Medicare: Antifraud Technology Offers Significant Opportunity to Reduce
Health Care Fraud (Letter Report, 08/11/95, GAO/AIMD-95-77).

Pursuant to a congressional request, GAO provided information on how the
Medicare program detects and prevents fraud, focusing on: (1) the tools
Medicare uses, as well as the other available technologies, to combat
fraudulent billing; and (2) rising Medicare fraud in South Florida and
the actions being taken to mitigate the problem.

GAO found that: (1) Medicare's controls against fraud have not kept pace
with the rising number of claims processed; (2) while electronic claims
processing is critical for efficiency, the extreme volume of Medicare
claims requires more innovative controls to curtail fraud; (3) existing
Medicare controls have inherent limitations in detecting attempted
fraud, since they are designed primarily to identify overutilized
services; (4) there are new antifraud systems available to private
insurers which recognize patterns in paid claims data and identify
fraudulent relationships; (5) it is believed that these systems may be
cost beneficial in combatting emerging types of fraud; and (6) South
Florida has been victimized by new types of fraud, resulting in the
Health Care Financing Administration's (HCFA) formation of an
interagency workgroup to identify specific problems and coordinate
enforcement actions.

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

 REPORTNUM:  AIMD-95-77
     TITLE:  Medicare: Antifraud Technology Offers Significant 
             Opportunity to Reduce Health Care Fraud
      DATE:  08/11/95
   SUBJECT:  Medicare programs
             Fraud
             Program abuses
             Claims processing
             Medical information systems
             Medical expense claims
             Cost effectiveness analysis
             Health insurance
             Billing procedures
             Overpayments
IDENTIFIER:  Florida
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Labor, Health
and Human Services, Education, and Related Agencies, Committee on
Appropriations, U.S.  Senate

August 1995

MEDICARE - ANTIFRAUD TECHNOLOGY
OFFERS SIGNIFICANT OPPORTUNITY TO
REDUCE HEALTH CARE FRAUD

GAO/AIMD-95-77

Antifraud Technology and Medicare


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

  GAO - General Accounting Office
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  MTS - Medicare Transaction System
  OIG - Office of Inspector General
  PBS - Pennsylvania Blue Shield

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


B-260886

August 11, 1995

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

Dear Senator Harkin: 

This report responds to your September 1, 1994, request for
information on existing tools used by the Medicare program to detect
and prevent fraud, and discusses the availability of other
technologies to assist in combatting fraudulent billing.\1 This
evaluation focused on Medicare part B benefits, which cover
physician, supplier, and other outpatient services, provided at a
cost of about $60 billion during 1994.  This portion of the Medicare
program currently constitutes slightly over a third of total Medicare
costs (part A--hospital care--makes up the rest) and is expected to
become an increasingly larger share. 

In addition, this report addresses your request for information on
Medicare fraud being perpetrated in South Florida and actions being
taken to mitigate this problem.  It also complements our recently
issued report on abusive Medicare billing practices and existing
information technology to help avoid the payment of abusive claims.\2

Currently, no reliable estimate of the cost of fraud to the Medicare
program exists; however, health care experts have estimated that as
much as 10 percent of national health care spending is attributable
to waste, fraud, and abuse.  Although the Department of Health and
Human Service's (HHS) Health Care Financing Administration (HCFA),
which manages the Medicare program, has acted to reduce program
fraud, the program remains vulnerable in this area.  Thus, we added
the Medicare program to our list of high-risk government programs in
1992.\3

HCFA contracts with 32 insurance companies, called carriers, who
processed 623 million Medicare part B claims in 1994.  These carriers
are also responsible for protecting program funds by developing
payment controls and performing other review activities called
payment safeguards.  Medicare fraud units within each carrier are the
focal points for coordinating and referring potential fraud cases to
the HHS Office of Inspector General (OIG). 


--------------------
\1 Abuse also involves actions resulting in inappropriate Medicare
program costs.  However, fraud differs from abuse in that it is an
illegal act that involves obtaining something of value through
willful misrepresentation. 

\2 Medicare Claims:  Commercial Technology Could Save Billions Lost
to Billing Abuse (GAO/AIMD-95-135, May 5, 1995). 

\3 Medicare Claims (GAO/HR-93-6, December 1992).  This information
has been updated in Medicare Claims (GAO/HR-95-8, February 1995). 


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

Medicare's controls against fraud have not kept pace with today's
health care environment in which the number of claims processed--and
those submitted electronically--have risen dramatically.  Processed
Medicare part B claims reached 623 million in 1994, a 32-percent jump
in 4 years.  The percentage processed electronically doubled during
this period, from 36 to 72 percent.  While electronic claims
processing is critical for efficiency, when the volume rises to this
degree, it also increases the need for more innovative controls to
curtail fraud. 

Existing Medicare carriers' controls rely on data from systems that
may identify potential fraud, but were primarily designed for other
purposes, such as identifying services that are not medically
necessary or were overutilized.  Medicare carrier fraud units also
rely heavily on beneficiary complaints to identify discrepancies
between services rendered and those billed.  Each of these controls,
however, have inherent limitations in detecting attempted fraud. 

New antifraud systems are available and used today by private
insurers, some of whom are also Medicare carriers.  This technology
may complement existing--and planned--Medicare systems.  The
principal advantage of these sophisticated systems is their ability
to recognize patterns in paid claims data and thus identify
potentially fraudulent relationships.  While it is too early to fully
document the cost- effectiveness of such systems, several potential
fraud cases have been detected by this new technology, indicating
that these systems can be cost-beneficial in combatting emerging
types of fraud.  Such technology may ultimately be utilized in the
claims-processing environment to delay or even prevent the payment of
questionable claims submitted by suspect providers. 

