Medicare Claims: Commercial Technology Could Save Billions Lost to
Billing Abuse (Letter Report, 05/05/95, GAO/AIMD-95-135).

Pursuant to a congressional request, GAO reviewed the Health Care
Financing Administration's (HCFA) potential use of commercial technology
to detect Medicare billing errors, focusing on whether: (1) commercial
systems could reduce Medicare costs; and (2) HCFA development approach
is likely to generate savings comparable to that of commercial systems.

GAO found that: (1) commercial code manipulation detection systems could
have reduced Medicare payments by $603 million in 1993 and $640 million
in 1994 and beneficiaries could have saved $134 million in 1993 and $142
million in 1994 in copayments and deductibles; (2) less than 10 percent
of health care providers are responsible for miscoded Medicare claims;
(3) although HCFA is enhancing its ability to detect code manipulations,
its efforts cannot match commercial detection system capabilities or
savings; and (4) commercial systems would be cost-effective, since the
operations costs for 1 year would range between $10 million and $20
million for all Medicare carriers and HCFA could save $600 million per
year.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-95-135
     TITLE:  Medicare Claims: Commercial Technology Could Save Billions 
             Lost to Billing Abuse
      DATE:  05/05/95
   SUBJECT:  Medicare programs
             Program abuses
             Cost effectiveness analysis
             Medical expense claims
             Health insurance cost control
             Payments
             Claims processing
             Health care cost control
             Medical information systems
             Billing procedures
IDENTIFIER:  CHAMPUS
             Civilian Health and Medical Program of the Uniformed 
             Services
             
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Cover
================================================================ COVER


Report to Congressional Requesters

May 1995

MEDICARE CLAIMS - COMMERCIAL
TECHNOLOGY COULD SAVE BILLIONS
LOST TO BILLING ABUSE

GAO/AIMD-95-135

Medicare Claims:  Technology Could Save Billions


Abbreviations
=============================================================== ABBREV

  AIMD - Accounting and Information Management Division
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  CPT - common procedural terminology
  GAO - General Accounting Office
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  SAF - standard analytical file

Letter
=============================================================== LETTER


B-261034

May 5, 1995

The Honorable Pete V.  Domenici
Chairman
The Honorable James Exon
Ranking Minority Member
Committee on the Budget
United States Senate

The Honorable Tom Harkin
Ranking Minority Member
Subcommittee on Labor, Health and Human
 Services, Education, and Related Agencies
Committee on Appropriations
United States Senate

Medicare is the nation's largest health insurer, serving almost one
in every seven Americans.  The Medicare program cost $158 billion
during fiscal year 1994 and is expected to rise to $286 billion by
2000.  Federal outlays for physician services and supplies--one
category of Medicare spending--totaled almost $36 billion in 1994. 
Given the magnitude of these outlays in a time of budgetary
constraint, it is increasingly important to ensure that program funds
are not lost to fraud, waste, or abuse.  As we recently reported, the
Medicare program is plagued by billing abuse due to inadequate
funding for fraud and abuse prevention activities, uneven
implementation of payment controls, and flawed payment policies.\1
Avoiding these preventable losses would help control Medicare costs
without affecting beneficiary services or provider fees. 

The Department of Health and Human Services' (HHS) Health Care
Financing Administration (HCFA)--the agency responsible for
administering Medicare--contracts with 32 insurance companies, called
carriers, to process and pay claims for physician services and
supplies.  A key payment control these contractors use to prevent
losses from fraud, waste, and abuse is claims processing computer
systems that review claims before payment is authorized.  One type of
abuse these systems detect is called code manipulation; this occurs
when providers submit claims containing an inappropriate combination
of billing codes that can, if not detected and corrected, lead to
overpayment for the services provided.  Many private and some public
insurers, following health insurance industry best practices, use
specialized commercial computer systems to detect these billing code
abuses.\2

This report responds to your request that we determine whether HCFA
should use commercial systems to detect code manipulation rather than
continuing to develop its own capabilities in this area.\3 Our
objectives were to (1) determine whether commercially available code
manipulation-detection systems can reduce Medicare costs, (2)
evaluate whether HCFA's development approach is likely to generate
savings comparable to that possible with commercial systems, and (3)
assess whether commercial systems are cost effective. 


--------------------
\1 1995 High-Risk Series:  Medicare Claims (GAO/HR-95-8, February 5,
1995). 

\2 These specialized systems supplement rather than replace claims
processing systems that perform other important functions, such as
determining whether the patient is entitled to Medicare benefits and
calculating deductible and coinsurance amounts. 

\3 This report does not address other types of abuse, such as billing
for inappropriate, unnecessary, or excessive services. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Based on a test in which four commercial firms reprocessed samples of
over 200,000 paid Medicare claims, we estimate that commercial code
manipulation-detection systems could have reduced federal outlays for
physician services and supplies, on average, by $603 million in 1993
and $640 million in 1994.  This represents about 1.8 percent of
Medicare payments for such services and supplies, which is consistent
with the actual savings achieved by private and public insurers that
use commercial systems.  Also, because beneficiaries are responsible
for about 22 percent of the HCFA-authorized payment amount (in the
form of deductibles and copayments), we estimate that they could have
saved $134 million in 1993 and $142 million in 1994.  The test
results also indicate that only a small proportion of providers are
responsible for most of the abuse:  less than 10 percent of providers
in the sample had a miscoded claim. 

