CMS, within the Department of Health and Human Services (HHS), provides operational direction and policy guidance for the nationwide administration of the Medicare program. It contracts with private organizations—called carriers and fiscal intermediaries—to process and pay claims from Medicare providers and perform related administrative functions. Twenty-three carriers nationwide make claims payments for physician services, which are covered under part B of Medicare. In addition, carriers are responsible for implementing controls to safeguard program dollars and providing information services to beneficiaries and providers. To ensure appropriate payment, they conduct claims reviews that determine, for example, whether the services physicians have claimed are covered by Medicare, are reasonable and necessary, and have been billed with the proper codes. Carriers employ a variety of review mechanisms. Automated checks, applied to all claims, are designed to detect missing information, services that do not correspond to a beneficiary’s diagnosis, or other obvious errors. They may also be used to determine if a claim meets other specific requirements, including national or local coverage policies (such as allowing only one office visit for an eye examination per beneficiary per year unless medical necessity is documented). Manual reviews by carrier staff are used when the review of a claim cannot be automated to determine if sufficient information has been included to support the claim. In the most thorough type of manual claims review, a carrier’s clinically trained personnel perform a medical review, which involves an examination of the claim along with the patient’s medical record, submitted by the physician, to determine compliance with all billing requirements. Typically, carriers conduct medical reviews on claims before they are paid, by suspending payment pending further examination of the claim. Prepayment medical reviews help to ensure that a carrier is making appropriate payment decisions while the claims are processed, rather than later trying to collect payments made in error. To target such reviews, carriers develop “edits”—specific criteria used to identify services that the carrier determines to have a high probability of being billed in error. Carriers develop these edits based on data analyses that include comparisons of local and national billing patterns to identify services billed locally at substantially higher rates than the national norm. Carriers may also develop edits for prepayment medical review based on other factors, such as CMS directives or individual physicians or group practices the carrier has flagged for review based on their billing histories. Before putting edits into effect, CMS expects the carriers to conduct targeted medical reviews on a small sample of claims in order to validate that the billing problem identified by the carrier’s data analysis or other sources does actually exist. In addition to prepayment medical reviews, carriers conduct some medical reviews after claims are paid. Postpayment reviews determine if claims were paid in error and the amounts that may need to be returned to the Medicare program. They focus on the claims of individual physicians or group practices that have atypical billing patterns as determined by data analysis. Such analyses may include comparisons of paid claims for particular services to identify physicians who routinely billed at rates higher than their peers. Carriers may also select claims for postpayment review based on other factors, such as information derived from prepayment reviews, referrals from other carrier units, and complaints from beneficiaries. In rare cases, postpayment reviews may result in referrals to carrier fraud units. Each year, as part of their budget negotiations with CMS, carriers develop medical review strategies that include workload goals for conducting medical reviews. CMS provides each carrier with an overall budget for claims review. The carriers then submit for CMS approval their workload goals for specific activities, such as the number of prepayment and postpayment medical reviews they plan to conduct, along with proposed budgets and staff allocations across these activities. In addition, the carriers submit budget proposals for provider education and training related to issues identified in medical review. CMS requires the carriers to reassess the allocation of these resources among review and educational activities during the course of the year and, with CMS approval, to shift resources as appropriate to deal with changing circumstances. In estimating the prevalence of medical reviews, data from the three carriers in our study show that more than 90 percent of physician practices—including individual physicians, groups, and clinics—did not have any of their claims selected for medical review in fiscal year 2001, and for those that did, relatively few claims were subject to review. A small proportion of physician practices served by the three carriers had any claims medically reviewed during fiscal year 2001. Table 1 shows that about 10 percent of the solo and group practices that filed claims with WPS had any prepayment medical reviews. This proportion was even lower at HealthNow NY and NHIC California, with rates of about 4 and 7 percent, respectively. The share of physician practices with postpayment reviews by any of these carriers was much smaller; approximately one tenth of 1 percent of practices had claims selected for medical review after payment had been made. Further, for most of the physician practices having any claims subject to medical review in fiscal year 2001, the carriers examined relatively few claims. As