[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]




 
    INSPECTOR GENERAL AUDIT OF HEALTH CARE FINANCING ADMINISTRATION 
                          FINANCIAL STATEMENTS

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 17, 1997

                               __________

                             Serial 105-19

                               __________

         Printed for the use of the Committee on Ways and Means




                     U.S. GOVERNMENT PRINTING OFFICE
47-097 CC                    WASHINGTON : 1998





                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada                  GERALD D. KLECZKA, Wisconsin
JON CHRISTENSEN, Nebraska            JOHN LEWIS, Georgia
PHILIP M. CRANE, Illinois            XAVIER BECERRA, California
AMO HOUGHTON, New York
SAM JOHNSON, Texas


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

U.S. Department of Health and Human Services, Hon. June Gibbs 
  Brown, Inspector General; accompanied by Joseph E. Vengrin, 
  Assistant Inspector General, Audit Operations and Financial 
  Statement Activities...........................................     7
Health Care Financing Administration, Hon. Bruce C. Vladeck, 
  Ph.D., Administrator...........................................    17

                       SUBMISSION FOR THE RECORD

Coyne, Hon. William J., a Representative in Congress from the 
  State of Pennsylvania, statement...............................    54


    INSPECTOR GENERAL AUDIT OF HEALTH CARE FINANCING ADMINISTRATION 
                          FINANCIAL STATEMENTS

                              ----------                              


                        THURSDAY, JULY 17, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 11:08 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisories announcing the hearing follow:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

July 3, 1997

No. HL-14

                      Thomas Announces Hearing on

                 Inspector General Audit of Health Care

              Financing Administration Financial Statements

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on the Inspector General of the Department of 
Health and Human Services' (HHS) Report on the Financial Statement 
Audit of the Health Care Financing Administration (HCFA). The hearing 
will take place on Thursday, July 17, 1997, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 10:00 
a.m. The Report will be released to the public at the time of the 
hearing.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Office of the Inspector General of the HHS recently completed 
its first full-scale audit of the HCFA Medicare financial statements 
and accounting procedures, as required by the Chief Financial Officers 
Act of 1990 and the Government Management Reform Act of 1994. The audit 
found that HCFA has a 14-percent error rate in paying Medicare fee-for-
service claims, amounting to $23 billion in net annual payments that 
were made improperly during fiscal year 1996.
      
    The Inspector General, June Gibbs Brown, will testify at the 
hearing on her review of the first year audit of HCFA's financial 
statements. With expenditures of approximately $300 billion, assets of 
$175 billion and liabilities of $50 billion, HCFA is the largest 
component of HHS. Because of the high-risk nature of health insurance 
reimbursement, the Office of Inspector General undertook a 
comprehensive review of claim expenditures including medical records 
review. This is the first time that a statistically valid national 
error rate for fee-for-service claims has ever been developed.
      
    In announcing the hearing, Chairman Thomas stated: ``During the 
104th Congress, the House conducted the first-ever financial and 
operational audit of the House of Representatives. We kept our word by 
auditing our books and developing programs to save money and improve 
efficiency. We need to make sure that HCFA is similarly accountable to 
the taxpayers. The Inspector General's audit shows that billions of 
dollars are being wasted every year by Medicare because of fraud, 
abuse, shoddy accounting practices, and improper payments. I believe 
the American people would benefit from a full public airing of the 
Inspector General's findings and hope we can work together to address 
these problems, as well as assuring Medicare beneficiaries and 
taxpayers that Medicare funds are being spent in the most prudent and 
cost-effective manner possible, in accordance with sound accounting 
principles.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine the details of the Inspector General's 
audit, focusing on the magnitude and cause of the incorrect payments 
made by HCFA. It will also focus on the accounting and financial 
reporting problems uncovered by the Inspector General.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text format only, with their 
name, address, and hearing date noted on a label, by the close of 
business, Thursday, July 31, 1997, to A.L. Singleton, Chief of Staff, 
Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515. If those 
filing written statements wish to have their statements distributed to 
the press and interested public at the hearing, they may deliver 200 
additional copies for this purpose to the Subcommittee on Health 
office, room 1136 Longworth House Office Building, at least one hour 
before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS 
Text format.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

                         NOTICE--CHANGE IN TIME

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

July 7, 1997

No. HL-14-Revised

                Time Change for Subcommittee Hearing on

                        Thursday, July 17, 1997,

               on Inspector General Audit of Health Care

             Financing Administration Financial Statements

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on the Inspector General of the Department of 
Health and Human Services' (HHS) Report on the Financial Statement 
Audit of the Health Care Financing Administration (HCFA). The hearing 
will take place on Thursday, July 17, 1997, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 10:00 
a.m. The Report will be released to the public at the time of the 
hearing.
      
    All other details for the hearing remain the same. (See 
Subcommittee press release No. HL-14, dated July 3, 1997.)
      

                                

    Chairman Thomas. The Subcommittee will come to order. Find 
a seat, please.
    This is the Health Subcommittee hearing on the Inspector 
General's audit of HCFA's financial statements. I believe this 
is the official release of the audit. We have heard others 
making comments on the other side of the Capitol. There was a 
press conference.
    My colleague, the gentleman from California, was 
interviewed on a television program, and they apparently had an 
advance copy and asked a question of him. And since he was the 
first of the Members to comment on it, I think it's appropriate 
that he be the first to make a statement.
    The Chair would be pleased to recognize the gentleman from 
California, Mr. Stark.
    Mr. Stark. I thank the Chairman. I was so surprised to know 
that we could get this information before the official release 
that I was caught a little short in preparing a lengthy opening 
statement worthy of this audit.
    But I thank you for holding this hearing so promptly or so 
contemporaneously with the release of the audit, which 
evidences your interest and the interest of some of our guests 
here today who are with the Oversight Committee. I would even 
hope that this hearing and the general information that the 
audit provides would help us to strengthen the antifraud 
provisions that we include in this year's budget reconciliation 
bill. To the extent we can help solve this problem, the sooner 
the better.
    I am, as most of us are, I'm sure, appalled, though not 
shocked, at the results of the audit. We have all been talking 
about fraud and abuse in broad terms for a number of years. 
Despite the knowledge of fraud and abuse and the workload piled 
on HCFA, last Tuesday the House actually cut the Medicare 
administrative budget below last year's budget. It seems to me 
that that can only guarantee us more waste and abuse than we'll 
save in the administrative budget.
    The number $23 billion has been out and about as being paid 
out improperly. We don't know how much of that was criminally 
paid out and how much of that was mistakes. Those are things 
that I think the Chair and the rest of the Subcommittee will 
want to determine.
    I would like to suggest that I feel HCFA has been taking 
aggressive action in investigating health fraud cases. The 
Columbia HCA issue is in the press regularly. This has been 
instigated, I am sure--although they may not admit it--by the 
actions of HCFA and perhaps by its Inspector General. This is a 
big, extensive problem, and I'm guessing that we have a very 
small number of people within Health and Human Services who are 
able to devote full time to it.
    I have asked Attorney General Reno to initiate a RICO 
investigation concerning Columbia. I think that if, in fact, 
that proves to be the proper statute, we will get a lot more 
effort from the private sector to comply. While many may say 
that the audit indicates that the government can't do anything 
right, and remind us of $600 toilet seats, I would like to 
point out that the beneficiaries of all this fraud and abuse 
have not been the government or the public instead they've been 
the private sector physicians, hospitals and claim processors 
who have received money to which they are not entitled.
    The net result is that we have been less able to provide 
extended benefits to the beneficiaries and, indeed, there's 
enough money in here to have bought health insurance for every 
poor child in this country and a host of other things that we 
struggle to do.
    Twenty-three billion is the amount that we're working on in 
conference, Mr. Chairman, to save over the next 5 years. Nobody 
suggests that if that is the accurate figure in fraud, waste 
and abuse, we could recover it all, or stop it all. But it sure 
would be the biggest item on our agenda if we could get a small 
piece of that and make all of our lives easier. You know, we 
could build a new rural hospital in every congressional 
district in this country with this kind of money.
    So it is not insignificant, and it is not easily solved. 
There is no reason to think it is a partisan problem, and it's 
a problem that I hope HCFA will tell us or suggest to us today 
how we can help them solve it, recover what money is 
recoverable, and prevent the continuation of this kind of 
inefficiency in the program.
    Thank you very much.
    Chairman Thomas. I thank the gentleman.
    The reason for the hearing is fairly obvious. There has 
already been much speculation and, unfortunately, most of the 
examination of the audit has been of the usual ``road kill'' 
variety. That is, they take the dollar amount, talk about 
waste, fraud and abuse, and then exclaim how horrendous that 
is.
    The reason I wanted to move as quickly as we did for an 
audit is because I believe the audit deserves a full airing 
opportunity, a presentation as complete as we can, as soon as 
we can, with appropriate comments from the individual who heads 
the administration for which the audit was done.
    Bruce Vladeck has been with us a number of times in front 
of the Subcommittee, and this may very well be his last time. 
If both of us had an opportunity to time, it probably would not 
have been under these circumstances. But I do want to tell you, 
Bruce, I have appreciated your openness and frankness and for 
the contributions that you have made, and that you will make.
    The other reason that I wanted to move as quickly as 
possible is because another hat I wear in this institution is 
Chairman of the Committee on House Oversight, which was the 
Committee that conducted the first ever independent audit of 
the House of Representatives. I full well have shared the 
experience of reading an audit, which was not the kind of audit 
you would like. We knew full well that would be the case 
because we had never been completely audited--We had never been 
audited before. In this instance, it was a more complete audit, 
notwithstanding the fact that there were some problems with the 
earlier audits in 1993, 1994 and 1995.
    But the process of audits and oversight is rarely 
enjoyable. They normally don't spend a lot of time applauding 
what you've done. You have to appreciate when you read the 
audit that their focus is criticism. There are a lot of good 
things that could be said, but their job is not to do that. 
Their job is to examine critically. It's not always pleasant. 
It is necessary, and it is an integral part of a process to 
ensure program integrity.
    If we're going to protect and preserve the Medicare 
Program, we need to do this in as open a way possible, so that 
we can examine where we are not as good as we would like to be, 
and then work together to be better. I do look forward working 
with the administration and others, especially since this audit 
occurs before we had the full ability to look at the Health 
Insurance Portability and Accountability Act changes that we 
had made, and we'll be asking questions about whether or not 
that will be useful and can we point it in that direction for 
additional help, or what other directions can we take. We will 
shortly pass a balanced budget act that contains additional 
tools--and the President and the administration has offered 
additional tools as well to fight fraud and abuse.
    I look forward to today's testimony. I look forward to 
hearing about the proposed action taken by HCFA and, frankly, 
want to spend as much or more time talking about where we want 
to go in a prospective way rather than dwelling on the problems 
or mistakes of the past. But obviously, we need to have a full 
understanding of how we got to where we are so that we can make 
sure that the steps that we take are the appropriate ones. I 
think that is the fundamental underpinning of an audit.
    With that, I would ask the Inspector General of the 
Department of Health and Human Services, June Gibbs Brown for 
her testimony--if she has written testimony, of course, that 
will be made a part of the record. You may address us in any 
way you see fit to adequately inform us, and then I'll ask Dr. 
Vladeck to respond to, since he has received the audit, the 
administration's or HCFA's response to the audit prior to going 
to any questions by Members. Similarly, the written testimony 
of Mr. Vladeck will be made a part of the record and he will 
address us in any way he sees fit.
    Ms. Brown.

  STATEMENT OF HON. JUNE GIBBS BROWN, INSPECTOR GENERAL, U.S. 
DEPARTMENT OF HEALTH AND HUMAN SERVICES; ACCOMPANIED BY JOSEPH 
 E. VENGRIN, ASSISTANT INSPECTOR GENERAL, AUDIT OPERATIONS AND 
                 FINANCIAL STATEMENT ACTIVITIES

    Ms. Brown. Thank you, Mr. Chairman.
    I am June Gibbs Brown, Inspector General of the Department 
of Health and Human Services. I am pleased to report to you on 
our audit of the Health Care Financing Administration's fiscal 
year 1996 financial statements. This is the first comprehensive 
audit of HCFA's financial statement that has been done.
    With me this morning is Joseph Vengrin, Assistant Inspector 
General for Audit Operations and Financial Statement 
Activities.
    Before beginning my testimony, I want to acknowledge the 
cooperation and support we received during this audit from both 
the Department and from the Health Care Financing 
Administration. A review of this magnitude and complexity could 
not have been carried out without HCFA's assistance and that of 
medical reviewers at the Medicare contractors and peer review 
organizations.
    Also, I would like to point out that this audit was 
performed in close cooperation with the General Accounting 
Office, due to HCFA's significance in the consolidated 
financial statements of the Federal Government that GAO has the 
responsibility to audit. The GAO participated extensively in 
various segments of the audit and provided significant 
contributions.
    We undertook this audit as part of our implementation of 
the Government Management Reform Act of 1994, which requires 
audited financial statements. My statement today will focus 
first on the extensive Medicare claims testing and then on 
concerns with several multibillion dollar accounts.
    The Medicare Program has 38 million beneficiaries, 800 
million annual claim payments, complex reimbursement rules, and 
decentralized operations. Further, health care consumers may 
not be alert to improper charges. As a result, the Medicare 
Program is inherently at high risk for payment errors. Because 
of this high risk, and the $168.6 billion in fiscal year 1996 
expenditures for Medicare fee-for-service claims, we embarked 
on a comprehensive review of claims expenditures and supporting 
medical records.
    Our review included a statistically valid sample of 5,314 
Medicare claims. Payments to providers for 1,577 of those 
claims did not comply with Medicare laws and regulations. By 
projecting the sample results nationwide, we estimate that 
improper payments for fiscal year 1996, at a 95-percent 
confidence level, are $17.8 billion to $28.6 billion, or 11 to 
17 percent. We used the midpoint of this range, $23.2 billion, 
or 14 percent of the total Medicare fee-for-service benefit 
payments.
    These improper payments could range from inadvertent 
mistakes to outright fraud and abuse. We cannot quantify what 
portion of the error rate is attributed to fraud.
    It is important to note two major points. Specifically, 99 
percent of the improper payments were detected through medical 
record reviews, coordinated by the Office of Inspector General 
in conjunction with medical personnel. When these claims had 
been submitted for payment to Medicare contractors, they 
contained no visible errors.
    Second, Medicare, like other insurers, makes payment based 
on standard claims forms. Providers are not required to submit 
supporting medical record documentation with each claim, but 
they are required to maintain such documentation to justify the 
necessity of the services billed. However, a significant 
portion of the payment errors occurred because providers did 
not submit any documentation, or submitted inadequate 
documentation, when requested to do so during the audit.
    I have some charts with me today, which you will find 
attached to my written testimony and are on display here.
    The first chart shows the errors we found. Most of these 
errors fell into four categories: Insufficient or no 
documentation, lack of medical necessity, net overpayments due 
to incorrect coding, and noncovered or unallowable services.
    The most pervasive error type was insufficient or no 
documentation, which accounted for $10.8 billion, or 
approximately 47 percent of the $23.2 billion in improper 
payments. Medicare regulations specifically require providers 
to maintain sufficient documentation to justify diagnoses, 
admissions, and other services.
    A lack of medical necessity was the second highest error 
category. It accounted for $8.5 billion, or 37 percent of the 
$23.2 billion in improper payment. In determining whether the 
medical records supported these Medicare claims, medical 
reviewers found that the services, as billed, were not 
medically necessary.
    The third highest category in our sample is incorrect 
coding, which accounted for $2 billion net of undercoding, or 
about 8.5 percent of the $23.2 billion in improper payments. 
For most of these errors, the medical reviewers determined that 
the documentation submitted by the provider supported a lesser 
reimbursement code.
    Finally, unallowable services accounted for $1.2 billion, 
or about 5 percent, of the $23.2 billion in improper payments. 
Unallowable services are those that Medicare will not reimburse 
because they do not meet reimbursement rules and regulations.
    Moving to the second chart, we can further analyze these 
errors. As you see, 88 percent of the $23.2 billion in improper 
payments occurred with six provider types. First, inpatient 
prospective payment system; second, the physician; third, home 
health agency; fourth, outpatient; fifth, skilled nursing 
facility; and sixth, laboratory.
    Mr. Christensen. Mr. Chairman, would the speaker either 
bring the chart up closer or point to where it is in the 
testimony, what page?
    Chairman Thomas. I would tell the gentleman that in the 
Inspector General's testimony, on page 6--the first chart was 
on page 3 of the Inspector General's written testimony, and 
this chart is on page 6. And then you follow through and there 
will be a series of charts. At the end, if she continues, there 
will be full chart pages.
    Ms. Brown. Thank you.
    On this chart we have highlighted the section of the chart 
for you, because these provider types present the target of 
opportunity for corrective action.
    Mr. Chairman, HCFA uses numerous prepayment and post- 
payment safeguards to prevent or detect improper Medicare fee-
for-service benefit payments. For instance, prepayment edits 
help ensure that billed services are paid accurately and 
timely, but they do not always detect the improper claims that 
we have identified, such as upcoded, medically unnecessary, or 
underdocumented services.
    In addition, HCFA's postpayment reviews are generally 
effective for identifying abuse due to overutilization, 
payments for unsubstantiated, medically unnecessary, and 
noncovered services. However, funding limitations have 
significantly constrained postpayment reviews. Currently, only 
about three of every thousand providers are subjected to these 
most extensive reviews.
    Even the best developed prepayment and postpayment controls 
at the contractor level may not be sufficient to prevent or 
detect material Medicare Program losses resulting from 
excessive, unnecessary, or unsubstantiated provider services. 
Therefore, HCFA needs to consider stronger deterrents to reduce 
improper benefit payments and to protect the solvency of the 
Medicare Trust Funds.
    Stronger oversight by HCFA is also needed to ensure 
provider compliance with Medicare reimbursement rules and 
regulations. Our report contains a number of recommendations 
for enhanced oversight.
    We have a disclaimer of opinion on HCFA's financial 
statements, for several reasons, and I would like to now focus 
on HCFA's financial reporting. We are unable to reach 
conclusions on several billion dollar accounts in HCFA's fiscal 
year 1996 financial statements. The auditing term is a 
``disclaimer of opinion.'' This basically means that we're not 
able to gather sufficient evidence on the validity or 
reasonableness in the following four areas.
    On the third chart you will see that Medicare accounts 
payable, as of September 30, 1996, reported Medicare accounts 
payable totaling $36.1 billion, and comprised 71 percent of the 
total liability. The Health Care Financing Administration did 
not provide adequate support for this estimate, and we couldn't 
find support for $18.3 billion of that accounts payable amount.
    Turning to our last chart now concerning our disclaimer, 
the second account shown is supplementary medical insurance 
review, which are part B Medicare premiums. Because this review 
has not been audited, and because we lack the statutory 
authority to audit the Social Security Administration, we were 
unable to determine the validity and completeness of $18.9 
billion of the SMI revenue account, as well as the $61.7 
billion Federal match.
    Third is Medicare accounts receivable, or overpayments to 
providers owed to HCFA. We could not determine the validity of 
$2.68 billion in accounts receivable because Medicare 
contractors did not maintain adequate documentation.
    Finally, our disclaimer relates to cost report settlements, 
the Medicare process for determining final payments to 38,000 
institutional providers. Due to the limited scope of 
contractors' audits of provider cost reports, we were unable to 
determine what adjustments, if any, were necessary to the $3 
billion in prior-year cost settlements reported in the 
financial statements.
    To briefly summarize, Mr. Chairman, unnecessary or improper 
benefit payments continue to plague the Medicare Program. To 
ensure provider compliance with Medicare reimbursement rules 
and regulations, stronger oversight by HCFA is needed. Also, 
claims must be subjected to medical review. I am pleased to say 
that HCFA is aggressively working on a corrective action plan 
addressing our concerns.
    Finally, I would like to note that we have already started 
to audit HCFA's fiscal year 1997 financial statements.
    I thank you for the opportunity to appear before you today 
and welcome your questions.
    [The prepared statement and attachments follow. The Report 
on the Financial Statement Audit of the Health Care Financing 
Administration for Fiscal Year 1996 is being held in the 
Committee's files.]

Statement of Hon. June Gibbs Brown, Inspector General, U.S. Department 
of Health and Human Services

    Good morning, Mr. Chairman. I am June Gibbs Brown, 
Inspector General of the Department of Health and Human 
Services (HHS), and I am pleased to report to you on our audit 
of the Health Care Financing Administration's (HCFA) Fiscal 
Year (fiscal year) 1996 financial statements. With me this 
morning is Joseph E. Vengrin, Assistant Inspector General for 
Audit Operations and Financial Statement Activities.
    My testimony today will focus on our extensive review of 
the correctness of Medicare payments and the reliability of 
HCFA's financial reports. Further details are provided in our 
report which is being released at this hearing.
    Before beginning my testimony, I want to acknowledge the 
cooperation and support we received during this audit from the 
Department and HCFA. A review of this magnitude and complexity 
could not have been carried out without HCFA's excellent 
cooperation and assistance in making available medical review 
staff at the Medicare contractors and the peer review 
organizations (PRO). We look forward to working with them again 
on the fiscal year 1997 audit. Also, I would like to point out 
that this audit was performed in close cooperation with the 
General Accounting Office (GAO) due to HCFA's significance in 
the consolidated financial statements of the Federal 
Government, which GAO has the responsibility to audit. The GAO 
participated extensively in various segments of the audit and 
provided significant contributions.
    We undertook this audit as part of our implementation of 
the Government Management Reform Act of 1994 which requires 
audited financial statements. As you know, the intended purpose 
of financial statements is to provide a complete picture of 
agencies' financial operations, including what they own 
(assets), what they owe (liabilities), and how they spend 
taxpayer dollars. The purpose of our audit was to independently 
evaluate the reliability of such statements. While we issued 
audit reports on portions of HCFA's financial statements in 
previous fiscal years, this year maral statement audit of HCFA.

