Medicare Integrity Program: Agency Approach for Allocating Funds 
Should Be Revised (06-SEP-06, GAO-06-813).			 
                                                                 
Since 1990, GAO has considered Medicare at high risk for fraud,  
waste, abuse, and mismanagement. The Medicare Integrity Program  
(MIP) provides funds to the Centers for Medicare & Medicaid	 
Services (CMS--the agency that administers Medicare--to safeguard
over $300 billion in program payments made on behalf of its	 
beneficiaries. CMS conducts five program integrity activities:	 
audits; medical reviews of claims; determinations of whether	 
Medicare or other insurance sources have primary responsibility  
for payment, called secondary payer; benefit integrity to address
potential fraud cases; and provider education. In this report,	 
GAO determined (1) the amount of MIP funds that CMS has allocated
to the five program integrity activities over time, (2) the	 
approach that CMS uses to allocate MIP funds, and (3) how major  
changes in the Medicare program may affect MIP funding		 
allocations.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-813 					        
    ACCNO:   A60329						        
  TITLE:     Medicare Integrity Program: Agency Approach for	      
Allocating Funds Should Be Revised				 
     DATE:   09/06/2006 
  SUBJECT:   Budget obligations 				 
	     Claims settlement					 
	     Contract oversight 				 
	     Fraud						 
	     Funds management					 
	     Health care programs				 
	     Medical expense claims				 
	     Medicare						 
	     Program abuses					 
	     Program evaluation 				 
	     Program management 				 
	     Medicare Integrity Program 			 

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GAO-06-813

     

     * Results in Brief
     * Background
          * HIPAA Established MIP and Provided Dedicated Funding
          * MIP Funds Support Program Integrity Efforts
     * MIP Funding for All Five Activities Has Generally Increased
     * CMS's Current MIP Funding Allocation Approach Has Weaknesses
          * MIP Funds Allocated Primarily on a Historical Basis
          * CMS Does Not Ensure That Funds Are Allocated in an Optimal W
               * Allocations for Medical Review, Provider Education, and Bene
               * Audit's Role Has Changed, but Funding Allocations May Not Be
               * CMS Used Savings Information to Optimize Allocation of Secon
     * Future Programmatic Changes Will Affect MIP Funding Allocati
          * CMS's Current MIP Allocation Approach Is Not Adequate to Add
          * Medicare Contracting Changes Will Affect MIP Allocations
     * Conclusions
     * Recommendation for Executive Action
     * Agency Comments and Our Evaluation
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to the Chairman, Committee on Finance, U.S. Senate

United States Government Accountability Office

GAO

September 2006

MEDICARE INTEGRITY PROGRAM

Agency Approach for Allocating Funds Should Be Revised

GAO-06-813

Contents

Letter 1

Results in Brief 4
Background 6
MIP Funding for All Five Activities Has Generally Increased over Time 11
CMS's Current MIP Funding Allocation Approach Has Weaknesses 15
Future Programmatic Changes Will Affect MIP Funding Allocations 26
Conclusions 30
Recommendation for Executive Action 31
Agency Comments and Our Evaluation 31
Appendix I Objectives, Scope, and Methodology 34
Appendix II Information on MIP Funding, Expenditures, and ROI 36
Appendix III Key Tasks Performed by Contractors That Conduct MIP
Activities 38
Appendix IV CMS's Planned Spending of $100 Million Provided by DRA 40
Appendix V Comments from the Centers for Medicare & Medicaid Services 42

Tables

Table 1: MIP Activities Performed by Specific Types of Medicare
Contractors 10
Table 2: Fiscal Year MIP Funding Ranges under HIPAA 36
Table 3: Amount of MIP Expenditures Allocated to the Five Program
Integrity Activities, Fiscal Years 1997 through 2005 36
Table 4: Percentage of MIP Funds Allocated to the Five Program Integrity
Activities, Fiscal Years 1997 through 2005 37
Table 5: Reported ROI for Audit, Medical Review, and Secondary Payer
Activities, Fiscal Years 1997 through 2005 37
Table 6: CMS's Planned Spending of MIP Funds Provided by DRA 40

Figures

Figure 1: MIP Expenditures for Fiscal Years 1997 through 2005 8
Figure 2: MIP Expenditures by Activity, Fiscal Years 1997 through 2005 12
Figure 3: Spending for the Five MIP Activities for Fiscal Years 1997,
2001, and 2005 13
Figure 4: Percentage of MIP Funds Allocated to the Five Program Integrity
Activities, Fiscal Years 1997 and 2005, and Average for Fiscal Years 1997
through 2005 15
Figure 5: CMS Reported ROI for Secondary Payer, Medical Review, and Audit,
Fiscal Years 1997 through 2005 17

