Medicare: Recent CMS Reforms Address Carrier Scrutiny of	 
Physicians' Claims for Payment (28-MAY-02, GAO-02-693). 	 
                                                                 
In 1990, GAO designated the Medicare program to be at high-risk  
for waste, fraud, and abuse. More than a decade later, Medicare  
remains on GAO's high-risk list. This report examines Medicare's 
claims review process, which is designed to detect improper	 
billing or payments. GAO found that most physicians who bill	 
Medicare are largely unaffected by carriers' medical reviews,	 
with 90 percent of physician claims going unreviewed in fiscal	 
year 2001. At the three carriers GAO studied, implementation of  
the progressive corrective action initiative has reduced medical 
reviews of claims and has increased carrier education to	 
individual physicians. The carriers in the study generally made  
appropriate payment determinations in examining physician claims 
selected for a medical review. By targeting claims that are more 
likely to have errors, carriers could improve the efficiency of  
their own operations and reduce administrative demands on the	 
small proportion of physician practices with claims selected for 
review. The Centers for Medicare and Medicaid Services (CMS) is  
refocusing its oversight of carrier performance in processing and
reviewing claims. The agency intends to hold carriers accountable
for the overall level of payment errors in all the claims they	 
process, not just the ones they review. Consistent with this	 
approach, CMS is developing a program in which an independent	 
contractor determines the accuracy of claims processed and paid  
by each carrier using quantitative performance measures.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-693 					        
    ACCNO:   A03397						        
  TITLE:     Medicare: Recent CMS Reforms Address Carrier Scrutiny of 
Physicians' Claims for Payment					 
     DATE:   05/28/2002 
  SUBJECT:   Health care costs					 
	     Health care programs				 
	     Health insurance					 
	     Billing procedures 				 
	     Medical expense claims				 
	     Claims processing					 
	     Managed health care				 
	     Comprehensive Error Rate Testing Program		 
	     Medicaid						 
	     Medicare Program					 

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GAO-02-693
     
Report to Congressional Committees

United States General Accounting Office GAO

May 2002 MEDICARE Recent CMS Reforms Address Carrier Scrutiny of Physicians?
Claims for Payment

GAO- 02- 693

Page i GAO- 02- 693 Physician Claims Review Letter 1 Results in Brief 3
Background 5 Few Physician Practices and Few Claims Per Practice Receive
Medical Reviews 7 New CMS Review Policy Has Reduced Physician Repayment

Amounts Due and Increased Focus on Physician Education 9 Independent Review
Confirms Accuracy of Carriers? Payment Decisions 17 Targeting Claims That
Most Warrant Medical Review Could Be Improved 19 CMS Makes Claims Accuracy
New Benchmark for Measuring Carrier Performance 25 Concluding Observations
27 Agency Comments 27 Appendix I Review of Medicare Carrier Medical Review

Decisions 30 Methodology Used to Validate Carrier Medical Review Decisions
30 Results of the DynCorp Review 30 Appendix II Recovery of Overpayments 33

Appendix III Comments from the Centers for Medicare and Medicaid Services 37

Related GAO Products 38

Tables

Table 1: Physician Practices Whose Claims Received Medical Review, Fiscal
Year 2001 8 Table 2: Number of Claims Per Physician Practice Subject to
Prepayment Medical Review, Fiscal Year 2001 8 Table 3: Overpayments Assessed
Physician Practices, Fiscal Years 2000- 2001 11 Contents

Page ii GAO- 02- 693 Physician Claims Review

Table 4: Carriers? Use of Extrapolation in Assessing Overpayments to
Physician Practices, Fiscal Years 2000- 2001 14 Table 5: Carrier Budgets for
Provider Education and Training Related to Medical Review Activities, Fiscal
Years 2001- 2002 15 Table 6: Accuracy of Carrier Medical Review Decisions on
Physician Claims 18 Table 7: Accuracy of Medical Review Decisions on
Physician Claims by Carrier 31 Table 8: Accuracy of Prepayment and
Postpayment Medical Review Decisions on Physician Claims (percent) 32 Table
9: Recovery of Overpayments From Physician Practices, Fiscal Years 2000-
2001 35 Table 10: Requests for Repayment Extensions, Fiscal Years 2000- 2001
36 Figure

Figure 1: Outcomes of Selected Carrier Prepayment Medical Review Edits,
Fiscal Year 2001 22 Abbreviations

CMS Centers for Medicare and Medicaid Services CERT Comprehensive Error Rate
Testing CPE contractor performance evaluation D. O. doctor of osteopathy E&
M evaluation and management HCFA Health Care Financing Administration HHS
Department of Health and Human Services LMRP local medical review policy

M. D. doctor of medicine NHIC National Heritage Insurance Company OIG Office
of Inspector General PCA Progressive Corrective Action PIMR Program
Integrity Management Reporting system PIN provider identification number

PSC program safeguard contractor WPS Wisconsin Physicians Service Insurance
Corporation

Page 1 GAO- 02- 693 Physician Claims Review

May 28, 2002 Congressional Committees In 1990, we designated the Medicare
program to be at risk of considerable losses to waste, fraud, and abuse
because of its vast size, complex structure, and weaknesses in both
financial and program management. More than a decade later, we still
consider Medicare to be a high- risk

program. 1 With annual fee- for- service payments now totaling about $192
billion, Medicare finances health services delivered to elderly and disabled
individuals by hundreds of thousands of providers. The Centers for Medicare
and Medicaid Services (CMS) 2 -the federal agency that manages the Medicare
program- is responsible for ensuring that these funds are spent
appropriately. However, the process of enforcing program payment rules has
raised concerns that the impact of these safeguard

activities has imposed too great a burden on health care providers. 3 With
an interest in striking a balance between appropriate payment controls and
reasonable billing requirements for providers, the Congress required, in the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of
2000, that we study Medicare claims review- designed to detect improper
billing or payment- and related education activities for physicians. 4 While
CMS contractors responsible for processing physicians? Medicare claims-
referred to as carriers- conduct an automated check of all claims submitted,
they select only a sample of claims for medical review. For the purposes of
our study, these are reviews that involve a

detailed examination of claims by clinically trained staff and require that
1 U. S. General Accounting Office, High Risk Series: An Update, GAO- 01- 263
(Washington, D. C.: January 2001). 2 Until June 14, 2001, CMS was known as
the Health Care Financing Administration (HCFA). 3 In June 2001, we
responded to questions raised by the Senate Finance Committee that were
related to these concerns. See U. S. General Accounting Office, Regulatory
Issues for Medicare Providers, GAO- 01- 802R (Washington, D. C.: June 11,
2001). 4 Pub. L. No. 106- 554, App. F, Sec. 437( a), 114 Stat. 2763A- 463,
2763A- 527. Although Medicare considers services from dentists,
optometrists, podiatrists, and chiropractors to be covered physicians?
services (see 42 C. F. R. sect. 410.20( b)( 2002)), as agreed with the
committees of jurisdiction we focused on claims filed by doctors of medicine
(M. D. s) and doctors of osteopathy (D. O. s) only. United States General
Accounting Office Washington, DC 20548

Page 2 GAO- 02- 693 Physician Claims Review

physicians submit medical records to substantiate their claims for payment.
In fiscal year 2001, CMS revised its policy on medical reviews of
physicians? claims under the Progressive Corrective Action (PCA)

initiative, directing carriers to focus their scrutiny on claims where there
is the greatest risk of inappropriate payments. 5 As agreed with the
cognizant congressional committees, we focused our

study on the medical review process and the related implications of PCA?s
implementation. Specifically, we examined (1) the extent to which physicians
have claims that are subjected to medical review, (2) the

implications for physicians of PCA?s strategic approach to overpayment
assessments and education, (3) the accuracy of carriers? decisions to pay or
deny a claim based on medical review, (4) the effectiveness of criteria used
to identify claims for medical review that have potential billing errors,
and (5) how CMS evaluates carrier efforts to reduce physicians? billing
errors.

Our study covers medical review activities, excluding fraud- related cases,
conducted largely in fiscal year 2001. Because national data specific to
medical reviews of physicians? claims were not available, we contacted three
carriers to obtain information that is only maintained at the carrier level.
These carriers are National Heritage Insurance Company (NHIC) in

California, Wisconsin Physicians Service Insurance Corporation (WPS), and
HealthNow NY; they serve six states and process claims for about onequarter
of Medicare?s participating physicians. 6 We interviewed carrier officials
about their selection of claims for medical review, the medical review
process, and related communication with physicians. In addition, we
collected data on physician practices that had claims subjected to medical
review, overpayment assessments, and requests for repayment extensions. We
also interviewed officials at CMS?s central and regional offices and
representatives of physician associations in several states.