                        Medicare Claims Testing

    The HCFA is the largest single purchaser of health care in 
the world. With expenditures of approximately $300 billion, 
assets of $175 billion, and liabilities of $50 billion, HCFA is 
also the largest component of HHS. Medicare and Medicaid 
outlays represented 33.2 cents of every dollar of health care 
spent in the United States in 1996.
    In view of Medicare's 38 million beneficiaries, 800 million 
claims processed and paid annually, complex reimbursement 
rules, decentralized operations, and health care consumers who 
may not be alert to improper charges, the Medicare program is 
inherently at high risk for payment errors. Medicare, like 
other insurers, makes payments based on a standard claims form. 
Providers typically bill Medicare using standard procedure 
codes without submitting detailed supporting medical records. 
However, Medicare regulations specifically require providers to 
retain supporting documentation and to make it available upon 
request. Because of the high risk in health insurance 
reimbursement and its dollar magnitude in relation to financial 
statement impact, i.e., $168.6 billion in Medicare fee-for-
service claims, we embarked on a comprehensive review of claims 
expenditures and supporting medical records.
    Our primary objective was to determine whether Medicare 
benefit payments were made in accordance with Title XVIII of 
the Social Security Act (Medicare) and implementing 
regulations. Specifically, we examined whether services were: 
(1) furnished by certified Medicare providers to eligible 
beneficiaries; (2) reimbursed by Medicare contractors in 
accordance with prescribed Medicare laws and regulations; and 
(3) medically necessary, accurately coded, and sufficiently 
documented in the beneficiaries' medical records.
    This is the first time in the history of the Medicare 
program that a comprehensive, statistically valid sample of 
Medicare fee-for-service claims has ever been taken to 
determine the correctness of payments. The results of our claim 
testing corroborate past program findings that the Medicare 
program is inherently vulnerable to improper provider billing 
practices.
    We estimate that during fiscal year 1996 net overpayments 
totaled about $23.2 billion nationwide, or about 14 percent of 
total Medicare fee-for-service benefit payments. These improper 
payments could range from inadvertent mistakes to outright 
fraud and abuse. We cannot quantify what portion of the error 
rate is attributable to fraud. Specifically, 99 percent of the 
improper payments were detected through medical record reviews 
coordinated by the Office of Inspector General (OIG) in 
conjunction with medical personnel. When these claims had been 
submitted for payment to Medicare contractors, they contained 
no visible errors.

                           Review Methodology

    To accomplish our objective, we used a multistage, 
stratified sample design. The first stage consisted of a random 
selection of 12 contractor quarters during fiscal year 1996, 
and the second stage consisted of a random sample of 50 
beneficiaries from each contractor quarter. The resulting 
sample of 600 beneficiaries produced 5,314 claims for review. 
The population from which the sample was drawn represented 
$168.6 billion in fee-for-service payments.
    We reviewed all claims processed for payment for each 
selected beneficiary during the 3-month period. Specifically, 
we used medical review personnel from HCFA's Medicare 
contractors (fiscal intermediaries and carriers) and PROs who 
regularly assess medical records to determine whether services 
billed were reasonable, medically necessary, adequately 
documented, and coded correctly in accordance with Medicare 
reimbursement rules and regulations. We asked the Medicare 
contractors to send a letter to each provider in our sample to 
obtain copies of all medical records supporting services 
billed. In the event that a response was not received, a second 
letter was sent, and in most instances additional telephone 
calls were made. Throughout the medical review, we coordinated 
OIG and medical review efforts to ensure consistency and 
accuracy.
    Concurrent with the medical review, we made additional 
detailed claims reviews, focusing on past incorrect billing 
practices, to determine whether: (1) the contractor paid, 
recorded, and reported the claim correctly; (2) the beneficiary 
and the provider met all Medicare eligibility requirements; (3) 
the contractor did not make duplicate payments or payments for 
which another primary insurer should have been responsible 
(Medicare secondary payer); and (4) all services were subjected 
to applicable deductible and co-insurance amounts and were 
priced in accordance with Medicare payment regulations.
    Projecting the 1,577 claims not meeting Medicare laws and 
regulations to the total fiscal year 1996 fee-for-service 
Medicare benefit payments, we estimated that the range of 
improper payments at the 95-percent confidence level is $17.8 
to $28.6 billion, or 11 to 17 percent. Therefore, we used the 
midpoint of this range, or $23.2 billion (about 14 percent of 
the $168.6 billion in processed fee-for-service payments) as 
the projected estimate of improper payments. However, the 
precision of the dollar estimate by specific type of claim and 
type of error is not sufficient to use for benchmarking 
purposes. This information is being provided to HCFA in order 
that appropriate corrective action can be taken. Also, this 
estimate of improper payments does not take into consideration 
waste (excessive pricing) and numerous kinds of outright fraud, 
such as phony records or kickbacks.

                         Types of Errors Found

    As shown in the following chart, most of the errors we 
found fell into four general categories: (1) documentation, 
which includes both insufficient and no documentation; (2) lack 
of medical necessity; (3) incorrect coding; and (4) noncovered/
unallowable services.

                  Estimated Amount of Improper Payments                 
                           (By Type of Error)                           
------------------------------------------------------------------------
                                    Estimated Dollars                   
      Type of Improper Payment         In Improper     Improper Payments
                                       Payments (in     as a Percent of 
                                        millions)            Total      
------------------------------------------------------------------------
Documentation:....................            $10,846              46.76
    Insufficient Documentation....              7,596              32.75
    No Documentation..............              3,250              14.01
Lack of Medical Necessity.........              8,529              36.78
Incorrect Coding..................               1,97              88.53
Noncovered or Unallowable Services              1,219               5.26
Other.............................                620               2.67
                                   -------------------------------------
Total.............................            $23,192             100.00
------------------------------------------------------------------------


Lack of Documentation

    The most pervasive error type in our sample is insufficient 
or no documentation, which accounts for $10.8 billion, or 
approximately 47 percent, of the $23.2 billion in improper 
payments. This can be further broken down between insufficient 
documentation totaling $7.596 billion (33 percent) and no 
documentation totaling $3.250 billion (14 percent). As 
previously indicated, if providers failed to submit 
documentation or submitted insufficient documentation, the 
contractors generally requested supporting medical records at 
least three times before determining the payment to be 
improper. Medicare regulation, 42 CFR 482.24(c), specifically 
requires providers to maintain medical records that contain 
sufficient documentation to justify diagnoses, admissions, 
treatments performed, and continued care.
    Some examples of documentation problems follow:
     Skilled Nursing Facility (SNF). A hospital-based 
SNF was paid $9,365 for a 25-day skilled nursing stay even 
though the medical records did not support the need for skilled 
care.
     Physician. A physician who was paid $523 for 10 
hospital visits could support only 2 visits, resulting in a 
$386 overpayment.
     Clinical Laboratory Services. One clinical 
laboratory billed Medicare $64 but could not provide the 
doctor's order authorizing the service.

Lack of Medical Necessity

    A lack of medical necessity is the second highest error 
category, accounting for $8.5 billion, or 37 percent, of the 
$23.2 billion in improper payments. Medical reviewers followed 
their normal claims review procedures to determine whether the 
medical records supported the Medicare claims. Their findings 
showed that in these cases, based upon the ``look behind'' 
review of the medical records employed in our audit, the 
services as billed were not medically necessary.
    Some examples include:
     SNF. A SNF was paid $15,362 for 61 days of care 
even though the medical records clearly documented that the 
individual did not need this level of care.
     Home Health Agency (HHA). An HHA was paid $11,790 
for skilled physical therapy, skilled nursing care, and home 
health aide services when the medical records clearly indicated 
that the patient had no functional diagnosis requiring physical 
therapy or skilled nursing care. Another HHA received payment 
of $1,528 for home health services which were not medically 
necessary because the services entailed custodial care (care to 
assist patients with daily living or meeting personal needs) 
rather than skilled nursing care. Therefore, the medical 
reviewer disallowed the entire claim.

Incorrect Coding

    Incorrect coding is the third highest category, accounting 
for an estimated $2 billion, or about 8.5 percent, of the $23.2 
billion in improper payments. The medical industry uses a 
standard coding system to bill Medicare for services provided. 
For most of the coding errors, the medical reviewer determined 
that the documentation submitted by the provider supports a 
lesser reimbursement code. However, we did find a few instances 
of downcoding which were offset against identified upcoding 
situations.
    Examples of incorrect coding follow:
     Inpatient Hospital. One beneficiary had three 
separate hospital inpatient admissions during a 3-month period. 
Medicare paid $8,533 for each admission under one diagnosis-
related group (DRG). Based on the medical records, the medical 
reviewer concluded that all three claims should have been paid 
under a less extensive and less costly DRG that paid $6,290, 
resulting in a total overpayment of $6,729.
     Physician. A physician billed Medicare for a 
hospital emergency room visit for ``treatment of a medical 
problem of high severity that requires urgent evaluation by the 
emergency room physician'' when the medical records support 
only treatment for problems of moderate severity.
    Another physician billed Medicare for subsequent hospital 
care requiring ``a medical decision of high complexity by the 
provider'' when it should have been for medical care ``that is 
straightforward or of low complexity.''
    Noncovered/Unallowable Services. Unallowable services 
account for an estimated $1.2 billion, or about 5 percent, of 
the $23.2 billion in improper payments. Medicare unallowable 
services are defined as those that Medicare will not reimburse 
because the services do not meet Medicare reimbursement rules 
and regulations.
    Following are some examples of noncovered or unallowable 
services identified during our review:
     Physician Claims. A physician billed Medicare for 
an electrocardiogram and various laboratory tests. After 
reviewing the provider's medical records, the medical reviewer 
concluded the billed services should be denied because the 
services were performed as part of the beneficiary's routine 
yearly physical examination, which is not a Medicare-covered 
service.
     Hospital Outpatient. A patient was evaluated for 
foot orthotics, and impressions were taken to make soft arch 
supports. Arch supports are not covered by Medicare. Although 
the patient signed a hospital form acknowledging that arch 
supports were not covered by Medicare, the claim was billed as 
though it were a Medicare-covered service.
     SNF Services. Most of the errors occurred when the 
SNF billed Medicare separately for various routine services 
already included in its flat-rate reimbursement.
    A further analysis of the errors, as illustrated in the 
chart herein, shows that 88 percent of the $23.2 billion in 
improper payments occurred within 6 provider types: (1) 
inpatient prospective payment system (PPS), (2) physician, (3) 
home health agency, (4) outpatient, (5) skilled nursing 
facility, and (6) laboratory.
    We believe that it would be prudent for HCFA to focus 
corrective action in these specific provider groups. We have 
provided HCFA a detailed list of certain procedure codes that 
have a high frequency of error.

            Conclusions and Recommendations: Claims Testing

    The HCFA uses numerous prepayment and postpayment 
safeguards to prevent or detect improper Medicare fee-for-
service benefit payments. For instance, prepayment edits help 
ensure that billed services are paid accurately and timely, but 
they do not always detect the improper services that we 
identified, i.e., undocumented, medically unnecessary, or 
upcoded services. The HCFA's postpayment medical review is 
generally effective for identifying abuse and overutilization 
and for detecting payments for unsubstantiated, medically 
unnecessary, and noncovered services. However, funding 
limitations have significantly constrained medical review to 
the extent that currently only about 3 of every 1,000 providers 
are subjected to postpayment medical review audit.
    Due to limited funding, resources devoted to prepayment and 
postpayment review have not kept pace with the increase in 
claims or questionable billing practices by providers. However, 
even the best developed prepayment and postpayment controls at 
the contractor level may not be sufficient to prevent or detect 
material Medicare program losses resulting from excessive, 
unnecessary, or unsubstantiated provider services. Therefore, 
HCFA needs to consider stronger deterrents to reduce improper 
benefit payments and to protect the solvency of the Medicare 
trust funds.
    As our results indicate, a significant opportunity exists 
for providers to: (1) bill for services that are excessive or 
not medically necessary; (2) bill for services that are 
unsubstantiated by the beneficiaries' medical records; and (3) 
improperly code services to obtain higher Medicare payment than 
the appropriate code would permit. Existing risks are sharply 
increased by the significant growth in Medicare claims and 
expenditures, the inherent complexities of the Medicare 
program, and restricted funding for program safeguards to deter 
abusive providers.

                                       Estimated Amount of Improper Payments                                    
                                            By Type of Error/Provider                                           
----------------------------------------------------------------------------------------------------------------
                                               Types of Error (in millions)                                     
                              -------------------------------------------------------------           Percentage
       Type of Provider         Insufficent/   Lack of              Noncovered/               Total       of    
                                     No        Medical   Incorrect  Unallowable  Remaining             Improper 
                               Documentation  Necessity    Coding     Service      Errors              Payments 
----------------------------------------------------------------------------------------------------------------
Inpatient PPS................       $1,040      $3,301       $900   ...........     ($2)      $5,239      22.59 
Physician....................        2,756         614      1,070        $329        258       5,027      21.68 
Home Health Agency...........        1,684       1,935   .........  ...........       31       3,650      15.74 
Outpatient...................        2,286         356          1          85         82       2,810      12.12 
Skilled Nursing Facility.....        1,056       1,365   .........  ...........        3       2,424      10.45 
Laboratory...................        1,173         146       (14)          30          2       1,337       5.76 
Subtotal.....................       $9,995      $7,717     $1,957        $444       $374     $20,487      88.34 
Other Providers..............          851         812         21         775        246       2,705      11.66 
                              ----------------------------------------------------------------------------------
Total........................      $10,846      $8,529     $1,978      $1,219       $620     $23,192     100.00 
Percentage of Improper                                                                                          
 Payments....................        46.76       36.78       8.53        5.26       2.67         100  ..........
----------------------------------------------------------------------------------------------------------------


    To ensure provider compliance with Medicare reimbursement 
rules and regulations, stronger oversight by HCFA is needed. 
Among the more important issues HCFA faces in the immediate 
future is preserving the solvency of the Medicare trusts 
strategic plan to safeguard these funds, we recommend that 
HCFA:
     Develop a system that objectively and periodically 
estimates improper payments and disclose the range of such 
overpayments in its financial statements.
     Develop a national error rate to focus corrective 
actions and measure performance in reducing improper payments.
     Enhance prepayment and postpayment controls by 
updating computer systems to better detect improper Medicare 
claims.
     Direct contractors to expand provider training to 
further emphasize the need to maintain medical records that 
contain sufficient documentation and the penalties for not 
doing so.
     Direct contractors to make followup evaluations of 
specific procedure codes we identified with high error rates 
and consider whether identified providers should be placed on 
prepayment medical review.
     Ensure that contractors adjust their Medicare 
accounts for improper payments we identified, initiate recovery 
from the identified providers, and follow up with the providers 
to correct deficiencies and to determine whether other systemic 
problems need to be corrected.

          Disclaimer of Opinion on HCFA's Financial Statements

    Lastly, I would like to focus my testimony on HCFA's 
financial reporting. We were unable to reach conclusions on 
several billion dollar accounts in HCFA's fiscal year 1996 
financial statements. This does not mean that these numbers are 
incorrect; rather, they are not supported by current accounting 
or audit data. The auditing term is a ``disclaimer of 
opinion,'' which means that we were not able to determine if 
HCFA's financial statements were fairly presented because the 
documentation was not adequate or available to support the 
reported financial statement amounts. Specifically, we were not 
able to gather sufficient evidence on the validity or 
reasonableness of the following:
     Medicare Accounts Payable--services provided at 
year end but not yet paid. As of September 30, 1996, reported 
Medicare accounts payable totaled $36.1 billion and comprised 
71 percent of total liabilities. These payables represent 
HCFA's estimate of actual or potential claims for services 
provided to beneficiaries but not paid at the end of the fiscal 
year. The HCFA did not provide adequate support for this 
estimate. Additionally, we were unable to determine, through 
alternative audit procedures, if the September 30, 1996, 
Medicare accounts payable balance was fairly presented. 
Specifically, we could not find support for $18.3 billion of 
the accounts payable amount using historical claims data 
adjusted for costs associated with interim payments to 
providers and settlements from providers' cost reports. 
Moreover, using expenditure trends to assess the reasonableness 
of the payables estimate, we noted that Medicare expenditures 
increased 16 percent while the accounts payable increased 64 
percent. Historically, when compared with expenditures, the 
payables had erratic and inconsistent changes which HCFA could 
not explain.
     Supplementary Medical Insurance (SMI) Revenue 
(Part B Medicare). The Social Security Administration is 
responsible for withholding premiums from SMI beneficiaries' 
Social Security checks and for transferring these funds to the 
SMI trust fund each month. Because the SMI revenue has not been 
audited and because we lack statutory authority to do this 
work, we were unable to determine the validity and completeness 
of the SMI revenue account of $18.9 billion, as well as the 
Federal match of $61.7 billion.
     Medicare Accounts Receivable--overpayments to 
providers owed to HCFA. We could not determine the validity of 
the $2.68 billion Medicare accounts receivable balance because 
Medicare contractors did not maintain adequate documentation to 
support reported accounts receivable activity and to provide 
adequate audit trails. For example:
     Some Medicare Part A providers are paid on an 
interim basis using prior claims activity and related costs 
(referred to as the periodic interim payment (PIP) method of 
reimbursement). Some contractors used inconsistent accounting 
procedures to calculate receivables and payables resulting from 
the PIP reimbursement process. One contractor, for instance, 
incorrectly included $700 million as a receivable when in fact 
all but $32 million was a payable. Also, four contractors did 
not record either PIP receivables or payables. One additional 
contractor included a $25 million PIP payable, rather than an 
$80 million PIP receivable.
     At another contractor location, approximately $7 
million could not be reconciled to reported amounts.
     Cost Report Settlements--HCFA's process for 
determining final payments to certain institutional providers. 
About 38,000 institutional providers are paid interim amounts 
throughout the year and subsequently file a cost report to 
reconcile actual costs to the interim payments received. The 
HCFA's cost report audit process is limited to specific issue 
areas or cost report line items and covers only a limited 
number of providers. Due to the limited scope of contractors' 
audits of provider cost reports, we were unable to determine 
what adjustments, if any, were necessary to the $3 billion in 
prior-year cost settlements reported in the fiscal year 1996 
financial statements.

                               Conclusion

    I appreciate the opportunity to appear before you today and 
to share our report with you. As demonstrated in our review, 
unnecessary or improper benefit payments continue to plague the 
Medicare program. Existing risks are sharply increased by the 
significant growth in Medicare claims and expenditures, the 
inherent complexities of the Medicare program, and restricted 
funding for program safeguards to deter abusive providers. Our 
review has also demonstrated the need for stronger oversight by 
HCFA to ensure provider compliance with Medicare reimbursement 
rules and regulations and the necessity of subjecting claims to 
medical review. I am pleased to say that HCFA and the 
Department's Chief Financial Officer are aggressively working 
on a corrective action plan addressing our concerns.
    Finally, I would like to note that we have already started 
our audit work on HCFA's fiscal year 1997 financial statements. 
As in fiscal year 1996, we will be performing comparable fee-
for-service claims testing. I welcome your questions.

[GRAPHIC] [TIFF OMITTED] T7097.001

[GRAPHIC] [TIFF OMITTED] T7097.002

      

                                

    Chairman Thomas. Thank you, Ms. Brown.
    As a preface to Mr. Vladeck's testimony, any Member who 
believes they should fill out a form for three units of 
accounting credit by the time we're through with this, feel 
free. But as Members of the Ways and Means Committee, we're 
familiar with a number of firms that are going through the 
change from cost accounting to accrual accounting, and we do 
need to familiarize ourselves with the various auditing terms 
as we go through.
    Ms. Brown, you mentioned a number of specific dollar 
figures. All of us understand that any specific dollar figures 
were based upon a guesstimate from a range that was available, 
off of a sample which was taken. If we keep that in mind as we 
deal with these figures, I think we put them in the proper 
perspective.
    With that, Bruce, proceed.

