Medicare Billing: Commercial System Could Save Hundreds of Millions
Annually (Letter Report, 04/15/1998, GAO/AIMD-98-91).

More than three years after GAO recommended that Medicare acquire
commercial software to detect inappropriate billings--which could save
hundreds of millions of dollars each year--the Health Care Financing
Administration (HCFA) has tested the software and plans to install it.
Incorrect billings, fraudulent and otherwise, cost Medicare about $1.7
billion in improper payments in 1997. This report analyzes HCFA's
progress in testing and acquiring a commercial system for identifying
inappropriate Medicare bills, the consequences of HCFA's initial
management decisions, and its current plans for immediate
implementation. GAO summarized this report in testimony before Congress;
see: Medicare Billing: Commercial System Will Allow HCFA to Save Money,
Combat Fraud and Abuse, by Joel C. Willemssen, Director of Civil
Agencies Information Systems Issues, before the Subcommittee on
Oversight and Investigations, House Committee on Commerce.
GAO/T-AIMD-98-166, May 19 (12 pages).

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

 REPORTNUM:  AIMD-98-91
     TITLE:  Medicare Billing: Commercial System Could Save Hundreds of
	     Millions Annually
      DATE:  04/15/1998
   SUBJECT:  Health care costs
	     Health care programs
	     Medical expense claims
	     Claims processing
	     Commercial products
	     Health insurance cost control
	     Management information systems
IDENTIFIER:  Medicare Program
	     Civilian Health and Medical Program of the Department of
	     Veterans Affairs
	     Civilian Health and Medical Program of the Uniformed
	     Services
	     DOD TRICARE Program
	     Physicians Current Procedural Terminology System
	     CHAMPUS

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GAO/AIMD-98-91

Cover
================================================================ COVER

Report to the Chairmen, Committee on Commerce, House of
Representatives, and the Special Committee on Aging, U.S.  Senate

April 1998

MEDICARE BILLING - COMMERCIAL
SYSTEM COULD SAVE HUNDREDS OF
MILLIONS ANNUALLY

GAO/AIMD-98-91

Medicare Billing

(511227)

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

  CCI - Correct Coding Initiative
  CHAMPUS - Civilian Health and Medical Program of the Uniform
     Services
  CHAMPVA - Civilian Health and Medical Program of the Department of
     Veterans Affairs
  CPT - Current Procedural Terminology
  EDS - Electronic Data Systems
  HBOC - HBO & Company
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  OMB - Office of Management and Budget
  TRICARE - Formerly the Civilian Health and Medical Program of the
     Uniform Services

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

B-277959

April 15, 1998

The Honorable Tom Bliley
Chairman, Committee on Commerce
House of Representatives

The Honorable Charles E.  Grassley
Chairman, Special Committee on Aging
United States Senate

During fiscal year 1997, Medicare reported it paid about $207 billion
in health care benefits for 39 million beneficiaries.  Of these
payments, about $44 billion was for physicians' services.  Physicians
use about 7,000 procedure codes to bill Medicare for payment; these
codes are updated annually to reflect changes in medical practice.
Because of the large number of claims and the complexity of the
uniformly accepted coding system, automated claims auditing systems
are necessary to help determine if the claims are appropriate.

In 1991, the Inspector General of the Department of Health and Human
Services (HHS) reported that commercially available claims auditing
systems could save $12 million annually at one Medicare processing
site alone.\1 Similarly, in 1995 we reported that, nationally, such
systems could save over $600 million annually by helping Medicare
avoid paying inappropriate claims.\2

Initially, the Health Care Financing Administration (HCFA)--the
agency responsible for administering Medicare--chose to develop its
own system rather than to acquire a commercial system.  In February
1991, HCFA directed its carriers to begin developing claims auditing
edits.  In August 1994, it awarded a contract to further develop
these edits, called the correct coding initiative (CCI), which it now
owns and began using in January 1996.