HCFA is enhancing its ability to detect code manipulation, however,
our analysis shows that its efforts will not match commercial system
capabilities or savings.  One reason is that HCFA's approach does not
address the types of abuse that accounted for about one-third of the
losses commercial systems identified.  In addition, the types of
abuse that are being addressed will not be fully prevented.  Because
commercial firms specialize in developing computer systems to detect
billing abuse, they are better equipped than individual insurers to
develop effective code manipulation-detection capabilities. 
According to commercial firm officials, the cost to implement and
operate commercial systems for 1 year would range between $10 million
and $20 million for all 32 Medicare carriers. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Authorized in 1965 under title XVIII of the Social Security Act,
Medicare provides health insurance for about 33 million elderly
people and about 4 million others with disabilities or end-stage
renal disease.  In fiscal year 1994, HCFA paid about $100 billion for
inpatient, home health, and skilled nursing care, and about $57
billion for noninstitutional care.  Noninstitutional care covers
physician services and supplies ($36 billion); and services at
hospital outpatient facilities ($13 billion), group practices ($5
billion), independent laboratories ($2 billion), and some home health
agencies ($120 million).  Noninstitutional costs have increased more
rapidly than inpatient hospital costs over the past decade, as health
care services shifted from primarily an inpatient setting to
outpatient and physician's office settings. 


      PHYSICIAN SERVICES AND
      SUPPLIES VULNERABLE TO CODE
      MANIPULATION
---------------------------------------------------------- Letter :2.1

Code manipulation is a problem that is faced by all health insurers. 
Medicare pays health care providers a fee for each covered medical
service provided to eligible beneficiaries.  Each service is
identified using the American Medical Association's uniformly
accepted coding system, called the Physicians' Current Procedural
Terminology (CPT).  Medicare and most private insurers have developed
or license fee schedules that use CPT codes and their accompanying
narrative descriptions as the basis for paying providers. 

However, because the coding system is complicated, providers and
insurers often have difficulty identifying the codes that most
accurately describe the services provided.  The coding system is
difficult to use because it attempts to identify codes for all
accepted medical procedures, including codes to describe minor
procedures that are components of more comprehensive procedures. 
Payment policies add to the difficulty.  For example, the fee for
surgery often includes the cost of related services for the global
service period, that is, for a set number of days before and after
the surgery.  To prevent overpayment in these cases, insurers need to
identify when claims for surgery include codes that represent related
services and reduce the payment accordingly.  It is also difficult
for providers and insurers to maintain proficiency in proper coding
practices because a substantial number of the codes are changed each
year. 

These complexities can inadvertently lead providers to submit
improperly coded claims.  They also make insurers vulnerable to abuse
from providers or billing services that\4 attempt to maximize
reimbursements by intentionally submitting claims containing
inappropriate combinations of codes.  HCFA has implemented and
communicated policies that prohibit common abuses such as unbundling,
global service period violations, duplicate procedures, and
inappropriate use of assistant surgeons.  Table 1 defines these
categories of abuse. 



                           Table 1
           
                     Categories of Abuse

Category            Description
------------------  ----------------------------------------
Unbundling          Billing for two or more codes to
                    describe a procedure when a single, more
                    comprehensive, code exists that
                    accurately describes the procedure

Global service      Billing for a major procedure--such as
period violations   surgery--and related procedures, when
                    the fee for the major procedure already
                    includes the fee for related procedures
                    provided during a predefined time period
                    (the global service period)

Duplicate           Billing for the same procedure twice
procedures          although it was only provided once

Unnecessary         Billing for an assistant surgeon when an
assistant surgeon   assistant was not warranted
------------------------------------------------------------
Unbundling is a common type of abuse.  Figure 1 illustrates how
unbundling can lead to overpayment for an electrocardiogram.  Using
this illustration, a provider would be overpaid if HCFA paid for both
the comprehensive service (93224) and one or more of its component
parts (93225, 93226, or 93227).  Overpayment occurs because the fee
for performing the comprehensive service already includes the value
of the component parts of the service.  A provider would also be
overpaid if HCFA paid for all three individual components instead of
the less expensive comprehensive procedure, an unbundling practice
called fragmentation. 

   Figure 1:  Structure of CPT
   Coding Scheme for
   Electrocardiogram

   (See figure in printed
   edition.)

This illustration can also be used to describe duplicate procedures. 
A provider would be overpaid if HCFA paid twice for this service on
the same day because the fee for the service covers a 24-hour period. 


--------------------
\4 Many providers use commercial firms, called billing services, to
prepare their claims. 


      COMPUTER SYSTEMS BEING USED
      TO DETECT ABUSES
---------------------------------------------------------- Letter :2.2

Due to the large number of claims processed by Medicare
carriers--about 500 million claims for physician services and
supplies in 1993--and the complexity of the coding system and payment
policies, it is not feasible for carrier staff to detect code
manipulation by manually examining claims.  To implement controls to
prevent these abuses, HCFA has directed its carriers to develop
computer programs that (1) detect each type of abuse and (2)
automatically adjust the payment.  HCFA also provides carriers with
the specific code combinations that should not be accepted and
directs carriers to incorporate the list in their computer systems. 