   STATEMENT OF HON. BRUCE C. VLADECK, PH.D., ADMINISTRATOR, 
              HEALTH CARE FINANCING ADMINISTRATION

    Mr. Vladeck. Thank you very much, Mr. Chairman, Members of 
the Committee. Mr. Chairman, I appreciate your kind words in 
your introductory remarks.
    Obviously, we have submitted a complete statement for the 
record, including a discussion of some of these accounting 
terms. Let me try very briefly to focus, as I think is 
appropriate, on the steps we have taken and, most importantly, 
propose to take as a result of these audit findings and our 
continuing ongoing work with the Inspector General and her 
staff.
    As the Inspector General noted, this was the first 
comprehensive audit of our financial statements and related 
systems. As she suggested at the very end of her statement, in 
which she noted the work has already begun on the 1997 audit, 
it is sometimes useful to view this more as a continuing 
process than as one of a series of discontinuous steps.
    I want to underscore our commitment to making sure, insofar 
as is humanly possible, that every dollar in the Medicare 
Program is well spent, and that our goals of increased 
efficiency and cost effectiveness protect the quality of health 
care for our beneficiaries. We are committed to making sure 
that our funds are accounted for in a businesslike manner. I 
would like to spend a few minutes just to tell you about some 
of the steps we are taking to address some of these concerns, 
particularly since I think you've had an excellent overview of 
the audit and its findings.
    We have made fighting fraud and abuse an important 
priority. In conjunction with Members of Congress, notably 
including the leadership of this Subcommittee, we have taken a 
number of important steps in recent years. We have some 
progress to show for that, which helps to provide the basis for 
moving forward.
    As an example of where we are at the moment, in fiscal year 
1996, the year discussed in the audit, our total expenditures 
for all of the activities in our budget that we describe as 
payment safeguards were $441 million, and they produced savings 
of approximately $6.2 billion. This is a cumulative return on 
investment of about 14 to 1. Although this high rate of return 
is encouraging, it makes one a little nervous in the sense of, 
if you can produce rates of return of 14 to 1 with existing 
dollars, what kind of actual dollar returns could you produce 
if you were spending more money on that activity? So we began 4 
years ago to seek additional resources for these activities.
    Thanks to the work of this Committee and other Members of 
Congress, we did include in last year's Health Insurance 
Portability and Accountability Act, in HIPAA, provisions to 
establish a stable funding base for the Medicare Integrity 
Program. However, actual increments in funding for our 
activities will not begin to take effect until October.
    In addition, working very closely with the Inspector 
General on Operation Restore Trust, since it was announced by 
the President in 1995, we have established and 
institutionalized a set of relationships between ourselves, the 
Inspector General, our contractors, State Medicaid Program 
agencies and survey agencies, and fraud control units and law 
enforcement activities to seek out and stop fraud, waste and 
abuse. We have identified in specific Operation Restore Trust 
specific activities, more than $187 million in fines or 
recoveries or audit disallowances that were owed to the 
government on incremental expenditures, of under $5 million 
over a 2-year period. As a result, we are expanding some of the 
specific Operation Restore Trust Activities to 12 additional 
States.
    We have also, and this is detailed in my written testimony, 
made a lot of investments in various kinds of technologies. 
Some, such as our unbundling and correct coding software, are 
already in use, and others are being tested. Still being tested 
are some of the off-the-shelf software and the pattern 
recognition fraud detection methods for which we have 
contracted with the Los Alamos National Laboratory.
    In that regard, we see the specific findings of the audit 
that is being released today as the latest effort in helping us 
to better understand the dimensions of the issues with which 
we're dealing and to better target our activities.
    The discussion of the appropriateness of claims payment as 
a result of this audit, has raised the central issue of the 
adequacy of our focus on medical review activities. Medical 
review is a very resource-intensive activity because it 
requires our contractors to collect additional medical 
documentation from the providers. It is also a very paper 
intensive process.
    Over time, we have decreased the proportion of actual 
claims that we subject to medical review because, in an era of 
highly constrained expenditures, we found that we were able to 
produce a higher rate of return on our investment by very 
highly focusing our medical review activities. Over the last 8 
years, for example, the proportion of all claims that have been 
subjected to medical review has fallen by almost half, from 16 
percent in 1989 to the current level of about 9 percent. 
However, the return on investment from this activity has 
increased from 6 to 1 in 1989 to about 14 to 1 in 1996.
    Nonetheless, the findings of this audit provide us with 
information that makes it necessary to rethink some of our 
strategies. In formulating a corrective action plan we have 
been working very closely with the Inspector General and her 
staff. We have tried to balance two competing goals: to more 
systematically scrutinize provider bills and to require the 
medical community to substantiate bills with appropriate 
documentation. At the same time, we must not swing the pendulum 
too far from the increased emphasis in the current budgetary 
environment on streamlining operations and requiring less 
paperwork from the American people.
    We think we are able to create a balance and walk the line 
through the following kinds of activities: First, just to 
reassure everyone, all of the overpayments or inappropriate 
payments identified by the auditors in the course of the audit 
are being actively pursued for overpayment. We are going to 
continue to work with our contractors on more aggressive 
systems, not only for getting the accounting straight on the 
amount of dollars to be recouped in the process, but on the 
techniques and effective ways in which they can do that.
    We will continue to maintain and reinforce the provision 
that providers who bill the Medicare Program are accountable 
for documentation to support the payment of the claim. In 
making such requirements, we are just requiring that providers 
follow the norms of good medical practice, which requires 
careful documentation of health services. Nonetheless, every 
time we undertake these sorts of efforts, we get a fair amount 
of complaining and objection. Our most recent experience in 
this regard grows out of the work the Inspector General has 
led, in which we found serious program integrity problems in 
clinical laboratory billings for the Medicare Program.
    A number of our carriers have begun to address some of 
those problems by requiring a diagnostic code on all laboratory 
orders submitted by physicians. We have had quite an amount of 
controversy about that, but we have persisted, and we are 
committed to working very closely with the provider community 
to recognize that there is additional work associated with 
increased documentation, to find waste in as straightforward 
and unburdensome a way as possible and to work collaboratively 
on a variety of education and other kinds of activities. We 
have already scheduled a series of meetings with particular 
provider associations to acquaint them with the findings of 
this audit activity and to begin to work cooperatively with 
them on addressing some of the issues that have been raised.
    We are going to simply increase the level of claims review 
that we undertake. Obviously, if you applied to every Medicare 
claim we receive the kind of scrutiny that the sample of claims 
received, we could over a period of time reduce the error rate 
to very close to zero. However, the reality is that the 
processing of 800 million claims a year makes 100 percent 
review unfeasible, cost ineffective, and not entirely rational. 
While we clearly need to do a more intensive medical review of 
claims than we are now doing, we clearly aren't going to get to 
100 percent. We are working with analysts and statisticians to 
find the number of claims review that will give us the most 
return for our claims review expenditures.
    In the meantime, we are going to undertake certain 
additional steps. In fiscal 1998, all of our Medicare carriers 
will be conducting random prepayment reviews of physician 
claims for evaluation and management services, the most 
commonly billed physician services, and claims which involve 
issues of documentation and appropriateness of coding. We hope 
that this particular initiative will not only identify 
overpayments in those areas, but will give us much greater 
insight into what the optimal level of medical review and 
prepayment ought to be. We hope it will also permit us to focus 
our future medical review activities.
    We are going to much more systematically scan Medicare 
billings for evidence of unnecessary admissions, and we will 
target specific reviews on leads generated from that process.
    We are about to implement a sampling methodology for part A 
claims, to estimate overpayments to part A providers. We will 
use that sampling methodology as the basis for defining 
recoveries of overpayments.
    We are in the process, through the legislative process, 
again with the help of Members of this Subcommittee, and other 
Members of Congress and activities we can undertake 
administratively, to substantially raise the standards for 
provider admission into the Medicare Program. We are working 
with you on legislative proposals to require disclosure of 
employer identification numbers, taxpayer identification 
numbers and Social Security numbers, and to both limit the 
folks who can enter the program and facilitate certain kinds of 
provider exclusions. We also are moving ahead with 
implementation of a national provider identification system, as 
required under HIPAA, that will help us prevent providers from 
obtaining multiple billing numbers and/or playing games of 
distributing their bills across different contractors. That 
provider identification system will permit us to track and 
monitor the complete billing pictures of providers more 
effectively.
    We are going to learn from this first-ever substantive 
claims review testing process as we move forward. The Inspector 
General will conduct parallel or similar kinds of activities in 
their audits of our financial statements for fiscal years 1997 
and 1998. By October 1 of next year, we will have in place our 
own internal system for substantive testing to establish 
performance measures, to do some degree of random review, and 
to have continuous measures of the appropriateness of the 
levels of review we are conducting and the relative cost 
effectiveness of the various kinds of review activities that 
take place.
    We will need to evaluate both the short-term effects, in 
terms of the number of erroneous claims we identify from which 
we make recoveries, and the longer term effects in terms of the 
sentinel or deterrent effect on inappropriate or incorrect 
billing.
    All of these initiatives and corrective actions are 
designed to improve our record in future CFO audits, and, in 
accordance with the Government Performance and Results Act, to 
strengthen our ability to monitor and track our efforts.
    But more importantly, they will help us reassure ourselves, 
Members of this Committee, and members of the general public, 
including our beneficiaries, of the financial soundness of 
Medicare operations.
    The work of this Committee and other Members of Congress 
has already contributed significantly to improving our ability 
to protect the integrity of the Medicare Program and to 
safeguard beneficiary interests. The lessons and experience we 
have gained from our efforts in the last few years will guide 
us as we put some of these new legislative and administrative 
tools to use. By effectively utilizing the kinds of solid 
partnerships among State and Federal agencies, the public, and 
private health care organizations, of the kind I think were 
reflected in our work with the Inspector General on this 
financial statement audit, we will be able to significantly 
strengthen and protect the Medicare and Medicaid Programs for 
future generations.
    Again, I appreciate the opportunity to be here today. I 
appreciate your having called this hearing, and obviously, I am 
happy to answer any questions you might have.

    [The prepared statement follows:]

Statement of Bruce C. Vladeck, Administrator, Health Care Financing 
Administration

                              Introduction

    Mr. Chairman and Members of the Subcommittee, I am very 
pleased to have this opportunity to discuss with you the 
findings of the recently completed Fiscal Year (FY) 1996 Chief 
Financial Officers (CFO) audit by the Department of Health and 
Human Services Office of the Inspector General (OIG), and our 
plan to respond to issues raised by the CFO audit and improve 
our performance. The Clinton Administration has a long record 
of efforts to strengthen program integrity and contractor 
activities and have had successes such as Operation Restore 
Trust (ORT) and the Medicare Integrity Program (MIP). For the 
past few years, the OIG has performed audits of selected 
accounts at the Health Care Financing Administration (HCFA). 
The FY 1996 audit, which was the first comprehensive audit of 
HCFA's financial statements and related systems, alerts us to 
additional improvements that are needed. We are already working 
to address the concerns noted in the audit.

What is the CFO Audit?

    In order to understand the CFO audit findings, it is 
necessary to describe briefly what the CFO audit is, why it was 
conducted, the separate components of the audit, and the audit 
findings.
    The CFO Act of 1990 (Public Law 101-576) requires HCFA to 
prepare financial statements that fully disclose its financial 
position and the results of operation in a manner consistent 
with financial reporting standards that have long been employed 
in the private sector, but which differ significantly from 
prior Government practice. The objective of the Act is to 
improve systems of accounting, financial management, and 
internal controls throughout the Federal Government to help 
reduce waste and inefficiency, and to provide to Congress 
complete, reliable, timely, and consistent information on the 
financial status of the Federal Government. The CFO Act and the 
Federal Financial Management Improvement Act of 1996 require 
HCFA to comply with Federal accounting standards. For example, 
financial reporting must be on the accrual basis of accounting 
(expenses are recognized when incurred, revenues are recognized 
when earned) rather than on the cash basis of accounting 
(expenses are recognized when cash is paid and revenues when 
cash is received). Like other Government programs, Medicare and 
Medicaid have historically used a cash accounting basis for all 
budget and reporting purposes. We are currently in the process 
of making a transition to the accrual basis of accounting.
    In 1994, the CFO Act was enhanced by the Government 
Management and Reform Act requiring Government-wide and 
Department-wide financial statements. This legislation required 
the Government Accounting Office (GAO) to audit the Government-
wide financial statements and the OIG to audit the Department-
wide financial statements. Including both the Medicare and 
Medicaid programs, HCFA is among the four largest Federal 
agencies in terms of outlays, thus highly influencing the audit 
opinion on the Government-wide financial statements.
    Since this process is new to all of us, it may also be 
useful to spend a moment on the terminology auditors employ. In 
public accounting terms, the purpose of an audit is to permit 
the auditors to issue a report as to whether the financial 
statements are presented fairly in conformity with generally 
accepted accounting principles. For Federal agencies, generally 
accepted accounting principles are the Federal accounting 
standards as recommended by the Federal Accounting Standards 
Advisory Board (FASAB) and issued by the Office of Management 
and Budget. There are four types of auditor's report: 1) 
unqualified opinion which means the financial statements are 
fairly presented; 2) qualified opinion which means the 
financial statements are fairly presented except for the 
effects of a matter or matters as described in the auditor's 
report: 3) adverse opinion which means the financial statements 
do not present fairly; and, (4) disclaimer of opinion which 
states that the auditor does not express an opinion on the 
financial statements and gives all the substantive reasons for 
the disclaimer.

                       Findings of the CFO Audit

    In the FY 1996 CFO audit, the OIG raised concerns and 
issued a disclaimer of opinion on HCFA's financial statements 
and systems. This is not necessarily an uncommon occurrence for 
first-year audits. Briefly, the CFO audit findings identified 
five areas of concern: the actuarial methodology for estimating 
Medicare accounts payable; the lack of a review of the 
Supplemental Medical Insurance (SMI) premiums; the substantive 
testing error rate reflecting improper payments; the records 
for Medicare accounts receivable; and the retroactive 
settlement process which was not reviewed by the OIG and caused 
them to issue a disclaimer. I will discuss each area in the 
order of the OIG report and later I will outline our corrective 
action plan.
    For MEDICARE PAYABLES $36 billion was disclaimed. In other 
words, the OIG has expressed concern with the methodology used 
by HCFA's actuaries to estimate payables as well as the lack of 
a validation process. In FY 1997, OIG contracted with Ernst and 
Young who provided actuarial auditors to review the Office of 
the Actuary (OACT) methodology for estimating accounts payable. 
The Ernst and Young auditors identified several areas where 
improvements could be made. The current HCFA estimating process 
is a byproduct of the overall process used by our actuaries to 
make Trust Fund projections. One of the chief concerns is that 
it is difficult for the auditors to validate, since the 
payables represent benefits incurred but not yet paid and some 
of these payments will be made as much as 2 years later. This 
creates a data set that is very volatile in the short term. 
However, it should be noted that the payable estimate is used 
only for financial statement purposes rather than for 
determining actual payments; our actuaries have traditionally 
made estimates for other purposes such as the Trustees' Report. 
HCFA will be working with Ernst & Young to develop a revised 
process that can be validated.
    For SUPPLEMENTAL MEDICAL INSURANCE or MEDICARE PART B 
PREMIUMS $80.6 billion was disclaimed. The Social Security 
Administration (SSA) is responsible for withholding premiums 
from Social Security checks of Supplemental Medical Insurance 
(SMI) beneficiaries and transferring these funds to the Part B 
Trust Fund each month. Since the number is material to HCFA's 
financial statement, specific auditing of SSA must be done. 
Because the OIG was not able to audit the SSA process this 
year, the OIG disclaimed the $18.9 billion in Part B premiums, 
as well as the $61.7 billion Federal matching funds 
(representing about 75 percent of Part B costs). The OIG has 
assured us that the issue is resolved and that this Social 
Security function will be audited for FY 1997.
    For SUBSTANTIVE CLAIMS TESTING, the OIG found that the 
majority of our systems and controls are effective. However, 
the Substantive Claim Testing audit demonstrated that 
contractor controls were not adequate to detect the types of 
errors identified in the audit, especially in cases where 
medical necessity existed but the provider had not maintained 
the required documentation. These findings are not necessarily 
a criticism of HCFA's or our contractors' processes but an 
indication of the fact that providers may not be fulfilling 
their responsibilities to provide adequate documentation. I 
will discuss this area in detail at the end of this section.
    For MEDICARE RECEIVABLES, $2.7 billion (net) was 
disclaimed. Much of Medicare's financial record-keeping is done 
by our contractors, under reporting and accounting rules that 
do not fully meet requirements of the CFO Act. Without an 
integrated general ledger and accounts receivable system 
maintained by the Medicare contractors, the OIG and their 
contract auditors had difficulty reconciling receivable data, 
as the contractors use many different systems for the tracking 
and reporting of receivables. The OIG has found that, contrary 
to HCFA instructions, many contractors do not reconcile the 
financial reports with their accounts receivable data reflected 
on the Provider Overpayment Report (POR), which reflects 
overpayments resulting from the cost settlement process, and 
the Physician Supplier Overpayment Report (PSOR), which is used 
to record most overpayments found by carriers. Difficulty 
following the ``audit trail'' is partly due to some contractors 
failing to save the documentation required to support the 
reports.
    For the COST REPORT SETTLEMENT PROCESS, $3 billion was 
disclaimed. The OIG was unable to determine an appropriate 
methodology to audit the cost settlement process, since this 
activity involves a fiscal intermediary (FI) audit of cost 
reports submitted by providers. The FIs conduct desk reviews of 
all cost reports, and also audit some providers' cost reports, 
using either a full or limited scope approach. HCFA's position 
has been to focus the limited scope audits on those providers 
that have a greater potential for overpayment in order to 
recover misspent Medicare funds and to provide a sentinel 
effect on all providers. The OIG has not challenged the quality 
of the current process and, in fact, has recognized its high 
cost-savings ratio.
    Government audit standards would allow the OIG to rely on 
HCFA's provider audit process if it were based upon a 
methodology that would select a representative sample of cost 
reports to be audited. Presently, it is not possible for the 
OIG to review a sub-sample of the HCFA audits and develop a 
statistically valid national error rate, or to ensure that the 
number reported on the financial statement is ``fairly 
represented'' as an accurate reflection of HCFA's liability. 
HCFA plans to work with the OIG to determine how to make the 
process auditable, and to implement that process.

Findings of the Substantive Claims Testing Audit

    Appropriately enough, most of the attention surrounding the 
CFO audit has focused on Substantive Claims Testing. These 
findings, however, do not impact HCFA's overall FY 1996 audit 
opinion. First of all, the Substantive Claims Testing audit 
demonstrated that contractor controls were adequate to: 1) 
ensure beneficiary and provider Medicare eligibility, through 
actions such as confirmation of the Provider Identification 
Number; 2) ensure that payment for claims was appropriate based 
on information submitted; and 3) ensure that services billed 
were allowable under Medicare rules and regulations. However, 
these controls were not effective in detecting the types of 
errors identified in the audit which originated at the provider 
level. Medicare, like other insurers, makes payment based on 
standard claim forms and validates the information submitted 
only in limited circumstances.
    Numerous allegations of high rates of fraud and abuse in 
health care programs prompted the OIG to review in detail the 
supporting medical documentation accompanying a sample of 
claims. We want to note that this is the first time that this 
type of audit has been done. To the best of our knowledge, no 
other audit either in the private or public sector has included 
such a comprehensive review as was done by the OIG in this 
audit. Since these reviews must be performed by medical 
personnel from the contractor or PRO, it is costly and time-
consuming.
    The OIG report on the CFO audit also included an assessment 
of HCFA's compliance with laws and regulations. The good news 
is that the CFO audit findings tell us that most of our systems 
and controls are working. The audit demonstrated that based on 
the information provided on the claim, payment was correct. 
However, in a number of cases sufficient medical documentation 
did not exist to support payment of the service. In fact, the 
OIG found that 99 percent of improper payments were detected as 
a result of the look-behind review and were not the failure of 
our system or controls.
    Of the 5,314 claims audited, which were taken from a 
statistically valid sample, roughly 30 percent were found to be 
incorrect. From this limited sample, the actual dollars in 
error were approximately $440 thousand. When these audit 
findings were extrapolated to the set of all existing claims, 
the total dollars paid in error were projected to be $23.2 
billion, which is approximately 14 percent of the $168.6 
billion in adjudicated fee-for-service payments reported by 
HCFA. Based on the precision of the sample, this estimate could 
vary from 11 percent ($17.8 billion) to 17 percent ($28.6 
billion). Eighty-eight percent of incorrect payments, or 
approximately $20 billion of the projected dollars in error, 
occurred in six provider types of services roughly in 
proportion to total Medicare payments by provider type. The six 
types of service are: Inpatient Hospital, Physician, Home 
Health Agency, Outpatient, Skilled Nursing Facility, and 
Laboratory.
    Almost half the errors identified resulted from 
insufficient or lack of documentation from providers, and one 
third of the documentation errors were associated with 
providers who failed to respond to repeated requests from the 
OIG to submit documentation. These percentages, however, cannot 
be extrapolated to the entire Medicare program, because the 
sample was designed only to yield the overall payment error. 
This lack of response from the medical community raises some 
important questions, for which we must find the answers:
     Why don't providers document the reasons for 
health care services? And why did one third of them ignore 
repeated requests for medical documentation?
     Was the care in fact reasonable, but poorly 
documented, in which case it would still not be reimbursable by 
Medicare? Or, did we pay when we should not have? The results 
of this audit should serve notice to the medical community, to 
document as they were trained or face delayed or denied claims, 
or other actions.
    This is new information for HCFA, and will be key to our 
future program integrity strategy. It is important to note that 
the errors reported by the OIG were not evident on the face of 
the claims, meaning that the error determinations were only 
made through the ``look-behind'' review of medical 
documentation. For example, an incomplete medical history and/
or diagnosis may cause the treatment prescribed to be viewed as 
unnecessary or improper, thus giving the appearance of error or 
fraud. Because of the significant expense involved in this type 
of review, the total amount of overpayments might not 
necessarily be recouped, after the cost of the review is 
considered.
    The Substantive Claims Testing audit findings are extremely 
disturbing and require HCFA's immediate attention. We have 
carefully reviewed these deficiencies, and a corrective action 
plan has been initiated to improve our financial controls.