Subsequent to our 1995 report, HCFA awarded a contract on September
30, 1996, to test a commercial claims auditing system in Iowa.  At
your request, we evaluated whether HCFA used an adequate methodology
for testing the commercial claims auditing system for potential
nationwide implementation with its Medicare claims processing
systems.

--------------------
\1 Manipulation of Procedure Codes by Physicians to Maximize
Reimbursement, Office of Inspector General, Department of Health and
Human Services, CIN:  A-03-91-00019, August 30, 1991.

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

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

The test methodology HCFA used in Iowa was consistent with the
approach used by other public health care insurers who have already
implemented a commercial claims auditing system.  HCFA's test covered
15 months and included extensive work, such as modifying the system's
software to comply with Medicare payment policies.  The test showed
that the commercial claims auditing system could save Medicare up to
$465 million annually with claims auditing edits that detect
inappropriately coded claims.\3 These savings are in addition to any
results from CCI which, according to HCFA, saved Medicare about $217
million in 1996.

While HCFA used an adequate methodology to test the system and
demonstrated that commercial claims auditing edits could result in
significant savings, two critical management decisions would have
unnecessarily delayed implementation for several years, resulting in
potentially hundreds of millions of dollars in lost savings annually.
First, HCFA limited its 1996 test contract to the test, and did not
include a provision for implementing the commercial system throughout
the Medicare program.  Thus, to acquire a commercial system for
nationwide implementation, up to an additional year may be required
to complete all activities necessary to plan for and award another
contract.  This could also result in substantial rework to adapt the
system if a different contractor were to win the new contract.
HCFA's administrator told us that HCFA is evaluating legal options
for expediting the contracting process.

Second, in addition to the potential delay from the test contract
limitation, following the test HCFA initially planned to develop its
own claims auditing edits rather than to acquire commercial edits,
such as those used in the test.  Under this plan, HCFA would have
obtained a development contractor that may, or may not, have existing
claims auditing edits.  If the winning contractor did not have
existing edits on which to build, it could take years to complete the
HCFA-owned edits.  Near the conclusion of our review HCFA
representatives told us this approach would have allowed them to make
the edits available to the public and avoid being obligated to one
vendor's commercial edits and related fees.  Public health care
insurers for the Departments of Defense and Veterans Affairs and
several state Medicaid agencies did not take this approach, opting to
lease commercial systems instead of owning the claims auditing edits.
Further, HCFA's approach (1) is not supported based on HCFA's lengthy
CCI development effort and the test findings, (2) may not provide the
magnitude of savings of a commercially available system, and (3)
would further delay implementation of a national claims auditing
system.

In March 1998, after considering our findings and other issues, the
Administrator of HCFA told us that HCFA's plans have changed, and
that the agency planned to begin immediately to acquire commercial
claims auditing edits.

--------------------
\3 Claims auditing edits consist of a database table, which contains
the rules and auditing logic that systems use to identify
inappropriately coded claims.  For example, these edits identify such
inappropriate claims as mutually exclusive procedures.

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

Medicare, authorized in 1965 under Title XVIII of the Social Security
Act, is a federal health insurance program providing coverage to
individuals 65 years of age and older and to many of the nation's
disabled.  HCFA uses about 70 claims-processing contractors, called
intermediaries and carriers, to administer the Medicare program.
Intermediaries primarily handle part A claims (those submitted by
hospitals, skilled nursing facilities, hospices, and home health
agencies), while carriers handle part B claims (those submitted by
providers, such as physicians, laboratories, equipment suppliers,
outpatient clinics, and other practitioners).

      VOLUMINOUS, COMPLEX BILLING
      CODES CAN CAUSE
      INAPPROPRIATE PAYMENTS
---------------------------------------------------------- Letter :2.1

The use of incorrect billing codes is a problem faced both by public
and private health insurers.  Medicare pays part B providers a fee
for each covered medical service identified by the American Medical
Association's uniformly accepted coding system, called the
physicians' Current Procedural Terminology (CPT).\4

The coding system is complicated, voluminous, and undergoes annual
changes; as a result, physicians and other providers often have
difficulty identifying the codes that most accurately describe the
services provided.  Not only can such complexities lead providers to
inadvertently submit improperly coded claims, in some cases it makes
it easier to deliberately abuse the billing system, resulting in
inappropriate payment.  The examples in table 1 illustrate several
coding categories commonly used in inappropriate ways.