Florida, with its highly publicized health care fraud issues, may be
a logical place to start expanding Medicare's fraud detection
capabilities with innovative and more imaginative approaches, and new
antifraud technologies.  Although Florida represents 7 percent of the
Medicare beneficiary population, in fiscal year 1994, Florida
accounted for over 20 percent of Medicare part B spending.  In
addition, reports continue to indicate that South Florida in
particular has been victimized by new types of fraud--often by
persons impersonating legitimate health care providers.  In response
to this problem, HCFA formed the interagency South Florida Workgroup,
to coordinate enforcement actions, identify specific problems, and
recommend corrective actions.  This effort has identified several
problems, including attempted fraud due to weaknesses in the provider
enrollment process. 


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

Authorized in 1965 under title XVIII of the Social Security Act,
Medicare pays for health care services and supplies for millions of
beneficiaries,\4 mostly elderly, and provides direct payment to 1
million providers and suppliers of services.  Medicare provides
coverage under two sections:  part A, primarily hospital insurance,
and part B, supplementary insurance.  Part B covers physician
services, outpatient hospital care, medical supplies, and other
health benefits, such as emergency ambulance services.  Medicare part
B generally pays 80 percent of the Medicare-approved amounts, with
beneficiaries responsible for the remaining 20 percent (the
copayment). 

Medicare part B program costs (mainly direct payments to providers)
rose an average of 9 percent per year from fiscal year 1990 through
fiscal year 1994, increasing from $43 billion to $60 billion.  These
costs are expected to almost double over the next 5 years.  Figure 1
depicts actual and projected increases in Medicare part B outlays
from 1990 to 2000. 

   Figure 1:  Medicare Part B
   Outlays, 1990-2000

   (See figure in printed
   edition.)

Note:  We did not independently verify these figures. 

Sources:  Overview of Entitlement Programs, 1994 Green Book,
Committee on Ways and Means, U.S.  House of Representatives, 103rd
Congress, 2nd Session, 1994; and Congressional Budget Office:  The
Economic and Budget Outlook, Fiscal Years 1996-2000, January 1995. 

As part of their contract to process, review, and pay claims for
covered services, Medicare carriers receive funding to perform
payment safeguard activities.  These activities are mainly performed
by claims processing, medical review, and fraud units.  Claims
processing units ensure that Medicare claims are paid properly. 
These units also review claims that are suspended due to prepayment
controls.  Medical review units perform payment safeguard activities
by identifying questionable billing patterns and practices. 
Potential fraud cases identified by either the claims processing or
medical review units are referred to fraud units.  Fraud units are
responsible for examining these referrals, as well as tips and
complaints received from beneficiaries, government agencies, or other
sources, to determine their validity.  Fraud units also forward
potential fraud cases to the HHS OIG, as appropriate, for further
investigation and possible punitive actions, such as fines, exclusion
from the Medicare program, or referral to the Department of Justice
for criminal or civil action. 


--------------------
\4 Medicare insures 36 million people aged 65 and over, and
individuals under 65 who are disabled. 


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

We reviewed HCFA's documentation on Medicare carrier antifraud
responsibilities, functions, workload, and funding.  We met with HCFA
officials at HCFA's headquarters in Baltimore and at the Atlanta
regional office.  We also interviewed all 32 Medicare carrier fraud
unit managers and met with several representatives from their claims
processing and medical review units to learn how potential fraud is
detected and what tools are being used to support this effort.  We
obtained views on health care antifraud activities by meeting with
officials from the HHS OIG and the Department of Justice.  Finally,
we met with representatives of the private sector to obtain
information on antifraud technology. 

Our work was performed from August 1993 through May 1995, in
accordance with generally accepted government auditing standards. 
Details of our scope and methodology are in appendix I.  We requested
written comments on a draft of this report from the Secretary of
Health and Human Services or her designee.  The Inspector General of
the Department of Health and Human Services provided us with written
comments.  These comments are discussed in the Agency Comments and
Our Evaluation section of the report and are reprinted in appendix
II. 


   EXISTING PAYMENT SAFEGUARDS
   DETECT FRAUD BUT HAVE
   LIMITATIONS
------------------------------------------------------------ Letter :4

Over the past several years, HCFA has initiated a number of actions
to increase the efficiency and effectiveness of its controls over
fraud.  Although these controls have been implemented within various
functions throughout the 32 Medicare carriers, they have limitations
that do not address the full spectrum of changes in today's health
care environment. 


      RAPIDLY CHANGING HEALTH CARE
      ENVIRONMENT MAKES FRAUD
      DETECTION MORE DIFFICULT
---------------------------------------------------------- Letter :4.1

The already difficult task of detecting fraud has become a greater
challenge as the number of Medicare part B claims has increased from
468 million in 1990 to 623 million in 1994.  At the same time, the
percentage of claims processed electronically doubled from 36 to 72
percent, with further increases likely.  Figure 2 shows the volume of
Medicare part B claims processed from paper and electronic
submissions from 1990 through 1994. 

   Figure 2:  Medicare Part B
   Claims Submitted on Paper and
   Electronically, 1990-1994

   (See figure in printed
   edition.)

Source:  HCFA. 