5 Department of Health and Human Services, HCFA, Medical Review Progressive
Corrective Action, Program Memorandum Transmittal AB- 00- 72 (Baltimore, MD:
Aug. 7, 2000). 6 These carriers vary by size and geographic region. NHIC?s
California component is a large

insurer with separate facilities serving the southern and northern areas of
the state. In some instances, data for fiscal year 2001 did not include the
entire year for NHIC because its southern office did not assume carrier
operations until 2 months after the fiscal year had begun. Prior to December
2000, another carrier conducted claims review for southern California. WPS,
also a large insurer, has separate facilities that operate in four states
(Wisconsin, Illinois, Michigan, and Minnesota). The Minnesota office was the
most recent addition, joining WPS in September 2000. HealthNow NY is a small
insurer that serves providers in upstate New York.

Page 3 GAO- 02- 693 Physician Claims Review

In addition, we contracted with a firm with expertise in Medicare?s medical
review activities to independently assess the accuracy of the three
carriers? medical review decisions. Its findings were discussed with carrier
officials and a consensus was reached on the correct medical review decision
in all but one case. The accuracy of the carrier decision in that case was
decided by the acting deputy director of CMS?s Program Integrity

Group- a physician. (For a detailed description of the validation process,
see app. I.)

Because the study was limited to three carriers, our findings regarding the
frequency and accuracy of claims reviews cannot be generalized to the
universe of carriers. The carriers performed a series of special analyses to
provide data necessary for our study and experienced varying degrees of

difficulty in extracting data from their information systems. Because the
data are maintained in multiple systems and in various formats, some
information was not readily available and could not be included in the
tables we present. We did not verify the accuracy or completeness of the
data provided by the carriers. Also, although part of the study?s mandate,
as agreed with committee staff we did not assess the adequacy of resources
that CMS devotes to physician education regarding the claims review process.
CMS policy changes concerning the focus of physician education have been too
recent to allow for analysis of the sufficiency of related resources. We
performed our work from June 2001 through March

2002 in accordance with generally accepted government auditing standards.

Our review at three carriers indicates that most physicians billing Medicare
are largely unaffected by carriers? medical reviews. In fiscal year 2001, at
least 90 percent of physician practices had no claims subjected to

a medical review. The share of physician practices that had any claims
subject to medical review before payment was 10 percent in states served by
the Wisconsin carrier and a smaller proportion in California and upstate New
York. For the typical practice, the carriers reviewed 2 claims during the
year. One- tenth of 1 percent of physician practices had claims selected

for medical review after they were paid. These reviews typically involved
about 30 to 50 claims.

At our three carriers, implementation of PCA has effectively reduced the
amounts that physicians must repay Medicare based on medical reviews of
their claims, and has increased carrier education to individual physicians.

Under PCA, carriers must limit their use of extrapolation- a process by
which carriers estimate the amount Medicare overpaid a practice by Results
in Brief

Page 4 GAO- 02- 693 Physician Claims Review

projecting the error rate found in a sample of its claims- to those cases
that involve major billing problems. In fiscal year 2001, the carriers in
our study virtually eliminated extrapolation. Following this and other
modifications related to PCA, the highest overpayment amounts assessed
physician practices decreased substantially. In addition, the three carriers
increased direct education and feedback to physicians concerning the results
of medical reviews and proper billing practices so that future

claims would be submitted correctly. With relatively few exceptions, the
carriers in our study made appropriate payment determinations in examining
the physician claims selected for a medical review. Our contractor?s
evaluation of the carriers? medical review decisions found a 96 percent
overall accuracy rate. The accuracy of carriers? decisions to totally deny
payment was even higher, 98 percent. For reviews where the carrier paid a
reduced amount on a physician?s claim, the accuracy of carrier decisions was
somewhat less- 92 percent. Such reductions occurred most often on claims
reviews involving what should have been the appropriate billing level for
physician office visits.

Overall, the small share of inaccurate decisions made by the carrier
resulted in both overpayments and underpayments.

While the three carriers were highly accurate in their payment decisions,
they could improve their selection of claims for medical review by better
identifying claims likely to have been billed incorrectly. Fiscal year 2001
data showed substantial variation in the performance of edits- criteria used
to target specific services for review- that our three carriers

employed to identify medically unnecessary or incorrectly coded physician
services. For the prepayment edits that accounted for the largest number of
claims examined by each of our carriers, denial rates- that is,

the proportion of reviewed claims that were fully or partially denied-
ranged from 5 to 82 percent. By refining their selection criteria to more
consistently target claims likely to have been submitted with errors,
carriers could improve the efficiency of their own operations and reduce
administrative demands on the small proportion of physician practices with
claims selected for review.

CMS is refocusing its oversight of carrier performance in processing and
reviewing claims. Specifically, the agency intends to hold carriers
accountable for the overall level of payment errors in all the claims they

process, not just the ones they review. Consistent with this approach, CMS
is developing a new tool- the Comprehensive Error Rate Testing (CERT)
program- that involves having an independent contractor determine the
accuracy of claims processed and paid by each carrier using quantitative

Page 5 GAO- 02- 693 Physician Claims Review

performance measures. CMS expects CERT to help identify individual carrier
performance problems and track each contractor?s rate of improvement. CERT
benchmarking is expected to be in place by November 2002.

We provided CMS a draft of this report for comment. The agency generally
agreed with our findings. CMS, within the Department of Health and Human
Services (HHS),

provides operational direction and policy guidance for the nationwide
administration of the Medicare program. It contracts with private
organizations- called carriers and fiscal intermediaries- to process and pay
claims from Medicare providers and perform related administrative functions.
Twenty- three carriers nationwide make claims payments for physician
services, which are covered under part B of Medicare. 7 In addition,
carriers are responsible for implementing controls to safeguard

program dollars and providing information services to beneficiaries and
providers. To ensure appropriate payment, they conduct claims reviews that
determine, for example, whether the services physicians have claimed are
covered by Medicare, are reasonable and necessary, and have been billed with
the proper codes.

Carriers employ a variety of review mechanisms. Automated checks, applied to
all claims, are designed to detect missing information, services that do not
correspond to a beneficiary?s diagnosis, or other obvious

errors. They may also be used to determine if a claim meets other specific
requirements, including national or local coverage policies (such as
allowing only one office visit for an eye examination per beneficiary per
year unless medical necessity is documented). 8 Manual reviews by carrier
staff are used when the review of a claim cannot be automated to

7 Part B also covers charges from licensed practitioners, as well as
clinical laboratory and diagnostic services, surgical supplies and durable
medical equipment, and ambulance services. Part A covers hospital and
certain other services. 8 Local coverage rules, known as local medical
review policies (LMRPs), reflect regional

differences in medical practice by specifying the circumstances under which
a carrier will or will not provide Medicare payment for a particular service
and how the service will be coded. According to CMS officials, LMRPs are
carriers? interpretations of Medicare coverage for a particular service that
enhance or clarify national Medicare policy or provide guidance in the
absence of national policy. Because these interpretations may differ, one
carrier might pay for a particular service that would not be paid for by
another carrier. Background

Page 6 GAO- 02- 693 Physician Claims Review

determine if sufficient information has been included to support the claim.
In the most thorough type of manual claims review, a carrier?s clinically
trained personnel perform a medical review, which involves an examination of
the claim along with the patient?s medical record, submitted by the
physician, to determine compliance with all billing requirements.

Typically, carriers conduct medical reviews on claims before they are paid,
by suspending payment pending further examination of the claim. Prepayment
medical reviews help to ensure that a carrier is making appropriate payment
decisions while the claims are processed, rather than

later trying to collect payments made in error. To target such reviews,
carriers develop ?edits?- specific criteria used to identify services that
the carrier determines to have a high probability of being billed in error.
Carriers develop these edits based on data analyses that include comparisons
of local and national billing patterns to identify services billed locally
at substantially higher rates than the national norm. 9 Carriers may also
develop edits for prepayment medical review based on other factors, such as
CMS directives or individual physicians or group practices the carrier has
flagged for review based on their billing histories. Before putting edits
into effect, CMS expects the carriers to conduct targeted medical reviews on
a small sample of claims in order to validate that the billing problem
identified by the carrier?s data analysis or other sources does actually
exist.

In addition to prepayment medical reviews, carriers conduct some medical
reviews after claims are paid. Postpayment reviews determine if claims were
paid in error and the amounts that may need to be returned to the Medicare
program. They focus on the claims of individual physicians or group
practices that have atypical billing patterns as determined by data
analysis. Such analyses may include comparisons of paid claims for

particular services to identify physicians who routinely billed at rates
higher than their peers. Carriers may also select claims for postpayment
review based on other factors, such as information derived from prepayment
reviews, referrals from other carrier units, and complaints from
beneficiaries. In rare cases, postpayment reviews may result in

referrals to carrier fraud units. 9 CMS maintains reports containing
national averages for the billing of specific services. Billing data are
also available by physician specialty, locality, and other categories.