                                Table 1

                   Categories of Inappropriate Coding

Category                      Description
----------------------------  ----------------------------------------
Mutually exclusive            Billing for two or more procedures
                              usually not performed on the same
                              patient on the same day, such as both a
                              closed and an open treatment of a
                              fracture.

Incidental procedure          Billing for both an incidental procedure
                              and a more complex primary procedure,
                              when the incidental procedure requires
                              few additional physician resources or is
                              clinically integral to the performance
                              of the primary procedure, such as
                              control of intraoperative bleeding with
                              a tonsillectomy.

Diagnosis to procedure        Billing for procedures that are
comparison                    unexpected for a given diagnosis, such
                              as a corneal transplant with a diagnosis
                              of pneumonia.
----------------------------------------------------------------------

--------------------
\4 Medicare's complete coding system is known as the HCFA Common
Procedural Coding System, or HCPCS, and in addition to CPT includes
codes for medical equipment, prescription drugs, and other services
and items not covered by CPT.

      COMMERCIAL SYSTEM POTENTIAL
      TOOL FOR COMBATING
      INAPPROPRIATE
      BILLING/PAYMENT
---------------------------------------------------------- Letter :2.2

Commercial claims-auditing systems for detecting inappropriate
billing have been available for a number of years; as early as 1991,
commercial firms marketed specialized auditing systems that identify
inappropriately coded claims.  The potential value of such a system
to Medicare has been noted both by the HHS Inspector General (in
1991) and by us (in 1995).  In fact, both the Inspector General and
we noted that such a tool could save the Medicare program hundreds of
millions of dollars annually.

Recognizing its need to address the inappropriate billing problem,
HCFA directed its carriers to begin developing claims auditing edits
in February 1991.  In August 1994, it awarded a contract to further
develop these claims auditing edits, called CCI, which it now owns
and operates.  According to HCFA, the CCI edits helped Medicare save
about $217 million in 1996 by successfully identifying inappropriate
claims.  Nevertheless, inappropriate coding and resulting payments
continue to plague Medicare.  Last summer HHS' Office of Inspector
General reported that about $23 billion of Medicare's fee for service
payments in fiscal year 1996 were improper, and that about $1 billion
of this amount was attributable to incorrect coding by physicians.\5

On September 30, 1996, HCFA initiated action to improve its
capability to detect inappropriate claims and payment.  It awarded a
contract to HBO & Company (HBOC), a vendor marketing a
claims-auditing system, to test the vendor's system in Iowa and
evaluate whether it could be effectively used throughout the Medicare
program.

--------------------
\5 Report on The Financial Statement Audit of The Health Care
Financing Administration For Fiscal Year 1996, Office of Inspector
General, Department of Health and Human Services, A-17-95-00096, July
17, 1997.

   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objective was to determine if HCFA was using an adequate
methodology for testing the commercial claims auditing system in Iowa
for potential implementation with its Medicare claims processing
systems.

To do this, we analyzed documents related to HCFA's test, including
the test contract, test plans and methodologies, test results and
status reports, and task orders.  This analysis included assessing
the limitations of the test contract, size of the test claims
processing sample, representation of users involved with the test,
and information provided to management in its oversight role.  We
also met with HCFA staff responsible for conducting the test to
obtain further insight into HCFA's test methodology.  While we
reviewed the reports of HCFA's estimated savings, we did not
independently validate the reported savings by validating the sample
of paid claims used as the basis for projecting them.  However, the
magnitude of HCFA's estimated savings is in line with our earlier
estimate of potential annual savings from such systems.