                 Current Program Integrity Initiatives

    This Administration has already taken action and 
implemented a number of important initiatives to improve the 
management of the Medicare program. The OIG has been empowered 
by the President and the Secretary to implement reforms that 
will help improve this program. Since the President took 
office, he has implemented initiatives which have saved 
billions of dollars. The President's first budget in FY 1993 
closed a number of loopholes in Medicare and Medicaid, 
tightening up on fraud and abuse. Under the President's 
leadership, the Justice Department has also made this a major 
priority, dramatically increasing health care fraud 
investigations, criminal prosecutions, and civil recoveries.
    The FY 1998 budget contains a number of new initiatives, 
including cracking down on abuses in home health services and 
skilled nursing facilities. CBO has estimated that the fraud 
and abuse savings in the budget will be worth about $9.7 
billion over ten years. In March, the President announced yet 
another series of anti-fraud initiatives. Some of the 
initiatives in the President's budget and subsequent 
legislation have been included in the House and Senate budget 
proposals. We are working to ensure that all of these 
provisions are included in the final Balanced Budget proposals. 
We want to work with the House and the Senate in this regard.
    Our current payment safeguards are already paying dividends 
in cost savings. These safeguards comprise a comprehensive 
system which attempts to identify improper claims before they 
are paid, to prevent the need to ``pay and chase.'' HCFA's 
current strategy for program integrity focuses on prevention 
and early detection. Some of our payment safeguard activities 
include: Medicare Secondary Payer, medical review (MR), cost 
report audits, and anti-fraud activities.
    The results of our current strategy have been substantial. 
In FY 1996, total administrative costs for all payment 
safeguard activities were $441.1 million, with an identified 
savings of $6.2 billion equally distributed between pre-payment 
and post-payment safeguard activities. This resulted in a 
projected ROI of $14 dollars saved for every dollar spent on 
payment safeguard activities (ROI = 14:1).
     For Medicare Secondary Payer, our contractors 
spent an estimated $109.3 million, producing identified savings 
of approximately $3,308.6 million, resulting in a projected ROI 
of $30 dollars saved for every dollar spent (ROI = 30:1).
     For Medical Review activities, our contractors 
spent an estimated $128.3 million, producing identified savings 
of approximately $1,864.1 million, resulting in a projected ROI 
of $14 dollars saved for every dollar spent (ROI = 14:1).
     For Audits, our contractors spent an estimated 
$152.3 million, producing identified savings of approximately 
$1,017.6 million, resulting in a projected ROI of $7 dollars 
saved for every dollar spent (ROI = 7:1).
     For Anti-Fraud, our contractors spent an estimated 
$51.2 million on payment safeguard activities. The ROI is not 
applicable to this area of the program because cases are turned 
over to law enforcement, and recoveries often require several 
years, while there is no quantitative estimate of deterrence 
effects.
    Last year's Health Insurance Portability and Accountability 
Act (HIPAA), which the President signed into law, contained 
provisions establishing a mandatory funding base for the 
Medicare Integrity Program (MIP). This legislation will help 
provide us the tools to address the concerns raised in the CFO 
audit. This audit, however, covers a period prior to the 
implementation of those new provisions. In FY 1997, which is 
the first year of MIP funding under HIPAA, the total 
allocations for program safeguard activities are $440 million, 
with projected savings of $5.3 billion.

HCFA'S Current Medical Review Strategy

    Our payment safeguard strategy has focussed on areas where 
we receive the biggest return on investment (ROI). These 
activities are funded out of HCFA's discretionary and mandatory 
funds. We have streamlined our medical review strategies to 
increase our ROI. The specific components of HCFA's current 
medical review strategy are:
    Medical Review of Claims: Since 1989, administrative 
funding for medical review and the percentage of claims 
reviewed has decreased. In 1990, 16 percent of claims were 
reviewed with an ROI of 7 to 1. In 1996, the percentage of 
claims reviewed decreased to 9 percent, yet the ROI increased 
to 14 to 1. This performance stems from increased efficiency in 
the use of resources that we have available to target and 
correct outstanding problems.
     Currently, about 9 percent of all 800 million 
claims, representing about $70 million, are reviewed each year 
on either a pre-payment or post-payment basis. Ninety-seven 
percent of current medical review savings come from pre-payment 
reviews. Whenever possible, review is automated to avoid the 
costs associated with manual documentation review. Many errors, 
however, cannot be discovered without documentation or some 
other form of manual review external to the claims. 
Documentation is not routinely received with the Medicare 
claims, but instead is submitted on request.
    Education: HCFA's contractors ``educate'' the provider 
billing community, including hospitals, physicians, home health 
agencies, and laboratories. This education covers current 
payment policy, documentation requirements and coding changes 
through quarterly bulletins, fraud alerts, seminars, and, more 
importantly, via local medical review policy. These efforts 
offer providers information and guidance that enable them to 
bill correctly.
    Use of Data and Innovative Technology: Analysis that leads 
to the efficient use of resources is critical to our strategy. 
HCFA and its contractors continue to pursue ways to make 
available data usable by invoking innovative technology in a 
number of ways:
     HCFA's willingness to fund new technology has 
driven private industry to develop and market software that our 
contractors use to profile providers, compare utilization 
trends and patterns and identify claims review priorities. Some 
of this software utilizes sophisticated methods such as neural 
netware or fuzzy logic to mine the data for what may not be 
obvious, thereby enhancing surveillance of fraudulent and 
abusive practices. HCFA has chosen not to endorse any specific 
software, but has funded contractors to purchase software so 
that competition continues and the best state-of-the-art 
software is produced.
     We are also utilizing a dedicated statistical 
analysis contractor to support Durable Medical Equipment (DME) 
Regional Carriers, who are responsible for payment safeguards 
in the area of DME, prosthetics, orthotics and supplies. The 
statistical analysis contractor works closely with the four DME 
Regional Carriers and produces ongoing analysis of utilization 
trends, impact of carrier policy and pre-payment review 
strategy, and unusual payment patterns at the national and 
regional levels. As a result of this comprehensive examination 
of utilization, duplicate billing and other aberrant billing 
practices have been quickly identified and addressed. The 
continued success of this concept will shape future contracting 
strategy.
     At the national level, HCFA is developing and 
continuing to support the HCFA Customer Information System 
(HCIS), which provides rapid access to national, provider and 
beneficiary level data.
     To prepare for the future, HCFA is also pursuing 
research and development of long range strategies for data 
analysis with the Los Alamos National Laboratories that will 
employ mathematical, computer-based methods to efficiently 
identify potentially fraudulent or abusive providers and claims 
on a pre-payment basis.
     HCFA has been working with the Lewin Associates to 
develop a methodology for determining a provider compliance 
rate that will complement the CFO Audit. This rate will 
indicate the percentage of providers that comply with Medicare 
rules and regulations and will include review of the 
documentation supporting the claim. For FY 1998, we will 
continue to develop this methodology and pilot this prepayment 
initiative.
    Current Efforts for Collaboration and Cooperation with 
Partners: Under the Operation Restore Trust (ORT) initiatives, 
HCFA and its contractors worked closely with the Office of the 
Inspector General, the Federal Bureau of Investigation, State 
Medicaid and State Survey Agencies to seek out and stop fraud, 
waste and abuse. This two-year demonstration project, which was 
launched by the President in May 1995 and concluded on March 
31, 1997, was designed to demonstrate new partnerships and new 
approaches in finding and minimizing fraud in Medicare and 
Medicaid. As a demonstration project, ORT targeted four areas 
of high spending growth: home health agencies, nursing homes, 
DME suppliers, and hospices. Because more than a third of all 
Medicare and Medicaid beneficiaries are located in New York, 
Florida, Illinois, Texas, and California, ORT efforts were 
targeted at these five states. Since its inception, Operation 
Restore Trust has produced returns of $10 for every $1 spent.
    HCFA plans to continue the relationships established during 
ORT. Using monies made available through the Fraud and Abuse 
Control Account, established in HIPAA, we expanded our 
successful ORT efforts nationwide using the State survey 
agencies to be our ``eyes and ears'' in the field and to report 
back to the contractors whether providers are meeting Medicare 
billing as well as quality requirements. In 1997, home health 
agencies and skilled nursing facilities remain a focus of 
ongoing reviews done in collaboration with HCFA's partners. 
Currently, we are developing projects for FY 1998 that will 
focus on the areas identified in the CFO audit. Seventeen 
States will participate in a total of 26 HIPAA-funded projects, 
allowing us to survey approximately 300 providers for both 
certification and reimbursement issues.
    Medicare Integrity Program (MIP): The Medicare Integrity 
Program was enacted to strengthen the Secretary's ability to 
deter fraud and abuse in the Medicare program in a number of 
ways. First, it created a separate and stable long-term funding 
mechanism for program integrity activities. Second, by 
permitting the Secretary to use full and open competition 
rather than requiring that we contract only with the existing 
intermediaries and carriers to perform MIP functions, the 
Government can seek to obtain the best value for its contracted 
services. Third, MIP permits HCFA to address potential conflict 
of interest situations. We will require our contractors to 
report situations which may constitute conflicts of interest, 
thus minimizing the number of instances where there is either 
an actual, or an apparent, conflict of interest.
    We are currently developing regulations and scope of work 
to implement the competitive contracting portion of MIP. As we 
transition work from one of our contractors, Aetna, which is 
terminating its Medicare work, we are testing a new contracting 
relationship in several western States that will separate out 
and consolidate payment integrity activities from claims 
processing. This will give us valuable experience as we prepare 
to implement MIP.

                       Our Corrective Action Plan

    The Administration will take immediate action to respond to 
the concerns raised by the CFO audit. Our preliminary 
corrective action plan outlines changes and improvements to 
HCFA's payment safeguard program. We recognize that a level of 
tension will be created by a program that scrutinizes provider 
billing and requires the medical community to substantiate 
billing with medical documentation. At the same time, the 
Federal government is promoting efficiency, less red tape, and 
less regulation. These two constraints could be difficult to 
resolve. Many of the actions listed below will in fact be 
incorporated into the scope of work of our MIP contractors.
    Increase the amount of payments recouped: Our contractors 
have denied improper claims and are seeking overpayments for 
these improper claims identified in the audit. We will also 
instruct contractors to evaluate the providers identified in 
the report for more extensive review. For example, we will look 
more closely at the skilled nursing facility that was paid 
$15,000 for respiratory and other services that could not be 
substantiated by medical documentation.
    In FY 1997, HCFA will continue working with the contractors 
to ensure compliance with accounting conventions for proper 
reconciliation of receivable and payables. These efforts will 
be supplemented by a review of internal controls in six 
contractors using the American Institute of Certified Public 
Accountants' Statement on Auditing Standard Number 70 (SAS-70), 
Reports on the Processing of Transactions by Service 
Organizations. Other contractors will be asked to review and 
certify the existence and operation of their internal controls, 
particularly in the area of financial reporting. Also, HCFA 
will hold a training session in 1997 to ensure that contractors 
understand the reconciliation process in order to correctly 
recoup funds. We have begun an analysis of the Intermediary, 
Carrier, and DMERC shared systems as well as the Common Working 
File to determine how accounting and reporting processes can be 
incorporated into these systems. A longer-term corrective 
action planned for FY 1998 and FY 1999 will be to further 
implement a single integrated accounting system for the 
tracking and reporting of receivables as part of the broader 
process of developing the Medicare Transaction System (MTS).
    Develop and implement a Substantive Claims Testing Program: 
The OIG will conduct the substantive testing activities and 
issue a report in FY 1997 and FY 1998. Pursuant to an agreement 
with the OIG, HCFA will have a substantive testing program 
fully operational by October 1, 1998. The program will 
establish performance measures, employ some level of random 
review, and include metrics to monitor outcomes. HCFA will 
replicate the OIG methodology used in the previous audits for 
the FY 1999 audit. This will allow for consistency and 
comparison with previous audits.
    This corrective action plan will re-engineer our medical 
review workload and strategy. We are in the process of 
understanding the required resources to implement this plan. As 
we work through this corrective action plan and implements its 
components, we will focus our efforts on the random prepayment 
review of claims and adherence to medical standards for 
documentation, which validate the medical necessity and 
reasonableness of the provided services. We will closely 
evaluate the successes gained through a reduced national error 
rate and the correct payment of claims, versus any short term 
impacts on our ROI. Most importantly, we will make every effort 
possible to ensure that paid claims are appropriately 
documented.
    Increase the Level of Claims Review: If we could look at 
every claim and the associated documentation, we could achieve 
the ideal error rate of zero. However, the reality is that the 
processing of 800 million claims a year makes a 100 percent 
review unfeasible and cost-prohibitive. This initiative will go 
a step further than the OIG's substantive testing activities by 
establishing a control system that provides reasonable but 
perhaps not absolute assurance that payments are made properly. 
At a minimum, the cost of reviewing 100 percent of claims would 
be a tenfold increase in medical review cost. Increasing the 
level of review and requiring documentation with initial claim 
submissions could have an impact on our ability to process 
claims in a timely manner. While the audit findings clearly 
argue for increased and intensified review levels, determining 
how to attack this problem is an issue which HCFA must, and 
will, resolve. Some level of review--between the current 9 
percent and the unattainable 100 percent--will most effectively 
resolve this problem. Finding the right number is our 
challenge.
    The most commonly billed physician services are the 
evaluation and management codes. In 1992, in conjunction with 
physician payment reform, the AMA issued new CPT codes for 
evaluation and management services. The interpretation and use 
of these new codes were questioned by the medical community and 
the carriers, resulting in HCFA instructing the carriers to 
cease review until documentation could be developed. In 1994, 
the AMA and HCFA jointly released documentation guidelines and 
embarked on an educational program. With the completion of the 
first round of provider education seminars, carriers were given 
discretion to conduct medical review of evaluation and 
management codes beginning in September 1995.
    In FY 1998, our Medicare contractors will be instructed to 
conduct a random prepayment review of evaluation and management 
claims. A detailed implementation plan, including instructions 
to our contractors, will be developed in the fourth quarter of 
FY 1997, for implementation in October of 1998. Our plan will 
include monitoring the effectiveness of the review process and 
further action will depend on the findings of this random 
review. We will instruct the contractors to make changes 
accordingly. Based on analysis of the CFO audit report and 
analysis of the data, HCFA will expand the scope of services 
subject to prepayment review of medical documentation.
    Continue Initiative Requiring Documentation: Despite 
anticipated controversy and protest, we will maintain and 
continue to reinforce the position that those providers who 
bill the Medicare program are accountable for the documentation 
to support the payment of a claim. We are requiring that 
providers follow standard medical practice, which requires 
careful documentation of health services. This requirement 
includes entities that bill for services that are ordered, 
referred or otherwise certified by physicians (e.g., clinical 
labs, skilled nursing facilities). Critical to this initiative 
is our ability to require diagnostic information on the claim.
    Increase the Number of Contractor Medical Directors: 
Contractor Medical Directors (CMD) are a critical component of 
all medical review and educational activities. To expand 
payment safeguard activities in FY 1997, we required CMDs at 
all carriers and regional home health intermediaries. We will 
increase the number of Medical Director full time equivalents 
(FTEs) by 15 percent for the fiscal intermediaries with funding 
under MIP.
    Use Sampling to Project and Collect Overpayment: We are 
working on detailed methodology to develop and enhance cost-
effective, yet fair, ways to estimate and collect overpayments 
to providers. This method involves post-payment review of a 
statistically valid sample of a provider's claims where results 
are extrapolated to the entire spectrum of claims. While our 
carriers have been active in using this approach, the fiscal 
intermediaries will begin this process when instructions are 
released later this summer. This methodology is a new tool for 
fiscal intermediaries that creates stronger deterrents to 
reduce improper payments.
    Review Inpatient Hospital Claims: Although peer review 
organizations (PROs) are not conducting random review of 
individual cases, PROs continue to perform mandatory review of 
a limited number of cases which include: assistants used in 
cataract surgery, beneficiary complaints, higher-weighted DRG 
adjustments, beneficiary requests for immediate review of 
continued stay notices of noncoverage, concerns identified 
during project data collection, dumping violations, and 
referrals from HCFA, OIG, and intermediaries. Work has begun on 
a system to scan Medicare billings for evidence of unnecessary 
admissions, which will be supplemented by a narrowly targeted 
review process to follow up on any leads generated. PROs will 
use these and other appropriate data to perform surveillance 
analyses to monitor patterns, trends, and variations in health 
status and care among Medicare beneficiaries, to identify 
sentinel events or clusters of events that may indicate less-
than-optimal care and to identify, prioritize, and act upon 
opportunities for improvement. The implementation of the Health 
Care Quality Improvement Program in 1993 shifted the focus of 
the PRO program from its emphasis on identifying individual 
(and often isolated) clinical errors to helping providers and 
practitioners improve the mainstream of medical care. However, 
PROs continue to perform mandatory review of a limited number 
of cases.
    Engage the Provider Community: HCFA cannot combat fraud and 
abuse alone. We will continue to seek the help of national 
organizations and the provider community to take more 
responsibility for identifying and eliminating widespread fraud 
and abuse. Although providers have been understandably 
reluctant to welcome the additional work associated with 
maintaining and submitting documentation, HCFA is working to 
facilitate provider documentation, via increased education 
programs that promote correct coding and documentation. In 
addition, we have scheduled meetings with professional provider 
organizations who will be invited to participate in an 
educational briefing to explain the audit findings and enlist 
their assistance in addressing the audit's identified problems.
    Correct Coding Initiative: In 1994, HCFA began the Correct 
Coding Initiative by awarding a contract to AdminaStar Federal 
for the development of correct coding policy for all physician 
CPT codes. This contract resulted in more than eighty thousand 
claims processing edits that bundle services prior to payment. 
Implemented in 1996, this enhanced pre-payment control and 
associated software update resulted in savings of about $217 
million in its first year.
    In FY 1998, HCFA will continue to develop coding policy and 
edits with a focus on new CPT codes with the potential for high 
utilization. This project includes ongoing evaluation of the 
utilization and associated pairing of CPT codes to ensure that 
all significant CPT codes are included in this initiative.
    Strengthen Provider Enrollment Safeguards: Due to the often 
covert nature of illegal acts, a review of documentation 
provides no assurance that illegality will be detected. HCFA 
will impose stricter standards, requirements and post 
application investigation to prevent those illegitimate 
providers, bent on fraud and abuse, from admission into the 
Medicare program in the first place. In FY 1998, proposed 
legislation will support this ongoing activity by requiring 
providers to disclose Employer Identification Numbers (EINs), 
their Social Security Number (SSN) and prohibiting entry into 
the Medicare or Medicaid Program to individuals or entities 
convicted of felonies. We are developing a Notice of Proposed 
Rule Making (NPRM) that would establish much stricter standards 
for suppliers of durable medical equipment, prosthetics, 
orthotics, and supplies (DMEPOS). Among other things, this NPRM 
will establish a requirement that each DMEPOS supplier obtain a 
surety bond as a prerequisite for participation in the Medicare 
program.
    Implementation of the National Provider Identifier (NPI) is 
also well underway. This initiative will prevent providers from 
obtaining multiple billing numbers and distributing billing 
across contractors. One provider identifier will allow HCFA to 
track and monitor the complete picture of a provider's billing 
practice. As these NPI numbers gain universal use and 
acceptance, we will be better able to identify and, more 
importantly, track abusive providers who have had numerous 
billing numbers in the past. A Notice of Proposed Rulemaking 
(NPRM) will be issued shortly on the NPI.
    Improve Use of Technology and Data: In FY 1998, HCFA will 
continue developing and refining the HCFA Customer Information 
System, which provides rapid access to national provider and 
beneficiary level data. Proposed additions for FY 1998 designed 
to enhance identification of abuse include expanded cost data, 
beneficiary profiles, and detailed HCPCS (HCFA Common Procedure 
Coding System) and Revenue Center code level analysis.
     In FY 1998, HCFA is planning a contract for a 
National Statistical Analysis Contractor. This initiative is 
modeled after the success of a similar contractor for the DME 
Regional Carriers, which improved contractor identification of 
abusive and fraudulent providers. The proposed statistical 
analysis contractor will also have a new capability to combine 
Part A and Part B claims data to develop comprehensive 
beneficiary profiles.
     Los Alamos National Laboratories (LANL)--As 
mentioned earlier, LANL is currently investigating new 
sophisticated statistical methods for HCFA that combine both 
provider and beneficiary profiles for development of algorithms 
based on patterns of care that could potentially identify 
providers at risk for submitting fraudulent and abusive claims. 
LANL has developed sophisticated computer pattern-recognition 
programs that quickly spot new types of fraud and abuse, before 
the claims are paid. LANL methodology will ``look at unusual 
data clusters'' and refer suspect claims for our analysis. We 
expect this research to translate into methods that can be 
incorporated into our claims processing systems to enhance the 
efficiency of claims review and proactively identify providers 
for review.