Abbreviations

ACRP Adjusted Community Rate Proposal CMS  Centers for Medicare & Medicaid
Services COB coordination of benefits DAC data analysis and coding DME
durable medical equipment DRA Deficit Reduction Act of 2005 ESRD end-stage
renal disease FBI Federal Bureau of Investigation HHS Department of Health
and Human Services HIPAA Health Insurance Portability and Accountability
Act of 1996 MAC Medicare administrative contractor MEDIC Medicare
prescription drug integrity contractor MedPAC Medicare Payment Advisory
Commission MIP  Medicare Integrity Program MMA Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 NSC National Supplier
Clearinghouse OIG Office of Inspector General PDE prescription drug event
PPS prospective payment system PSC program safeguard contractor ROI return
on investment

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separately.

United States Government Accountability Office

Washington, DC 20548

September 6, 2006

The Honorable Charles E. Grassley Chairman Committee on Finance United
States Senate

Dear Mr. Chairman:

In 1990, we designated the Medicare program as high risk for fraud, waste,
abuse, and mismanagement, in part because of its sheer size and
complexity. Medicare is a federal program that now pays over $300 billion
a year to over 1 million providers to help more than 42 million elderly
and certain disabled beneficiaries obtain a variety of health care
services and items. One measure of the program's vulnerability is the
billions of dollars in improper payments that Medicare makes each year to
providers that participate in the program.1 In November 2005, the Centers
for Medicare & Medicaid Services (CMS)2-the agency that administers the
Medicare program-reported that Medicare made an estimated $12.1 billion in
improper payments to providers.3 To address Medicare's vulnerability, the
Congress enacted a provision in the Health Insurance Portability and
Accountability Act of 1996 (HIPAA) that established the Medicare Integrity
Program (MIP).4 MIP provides CMS with dedicated funds to identify and
combat improper payments, including those caused by fraud and abuse.

1Improper payments are payments made for unauthorized purposes or in
excessive amounts and range from inadvertent errors to outright fraud and
abuse.

2Until July 1, 2001, CMS was called the Health Care Financing
Administration. We use the name CMS throughout this report.

3The estimated amount of $12.1 billion represents gross dollars paid in
error, which is calculated by adding estimated dollars paid in error that
were due to overpayments to the estimated amount of underpayments. In
2004, Medicare paid an estimated $11.2 billion in overpayments and
underpaid claims by an estimated $0.9 billion.

4Pub. L. No. 104-191, S: 202, 110 Stat. 1996-98 (codified at 42 U.S.C. S:
1395ddd (2000)).

CMS pays MIP funds to its Medicare contractors to conduct five activities
to safeguard Medicare payments.5 These activities are (1) audits of cost
reports, which are financial documents that hospitals and other
institutions are required to submit annually to CMS; (2) medical reviews
of claims to determine whether services provided are medically reasonable
and necessary; (3) determinations of whether Medicare or other insurance
sources have primary responsibility for payment, which is called secondary
payer; (4) identification and investigation of potential fraud cases,
which is called benefit integrity; and (5) education to inform providers
about appropriate billing procedures.

Recent events have raised questions about how MIP funding is being used.
In addition to establishing MIP, HIPAA established a fund to provide
resources for the Department of Justice-including the Federal Bureau of
Investigation (FBI)-and the Department of Health and Human Services (HHS)
Office of Inspector General (OIG) to investigate and prosecute health care
fraud and abuse.6 In 2005, we reported that the FBI could not adequately
account for its share of these funds or demonstrate that its funds were
being used to investigate health care cases.7 This finding raises concerns
about how CMS is using its MIP funds to conduct its program integrity
efforts-also called program safeguard activities. Further, the Medicare
program is undergoing significant changes that will alter the nature and
scope of CMS's program integrity efforts. For example, the new Medicare
Part D prescription drug benefit will increase Medicare's vulnerability to
improper payments.

You expressed interest in CMS's efforts to safeguard Medicare payments and
ensure that MIP funds are used effectively. In this report, we (1) provide
information on CMS's allocation of MIP funds among its five program
integrity activities over time, (2) examine the approach that CMS uses to
allocate MIP funds among these activities, and (3) describe how major
changes in the Medicare program may affect MIP funding allocations.

5These payments include those made to participating Medicare providers of
services, such as physicians, hospitals, and others.

6HIPAA S: 201(b), 110 Stat. 1992 (codified at 42 U.S.C. S: 1395i(k)(4)
(2000)).