Because insurers have found it difficult to develop and maintain the
specialized capabilities required to detect code manipulation on
their own, commercial firms have developed and now market systems
that focus on detecting this type of abuse.  The complex analysis
needed to quickly and accurately (1) detect the numerous code
combinations that could result in overpayment, and (2) calculate the
proper payment, requires sophisticated computer programs. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To determine whether commercially available code
manipulation-detection systems would save money, we conducted a
controlled test by having four commercial firms reprocess
statistically valid samples of over 200,000 claims.  Each sample
included claims for about 24,000 beneficiaries that had been paid by
Medicare during the first 9 months of 1993, the most recent period
for which data were available at the time of our review.  We
controlled the test by ensuring that each system's capabilities were
limited to detecting billing code abuses using CPT codes that were
valid in 1993.  The systems did not, however, exactly match HCFA's
current code manipulation-detection rules because we wanted to
compare Medicare to private industry practices.  We also verified the
test results by independently reviewing a random sample of claims
each firm identified as having been overpaid.  We confirmed that the
adjustment made to each claim followed the appropriate system rule
and that the rule was supported by medical documentation.  The scope
of our test was limited to the $36 billion portion of the program
that covers the cost of physician services and supplies. 

To evaluate whether HCFA's current development approach would match
commercial system savings, we interviewed responsible HCFA officials
and reviewed documents describing HCFA's approach, scope, and
methodology.  We also reviewed documents describing HCFA's
preliminary results.  We compared these preliminary results to
existing commercial capabilities.  To assess the cost-effectiveness
of commercial systems, we interviewed commercial firm officials who
provided cost estimates.  We validated the reasonableness of each
estimate by comparing it to the cost estimate developed by a federal
agency that recently decided to implement a commercial system.  We
also obtained oral comments on a draft of this report from the Deputy
Directors of HCFA's Bureau of Program Operations and Bureau of Policy
Development.  Their views are summarized in the Agency Comments and
Our Evaluation section of this report.  Our work was performed at
HCFA headquarters in Baltimore, Md.; various Medicare carriers; and
offices of the four commercial firms from February 1994 through April
1995 in accordance with generally accepted government auditing
standards.  Appendix I includes a detailed discussion of our scope
and methodology. 


   COMMERCIAL SYSTEMS COULD SAVE
   OVER
   $600 MILLION A YEAR
------------------------------------------------------------ Letter :4

HCFA could save over $600 million annually by using commercial
systems to detect code manipulation.  Also, beneficiaries would save
over $140 million a year.  Although losses are substantial, less than
10 percent of the providers in our sample had one or more miscoded
claims.  Unbundling and global service period violations made up 93
percent of the potential savings.  According to several private and
public insurers who use commercial systems, our overall savings
estimate is comparable to the savings they have actually achieved
with commercial systems. 


      TEST RESULTS
---------------------------------------------------------- Letter :4.1

Based on a controlled test conducted by four firms, commercial
systems could have reduced costs for physician services and supplies,
on average, by about $452 million during the first 9 months of 1993,
or about 1.8 percent of outlays for those services.\5 Extrapolating
from those results, figure 2 shows that HCFA could have saved about
$603 million in 1993 and about $640 million in 1994.\6 Appendix II
identifies the participating firms. 

   Figure 2:  Estimated Average
   Savings for Medicare Program

   (See figure in printed
   edition.)

The savings estimates for the four firms were reasonably consistent,
ranging between 1.4 and 2.2 percent of outlays.  Medicare
beneficiaries would have saved $100 million during the first 9 months
of 1993, which extrapolates to $134 million in 1993 and $142 million
in 1994. 

Savings would vary from our estimate for several reasons.  First,
savings could be diluted somewhat by the results of provider appeals
to have payment reductions reconsidered.  For example, some
adjustments will be due to coding errors which, when corrected, would
result in payment.  On the other hand, it is likely that commercial
systems would generate more savings than identified through the
narrowly defined scope of our test.  To ensure that savings were not
overstated, we did not test some features of commercial system that
are designed to generate savings.  These features include (1)
ensuring that procedures are appropriate to the beneficiary's age and
sex and (2) analyzing historical claims to identify patterns of
coding abuse. 

Although the potential savings are large, 92 percent of the providers
in our sample billed correctly.  Only 4 percent of the claims
reviewed by the four commercial firms required adjustment.  As shown
in figure 3, fewer than one in 12 providers had one or more claims
adjusted by the commercial systems.  This is an important fact
because, since most providers bill correctly, most would not be
affected by better controls to identify these abuses. 

   Figure 3:  Percentage of
   Providers With Appropriately
   Coded and Miscoded Claims

   (See figure in printed
   edition.)


--------------------
\5 The number of claims included in our sample allows us to be 95
percent confident that actual savings would have been within 5
percent of our estimate. 

\6 We believe that our calendar year estimates reasonably approximate
the extent of losses that occurred because HCFA did not significantly
strengthen its controls during this time.  We also compared 11
different claim characteristics, by carrier, to ensure that claims
processed during the last 3 months of 1993 had the same
characteristics as the claims in our sample.  We found no significant
differences.  This allows us to be confident that seasonal changes,
such as (1) a possible shift in the beneficiary population to the
South or (2) changes in the types of medical services provided during
the last quarter of the year, would not affect the extent of abuse. 