                               Conclusion

    The initiatives and corrective actions described in this 
testimony are designed to improve HCFA's record in the future 
CFO audits, and, in accordance with GPRA, strengthen our 
ability to monitor and track Program Integrity efforts. 
However, the degree to which these efforts will influence the 
error rate is unclear at this time. As we gain experience, 
these actions will be monitored, evaluated and adjusted in 
future years to ensure effectiveness.
    The work of this Committee and other Members of Congress 
has been vital to increasing our ability to protect the 
integrity of the Medicare program, and to safeguard the 
interests of our beneficiaries. Most importantly, the lessons 
and experience gained from our efforts in the past few years 
will guide us as we put our new legislative and administrative 
tools to use. By effectively utilizing the solid partnerships 
between State and Federal agencies, the public, and private 
health care organizations, we will preserve Medicare and 
Medicaid for future generations.
      

                                

    Chairman Thomas. Thank you, Mr. Vladeck.
    I want to mention that we have with us Members of the House 
Oversight Subcommittee. The Chairman of that Subcommittee is 
the gentlewoman from Connecticut, Mrs. Johnson. She is also a 
Member of this Subcommittee, but we wanted to make sure that 
Members of that Subcommittee would participate.
    Also, the gentleman from Washington, Mr. McDermott, 
although I don't believe is currently a Member of either 
Subcommittee, is a previous Member of the House Subcommittee 
and, as a practitioner, would obviously show interest. I am 
pleased to have him here as well.
    I think, in part, we need to begin our questioning with the 
understanding that, with the Government Management Reform Act 
of 1994, we have the ability to look behind the other audits, 
and that has produced some of the more ``sensational'' findings 
of waste, fraud and abuse. But you did have a limited scope 
audit authority and did so in 1993, 1994 and 1995.
    My first question would be to that portion of the audit 
which was like the previous audits. That is, my understanding 
is that this audit was not significantly different from the 
audits in the area that had been looked at in 1993, 1994 and 
1995; is that correct, Ms. Brown?
    Ms. Brown. Yes, sir, that's correct, as to accounts payable 
and accounts receivable.
    Chairman Thomas. So you had discovered weaknesses, if you 
will, noncompliance over a period of time, but obviously, based 
upon Mr. Vladeck's testimony, they have been attempting to 
implement changes.
    Do you have any feeling now, looking at it from a 
historical perspective, of making the same auditory comments 
without significant change, as to why what is attempted to be 
instituted has been so ineffective?
    Ms. Brown. A couple of things--there had been other 
priorities--health care reform and so on--going on during that 
time. Also, funding was not adequate to make some of the 
changes. That's at least a partial reason, I'm sure. With the 
HIPAA Act, which was passed last year, there will be additional 
funding both for our work and also for HCFA in doing their 
control work and monitoring.
    Chairman Thomas. So what we did in the HIPAA Act, providing 
funding and focusing on waste, fraud and abuse, you see as a 
very useful tool?
    Ms. Brown. Extremely useful. I think it was a giant step 
forward.
    Chairman Thomas. I'll come back to you in terms of whether 
you've had enough experience with it to make any kind of 
meaningful comments, and if you've had an opportunity to look 
at the budgetary aspects.
    I am especially concerned about what I hope is not an 
ongoing problem, because in 1993, you indicated in your report 
that the Office of the Actuary did not provide the IG with 
sufficient documentation and, according to your report, you 
were informed by HCFA officials that HCFA actuaries were 
involved in the President's health care reform initiative and, 
therefore, were not available to provide sufficient information 
to audit the details of the actuarial estimate of the payables. 
That's a statement that you made, in fact. I believe in your 
testimony you stated that.
    What does that mean and what were the consequences for the 
audit?
    Ms. Brown. Those earlier audits were of a much smaller 
scope, and we were trying to do some testing in order to 
prepare for this audit. One of the things we wanted to look at 
was the actuarial work. At the time, HCFA did not make that 
available to us. I think you can detect a high level of 
annoyance there. But we did not expect it to be as far off as 
what it was this year when we were able to do a complete study 
of that work.
    Chairman Thomas. And the actuaries have been cooperating 
with you more fully now?
    Ms. Brown. Yes, this year----
    Chairman Thomas. So you believe it was simply because they 
were preoccupied with the President's proposal that they did 
not work with you, or is there some kind of a working 
relationship problem?
    Ms. Brown. You know, in retrospect, it's hard to know what 
they were thinking, but it did seem to be plausible at the time 
that they were extremely limited in their time and resources. 
That portion of it was an estimate and not a high priority with 
us at that time.
    However, that estimate does affect what we consider to be 
spent on Medicare each year, because it shows what payables are 
left at the end of the year, and if it's $18 billion off, it 
looks as if a lot more was spent in, say, fiscal year 1996 than 
was actually owed and eventually paid.
    Chairman Thomas. You mentioned in your testimony on page 8 
that you didn't look at the part B beneficiary payment 
structure because that's in the Social Security area and you 
don't have the statutory power for that.
    I did want to ask you a question about the structure of the 
IG under Health and Human Services, in looking at the largest 
area of HHS's involvement, HCFA. I wanted to ask you to either 
be qualified as a comfort level question, or perhaps even a 
legal structure question; that is, we know that the Social 
Security Chief Actuary is structured differently than the 
actuaries in HCFA.
    Is that a model that we might look to that would resolve 
the problems--that is, an independent or separate structure for 
the actuary arrangement--or do you have a comfort level now 
that it was the need to work on the President's proposal and it 
wasn't necessarily a structural problem, that it was simply a 
time problem and their demands were called for by the President 
and they couldn't devote the time to working with you? Is it 
structure or--Would it help as if we looked at the Social 
Security structure as a model?
    Ms. Brown. No. I believe they are structured fairly 
similarly. I don't believe there's a real difference.
    Joe Vengrin, who did these audits, is here with me. Could 
you comment on that, Joe?
    Mr. Vengrin. Mr. Chairman, we looked into that issue, and I 
believe they are very similar.
    Chairman Thomas. So that would not be a help to us; it 
mainly is a working relationship, time-focused problem, that I 
think the Department is now sensitized to, or at least it will 
not occur again.
    Mr. Vengrin. No, sir. We had total access to the Actuaries' 
Office this year.
    Mr. Stark. Was there anybody in the office?
    Mr. Vengrin. I'm sorry, sir?
    Mr. Stark. Were there actuaries in the office?
    Mr. Vengrin. Yes, sir, there were.
    Chairman Thomas. The gentleman from California has some 
questions along this line as well, because we're concerned 
about the department working cooperatively to produce the best 
possible product. If there are demands on time, which they feel 
they need to respond to, we were thinking there might be an 
ability to create an independence there that would allow a time 
use that would not be similar to the 1993 experience.
    Mr. Vladeck, in February we spent all day in Baltimore 
going through the new operation there, and we were talking 
about the planned integration of the managed care structure. 
Some time was spent in your presentation on the Medicare 
transaction system. One of the focuses of the presentation was 
that it would improve the control of the Medicare Expenditure 
Program and that, in fact, it was going to be a tool that would 
assist the department in waste, fraud and abuse.
    That response, I think, would have--and I accepted it at 
the time, under the old auditing system, which obviously showed 
a 99-percent failure to detect what went on in this audit. I 
guess I would be willing to give you a little time to respond, 
as to whether or not you think the MTS system really is 
something we should continue to plow the amount of millions 
that we've plowed into it, on the assumption that it would be a 
useful tool in dealing with waste, fraud and abuse.
    Mr. Vladeck. Well, let me begin my comments by saying that, 
if you look at the history of the audit reports over the last 4 
or 5 years, and some of the recommendations and corrective 
actions we committed to, I think, in hindsight, we may have put 
too many eggs in that basket of how that was going to solve all 
our problems. And let me speak to a couple of those at the 
moment.
    Clearly underlying the audit findings relative to both 
Medicare payables and receivables, and a number of other issues 
that have been raised, is the reality that we do not have an 
integrated financial accounting system for the Medicare Program 
that even comes close to meeting the requirements of 
contemporary accounting or audit standards. That's because the 
program grew up over a period of time with much of the 
financial recordkeeping responsibilities in the hands of the 
individual contractors, and in an era in which the expectations 
were different and the standards of performance were different.
    We have always viewed the development of an integrated, 
CFO-Act-compliant, accounting system as one of the central 
components of the Medicare transaction With some of the 
setbacks we've had in the development of the MTS, it has become 
clear to us in the last number of months that we can't wait for 
full-scale implementation of the MTS in future years to have 
that kind of adequate financial reporting and accounting 
system. So when we are back consulting with you in the next few 
months about our revised MTS strategy, you will see that one of 
the pieces will be to move ahead on a separate track, with the 
development of a contemporary, CFO-compliant, Medicare 
accounting system.
    Chairman Thomas. My concern was that maybe we set up a 
system to go in the wine cellar and count the bottles, but 
nobody ever checked to see if there was any wine in them.
    On that basis, do you think that a healthy dose of random 
audits would be a way to get at it? I know it's intensive and 
expensive, but based on the results that we found, I don't see 
how you can't have a random audit, in depth structure built in.
    Mr. Vladeck. Mr. Chairman, I think your point is exactly 
correct, and it very much reflects what we have learned as a 
result of this audit process.
    As payment safeguard dollars became tighter and tighter 
over the years, in the context of an ever-increasing claims 
volume, we did move away from random testing of a variety of 
kinds of efforts to focus testing on higher yield kinds of 
activities.
    I think what the audit results show us is that it's 
imperative that you maintain some level of random review. I do 
think that, in part, because of the additional resources we'll 
be getting as a result of HIPAA's establishment of a dedicated 
fund for these activities, and as a result of what we learned 
in the course of this audit, we will have to get back to trying 
to find an appropriate level of random testing as well. We will 
begin doing that at the very beginning of the next fiscal year.
    Chairman Thomas. Then briefly, in terms of the testimony, I 
just have a couple of questions because of the statements that 
were made and my inability to fully understand them in the 
testimony--and I know my other colleagues are anxious to ask 
questions as well.
    On page 3 of your testimony, Ms. Brown, you indicate that 
``this estimate of improper payments does not take into 
consideration waste [excessive pricing] and numerous kinds of 
outright fraud, such as phony records or kickbacks.'' Yet in 
the chart in the next section on the same page, you have 100 
percent as the total.
    Is it reasonable to assume that the phony records, for 
example, might likely fall under the documentation category of 
no documentation, or insufficient documentation, or would this 
be an entirely separate area and that the 100 percent in no way 
takes into consideration--and if that's the answer, I don't 
understand how it relates to the numbers that you have here.
    Ms. Brown. It was 100 percent of the sample. The sample 
itself was just on fee-for-service claims. So of those claims, 
we looked for medical backup. That's what the figures that are 
on the chart refer to.
    Chairman Thomas. But when you use the term ``phony 
records,'' and you have a category of ``insufficient 
documentation''----
    Ms. Brown. If somebody were forging records in some case, 
that wouldn't have been detected here. In fact, there would be 
documentation then because they would have those falsified 
records.
    Chairman Thomas. OK. So we have the first level of never 
looking behind at the actual claims and we were paying whatever 
was shoved over the transom; you now go behind and look at it 
to see if there's documentation to determine whether or not it 
was appropriate.
    Ms. Brown. Yes.
    Chairman Thomas. This is the first audit that we've seen 
doing that.
    Ms. Brown. That's true.
    Chairman Thomas. But we still haven't looked to see, even 
if they laid out full documentation, whether it was totally 
phony or not.
    Ms. Brown. Well, that's true. And in a lot of our other 
work, in our investigative work and so on, we recognize that 
kickbacks or people who are submitting false records, things 
like that, are whole other categories of fraud.
    Chairman Thomas. Were the tools that we gave you in HIPAA 
more useful to get at that kind of behavior than you've had in 
the past, or do we need additional tools for that?
    Ms. Brown. I believe those tools that we got during HIPAA, 
and those that are being considered under the Budget 
Reconciliation Act now, will give us the things that we really 
need to keep this system as clean as possible.
    Chairman Thomas. For example, on page 6, in referring to 
the coding difficulties, and the chart that identified the six 
particular areas in terms of the types of difficulty, including 
coding, you say, ``We have provided HCFA a detailed list of 
certain procedure codes that have a high frequency of error.''
    Is it possible to briefly describe the high frequency of 
error? That is, are they difficult to use accurately, or are 
they easy to misuse in terms of upcoding, or are there a 
variety of uses under the ``high frequency of error'' term that 
you use?
    Mr. Vengrin. Mr. Chairman, we highlighted codes with a 
frequent incident of error. For example, as Dr. Vladeck was 
talking about the E&M codes, they had a very, very high error 
rate. Also--
    Chairman Thomas. When you say error, what type of error?
    Mr. Vengrin. Both with respect to documentation problems 
and medical necessity, in the area of home health agencies.
    Chairman Thomas. So they were listed as a higher category 
than would have been appropriate, or they were upcoded?
    Mr. Vengrin. Both.
    Chairman Thomas. Both.
    Mr. Vengrin. In medical necessity, too. We said to them 
that the area of home health agency had overall a very high 
frequency of error.
    Chairman Thomas. Bruce, in your testimony--and let me see 
if I can find the page--you say on page 4 that, in terms of the 
kinds of reviews that must be performed by medical personnel 
from the contractor or the PRO, the second paragraph on page 4, 
it is costly and time consuming.
    Given the potential cost of $18 to $29 billion, my 
assumption is that that statement is a relative one, and that, 
in all probability, if we did more of this, there would be a 
net savings?
    Mr. Vladeck. No question, Mr. Chairman. This is exactly the 
issue, that HIPAA begins to address. Over many years while the 
total size of the program grew, estimates of potentially 
erroneous payments grew. There was a fixed dollar amount with 
which do to all of our payment safeguard activities. And so 
clearly, if you're running returns on investment of 12 to 1, 14 
to 1, you could invest substantially more and it would still be 
an intelligent investment Not until HIPAA did we begin to have 
the opportunity to do so.
    Chairman Thomas. Right. On page 5 you say, ``did we pay 
when we should not have?'' You went into an examination of how 
you try to recoup money that maybe was paid out. My argument is 
we need to look at a system that doesn't pay out first and then 
determines whether it was accurate later.
    Finally, in reviewing the suggested changes, I was somewhat 
amazed that there wasn't a real emphasis on changing the 
payment methodology as much as I thought there might be, if PPS 
is significantly different than the fee-for-service, and I 
believe reduces the possibility of waste, fraud and abuse, and 
again significantly left out of suggested conclusions was a 
significant role for the beneficiaries, in terms of their 
participation through education and information, and the need 
for computerized patient records, not only for smart buying but 
for clear comparison, which I think on a comparative basis you 
could detect patterns that otherwise wouldn't be there, all of 
these tools, things that we've been trying to move forward 
with.
    I guess what I did when I read your conclusions, it looked 
too much like the head of a very large bureaucracy that's just 
had an audit, that turned inward to try to figure out how you 
could do a better job inside the bureaucracy, instead of saying 
the way we can solve a lot of these problems is to realize that 
the system doesn't make a lot of sense and that we ought to 
fundamentally change the system, both in terms of who helps us 
detect waste, fraud and abuse, and the way in which we pay our 
bills.
    Mr. Vladeck. Obviously, you're entirely correct, Mr. 
Chairman. If I could just make one specific point in that 
regard, because we and you and our staffs have worked so hard 
on it for so long. We are, whatever else may occur, going to 
have prospective payment systems for home health and skilled 
nursing facilities in law very soon. If you look at some of 
these numbers, particularly the audit findings when you're no 
longer paying on a cost basis, the nature of these problems 
changes very dramatically. At least we will have new wars to 
fight, and we will eliminate the old wars on some of these.
    Chairman Thomas. But as a final statement, notwithstanding 
our ability to put those into effect, it's clear that we need 
people watching carefully, and some very real tools in 
punishing those who, removing errors, clearly appear to be 
actively involved in fraudulent behavior. And when you look at 
the dollar amounts involved from a projection, it is serious 
business for us to get to the bottom of.
    Mr. Vladeck. Absolutely.
    Chairman Thomas. The gentleman from California, Mr. Stark.
    Mr. Stark. Thank you, Mr. Chairman. Ms. Brown, it's good to 
see you here, and Bruce. Is this the last time you'll be here?
    Mr. Vladeck. It depends on the Chair's intention about 
additional hearings. [Laughter.]
    We are always prepared to appear whenever the Chair 
desires.
    Mr. Stark. If it is your last time here, I wish we had a 
more suitable forum for celebrating your past service and 
saying we will miss you, Bruce.
    Bear with me a minute while I try and get in focus some of 
the understanding of the problems in auditing, Ms. Brown. I 
want to draw a parallel here with banks. When I was a banker, I 
had to deal with several audits, so I have a lot of experience 
in that area.
    It does seem that we're out of whack here about the same 
amount that we lost in the savings and loan scandal. That cost 
taxpayers about $130 billion, and we think that over 5 years, 
at this rate, we could get to the same amount in Medicare.
    Also, in auditing a bank, when the examiners first roar in 
and take control, they count up the money--and perhaps Mr. 
Vengrin has never done this--but that is not rocket science. 
You count up the money, count the change, count the vault cash, 
add up all the debits and credits, and it ought to come out 
right. The key is basically finding out what is the value and 
integrity of the assets. There's a lot of subjective judgment 
in that.
    I presume that it is similar in auditing a provider. You 
can pretty much add up the number of bills they submitted, and 
you can look to see if the code was the right code. But the key 
question is: was that code right? Was there a patient there, 
was it pneumonia grade one, two or three? Those are very 
subjective or often can be defended on a subjective basis. So 
you may need to take an auditor trained to analyze more than 
just the empirical data, but also the subjective data 
underlying it.
    Am I going down the right path here in what the problems 
are? Why not then follow what was done when we had the scandals 
of Thomas Jefferson and Penn. They decided, as part of their 
penance, that they would set up compliance audit plans with 
outside auditing firms, or law firms, who would annually review 
the institution's policies and activities in compliance.
    Why would this not be a good condition of participation for 
our providers and, indeed, intermediaries? Let them pay to have 
an outside audit to make sure that their system, at least, is 
one that would lend itself to be audited, and to enhance 
compliance? Would that be a useful tool?
    Ms. Brown. I think it would be very useful. Currently, the 
plans that you were speaking of, the integrity plans, are 
something that we imposed. It was part of the settlement, that 
providers had to follow these types of plans.
    We're in the process now of working with the industries to 
put out model compliance plans that they could voluntarily 
adopt, that would contain these things.
    Mr. Stark. How about requiring them to adopt the plans?
    Ms. Brown. Well, the problem is that there is so much 
variance from one provider to another--large hospitals, small, 
and things like that, that we----
    Mr. Stark. Wasn't there enough consistency in the types of 
mistakes you found that it wouldn't make any difference what 
kind of provider it is. Upcoding is upcoding, isn't it?
    Ms. Brown. That's true. In the coding area, it could be 
pretty consistent. I think some areas would----
    Mr. Stark. Could I suggest a second tool that the 
Comptroller of the Currency uses that has a very meritorious 
effect on financial institutions. That is that when examiners 
go into an institution and go through the loan portfolio, they 
stay there until the documentation is completed. They stay 
there at the expense of the financial institution. When a bank 
is audited or examined, the bank pays for the examiners.
    Ms. Brown. I see.
    Mr. Stark. Why should we not charge the providers for 
having the auditors come in? If they're good and they're clean 
and they keep the records the way they should, the auditor 
would go through there very quickly. Also, the cleaner they 
are, the less frequently you would audit them anyway.
    It's the ``bad actors,'' who would have our resident 
examiners. If they don't have the paperwork, we'll do it for 
them at their expense. I would like you to consider that, 
because instead of thinking that we've got to go and 
appropriate more money all the time to help Bruce get more 
staff, maybe what we ought to be doing is having some of these 
offenders paying.
    I suspect there weren't many prosecutable criminal cases 
that came up because of the intent problem, is that fair to 
say?
    Ms. Brown. Not out of this audit, yes.
    Mr. Stark. So I'm just suggesting that maybe we could 
tighten this up. Senator McCain and I have a bill in saying, 
``Make these guys pay fees when they don't repay what they 
should fast enough.'' They're using us as a bank. They draw out 
money through in their interim payments, and then after we find 
out they owe us money back, they take forever to pay us back. 
That's fine if we charge them real tough fees to make that an 
unattractive alternative.
    I'm suggesting these ideas in hopes that you all will think 
about them and see if there are areas in which you might ask us 
to legislate.
    There is a guy who does seminars for providers out in La 
Mesa, California. He held ten seminars in June throughout 
California on how to get the maximum payments out of Medicare. 
He tells providers that you can scan their E&M codes, as a tip 
off to possible fraud. This guy runs seminars based on your 
screening. He shows people how to upcode within acceptable 
ranges so you won't catch it as an outlier outside the bell 
curve.
    Now, why don't we just send somebody from your staff to 
these seminars to take down the names of everybody that's there 
and audit them first. [Laughter].
    I can tell you, that's where you'll find problems.
    Finally, the American Hospital Association treats this, as 
they usually do when we ask them to do something good, as 
something to whine and complain about. They have asked Ms. Reno 
and Secretary Shalala for a 6-month moratorium on hospital 
audits, I suppose so they can steal more money. But is there 
any reason to postpone the audits on upcoding? I mean, why, now 
that we know upcoding is there, why cave in to the pressures of 
the industry and give them time? They've had years to try and 
voluntarily comply and haven't. We've all seen how JCAHO gets 
sloppy and we have to remind them.
    Let's get tough now and keep auditing. That would be my 
plea to you and to Bruce. This is not a time when we suddenly 
have found it's the providers that are not doing their job, 
either through incompetence or through greed. They've been 
doing it all along but it isn't because of any problems we're 
creating for them. So I would hope that you would look very 
much askance at giving them any kind of moratorium on going 
after them through audits, because a 6-month moratorium means 
$11.5 billion lost to fraud.
    Ms. Brown. Yes, sir. We have not agreed and----
    Mr. Stark. Good.
    Ms. Brown. It certainly isn't something we're considering, 
that we would withdraw----
    Mr. Stark. I would love to hear from you and from Bruce's 
department, about in what we could do to put much of the burden 
on the providers to get their records in shape and make it very 
expensive for them if they don't. Because the expense to the 
taxpayers, this $23 billion, is Medicare funds that aren't 
going to provide health care to other people who need it. 
That's a pretty nasty indictment of the providers.
    Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. Certainly.
    The gentleman from Louisiana, Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman.
    This is, indeed, a very interesting hearing. It's a little 
unbelievable to me that this is the first time we've ever had a 
comprehensive audit of this system. It started in 1965, and 
that's a long time to go without really knowing what's 
happening.
    Ms. Brown, is there any chance that there are billions of 
dollars out there not being claimed? Is there any chance that 
doctors or hospitals or clinics are doing work for elderly 
patients and not filing their claims?
    Ms. Brown. There is a certain amount of that. What we 
usually do when we're looking at coding errors--for instance, 
in the PATH audit that was referred to in looking at the coding 
errors, if we found there was a range of errors that went in 
what you would consider a normal curve, some undercoded, some 
overcoded and so on, we offset those. If it was within a 
reasonable amount, we didn't consider that something that we 
were going to go after and even get any of the penalties.
    Dartmouth, for instance. When we gave them a pass and said 
that they did not have any substantive errors, it wasn't that 
they didn't have errors. It's just that there was an 
understandable amount.
    When we go in and we find that virtually all the errors go 
in one direction, and that they're very heavily in favor of the 
provider of the services, then we feel there has been some kind 
of philandering here. It would depend upon the degree, and we 
look at how people do their coding, what are their 
instructions, a lot of other things, to determine just why that 
happens. That's where the more severe penalties will be placed.
    Mr. McCrery. So let me get this straight. In the course of 
your audit, you did find that there were instances where 
providers would undercode or perhaps not even claim work that 
was done?
    Ms. Brown. Yes. We netted those. For purposes of this 
audit, where we did the sample, we netted the undercodes 
against the overcodes to get the rates that we're looking at 
here. We do all kinds of audits, so the coding is one of the 
things that we typically would audit in a variety of different 
forums.
    Mr. McCrery. Considering that the net figure is, what, $23 
billion in overpayments are we to assume that the frequency of 
undercoding and not filing claims is probably less than the 
frequency of upcoding and filing more claims?
    Ms. Brown. It's extremely low. In the claims that we 
tested, it was certainly extremely low; and it was a sample 
from which we could project for the universe.
    Mr. McCrery. Why do you think that is? Why do you think 
there is so much more overcoding and filing of additional 
claims than there are the reverse?
    Ms. Brown. Well, I think people are trying to optimize 
their profitability, and that if there haven't been any types 
of examination audits and so on for a long time, they get more 
and more aggressive and tend to optimize----
    Mr. McCrery. So the system gives them the opportunity to--
--
    Ms. Brown. Yes. It's a very complicated and a huge system. 
It is certainly one we would consider a high risk system.
    Mr. McCrery. Yes. We're now at over $200 billion of claims 
being paid by the Medicare system. That is a huge system.
    Ms. Brown. Yes.
    Mr. McCrery. I think that's an understatement.
    Mr. Stark earlier referred to the $200 toilet seats and 
things like that, and that was in the Defense Department, which 
also spends $200 billion plus. Any time you've got that much 
money out there, it's going to be difficult, if not impossible, 
to prevent some fraud and abuse from occurring.
    Ms. Brown. Sir, I also served as Inspector General of the 
Defense Department for some time----
    Mr. McCrery. So you're the one that cleared up the $200 
toilet seats. Good. [Laughter].
    Ms. Brown. We did a lot of clearing up.
    Improper payments by Medicare is a far more difficult thing 
to control than the types of fraud we were finding with the 
Defense Department.
    Mr. McCrery. Why is it more difficult?
    Ms. Brown. Because there is such an enormous number of 
providers of various types of services, of beneficiaries. This 
is something----
    Mr. McCrery. In fact, I think you said there was 800 
million claim payments per year?
    Ms. Brown. That's right.
    Mr. McCrery. Eight hundred million instances of claims 
being paid.
    Ms. Brown. That's right. So there is enormous room for----
    Mr. McCrery. That's more than the Defense Department?
    Ms. Brown. Well, yes. I mean, in Defense we basically----
    Mr. McCrery. By several times?
    Ms. Brown [continuing]. 300 major contractors. It was a 
different type of work.
    Mr. McCrery. That's the point that I wanted to make, that 
this problem is even more difficult than the $200 toilet seat 
or the Defense Department fraud and abuse, which we know has 
been and still is and forever will be with that much money out 
there.
    But this problem is even more difficult, and it will remain 
more difficult as long as we have 800 million points of payment 
out there, as long as we provide that much opportunity for a 
single individual or a corporate individual to abuse the 
system, or even to game the system.
    Ms. Brown. Yes.
    Mr. McCrery. I notice that you did not audit the managed 
care operations, only the fee-for-service part of Medicare. Why 
is that?
    Ms. Brown. Managed care companies are paid a certain amount 
per patient, regardless of how much usage that patient has. So 
for purposes of this audit, that was not an area where we had 
this kind of concern. They're given--I believe it's 95 percent 
of what, on average, the fee-for-service patients would be----
    Mr. McCrery. So the opportunity for fraud and abuse and 
waste or error is less in the managed care operations than it 
is in the fee-for-service operation?
    Ms. Brown. I have to say that the incentives are completely 
reversed. Abuses could be in underutilization rather than 
overutilization. We have different incentives. Managed care is 
fairly new for Medicare at least, and we still need to do a lot 
of work in that area to find out if the people are getting the 
services they need and other things. But for purposes of this 
audit, we did not find problems in that area.
    Mr. McCrery. Thank you very much for your testimony, and 
Dr. Vladeck for your testimony.
    Mr. Chairman, my time is up. But I want to conclude by 
saying that I think this audit points to the fact that this 
system is so broken it cannot be fixed, that fraud and abuse 
and waste in this system will forever be with us, as long as we 
have this open-ended, fee-for-service, 800 million point of 
contact system. We need to drastically change it if we are 
going to stop this kind of error rate and have a program that 
is responsible and the kind of program that Americans expect 
for their tax dollars.
    Thank you.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Maryland, Mr. Cardin, wish to 
inquire?
    Mr. Cardin. Yes. Thank you, Mr. Chairman. I, too, want to 
thank you for holding this hearing in such a prompt way. 
Obviously, a 14-percent overpayment, or unjustified payment, is 
unacceptable and we need to get a handle on that.
    I want to follow up on Mr. McCrery's questions, but from a 
different angle.
    It's interesting that we do pay the managed care operators 
95 percent of the average cost under the fee-for-service 
program, but if there is a 14-percent overpayment in the fee-
for-service program, can we then draw a conclusion that 95 
percent is really paying a significant overpayment to the 
managed care programs?
    Dr. Vladeck, I would appreciate your observation, or that 
of Ms. Brown. Is that 95-percent payment an overpayment to the 
managed care program?
    Mr. Vladeck. I think one can say more generally, Mr. 
Cardin, that any aspect of the fee-for-service system, whether 
it's erroneous payments or fraudulent payments or excessively 
high unit payments for certain services that occurs in a fee-
for-service system, does indeed get built into the rate 
determinations for managed care plans.
    Mr. Cardin. It's interesting to point out that in our 
budget that we're working through in conference, we're trying 
to correct some of those inherent problems of using a formula 
tied to the fee-for-service. But it does point out that it can 
cause an overpayment to our managed care providers.
    Ms. Brown, I don't know if you have a view on that or not, 
was that part of your audit in any way.
    Ms. Brown. That wasn't one of the things we were auditing, 
but obviously, any of these things are going to affect all the 
decisions that are based on the totals used in Medicare.
    Mr. Cardin. It is an inherent problem in fee-for-service, 
where you have to rely upon the providers' good faith 
submission of claims. They are supposed to have certain medical 
records to back up what they're doing, and you have shown in 
your audit that they, in fact, have not done that.
    I'm curious as to whether there's any information you have 
about any of the private fee-for-service plans, either now or 
historically, as to whether audits have been done and whether 
there's any contrast or comparison as to whether the 14 percent 
that we have found is somewhat typical, or is high or low, on a 
fee-for-service plan?
    Mr. Vladeck. We have had a number of conversations with 
folks in the private insurance business, many of whom, of 
course, are contractors. I think their general response to the 
questions is one of astonishment, that when you have activities 
that are producing rates of return of the kind that our program 
safeguard activities have been, that you don't expand them.
    The notion that is an artifact of the Federal budgetary 
process, that you have benefit spending over here and 
administrative spending over here, and you can't trade off 
between them, is a hard concept for many of them to comprehend, 
and when they comprehend, they have some questions about its 
underlying sanity.
    So I think their belief is that their level of problems is 
significantly lower than ours, but that is in part because 
their expenditures on the safeguard activity relative to 
benefit payments is higher than ours.
    Mr. Cardin. Medicare, being such a large part of the 
medical reimbursement in health care, has certain advantages. 
And I want to follow up on Mr. Stark's point. Should we have 
some type of compliance audit requirements from certain 
participants as a condition of participation in the Medicare 
system? We may very well wish to either make that a condition 
of large providers, or providers who your audits have shown 
have had problems in this area, in order to make it 
administratively feasible and cost effective.
    Do you have the legal authority to require some form of a 
compliance audit from providers, or is that something that 
Congress needs to be able to give you additional authority, in 
order to get better compliance to the rules of Medicare?
    Mr. Vladeck. I think that probably varies by category of 
provider. I think, for most part B providers, we probably do 
not. I would emphasize the relative small size as economic 
entities of many part B providers as we think about that.
    We do get audited financial statements from all hospitals, 
for example, participating in the Medicare Program, and----
    Mr. Cardin. But they're not compliance audits.
    Mr. Vladeck. They're not compliance statements, that's 
correct. But I believe we could probably, for part A providers, 
generate such a requirement without statutory change. But I 
