[Federal Register Volume 60, Number 172 (Wednesday, September 6, 1995)]
[Notices]
[Pages 46288-46296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22029]



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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
[BPO-133-PN]


Medicare Program; Data, Standards, and Methodology Used to 
Establish Fiscal Year 1996 Budgets for Fiscal Intermediaries and 
Carriers

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed notice.

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SUMMARY: This notice describes the data, standards, and methodology 
that would be used to establish fiscal intermediary and carrier budgets 
for the Federal fiscal year (FY) 1996, that begins October 1, 1995. 
Fiscal intermediaries and carriers are public or private entities that 
participate in the administration of the Medicare program by performing 
claims processing and benefit payment functions. This notice is 
published in accordance with sections 1816(c)(1) and 1842(c)(1) of the 
Social Security Act, which require us to publish for public comment the 
data, standards, and methodology we intend to use to establish budgets 
for Medicare fiscal intermediaries and carriers.
    In addition, we respond to the single public comment we received in 
response to our proposed notice of October 21, 1994, and we announce 
the data, standards, and methodology we proposed to use to establish 
the Medicare fiscal intermediary and carrier budgets for FY 1995, 
beginning October 1, 1994, as final.

DATES: Comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 5 p.m. on 
November 6, 1995.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: BPO-133-PN, P.O. Box 26676, 
Baltimore, MD 21207.
    If you prefer, you may deliver your comments (1 original and 3 
copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code BPO-133-PN. Comments received timely will be available for 
public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, 

[[Page 46289]]
in Room 309-G of the Department's offices at 200 Independence Avenue, 
SW, Washington, DC, on Monday through Friday of each week from 8:30 
a.m. to 5 p.m. (phone: (202) 690-7890).

FOR FURTHER INFORMATION CONTACT: Leslie Trazzi, (410) 786-7544

SUPPLEMENTAL INFORMATION:

I. Background

    Preparation of Contractor Budgets--Under sections 1816(a) and 
1842(a) of the Social Security Act (the Act), public or private 
organizations and agencies may participate in the administration of the 
Medicare program under agreements or contracts entered into with the 
Secretary. These Medicare contractors are known as fiscal 
intermediaries (section 1816(a) of the Act) and carriers (section 
1842(a) of the Act). Fiscal intermediaries perform bill processing and 
benefit payment functions for Part A of the program (Hospital 
Insurance), and carriers perform claim processing and benefit payment 
functions for Part B of the program (Supplementary Medical Insurance). 
When bills are submitted by providers, and claims by beneficiaries, 
physicians, and suppliers of services, fiscal intermediaries and 
carriers are responsible for--
     Determining the eligibility status of a beneficiary;
     Determining whether the services on the submitted claims 
or bills are covered under Medicare and, if so, the correct payment 
amounts; and
     Making appropriate payments to the provider, beneficiary, 
physician, and/or other supplier of services.
    Fiscal intermediary and carrier performance is monitored by us at 
the central office staff and regional office levels. In general, the 
central office staff address issues that affect policies on a national 
level, and the regional office staff address issues dealing with 
regional and local policies, as well as those of an operational nature. 
Continuous communication between us and the fiscal intermediaries and 
carriers is maintained through consultation workgroups that meet on a 
regular basis and are comprised of representatives from the central 
office, regional offices, and Medicare contractors.
    HCFA's central office is responsible for developing a national 
contractor budget for Part A and Part B of the Medicare program. The 
budget is formulated over an 18-month period, beginning in March of the 
calendar year preceding the fiscal year to which it applies. The 
central office receives input from the contractor community, our 
regional offices, the Department of Health and Human Services, and the 
Office of Management and Budget (OMB) before the budget is submitted to 
the President for approval and forwarding to the Congress. Once the 
national contractor budget has been approved, we issue Budget and 
Performance Requirements (BPRs). BPRs specify the level of effort 
required for contractor functions and serve as the statement of work 
for contractor use in preparing their individual budgets for submission 
to us.
    The regional offices review the budgets submitted by contractors 
during a budget level determination process that is based on current 
claims processing trends, legislative mandates, administrative 
initiatives, current year performance standards and criteria, and the 
availability of funds appropriated by the Congress. Subsequently, we 
allocate funding within these constraints.
    Requirements to Publish Contractor Budget Information--Sections 
1816(c)(1) and 1842(c)(1)(A) of the Act require us to publish for 
public comment the data, standards, and methodology we intend to use to 
establish budgets for Medicare fiscal intermediaries and carriers at 
least 90 days before September 1. The statute further requires that we 
publish the final data, standards, and methodology no later than 
September 1. In the past, when preparing the Medicare contractor budget 
for each fiscal year, every attempt was made to publish the proposed 
and final notices as timely as possible. However, because of the time 
involved in developing the budget and the lengthy review and clearance 
process, we have been unable to publish both proposed and final notices 
before the beginning of the fiscal year. (See, for example, the notices 
for FYs 1993 and 1994 published in the Federal Register at 59 FR 13491 
and 35933.) However, because of our continuous communications with 
contractors, we do not believe that the publication date of the Federal 
Register document has any negative effect on the fiscal intermediaries 
or carriers. The BPRs issued to all intermediaries and carriers discuss 
in detail the work, level of effort, and activities we expect them to 
perform in the coming fiscal year. Further, we provide a discussion and 
explanation of the bottom-line unit cost target established for each 
intermediary and carrier at the time the BPRs are issued.
    Sections II and III of this notice contain proposed data, 
standards, and methodology we intend to use to establish budgets for 
Medicare fiscal intermediaries and carriers for FY 1996. If comments 
are received during the comment period, we will address those comments 
in a final notice and, if necessary, make revisions to the FY 1996 
data, standards, and methodology. If no comments are received, the 
data, standards, and methodology proposed for FY 1996 will become 
final, effective October 1, 1995.
    FY 1995 Budget Information--A proposed notice describing the data, 
standards, and methodology we proposed to use to establish contractor 
budgets for FY 1995 was published in the Federal Register (59 53187) on 
October 21, 1994. In response to our request for public comment in the 
proposed notice, we received one timely item of correspondence. Based 
on our review of the comment submitted, we are making no changes to the 
data, standards, and methodology we proposed to use. As noted earlier, 
it has been our practice to issue separate notices dealing with 
proposed and final budget data. Because no changes are being made to 
the proposed budget data included in the October 21 notice, we believe 
it appropriate to combine in this document the final notice announcing 
the contractor budget for FY 1995, and the proposed contractor budget 
elements for FY 1996. Therefore, through this notice, we announce that 
the data, standards, and methodology we proposed to use to establish 
the contractor budget for FY 1995 are final.
    A discussion of the October 21, 1994, proposed notice and our 
response to the public comment received appears in section IV. of this 
document.