      TYPES OF ABUSE DETECTED
---------------------------------------------------------- Letter :4.2

The commercial systems found abuse in each of the four categories. 
Two categories, unbundling and global service period violations,
accounted for 93 percent of the savings in the claims sample.  Figure
4 shows the proportion of savings in sampled claims by abuse type
from two of the commercial firms.  These were the only firms that
categorized savings by abuse type. 

   Figure 4:  Percentage of
   Savings by Type of Abuse

   (See figure in printed
   edition.)

The following examples, drawn from the sampled claims, illustrate (1)
the numerous and complex ways that procedure codes can be manipulated
to increase reimbursement and (2) the difficulty involved in
detecting abuse.  To protect against these abuses, computer systems
must quickly compare millions of possible code combinations that can
be abused. 

Unbundling includes several related abuses.  Simple unbundling occurs
when a provider charges a comprehensive code as well as one or more
component codes.  Because thousands of comprehensive codes exist with
one or more component codes, numerous combinations of comprehensive
and component codes can be submitted on a claim.  To identify
unbundling, the computer must be able to determine whether each code
submitted is a component of one or more comprehensive codes.  Figure
5 shows how an x-ray examination was unbundled. 

   Figure 5:  Example of
   Unbundling

   (See figure in printed
   edition.)

Fragmentation is a more complex and difficult-to-detect form of
unbundling.  In this case, the provider bills for several component
codes instead of the more comprehensive code, which is normally less
expensive than the sum of the individual components.  These abuses
are difficult to detect because the computer must be able to
recognize which combinations of component procedures equal a
comprehensive procedure and then substitute a new code that was not
included on the original claim.  Figure 6 shows how an x-ray
examination was fragmented. 

   Figure 6:  Example of
   Fragmentation

   (See figure in printed
   edition.)

Mutually exclusive procedures--another form of unbundling--are those
that are either impossible to perform together or, by accepted
clinical practice standards, should not be performed at the same
time.  There are, however, caveats since, in some cases, a physician
may try one approach and in mid-operation decide on another approach. 
The accepted payment practice in such circumstances is to pay for the
more clinically intense procedure, not for both.  To detect these
abuses, the computer must be able to recognize which combinations of
procedures either (1) should not be performed together or (2)
represent alternative approaches to deal with the same problem. 
Figure 7 shows mutually exclusive laboratory tests. 

   Figure 7:  Example of Mutually
   Exclusive Procedures

   (See figure in printed
   edition.)

Global service period violations are possible because the fee for
most surgery includes all related services for a set number of days
before and after the surgery.  Detecting these abuses can be
difficult because the computer must be able to determine which
services are related to the surgery and which are not.  Figure 8
shows a global service period violation. 

   Figure 8:  Example of Global
   Service Period Violation

   (See figure in printed
   edition.)

The difficulty in detecting global surgery violations is compounded
when services are rendered by more than one provider.  HCFA payment
policy allows the fee to be divided, but does not allow the total
payment to exceed the global fee.  Figure 9, shows a case in which,
because an assistant surgeon was involved, the computer must keep
track of charges being made by the assistant to prevent overpayment. 
In addition to the payments made to the assistant, a surgeon who
performed the operation was paid $1,219, which includes the value of
related services during the global period. 

   Figure 9:  Example of a Global
   Service Period Violation

   (See figure in printed
   edition.)

A HCFA official told us that this example does not reflect existing
HCFA payment policy.  According to this official, when an assistant
surgeon is involved, HCFA allows the assistant to be paid for
services that would normally be included in global fee.  However,
even if HCFA policy allows these payments, the key point illustrated
above is that HCFA is losing money by not enforcing global service
fee periods for assistant surgeons, as is done in the private sector. 

Duplicate procedures also exist in several forms, some of which can
be difficult to detect.  Simple or exact duplicate procedures
involves charging for the same procedure twice when it was only
provided once.  Even simple duplicate procedures are not always easy
to detect because it is sometimes appropriate to pay more than once
for the same service on a single day.  Therefore, the computer must
be able to distinguish between codes that should and those that
should not be paid for more than once in a single day.  Figure 10
shows duplicate hospital care services. 

   Figure 10:  Example of
   Duplicate Procedures--Same
   Physician, Same Day, Same Site
   of Care

   (See figure in printed
   edition.)

Similarly, some procedures cover all services rendered regardless of
where the services were provided.  Figure 11 illustrates an example
of duplicate procedures by charging for the same service provided
three times at three different sites of care. 

   Figure 11:  Example of
   Duplicate Procedures--Same
   Physician, Same Day, Different
   Site of Care

   (See figure in printed
   edition.)


      PRIVATE AND PUBLIC INSURERS
      CONFIRM COMMERCIAL SYSTEM
      SAVINGS
---------------------------------------------------------- Letter :4.3

Commercial systems are widely used by private and public insurers. 
Officials we surveyed from both private and public insurers were
satisfied with the benefits--both monetary and nonmonetary--generated
for their companies by using commercial systems to detect code
manipulation.  All of the officials also said that Medicare would
benefit from using commercial systems. 