We observed operations at the test site in Des Moines, Iowa, and
assessed the carrier officials' role in the test.  We visited HBOC
offices in Malvern, Pennsylvania, and the Plano, Texas, headquarters
of Electronic Data Systems (EDS), the part B system maintainer, into
whose system the claims-auditing system was integrated.  During these
visits, we documented these companies' roles and responsibilities in
testing the system.  Also, in August 1997 at a 3-day conference at
HCFA headquarters, we observed the test team's effectiveness and
objectivity in discussing the progress made to date and in developing
solutions to issues still needing resolution.

We compared the adequacy of HCFA's test methodology with the
methodologies used by other public health care insurers to test and
integrate a commercial claims-auditing system.  We visited offices of
these insurers and analyzed documents describing their test and
integration approach.  Finally, we compared the approach used by
these insurers with HCFA's.  The insurers whose methodologies we
analyzed consisted of the Department of Defense's TRICARE support
office (formerly called the Civilian Health and Medical Program of
the Uniform Services (CHAMPUS)) in Aurora, Colorado; Civilian Health
and Medical Program of the Department of Veterans Affairs (CHAMPVA)
in Denver, Colorado; and the Kansas and Mississippi state Medicaid
agencies in Topeka, Kansas, and Jackson, Mississippi, respectively.

To evaluate HCFA's decisions regarding national implementation of a
commercial claims-auditing system, we reviewed the contract and other
documents related to the test and evaluated their impact on HCFA's
ability to implement a claims-auditing system nationally.  We also
discussed HCFA's rationale for these decisions with senior HCFA
officials.

Finally, to assess HCFA's experience in acquiring and using the
HCFA-owned CCI claims auditing edits, we reviewed the CCI contract
(and related documents).  We discussed this project and its results
with cognizant HCFA officials.  We performed our work from July 1997
through March 1998, in accordance with generally accepted government
auditing standards.  HCFA provided written comments on a draft of
this report.  These comments are presented and evaluated in the
"Agency Comments and Our Evaluation" section of this report, and are
included in appendix I.

   HCFA TEST METHODOLOGY ADEQUATE,
   SIMILAR TO THAT OF OTHER PUBLIC
   HEALTH INSURERS
------------------------------------------------------------ Letter :4

HCFA used a test methodology that was comparable with processes
followed by other public insurers who have successfully tested and
implemented such commercial systems.  HCFA's test showed that
commercial claims auditing edits could achieve significant savings.

Other public insurers--CHAMPVA, TRICARE, and the Kansas and
Mississippi Medicaid offices--each used four key steps to test their
claims-auditing systems prior to implementation.  Specifically, they
(1) performed a detailed comparison of their payment policies with
the system's edits to determine where conflicts existed, (2) modified
the commercial system's edits to comply with their payment policies,
(3) integrated the system into their claims payment systems, and (4)
conducted operational tests to ensure that the integrated systems
properly processed claims.  These insurers' activities were
comprehensive and required significant time to complete.  CHAMPVA
took about 18 months to integrate the commercial system at one claims
processing site.  TRICARE took about 18 months to integrate the
system at two sites.  It allowed about 2 years to implement the
modified system at its nine remaining sites.

HCFA's methodological approach was similar.  From the contract award
on September 30, 1996, through its conclusion on December 29, 1997,
HCFA and contractor staff made significant progress in integrating
the test commercial system at the Iowa site and evaluating its
potential for Medicare use nationwide.  HCFA used two teams to
concentrate separately on the policy evaluation and technical aspects
of the test.

The policy evaluation team consisted of HCFA headquarters individuals
and Kansas City (Missouri) and Dallas regional office staff
knowledgeable of HCFA policies and the CPT billing codes, as well as
individuals representing the Iowa carrier and HBOC.  This team
conducted a detailed comparison of the commercial system's payment
policy manuals with Medicare policy manuals to identify conflicting
edits.  The reviews identified inconsistencies that both increased
and decreased the amount of Medicare payments.  For example, the
commercial system pays for the higher cost procedure of those deemed
mutually exclusive, while Medicare policy dictates paying for the
lower cost procedure.  Conversely, the commercial claims-auditing
system denies certain payments for assistant surgeons, whereas
Medicare policy allows these payments.  These and all other conflicts
identified were provided to the vendor, who modified the system's
edits to be consistent with HCFA policy.