shown in table 2, over 80 percent of the practices at each carrier whose claims received a prepayment review had 10 or fewer claims examined and about half had only 1 or 2 claims reviewed. For the small number of physician practices whose claims were subject to postpayment review in fiscal year 2001, the three carriers typically examined more claims per practice. At NHIC California, the median physician practice had 33 claims reviewed postpayment; at WPS, 49; and at HealthNow NY, 31. With the issuance of the PCA initiative, CMS modified the approach that carriers use to select physicians’ claims for medical review, determine repayments due, and prevent future billing errors. PCA directs carriers to (1) use their analyses of physician billing patterns to better focus their medical review efforts towards claims with the greatest risk of inappropriate payments, and (2) provide targeted education regarding how to correct billing errors. Information from our three carriers indicates that, as a result of PCA, they virtually eliminated in fiscal year 2001 their use of extrapolation, a corrective action that involves projecting a potential overpayment from a statistical sample. A recent CMS survey also showed reduced use of extrapolation by other carriers. After PCA was implemented, the highest repayment amounts each of our three carriers assessed physicians were substantially lower than in the previous year. The carriers have also developed medical review strategies that include increased education for individual physicians in an effort to change billing behavior and, thus, prevent incorrect payments. PCA seeks to more effectively select physician claims for medical review. The initiative aims to further the agency’s program integrity goals of making sure that claims are paid correctly and billing errors are reduced while carriers maintain a level of medical review consistent with their workload agreements with CMS. In targeting physician claims, PCA requires that carriers subject physicians only to the amount of medical review necessary to address the level and type of billing error identified. If claims data analysis shows a potential billing problem for a particular service, carriers must first conduct a “probe review”—requesting and examining medical records from a physician for a limited sample of claims—to validate suspicions of improper billing or payment. For example, a carrier may initiate a postpayment probe review after discovering that a physician billed, per patient, substantially more services than his or her peers. If the carrier determines that the documentation in the medical records does not support the type or level of services that was billed, the carrier calculates an error rate—the dollar amounts paid in error relative to the dollar amount of services reviewed. The error rate, the dollar value of the errors, and the physician’s past billing history are among the factors the carrier may consider in assessing the level of the billing errors and determining the appropriate response. Under PCA, CMS instructs carriers to categorize the severity of billing errors found in probe samples into three levels of concern—minor, moderate, or major. Minor concerns may include cases with a low error rate, small amounts improperly paid, and no physician history of billing problems. Moderate concerns include cases that have a low error rate but substantial amounts improperly paid. Major concerns are cases with a very high error rate, or even a moderate error rate if the carrier had previously provided education to the physician concerning the same type of billing errors. Although no numerical thresholds were established in the instructions to carriers, CMS provided vignettes illustrating the various levels of concern. In an example of a major concern, 50 percent of the claims in a probe sample were denied, representing 50 percent of the dollar amount of the claims reviewed. PCA allows carriers flexibility in determining the most appropriate corrective action corresponding to the level of concern identified. At a minimum, the carrier will communicate directly with the provider to correct improper billing practices. For probe reviews that are conducted postpayment—the stage at which probe reviews are most commonly done at the three carriers we visited—they must also take steps to recover payment on claims identified as having errors. Further options for corrective action include: for minor concerns, conducting further claims analysis at a later date to ensure the problem was corrected; for moderate concerns, initiating prepayment medical review for a percentage of the physician’s claims until the physician demonstrates compliance with billing procedures; and for major concerns, initiating prepayment medical review for a large share of claims or further postpayment review to estimate and recover potential overpayments by projecting an error rate for the universe of comparable claims—a method of estimation called “extrapolation.” Under PCA, because the corrective action is scaled to the level of errors identified, the potential financial impact of medical review on some physicians has decreased. Although our three carriers did not frequently use extrapolation in 2000, before PCA, a physician could experience a postpayment medical review that involved extrapolation regardless of the level of errors detected. As shown in table 3, after PCA’s implementation, the highest amount any physician practice was required to repay substantially declined at the three carriers. The largest overpayment assessed across the carriers ranged from about $6,000 to $79,000 in fiscal year 2001, compared with about $95,000 to $372,000 in the previous year.