Almost 200 private insurers now use commercial systems to detect code
manipulation, including 13 of the 20 largest.  In addition, several
public insurers, such as state Medicaid agencies and Medicare
contractors who provide services to beneficiaries enrolled in managed
care plans use commercial systems.\7 The Department of Defenses'
Civilian Health and Medical Program of the Uniformed Services
(CHAMPUS), which provides health insurance to dependents of military
personnel, has also contracted to use a commercial system.  Although
16 of the 32 Medicare carriers use these systems to process claims
for their private businesses, none uses a commercial system for its
Medicare claims because HCFA directs them to implement HCFA-developed
controls. 

We contacted 11 officials from private and public insurers that use
commercial systems.  All of the officials stated they realized
substantial savings, although the benefits varied according to how
each insurer modified the system and how each estimated savings.  Six
insurers stated that their savings ranged from 1 to 2 percent of
claims payments.\8

The CHAMPUS program, which generally follows Medicare payment
restrictions, recently had one commercial firm test a sample of
claims.  The firm identified potential savings totaling about 2
percent--similar to our estimate of potential Medicare savings. 

The officials also cited other benefits of using commercial systems. 
Nine officials stated that commercial systems provided a clinically
sound method for reviewing claims to detect code manipulation.  That
is, because the systems were developed with the support of
physicians, coding determinations are closely tied to CPT code
descriptions, and the input from practicing physicians prevents the
systems from denying claims for strictly administrative reasons that
do not make sense in patient treatment.  Two officials added that the
commercial firms provide good customer service and support in
explaining coding adjustments to providers.  One noted that
standardized explanations helped providers understand why code
determinations were made, reducing the number of appeals.  Four
officials cited the ability to easily modify the system to fit their
unique requirements as another benefit.  Four officials said
commercial systems also provided more consistent application of rules
by eliminating human intervention and judgment. 


--------------------
\7 Medicare contracts separately for services to beneficiaries who
are enrolled in managed care plans.  These "risk" contractors agree
to provide care to beneficiaries at a fixed fee.  Several risk
contractors use commercial code manipulation detection systems to
control their costs. 

\8 The remaining insurers' estimates were not useful as comparisons
because they involved estimates of annual monetary savings or of the
number or percentage of claims that were adjusted. 


   HCFA'S DEVELOPMENT APPROACH
   WILL NOT YIELD COMPARABLE
   SAVINGS
------------------------------------------------------------ Letter :5

HCFA's internal effort to better detect these abuses will not match
commercial systems' capabilities or savings.  A primary reason is
that HCFA is not addressing the types of abuse that accounted for
about one-third of the savings identified by commercial firms.  HCFA
also will not match commercial systems' ability to detect unbundling. 
Commercial firms are better able to develop code
manipulation-detection capabilities than individual insurers because
they profit by excelling in their specialty--helping insurers detect
billing abuses. 


      SCOPE OF HCFA'S INITIATIVE
      LIMITS POTENTIAL BENEFITS
---------------------------------------------------------- Letter :5.1

In August 1994, HCFA awarded a contract to strengthen its ability to
identify unbundling.  HCFA's contractor recently identified about
40,000 codes that should be denied when submitted with a another
code.  After review by medical societies and final approval by HCFA,
the new code combinations will be incorporated in carrier claims
processing computer systems by the end of this October.  However,
HCFA's contract does not address two other types of abuse subject to
significant losses.  Our test results show that significant amounts
of global service period violations and duplicate billing are not
detected by HCFA carriers.  These abuses accounted for about 30
percent of the losses identified in the sample of claims tested by
the two commercial firms that categorized savings by type of abuse. 

Further, HCFA's contract will not fully correct unbundling
deficiencies.  In contrast to the 40,000 inappropriate code
combinations identified by HCFA's contractor, commercial systems are
designed to analyze millions of potential combinations of component
and comprehensive codes.  To estimate the extent to which HCFA's
approach would correct the unbundling deficiencies identified by
commercial systems, we compared HCFA's proposed code combinations to
faulty claims identified by one commercial firm.  First, we
identified all inappropriate code combinations detected for a sample
of 50 beneficiaries.  We then compared these problem codes to HCFA's
proposed new code combinations.  As shown in figure 12, HCFA's
proposed improvements would not have identified any global surgery or
duplicate claims.  In addition, of 57 unbundled codes identified by
the commercial firm, HCFA's proposal would have identified only 13. 

   Figure 12:  Proportion of
   Abuses Correctable Under HCFA
   Effort

   (See figure in printed
   edition.)


      COMMERCIAL FIRMS HAVE AN
      ADVANTAGE
---------------------------------------------------------- Letter :5.2

Because commercial firms focus on developing systems to detect code
manipulation, and do so as a business concern in a competitive
market, they are better equipped to develop effective capabilities
than are individual insurers.  Commercial firms invest significant
full-time resources to identify the relationships among numerous
codes and code combinations that are subject to abuse.  Commercial
firms have multiple physicians on staff and a network of
board-certified consulting physicians in specialty areas to analyze
all codes and code combinations.  Commercial firms also employ
computer professionals to develop efficient systems to detect code
manipulation.  In contrast, HCFA has invested limited resources to
identify the numerous codes that can be abused.  HCFA's contract
called for a single physician and limited support staff to identify
new inappropriate code combinations.  The contract does not call for
any activity to improve computer system capabilities. 