Page 7 GAO- 02- 693 Physician Claims Review

Each year, as part of their budget negotiations with CMS, carriers develop
medical review strategies that include workload goals for conducting medical
reviews. CMS provides each carrier with an overall budget for

claims review. The carriers then submit for CMS approval their workload
goals for specific activities, such as the number of prepayment and
postpayment medical reviews they plan to conduct, along with proposed
budgets and staff allocations across these activities. In addition, the
carriers submit budget proposals for provider education and training related
to issues identified in medical review. CMS requires the carriers to
reassess the allocation of these resources among review and educational
activities during the course of the year and, with CMS approval, to shift
resources as appropriate to deal with changing circumstances.

In estimating the prevalence of medical reviews, data from the three
carriers in our study show that more than 90 percent of physician practices-
including individual physicians, groups, and clinics- did not have any of
their claims selected for medical review in fiscal year 2001,

and for those that did, relatively few claims were subject to review. A
small proportion of physician practices served by the three carriers had any
claims medically reviewed during fiscal year 2001. Table 1 shows that about
10 percent of the solo and group practices that filed claims with WPS had
any prepayment medical reviews. This proportion was even

lower at HealthNow NY and NHIC California, with rates of about 4 and 7
percent, respectively. The share of physician practices with postpayment
reviews by any of these carriers was much smaller; approximately one tenth
of 1 percent of practices had claims selected for medical review after
payment had been made. Few Physician

Practices and Few Claims Per Practice Receive Medical Reviews

Page 8 GAO- 02- 693 Physician Claims Review

Table 1: Physician Practices Whose Claims Received Medical Review, Fiscal
Year 2001 NHIC California a WPS b HealthNow NY Medical review Number Percent
of total c Number Percent of total d Number Percent of total d Prepayment
5,590 7.4 13,732 10.1 1,270 4.3

Postpayment 113 0.1 80 0.1 33 0.1 Note: Physician practices were identified
by the Medicare Provider Identification Number (PIN). a The number of
practices shown include data from northern California for November 2000 to
September 2001 and from southern California for December 2000 to September
2001. b WPS prepayment data include reviews in Illinois, Michigan, and
Minnesota only; data were not available for Wisconsin. Postpayment data
include Illinois, Michigan, Minnesota, and Wisconsin. c Because a list of
active PINs was not available from NHIC California, we estimated the total
number

of solo and group practices in California based on data from the most recent
American Medical Association census of group medical practices, adjusted for
increases in the total number of nonfederal M. D. s as of December 31, 2000,
and the number of D. O. s in the state. d Percentages are based on lists of
active PINs obtained from the carrier. Source: GAO analysis of carrier data,
and physician practice data from the American Medical Association and
American Osteopathic Association. Further, for most of the physician
practices having any claims subject to medical review in fiscal year 2001,
the carriers examined relatively few claims. As shown in table 2, over 80
percent of the practices at each carrier whose claims received a prepayment
review had 10 or fewer claims

examined and about half had only 1 or 2 claims reviewed.

Table 2: Number of Claims Per Physician Practice Subject to Prepayment
Medical Review, Fiscal Year 2001

Percent of practices whose claims were reviewed Claims per practice NHIC
California a WPS b HealthNow NY

1 or 2 56.4 54.0 50.9 10 or fewer 86.4 88.7 81.7 100 or more 1.2 0.5 2.9

a The figures shown include data from northern California for November 2000
to September 2001 and from southern California for December 2000 to
September 2001. b WPS prepayment data include Illinois, Michigan, and
Minnesota; prepayment data were not available for Wisconsin.

Source: GAO analysis of carrier data. For the small number of physician
practices whose claims were subject to postpayment review in fiscal year
2001, the three carriers typically examined more claims per practice. At
NHIC California, the median

Page 9 GAO- 02- 693 Physician Claims Review

physician practice had 33 claims reviewed postpayment; at WPS, 49; and at
HealthNow NY, 31.

With the issuance of the PCA initiative, CMS modified the approach that
carriers use to select physicians? claims for medical review, determine
repayments due, and prevent future billing errors. PCA directs carriers to
(1) use their analyses of physician billing patterns to better focus their
medical review efforts towards claims with the greatest risk of
inappropriate payments, and (2) provide targeted education regarding how

to correct billing errors. Information from our three carriers indicates
that, as a result of PCA, they virtually eliminated in fiscal year 2001
their use of extrapolation, a corrective action that involves projecting a
potential overpayment from a statistical sample. A recent CMS survey also
showed reduced use of extrapolation by other carriers. After PCA was
implemented, the highest repayment amounts each of our three carriers
assessed physicians were substantially lower than in the previous year. The
carriers have also developed medical review strategies that include
increased education for individual physicians in an effort to change billing
behavior and, thus, prevent incorrect payments.

PCA seeks to more effectively select physician claims for medical review.
The initiative aims to further the agency?s program integrity goals of
making sure that claims are paid correctly and billing errors are reduced

while carriers maintain a level of medical review consistent with their
workload agreements with CMS. In targeting physician claims, PCA requires
that carriers subject physicians only to the amount of medical review
necessary to address the level and type of billing error identified. If
claims data analysis shows a potential billing problem for a particular

service, carriers must first conduct a ?probe review?- requesting and
examining medical records from a physician for a limited sample of claims-
to validate suspicions of improper billing or payment. For example, a
carrier may initiate a postpayment probe review after discovering that a
physician billed, per patient, substantially more services than his or her
peers. 10 If the carrier determines that the documentation in

10 Provider- specific probe reviews can be both prepayment and postpayment.
If the carrier can select a sufficient number of claims for a probe in a
reasonable period, it may choose to conduct a prepayment medical review. For
lower volume services, however, the carrier will typically take a
postpayment approach so that the physician does not have an excessive wait
before having claims processed. New CMS Review Policy Has Reduced

Physician Repayment Amounts Due and Increased Focus on Physician Education

CMS Policy Matches Corrective Actions to Level of the Physician?s Billing
Problems

Page 10 GAO- 02- 693 Physician Claims Review

the medical records does not support the type or level of services that was
billed, the carrier calculates an error rate- the dollar amounts paid in
error relative to the dollar amount of services reviewed. The error rate,
the

dollar value of the errors, and the physician?s past billing history are
among the factors the carrier may consider in assessing the level of the
billing errors and determining the appropriate response. 11 Under PCA, CMS
instructs carriers to categorize the severity of billing errors found in
probe samples into three levels of concern- minor,

moderate, or major. Minor concerns may include cases with a low error rate,
small amounts improperly paid, and no physician history of billing problems.
Moderate concerns include cases that have a low error rate but substantial
amounts improperly paid. Major concerns are cases with a very high error
rate, or even a moderate error rate if the carrier had previously provided
education to the physician concerning the same type of billing errors.
Although no numerical thresholds were established in the instructions to
carriers, CMS provided vignettes illustrating the various levels of concern.
In an example of a major concern, 50 percent of the claims in a probe sample
were denied, representing 50 percent of the dollar amount of the claims
reviewed.

PCA allows carriers flexibility in determining the most appropriate
corrective action corresponding to the level of concern identified. At a
minimum, the carrier will communicate directly with the provider to

correct improper billing practices. For probe reviews that are conducted
postpayment- the stage at which probe reviews are most commonly done at the
three carriers we visited- they must also take steps to recover payment on
claims identified as having errors. Further options for corrective action
include:  for minor concerns, conducting further claims analysis at a later
date to

ensure the problem was corrected;

 for moderate concerns, initiating prepayment medical review for a
percentage of the physician?s claims until the physician demonstrates
compliance with billing procedures; and

 for major concerns, initiating prepayment medical review for a large share
of claims or further postpayment review to estimate and recover potential 11
PCA identifies secondary considerations that carriers should use in
determining appropriate corrective actions. Aggravating factors might
include past history of abusive billing practices or a high percentage of
particular types of errors. Mitigating factors include establishing a
compliance training program for office staff.

Page 11 GAO- 02- 693 Physician Claims Review

overpayments by projecting an error rate for the universe of comparable
claims- a method of estimation called ?extrapolation.? Under PCA, because
the corrective action is scaled to the level of errors identified, the
potential financial impact of medical review on some physicians has
decreased. Although our three carriers did not frequently use extrapolation
in 2000, before PCA, a physician could experience a postpayment medical
review that involved extrapolation regardless of the level of errors
detected. As shown in table 3, after PCA?s implementation, the highest
amount any physician practice was required to repay substantially declined
at the three carriers. The largest overpayment assessed across the carriers
ranged from about $6, 000 to $79,000 in fiscal year 2001, compared with
about $95,000 to $372,000 in the previous year.

At the same time, changes in the median overpayment amounts varied across
our three carriers, with a dramatic decline at NHIC California. (Recovery of
overpayments from physicians is discussed in app. II.)