The former Secretary of Health and Human Services initiated the
Workgroup for Electronic Data Interchange in 1991 to reduce
administrative costs in the nation's health care system by promoting
electronic claims submission.  HCFA promoted this initiative by
requiring that carriers reimburse providers for electronic claims
more quickly than for paper claims (14 days versus 27 days), thus
encouraging providers to submit more claims electronically.  This is
an important gain, and the increased use of electronic claims
submission should be encouraged; however, this method also increases
the need for more innovative controls to curtail fraud. 

With paper claims, signatures of providers and any obvious
alterations to documents are apparent to claims adjudicators.  In
addition, the same types of claims (for example, by medical
specialty) typically were handled by the same adjudicator. 
Therefore, aberrations could be more easily spotted.  In contrast,
electronic claims submission eliminates human intervention and thus
any opportunity to examine provider signatures or detect any
alterations to claims data. 


      EXISTING MEDICARE ELECTRONIC
      AND MANUAL CONTROLS CAN
      IDENTIFY POTENTIAL FRAUD
---------------------------------------------------------- Letter :4.2

HCFA requires Medicare carriers to implement various manual and
electronic fraud-detection controls, such as prepayment edits,
medical review of overutilized and medically unnecessary procedures,
and review of beneficiary complaints.  Electronic controls within
claims processing systems suspend claims with erroneous or incomplete
data.  These controls include, for example, edits to determine
whether the number and accuracy of digits in a provider's billing
number or beneficiary's identification number are correct.  Such
edits also check for duplicate claims, beneficiary eligibility, and
whether the procedure cited in the claim was possible for the
beneficiary's gender.  Also, the system suspends claims that are
flagged by electronic edits as not meeting certain conditions for
payment.  For example, if foot care is covered only under certain
conditions, claims not meeting these conditions will be suspended
until further review. 

Medical review is another manual and electronic control that can
serve to identify potential fraud.  This function, which HCFA
requires carriers to perform, primarily involves identifying abuse
and overutilization, and preventing payments for medically
unnecessary and noncovered services.  According to HCFA data, in
1994, medical review referrals were among the 23,290 referrals made
to carrier fraud units, and approximately 4,100 of these were
subsequently referred to the HHS OIG.\5 Two kinds of postpayment
medical review exist, with differing emphases.  In the first type,
called focused medical review, each of the 32 carriers examines
national statistics to identify specific types of medical procedure
codes for which the carrier exceeds the national Medicare norm.  By
changing individual carrier payment policies for such procedures and
educating providers to bill correctly, HCFA hopes to discourage the
submission of claims for noncovered or unnecessary services.  In the
second type, called comprehensive medical review, carriers audit
individual providers whose claims appear to demonstrate a pattern of
overutilizing procedures or performing those that are not medically
necessary. 

HCFA required carriers to obtain automated systems to support medical
review functions and identify areas requiring special attention. 
These systems, for example, contain paid-claims data and use such
techniques as trend analysis to profile providers and identify those
who bill disproportionately, causing a carrier to exceed the national
Medicare utilization norm.  These providers are then ranked for
investigation, based on the extent to which they exceed specified
limits, such as the number of services provided.  Further
investigation of these providers may identify cases of unnecessary
medical care or overall aberrant practice patterns compared with
peers within their specialty and locality.  Based on the outcome of
this investigation, the provider may be referred to the fraud unit as
a potential fraud case.  For instance, due to a comprehensive medical
review, a provider identified for billing an excessive and,
therefore, questionable amount of psychotherapy sessions on the same
day was referred to the fraud unit because the carrier's psychiatric
medical consultant determined that it would be impossible to perform
that many procedures in 1 day. 

Beneficiaries also serve as controls over fraud and abuse in the
Medicare program and are considered to be the front-line defense for
referring potential fraud cases to fraud units.  Beneficiaries
receive explanation of Medicare benefits (EOMB) statements that list
charges submitted to Medicare and the amount paid to providers, thus
uniquely positioning beneficiaries to identify payments for medical
services or supplies that were not received or that they believe were
unnecessary.  HCFA encourages beneficiaries to notify carrier fraud
units if they notice such discrepancies and requires carriers to
analyze such complaints for their potential for fraud. 


--------------------
\5 HCFA combines potential fraud referrals from providers, medical
review, and special requests from the OIG or HCFA into one category;
therefore, we could not determine the number of referrals made
specifically by medical review. 


      MEDICARE'S CONTROLS HAVE
      TECHNICAL AND FUNDING
      LIMITATIONS
---------------------------------------------------------- Letter :4.3

While HCFA has implemented Medicare part B controls that may identify
fraud, these controls have technical limitations.  In addition,
per-claim funding for Medicare program safeguard activities declined
by over 20 percent from 1989 through 1993. 

Prepayment electronic edits help ensure that billed services are paid
correctly, but these edits are not specifically designed to detect
indicators of potential fraud.  HCFA has progressively reduced the
percentage of claims that can be suspended and reviewed by the
carrier prior to payment from 20 percent during 1989 to 5 percent in
1994, due to per-claim reductions in safeguard funding. 

Fraud-detection capabilities of medical review are limited since the
systems used for this function usually concentrate on relatively few
variables, such as the total number of services per beneficiary. 
These systems typically do not examine questionable behavior
patterns, including the percentage of visits on Sundays and holidays,
and a percentage of billing outside of the providers' geographic
area.  According to private industry, fraud is difficult to detect in
this manner because individual billing patterns may not reveal
anything meaningful about the overall behavior of a provider.  In
some cases, medical review systems results may be distorted when, for
example, a cancer specialist is classified as an internist and
measured against other internists on the number of laboratory tests
rendered.  Since cancer specialists perform a relatively high number
of laboratory tests, misclassified internists would appear to have
significantly exceeded the normal rates for laboratory tests when
compared to all internists. 