Commercial firms are also better able to maintain up-to-date
capabilities, compared with HCFA's development schedule.  Maintaining
up-to-date abuse-detection capabilities is difficult because a
substantial number of procedure codes change each year.  The firms
received the revised CPT code manual in October 1994 and all provided
their customers with system changes that incorporated new code
combinations this spring.  In contrast, the code combinations
identified by HCFA's contractor will not be implemented by Medicare
until October 1995--6 months behind the commercial systems.  Unless
HCFA changes its contract schedule, subsequent changes to maintain
current code manipulation-detection capabilities will be similarly
delayed. 

Commercial firms are also better positioned to develop product
improvements to counter new types of abuse because they interact with
a large number of insurance clients who demand new capabilities to
control newly detected abuses.  To remain competitive, commercial
firms have an incentive to respond quickly.  They do so by issuing
annual product improvements.  According to one firm, a customer
recently identified a potential new abuse:  an increasing number of
childbirth claims included charges for such physical therapy services
as whirlpool baths and massages.  Because childbirth is covered under
a global service period, related services should not be charged
separately.  Although the firm's system checked services related to
childbirth, it did not check for physical therapy services.  The
firm's officials explained that the customer added physical therapy
services to the system's childbirth checks.  The firm is now
analyzing claims data and medical literature related to physical
therapy and childbirth to determine whether similar checks should be
added to its standard system. 


   COMMERCIAL SYSTEMS ARE
   COST-EFFECTIVE
------------------------------------------------------------ Letter :6

Potential savings of over $600 million a year, compared with
acquisition costs of about $20 million, make commercial systems a
highly cost- effective investment.  The four firms that participated
in our test estimate that the cost to implement and operate a
commercial system for 1 year would range from $10 million to $20
million at all 32 Medicare carriers.  The actual cost would be
subject to formal bids and negotiations with interested firms.  One
reason for the wide range in estimates is uncertainty about the
technical requirements to implement a commercial system with existing
carrier computer systems.  The $20-million estimate anticipates
unknown problems in attempting to implement a commercial system with
the seven different claims processing systems currently used by
Medicare carriers. 

The experience of the CHAMPUS program lends credence to commercial
firm estimates and the caution that unanticipated problems could
occur.  CHAMPUS uses five contractors to process its claims.  CHAMPUS
officials told us that they estimate the annual cost to license and
implement a commercial system at all five contractor locations will
be under $2 million.  They also noted that careful planning is
appropriate because implementation difficulties can occur.  The
CHAMPUS program encountered unanticipated delays implementing a
commercial system.  According to program officials, the agency needed
to change existing claims processing systems and the commercial
system more than expected.  These officials stated, however, that
implementation delays could be avoided by fully analyzing the
required changes when evaluating commercial systems. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

Fraud, waste, and abuse are problems faced by all health insurers. 
HCFA, as the agency responsible for administering the nation's
largest insurance program, could have been a leader in implementing
effective payment controls to prevent losses to billing abuse. 
However, HCFA has not kept pace with private industry's use of
advanced information technology to detect code manipulation, one
common form of abuse.  As a result, over half a billion dollars is
being wasted each year.  HCFA's internal efforts to develop code
manipulation-detection capabilities are limited and will not fully
stem losses from these abuses. 

HCFA could benefit from the experiences of private and other public
insurers who have turned to commercial systems to enhance their
ability to control costs by avoiding payments for faulty claims. 
Such systems provide a more comprehensive ability to protect Medicare
funds.  In an era of reinventing government initiatives, existing
agency perceptions of opportunities and limitations must be
reexamined; bold ways to better accomplish missions and protect
government resources can be identified.  Acquiring commercial systems
represents such bold thinking, and provides an efficient and
cost-effective way to reduce Medicare program losses substantially. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

To better protect Medicare funds from losses due to code
manipulation, we recommend that the Secretary, HHS, direct the
Administrator of HCFA to require Medicare carriers to use a
commercial system to detect code manipulation when processing
Medicare claims for physician services and supplies. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

Senior HCFA officials provided oral comments to our draft report. 
These officials stated that HCFA supports the use of modern
information technology to strengthen payment controls.  They also
stated that HCFA will fully analyze the feasibility of using
commercially available code manipulation-detection software to
process Medicare claims. 

The officials cautioned, however, that HCFA has a responsibility as a
public agency to resolve three important issues before requiring
carriers to implement commercial technology.  First, to ensure that
commercial systems adjust claims appropriately, HCFA needs assurance
that commercial system rules match or can be modified to match
Medicare payment policies.  Second, to ensure that physicians and
other affected parties have an opportunity to provide comments on
Medicare policies, HCFA needs to determine the extent to which
commercial firms would be willing to disclose information about their
systems.  Third, HCFA needs to analyze the cost and technical
feasibility of implementing commercial systems with existing carrier
claims processing systems.  These officials noted that HCFA has
scheduled briefings with each firm to begin addressing these issues. 