would have to check into that.
    Mr. Cardin. I would appreciate if you could get back to me, 
Bruce, on that. And I'm not necessarily suggesting that for 
every provider that there be an annual compliance audit. It may 
well be that, depending on size and depending upon their 
history, and depending upon your audits, and depending upon the 
areas that we've had problems, that we could have a game plan, 
a selective process, for requiring compliance audits on a 
periodic basis for those providers that have a history of poor 
performance. It seems to me that could save a lot of money.
    I agree with Mr. Stark. In those cases, it seems to me that 
the provider should be responsible for the cost and it should 
not come out of HCFA's budget.
    Mr. Vladeck. Certainly when cases are pursued to formal 
litigation, either civil or criminal, the Inspector General has 
made it a practice, in the resolution of many of those cases, 
to require continued compliance plans and so forth. But we 
should probably look at making that more general.
    Mr. Cardin. Thank you.
    Thank you, Madam Chairwoman.
    Ms. Brown. If I could add to that, sir, there are several 
things we feel are very important that are now under 
consideration in the Budget Reconciliation Act, things like the 
Social Security number, so that we can track the individuals--
because many of them work for a number of different firms; ways 
of keeping people who have a criminal record out of the program 
so that they don't get in in the first place; not allowing them 
to discharge their obligations in this area under bankruptcy.
    These are the kinds of problems that we have seen abused 
over and over again, and I would be glad to talk to any Members 
or their staffs about what we have found and why some of these 
things might be very important.
    Mr. Cardin. Thank you.
    Mrs. Johnson [presiding]. Thank you.
    I want to make a couple of comments. First of all, for 
several years the trustees of Medicare have reported that the 
system is in significant trouble and, indeed, is catapulting 
itself toward bankruptcy. As Chairman of the Oversight 
Subcommittee of Ways and Means, we have now, for all 3 years 
that I've chaired that Subcommittee, have reports from the 
executive branch that Medicare was one of the few high fraud 
programs, highest fraud programs, in the Federal Government. 
Every year they pick out the top high fraud programs and report 
to us on them. It is, at a fundamental level, really outrageous 
that, given the importance of Medicare to seniors in America, 
given the seriousness of its financial situation, and given the 
concerns we had about it, that we should only now be coming to 
this information.
    The good news is that we're coming to this information. The 
really outrageous news is that it has taken us so long to get 
here. I am pleased to know that the tools that we gave you a 
year ago are helping, and that the tools we're finally putting 
in this budget reconciliation, this Medicare reform bill, will 
be helpful.
    But I think we have to look at the comment that Mr. McCrery 
made. Is it possible to manage all this information? That's 
where I want to focus my questioning in the time that I have.
    It doesn't appear to me that the lack of information is the 
problem. What appears to me is that we don't look at it. Now, 
one of the things that you say in your testimony, both of you 
in different ways, one of your disclaimers has to do with the 
auditing of hospitals, home health agencies and so on, and that 
you are working now on an audit process for 1997 that you will 
both agree on.
    Now, if there is a group of providers from which we've been 
getting detailed cost reports, it's certainly the home health 
industry. Frankly, many of us have wondered whether anybody 
ever looked at that stuff. So I wonder, as you go through this 
audit issue, are you looking at what information are we 
collecting--because it all has a cost--and are we using that, 
has it been helpful, and is one of the messages we're getting 
from this is that we're asking for the wrong information? So I 
want to hear about that in the home health.
    But I would have to say, if there's anything we've been 
looking at, we certainly have been looking at coding, so it 
strikes me as truly outrageous that 8.5 percent of the $23 
billion are coding errors. That's not hard.
    Even the documentation. We've known what the documentation 
requirements were. Wasn't anyone looking to see if the fiscal 
intermediaries were asking for documentation? Twenty-three 
billion dollars in documentation errors, in coding errors, 
things like that known, simple. That's more than anyone has 
ever proposed saving any year, and would easily have solved the 
problems of Medicare.
    So while I understand we're never going to be to zero, I 
think this report is an absolutely startling, dramatic 
condemnation of this government-run health care program. It 
raises fundamental issues, as Mr. McCrery pointed out, about 
our ability as a bureaucracy to assure an honest system that 
pays for appropriate health care.
    But to return to some of the narrower issues that we might 
try to sort through, I would like to hear you both talk about 
the cost reports that are already in the agencies and why they 
weren't more helpful, why you have to now go back and find an 
audit process you can both agree on when we had cost reports, 
we had audit processes, presumably, and they aren't working for 
us.
    Mr. Vladeck. That's not what the report says, Mrs. Johnson. 
Let me try to clarify that, because I think the Inspector 
General's audit showed that there are very substantial 
recoveries as a result of our auditing of the cost reports.
    What it also found, however, is the cost of the limitations 
on the amount of auditing we perform, which is directly a 
function of the budgetary limitations for those procedures. We 
don't have a nationally valid sample from which an auditor can 
project the potential savings or the potential overpayments 
across all audit activities.
    We know, for every dollar we spend on auditing cost reports 
for Medicare providers, we save the program $7. What we don't 
know is how much in total could be saved, because we don't have 
enough audit funding to provide a statistically reliable sample 
of all the audit activity we have. Is that a fair----
    Mr. Vengrin. That is fair.
    Mr. Vladeck. So, in fact, the audit process is extremely 
useful. There just isn't enough of it.
    Mrs. Johnson. If the audit process then is not at issue, 
then why does there have to be a disclaimer?
    Ms. Brown.For instance, in asking for all the backup 
documentation, HCFA in the past was only able to go through 
that type of process for 3 out of 1,000 providers.
    Mr. Vladeck. No, that's the medical review estimate.
    Ms. Brown.The medical review, I think, is one of the things 
you're talking about; that is, having people do those kinds of 
medical reviews before Medicare agrees to pay, or shortly 
afterward, so that they can reconcile those overpayments. There 
hasn't been enough funding that HCFA has gone through and done 
that on a more frequent basis. Certainly if it was done, maybe 
3 percent or something, people would be careful.
    Mrs. Johnson. Let me clarify something here.
    They go through this reconciliation process of accounts 
every year, for every provider.
    Mr. Vengrin. That's correct.
    Mrs. Johnson. Are you saying that that's not an accurate 
process?
    Mr. Vengrin. We're saying they don't do enough of them, 
ma'am. Of 38-40,000 cost reports, the maximum they can do is 
selective line items. They cannot cover all the providers out 
there. So while they recover an enormous amount of money back 
from those that they review, we know that there's still a major 
population that gets no review.
    Mrs. Johnson. I think I'm asking a slightly different 
question.
    Mr. Vengrin. OK.
    Mrs. Johnson. Every year, in order to reconcile accounts 
with agencies--in other words, the difference between the 
prepayments and the final payments----
    Mr. Vengrin. Yes, ma'am.
    Mrs. Johnson [continuing]. They do reconcile a lot of 
bills. I mean, they review tons of material.
    Mr. Vengrin. Yes.
    Mrs. Johnson. I mean, they have to. Otherwise, they can't 
decide how much money to pay that agency.
    Mr. Vengrin. Correct.
    Mrs. Johnson. What is the quality, what is the accuracy, of 
that process? Because we're putting lots of money into that, 
provider specific, action by action, bill by bill. What is the 
quality of that process, in your estimation?
    Mr. Vengrin. I can only talk about the cost reports. Now, 
when we went out there and interviewed, the individuals 
reviewing the actual cost reports themselves, they will tell 
you that there is still a major population out there that they 
absolutely do not review at all.
    In terms of the claims reconciliation, I'm not too sure 
that they're covering that. Again, they only have resources to 
look at selective cost centers or line items. But again, some 
of these things can be 11 or 12 inches thick. They do not have 
resources to validate various line items. That is the problem. 
We cannot be sure that the amount they are ultimately selling 
for, approximately $3 billion, is the correct amount. Stated 
another way, they could be settling on costs that are inflated.
    Mrs. Johnson. I appreciate that. I don't think that you can 
make a determination about how to solve the system without 
understanding whether or not that basic reconciliation process 
that goes on in an agency-specific level--I mean, surely that 
ought to be capable of looking at coding, looking at 
appropriateness of care, and looking at documentation.
    The forms these agencies fill out, and the stuff they're 
sending to the government, is voluminous. So I guess we're not 
going to solve this here. But I would say that this report 
really challenges us all to deeply rethink the system, not just 
to make superficial changes. I will be interested to see 
whether the provider number, which we could have done several 
years ago--it was in the recommendations, I think, in our 
original Medicare reform bill--helps. But I think Mr. McCrery's 
point is one that we've got to be far more serious about.
    So I have taken my time and I will recognize now Mr. Lewis.
    Mr. Lewis. Thank you, Madam Chair, but I think other 
Members were here before me, Mr. Becerra.
    Mrs. Johnson. Excuse me. I guess next is Mr. Becerra. My 
mistake. Following him, Mr. Christensen.
    Mr. Becerra. Thank you, Madam Chair. I thank my colleague, 
Mr. Lewis, for that courtesy.
    Let me see if I can ask a couple of questions with regard 
to our remediation efforts on the whole issue of fraud and 
abuse, and recognizing that the findings in this audit don't 
necessarily reflect 100-percent fraud or abuse.
    Can either of you give me some sense of, say, over the past 
couple of years, the last 2 years, how many cases of criminal 
prosecution have been instituted by HHS to try to address the 
issue of intentional fraud or abuse?
    Ms. Brown. We have between 1,500 and 2,000 in a year. I can 
get you the accurate numbers and I will submit that for the 
record.
    Mr. Becerra. Out of how many prosecutions? It's 1,500 to 
2,000 convictions. How may prosecutions?
    Ms. Brown. These are for just the health care area. We only 
have about 150 convictions in the year, but we have about 650 
civil settlements.
    Mr. Becerra. OK. Let me make sure I'm distinguishing here. 
We're talking criminal and civil prosecutions here, or are we 
talking only criminal prosecutions?
    Ms. Brown. OK. Frequently, if somebody is going to be 
prosecuted criminally----
    Mr. Becerra. They settle on something else, civil charges?
    Ms. Brown. They settle in a civil settlement. So it's very 
hard to draw the line. There is some overlap there.
    Mr. Becerra. So then let's be clear.
    How many actual convictions, criminal convictions, did you 
have, and over what period?
    Ms. Brown. About 150 a year.
    Mr. Becerra. A year.
    Ms. Brown. A year.
    Mr. Becerra. OK. And you mentioned the figure 650 
settlements.
    Ms. Brown. That's true.
    Mr. Becerra. And they settled on civil grounds?
    Ms. Brown. Yes.
    Mr. Becerra. And it could have included criminal 
complaints, but----
    Ms. Brown. There may be a few of those as well in there, 
and many of the civil settlements were--we could have gone 
either way. In each case we analyze whether or not this entity 
should be able to continue providing service. We exclude them, 
and the figures I mentioned about the 2,000 were for those we 
exclude from participating in the program.
    Mr. Becerra. How many actual prosecutions or initiations of 
actions against providers in a year do you normally see occur?
    Ms. Brown. You mean how many investigations are ongoing?
    Mr. Becerra. Investigation doesn't always lead to some form 
of action or prosecution. Why don't we first talk about how 
many--Well, how many investigations in a year do you typically 
perform?
    Ms. Brown. OK. Excuse me. There are about 750 ongoing 
investigations, and some of them overlap years, though. But 
they would yield these results. And over time, you would say, 
of the 750 or so going on, you would get about 150 convictions 
a year, and you get settlements of about 650. I can give you 
that information in a more accurate form.
    Mr. Becerra. It sounds like what you're telling me is that, 
if you initiate some 700 to 800 investigations, that in most 
cases you end up with either a settlement or a prosecution.
    Ms. Brown. Yes.
    Mr. Becerra. So it doesn't look like, in most instances, 
you're engaged in any kind of ``fishing expedition.'' You've 
got some pretty substantial evidence to have you go forward.
    Ms. Brown. Yes, sir. I have been Inspector General for five 
agencies, and one of the things we ordinarily did in all of the 
other agencies where I served was a lot of work trying to find 
vulnerable areas and looking for places where fraud could 
exist.
    We have so much available that we're picking those that are 
the best cases and that we know we can get some kind of 
resolution.
    Mr. Becerra. That tells me then that you're picking, of all 
the information you've received, you're picking those that you 
think are most likely to lead to some form of action, that you 
can have success on them.
    Ms. Brown. That's true. In fact, the Secretary's initiative 
is to get a real handle on the fraud, waste and abuse and, of 
course, the Congress has seen fit to pass the HIPAA legislation 
last year, which will fund a lot more of this work, so that we 
can do a better job.
    Mr. Becerra. So that leads me to conclude from what you're 
saying that there are a number of investigations that you don't 
undertake, whether it's because of resources or other reasons 
that you don't undertake, that could also be fruitful----
    Ms. Brown. That's true.
    Mr. Becerra. Could you use more money for the purpose of 
investigations?
    Ms. Brown. We certainly can.
    Mr. Becerra. How would you propose to collect on some of 
the overpayments that you've discovered in this audit that 
you've just performed, and how much would it cost to do so?
    Ms. Brown. In the audit performed, those things that were 
in the sample and where we found errors, we have turned those 
over to HCFA and they will look at them to see where 
overpayments can be collected, or an exception is appropriate, 
and start the collection action.
    Perhaps Bruce would want to comment on that.
    Mr. Becerra. Mr. Vladeck, can you tell us how much it's 
going to cost you to do that, and do you have the resources to 
do the collection?
    Mr. Vladeck. No, we haven't looked at that.
    Let me just say two things about that. One is that the 
recoveries are a gross figure, not a net figure, relative to 
collection costs. But we have not estimated that.
    The second is that it's not clear that we will recover in 
every instance. Ordinarily, particularly on denials of medical 
necessity, providers whose claims we deny appeals rights. In 
the appeals process on medical necessity claims, we lose about 
half the time. So none of the instances found in this audit 
were post appeals process. They were all the determinations we 
would make. So whatever the dollar estimates are, they are not 
necessarily an estimate of recoverable dollars.
    Mr. Becerra. Madam Chair, if I could be indulged for one 
last question.
    Give us a sense, if you can today--We have an audit that 
says an estimated $23 billion was overpaid by the system to 
providers. Some of that you're telling me we will not be able 
to collect because in some cases the providers acted 
legitimately and they would win on appeal. In other cases 
perhaps it would be difficult for us to prove up that we're 
owed the moneys.
    But there is a pot of money out there that we're fairly 
sure was overpaid. How much would it cost us to go collect it 
and are you going to try to collect it?
    Ms. Brown. If I could comment, the $23 billion is the 
result of a sampling technique. It's a valid sample that is 
projectable and so on.
    Mr. Becerra. Understood.
    Ms. Brown. All we have is those in the sample. So we have a 
little over 1,500 claims that we can go back on. But that would 
be a small portion of the amount of money identified. I don't 
think that we'll ever collect that money back. There will be a 
small portion of that that can be collected, but we do want to 
be sure that it doesn't continue to happen in the future.
    Mr. Becerra. Madam Chair, if I could be indulged--They're 
raising more questions than I think answering.
    What percentage did the sample represent of all the various 
claims that were submitted by providers? What percentage are we 
talking about, the sample?
    Mr. Vengrin. The sample was not segregated by provider 
type. We selected it from the contractors. Otherwise, to do 
that we would have had to review maybe 60,000 or 70,000 claims.
    Mr. Becerra. Well, you extrapolated and told us there was 
about $23 billion out there that was overpaid.
    Mr. Vengrin. Yes, sir.
    Mr. Becerra. What was the actual amount you found to be 
overpaid?
    Mr. Vengrin. $400,000.
    Mr. Becerra. $400,000. So you have extrapolated to what 
degree?
    Mr. Vengrin. We projected the individual overpayments back 
to the population that we drew from, which was $168 billion.
    Mr. Becerra. What I'm trying to get a sense of is your 
actual sample is what percentage of the full universe.
    Mr. Vengrin. We reviewed 5,000 claims. It would be 5,000 
out of 800 million claims.
    Mr. Becerra. Out of how many?
    Mr. Vengrin. 800 million.
    Mr. Becerra. 800 million claims, and you examined 5,000?
    Mr. Vengrin. Yes.
    Mr. Becerra. OK. So clearly, what you have found in terms 
of actual overpayment reflects only a very tiny, infinitesimal 
sample, and you've been able to, using statistical methodology, 
extrapolate that we would have about $22 billion overpayment.
    Mr. Vengrin. I would just like to insert one caution. 
Population is not a major factor in our sampling.
    Mr. Becerra. That's fine.
    Mr. Vengrin. It's the variability in the population.
    Mr. Becerra. What I'm trying to find out is, given that we 
used a small sample to come up with this overall estimate of 
$23 billion, we know some specific cases of overpayment through 
the sampling----
    Mr. Vengrin. Yes, sir.
    Mr. Becerra. We're now estimating the entire amount of 
overpayment for the entire system.
    Mr. Vengrin. Yes.
    Mr. Becerra. In order to ever collect that $23 billion, we 
have to go out and examine all the files, all the claims, to 
find out where the overbilling took place----
    Mr. Vengrin. Absolutely.
    Mr. Becerra [continuing]. Which would cost you enormous 
amounts of money and enormous amounts of time. So we're looking 
at $23 billion in projected overpayment.
    But what is the chance that we're ever going to be able to 
collect what you have estimated to be a $23 billion 
overpayment?
    Ms. Brown. I would say it's far less than 1 percent. Nobody 
is attempting to do that.
    Mr. Becerra. So it seems to me that we had better find a 
better way to prevent the overbilling from occurring, because 
collecting it is virtually a nil possibility. So some of the 
ideas that were suggested by Mr. Stark and others, to try to 
make sure that we encourage providers not to make mistakes, is 
probably the best way to go.
    I thank the Madam Chairwoman for the extra time.
    Mrs. Johnson. Mr. Christensen.
    Mr. Christensen. Thank you, Madam Chairwoman.
    Not to go overboard in terms of the last question, I think 
the Congressman's question was very good--exceptional, as a 
matter of fact. The one thing I do want to ask, though, is this 
$8.5 billion on the lack of medical necessity.
    When you were looking at the testing in these areas to 
determine lack of medical necessity, what were some of your 
findings and what were the various parameters that you set up 
to determine lack of medical necessity?
    Ms. Brown. First I would like to comment that we had 
doctors doing this work, medical specialists, that were very 
familiar with these things. We used both some of the medical 
people that worked for the HCFA contractors and the PRO's to do 
this examination. So HCFA actually did a major portion of that 
work; or it was through HCFA that we got that done.
    As far as the parameters, Joe, do you have a comment?
    Mr. Vengrin. The medical review staff followed the same 
methodology that they did when they were out there performing 
the services as part of the contractors.
    What are types of examples? Skilled nursing facility. When 
we requested the medical documentation, and when it was 
submitted and provided to the medical review staff, they went 
into the records, and it generally did not support the level of 
care billed. There has to be documentation. That's a 
requirement under the Federal regulations, to clearly document 
the need in the case record.
    When the medical reviewers went to do that, many 
instances--for example, in the skilled nursing facility, it 
showed that the patient was receiving a lesser level of care.
    Mr. Christensen. Of the 5,000 cases that you've analyzed, 
were all of them also looked at for each of these various 
categories, incorrect coding, lack of medical necessity----
    Mr. Vengrin. Yes, sir.
    Mr. Christensen [continuing]. Or was there a separate pool 
that just specifically dealt with lack of medical necessity?
    Mr. Vengrin. No, sir. Each of the 5,000 claims that we 
reviewed all included a medical review, plus I had an audit 
program that covered every aspect of the claim--eligibility, 
provider eligibility, and what have you.
    Mr. Christensen. I wanted to ask Bruce, how far along are 
we in the national provider identifier system and what phase 
have we reached in that system, regarding the first page in the 
Chief Financial Officer's report?
    Mr. Vladeck. I think there's really two elements to that, 
Mr. Christensen. One is the updating of HCFA's own provider 
records to conform to the national provider identification 
system, and sort of in parallel to that is the adoption of a 
rule under the provisions of HIPAA for essentially an all payer 
national provider system.
    We will have the proposed, HIPAA rule, out within the next 
couple of months. It will have an effective date of some time 
in mid-1998. Our systems will be in conformance with it by that 
time. So we're progressing and we're within less than a year, I 
think, of bringing our own records in to conformity with the 
national provider identification system and of trying to 
establish a norm so that the private sector over the following 
years will also come to use the same system.
    Mr. Christensen. To what degree do you think the national 
provider identifier system will help in deterring fraud and 
abuse?
    Mr. Vladeck. It will help enormously, I think, in fraud 
cases where there is real intent to deceive and to steal from 
the programs, I think it will be, based on the experience we've 
had in Operation Restore Trust and other cases, I think it will 
be enormously helpful. For the kind of overpayment issues that 
we're talking about, I don't think it will be as critical.
    Mr. Christensen. Ms. Brown, have you looked at this system 
yet? Have you looked at the national provider identifier 
system?
    Ms. Brown. Well, we've got somebody that is working with 
them to finalize the system, and our input is being used in all 
of the decisions.
    Mr. Christensen. I think Ms. Johnson said earlier we're not 
going to begin to solve all the problems at this hearing.
    But I do believe, if you look at the $8.5 billion in the 
lack of medical necessity that the Inspector General has 
documented here through her sampling, it points to a larger, 
problem, and the fact that people are not don't have a 
financial interest in the system, means that they 
unintentionally use the system.
    That's why I think we have to move away from the current 
system. We have to go to a system where people have a financial 
interest, every time they go to a doctor, they have an 
opportunity to share in the expenses of that, and they have a 
second chance to think about whether or not they want to use 
the system in that manner.
    I believe, until we get to a system where people have to 
dig into their own pocket a little bit deeper, to make the 
decision on whether or not they're going to invoke the Medicare 
system, we're going to continue to experience this lack of 
medical necessity, and the kind of money that we're spending, 
37 percent of the $23 billion documented here is outrageous.
    I would like to say, frankly, there are very few 
companies--maybe the top 100. I don't know what the top 100 
corporations in the country, in terms of net sales are, but I 
would say that $23 billion is equivalent to the earnings of at 
least one of the top 100. Unless we have a fundamental shift in 
the way the Medicare system is operated, and construed by the 
beneficiaries, we're going to see this year in and year out. I 
would just applaud the Chairman for holding this hearing, but 
hopefully we can move on to a fundamental in Medicare of where 
we're going to take the program to the 21st century.
    Mrs. Johnson. Thank you, Mr. Christensen.
    Mr. Lewis.
    Mr. Lewis. Thank you, Madam Chairperson. I will be rather 
brief.
    Ms. Brown, on page 7 of your testimony you make six 
recommendations for improving HCFA accounting practices. Could 
you explain the first two a little further?
    Ms. Brown. OK. I'm going to let Joe----
    Mr. Lewis. The first two recommendations.
    Ms. Brown [continuing]. Go into a little more detail on the 
recommendations.
    Mr. Vengrin. Yes, sir. We feel, since this is the first 
nationwide error rate that has ever been established for the 
program, that HCFA should continue with that process. As Dr. 
Vladeck indicated, I believe by fiscal year 1999 they have 
agreed to develop that.
    They need that for a couple of purposes, not only to 
determine where to prioritize their attack on the claims 
process, but also in terms of the financial statement 
implication. Because as I mentioned, the fee-for-service is 
$168 billion. They need to reflect what part of that for 
financial reporting does not meet the current Medicare laws and 
rules.
    Mr. Lewis. Do you have any sense of how easily these 
recommendations can be implemented?
    Mr. Vengrin. I think that, as everyone has probably 
testified here today, this is a most complex problem. It's not 
one that is easily resolvable today, but certainly 
documentation is 47 percent of the problem, and certainly one 
attack that they need to focus on is making sure that the 
providers understand that this is a problem. So I think the 
outreach effort, which may not cost, you know, billions of 
dollars, is certainly critical here.
    Mr. Lewis. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas [presiding]. I thank the gentleman.
    Does the gentleman from Washington wish to inquire?
    Mr. McDermott. Thank you,
    Mr. Chairman.
    Chairman Thomas. Thanks for being with us.
    Mr. McDermott. I want to ask a pragmatic question here. You 
did 5,500 audits of 5,500 claims. Where did you select those 
claims from, in HCFA or out in the field at various State 
intermediaries?
    Ms. Brown. They were at the contractor's site. The claims 
selected were from the contractors, claims they had paid.
    Mr. McDermott. Where did you do these?
    Mr. Vengrin. We first started, sir, with a selection of the 
contractors, and then we reconciled the actual pay claims back 
to reported amounts----
    Mr. McDermott. But, in which States did you do these 
audits, which contractors did you audit?
    Mr. Vengrin. The first cut on the statistical selection was 
of the contractors, so it was across the country.
    Mr. McDermott. So you went and looked at completed claims 
in the contractor's file?
    Mr. Vengrin. That they processed, yes, sir.
    Mr. McDermott. You didn't go up to the HCFA level and get 
what had been submitted from the contractor?
    Mr. Vengrin. We pulled the sample at the contractor site of 
processed claims, yes, sir.
    Mr. McDermott. Now, if I understand correctly, when I used 
to practice medicine, I filled out a form and I sent it to the 
intermediary in my State. It would be Blue Cross or Blue Shield 
or Aetna, one of the major insurance companies that had a 
contract with HCFA to administer at the State level; is that 
correct?
    Mr. Vengrin. Yes.
    Mr. McDermott. That's still the process today?
    Mr. Vengrin. Yes.
    Mr. McDermott. Now, if there is an error of either no 
documentation or poor documentation, it should have been picked 
up at that level, shouldn't it?
    Mr. Vengrin. Not necessarily, sir. When we went back to the 
medical records, that's where the problem was. On the surface, 
the bill, as submitted, was correct.
    Mr. McDermott. So you went one step back. You took the 
document that they had said for a peptic ulcer or something, 
and you went back then and pulled the hospital chart?
    Mr. Vengrin. Yes, sir.
    Mr. McDermott. In the hospital itself, or did you use some 
kind of data access system?
    Mr. Vengrin. We mailed out a letter to the specific 
provider and asked that that documentation supporting the claim 
be sent to us. Mr. McDermott. And so what they did was they 
xeroxed the pages out of the hospital chart, or their office 
files or whatever, and sent it in to you as documentation?
    Mr. Vengrin. Yes, sir. In some instances, they did not send 
in documentation.
    Chairman Thomas. Would the gentleman yield?
    Ms. Brown. We did go back to them at least three times, and 
they knew that on that particular claim they would have to 
reimburse us if they did not submit the documentation and 
backup for it. So there was great incentive for them to do so, 
if it was available.
    Chairman Thomas. Incentive. But what was the general 
feeling of cooperativeness about what you were doing, since you 
had never done this sort of thing before?
    Mr. Vengrin. Well, it's kind of hard to read from that, 
since in a high incidence there was no documentation provided. 
As the Inspector General points out, the letter clearly 
indicated that if this information was not provided, a 
disallowance would be taken. And then we went back the second 
time with a follow up formal letter saying the same thing.
    Chairman Thomas. I thank the gentleman.
    Ms. Brown. And then a third time with phone calls or in a 
few cases, letters a third time.
    Mr. McDermott. So if there's a problem here, it is that the 
intermediaries, not HCFA, not public employees, but private 
sector contractors who have a contract with the government have 
not been following up and actually looking for the 
documentation. Is that a fair assessment of where the problem 
actually exists?
    Mr. Vengrin. No. I think it goes back further, sir. It's at 
the provider level. Typically under Medicare, as with most 
insurance systems, they do not submit backup medical files when 
they process a claim.
    Mr. McDermott. So, the contractor is not requiring 
providers to send in sufficient information; is that what you 
say the fundamental problem here is?
    Ms. Brown. The system is built on a trust, that there will 
be documentation in the medical records, and people are aware 
of the fact that we can request that at any time. But it is 
seldom requested, and I think there was carelessness in the 
best instance, and perhaps some pushing the system by claiming 
things that weren't actually procedures performed.
    Mr. McDermott. Mr. Vladeck, Is there anything, Mr. 
Vladeck--When you negotiate a contract with one of these 
intermediaries, do you require them to do any kind of 
compliance auditing? Is there anything in the contract that 
requires them to do so, or do they just accept the 
responsibility? If they say the claim is OK, that means there's 
documentation somewhere, some place in a file?
    Mr. Vladeck. Let me try to clarify this, because I think 
it's important and it's at the heart of the issue of the 
corrective action plan.
    Intermediaries and carriers are required to do several 
things. One of the things they are required to do by law is to 
pay a so-called ``clean'' claim within 30 days of the time they 
have received it. Another thing they are required to do is to 
provide as much incentive as possible for providers to submit 
claims electronically, because the only way we've been able to 
afford to maintain claims payment, with the volume increases 
and a flat budget, is by moving from a paper system to an 
electronic system.
    They are also required to do a detailed review of the 
backup documentation for medical necessity, of a sample of all 
the claims for all of the providers they deal with. However, 
they are on cost-based reimbursement contracts with a budgeted 
cap for those activities in the course of their fiscal year.
    So we will say to a particular contractor, you have an 
approved budget for this year of $18 million, with which you 
have to do the following things, including devote a certain 
amount of time and effort to doing these look-behind reviews, 
but your budget for payment safeguard should not exceed $x.
    What the audit found, in fact, was that the contractors 
were extremely compliant with our requirements on them, and 
that the activities they undertook in audit and medical review, 
among other things, were done extremely well. But the amount of 
resources devoted to these sorts of activities, relative to the 
total claims volume, is very, very small.
    Mr. McDermott. So you actually set two requirements a 
disincentive to an incentive. One is they're supposed to look 
back, but the other is you can only use $50 to do it, which 
made it impossible for them to do the kind of look-back process 
that you anticipated?
    Mr. Vladeck. Again, when they do the process, they do it 
well. The problem is they don't do nearly enough of it, and 
that's because they don't have the money to do it.
    Mr. McDermott. Their sample is too small.
    Mr. Vladeck. That's correct.
    Mr. McDermott. So out in the field, where Mr. Stark heard 
of these seminars, they told people how to avoid the look-back 
process that's being done by the local intermediaries? Is that 
a fair description?
    Mr. Vladeck. We have gotten to a process, I think, where 
the intermediaries and carriers are very sophisticated about 
using statistical data, to make it hard to predict who they're 
going to look at and what they're going to look at from 1 year 
to the next. So some of the value of these seminars is 
relatively short lived.
    But the underlying fact is, again, that the number of 
claims on which we do this sort of detailed look behind as a 
proportion of the total claims volume or the total dollar 
volume is clearly just way too small.
    Mr. McDermott. So it's sort of like the IRS audit. You know 
that you can slide pretty much if you don't get too far out, 
because they only audit a very small number of people. It's the 
same thing operating here. Doctors or the professions would 
know that there were very few audits actually occurring and the 
likelihood of getting caught was small.
    Mr. Vladeck. I think the average doctor with a large 
Medicare practice, who submits a lot of Medicare bills, finds 
very few instances in which somebody comes and looks at a 
chart.
    Mr. McDermott. Let me ask one more question, and this is 
one that I think, Mr. Chairman, at some point probably needs 
another hearing of its own, and that's the whole question of 
medical privacy. In the back of the audit from the Inspector 
General is this whole section detailing your ability to invade 
the privacy of medical records. It sounds like you were able to 
get into the entire system without very much trouble. It sounds 
like there was little if any resistance to your going in and 
finding any information that was stored in the electronic 
system. Is that correct?
    Ms. Brown. We, as members of the Inspector General Office, 
have the right to go in and look at those records. But one of 
the things we looked at was whether or not the system was 
secure from others going in.
    Mr. McDermott. And your answer, basically, is a whole page 
of ``noes.'' This system is not secure. Isn't that a fair 
assessment?
    Ms. Brown. There were some problems in that area.
    Mr. McDermott. It seems to me that, under the Kennedy-
Kassebaum bill, you have a requirement now that everyone's 
medical information be put into an electronic data system. That 
issue, I think, is going to be a huge problem, at least that's 
my assessment.
    Is it your assessment from your audit that there is the 
potential, at least as we go to a national data system, where 
all medical records are put into the same data base, that we 
will have that difficulty of medical record confidentiality?
    Ms. Brown. I think those problems that were identified were 
corrected already, and that there is a great consciousness here 
of the necessity for protecting medical records. So it's 
something we will continue to look at and put emphasis on, and 
I believe also that HCFA is very much aware of that and is 
taking precautions.
    Mr. McDermott. You're saying that right now it's not as 
easy to get into the system as it was when you did the audit; 
is that correct?
    Ms. Brown. That's true.
    Mr. McDermott. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman.
    Without objection, a statement and questions from the 
gentleman from Pennsylvania, Mr. Coyne, will be made a part of 
the record.
    [The prepared statement of Mr. Coyne follows:]