Table 3: Overpayments Assessed Physician Practices, Fiscal Years 2000- 2001
NHIC California a WPS HealthNow NY 2000 2001 2000 2001 2000 2001 Number of
practices assessed an overpayment 58 81 106 b 76 b 158 151

Overpayment per practice c Median amount $11,644 $2,023 $2,185 $2,913 $134
$133 Highest amount 174,838 79,313 94,545 79,488 372,446 6,449

Notes: Overpayment assessments can result from billing errors found in one
or more claims or be extrapolated from errors found in a sample of claims.
Some overpayment assessments may reflect the outcomes of medical reviews
conducted the previous fiscal year. a The figures shown include data from
NHIC?s northern California office only; data were not available for its
southern office for fiscal year 2000. However, during fiscal year 2001, the
southern California office?s median overpayment assessment was $101 and the
highest amount was $18,396. b WPS data represent the number of overpayment
assessments. Because a few physicians were

assessed more than one overpayment during the fiscal year, these data very
slightly overstate the number of physician practices. c Some assessments may
have been subsequently reduced after an appeal. Source: NHIC California,
WPS, and HealthNow NY. Several factors may account for the lower overpayment
amounts assessed

physician practices in fiscal year 2001. Under PCA, probe samples are
designed to include a small number of claims per physician, so any
overpayments discovered through the probe review process will likely be
limited. Whereas the typical postpayment medical review conducted before PCA
might involve several hundred claims, a probe review

Page 12 GAO- 02- 693 Physician Claims Review

generally samples 20 to 40 claims selected from an individual physician for
the time period and the type of service in question. If the carrier
classifies the physician?s billing problem as a minor or moderate level of
concern, the physician is responsible for returning only the amount paid in
error

found in the probe sample. In these cases, there would not be an
extrapolation as may have occurred in the past.

The circumstances in which carriers determine an overpayment by
extrapolating from a statistical sample have narrowed. Before PCA was
implemented, carriers were encouraged to extrapolate an overpayment amount
whenever a postpayment sample of claims was drawn. However, even then, our
three carriers used extrapolation in only 38 instances in

fiscal year 2000. Now CMS has directed carriers to reserve the use of
extrapolation for those cases where a major level of concern has been
identified. In addition, before it can proceed with an extrapolation, the
carrier has to draw a new, statistically valid random sample from which to
project the assessed overpayment. 12 Furthermore, the amount to be recovered
based on an extrapolation is smaller than it typically would

have been in years past because instead of using the average overpayment
found in the sample, the average is reduced because statistical estimates do
not have 100 percent accuracy. 13 In the event that extrapolation is used,
the requirement to start with probe

samples may also reduce the physician?s financial risk. Because a probe
sample is fairly small, carrier officials stated that they may only examine
one or two types of services, compared to four to six types of services
reviewed previously. This means that if the probe review results lead to an
extrapolation based on a larger statistically valid random sample, only
claims for the small number of service types will be included in that sample
and the results will be projected to a smaller universe of claims.

12 An exception where extrapolation based on the original probe sample is
allowed, is when the physician chooses to accept a proposed consent
settlement rather than having to submit medical record documentation for a
new, and typically larger, sample of claims.

13 In a typical extrapolation, the amount of the overpayment is calculated
by (1) determining the average overpayment per claim in the sample as a
whole or broken down into strata or clusters, (2) multiplying that amount by
the number of corresponding claims in the

universe, and (3) reducing that amount to that represented by the lower
bound of a onesided 90 percent confidence interval. This third step was
introduced in January 2001, when CMS issued new standards for statistical
sampling and extrapolation methodologies used by carriers. This change takes
into account that statistical estimates may be in error and that the actual
amount may fall within a range around an estimate. This policy involves
using the bottom of the range as the amount of overpayment to recover.

Page 13 GAO- 02- 693 Physician Claims Review

Consequently, the total amount assessed would tend to be smaller than
previously extrapolated amounts. In the first year of PCA implementation,
our three carriers virtually

eliminated their use of extrapolation to determine overpayments. For
example, NHIC California officials stated that before PCA it was not
uncommon to use extrapolation in determining overpayments based on samples
involving a relatively large number of claims. But now, such extrapolation
is to be used infrequently. If a physician failed to correct inappropriate
billing practices following a probe sample and targeted education, the
carrier would probably subject some or all of the physician?s subsequent
Medicare billing for prepayment review before it would consider selecting a
larger postpayment sample suitable for

extrapolation. As shown in table 4, in fiscal year 2000, NHIC California
conducted 31 postpayment reviews that involved extrapolation, with a median
overpayment assessment of about $32,000, but had no cases involving
extrapolation in fiscal year 2001. Similarly, HealthNow NY had none in
fiscal year 2001 and WPS reported no cases of extrapolation other than a
small number of consent settlement cases. 14 14 Under a Medicare consent
settlement, a potential overpayment is determined by extrapolating from a
small sample of claims that is not statistically valid. The carrier would

then offer the provider the option of repaying the projected overpayment and
agreeing to a consent settlement or proceeding to a further review of a
larger, statistically valid random sample of claims and overpayment
projection. Of the carriers in our study, only WPS? Minnesota office used
consent settlements for a few cases in either fiscal year 2000 or 2001,

and it settled all but one of its cases.

Page 14 GAO- 02- 693 Physician Claims Review

Table 4: Carriers? Use of Extrapolation in Assessing Overpayments to
Physician Practices, Fiscal Years 2000- 2001

NHIC California WPS HealthNow NY 2000 2001 2000 2001 2000 2001

Number of overpayment cases involving extrapolation 31 0 6 0 1 0 Size of
claims samples used

Smallest 43 a 60 a a a Median 207 a 171 a 43 a Largest 1,232 a 432 a a a
Projected overpayment Lowest amount $3,758 a $2,640 a a a Median amount
32,140 a 29,093 a $112,896 a Highest amount 234,890 a 72,679 a a a Note:
Because a physician practice may have more than one sample of claims
selected in a year, overpayments were reported for each case where
extrapolation was used. Some projected overpayments were later reduced as
the result of physician rebuttals or appeals. a Not applicable. Sources:
NHIC California, WPS, and HealthNow NY.

A recent CMS survey indicates that most carriers limit their use of
extrapolation. In October 2001, CMS surveyed carriers to determine, in part,
the number of cases that involved extrapolation during the last 3 fiscal
years. 15 Of the 18 carriers that responded to the survey, only

3- serving Ohio, West Virginia, Massachusetts, and Florida- had more than 9
cases involving extrapolation in fiscal year 2001. 16 15 These cases
involved statistically valid random samples of claims that were used to
project overpayments. The survey also identified other cases involving
consent settlements based on extrapolations from more limited samples of
claims. 16 One of the three carriers did not separate the number of
extrapolation cases for medical review from those associated with fraud-
unit activity. An official at that carrier told us that approximately 33 of
the 131 cases where extrapolation was used were related to medical review.

Page 15 GAO- 02- 693 Physician Claims Review

A key focus of PCA is its emphasis on carrier feedback to physicians in the
medical review process. Educating physicians and their staffs about billing
rules is intended to increase correct billing, which reduces both inaccurate
payments and the number of questionable claims for which physicians may be
required to forward copies of patient medical records. When a carrier
identifies a physician?s billing problem, PCA requires the carrier to

provide data to the physician about how his or her billing pattern varies
from other physicians in the same specialty or locality. For issues that
affect a large number of providers, CMS recommends that carriers work with
specialty and state medical societies to provide education and training on
proper billing procedures.

In response to PCA, two of the three carriers planned substantial increases
in their spending for education and feedback to physicians on medical review
issues as part of their overall medical review strategies for fiscal year
2002. As shown in table 5, the three carriers had budget increases of
various sizes for provider education and training related to medical review.
17 Table 5: Carrier Budgets for Provider Education and Training Related to
Medical

Review Activities, Fiscal Years 2001- 2002 NHIC California a WPS HealthNow
NY

Fiscal year 2001 $491,817 $645,561 $277,939 Fiscal year 2002 767,032 736,000
284,000 Percent change +56.0 +14.0 +2.2

Note: Data for fiscal year 2001 represent actual expenditures; data for
fiscal year 2002 are estimates. a Because NHIC California?s southern office
did not assume carrier operations until December 2001, fiscal year 2001
includes only 10 months for that office and all 12 months for the northern
office. As a result, the percentage change in the budget for fiscal year
2002 is overstated as the budget for that year covers 12 months for both
offices. Source: CMS and NHIC New England. 17 All education and training
activities related to medical review are funded through the Medicare
Integrity Program, which also supports claims reviews and antifraud
activities. General provider education related to enrollment and billing
procedures is funded from a larger and separate budget for program
management. The related fiscal year 2002 budgets for the three carriers
were: $1. 6 million for NHIC California, $2. 8 million for WPS, and $1. 3
million for HealthNow NY. These represented increases from the previous
fiscal year of 42, 6, and 102 percent, respectively. Carriers Are Expected
To Integrate Medical Review