We believe these issues can be resolved.  First, commercial firm
officials told us that their systems are designed to be easily
customized to implement different payment policies.  This would also
give HCFA the opportunity to reassess its current payment policies
when analyzing commercial system capabilities.  As noted in this
report, a HCFA official indicated that a global surgery period
overpayment detected by one commercial firm would not be prevented
under current HCFA payment policies.  Second, although commercial
firm officials consider the details of their computer systems to be
proprietary, and not publicly releasable, they told us that within
certain parameters, HCFA could obtain input from affected parties. 
Accordingly, HCFA could continue to release Medicare payment policies
and detailed examples of the types of code combinations that are
inapproprite based on the policies.  Third, as pointed out in this
report, the estimated cost to implement commercial systems is from
$10 million to $20 million.  Regarding technical feasibility,
commercial firm officials told us that their systems are designed to
operate with a wide variety of claims processing systems and to be
easily installed.  This capability is illustrated by the fact that
commercial systems are widely used by private insurers. 

HCFA officials also expressed concern that we did not fairly portray
HCFA efforts to prevent billing abuse, including code manipulation. 
They stated that HCFA has made significant progress in deterring
abusive billing, citing efforts to implement physician payment
reforms, including regulations to standardize payment rules and
strengthen controls to prevent global surgery period violations. 
While we applaud these efforts, our test results show that commercial
systems provide an opportunity to further strengthen HCFA's ability
to deter these abuses. 

We are sending copies of this report to the Secretary of HHS, the
Administrator of HCFA, the Office of Management and Budget, and
Medicare carriers.  Copies also will be made available to others upon
request.  This report was prepared under the direction of Patricia T. 
Taylor, Associate Director, Information Resources Management/Health,
Education, and Human Services.  If you have any questions regarding
this report, you can contact me at (202) 512-6252 or her at (202)
512-5539.  Other major contributors are listed in appendix III. 

Frank W.  Reilly
Director, Information Resources Management/
 Health, Education, and Human Services


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To determine whether commercial systems would save money, we
conducted a controlled test by having four commercial firms reprocess
a sample of claims that Medicare paid during the first 9 months of
1993--the most recent time period for which data were available at
the time of our review.  Although these billing abuses affect the
entire $56 billion part B portion of the Medicare program, the scope
of our test was limited to claims for physician services and
supplies, which cost $36 billion in 1994.  We did not test other
categories of Medicare part B claims because (1) HCFA's claims
history file did not maintain the information needed to detect
billing abuse on outpatient claims and (2) independent laboratory,
prepaid group practice, and home health services account for a
relatively small portion of part B costs. 


      FOUR COMMERCIAL FIRMS AGREED
      TO DEMONSTRATE THEIR
      SYSTEMS' CAPABILITIES
------------------------------------------------------- Appendix I:0.1

To determine whether commercial systems are more capable of detecting
abuse than systems Medicare uses, we arranged for a controlled test
of the capabilities of four off-the-shelf commercial systems that
insurers use to detect abuse.  To identify which commercial firms
market these systems, we (1) reviewed literature describing computer
products used in the claims-processing industry, (2) contacted the
HHS Office of Inspector General, which had analyzed commercial
capabilities, and a Department of Defense health insurance agency,
which was considering a commercial system, (3) talked with exhibitors
attending a national health care antifraud conference, and (4)
contacted companies marketing abuse-detection systems to determine if
they would be willing to participate in our evaluation. 

All four commercial firms we identified agreed to participate.  We
held several discussions with each company to determine its product's
capability and market penetration and arrange the terms of
participation.  Two issues were central to these discussions.  First,
the companies wanted assurances, which we provided, that we would not
disclose proprietary information about their systems.  Second, we
designed the test to avoid a direct or implied comparison of company
capabilities because our objectives did not include identifying which
system would best meet HCFA's needs.  We took several steps to avoid
such a comparison, including providing different claims samples to
each company, controlling the edits that each company applied, and
using average results, rather than each company's results in our
report.  We documented the study requirements and ground rules in a
memorandum of understanding between GAO and each firm.  Also, in
October 1994, we identified a company that recently began marketing a
billing abuse detection product.  This firm briefed us on its system
capabilities but did not participate in the study. 


      WE OBTAINED A VALID SAMPLE
      OF MEDICARE CLAIMS
------------------------------------------------------- Appendix I:0.2

To obtain a valid sample of Medicare claims, we reviewed documents
describing the contents of HCFA's Medicare databases and held several
discussions with responsible HCFA officials about the content and
reliability of the data.  We then selected the data elements required
for the analysis and confirmed that the elements corresponded to the
data needed by each company. 

We selected HCFA's 5-percent standard analytical file (SAF) as the
appropriate source for the sample.  The 5-percent SAF contains final
action claims--reviewed and validated--for a random sample of 5
percent of Medicare beneficiaries.  These claim records are obtained
directly from HCFA's common working file system, the system that
authorizes claims payments.  The 5-percent SAF is also used
extensively by HCFA and public policy researchers, and is the primary
source of data about the Medicare program.  HCFA documents cited
controls and quality assurance testing to ensure data reliability. 
To further verify the reliability of the HCFA data, we analyzed the
controls over the process used to convert data from the common
working file to the 5-percent SAF, and reviewed the results of HCFA
quality assurance assessments. 