Statement of Hon. William J. Coyne

    In March of this year, the Oversight Subcommittee held 
hearings on programs deemed by the U.S. General Accounting 
Office to be ``high risk'' programs--those programs highly 
vulnerable to waste, fraud, abuse, and mismanagement. The 
Medicare program, the nation's second largest social program, 
has been on the GAO's list of high risk programs since 1992 and 
remains there today. It is my hope that the information we will 
receive today will give us a better idea of the true scope of 
problems faced by the Health Care Financing Administration 
(HCFA) in preventing erroneous Medicare overpayments to 
providers. I commend Chairman Thomas and Ranking Member Stark 
for holding today's hearings on this exceedingly important 
issue.
    In its high risk report, the GAO estimated that the costs 
of fraud and abuse in the Medicare program range from 3 to 10 
percent. The HHS Inspector General's audit reveals that this 
number is actually closer to 14 percent--or approximately $23 
billion in erroneous payments in fiscal year 1995. At a time 
when the Congress is considering dramatic changes to the 
Medicare program in order to protect it from insolvency, we 
cannot afford such staggering losses to the program from 
overpayments to providers. I look forward to hearing from the 
Inspector General and from the HCFA Administrator as to their 
ideas and recommendations for safeguarding the Medicare program 
against the problems that we will hear about today.

