not Collectible Overpayments, OEI-03-11-00670 (Washington, D.C.: June 2013).