II. Overview of FY 1996 National Medicare Contractor Budget

A. Data, Standards, and Methodology

    We submitted the FY 1996 national Medicare contractor budget 
proposal to the Congress in February 1995. The workload for the FY 1996 
request is expressed in terms of work processed. For Part A, the FY 
1996 estimated workload (140.6 million bills) is 8.8 percent more than 
the FY 1995 estimate. For Part B, the FY 1996 estimated workload (681.4 
million claims) is a 3.9 percent increase over the FY 1995 estimate.
    Our estimates involved the use of a regression model that uses the 
last 36 months of actual contractor workload data. For the FY 1996 
projections, we used November 1994 data, which were the latest 
available to us at the time. We will continue to update the resulting 
projections monthly to ensure that the most timely data are available 
for budgeting purposes.
    The FY 1996 unit costs for processing bills and claims were 
calculated based 

[[Page 46290]]
on the FY 1995 level adjusted for savings achieved due to productivity, 
electronic media claims, and reduced funding for incremental workload. 
This calculation resulted in a new unit cost, which, when multiplied by 
the Part A or Part B workloads, determines the total amount required 
for bill or claim processing in FY 1996.
    Feedback received from contractors and regional offices during the 
past several years has led us to believe that contractors can make 
major improvements in performance if given the authority to manage 
their budgets. The FY 1994 BPRs gave the regional offices the authority 
to set a budget and the contractors the authority to manage their 
budgets on a bottom-line basis. Once funding was issued, each 
contractor had the flexibility to optimally manage the budget 
consistent with the statement of work contained in the BPRs. Before FY 
1993, contractors were not allowed to ``shift'' more than 5 percent of 
funds from one line item to another in their budget, as determined by 
the lesser of the two line items. That restriction was intended to 
allow us to maintain control over the national budget, but still give 
contractors some latitude with regard to reporting their costs. With 
the exception of the ``Payment Safeguards,'' ``Productivity 
Investments,'' and ``Other'' line items, contractors now have total 
flexibility in the use of funds. There is a 5 percent limitation on the 
amount of funds that may be shifted out of individual ``Payment 
Safeguards,'' with unlimited shifting into ``Payment Safeguards.'' 
Shifting into or out of ``Productivity Investments'' and ``Other'' line 
item funding, not governed by contract modifications, may not exceed 5 
percent. Each ``Other'' line item is treated separately. The 
``Productivity Investment'' line item is treated as a whole and not as 
separate projects. Funding that is governed by contract modifications 
may not be shifted to other functions or line items.
B. Medicare Contractor Functional Areas