The technical team consisted of staff from HCFA's headquarters and
its Kansas City (Missouri) and Dallas regional offices; HBOC; EDS;
and the Iowa carrier.  This team prepared and carried out three
critical tasks.  First, it developed the design specifications and
related computer code necessary for integrating the commercial system
into the Medicare claims-processing software.  Second, it integrated
the claims auditing system into the Medicare part B claims-processing
system.  Finally, the team conducted numerous tests of the integrated
system to determine its effect on processing times and its ability to
properly process claims.  HCFA management was kept apprised of the
status of the test through biweekly progress reports and frequent
contact with the project management team.

HCFA reported that the edits in this commercial system could save
Medicare up to $465 million annually by identifying inappropriate
claims.  Specifically, the analysis showed that the system's mutually
exclusive and incidental procedure edits could save about $205
million, and the diagnosis-to-procedure edits would save about $260
million.  HCFA's analysis was based on a national sample of paid
claims that had already been processed by the Medicare part B systems
and audited for inappropriate coding with the HCFA-owned CCI edits.
While we reviewed the reports of HCFA's estimated savings, we did not
independently verify the national sample from which these savings
were derived.  However, the magnitude of savings when added to the
savings from CCI, which HCFA reported to be about $217 million in
1996, is in line with our earlier estimate that about $600 million in
annual savings are possible.\6

Test officials also concluded that the claims-processing portion of
the test system's software provides little, if any, added value since
the existing part B claims processing system already handles this
function.  Further, the test showed that integrating the commercial
system's claims-processing function with the existing claims
processing system could significantly increase processing time and
delay payment.

On November 25, 1997, HCFA officials notified the administrator about
the success of the commercial system test.  They reported that the
test showed that the system's claims auditing edits could save
Medicare up to $465 million annually, which is in addition to the
savings provided by the CCI edits.

--------------------
\6 As with any claims editing, some of the denied items will likely
be appealed and paid.  The estimates are not adjusted for this.  In
addition, diagnosis-to-procedure edits have not yet been reviewed for
consistency with Medicare policies.

   MANAGEMENT DECISIONS COULD HAVE
   COST MONTHS AND HUNDREDS OF
   MILLIONS OF DOLLARS
------------------------------------------------------------ Letter :5

Despite the success of the test, two key management decisions, if
left unchanged, could have significantly delayed national
implementation.  One decision was to limit the test contract to the
test, and not include a provision for nationwide implementation, thus
delaying implementation of commercial claims auditing edits into the
Medicare program.  The second--HCFA's initial plan following the test
to award a contract to develop its own edits rather than acquiring
commercial edits such as those used in the test--would have
potentially not only required additional time before implementation,
but could well have resulted in a system that is not as comprehensive
as commercially available edits.

In March 1998, the Administrator of HCFA, told us that HCFA's plans
have changed.  She said HCFA (1) is evaluating legal options for
expediting the contracting process, and (2) now plans to begin
immediately to acquire commercial claims auditing edits.

      LIMITED TEST CONTRACT DELAYS
      NATIONAL IMPLEMENTATION
---------------------------------------------------------- Letter :5.1

HCFA limited the use of the test system to its Iowa testing
site--just one of its 23 Medicare part B claims-processing sites and
did not include a provision for implementation throughout the
Medicare program.  As a result, additional time will be needed to
award another contract to implement either the test system's claims
auditing edits or any other approach throughout the Medicare program.
A contracting official estimated that it could take as much as a year
to award another contract using "full and open" competition--the
contracting method normally used for such implementation.  This would
involve preparing for and issuing a request for proposals, evaluating
the resulting bids, and awarding the contract.  HCFA's estimated
savings of up to $465 million per year demonstrate the costs
associated with delays in implementing such payment controls
nationwide.