One medical review unit manager stated that another difficulty in
detecting fraud through medical review systems is the risk that the
data from which they evaluate trends may be skewed if the peer group
as a whole is engaging in egregious billing patterns.  Also, as long
as fraud perpetrators stay within the parameters of payment policies
and peer group norms, they may escape detection.  Funding limitations
have also constrained medical review, with HCFA reducing the number
of providers audited from 8 per 1,000 providers in 1992 to 3 per
1,000 in 1995. 

As post-payment safeguards, beneficiary complaints are only effective
if recipients receive an EOMB statement and conscientiously report
apparent discrepancies.  For example, numerous cases have been
alleged or adjudicated in which unscrupulous providers have persuaded
Medicare recipients into accepting services or items in exchange for
their Medicare identification numbers.  These providers then used the
beneficiaries' identification numbers to bill Medicare for other
procedures or services not rendered.  Beyond these limitations, HCFA
data show that fraud units devoted 70 percent of their time
responding to almost 100,000 beneficiary complaints during 1994, and
over 5,000 complaints were referred to the HHS OIG for further
investigation and possible prosecution.  This workload may also
increase as the volume of claims continues to rise, and thus, may
necessitate a reevaluation on how these complaints are handled. 


   SOPHISTICATED NEW TECHNOLOGY
   AVAILABLE TO COMPLEMENT HCFA
   INITIATIVES
------------------------------------------------------------ Letter :5

Commercial vendors have developed specialized antifraud systems that
are much more sophisticated than the electronic controls used by
Medicare carriers.  Although it is too early to fully quantify the
benefits of this new technology, one carrier's experience suggests
that this technology has greater fraud-detection capabilities and can
complement carriers' existing controls against fraud. 


      ANTIFRAUD SYSTEM OFFERS
      OPPORTUNITIES TO IMPROVE
      DETECTION AND PREVENTION OF
      MEDICARE FRAUD
---------------------------------------------------------- Letter :5.1

The antifraud systems recently developed and implemented by the
private sector appear promising in identifying potentially fraudulent
providers.  We identified three vendors involved in developing such
systems which incorporate a wide array of technologies to evaluate
data and identify provider behavior patterns consistent with known
attempts at fraud.  Antifraud systems can formulate preliminary
conclusions about both these patterns and their relative significance
for further investigation.  Although HCFA has recently acknowledged
the importance of antifraud technology, it has not yet formally
directed carriers to obtain it.  Table 1 highlights some of the
technical tools currently being used in antifraud systems. 



                           Table 1
           
              Technical Tools Used in Antifraud
                           Systems

Technical tool      Description
------------------  ----------------------------------------
Artificial          A form of computing used to develop
intelligence        programs that emulate the way humans
                    solve problems, learn from experience,
                    and make reasonable inferences from
                    incomplete information.

Fuzzy logic         A form of logic used in some expert
                    systems and other artificial-
                    intelligence applications that processes
                    data by monitoring very subtle degrees
                    of abnormality for any given behavior.
                    This technology weights factors and
                    measures them collectively to reach
                    certain conclusions and is suitable for
                    detecting potential fraud and abuse
                    because it takes into account many
                    different factors at once. For example,
                    the number or percentage of patient
                    visits to a provider on Sundays and
                    holidays can be combined and weighted
                    with other data, such as the number of
                    duplicate bills submitted. This
                    information is then scored and measured
                    against a peer group score.

Link analysis       A powerful visual tool that allows one
                    to uncover, analyze, and display
                    patterns of interaction among
                    individuals and groups. These patterns
                    are displayed by linking diagrams or
                    two-dimensional shapes that represent an
                    entity (e.g., patients, providers, etc.)
                    with lines to display relationships. For
                    example, one pattern may identify
                    providers who over-refer patients to
                    other providers because of possible
                    kickbacks or collusion between
                    providers.

Neural network      A type of artificial intelligence system
(pattern            intended to simulate the way in which a
recognition)        brain processes information, learns, and
                    remembers. Neural networks learn by
                    comparing new data to what has already
                    been experienced, and can be used to
                    detect hidden patterns in large volumes
                    of data. They can learn characteristics
                    of potentially fraudulent claims and
                    quickly identify claims and providers
                    suspected of fraud. Neural networks can
                    identify, for instance, all providers
                    who have a post office box mailing
                    address, did not pass the usual
                    certification boards, and for whom all
                    patients seen have at least one lab test
                    in common. Neural networks can also
                    automatically learn new characteristics
                    of potentially fraudulent claims,
                    thereby updating their capabilities over
                    time.
------------------------------------------------------------
Sources:  Computer Dictionary 2nd Edition, Microsoft Press, Redmond,
Washington, 1994; and product descriptions from Booz-Allen &
Hamilton, Inc.; Healthcare Information Services Team; and
International Business Machines, Inc. 