                                

    Chairman Thomas. I know of the gentleman's interest in the 
privacy of records and the confidentiality. I made a statement 
earlier that we may need to move into the computerized patient 
records area. But clearly it would be with sufficient 
safeguards for confidentiality, and I believe the gentleman 
shares the general understanding. Perhaps how and when it's 
done might be different.
    The gentlewoman from Florida. We're hopeful that we can 
conclude the hearing prior to having to go to vote.
    Ms. Thurman. I thank the Chairman. I will be brief.
    Ms. Brown, let me ask a question, because in the course of 
some of the questioning earlier--I hope I misunderstood but I 
may not have--that you believed, with the Kennedy-Kassebaum and 
with what's happened this year in the budget reconciliation, 
that you might have all of the tools you need to fight fraud?
    Ms. Brown. Well, I certainly could identify others, and we 
can certainly use more money. But I think it has given us a 
substantial increase to the tools that we have available to us. 
The funding that HCFA has to perform their oversight functions 
is also increasing. For a 7-year period we will get substantial 
increases every year, which were probably calculated on the 
basis of what they thought we could absorb.
    Ms. Thurman. On the other side of that, though, let me 
remind you of a letter that you sent to Chairman Archer that 
dealt with some areas of advisory opinions for antikickback 
law, the intent standard change for civil money penalties, and 
the expanded exceptions for managed care under antikickback 
law, and basically thought that they were standing in the way 
of prosecuting health care fraud.
    I'm just curious. Are those no longer needed, or should we 
be continuing to look at these issues? Are these some of the 
other tools that we still need to be looking at?
    Ms. Brown. Yes. The President submitted a bill this year 
that had many of the tools that we need. I know that in budget 
reconciliation, both the House and Senate versions, contained 
many of the things that we have been requesting and felt would 
be very helpful in fighting this battle.
    Things change quickly in that environment, as you well 
know, and we were planning to work on a continuing basis with 
the Committees to supply any kind of backup information so that 
they could make the decisions on which ones they would put into 
law.
    Ms. Thurman. I would just hope that, as this conference 
goes through, while I know there are some provisions in the 
bill--and I thank the Chairman for the surety bond issue--but I 
am still very concerned. I think on the heels of this report 
that we have some way to go, and that I hope we continue to 
keep this in the front so that people feel like we are not 
wasting dollars out there.
    Ms. Brown. I don't think this will be, you know, an instant 
fix or anything, but as we continue to work, we will continue 
to provide that information so that--I'm sure many decisions 
will have to be made before we have a clean system.
    Chairman Thomas. No, but I do think it's important to 
underscore the fact that this is not 1993, it is 1997, and in 
those 4 years there have been fundamental changes. We've gotten 
off the political arguments.
    One of the really useful things that an audit does is focus 
issues in positive ways, notwithstanding the pain that's 
involved in the positive ways, and concrete ways. Instead of 
pontificating about the way the world ought to be, you get some 
very specific focus on what you should or should not do.
    I began by saying that this is a painful process, but it is 
absolutely integral to us being able to make meaningful 
responses. There's a lot of dollars out there being wasted. 
What we're focusing on are ways in which we can reduce that 
waste, and there are, sad to say, people engaged in fraud. It's 
like any white collar crime area; the chances of getting caught 
are so small that the odds are that you, in essence, are 
willing to run the risk.
    Our job is to provide a structure within reasonable costs 
to minimize all of those. We're never going to eliminate them, 
but audits are absolutely crucial as tools for us to identify 
whether we're moving in the right direction and, to a certain 
extent, at what speed we should be moving.
    So I want to underscore the positive aspect of the audit. I 
am pleased to know that the IG has a comfort level in going 
forward into 1997 and beyond. We're receptive to any tools that 
may be necessary.
    Mr. Vladeck, once again I want to apologize on the part of 
all the Subcommittee, and if this is the last appearance in 
front of this Subcommittee, we will remember all the other 
times as well as this one.
    [The following questions and answers were subsequently 
received:]

Questions submitted by Hon. William J. Coyne, Ranking Minority Member, 
                        to Hon. June Gibbs Brown

    1. What, in your opinion, are some of the most cost-
effective efforts that the Health Care Financing Administration 
(HCFA) can undertake in the very near future to start to reduce 
the amount of Medicare overpayments?
    Answer: In the short term, HCFA could direct its 
contractors to make follow-up evaluations of specific procedure 
codes we identified with high error rates and consider whether 
identified providers should be placed on prepayment medical 
review. The HCFA can direct its contractors to emphasize to 
providers the importance of maintaining sufficient 
documentation and the penalties for not doing so. Since 99 
percent of claims that come to the contractors appear, on their 
face, to be correct, it is very difficult for the contractors 
to do a better job of identifying overpayments in the near 
future without implementing improved processes and systems. 
Their overpayment reduction efforts should be targeted 
initially to high-risk areas and to making providers understand 
that ``mistakes'' that result in a pattern of overpayments will 
not be taken lightly.
    2. Since HCFA has already invested nearly $100 million in 
the Medicare Transaction System (MTS), do you have any 
recommendations about the implementation of this system? What 
are some issues that HCFA ought to take into consideration when 
planning for making this system operational, in light of your 
findings?
    Answer: Regarding the cost of MTS, there have been a lot of 
numbers quoted in the press lately. At the beginning of 1997, 
we estimated that HCFA would spend $102 million for MTS 
contracts. Meanwhile the contract was terminated, and the 
contractor incurred about $45 million. Of that, HCFA paid about 
$41 million. Several tangible products came from that 
investment, including a system design to meet the needs of a 
completely redesigned managed care and fee-for-service 
transaction system and a high-level set of requirements (what 
the system must do) for the entire Medicare environment, 
including both fee-for-service and managed care, covering both 
current and future capabilities. The work that was done to 
develop system requirements will be useful to HCFA in whatever 
way it proceeds.
    The HCFA states that as a result of the MTS development 
effort, it will consolidate existing contractor systems into 
standard Part A, Part B, and durable medical equipment (DME) 
systems by the year 2000. To date, 20 Part A intermediaries 
have been transitioned to a shared system and the remaining 20 
will be transitioned by next August. Three of the four DME 
contractors are using a standard system now, and the transition 
for the fourth will be completed by July 1998. Eight Part B 
carriers are using a standard system now, and the remaining 24 
will be using the same system by August 2000. While this does 
not fulfill the original goal of housing all information on 
beneficiaries, providers, payments, and services on a single 
shared database, it is a workable alternative and another step 
in the direction of a fully integrated system. A fault of the 
MTS plan was attempting to do too much in one initiative. The 
incremental enhancements that are going on now have a better 
potential for success. In moving toward an integrated system, 
we continue to recommend that HCFA build in adequate computer 
edits, internal controls, and related safeguards as described 
in OIG and General Accounting Office reports.
    3. I understand that the focus of your audit was the fee-
for-service side of the Medicare program. In your opinion, is 
it possible that such significant problems also exist in the 
managed care side of the program? We know from the GAO's high 
risk report that Medicare payments to HMOs are excessive, and 
we know that HCFA has historically not been very effective at 
ensuring that managed care companies play by Medicare's rules. 
Do you have any plans to undertake a similar audit of the 
Medicare managed care program?
    Answer: Yes, although the focus of our CFO audit for fiscal 
year 1996 was on the Medicare fee-for-service side, we did 
conduct some limited testing on the managed care side. As 
managed care increases (as is expected) we will plan more 
testing, accordingly. Since managed care providers have a 
financial incentive to control costs, it would seem they would 
be less likely to provide medically unnecessary or unallowable 
services. Billing errors and coding problems associated with 
fee-for-services claims would likely be significantly 
diminished or eliminated in the managed care setting. However, 
rate setting methodologies for risk-based health maintenance 
organizations (HMOs) are based on expenditures in Medicare's 
fee-for-service program. We are concerned that abusive 
practices which drive up costs in the fee-for-service program 
are included when the HMO rate setting methodologies are 
applied. This is especially disconcerting when considering 
payments to HMOs are expected to increase throughout the decade 
as more beneficiaries opt to join HMOs.
    Also, the GAO believes Medicare may be overpaying managed 
care providers by at least $2 billion a year because some HMOs 
substantially avoid the chronically ill. Our work related to 
the profit margins of Medicaid managed care plans is consistent 
with the GAO findings. The OIG has conducted a number of audits 
and inspections of the managed care environment in recent years 
and will continue to do so. Several managed care projects are 
slated to begin in fiscal year 1998.
    4. In your opinion, do some of the provisions included in 
the Health Insurance Portability and Accountability Act 
(HIPAA)--like advisory opinions, anti-kickback rule exceptions, 
and weak false claims standards--present problems in combating 
the types of erroneous payments you identified in your audit?
    Answer: It may be too early to assess the impact of 
specific provisions. Most fraud cases take several years to 
resolve. At any given moment, we are opening new cases, 
managing field investigations, initiating court or 
administrative proceedings, and wrapping up prosecutions or 
settlements of older cases. The resources made available under 
the HIPAA have enabled us to attack all phases of fraud 
fighting with renewed effectiveness. After passage of HIPAA, we 
moved expeditiously to form a new unit with primary 
responsibility for issuing advisory opinions. We worked 
diligently to ensure that the regulations and resources needed 
to respond to such requests were in place in advance of the 
statutory deadlines. We have received and responded to several 
advisory opinion requests, and are educating the industry about 
advisory opinion procedures through presentations to interested 
trade association and bar groups. In addition to advisory 
opinions, the new law requires the Secretary to provide 
industry guidance by soliciting proposals for modifications and 
additions to the so-called Safe Harbors, i.e., regulatory 
provisions which establish conditions for business structures 
or practices deemed to be non-abusive. Such arrangements will 
not be investigated or prosecuted under the Anti-kickback 
Statute. We anticipate that in the next several months we will 
be able to finalize eight proposed safe harbors and 
clarifications.
    5. As you know, yesterday a multi-departmental 
investigation continued into the Medicare billing practices of 
Columbia/HCA in several states. From press reports it appears 
that the investigation is focusing on many of the same problems 
as your audit--upcoding, lack of medical necessity, etc. I 
notice that your report did not distinguish between 
overpayments to for-profit health care institutions versus 
those not-for-profit institutions. Is that information that you 
would be able to provide to the Subcommittee?
    Answer: As to the Columbia/HCA investigation, we are 
actively involved in an official investigation with various 
other Federal agencies and cannot comment at this time. 
Regarding the second part of your question, we would generally 
agree that the causes for overpayments to hospitals do not 
differ substantially between for-profit and not-for-profit 
institutions.
    6. The IG's review demonstrated ``weaknesses in Electronic 
Data Processing (EDP) general controls through a system 
penetration test in which the IG obtained access privileges 
necessary to read or modify sensitive Medicare enrollment, 
beneficiary, provider and payment information.'' How widespread 
is this problem, and what needs to be done to insure the 
protection of confidential and sensitive Medicare data?
    Answer: The specific vulnerability to which the quotation 
above refers was immediately corrected. To say that the problem 
is ``widespread'' would imply that many unauthorized 
individuals are penetrating the various subsystems of the 
Medicare network. We believe the possibility for abuse was 
present, and the fact that we were able to penetrate is a 
concern that must be addressed. There were several 
vulnerabilities. We found that access controls did not 
adequately protect data from unauthorized modifications or 
destruction. Application developers were allowed update access 
to production data for many sensitive applications in a manner 
that would bypass audit trail controls. In addition, access 
control software was configured so that it did not adequately 
protect HCFA's 400,000 tapes. Furthermore, the use of sensitive 
utilities that could bypass access controls was not monitored. 
All of these weaknesses could allow users to modify production 
data without detection.
    We also identified serious application development and 
change control weaknesses. In addition, EDP functions were not 
adequately separated to prevent one individual from controlling 
key aspects of computer related operations; controls over 
operating system software were ineffective; and service 
continuity controls had serious weaknesses.
    As HCFA consolidates its systems, we expect the 
vulnerabilities will be eliminated. We will, nevertheless, 
continue testing HCFA's controls in the future to ensure the 
privacy, integrity, and safety of Medicare data and will report 
our findings to the Congress as needed. The HCFA is now well-
aware of the critical importance of system security and is 
working to build adequate controls into its protocols.
    7. During the Oversight Subcommittee's March 1997 hearing 
on ``high risk'' federal programs, the GAO provided extensive 
testimony on Medicare claims fraud. Among other findings, the 
GAO concluded that:
     Medicare fraud and abuse was in the range of $6 to 
$20 billion annually;
     problems in funding program safeguards and HCFA's 
limited oversight of contractors continue to contribute to fee-
for-service program losses; and
     the managed care program suffers from excessive 
payment rates to HMOs and weak HCFA oversight of the HMOs with 
which it contracts.
    Do you have any comments on these GAO findings?
    Answer: Regarding GAO's estimate of fraud and abuse, we now 
believe that $6 to $20 billion annually may be a fairly 
conservative number, particularly if you consider improper 
claims to be a form of program abuse. We projected a mid-point 
of $23 billion and a range of $17.8 billion to $28.6 billion 
that HCFA would not have paid in fiscal year 1996 if the 
Medicare contractors had been able to do pre or post payment 
reviews of the medical files. We would not venture to say how 
much of that is fraud because our review was limited to 
determining whether the claims in our sample were proper and 
supported.
    Regarding funding of program safeguards and HCFA's limited 
oversight of contractors, we believe the resources provided by 
the Health Insurance Portability and Accountability Act will 
greatly strengthen these activities. One of the most 
significant provisions of HIPAA was the Medicare Integrity 
Program (MIP). This program authorizes the Secretary to promote 
the integrity of the Medicare program by entering into 
contracts with eligible entities to carry out program integrity 
activities such as audits of cost reports, medical review, and 
payment determinations. The MIP provides a stable source of 
funding for HCFA's program integrity activities, and provides 
it with the authority to contract for these activities with any 
qualified entity (not just those insurance companies who are 
currently fiscal intermediaries or carriers). A dependable 
funding source allows HCFA the flexibility to invest in new and 
innovative strategies to combat fraud and abuse. It will help 
HCFA to shift emphasis from post-payment recoveries on 
fraudulent claims to pre-payment strategies designed to ensure 
that more claims are paid correctly the first time.
    We agree with the GAO that the managed care program suffers 
from excessive payment rates to HMOs and weak HCFA oversight of 
the HMOs with which it contracts. Payment rates appear to be 
inflated because HMO rates are driven by inflated fee-for-
service expenditures and HMOs tend to recruit healthy 
beneficiaries, avoiding the costs of caring for the chronically 
ill. There are other systemic challenges as well, including HMO 
insolvency and difficulty in recovering overpayments made to 
HMOs. We encourage HCFA to communicate actively with its 
resource partners within the Government and the private sector 
to strengthen its monitoring and management of the program. The 
OIG is undertaking a number of audits and inspections in fiscal 
year 1998 to study a cross-section of managed care issues.
      

                                

     Question submitted by Hon. Pete Stark to Hon. Bruce C. Vladeck

    Question: I would love to hear from you (OIG) and from 
Bruce's department, in what we could do to put much of the 
burden on the providers, to get their records in shape, and 
make it very expensive for them if they don't.
    Answer: It is HCFA's position that all providers who bill 
the Medicare program are accountable for the documentation to 
support payment of each claim. Careful and appropriate 
documentation of health conditions and services is an integral 
part of good medical practice.
    HCFA's Corrective Action Plan includes a commitment to 
reduce the errors identified in the CFO audit. To do this, HCFA 
will ``put the burden on providers to get their records in 
shape'' as follows:
     Providers must submit underlying documentation, 
which must be reviewed prior to payment or denial. Failure to 
submit such documentation will make it more expensive for 
providers by delaying their payment or denial of their claims.
     HCFA's prepayment medical review will be increased 
to approximately 10 percent of the total claims processed and 
will include requests for additional documentation. Where 
problems are found, the effort will be intensified. This will 
slow reimbursement somewhat and increase providers' awareness 
that documentation of all services is required for timely 
reimbursement.
    Our contractors have denied claims and are seeking 
overpayments for the improperly filed and paid claims uncovered 
during the OIG's fiscal year 1997 CFO Audit. In addition, the 
providers identified in that report will be evaluated by HCFA's 
contractors as to the need for more extensive review.
      

                                

  Question submitted by Hon. Benjamin Cardin to Hon. Bruce C. Vladeck

    Q: Mr. Cardin asked whether there shouldn't be some type of 
compliance audit requirements from certain participants as a 
condition of participation in the Medicare system and about 
whether HCFA had legal authority to require some form of 
compliance audit from providers. He said, maybe we should 
request audits on a periodic basis from providers with a 
history of poor performance and, in those cases, make the 
provider responsible for the cost, not HCFA's budget.
    Bruce Vladeck agreed to check HCFA's authority to require 
such audits.
    Answer: HCFA has broad audit authority to assure that 
proper payments are made in both Medicare Part A and Medicare 
Part B as follows:
     For Part A, 42CFR Subpart B, Section 413.20(d) 
describes continuing provider recordkeeping requirements 
including that:
    ``(1) The provider must furnish such information to the 
intermediary as may be necessary to (i) Assure proper payment 
by the program, including the extent to which there is any 
common ownership or control between providers or other 
organizations, and as may be needed to identify the parties 
responsible for submitting program cost reports; and... (iii) 
Satisfy program overpayment determinations.''
    ``(2) The provider must permit the intermediary to examine 
such records and documents as are necessary to ascertain 
information pertinent to the determination of the proper amount 
of program payments due.''
     For Part B, Section 1842(a)(1)(C) of the Social 
Security Act authorizes the Secretary to enter into contracts 
with carriers to...``make such audits of the records of 
providers of services as may be necessary to assure that proper 
payments are made under this part.''
    HCFA's fiscal intermediaries and carriers monitor billing 
patterns and do focused medical review. When they identify 
problems, they may suspend payment of claims, perform total 
prepayment review of all claims for a given provider, as well 
as monitor and question problem providers.In addition, the OIG 
has required continued compliance plans in cases that have been 
pursued to formal litigation.
      

                                

    Chairman Thomas. The Subcommittee stands adjourned.
    [Whereupon, at 1:20 p.m., the hearing was adjourned.]

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