Awarding a new contract could result in additional expense to either
develop new edits or for substantial rework to adapt the new system's
edits to HCFA's payment policy if a contractor other than the one
performing the original test wins the competition.  If another
contractor became involved, this would mean that much of the work
HCFA performed during the 15-month test would have to be redone.
Specifically, this would involve evaluating the new claims auditing
edits for conflict with agency payment policy.

Instead of limiting the test contract to the test site, HCFA could
have followed the approach used by TRICARE, which awarded a contract
that provided for a phased, 3-year implementation at its 11
processing sites following successful testing.  In March 1998, HCFA's
administrator told us that HCFA is doing what it can to avoid any
delay resulting from this limited test contract.  She said HCFA is
evaluating legal options to determine if other contracting avenues
are available, which would allow HCFA to expedite national
implementation of commercial claims auditing edits.

      INITIAL HCFA PLAN TO DEVELOP
      OWN CLAIMS AUDITING EDITS
      WOULD HAVE BEEN COSTLY AND
      COULD HAVE BEEN INEFFECTIVE
---------------------------------------------------------- Letter :5.2

In reporting the test results, HCFA representatives recommended that
the HCFA administrator award a contract to develop HCFA-owned
claims-auditing edits, which would supplement CCI, rather than to
acquire these edits commercially.  They provided the following key
reasons for this position.  First, they said this approach could cost
substantially less than commercial edits because (1) HCFA would not
always be required to use the same contractor to keep the edits
updated, (2) it would not be required to pay annual licensing fees,
and (3) the developmental cost would be much less than using
commercial edits.  Second, they said this approach would result in
HCFA-owned claims-auditing edits, which are in the public domain,
allowing HCFA to continue to disclose all policies and coding
combinations to providers--as is currently done with the CCI edits.
They also explained that if a vendor of a commercial claims auditing
system chooses to bid, wins this contract, and agrees to allow its
claims auditing edits to be in the public domain as they are with
CCI, HCFA will allow the vendor to start with its existing edits,
which should shorten the development time.

We do not agree that this approach is the most cost-effective.
First, upgrading the edits by moving from the contractor who develops
the original edits to one unfamiliar with them would not be easy and
could be costly because this is a major task, which is facilitated by
a thorough clinical knowledge of the existing edits.  For example,
the Iowa test system contains millions of edits, which would have to
be compared against annual changes in the CPT codes.  Second, the
annual licensing fees that HCFA would avoid with HCFA-owned edits
would be offset somewhat by the need to pay a contractor with the
clinical expertise offered by commercial vendors to keep the edits
current.  Third, while the commercial edits could cost more than
HCFA-owned ones, this increased cost has been justified by HCFA's
test results, which demonstrated that commercial edits provide
significantly more Medicare savings than HCFA-developed edits.

Regarding HCFA's initial plan to fully disclose the HCFA-owned edits
as they are with CCI, this policy is not mandated by federal law or
explicit Medicare policies, nor is it followed by other public
insurers, and it could result in potential contractors declining to
bid.  In a May 1995 memorandum from HHS to HCFA, the HHS Office of
General Counsel concluded that federal law and regulations do not
preclude HCFA from protecting the proprietary edits and related
computer logic used in commercial claims auditing systems.  Further,
according to HCFA's deputy director, Provider Purchasing and
Administration Group, HCFA has no explicit Medicare policies that
require it to disclose the specific edits used to audit providers'
claims.  Likewise, other public health care insurers, including
CHAMPVA, TRICARE, and the two state Medicaid agencies we visited, do
not have such a policy, and are indeed using commercial
claims-auditing systems without disclosing the details of the edits.
Rather than disclose the edits, these insurers notified providers
that they were implementing the system and provided examples of the
categories of edits that would be used to check for such disparities
as mutually exclusive claims.  This approach protects the proprietary
nature of the commercial claims auditing edits.