7GAO, Federal Bureau of Investigation: Accountability over the HIPAA
Funding of Health Care Fraud Investigations Is Inadequate, GAO-05-388
(Washington, D.C.: Apr. 22, 2005).

In preparing this report, we interviewed CMS officials about their
allocation of MIP funds among the five activities for fiscal years 1997
through 2005 and reviewed allocations of MIP funds to the five activities.
We also reviewed related financial and other documentation, including
budget, expenditure, and savings data for fiscal years 1997 through 2005,
and budget proposals for fiscal years 2006 and 2007. Because most MIP
expenditures are for activities related to Medicare Parts A and B,8 our
analysis focused on those expenditures;9 however, we also collected some
information about CMS's planned MIP expenditures for the new prescription
drug benefit (Part D). In addition, the Deficit Reduction Act of 2005
(DRA), which was enacted in February 2006, established an additional
activity under MIP and provided $12 million in funding for this activity
in fiscal year 2006.10 We did not review allocations of funds for this
activity because our review covered expenditures through fiscal year 2005.

We also interviewed CMS officials regarding the approach they use to make
decisions on MIP funding allocations and reviewed related documentation,
including CMS reports on dollars saved in relation to dollars spent. We
did not independently examine the internal and automated data processing
controls for CMS systems from which we obtained data used in our analyses,
but we reviewed selected data for internal consistency and accuracy. CMS
subjects its data to different levels of review and conducts periodic
examinations of selected systems and controls over the data. The agency
uses these data to support its management and budgetary decisions and
expend funds to contractors. Therefore, we considered the data to be
reliable for the purposes of our review. In addition, we interviewed CMS
officials regarding changes in Medicare contracting that may affect MIP
funding allocations, performance measures, and contractors' evaluations,
and reviewed related agency documents. Appendix I contains a more detailed
discussion of our scope and methodology. We performed our work from August
2005 through August 2006 in accordance with generally accepted government
auditing standards.

8Medicare Part A covers inpatient hospital care, skilled nursing facility
care, some home health care services, and hospice care. Part B services
include physician and outpatient hospital services, diagnostic tests,
mental health services, outpatient physical and occupational therapy,
ambulance services, some home health services, and medical equipment and
supplies.

9Under the traditional Medicare fee-for-service program, beneficiaries are
usually charged for each health care service or item provided to them.
Medicare Advantage plans, under Part C of Medicare, charge a fixed monthly
fee per enrollee regardless of the number and mix of services they
provide. In fiscal year 2005, about 87 percent of Medicare beneficiaries
were enrolled in fee-for-service and about 13 percent were enrolled in
Medicare Advantage.

10Pub. L. No. 109-171, S: 6034(d), 120 Stat. 4, 77 (2006) (to be codified
at 42 U.S.C. S: 1395ddd(b)(6) and 1395i(k)(4)(D)). This activity is the
Medi-Medi program, which is designed to identify improper billing and
utilization patterns by matching Medicare and Medicaid claims information
on providers and beneficiaries to reduce fraudulent schemes that cross
program boundaries. The statute appropriates funds for CMS to contract
with third parties to identify program vulnerabilities in Medicare and
Medicaid through examining billing and payment abnormalities. The funds
also can be used in connection with the Medi-Medi program for two other
purposes: (1) coordinate actions by CMS, the states, the Attorney General,
and the HHS OIG to protect Medicaid and Medicare expenditures and (2)
increase the effectiveness and efficiency of both Medicare and Medicaid
through cost avoidance, savings, and recouping fraudulent, wasteful, or
abusive expenditures.

                                Results in Brief

MIP funding allocated to the five program integrity activities has
generally increased since fiscal year 1997, but the amounts of the
allocations and the percentage increases varied by year and activity. For
fiscal years 1997 through 2005, provider education received the largest
percentage increase in funds, while audit and medical review received the
largest share of funds. Among the five activities, from fiscal year 1997
to fiscal year 2005, CMS increased its allocation by about 45 percent for
audits to $207.6 million, 40 percent for medical review to $165.9 million,
49 percent for secondary payer to $151.5 million, and 89 percent for
benefit integrity to $118.5 million. CMS increased its allocation by about
590 percent for provider education to $70 million. This increase was due,
in part, to CMS's decision in fiscal year 2002 to use MIP funds for
outreach activities to groups of providers, which had not previously been
funded through MIP. In fiscal year 2006, CMS will be able to further
increase expenditures to MIP activities because the $720 million
originally appropriated for fiscal year 2006 under HIPAA was increased by
$112 million under DRA.11 CMS plans to use these additional funds, in
part, to address potential fraud and abuse in the new Medicare
prescription drug benefit.