    The Medicare contractor budget consists of functional areas of 
responsibility that are performed by the fiscal intermediaries for Part 
A and the carriers for Part B. The eight functional areas of 
responsibility for fiscal intermediaries under Part A are--
     Bill Payment;
     Reconsideration and Hearing;
     Medicare Secondary Payer;
     Medical Review and Utilization Review;
     Provider Audit (Desk Review, Field Audit, and Provider 
Settlement);
     Provider Payment;
     Productivity Investments; and
     Benefits Integrity.
    The nine functional areas of responsibility for carriers under Part 
B are--
     Claim Payment;
     Review and Hearing;
     Beneficiary or Physician Inquiry;
     Provider (physician/supplier) Education and Training;
     Medicare Review and Utilization Review;
     Medicare Secondary Payer;
     Participating Physicians;
     Productivity Investments; and
     Benefits Integrity.
    The Hospital Insurance and Supplementary Medical Insurance Trust 
Funds and appropriations provide funding for these functions. 
Discussions concerning the data, standards, and methodology for these 
functional areas are in section III of this notice. In the following 
national budget summary, we combine the discussion of functional areas 
that are common to fiscal intermediaries and carriers. However, we list 
specific data for Part A or Part B under each heading. In developing 
the budget, we provide workload estimates for all functional areas that 
are predominantly workload driven. We do not provide workload estimates 
for those functional areas that are not predominantly workload driven 
or for an uncertain workload until final negotiations with the Medicare 
contractors are complete.
1. Bill and Claim Payment (Parts A and B)
    We currently estimate the Part A processed workload to be 140.6 
million bills in FY 1996. The Part B processed workload is currently 
projected at 681.4 million claims.
2. Reconsideration (Part A), Review (Part B), and Hearing (Parts A and 
B)
    Beneficiaries, providers, physicians, and other suppliers are 
entitled by law to appeal, through reconsiderations, formal reviews, or 
hearings, as appropriate, the various payment determinations made by 
Medicare contractors. We project that Part B reviews and hearings 
workloads for FY 1996 will not exceed FY 1995 levels, while workload 
for Part A reconsiderations and hearings will have a moderate increase. 
We expect contractors to control and respond to requests for appeal and 
to control receipt of Administrative Law Judge hearing requests.
    We continue to maintain efficiencies achieved in prior years 
through the use of shorter decision letters and the experimental use of 
the telephone to conduct reviews and reconsiderations.
3. Medicare Secondary Payer (Parts A and B)
    The Medicare secondary payer function is the first of four 
initiatives (Medicare secondary payer, medical review and utilization 
review, benefits integrity, and provider audit) we developed as 
``payment safeguards'' for the Medicare program. Our continuing 
Medicare secondary payer program is designed to identify situations in 
which other insurers are the primary payers, to pay all claims 
correctly the first time, and to recover Medicare dollars in instances 
in which mistaken conditional payments have occurred.
    We aggressively pursue the identification of secondary payer 
situations through the collection and matching of beneficiary-specific 
health care data through the Internal Revenue Service/Social Security 
Administration/HCFA (IRS/SSA/HCFA) data match authorized by section 
1862(b)(5) of the Act. The FY 1996 budget includes funding to process 
the workloads based on the IRS/SSA/HCFA data match project. We allocate 
the funds based on the number of report identification numbers we 
expect a contractor to process.
    In addition to the IRS/SSA/HCFA data match, we continue to pursue 
other data matches with State Motor Vehicle Administrations, Workers' 
Compensation, Medicaid Agencies, and the Departments of Defense, Labor, 
and Veterans Affairs. Further, our use of the initial enrollment 
questionnaire is an important part of our commitment to capturing vital 
health care coverage data on beneficiaries and their spouses at the 
time of Medicare enrollment and before any claims are filed.
4. Medical Review and Utilization Review (Parts A and B)
    In addition to processing and paying claims from providers of 
services and Medicare beneficiaries, contractors perform medical and 
utilization reviews of claims to determine whether services are covered 
under the program and are medically necessary. The distribution of 
Medicare contractor funding is based on each contractor's proportion of 
the workload and individual contractor medical review/utilization 
review projects.
    Specifically, our contractors are required to work with the medical 
community to develop clear medical review policies and communicate 
those policies to the providers of services. Moreover, we also 
emphasize the need for systematic and ongoing analysis of 

[[Page 46291]]
claims data to focus prepayment and postpayment medical review. To meet 
this requirement, intermediaries and carriers currently analyze local 
and national data to identify practice patterns, trends, and 
aberrancies that may reflect areas of potential abuse, inappropriate 
care, and overutilization. This data-driven approach allows us to 
target and direct our efforts to our greatest risk of inappropriate 
program payment.
    Part A medical reviews by fiscal intermediaries focus on preventing 
inappropriate billing through provider education and on targeting 
reviews of providers who fail to change inappropriate behavior. Through 
analysis of national and local data, areas of abuse and overutilization 
are identified and payment is denied for services that are not covered 
under the Medicare program. Reviews are targeted where they will be 
most effective in protecting the program.
    Part B medical reviews by carriers identify areas of abuse and 
overutilization and focus on preventing Medicare payment for medically 
unnecessary or noncovered services. Carriers use computerized methods 
of analyzing utilization, epidemiologic, and demographic data to detect 
trends in physician and other supplier activities and the delivery of 
health care. This is accomplished through prepayment and postpayment 
analysis of Medicare Part B claims.
    In FY 1996, we will continue to support the medical review 
activities of the four Durable Medical Equipment Regional Carriers 
(DMERCs). The DMERCs will conduct prepayment and postpayment review of 
durable medical equipment, prosthetics, orthotics, and supplies 
(DMEPOS) claims to identify areas of potential abuse and 
overutilization and prevent payment for noncovered items and services.
    The DMERCs will identify aberrancies from an analysis of national 
and local databases. The DMERCs will initiate corrective action for 
overpayment recoupment, target supplier claims for services most 
frequently billed, and continue to revise regional medical review 
policies and screens for referral to the Office of the Inspector 
General (OIG). This targeting principle will assist in developing 
regional medical review policies to address identified problem areas or 
trends in new technologies. In addition to educating suppliers, DMERCs 
need to educate the referring/ordering physicians responsible for 
prescribing DMEPOS items and include them in the medical policy 
development process.
5. Provider Audit (Part A only)
    The audit of provider cost reports is our primary instrument to 
help ensure the integrity of Part A Medicare payments. Funding 
priorities are directed toward the use of limited desk reviews where 
low cost/low utilization providers are involved and toward the use of 
onsite focused reviews to expand the overall examination of high cost/
high payment issues. Program savings remain relatively flat, while the 
FY 1996 funding level remains constant.
    In FY 1996, budget estimates allow for a relatively consistent 
level of reviews and audits for all types of providers, although an 
increasing number of providers require both desk review and settlement. 
Full desk reviews and field audits are directed toward high cost/high 
utilization providers and past poor performers. Contractors will retain 
a knowledgeable audit staff and provide training in accordance with 
government auditing standards.
    Contractors will also respond to provider appeals by conducting 
intermediary hearings and by filing position papers and attending 
hearings at the Provider Reimbursement Review Board (PRRB). Contractors 
will also reopen and revise prior period settlements based on provider 
requests, as well as PRRB and HCFA directives and resolve problems 
identified on provider cost reports.
6. Provider Payment (Part A only)
    In FY 1996, Medicare contractors will provide payment services to 
approximately 31,500 health care providers. These payment services 
include establishing and adjusting interim rates, recouping provider 
overpayments, and providing consultative services to providers for 
maintaining and adjusting their accounting systems to ensure accurate 
data for preparing Part A bills and cost reports.
    We will distribute funds in proportion to workload by provider 
type.
7. Productivity Investments (Parts A and B)
    We refer to the costs of implementing legislation and new 
initiatives that are designed to improve the effectiveness of Medicare 
program administration as productivity investments. Productivity 
investments generally provide start-up funds for new or revised 
contractor activities. Once these projects are operational, their 
funding becomes part of the contractor's ongoing costs. The criteria 
for selecting productivity investments vary. For example, the statute 
or regulations require some productivity investments. We also fund 
projects that will improve administrative cost efficiency, such as 
administrative simplification.
    There is no single distribution methodology for the allocation of 
productivity investment funds. After we determine the national cost of 
a productivity investment, we distribute funds among the contractors. 
These funds are based on the contractors' cost estimates or through 
formulas that we derive based on project specifications. Other 
productivity investment initiatives require equal effort by all 
contractors regardless of size and, therefore, funds are distributed 
equally among contractors. Finally, some productivity investments, such 
as administrative simplification and the Medicare Transaction System, 
are given only to contractors that are involved in the specific 
projects.
8. Beneficiary or Physician Inquiry (Part B only)
    The Medicare contractors are the direct link between beneficiaries, 
providers, physicians and other suppliers, and the Medicare program. It 
is the responsibility of HCFA and the contractors to provide the most 
effective and efficient service to beneficiaries, providers, 
physicians, and other suppliers, and to continue to expand their 
awareness and understanding of the Medicare program.
    We are currently revising all benefit notices into a single, easy 
to read summary format. Carriers will begin using the new notice format 
in FY 1996. Beneficiary and provider feedback is used to modify the 
format, as necessary, to ensure maximum beneficiary comprehension. We 
and our contractors will conduct extensive outreach to ensure a smooth 
transition to the new format.
    Our Carrier Customer Service Plan initiative is expanded to 
include--
     Tone/clarity self-assessment;
     Initiatives to improve service to blind, deaf, and 
disabled beneficiaries;
     An automated inquiries analysis program;
     Improvements to the internal review process;
     Partnerships with local beneficiary counseling and 
assistance organizations;
     The expansion of beneficiary advisory committees; and
     Initiatives designed to improve service to Spanish 
speaking individuals.
    Also, carriers use Audio Response Units as the initial contact for 
providers, and a beneficiary Audio Response Unit script is offered to 
all carriers. In FY 1996, carriers will expand the use of Audio 
Response Units. The Audio 