In many respects, antifraud technology can complement the current
controls used by carriers.  Antifraud technology allows looking at a
number of variables concurrently to assess the validity of claims and
whether the data display patterns of potential fraud.  In addition,
while medical review systems typically only look at a specific
service, antifraud technology can look at entire episodes of care so
that a service performed in the right context becomes apparent.  For
example, referrals for radiological services would typically
originate with other providers, entail analysis of x-rays by other
practitioners, and involve at least some follow-up treatment of some
beneficiaries.  If a provider continues to bill for radiological
procedures without the full range of expected relationships and
services for the beneficiaries, an antifraud system can monitor this
activity or target the provider for further inquiry.  Once a provider
is suspected of potential fraud, future claims submitted by this
provider may be suspended from claims processing to prevent
additional losses. 

Fraudulent providers must mirror many different behaviors to be
consistent with legitimate providers--both in their prescribing
habits and relationships with other providers-- which makes it more
difficult to avoid detection by this new technology.  For example, to
avoid detection by this technology, a fraudulent provider may have to
ensure that (1) the bills submitted for a patient are for services
consistent with other treatments received by the patient, (2) the
sequence and timing of the patient's Medicare bills makes sense, and
(3) referring providers listed on claims forms are also billing for
that patient's care. 

In addition to HCFA's existing controls, antifraud systems may also
be a valuable component for its planned Medicare Transaction System
(MTS), primarily a claims-processing system that is expected to be in
use about 1999.  According to HCFA's director of operations, MTS will
increase Medicare's ability to detect potential fraud and abuse by
providing a uniform claims format, integrated Medicare part A and B
claims processing, and some standard statistical data analysis
functions.  Although HCFA is reviewing new emerging technologies, it
has not yet determined whether antifraud technology will become part
of MTS or how this technology would be acquired. 


      PRIVATE HEALTH INSURERS, ONE
      MEDICARE CARRIER USING
      LATEST TECHNOLOGY
---------------------------------------------------------- Letter :5.2

Sophisticated, new antifraud technology is being used by several
private health insurers, and early results have been positive. 
Several Medicare carriers--Aetna, CIGNA, and Travelers--have
incorporated antifraud systems for their own private insurance
business.  According to a CIGNA official, its antifraud system has
made fraud detection and investigation faster and easier.  The
assistant vice president of Aetna Health Plans stated that antifraud
systems can yield a significant return on investment. 

One carrier, Pennsylvania Blue Shield (PBS), has acquired an
antifraud system for its Medicare operations.\6 Both identified
potential fraud and actual savings from improper payments not made
showed marked increases.  PBS advised us that since the system's
implementation in April 1994, it has identified over $6 million in
overpayments due to potentially fraudulent claims.  The carrier also
reported that it more than doubled actual savings (from payments not
made to suspicious providers), from over $2 million in 1993 to almost
$5 million in 1994.  This is a principal advantage because once a
fraudulent pattern is identified, prepayment claims suspension for
the suspect provider can be applied to the claims processing system. 
If the suspicion is confirmed, this claims suspension avoids
additional losses to Medicare.  Another benefit PBS associated with
the system is a significant reduction in time needed to develop
potential fraud cases. 

The antifraud system used by PBS allows the carrier with the
opportunity to identify fraudulent patterns of billing behavior. 
Since not all behaviors deserve equal weight in determining potential
fraud, the carrier assigns each pattern a different weight, on the
basis of its judgment and experience.  The antifraud system
identifies providers whose scores fall significantly above those of
their peers in the same medical specialty. 

One potentially fraudulent case identified by PBS' system concerned
an ambulance service--an historically high-risk area for potential
fraud.  The ambulance company scored significantly high in 12 of 18
potentially fraudulent behavior patterns.  PBS' antifraud system
ranked the company particularly high in behavior patterns, such as
percentage of trips out of the area in which the patient lives,
average cost per patient, and other behavior patterns that could
indicate nonhospital transports.  Based on its investigation, PBS
alleged that the company was inflating its Medicare reimbursements by
using a different state identification number than the one for the
state in which it was actually rendering services.  This difference
alone resulted in the company's charging about $70 more for each of
about 23,000 trips, amounting to reimbursement of $1.6 million.  PBS'
fraud unit staff also suspected that almost half of the claims
submitted by the company in a 6-month period were for transports not
covered by Medicare.\7 While payment for many of these claims was
initially denied by the carrier's claims processing system, to make
the claims payable, the provider allegedly modified the patient's
destination to reflect a hospital transport. 

The data generated by the antifraud system allowed the carrier to
immediately refer the case to the HHS OIG for further investigation. 
This case has been accepted by one of the U.S.  attorneys for
Pennsylvania, who is pursuing a criminal investigation.  These
suspicions materialized quickly with this new complex technology,
which combines an analytical tool--fuzzy logic (see table 1)--with
high-performance computing\8 and statistics to identify high-risk
providers within peer groups.  According to the vendor, the cost to
purchase a system similar to the one used by PBS would range from
$315,000 to $400,000, depending on current hardware configuration,
level of customization needed, installation, training, and support. 


--------------------
\6 PBS, which is now referring to its Medicare operations as Xact
Medicare Services, is the largest Medicare part B carrier, having
processed over 74 million claims in 1994. 

\7 Medicare covers ambulance transports to or from a hospital or
skilled nursing facility only. 

\8 High-performance computing refers to the use of advanced computing
technologies, including hardware and software that solve highly
complex, numerically intensive problems quickly. 