And Education Outreach Functions

Page 16 GAO- 02- 693 Physician Claims Review

As part of their strategies to increase physician education, the three
carriers reported that they were making greater use of phone calls and
individualized letters to physicians? offices to notify them about billing
errors. Carriers record their contacts using physician tracking systems to
check on the education that has been provided to the physician, which can
include letters, materials, phone calls, or face- to- face visits. Whereas
in the past it was common for carriers to simply point physicians toward the
applicable Medicare rules, under PCA they have assisted physicians in
interpreting the rules and applying them to specific billing situations. The

carrier?s medical review staff has addressed problems of questionable
billing patterns by contacting physicians by phone to provide specific
information pertaining to billing rules. For physicians whose claims are

undergoing postpayment review, the carrier sends a letter at the completion
of the medical review that provides a description of the billing problems
found, including, as needed, information on the relevant national and local
medical policies. The letter also identifies a contact person at the

carrier, should the physician want additional information about billing or
documentation issues. For example, WPS officials acknowledged that they
previously had little or no follow- up with physician practices whose claims
were denied or reduced after medical review to make sure they understood how
to bill correctly. In fiscal year 2001, WPS began providing additional
education-

some efforts addressing all Medicare physicians and some targeted to
providers in specific specialties or service locations. To identify the
groups that would most benefit from targeted education, the carrier
developed benchmark data on billing errors using aggregate claims data on
utilization, denial rates, and other billing patterns. For example, the
carrier developed education campaigns targeted to mental health
practitioners, such as psychologists, clinical social workers, and
psychiatrists. In fiscal year 2001, WPS also began to conduct on- site
education and group

meetings and contact specialty associations to disseminate further
information.

Page 17 GAO- 02- 693 Physician Claims Review

In addition to concerns about having their claims selected for medical
review, some physicians have expressed dissatisfaction with the accuracy of
the carrier medical review decisions concerning the medical necessity,
coding, and documentation of physician services billed to Medicare. To
assess the appropriateness of clinical judgments made by carriers? medical
review staff, we sponsored an independent evaluation by the private firm
that monitors claims payment error rates as a Medicare program safeguard

contractor. 18 The firm found that our three carriers made highly accurate
medical review decisions. In addition, the level of accuracy was highly
consistent across the three carriers. Slight variation in the degree of
accuracy was evident when the claims reviewed were classified by the type of
payment decision: to pay the claim in full, to pay a reduced amount, or to
fully deny payment. The independent review was conducted on samples of 100
physician

claims from each carrier selected randomly from all claims undergoing either
prepayment or postpayment medical review in March 2001. Nurse reviewers
examined the carrier?s initial review decision to see if it was supported by
the available medical record documentation and carrier policies in effect
when the carrier made its payment decision. These reviewers then discussed
with the carrier?s staff each claim where they had come to a different
conclusion, and in all but one instance, the carrier

and contractor achieved a consensus as to whether the original carrier
decision was in error. The acting deputy director of CMS?s Program Integrity
Group, a physician, decided the accuracy of the one case that remained in
dispute.

For the vast majority of claims, the independent reviews validated the
carriers? decisions. As shown in table 6, the independent reviewers agreed
with carriers? original assessments in 280 of the 293 cases examined, or
about 96 percent of the time. 19 The small share of inaccurate decisions

18 HCFA chose 12 claims administration contractors in 1999 to act as program
safeguard contractors (PSCs) for Medicare and since then has issued task
orders that include different ways of using PSC services. Some task orders
involve discrete activities by a single PSC that focus on specific areas
vulnerable to fraud and abuse, others require PSCs to replace some or all of
the program safeguard activities traditionally performed by claims
administration contractors, and still others may have a national impact on
fraud and abuse

prevention and detection. 19 This result was consistent across the three
carriers and for both prepayment and postpayment reviews. (See app. I.)
Independent Review

Confirms Accuracy of Carriers? Payment Decisions

Page 18 GAO- 02- 693 Physician Claims Review

made by the carrier resulted in both overpayments and underpayments to
physicians.

Table 6: Accuracy of Carrier Medical Review Decisions on Physician Claims
Inaccurate decision rate

Carrier decision Accurate

decision rate (percent) Overpayment

(percent) Underpayment (percent)

All decisions on sampled claims a (n= 293) 95.6 2.7 1.7

Deny in full (n= 64) 98.4 0.0 1.6 Deny in part (n= 59) 91.5 1.7 6.8 Pay in
full (n= 170) 95.9 4.1 0.0

a Claims randomly selected from all carrier prepayment and postpayment
reviews during March 2001. Although 100 claims were selected from each of
the three carriers, 5 claims from WPS and 2 from HealthNow NY were excluded
either because the billing entity did not meet our definition of physician
(M. D. or D. O.) or because documentation from the carrier associated with
the claim was unavailable or not interpretable. Source: GAO analysis of
independent review results. There was slight variation in the accuracy of
carrier medical review decisions for different types of payment
determinations that resulted from

the carriers? initial review. The independent reviewer found that carrier
decisions to completely deny payment were the most accurate. In our sample,
only 1 of the 64 carrier decisions (1.6 percent) to fully deny a claim was
determined to be a medical review error. Carrier decisions to reduce payment
amounts were slightly less accurate. The independent reviewers (with
subsequent concurrence by the carriers) found errors in 5 of 59 claims (8.5
percent) that the carriers had initially decided to pay at a reduced amount.
In one instance, the independent reviewer determined that the carrier should
have denied the claim altogether; for the other 4 claims, it judged that the
carrier should have made a smaller reduction or paid the claim in full. 20
Three of the five instances in which the independent reviewer questioned

the carrier?s decision to reduce the amount paid involved claims for 20
There was 1 claim among the 293 examined where the carrier decided (and the
contractor concurred) that, based on the medical documentation provided, the
physician was entitled to more than the amount submitted. In all other
cases, once carrier and contractor reviews were completed, any adjustment to
the claim as it was originally submitted to the carrier resulted in a
decrease in the amount paid to the physician.

Page 19 GAO- 02- 693 Physician Claims Review

physicians? evaluation and management (E& M) services- commonly known as
physician visits or consultations. 21 The coding system used for billing
much of physician care has five separate levels of evaluation and management
service intensity, each linked to a distinct payment amount. In order to
assess the appropriateness of a claim?s billing level, reviewers have to
find specific information in the submitted clinical documentation on, among
other factors, the breadth of the medical history taken, the

scope of the physical examination conducted, and the complexity of the
decisions made by the physician. According to CMS officials, one reason
medical review decisions for these claims are likely to raise questions is
that the different levels along these key dimensions are not clearly
defined, such as distinguishing between ?straightforward? and ?low?
complexity in medical decision making. Such reviews are also complicated by
CMS?s

instruction to the carriers that they may use either the guidelines for
billing evaluation and management services issued in 1995 or the ones issued
in 1997, depending on which set is most advantageous to the physician. 22
Another factor contributing to the difficulty in medically reviewing E& M

claims is the broad variability in style and content found in the medical
records. Carrier officials noted that some physicians meticulously document
exactly what they have observed and done while others tend to be less
complete and careful. Reviewers are likely to vary in what they infer from
the less complete records, which, in turn, can lead to different

conclusions as to whether a case is of low, medium, or high complexity.
Although the carriers in our study were highly accurate in making payment
determinations, they can improve their process for selecting claims for
medical review that are most likely to contain billing errors. Our data show
that, in fiscal year 2001, there was variation in the performance of edits-
criteria used to target specific services for review- that our three
carriers employed to identify medically unnecessary, or incorrectly coded,
physician services. Carriers have difficulty establishing edits that
routinely

21 They can include physician encounters in hospitals and nursing facilities
as well as in the doctor?s office. 22 Primary care physicians find the 1995
documentation guidelines less cumbersome, while

the more detailed 1997 guidelines better reflect the needs of specialists.
See Nancy- Ann DeParle, ?Evaluation & Management Services Guidelines,?
Journal of the American Medical Association, vol. 283, no. 23 (June 21,
2000). Targeting Claims That Most Warrant Medical

Review Could Be Improved

Page 20 GAO- 02- 693 Physician Claims Review

select claims with the greatest probability of errors because they have to
rely, to some degree, on incomplete data. Also, CMS?s oversight of the
carriers does not include incentives to develop and use more refined edits.
CMS has limited its involvement in this area to collecting data from the
carriers on the results of reviews selected by the edits and setting general
expectations for the carriers to assess the effectiveness of the edits that
they use. Carriers receive no feedback on the edit effectiveness data that
they have reported to the agency and little guidance as to how they could

maximize the effectiveness of their procedures to select physician claims
for medical review.