CMS officials told us that they generally have allocated MIP funds to the
five activities based predominantly on their past allocation levels.
Although CMS has quantitative measures of effectiveness for two
activities-the savings generated by medical review and secondary payer
compared to their costs-it does not have similar measures to determine the
effectiveness of each of its program integrity activities in relation to
the others. In addition, CMS has generally not assessed whether MIP funds
are allocated within the program integrity activities to address risks or
provide the greatest overall potential benefit to Medicare. For example,
distribution of medical review funds to individual contractors has not
considered the size of a particular contractor's claims payment workload
and its risk of making improper payments, based on the propensity of fraud
in the area or past levels of improper payments. While agency officials
told us that MIP allocations are generally historically based, in a few
instances, CMS has modified its funding to respond to the agency's
immediate priorities. For example, in fiscal year 2004, CMS began to
increase funds to expand the scope of its annual study to estimate
Medicare improper payment rates, and in fiscal year 2002, it increased its
MIP allocation for contractors to better educate providers about Medicare.

11DRA S:S: 5204 and 6034(d), 120 Stat. 48 and 77 (to be codified at 42
U.S.C. S: 1395i(k)(4)(C) and (D)).

As a result of significant changes that the Medicare program is
undergoing, CMS will need to make new choices about how it should allocate
its MIP funds to best address challenges that will occur. For example, in
2006, CMS implemented the new Part D prescription drug benefit. CMS may
need to reallocate funds from program integrity activities for Parts A and
B to conduct program integrity activities for Part D. Further, the agency
is also reforming contracting practices for claims administration
services, which include program integrity activities. As part of its
contracting reform efforts, CMS plans to reduce the number of Medicare
claims administration contractors from 51 to 23 by 2009, has established
new jurisdictions for them and the program safeguard contractors (PSC)
that will be working with them, and will require the contractors to
perform different MIP activities from those they perform currently. While
there is little precedent for CMS to follow in addressing these
programmatic changes, its current allocation approach is not geared to
best address future needs by targeting MIP funds to the activities with
the greatest impact on the program and to ensure that the contractors have
funding commensurate with their relative workloads and risk of making
improper payments.

To better ensure that MIP funds are appropriately allocated among and
within the five activities, we recommend that CMS develop a method of
allocating funds based on the effectiveness of its program integrity
activities, the contractors' workloads, and risk.

In its written comments on a draft of this report, CMS generally agreed
with our recommendation. (See app. V). However, CMS expressed concern that
the report appeared to emphasize the use of a quantitative measure that
tracks dollars saved in relation to dollars spent as a way to allocate MIP
funds. CMS stated that this quantitative measure can be an indicator of
effectiveness, but noted that such a measure cannot serve as the sole
basis for informing funding decisions. While our report does discuss the
importance of quantitative measures of effectiveness, it also discusses
other considerations for allocating MIP funds.

                                   Background

Before 1996, Medicare program integrity activities were subsumed under
Medicare's general administrative budget and performed, along with general
claims processing functions, by insurance companies under contract with
CMS, which led to certain problems. The level of funding available for
program integrity activities was constrained, not only by the need to fund
ongoing Medicare program operations-such as the costs for processing
medical claims, but also by budget procedures imposed under the Budget
Enforcement Act of 1990.12 In the early and mid-1990s, we reported that
such funding constraints had reduced Medicare contractors' ability to
conduct audits and review medical claims.13 HHS advocated for a dedicated
and stable amount of program integrity funding outside of the annual
appropriations process, so that CMS and its contractors could plan and
manage the function on a multiyear basis. HHS also asserted that past
fluctuations in funding had made it difficult for contractors to retain
experienced staff who understood the complexities of, and could protect,
the financial integrity of Medicare program spending.

HIPAA Established MIP and Provided Dedicated Funding

Beginning in fiscal year 1997, HIPAA established MIP and provided CMS with
dedicated funding to conduct program integrity activities. HIPAA
stipulated a range of funds available for these activities from the
Medicare trust funds each year. For example, for fiscal year 1997, the law
stipulated that at least $430 million and not more than $440 million
should be used. The maximum amount of MIP funds rose from $440 million in
fiscal year 1997 to $720 million in fiscal year 2003. For fiscal year
2003, and every year thereafter, the maximum amount that HIPAA stipulated
for MIP was $720 million. (See app. II, table 2, for additional
information on the MIP funding ranges.) As a result of the increases
stipulated in HIPAA, from fiscal years 1997 through 2005, total MIP
expenditures increased about 63 percent-from about $438 million to $714
million, as figure 1 shows.14 HIPAA authorized MIP funds to be used to
enter into contracts to "promote the integrity of the Medicare program."
The statute also listed the various program integrity activities to be
conducted by contractors.15

12Pub. L. No. 101-508, tit. XIII, 104 Stat. 1388, 1388-573-1388-630. Under
the Budget Enforcement Act, funding for Medicare administrative
activities, including for program safeguard activities that were found to
be very cost-effective, could be increased only if discretionary funding
for other programs, such as immunizations or job training, were reduced.