   RISING MEDICARE FRAUD IN
   FLORIDA OFFERS OPPORTUNITY FOR
   OPERATIONAL TEST OF ANTIFRAUD
   TECHNOLOGY
------------------------------------------------------------ Letter :6

Despite efforts to halt rising fraud, information from HCFA, law
enforcement agencies, carriers, and health insurance organizations,
indicates that Medicare fraud in Florida has mushroomed out of
control over the past few years and may be costing taxpayers hundreds
of millions of dollars every year.  The South Florida area has been a
particular target of fraud against Medicare.  In response, HCFA
formed the interagency South Florida Workgroup to coordinate the
efforts to stop this fraud.  Antifraud technology, too, might help
considering the complex nature of health care fraud and the many
types of schemes perpetrated against Medicare. 


      FLORIDA'S MEDICARE FRAUD
      SCHEMES
---------------------------------------------------------- Letter :6.1

Florida has been reported to have the highest rate of Medicare fraud
in the nation.  According to its U.S.  attorney, the state has been
particularly victimized by Medicare fraud due to the large percentage
of poor and elderly people in the area.  With only 7 percent of the
Medicare beneficiary population, Florida accounted over 20 percent
(about $12 billion) of total fiscal year 1993 Medicare part B
spending (about $54 billion).  Further, Florida's Medicare carrier
identified about $21 million in overpayments for potential fraudulent
claims during 1994-- about half the total $46 million identified by
carrier fraud units nationwide. 

During a hearing on health care fraud in March 1995, Florida's U.S. 
attorney described Medicare fraud in South Florida as rampant. 
Particular schemes have included (1) offering beneficiaries free
groceries, medical services, or cash in exchange for Medicare
identification numbers that can be used to fraudulently bill the
program, (2) using physicians' names and identification numbers to
submit fraudulent claims, and (3) applying for and obtaining Medicare
physician/supplier identification numbers though not authorized or
licensed as a health care provider. 

One Florida company that allegedly existed just to bill Medicare
without rendering medical services was paid about $2 million during a
5-month period.  By the time this scheme was detected and a court
order obtained to freeze the company's bank account, most of the $2
million had disappeared--as had the company's owner.  Table 2
provides examples of other recent Medicare fraud cases in Florida, as
reported by the Department of Justice in 1994. 



                           Table 2
           
               Examples of Medicare Fraud Cases
               Recently Adjudicated in Florida

Provider type       Description
------------------  ----------------------------------------
Home health         In October 1994, an owner and operator
                    of a home health agency was sentenced to
                    37 months in prison, fined $100,000, and
                    ordered to forfeit real and personal
                    property valued at approximately
                    $750,000. Through his home health
                    agency, the defendant submitted
                    thousands of Medicare claims that
                    falsely stated that licensed, medical
                    doctors ordered health services for
                    Medicare patients. The indictment
                    alleged that the defendant received $1.4
                    million in Medicare reimbursements from
                    1990 through 1993.

Lab services        In September 1994, five defendants were
                    sentenced after pleading guilty to
                    scheming to defraud the Medicare and
                    Medicaid programs out of approximately
                    $4 million. The lead defendant admitted
                    that she routinely purchased Medicare
                    and Medicaid information and often paid
                    people to undergo various tests. She
                    used this information to submit
                    fraudulent claims. Two other defendants
                    admitted that, as diagnostic technicians
                    working for the lead defendant, they
                    performed 98 diagnostic tests on each
                    other to generate additional test
                    results, which were used as a basis for
                    false claims submissions.

Home infusion       Twelve defendants were convicted and
therapy             sentenced for defrauding Medicare of
                    over $14 million from 1989 through 1991.
                    The principal defendants owned and
                    operated eight companies in Miami, which
                    distributed (usually to the home)
                    nutritional supplements to Medicare
                    beneficiaries. However, these
                    supplements are only covered by Medicare
                    if a beneficiary is unable to eat solid
                    foods. Doctors who signed blank
                    prescriptions and door-to-door
                    recruiters who fraudulently obtained
                    Medicare beneficiary numbers in exchange
                    for free liquid nutrients described as
                    "milk" were also convicted.
------------------------------------------------------------
Source:  Department of Justice Health Care Fraud Report, Fiscal Year
1994. 


      HCFA'S SOUTH FLORIDA
      INITIATIVE
---------------------------------------------------------- Letter :6.2

To coordinate the South Florida antifraud effort, in September 1994,
HCFA formed the South Florida Workgroup.  The workgroup has
undertaken the "South Florida Project" to identify specific problems
and recommend corrections.  Participants include Medicare contractors
in Florida, the HHS OIG, the Federal Bureau of Investigation,
Justice, Miami's United States attorney, and the Florida Attorney
General's Medicaid fraud control unit.  The workgroup made
recommendations to the HCFA Administrator this spring. 

One issue addressed by the workgroup concerns a problem identified in
July 1994, in which 335 potentially fraudulent applications for
provider numbers were discovered by chance during a manual review of
pending applications.  If these suspicious applications had been
approved, each provider number would have created additional
opportunities for perpetrators to fraudulently bill Medicare. 
Weaknesses in the provider enrollment process\9 have also contributed
to Medicare's vulnerability to fraud, particularly in Florida. 
HCFA's controls for monitoring the process had been weak; it was,
therefore, easy for fraudulent providers to obtain and retain
credentials that allowed them to be paid by Medicare.  The HCFA task
force has already taken several actions to strengthen the conditions
of enrollment, such as verifying addresses, telephone numbers, and
other information submitted by the applicant. 


--------------------
\9 Medicare and Medicaid:  Opportunities to Save Program Dollars by
Reducing Fraud and Abuse (GAO/T-HEHS-95-110, March 22, 1995). 