The data were generally reliable for our purposes, with one
exception.  The amounts contained in the common working file and
5-percent SAF as being paid did not always reflect the amount that
was actually paid.  This discrepancy exists because, in some cases,
the common working file directed carriers to recalculate the paid
amount but did not record the adjustment.  This problem has been
subsequently corrected.  The paid amounts are important to this
analysis because they represent the amount of federal outlays for the
Medicare program.  After discussing this issue with staff from HCFA's
Office of the Actuary, we decided, and HCFA agreed, that we could
closely approximate the amount of federal outlays by reducing the
allowed amount\1 by 22 percent which, according to HCFA actuaries, is
the amount beneficiaries actually paid in coinsurance and
deductibles. 

We confirmed that HCFA's method of selecting the beneficiary sample
for the 5-percent SAF was statistically valid, obtained a list of all
beneficiaries included in the 5- percent SAF, and selected a
statistically valid random sample of beneficiaries.  We asked HCFA to
extract all applicable claims processed during the first 9 months of
1993 for the sampled beneficiaries, the most recent data available at
the time of our review. 

To convert the data into a format that each company could use, we
worked directly with each company's technical representatives to
understand their data record layout requirements and develop the
programs necessary to convert HCFA's data to the required formats. 
We then divided the claims and converted each group into the format
needed by each company. 


--------------------
\1 The allowed amount is the amount HCFA authorizes the physician to
collect.  Federal outlays--reflected in the paid amount--are
calculated by deducting beneficiary deductible and coinsurance
obligations from the allowed amount. 


      WE CONTROLLED THE TEST AND
      VERIFIED THE RESULTS
------------------------------------------------------- Appendix I:0.3

To ensure that the test was limited to identifying instances of code
manipulation, we reviewed each company's user manuals, system
manuals, and payment rules to understand the basis for each type of
rule and the sequence with which the system executed its analysis. 
We then discussed the research that went into determining each rule
type to ensure, as far as possible, that the test would be limited to
clear-cut instances of code manipulation that did not need manual
intervention in order for a decision to be made.  We divided the rule
types into three categories:  checks that identify inappropriate
payments; other checks that could lead to savings but either involve
manual review or could reflect data entry errors; and checks that
were outside the scope of our review.  Our savings estimates were
limited to the first category--inappropriate payments that could be
automatically detected and adjusted on the basis of the data
contained on the claims.  We also controlled the test by ensuring
that each system's capabilities were limited to detecting abuses
using CPT codes that were valid in 1993.  Because we wanted to
compare Medicare to private industry practices, the systems were not
customized to reflect HCFA payment rules which, in some cases, differ
from those of private insurers. 

To verify the accuracy of the companies' analyses, we selected and
reviewed a random sample of claims that were adjusted by each
company.  We compared the firms' actions with CPT code descriptions
and payment rules used by the system.  We met with company
representatives to review each claim and verify that the adjustment
made was based on a documented rule, supported by medical analysis,
and processed accurately by the system. 


      WE EVALUATED HCFA'S EFFORT
      TO DEVELOP BILLING
      ABUSE-DETECTION CAPABILITIES
------------------------------------------------------- Appendix I:0.4

To evaluate whether HCFA's current development approach would match
commercial system savings, we interviewed responsible HCFA officials
and reviewed documents describing the approach, scope, and
methodology being followed.  We reviewed the contract HCFA awarded to
define additional unbundled code combinations to determine its scope,
methodology, resource requirements, and schedule.  We compared HCFA's
approach with that used by commercial firms.  We also reviewed two
products of the contract that described the improvements expected. 
The draft Medicare unbundling policy and new unbundled code
combinations provided a basis to estimate the extent to which HCFA's
proposed improvements would incorporate capabilities available in
commercial systems.  We also reviewed the contractor's analysis of
existing Medicare computer system limitations and recommendations for
near-term and long-term improvements which explained why Medicare
computer systems would not be able to match commercial system
capabilities. 


      WE ASSESSED THE
      COST-EFFECTIVENESS OF
      COMMERCIAL SYSTEMS
------------------------------------------------------- Appendix I:0.5

To assess the cost-effectiveness of commercial systems, we
interviewed commercial firm officials who provided cost estimates. 
We validated the reasonableness of the estimate by interviewing
officials from the Department of Defense's Civilian Health and
Medical Program of the Uniformed Services (CHAMPUS), which provides
health insurance to dependents of military personnel.  We compared it
to the cost estimate developed by a federal agency which recently
decided to implement a commercial system. 


COMMERCIAL FIRMS THAT PARTICIPATED
IN THIS REVIEW
========================================================== Appendix II



   (See figure in printed
   edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

David B.  Alston, Assistant Director
Theodore P.  Alves, Assignment Manager
M.  Yvonne Sanchez, Computer Specialist
Yvette R.  Banks, Technical Adviser
Michael P.  Fruitman, Communications Analyst
Teresa L.  Jones, Information Processing Specialist

PROGRAM EVALUATION AND METHODOLOGY
DIVISION,
WASHINGTON, D.C. 

Harry M.  Conley III, Assistant Director

CINCINNATI REGIONAL OFFICE

Kenneth B.  Bibb, Evaluator-in-Charge
Julie A.  Schneiberg, Computer Specialist
Arthur D.  Foreman, Technical Assistance Manager

ATLANTA REGIONAL OFFICE

Amanda S.  Cooksey, Staff Evaluator

SAN FRANCISCO REGIONAL OFFICE

Donald R.  Hunts, Senior Evaluator