[[Page 46292]]
Response Units will provide improved service, accuracy, and consistency 
through the use of expanded standardized scripts and equipment 
enhancements.
    In FY 1996, carriers will receive an estimated 40.1 million 
inquiries by telephone, in writing, or through direct contact, an 
increase of 1 percent over the current FY 1995 projection of 39.6 
million inquiries.
9. Participating Physicians/Suppliers (Part B only)
    Participating physicians and suppliers are those who agree to 
accept assignment on all Medicare claims in return for certain 
incentives or benefits. All physicians are given an opportunity to 
enroll or disenroll in the program annually.
    Carriers must perform several activities including: (1) Conducting 
annual participation enrollment; (2) Distributing the Medicare 
Participating Physician/Supplier Directories; (3) Upgrading and 
maintaining direct electronic media claim lines for participants; and 
(4) Monitoring and enforcing the program requirements for participants 
and nonparticipants, which includes the comprehensive limiting charge 
compliance program.
10. Physician/Supplier Education and Training (Part B only)
    Increasing numbers of physicians, nonphysician practitioners, and 
other suppliers who furnish health care services rely on information 
gained through communications with carriers about Medicare program 
provisions. To respond to this need, we have fostered interaction 
between suppliers of health care services and carriers to promote 
efficient, economic claims activities. For example, these activities 
include: (1) Communicating with suppliers of health care services; (2) 
Educating suppliers to eliminate the submission of erroneous or 
underdocumented claims; (3) Distributing newsletters to all suppliers 
of services detailing changes in coverage, payment, or billing policy; 
and (4) Educating carrier staff members, on a regularly scheduled 
basis, to ensure compliance with legislative and policy changes 
affecting the coding and submission of claims.
11. Benefits Integrity (Parts A and B)
    We will continue to deter and detect Medicare fraud and abuse 
activities through concerted efforts with the OIG, the Federal Bureau 
of Investigation, Medicaid Fraud Control Units, the Department of 
Justice, and other HCFA partners. As in FY 1995, we will continue to 
improve the quality of referrals to the OIG by increasing our fraud 
detection capabilities through expanded data analysis and improvements 
in fraud detection by the carriers and intermediaries.
    In addition, the National Claims History Database continues to be 
available to focus postpayment review on practitioners and suppliers 
that appear to be billing fraudulently or that are misrepresenting to 
Medicare the services or items they are furnishing.
    In FY 1996, Medicare carriers will focus their detection activities 
on medical laboratory, radiology, anesthesia, physician services, and 
ambulance claims. Also, in FY 1996, Medicare carriers will upgrade 
their fraud detection capabilities by making better use of available 
databases and expanded relationships with other fraud detection 
organizations.
12. Printing Claim Forms (Parts A and B)
    Although this activity is not among the nine Part A and eight Part 
B contractor functional areas, it is a part of the national Medicare 
contractor budget. In the interest of maintaining standard formats and 
quality of Medicare entitlement and report forms, we supply beneficiary 
enrollment and provider cost reporting forms. The use of these forms is 
essential for beneficiary notification and for effective and efficient 
contractor operations. We will print 50 million copies of these forms 
for FY 1996.