      ANTIFRAUD TECHNOLOGY MAY
      BENEFIT FLORIDA'S CARRIER
---------------------------------------------------------- Letter :6.3

The following example illustrates how losses to Medicare fraud can
occur, and how antifraud technology can prevent such losses.  In one
recent and highly publicized case in South Florida, an unemployed
tow-truck driver was charged with using a nonexistent medical
laboratory to cheat Medicare out of more than $300,000 by allegedly
filing 717 false electronic claims in just 2 weeks.  According to
investigators, the suspect was arrested as he tried to withdraw
$200,000 in cash from his "company's" bank account.  If not for the
actions of a suspicious bank teller, investigators say, the suspect
would have disappeared.  An additional $300,000 in electronic claims
from this same individual were in process, but had not yet been paid
at the time of his arrest. 

We discussed this case with several antifraud system vendors, who
confirmed that their technology could have detected this type of
fraud.  According to one company representative, antifraud systems
can identify individuals in this type of scheme if a combination of
behavior patterns is established in the system to evaluate all new
Medicare billers.  For instance, if the patterns included all new
providers having a post office box (in lieu of a street address)
combined with a high number of first-time claims and a large number
of beneficiaries located very long distances from the place of
service, the provider in this example would have matched known
behavior patterns consistent with attempted fraud. 

In its current efforts to combat Medicare fraud in Florida, HCFA
acquired an advanced data query system.  Although the capabilities of
this system are substantial for medical review and reporting
functions, it does not include the capabilities available through
antifraud technology to draw inferences regarding potential fraud. 
The substantial losses attributable to the Florida fraud problem
provide HCFA with an opportunity to test the effectiveness of this
latest antifraud technology in reducing Medicare fraud. 


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

Medicare continues to experience large losses each year due to fraud. 
Existing risks are sharply increased by the continual growth in
Medicare claims--both in number and percentage processed
electronically.  Existing Medicare payment safeguard controls can be
bypassed and apparently do not deter fraudulent activities.  HCFA
should be able to benefit by taking full advantage of the emerging
antifraud technology to better identify and prevent Medicare fraud. 
The number and types of Medicare fraud schemes perpetrated in South
Florida may make that area the best place to test antifraud systems
before nationwide use. 


   RECOMMENDATION
------------------------------------------------------------ Letter :8

To assist the Health Care Financing Administration in identifying
more potential fraud in the Medicare program, we recommend that the
Secretary of Health and Human Services direct the Administrator of
HCFA to develop a plan for implementing antifraud technology.  One
approach would be to monitor the carrier currently using antifraud
technology and immediately begin a pilot or demonstration program
that would enable the agency to quickly see through valuable,
first-hand experience how it can best deploy antifraud technology. 
Such a test could be conducted where the need to reduce fraud is
great, such as in South Florida.  If the results of this test show
that antifraud technology is cost effective and useful in identifying
potential fraud, HCFA should expeditiously expand the use of this
technology nationwide. 


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

In commenting on a draft of this report, HHS agreed that Medicare
payment safeguards could benefit from new technology to identify
fraudulent patterns of behavior.  However, it expressed concerns
about implementing such technology in the Medicare program because it
questions the (1) general applicability of this technology in a
health insurance setting, (2) utility of the technology to Medicare
without substantial modification, and (3) degree to which this
technology has been tested.  HHS did not respond to our
recommendation to develop a plan to implement such technology.  It
stated that it would continue to review antifraud technology for
possible inclusion in its Medicare Transaction System (MTS), now
scheduled for implementation in 1999. 

As noted in our report, these new antifraud technologies are
gradually being adopted by private health insurers.  On several
occasions during our fieldwork, and at our final conference with HCFA
officials, we discussed the use of this technology by Pennsylvania
Blue Shield--the largest Medicare carrier.  In addition, HCFA
officials attended a number of demonstrations of this technology
sponsored by the carrier.  Since we completed our audit work, several
additional private health insurers have contracted for this type of
technology, and we have given HCFA a list of these companies. 

We believe that, as would be the case with almost any system,
customization--along with its costs--may be needed to satisfy
specific program requirements.  If Medicare is to be proactive in
detecting and preventing fraud, it must continually modify its
systems' capabilities to keep pace with new fraud schemes and the
changing health care environment.  While Pennsylvania Blue Shield
noted that certain modifications were necessary to tailor the
system's behavior patterns to fit Medicare's needs, the acquisition
price included the costs for this customization.  According to the
vendor, the cost for a similar system would range from $315,000 to
$400,000, depending on factors such as the numbers and types of
potential fraud scenarios that need to be incorporated into the
software, and a client's particular hardware configuration.  HCFA has
invested in developing fraud behavior profiles for one carrier and,
according to the vendor, this information is available to other
Medicare carriers at no additional cost. 

HHS noted that HCFA is actively reviewing antifraud technology but
stated that the results of its review indicate that more testing is
needed before any judgment on the usefulness of this technology in
detecting Medicare fraud can be made.  Pennsylvania Blue Shield has
reported considerable success with this technology, returning funds
to the Medicare Trust Fund.  The carrier advised HCFA that it
collected over $94,000 in overpayments, and informed us that it
identified over $6 million in potential fraud as a result of cases
identified by its antifraud system since the system's implementation
in April 1994.  Thus, the application of antifraud technology to the
Medicare program appears to be cost-effective.  A strong indication
of its value is that other insurance companies are moving to acquire
similar technology. 