To help reduce local billing problems, carriers usually decide on their own
which claims to select for medical review. They generally develop edits by
(1) analyzing claims data to identify services or providers where local
billing rates are substantially higher than national averages, and

(2) selecting a small probe sample of such claims for medical review to
substantiate the existence of a billing problem. Other edits are designed to
ensure that physicians adhere to local medical review policies- rules that
describe when and under what circumstances certain services may be covered.
Claims identified by the edits are suspended, that is, temporarily held back
from final processing, and the physicians involved are contacted to request
the relevant medical records. Once those records arrive, claims

examiners determine whether the claim should be paid in full, reduced, or
denied. Of the total number of prepayment edits related to physician
services used at each carrier (36 edits at WPS in each of its two largest
states; 18 at NHIC?s Northern California office, and 7 at HealthNow NY), 27
identified the large majority of claims undergoing medical review in fiscal

year 2001. Specifically, 10 or fewer edits at each of the carriers suspended
more than three- fourths of the claims medically reviewed prior to payment.

In order to assess the relative effectiveness of those edits, we drew on
data that the carriers recorded on the results of reviews initiated by each
edit in effect during that period. These data included information on the
proportion of suspended claims that were reduced or denied as a consequence
of medical review, and the average dollar reduction for those claims that
were not paid in full. Edits would be considered better targeted

if they have (1) a higher rate of claims denied or reduced, or (2) a larger
average amount of dollars withheld from payment for an inappropriately
billed service. The strongest case could be made for edits that did well on
both dimensions, and the weakest case would apply for those edits that
ranked low on both denial rate and average amount withheld.

Page 21 GAO- 02- 693 Physician Claims Review

Figure 1 shows the results of this analysis for the 27 prepayment edits that
accounted for the largest number of claims suspended by each of our three
carriers. 23 The four bars indicate the number of edits achieving different
levels of denial (or reduction) rates. The grouping with the largest number
of edits, 11, represents the lowest level of effective targeting, between 5
and 19 percent. 24 Two thirds of the edits, 18, have denial rates under 40
percent. By contrast, 6 edits have denial rates of

between 60 and 82 percent. 23 We have excluded some prepayment edits that
are expected to have low denial rates. For instance, carriers use ?pricing
edits? to gather information to help determine an appropriate payment amount
for newly covered services (for which Medicare has not established a set
fee) or for highly complex procedures, such as certain surgeries. In these
cases, although a nurse reviewer must examine each claim to determine an
appropriate payment amount, claims suspended by these edits are likely to be
paid in full. 24 A once effective edit may experience declining denial rates
over time, to the extent that it has its intended effect of changing
physician billing behavior. This is why carriers need to monitor edit
performance at periodic intervals and make appropriate adjustments.

Page 22 GAO- 02- 693 Physician Claims Review

Figure 1: Outcomes of Selected Carrier Prepayment Medical Review Edits,
Fiscal Year 2001

Note: Includes data for NHIC northern California only; comparable data were
not available from the carrier?s southern California office. Source: NHIC
California, WPS, and HealthNow NY. The segments within the bars indicate the
average dollar amount reduced

or denied when either occurs. Only 3 of the 11 major edits in the lowest
denial rate group generated relatively large program savings- an average of
$200 or more- for those claims that were reduced or denied. An equal number,
and larger proportion, of edits in the highest denial rate group also
produced savings exceeding $200 per claim. The wide variation among these 27
major edits across both the dimensions of denial rate and average dollar
amount denied or reduced suggests that there is room for improvement. CMS
requires the carriers to periodically

0 2

4 6

8 10

12 5 to 19 20 to 39 40 to 59 60 to 82 Percent of claims denied or reduced
Number of edits

Under $100 $100-$ 199

$200 or more

Average dollar value of denied claims

Page 23 GAO- 02- 693 Physician Claims Review

evaluate the effectiveness of the edits they use to ensure that each has a
reasonable denial rate and dollar return. However, CMS has not provided
guidelines to the carriers as to how such evaluation should be conducted, or
what minimum level of performance they should strive for with respect to
denial rates, average dollar reductions, or other measures of efficiency.

Moreover, officials at the three carriers indicated that they did not
receive feedback from CMS regarding the performance of their edits, even
though the carriers submit quarterly reports to the agency on the
performance of their most active edits. CMS?s involvement in this area was
generally limited to ensuring that carriers had their own process in place
for evaluating prepayment edits.

The three carriers tend to consider similar variables in evaluating edit
effectiveness, but vary quite a bit in the procedures that they follow to
make that assessment. In general, all three carriers consider factors such
as the number of claims suspended, the denial rate, dollar savings, and the
overall magnitude of the potential billing problem. With respect to process,
HealthNow NY did not have any explicit procedure to evaluate edits until the
end of fiscal year 2001. At that point it adopted a detailed scoring system
with numeric thresholds that determine when to discontinue using a edit. 25
The other carriers continue to rely less on quantitative measures and more
on the professional judgment of medical review staff in evaluating
prepayment edits.

Several factors contribute to the continued use of poorly targeted edits.
Some of the carriers contend that their data on the relative effectiveness
of their edits are incomplete and therefore unreliable. For example, NHIC

California officials noted that they often lack good information on the
ultimate outcome of reviews, taking account of reversals that occur when
initial carrier decisions are appealed. Not only does the appeal process
take a long time, if followed to its full extent, it can also be difficult
to determine why certain claim denials were overturned. 26 25 Each
prepayment edit is scored based on its performance on six dimensions: number
of

claims suspended (should be greater than 150); percent of claims denied
(should be greater than 25 percent); dollar value denied (should be greater
than $10,000); percent of dollars denied (should be greater than 25
percent); percent of claims reversed (should be less than 40 percent); and
percent of dollars reversed (should be less than 40 percent). 26 When
medical review staff denies a claim before payment, the billing physician
can appeal the denial. See 42 CFR 405. 801( b)( 1). If the appeal is
successful, the carrier may ultimately pay a claim that it initially denied.
Carriers? data systems generally do not track the claims denied by medical
review to determine if they are appealed and then paid.

Page 24 GAO- 02- 693 Physician Claims Review

Another reason why carriers maintain low- performing prepayment edits is
that there are few incentives- and some disincentives- for them to change.
In particular, carriers have agreed with CMS to conduct a certain number of
reviews that are evenly distributed throughout the course of the year.
Before a carrier discontinues use of an edit, it must have another one in
place that will garner at least as many claims for medical review to meet
workload targets, or else negotiate a change in its medical review strategy
with CMS officials to reallocate those review resources to other activities.

Putting new edits in place often requires carriers to adjust the selection
criteria over time in order to obtain the manageable number of claims
selected for review. Carrier officials also noted that there is no
systematic dissemination of carriers? best practices- those worthy of
consideration by all carriers-

regarding the success of individual edits or methods to evaluate edit
efficiency. An official at HealthNow NY told us that they informally share
information about their experiences with particular prepayment edits with
other carriers operating in the same region. Carrier officials reported that
this is not common practice at WPS or NHIC California. In a 1996 report

on selected prepayment edits, we recommended that HCFA, now CMS, disseminate
information to carriers on highly productive edits. 27 However, the agency
currently does not identify and publicize in any systematic manner those
edits that generate high denial rates or the selection criteria used to
develop them. 27 U. S. General Accounting Office, Medicare: Millions Can Be
Saved by Screening Claims for Overused Services, GAO/ HEHS- 96- 49
(Washington, D. C.: January 30, 1996).

Page 25 GAO- 02- 693 Physician Claims Review

Since 1996, the overall level of payment errors for the Medicare program has
been tracked nationwide in annual audit reports issued by the HHS Office of
Inspector General (OIG). In the most recent audit, covering fiscal year
2001, the OIG found that $12.1 billion, or about 6.3 percent of the

$191.8 billion in processed fee- for- service payments, was improperly paid
to Medicare providers. 28 These OIG reports of aggregate Medicare payment
errors have spurred CMS to improve its efforts to safeguard Medicare
payments by assessing not only an error rate nationwide but also for the
individual carriers.

In February 2000, HCFA announced the development of a new tool to assess
individual carrier performance called the Comprehensive Error Rate Testing
(CERT) Program. CERT is designed to measure, for all claims, the accuracy of
payment decisions made by each carrier. 29 The

CERT benchmark will allow CMS to hold the carriers accountable for the
accuracy of payment decisions for all claims processed, not just those
selected for review. Thus, the results will reflect not only the carrier?s
performance, but also the billing practices of the providers in their
region. According to CMS officials, CERT information on all the carriers
processing physician claims is expected to become available in

November 2002. At that point, both CMS and the carriers can begin to use
that information for program oversight and management, and will then see if
the expectations for CERT are met in practice. Under the CERT program, CMS
will use an independent contractor to select a random sample of
approximately 200 claims for each carrier from among all those submitted
each month for processing. For this sample, the

carrier will provide the CERT contractor with information on the payment
decisions made and all applicable medical documentation used in any medical
reviews of the sample claims. The CERT contractor will request comparable
documentation from physicians whose claims in the sample

28 For the fiscal year 2001 audit, OIG selected 600 beneficiaries nationwide
with 6, 594 feefor- service claims processed for payment. Based on this
sample, it estimated the range of improper payments at the 95 percent
confidence level to be $7. 2 billion to $16. 9 billion. The

OIG indicated that this result was not significantly different from the
estimates for the past 3 years. See Department of Health and Human Services/
Office of Inspector General,

Improper Fiscal Year 2001 Medicare Fee- For- Service Payments, A- 17- 00-
02000 (Washington, D. C.: Feb. 15, 2002). 29 Previously, carriers selected a
portion of their prepayment medical reviews through a

random sampling procedure. CERT is taking the place of that random sample,
and henceforth carriers should only select claims for prepayment review that
have been identified as potentially problematic. CMS Makes Claims

Accuracy New Benchmark for Measuring Carrier

Performance

Page 26 GAO- 02- 693 Physician Claims Review

were not medically reviewed by the carrier. The CERT teams of clinician
reviewers will examine the documentation and apply the applicable national
and local medical policies to arrive at their own payment decisions for all
of the sampled claims.