C. Contractor Unit Cost Calculations

    A key step in the contractor budget process is the development of 
contractor unit costs for processing Part A bills and Part B claims. 
These bottom-line unit costs encompass all budget line items except 
``Provider Audit,'' ``Provider Reimbursement,'' ``Productivity 
Investments,'' and, ``Other.''
    As first implemented in FY 1992, the complexity index was designed 
to improve efficiency and reduce contractor-by-contractor cost 
inequities and was based on the application of the Industrial 
Engineering study commissioned by us. The Industrial Engineering study 
provided us with an actual weighted unit cost for each claim type; that 
is, inpatient or outpatient, and method of submission of a bill or a 
claim. After adjustment for changes in program emphasis, these unit 
costs were applied to each contractor's individual workload mix to 
develop a weighted unit cost that reflects the complexity of its 
workload mix. We published an explanation of the complexity index in a 
Federal Register notice published on January 2, 1992 (57 FR 57). After 
adjusting for various savings and increases associated with 
initiatives, we then arrayed the contractors' unit costs and identified 
the high cost contractors.
    We believe that the use of the complexity index has enabled us to 
successfully achieve the goals of improving efficiency in contractor 
operations and reducing contractor-by-contractor cost inequities. Since 
we have achieved these goals, and believe that costs can be controlled, 
we will base each contractor's FY 1996 unit cost on the FY 1995 level, 
adjusted for inflation and for savings achieved as a result of 
increased productivity, and on reduced funding for incremental 
workload.

D. Overall Budget Considerations

    We note that limitations on the FY 1996 budget could require 
across-the-board cost cutting measures. In that case, each regional 
office will determine the amount of budget reduction for its 
contractors.

III. FY 1996 National Medicare Contractor Budget: Data, Standards, 
and Methodology

    Since the submission of the President's FY 1996 Medicare contractor 
budget request to the Congress in February 1995, we have developed and 
issued BPRs to the contractors. These requirements outline the 
statement of work and level of effort that fiscal intermediaries and 
carriers are expected to perform during the upcoming fiscal year in 
each of the functional areas for which they are responsible.
    Our schedule is that draft BPRs are released to the regional 
offices in April, and the final BPRs are released in June 1995. At the 
time of release, each fiscal intermediary and carrier is given the 
individual requirements to be used in preparing their FY 1996 budget 
request. The regional offices will send any additional information that 
is pertinent to the fiscal intermediaries and carriers within their 
region. Fiscal intermediaries and carriers must submit their budget 
requests to us no later than 6 weeks after the issuance of the BPRs.
    After the fiscal intermediaries and carriers review the BPRs, they 
prepare their budget requests. The central office and regional office 
staff review the fiscal intermediary and carrier budget requests as 
they are submitted. The regional office staff negotiates a final and 
mutually-acceptable budget, within the limits of the funding available 
to us, with each fiscal intermediary and carrier. The central office 
prepares a financial operating plan for each regional office that 
provides total regional funding authority for each 

[[Page 46293]]
functional area. The regional offices, in turn, prepare a Notice of 
Budget Approval for each fiscal intermediary and carrier that provides 
a full year budget plan subject to quarterly cash draw limitations.

A. Standards

    The basic statement of work, along with new and special activities 
that fiscal intermediaries and carriers are expected to perform, is 
described in the BPR package. Fiscal intermediaries and carriers are 
expected to perform the work as described in the BPR package and in 
accordance with the standards included in the Contractor Performance 
Evaluation for FY 1996. For consideration in developing their initial 
budget requests, a copy of the draft Contractor Performance Evaluation 
standards will be sent to contractors. Final FY 1996 Contractor 
Performance Evaluation standards will be published in the Federal 
Register.
B. Data

    The following data contain various workload volumes, functional 
costs, and manpower information that are used in developing the 
individual fiscal intermediary and carrier budgets for FY 1996:
     Forms HCFA-1523/1524 (a multipurpose form that serves as 
the Budget Request, Notice of Budget Approval, and Interim Expenditure 
Report).
     Forms HCFA-1523A/1524A (Schedule of Productivity 
Investments and Other).
     Forms HCFA-1523B/1524B (Schedule of Credits, Electronic 
Data Processing, and Overhead).
     Forms HCFA-1523C/1524C (Schedule of Appeals).
     Forms HCFA-1523D/1524D (Schedule of Medicare Secondary 
Payer Costs).
     Forms HCFA-1523E/1524E (Schedule of Medical Review Costs).
     Forms HCFA-1523G/1524G (Schedule of Fraud and Abuse).
     Form HCFA-1525A/1525A (Contractor Audit Settlement 
Report).
     Schedules A, B, & C.
     Provider Payment Profile.
     Schedule of Providers Serviced.
     Medicare Secondary Payer Savings Report.
     Medical Review/Utilization Review Savings Report.
     Form HCFA-2580 (Cost Classification Report).
     Forms HCFA-1565/1566 (Carrier Performance Report/
Intermediary Monthly Workload Report).
     OMB's economic assumptions of 3.2 Percent.
     Savings from prior productivity investments.
     New legislation costs.
     Regional Office recommendations.
     Contract provisions.