Finally, the development time would likely be shortened if a
commercial claims auditing vendor is awarded this contract and uses
its existing edits as a starting point.  However, if the request for
proposals requires that these edits be in the public domain, it is
doubtful that such vendors would bid on this contract using their
already developed edits.  An executive of a vendor that has already
developed a claims auditing system told us that his company would not
enter into such a contractual agreement if HCFA insists on making the
edits public, because this would result in the loss of the
proprietary rights to his company's claims auditing edits.

Although HCFA's then director of the Center for Health Plans and
Providers, recommended that HCFA develop its own edits, he also
acknowledged that this approach could result in a less effective
system than use of a commercial one.  In a November 25, 1997,
memorandum to the administrator assessing the results of the
commercial test, the director stated that there were several "cons"
to developing HCFA-owned edits.  He concluded that "the magnitude of
edits approved for national implementation could potentially be less
[than using commercial edits], depending on the number of edits
developed and reviewed for acceptance prior to the implementation
date." He also stated that "there could be a perception that HCFA is
unwilling to take full advantage of the technology and clinical
expertise offered by [commercial system] vendors."

Furthermore, HCFA's initial plan to develop its own claims-auditing
edits was inconsistent with Office of Management and Budget (OMB)
policy in acquiring information resources.  OMB Circular A-130,
8b(5)(b) states that in acquiring information resources, agencies
shall "acquire off-the-shelf software from commercial sources, unless
the cost-effectiveness of developing custom software to meet mission
needs is clear and has been documented." HCFA has not demonstrated
that its plan to develop HCFA-owned claims auditing edits is
cost-effective.  A key factor showing otherwise is HCFA's estimate
that every year it delays implementing claims auditing edits of the
caliber of those used in the commercial test system in Iowa, about
$465 million in savings could be lost.

Developing comprehensive HCFA-owned claims auditing edits could take
years, during which time hundreds of millions of dollars could be
lost annually due to incorrectly coded claims.  To illustrate:  HCFA
began developing its CCI database of edits in 1991 and has continued
to improve it over the past 6 years.  While HCFA reported that CCI
identified about $217 million in savings (in the mutually exclusive
and incidental procedure categories) in 1996, CCI did not identify an
additional $205 million in those categories identified by the test
edits nor does it address the diagnosis-to-procedure category, where
the test edits identified an additional $260 million in possible
savings.  Furthermore, HCFA has no assurance that the HCFA-owned
edits would be as effective as available commercial edits.

In March 1998, after considering our findings and other factors, the
Administrator, HCFA told us that she now plans to take an approach
consistent with the test results.  She said she plans to acquire and
implement commercial claims auditing edits.

   CONCLUSIONS
------------------------------------------------------------ Letter :6

HCFA followed an approach in testing and evaluating the commercial
claims auditing system that was consistent with the approach used by
other public health care insurers.  This test showed that using this
system's edits in the Medicare program can save up to $465 million
annually.  However, the Medicare program is losing millions each
month that HCFA delays implementing such comprehensive claims
auditing edits.

Two critical HCFA decisions could have unnecessarily delayed
implementation for several years and prevented HCFA from taking full
advantage of the substantial savings offered by this technology.
These decisions--to limit the test contract to the test and not
include a provision for national implementation, and to develop
HCFA's own edits rather than acquiring commercial ones--would have
resulted in costly delays and could have resulted in an inferior
system.  However, we believe these decisions were appropriately
changed by the administrator in March 1998.  The administrator's
current plans for expediting national implementation and acquiring
commercial claims auditing edits should, if successfully implemented,
help HCFA take full advantage of the potential savings demonstrated
by the commercial test.

   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

To implement HCFA's current plans to expeditiously realize dollar
savings in the Medicare program through the use of claims auditing
edits, we recommend that the Administrator, Health Care Financing
Administration

  -- proceed immediately to purchase or lease existing comprehensive
     commercial claims auditing edits and begin a phased national
     implementation, and

  -- require, in any competition, that vendors have comprehensive
     claims auditing edits, which at a minimum address the mutually
     exclusive, incidental procedure, and diagnosis-to-procedure
     categories of inappropriate billing codes.