With the development of carrier- level error rates, CMS expects to monitor
payment accuracy trends for the individual carriers and focus its oversight
on those carriers with relatively high, or worsening, rates of error.
Moreover, on a national basis, CERT will calculate error rates for different
provider types. For example, it will indicate how often physicians bill
incorrectly and receive either too much or too little payment compared to

such nonphysician providers as ambulance companies and clinical labs. The
structure of subgroup analyses designed to help carriers better target their
medical reviews remains open to discussion among CMS officials.

CERT will complement but not replace CMS tracking systems designed to
monitor carrier performance using data periodically reported to CMS by the
carriers concerning medical review costs, the reduction in provider payments
resulting from medical reviews, and workload. CMS has relied on these data
to ensure that carriers sustain the level of effort specified in agreements
with CMS- particularly the number of medical reviews

conducted. CMS is currently working to consolidate and streamline these
various reports into a Program Integrity Management Reporting (PIMR) system.
CMS?s intention is for PIMR to collect, from each carrier, data such as the
number of claims medically reviewed, the number denied, the number of
denials reversed on appeal, and the associated dollar amounts saved or
recouped. Currently, this information is not maintained in a common format
and is difficult to compile. The first management reports based on PIMR are
expected by the end of fiscal year 2002.

In addition to CERT and the carrier- reported data, CMS oversight of
physician medical review will continue to rely on contractor performance
evaluations (CPEs)- assessments based on site visits conducted by a small
team of CMS regional and headquarters staff. For carrier medical review
activities, these CMS evaluations occur at irregular intervals, depending on
the carrier?s volume of claims and the level of risk of finding substantial
problems at the carrier. CMS?s evaluation emphasizes an assessment of the
carrier?s compliance with Medicare rules and

procedures in areas related to medical review- such as data analysis to
support the selection of edits, the development of local coverage rules,

Page 27 GAO- 02- 693 Physician Claims Review

and tracking contacts with physicians. The evaluation also involves
examining a small number of claims to determine the accuracy of the
carrier?s review decisions. 30 Critics have previously alleged that CPE
assessments lacked consistency and objectivity. In response, CMS has
attempted to ensure greater uniformity across carriers in the way these
evaluations are conducted by recruiting CPE team members from the agency as
a whole, not the local regional office, and by using nationally based CPE
protocols. While CMS has modified its medical review procedures, it is too
soon to determine whether the PCA approach will enhance the agency?s efforts
to perform its program integrity responsibilities. Carrier staff conduct
medical reviews to maintain program surveillance and make physicians aware
of any billing practices that are not in keeping with payment rules.

In this regard, CMS?s PCA policy emphasizes feedback and educational
contacts with individual physicians. Evaluating the efficacy of this policy
will require a systematic examination of carriers? performance data. When
CERT data become available, CMS may be in a better position to assess PCA?s
impact on reducing billing errors and preventing inappropriate

payments. CMS officials reviewed a draft of this report and generally agreed
with its findings. In particular, the agency noted that our discussion of
the effectiveness of carrier edits confirmed the need for CMS to ?become

more active in assisting contractors in this area.? The agency also provided
a number of technical corrections and clarifications that we incorporated
into the text as appropriate. These comments are reprinted in Appendix III.
We are sending copies of this report to the Administrator of CMS and we will
make copies available to others upon request. In addition, the report will
be available at no charge on the GAO Web site at http:// www. gao. gov.

30 In a typical CPE about 30 claims are reassessed. By contrast, CERT will
examine approximately 200 claims payment decisions per month for each
carrier. Concluding Observations

Agency Comments

Page 28 GAO- 02- 693 Physician Claims Review

If you or your staffs have questions about this report, please contact me at
(312) 220- 7600 or Rosamond Katz at (202) 512- 7148. Other contributors to
this report were Hannah Fein, Jenny Grover, Joel Hamilton, and Eric
Peterson.

Leslie G. Aronovitz, Director, Health Care- Program Administration and
Integrity Issues

Page 29 GAO- 02- 693 Physician Claims Review

List of Committees

The Honorable Max Baucus Chairman The Honorable Charles E. Grassley Ranking
Minority Member Committee on Finance

United States Senate The Honorable W. J. ?Billy? Tauzin Chairman The
Honorable John D. Dingell Ranking Minority Member Committee on Energy and
Commerce

House of Representatives The Honorable William M. Thomas Chairman The
Honorable Charles B. Rangel Ranking Minority Member Committee on Ways and
Means

House of Representatives

Appendix I: Review of Medicare Carrier Medical Review Decisions Page 30 GAO-
02- 693 Physician Claims Review

We assessed the claims review accuracy of the three carriers in our study-
National Heritage Insurance Company in California, Wisconsin Physicians
Service Insurance Corp, and HealthNow NY- by validating initial medical
review decisions involving physician claims. We contracted with DynCorp- the
Medicare contractor already selected by CMS to

administer its Comprehensive Error Rate Testing (CERT) program- to use the
same review procedures developed for CERT in assessing a sample of medical
review decisions made by the three carriers. We requested that each carrier
identify the universe of physician claims subjected to prepayment and
postpayment review during March 2001, limiting the universe to those claims
submitted by M. D. s and D. O. s. From that universe, Dyncorp randomly
selected 100 claims for review. Then, DynCorp obtained the medical record
information for those claims from the carrier, and reviewed each payment
decision for accuracy. The

number of carrier decisions examined by DynCorp staff exceeded the number of
claims because, in several instances, carriers had reviewed multiple lines
on a claim. The results of this assessment of carrier medical review
decisions can only be generalized to the universe of claims from which the
samples were drawn: claims from M. D. s or D. O. s that underwent medical
review in March 2001 by one of our three carriers.

In reviewing payment accuracy, DynCorp staff was tasked with determining if
the carrier?s initial review decision was supported by the medical record
and carrier policies in place at the time the payment decision was made.
Specifically, DynCorp assessed whether documentation in the medical records
supported the procedure codes and level of service that was billed. Where
their determination differed from that of the carrier, DynCorp staff
discussed those claims with the carrier?s medical review staff. In all but
one case, the parties came to agreement on whether payment decisions were
accurate. In the one case where agreement could not be reached, the acting
deputy director of CMS?s Program Integrity Group- a physician- provided a
second opinion that confirmed the carrier?s decision.

The results obtained from DynCorp?s review of physician claims undergoing
medical review were consistent across the three carriers. The accuracy of
decisions across all the sampled medical reviews for each carrier exceeded
94 percent. (See table 7.) In those cases where medical review errors were
identified, NHIC California and WPS decisions resulted in a mix of
underpayments and overpayments. However, HealthNow NY?s Appendix I: Review
of Medicare Carrier

Medical Review Decisions Methodology Used to Validate Carrier Medical Review
Decisions

Results of the DynCorp Review

Appendix I: Review of Medicare Carrier Medical Review Decisions Page 31 GAO-
02- 693 Physician Claims Review

review errors were concentrated in decisions to pay claims in full that
should have been denied or reduced.