C. Methodology

    The Medicare contractor budget is organized around the previously 
listed functional areas that are performed by the fiscal intermediaries 
for Part A and the carriers for Part B. In 1992, we developed a bottom-
line unit cost for each individual contractor. The following narrative 
describes the methodology used to calculate individual line-item costs. 
This methodology will be considered as general reference for 
contractors as they develop their FY 1996 budgets and also provides 
additional explanation in determining how certain costs and savings 
were determined. The regional offices will negotiate with the fiscal 
intermediaries and carriers to resolve any differences within the 
limits of the funding available to us.
1. Bill and Claim Payment
    A statistical forecasting model determines the individual fiscal 
intermediary and carrier workload levels for FY 1996. Using the same 
data, we are also projecting the number of bills or claims a fiscal 
intermediary and carrier may expect to have pending at the end of FY 
1995. We will then combine the FY 1996 receipt estimate with the 
anticipated end of FY 1995 pending level, and subtract the estimated FY 
1996 pending for each fiscal intermediary and carrier to establish a 
processed workload; that is, Estimated FY 1996 receipts + Estimated end 
of FY 1995 pending - Estimated end of FY 1996 pending = Estimated FY 
1996 Processed Workload.
    In order to price individual contractor bill and claim workload, we 
develop a unit cost that is the cost of processing a single bill or 
claim. The individual fiscal intermediary and carrier unit costs for FY 
1996 are calculated from the unit costs in the FY 1995 Notice of Budget 
Approvals. Savings achieved from operating efficiencies also are part 
of the formula employed in computing FY 1996 target unit costs.
2. Reconsiderations (Part A), Reviews (Part B), and Hearings (Parts A 
and B)
    We will allocate funding based on the dollar amount spent (line 2 
of Forms HCFA-1523/1524) in the prior years, adjusted for inflation and 
changes in volume. Specifically, we will adjust the previous year's 
costs for reconsiderations and hearings by the estimated percentage 
change in workload.
    We estimate the individual fiscal intermediary and carrier budget 
allocations for reconsiderations, reviews, and hearings by multiplying 
forecast workloads by the adjusted unit costs.
3. Beneficiary and Provider Inquiries (Part B only)
    To establish a budgeted amount for beneficiary and provider 
inquiries, we increase the prior year's cost by the projected workload 
change. We also consider special conditions unique to specific carriers 
in negotiating the budget. We will use the data to develop a budgeted 
cost for beneficiary and provider inquiries by multiplying forecasted 
processed volume by the unit cost.
4. Provider Payment (Part A only)
    In determining individual fiscal intermediary budgets for 
reimbursement activities, we took into consideration the FY 1995 
budgeted figures, the projected funding for FY 1996, and the projected 
workload based on the workload reported on the Schedule of Providers 
Serviced. The Schedule of Providers Serviced is a listing of all the 
facilities serviced by the fiscal intermediary. The Schedule of 
Providers Serviced is submitted with each initial budget request so 
that a part of the analysis is the comparison of the composition of the 
provider community serviced by the fiscal intermediary and any change 
reported between fiscal years.
5. Provider Audit (Part A only)
    For FY 1996, the provider audit function is divided into three 
major activities: field audits, desk reviews, and settlements. The 
Contractor Auditing and Settlement Report (Form HCFA-1525/1525A) 
provides a breakout of audit activities and costs by type of provider 
and documents the savings incurred as a result of audit activity. Using 
this as a base, we develop the desk review costs by projecting the 
number of providers serviced by the unit cost per desk review 
(developed for the latest Contractor Auditing and Settlement Report for 
FY 1994) to determine the cost of handling the FY 1996 workload at the 
FY 1994 unit cost. We base the settlement costs on the workload 
projected in the fiscal intermediary's budget request, multiplied by 
the unit cost for settlements found in the most recent Contractor 
Auditing and Settlement Report for FY 1994. 