Given the potential for substantial savings of program funds and
commonly accepted best practices in the field of information
resources management that encourage the use of available
off-the-shelf software, we continue to believe that HCFA should
expeditiously expand acquisition and testing of this technology in
the Medicare program.  In an era of escalating health care costs,
rising indicators of fraud, and a new market with several competing
vendors, it appears prudent and practical to acquire such technology,
starting in the higher risk environments, such as Florida. 


---------------------------------------------------------- Letter :9.1

As agreed with your office, unless you publicly announce the contents
of this report earlier, we will not distribute it until 30 days from
the date of this letter.  We will then send copies of this report to
other interested congressional committees; the Secretary of Health
and Human Services; the Administrator of the Health Care Financing
Administration; the Director of the Office of Management and Budget;
and the 32 Medicare carriers.  Copies will also be made available to
others upon request.  Should you have any questions concerning this
report, please contact me at (202) 512-6408.  Other major
contributors to the report are listed in appendix III. 

Sincerely yours,

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


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

To accomplish our objectives, we obtained information on the
antifraud activities of all 32 Medicare part B carrier fraud units. 
We visited the following 10 fraud units and interviewed unit managers
and staff to determine how information technology is being used to
detect and prevent potential Medicare fraud:  Blue Shield (Alabama);
Travelers (Connecticut); Blue Shield (Florida); Aetna (Georgia);
Health Care Service Corporation (Illinois); AdminaStar (Kentucky);
Blue Shield (Maryland); General American Life (Missouri); Blue Shield
(New York); and Blue Shield (Pennsylvania).  In some cases, we also
met with representatives from carriers' claims processing and medical
review units to obtain information on the process for referring
suspected fraud cases to the fraud units.  We also surveyed the
remaining 22 carriers by telephone to determine the types of
technology they use. 

We interviewed HCFA officials from the Bureau of Program Operations
to identify fraud-unit requirements, guidance, and funding, and how
units are evaluated under HCFA's Contractor Performance Evaluation
Program.  We also met with the project manager for the planned
Medicare Transaction System (MTS) to determine whether this system
will include antifraud technology.  To obtain additional information
on health care antifraud activities throughout the government, we met
with officials from the HHS OIG and the Department of Justice, in
Washington, D.C. 

To obtain data on private industry antifraud capabilities, we met
with representatives of Medicare carriers' private insurance business
units in Middletown and East Hartford, Connecticut.  In addition, we
interviewed representatives of the Health Care Insurance Association
of America and the National Health Care Anti-Fraud Association, in
Washington, D.C., to obtain background information on health care
fraud and the programs private insurers use to combat fraud.  We also
met with companies developing specific technology to detect health
care fraud. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
HEALTH AND HUMAN SERVICES
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


GAO COMMENTS

1.  We disagree with HHS' statement that shared systems or claims
processing systems used by some contractors include sophisticated
software designed to provide data necessary to identify fraudulent
claims.  As our report discusses, while these systems have some
capabilities that may identify potential fraud, including suspending
duplicate claims, these systems were primarily designed to process
and pay Medicare claims.  We have also testified and reported on
limitations of these systems compared with private-sector
capabilities.\1

2.  We commend HCFA for coordinating its antifraud efforts in South
Florida.  The amounts recovered and the examples cited in our report
confirm the serious nature of the fraud plaguing the Medicare program
in South Florida.  We believe that the types of fraud schemes
identified lend themselves to the antifraud technology we recommended
be extended to South Florida. 

3.  As discussed in the Agency Comments and Our Evaluation section of
this report, HHS officials were aware of the existence and
application of this type of technology in the health insurance
setting. 

4.  HHS indicates that HCFA is planning to incorporate fraud
detection edits in MTS and has asked for the design of a technology
that will recognize patterns on a prepayment basis.  However, MTS is
not scheduled to be implemented until 1999.  Also, as our report
points out, antifraud technology is available, and current best
practices in information systems development recommend taking a hard
look at commercially available technology, and in fact favor its
acquisition over specific in-house development efforts. 

5.  We have updated our report to reflect current fiscal year 1994
data.  Also, because HCFA combines referrals from providers, medical
review, and special requests from the OIG and HCFA into one category,
HCFA could not provide us with the number of potential fraud
referrals made specifically by medical review or those referrals
subsequently referred to the OIG. 

6.  Discussed in the Agency Comments and Our Evaluation section of
this report. 

7.  We have deleted the statement we attributed to the Director of
the Bureau of Program Operations and clarified that although HCFA is
reviewing emerging technologies, it has not yet determined whether
antifraud technology will be applied to MTS or whether this
technology would be developed in-house or acquired via a commercial
system. 

8.  We have revised the report by deleting the Internal Revenue
Service from the list of participants involved in the South Florida
Workgroup. 


--------------------
\1 Medicare Claims Billing Abuse:  Commercial Software Could Save
Hundreds of Millions Annually (GAO/T-AIMD-95-133, May 5, 1995);
Medicare Claims (GAO/AIMD-95-135). 


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

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

Patricia T.  Taylor, Associate Director
David B.  Alston, Assistant Director
Yvette R.  Banks, Evaluator-in-Charge
Theodore P.  Alves, Technical Adviser
Michael P.  Fruitman, Communications Analyst
Teresa L.  Jones, Information Processing Specialist

ATLANTA REGIONAL OFFICE

Carl L.  Higginbotham, Senior Evaluator
Amanda S.  Cooksey, Staff Evaluator
Maria B.  Warkentine, Staff Evaluator