Table 7: Accuracy of Medical Review Decisions on Physician Claims by Carrier
Inaccurate decision rate Carrier decision

Accurate decision rate

(percent) Overpayment (percent) Underpayment

(percent)

All decisions on sampled claims NHIC California a (n= 100) 94.0 3.0 3. 0 WPS
b (n= 95) 96.8 1.1 2. 1 HealthNow NY b (n= 98) 95.9 4.1 0. 0 Deny payment
NHIC California (n= 24) 95.8 0.0 4.2

WPS (n= 26) 100.0 0.0 0.0 HealthNow NY (n= 14) 100.0 0.0 0.0 Pay in part
NHIC California (n= 26) 88.5 3.8 7. 7

WPS (n= 20) 90.0 0.0 10.0 HealthNow NY (n= 13) 100.0 0.0 0.0 Pay in full
NHIC California a (n= 50) 96.0 4.0 0. 0 WPS (n= 49) 98.0 2.0 0. 0 HealthNow
NY c (n= 71) 94.4 5.6 0. 0 a Includes six claims in the NHIC California
sample that DynCorp (with concurrence of the acting

deputy director of CMS?s Program Integrity Group) judged inaccurate on
technical grounds, but we considered them to have been decided
appropriately. Although DynCorp noted that the physicians had provided
documentation sufficient to justify payment, it judged them to have been
paid in error

because NHIC California had a local medical review policy (LMRP) that
explicitly required the physician to document the number of minutes spent
with the patient for these services. The physicians submitting these claims
had not done so, but the carrier and DynCorp agreed that if the

LMRP had not been in place, the documentation provided would have been
sufficient to justify payment. Therefore, the problem identified by the
DynCorp review was the failure of NHIC California to update its LMRP to
reflect the review practices it was actually following- not inadequacies in
the

reviews themselves. b Although 100 claims were selected from each of the
three carriers, 5 claims from WPS and 2 from HealthNow NY were excluded
either because the billing entity did not meet our definition of physician
(M. D. or D. O.) or because documentation from the carrier associated with
the claim was unavailable or not interpretable. c Includes one claim where
the carrier determined that the physician was entitled to more than the

amount submitted. Source: GAO analysis of claims review data from NHIC
California, HealthNow NY, WPS, and Dyncorp.

Appendix I: Review of Medicare Carrier Medical Review Decisions Page 32 GAO-
02- 693 Physician Claims Review

Because a relatively small proportion of medical reviews are conducted after
claims payment, our samples from the three carriers included just 19 claims
where a postpayment review was performed. The accuracy of carrier
determinations for both prepayment and postpayment medical reviews was
consistent, at about 95 percent. (See table 8.)

Table 8: Accuracy of Prepayment and Postpayment Medical Review Decisions on
Physician Claims (percent)

Inaccurate decision rate Medical review Accurate decision

rate (percent) Overpayment (percent) Underpayment

(percent)

Prepayment (n= 274) 95.6 2. 9 1.5 Postpayment (n= 19) 94.7 0. 0 5.3

Source: GAO analysis of claims review data from NHIC California, HealthNow
NY, WPS, and Dyncorp.

Appendix II: Recovery of Overpayments Page 33 GAO- 02- 693 Physician Claims
Review

Carriers attempt to collect any overpayments due the Medicare program as
soon as possible after the completion of postpayment reviews. The carrier
notifies physician practices that they have three options for returning an
overpayment: (1) pay the entire overpayment amount within 30 days, (2) apply
for an extended repayment plan, or (3) allow the carrier to offset the
overpayment amount against future claims.

Initially, the carrier sends a letter informing the physician practice of
the medical review results and the specific dollar amount that the practice
must return to Medicare. The letter provides an explanation of the

procedures for repaying an overpayment, which includes a statement of
Medicare?s right to recover overpayments and charge interest on debts not
repaid within 30 days, as well as the practice?s right to request an
extended repayment plan if the overpayment cannot be paid in that time. 1
The letter also advises the physician practice of the right to submit a
rebuttal statement prior to any recoupment by the carrier and to appeal the
review decision to, in the first instance, the carrier?s separate appeals
unit. In

addition, the letter notifies the practice of any additional reviews that
the carrier has planned. Regardless of whether the physician practice
appeals the review decision, repayment is due within 30 days of the date of
the letter, unless an extension is approved.

Carriers will consider extended repayment plans for those physician
practices that cannot make a lump sum payment by the due date. To qualify
for an extension, the overpayment amount must be $1,000 or more and a
practice must prove that returning an overpayment within the required time
period would cause a financial hardship. Accordingly, a physician practice
must offer specific documentation to support the request, including a
financial statement with information on monthly income and expenses,
investments, property owned, loans payable, and other assets and
liabilities. In addition, if the requested repayment extension is for 12
months or longer, the physician practice must submit at

least two letters from separate institutions indicating that they denied a
loan request for the amount of the repayment. Requests for payment
extensions that exceed 12 months must be referred to CMS regional staff for
approval.

1 Medicare regulations provide for the assessment of interest at the higher
of the private consumer rate or the current value of funds rate (5 percent
for calendar year 2002). See 42 C. F. R. Sec. 405. 378 (d) (2001). As of
February 1, 2002, the private consumer rate was 12. 625 percent. Appendix
II: Recovery of Overpayments

Appendix II: Recovery of Overpayments Page 34 GAO- 02- 693 Physician Claims
Review

If a physician practice does not return payment within 30 days or establish
a repayment extension plan, the carrier must offset the amount owed against
pending or future claims. The carrier has some discretion as to the exact
date that offsetting begins, taking into consideration any statements or
evidence from the physician practice as to the reasons why offsetting

should not occur. 2 In fiscal year 2001, HealthNow NY offset amounts owed by
72 of 95 physician practices that did not pay their overpayment amounts
within 30 days. Most of the practices that did not have amounts

offset returned their overpayments within 40 days. Any offset payments are
applied against the accrued interest first, and then the principal.

As shown in table 9, the three carriers in our study reported that most
physician practices assessed an overpayment in fiscal year 2000 or 2001
repaid Medicare within 6 months of the carrier?s notice.

2 CMS instructs carriers to allow physician practices 15 days from the
initial notification letter to submit information related to offsetting. The
carrier is to promptly consider and respond to the information. If the
carrier does not receive such a response from the practice, CMS instructs
carriers to initiate offset within 40 days after the date of the letter
notifying the physician practice of the overpayment amount.

Appendix II: Recovery of Overpayments Page 35 GAO- 02- 693 Physician Claims
Review

Table 9: Recovery of Overpayments From Physician Practices, Fiscal Years
2000- 2001 NHIC California a WPS HealthNow NY

2000 2001 2000 2001 2000 2001 Number of practices assessed an overpayment b
58 81 106 c 76 c 158 151 Number of practices that repaid within:

30 days 33 48 37 24 46 56 31- 180 days 23 33 57 34 107 94 181- 365 days 0 0
1 1 3 1 Over 1 year 2 0 6 4 1 0 Outstanding 0 0 5 13 1 0 Number of practices
with overpayments of $5,000 or more that repaid within:

30 days 21 10 7 2 1 3 31- 180 days 12 17 24 13 6 1 181- 365 days 0 0 1 0 1 0
Over 1 year 2 0 6 1 1 0 Outstanding 0 0 5 2 0 0

a Data include NHIC?s northern California office only; data were not
available for its southern office for fiscal year 2000. However, during
fiscal year 2001, the southern office assessed 137 physician practices an
overpayment, and all but 5 repaid within 6 months. b Some overpayment
assessments may reflect the outcomes of medical reviews conducted in the

previous fiscal year. c WPS data represent the number of overpayment
assessments. Because a few physicians practices were assessed more than one
overpayment during the fiscal year, these data very slightly overstate the
number of practices involved. Source: NHIC California, WPS, and HealthNow
NY. The three carriers also reported few requests from physician practices
for

extended repayment plans. As shown in table 10, none of the carriers had
more than four requests during fiscal year 2001, and no extension exceeded 1
year.

Appendix II: Recovery of Overpayments Page 36 GAO- 02- 693 Physician Claims
Review

Table 10: Requests for Repayment Extensions, Fiscal Years 2000- 2001 a NHIC
California WPS HealthNow NY 2000 2001 2000 2001 2000 2001

Extensions requested 124 3 1 0 1 Extensions approved 11 2 3 0 b 1 Extension
period granted 6 to 24 months 6 to 12 months 7 to 12 months

b b 6 months Range of overpayments c (dollars) Lowest amount $18,337 $20,588
$2,708 b b b Median amount 159,894 b 28,749 b b $13,343 Highest amount
324,106 49,981 105,924 b b b

a Some requests for repayment extensions relate to overpayments assessed in
a previous fiscal year. b Not applicable. c Repayment amounts include the
principal only, adjusted for any reductions that may have resulted from
physician rebuttals or appeals. Source: NHIC California, WPS, and HealthNow
NY.

Appendix III: Comments from the Centers for Medicare and Medicaid Services
Page 37 GAO- 02- 693 Physician Claims Review

Appendix III: Comments from the Centers for Medicare and Medicaid Services

Related GAO Products Page 38 GAO- 02- 693 Physician Claims Review

Medicare: Communications With Physicians Can Be Improved (GAO- 02- 249,
February 27, 2002).

Medicare Management: CMS Faces Challenges to Sustain Progress and Address
Weaknesses (GAO- 01- 817, July 31, 2001).

Medicare Management: CMS Faces Challenges in Safeguarding Payments While
Addressing Provider Needs (GAO- 01- 1014T, July 26, 2001).

Regulatory Issues for Medicare Providers (GAO- 01- 802R, June 11, 2001).
Related GAO Products (290072)

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