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    The first priority of all audit efforts is the completion of any 
special activities required by legislation. The second priority is that 
all cost reports be reviewed and, to the extent possible, settled.
6. Medicare Secondary Payer
    We will review the estimated workload data, reported backlog data, 
and any other items, for example, proposed Medicare secondary payer 
systems enhancements, to determine Medicare secondary payer funding 
allocations. Each contractor's case mix will be analyzed to adjust for 
specialized workloads such as home health claims or durable medical 
equipment (DME). In FY 1996, we will allocate the budget based on the 
above considerations, adjustments created by shifts in the DME workload 
from all carriers to the four specialty carriers, and other shifts in 
workload that may require adjustments.
7. Medical Review/Utilization Review
    The individual fiscal intermediary and carrier medical review/
utilization review budgets for FY 1996 will be calculated in three 
segments: (1) Prepayment medical review; (2) Postpayment medical review 
activities; and (3) Data analysis and screen development. The BPR 
describes the activities and workload requirements that the fiscal 
intermediaries and carriers are expected to meet. As part of the BPRs, 
we will ask the fiscal intermediaries and carriers to estimate the 
level of funding that will be necessary to meet such requirements. We 
will allocate prepayment and postpayment medical review funding to 
contractors based upon the workload that a fiscal intermediary or 
carrier projects for FY 1996.
8. Participating Physicians/Suppliers (Part B only)
    In determining the individual carrier funding levels for the 
participating physician/supplier program for FY 1996, we considered the 
following factors:
      The number of physicians/suppliers in the carrier's 
service area.
      The carrier's current participation rate.
      The carrier's recent performance in increasing its 
participation rate.
      The statement of work to be performed as outlined in the 
BPRs.
      FY 1995 cost experience.
    Since participating physicians/suppliers are eligible for toll-free 
telephone lines for electronic billing, allowance will be made for 
these expenses. Carriers with lower participation rates will receive 
greater funding for the limiting charge violation monitoring. We have 
discontinued carrier monitoring of the elective surgery disclosure 
requirement. We now require carriers to investigate beneficiary 
complaints on a case-by-case basis.
    We allocate carrier monitoring funds based on the national 
percentage of nonparticipating physicians/suppliers. All carriers will 
receive the same funding amount for reporting participation statistics.
9. Productivity Investments
    We refer to the costs of implementing legislation and new 
initiatives that are designed to improve the effectiveness of Medicare 
program administration as productivity investments. Several allocation 
methodologies will be employed in calculating the productivity 
investment budgets for individual fiscal intermediaries and carriers. 
For those projects involving only single contractors or small groups of 
contractors, we will allocate funds based upon the specifications of 
the particular project. For those projects involving all fiscal 
intermediaries or carriers, if the costs are driven by bill or claim 
volume, we will distribute the funding based upon our workload 
projections for each contractor. Finally, for those projects involving 
all fiscal intermediaries or carriers that require equal effort, 
regardless of the contractor's size, we derive a standard allocation to 
be given to all contractors.
10. Physician/Supplier Education and Training (Part B only)
    Distribution of funds made available to HCFA for physician/supplier 
education and training is based upon the ratio of physicians and 
suppliers in each carrier's service area to the national total of 
physicians and suppliers.
11. Benefits Integrity
    In allocating the FY 1996 benefits integrity budget to individual 
fiscal intermediaries and carriers, we will consider the following:
      The prior year's effectiveness in initiating fraud 
referrals to the OIG.
      Initiating overpayment recoveries when appropriate.
      Prioritizing workload to concentrate on high dollar and 
multi-state fraud.
      The extracted workload and cost data from the Schedule of 
Fraud and Abuse (Forms HCFA-1523G/1524G).
      The Medicare Fraud Unit Workload Report.
      The fraud unit's level of sophistication to determine 
benefits integrity funding allocations.
      The completion of any special activity required by 
legislation which will be an overriding priority.
      The networking costs, which will be determined by the 
personnel cost to support the Medicare Fraud and Abuse Information 
Coordinator, travel costs, and the other expenses needed to conduct 
networking for the area assigned.

IV. Data, Standards, and Methodology Used to Establish the Medicare 
Contractor Budgets for FY 1995

    The October 21, 1994, notice described the budget development 
process in general and gave an overview of how we intended to use the 
contractor budget data, standards, and methodology to establish the FY 
1995 budgets.
    Based on our review of the comments submitted, we are making no 
changes to the proposed data, standards, and methodology as published 
on October 21, 1994. Therefore, we announce provisions of the proposed 
notice as final.

Provisions of the Proposed Notice

    We indicated in the proposed notice that the contractor budget 
would be structured to coincide with the eight functional areas of 
responsibilities performed by fiscal intermediaries for Part A and nine 
functional areas of responsibilities performed by carriers for Part B 
of the Medicare program. We proposed that final funding for the 
contractor functions would be allocated in accordance with the current 
claims processing trends, legislative mandates, administrative 
initiatives, current year performance standards and criteria, and the 
availability of funds appropriated by the Congress. While the 
contractors were preparing their budget requests, we developed 
preliminary budget allocations for the 17 functional areas that were 
based on historical patterns, workload growth, inflation assumptions, 
statistical forecasting reports, and any other available information.
    A key step in the contractor's budget process is the development of 
contractor unit costs for processing Part A bills and Part A claims. As 
in FY 1994, the FY 1995 budget process used a bottom line unit cost 
approach. All budget line items except Provider Audit, Productivity 
Investments, Other, and in FY 1995, Provider Payment, are part of the 
bottom line unit cost calculation. In FY 1995, the complexity index was 
not used as it was in prior years. We believe that the use of the 
complexity index 

[[Page 46295]]
over the last 3 fiscal years has enabled us to successfully achieve the 
goals of improving efficiency in contractor operations and reducing 
contractor-by-contractor cost inequities. Since we have achieved these 
goals, and believe that costs can be controlled, we based each 
contractor's unit cost on their FY 1994 level, adjusted for savings 
achieved due to increased productivity, electronic media claims, and 
reduced funding for incremental workload. Because of reduced funding in 
FY 1995 inflation was not given.
    The Medicare secondary payer function is the first of four 
initiatives we developed as ``Payment Safeguards'' for the Medicare 
program. The focus of the Medicare secondary payer initiative is to 
ensure that the Medicare program pays for covered care only to the 
extent required after payment by the primary insurer. We proposed that 
the standard for determining the amount of Medicare secondary payer 
funding a contractor would receive in FY 1995 would be based on 
workload volumes, required systems changes, and any special projects 
that may be assigned to contractors.
    Based on actuarial analysis, we developed specific savings goals 
for each contractor. The goals were developed on estimates of savings 
to be achieved by contractors for the Medicare secondary payer 
categories of working aged, disabled, workers' compensation, end-stage 
renal disease, and liability or no-fault insurance. After assigning 
goals to contractors, funds were allocated based on the various 
Medicare secondary payer activities a contractor must perform such as 
processing prepayment claims, postpayment claims, inquiries, outreach, 
and hospital reviews.
    We proposed that in FY 1995, the Initial Enrollment Questionnaire 
would be operational. The Initial Enrollment Questionnaire eliminates 
the need for first claim development on approximately 85 percent of new 
enrollees. This initiative improves service to beneficiaries on a 
national basis by providing detailed information on the Medicare 
secondary payer program at the time a beneficiary enrolls in Medicare.
    We proposed to include funding to process the workloads based on 
the IRS/SSA/HCFA data match project. The funds would be allocated on 
the basis of the number of report identification numbers a contractor 
will process. We would review the estimated workload data, reported 
backlog data, and proposed Medicare secondary payer systems 
enhancements to determine Medicare secondary payer funding allocations. 
Each contractor's case mix would be analyzed to adjust for specialized 
workloads such as home health claims or DME.
    In FY 1995, we proposed the budget be allocated based on 
adjustments created by shifts in the DME workload from all carriers to 
the four specialty carriers and by other shifts in workload that may 
require adjustments. The regional offices would negotiate with the 
fiscal intermediaries and carriers to resolve any differences between 
our allocations and their requests within the limits of the funding 
available to us.