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

HCFA agreed with our recommendations in this report and stated that
it is proceeding immediately with a two-phased approach for procuring
and implementing commercially developed edits for the Medicare
program.  During the first phase, HCFA plans to immediately implement
procedure-to-procedure edits, such as those described in the mutually
exclusive and incidental procedure categories in table 1.  According
to HCFA, the second phase will be used to complete its determination
of the consistency of diagnosis-to-procedure edits with Medicare
coverage policy--which was begun during the test--and then implement
the edits as quickly as possible.  HCFA added that, as part of this
process, it will also consider modifying national coverage policy,
where appropriate, to meet program goals.  It cautioned that the
amount of the projected savings from the commercial test may decrease
once its full analysis is complete.

We are encouraged that HCFA concurs with our recommendations and is
proceeding immediately to take advantage of this commercial claims
auditing tool, which can save Medicare hundreds of millions of
dollars annually.  HCFA's comments and our detailed evaluation of
them are in appendix I.

---------------------------------------------------------- Letter :8.1

As agreed with your offices, unless you publicly announce its
contents earlier, we will not distribute this report until 30 days
from the date of this letter.  At that time, we will send copies to
the Secretary of Health and Human Services; the Administrator, Health
Care Financing Administration; the Director, Office of Management and
Budget; the Ranking Minority Members of the House Committee on
Commerce and the Senate Special Committee on Aging; and other
interested congressional committees.  We will also make copies
available to others upon request.

If you have any questions, please call me at (202) 512-6253, or Mark
Heatwole, Assistant Director, at (202) 512-6203.  We can also be
reached by e-mail at [email protected] and
[email protected], respectively.  Major contributors to this
report are listed in appendix II.

Joel C.  Willemssen
Director, Civil Agencies Information Systems

(See figure in printed edition.)Appendix I
COMMENTS FROM THE HEALTH CARE
FINANCING ADMINISTRATION
============================================================== Letter

(See figure in printed edition.)

Now on p.  4.

(See figure in printed edition.)

The following are GAO's comments on the Department of Health Care
Financing Administration's letter responding to a draft of this
report.

GAO COMMENTS

1.  We are encouraged that HCFA concurs with our recommendations and
is proceeding immediately to take advantage of this commercial claims
auditing tool.  If effectively implemented, according to test
results, commercial claims auditing edits should save Medicare
hundreds of millions of dollars annually.  Further, we are pleased
that, in addition to determining that the commercial edits are
consistent with HCFA policy, HCFA also plans to evaluate its national
coverage policy to determine if it also needs modification.  This
dual assessment should improve the overall effectiveness of the final
implemented edits.  Finally, although the amount of HCFA's projected
savings may decrease once its full analysis is complete, its
projected annual savings of $465 million is so large that, most
likely, even a reduced figure will still be significant.

2.  As stated, the HHS Office of the Inspector General identified its
findings through a manual review.  The Inspector General's report
findings included examples of improper billing for incidental
procedures.  Thus, commercial systems could have detected some of the
errors identified in the Inspector General's report.  While HCFA is
correct in asserting that other identified problems would not
typically be identified by the type of commercial claims editing
system discussed in this report, other types of automated analytical
claims analyses systems are available to examine profiles of provider
submitted claims for targeting investigations of potential fraud.
See our reports titled Medicare:  Antifraud Technology Offers
Significant Opportunity to Reduce Health Care Fraud (GAO/AIMD-95-77,
Aug.  11, 1995) and Medicare Claims:  Commercial Technology Could
Save Billions Lost to Billing Abuse (GAO/AIMD-95-135, May 5, 1995).

3.  We considered HCFA's suggested wording changes and have
incorporated them as appropriate.

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

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

Mark E.  Heatwole, Assistant Director
Elizabeth A.  Roach, Senior Business Process Analyst
Michael P.  Fruitman, Communications Analyst

KANSAS CITY REGIONAL OFFICE

John B.  Mollet, Senior Evaluator
John G.  Snavely, Staff Evaluator

*** End of document. ***