Analysis of and Response to Public Comment

    In response to our request for public comment in the October 21, 
1994 notice, we received one timely item of correspondence from a 
health insurance company. Several issues that were raised by the 
commenter are outside the scope of the proposed notice and are not 
addressed in this notice. The proposed notices are intended to address 
only the data, standards, and methodology to be used to establish 
budgets for fiscal intermediaries and carriers for a particular fiscal 
year. Specific instructions on how to implement and monitor certain 
initiatives (for example, beneficiary inquiries, participating 
physician and benefits integrity) are presented through program 
memoranda, manual instructions, BPR, and other means.
    Comment: The commenter was concerned that the proposed notice was 
published after the beginning of FY 1995. The commenter believed that 
untimely publication of the proposed notice denied interested parties 
the opportunity to comment before implementation of the budget.
    Response: In the preparation of the Medicare contractor budget each 
fiscal year, we attempt to publish the proposed and final notices 
timely. However, because of the time involved in reviewing data and 
developing the budget and the lengthy review and clearance process, we 
were not able to publish the proposed and final notices before the 
beginning of the 1995 fiscal year. We regret that we were unable to 
publish the proposed notice timely, but we do not believe that our 
actions substantively penalized or prejudiced the fiscal intermediaries 
or carriers. The BPRs issued to all intermediaries and carriers discuss 
in detail the work, level of effort, and activities we expect them to 
perform in the coming fiscal year. Further, we provide a discussion and 
explanation of the bottom-line unit cost target established for each 
intermediary and carrier at the time the BPRs are issued. The 
intermediaries and carriers have ample time to identify and resolve any 
problems before they finalize their budget requests for the fiscal 
year.
    Comment: The commenter indicated that the use of the complexity 
index in prior years provided a methodologically flawed basis for 
calculating the contractor unit costs in FY 1995.
    Response: We do not agree. As stated in the proposed notice, we 
believe that the complexity index is useful in helping to control 
contractor costs by providing funding on the basis of workload 
complexity. The use of the complexity index over the last 3 fiscal 
years has enabled us to successfully achieve the goals of improving 
efficiency in contractor operations and reducing contractor-by-
contractor cost inequities. Since we have achieved the above goals, we 
believe it is reasonable for FY 1995 contractor unit costs to be based 
on each contractor's FY 1994 level.
    Comment: The commenter expressed concern about the process used to 
develop specific Medicare secondary payer savings goals for each 
contractor for FY 1995 as well as how funding was determined for each 
contractor for Medicare secondary payer activities. The commenter 
believed that Medicare secondary payer funds are allocated after 
assigning Medicare secondary payer savings goals.
    Response: The President's budget estimate that was published in 
February 1994 covers the entire Medicare contractor budget. Although 
the budget estimate mentions Medicare secondary payer savings, it does 
not define specific savings per contractor. Further, we have not 
assigned savings goals to intermediaries and carriers since FY 1993. 
Therefore, Medicare secondary payer funds are not allocated after 
assigning Medicare secondary payer savings goals to contractors.
    The factors that affect Medicare secondary payer funding for 
individual contractors are: the national Medicare secondary payer 
budget; the priority of the Medicare secondary payer activities; 
individual contractor Medicare secondary payer budget requests and 
workload estimates (a contractor's estimated Medicare secondary payer 
workload and budget request is compared to its previous workload and 
expenditures for Medicare secondary payer activities); an analysis of a 
contractor's Medicare secondary payer budget request and that of 
similar contractors with similar workloads (intermediaries and carriers 
are compared separately); the ability of a contractor to justify and 
document its request for additional funding, or for 

[[Page 46296]]
funding we believe is out of its peer grouping; and negotiations 
between the regional offices and the individual contractors.

V. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on documents published for comment, we are not able to 
acknowledge or respond to them individually. We will consider all 
comments we receive by the date specified in the DATES section of this 
notice, and we will respond to the comments in a subsequent published 
notice. To the extent that we receive comments during the comment 
period, we will address those comments in a final notice and, if 
necessary, make revisions to the proposed data, standards, and 
methodology for FY 1996. If no comments are received, we will simply 
adopt the proposed data, standards, and methodology for FY 1996 as 
final, effective October 1, 1995.
    In accordance with the provisions of Executive Order 12866, this 
proposed rule was not reviewed by the Office of Management and Budget.

    Authority: Sections 1816(c)(1) and 1842(c)(1) of the Social 
Security Act (42 U.S.C. 1395h(c)(1) and 1395u(c)(1)).

    (Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program.)

    Dated: August 16, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
[FR Doc. 95-22029 Filed 9-5-95; 8:45 am]
BILLING CODE 4120-01-P