13GAO, Medicare Spending: Modern Management Strategies Needed to Curb
Billions in Unnecessary Payments, GAO/HEHS-95-210 (Washington, D.C.: Sept.
19, 1995); Medicare: Adequate Funding and Better Oversight Needed to
Protect Benefit Dollars, GAO/T-HRD-94-59 (Washington, D.C.: Nov. 12,
1993); and Medicare: Funding and Management Problems Result in Unnecessary
Expenditures, GAO/T-HRD-93-4 (Washington, D.C.: Feb. 17, 1993).

14A CMS official told us that the agency typically spends about 1 percent
less than the maximum appropriated amount to ensure that it can cover
additional contractor expenses that may occur.

15These activities are (1) review of activities of providers of services
or other individuals and entities furnishing items and services for which
payment may be made (such as skilled nursing facilities and home health
agencies), including medical and utilization review and fraud review; (2)
audit of cost reports; (3) determinations as to whether payment should not
be, or should not have been, made and recovery of payments that should not
have been made; (4) education of providers of services, beneficiaries, and
other persons with respect to payment integrity and benefit quality
assurance issues; and (5) developing (and periodically updating) a list of
items of durable medical equipment (DME) that are subject to prior
authorization. Concerning the fifth activity, CMS has published
instructions related to the prior authorization of customized DME in the
Medicare Program Integrity Manual, and contractors (Medicare
administrative contractors and PSCs) are required to publish examples of
the types of items for which prior authorization is available. The first
activity listed above includes both medical review and benefit integrity.

Figure 1: MIP Expenditures for Fiscal Years 1997 through 2005

MIP Funds Support Program Integrity Efforts

CMS allocates MIP funds primarily to support its contractors' program
integrity efforts for the traditional Medicare program, known as
fee-for-service Medicare.16 Among these contractors are fiscal
intermediaries (intermediaries), carriers,17 PSCs, and Medicare
administrative contractors (MAC).18 MACs are a new type of contractor that
will replace all intermediaries and carriers by October 2011, as required
by the Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA).19 MMA required CMS to conduct full and open competition to
select MACs. CMS refers to this change as contracting reform.

16In fiscal year 2005, about 1.6 percent of total MIP expenditures were
used for program integrity efforts for Medicare Advantage plans.

17Intermediaries process Medicare Part A and Part B claims paid to
hospitals and other institutions, such as home health agencies. Carriers
process the majority of Part B claims for the services of physicians and
other providers.

18In January 2006, CMS selected four MACs.

19Pub. L. No. 108-173, S: 911, 117 Stat. 2066, 2378-86.

CMS has contracted with intermediaries, carriers, and MACs to perform two
types of activities-claims processing and program integrity. Their claims
processing activities include receiving and paying claims. These
activities are classified as program management and are funded through a
program management budget. In addition, intermediaries and carriers have
been charged with conducting some program integrity activities under MIP,
including performing medical review of claims. The four MACs selected in
January 2006 will not conduct medical review activities. CMS plans to
assign responsibility for medical review of claims to the MAC selected in
July 2006 and to the other MAC contracts to be awarded in the future. MIP
provides funds to support these program safeguard efforts.

In addition, CMS uses MIP funds to support the activities of PSCs, which
perform medical review of claims and identify and investigate potential
fraud cases; a coordination of benefits (COB) contractor, which determines
whether Medicare or other insurance has primary responsibility for paying
a beneficiary's health care costs; the National Supplier Clearinghouse
(NSC), which screens and enrolls suppliers in the Medicare program; and
the data analysis and coding (DAC) contractor, which maintains and
analyzes Medicare claims data for durable medical equipment (DME),
prosthetics, orthotics, and supplies.20

Contractors receive MIP funds to perform one or more of the following five
program integrity activities:

           o  Audits involve the review of cost reports from institutions,
           such as hospitals, nursing homes, and home health agencies. Cost
           reports play a role in determining the amount of providers'
           Medicare reimbursement.
           o  Medical review includes both automated and manual prepayment
           and postpayment reviews of Medicare claims and is intended to
           identify claims for noncovered or medically unnecessary services.
           o  The secondary payer activity seeks to identify primary sources
           of payment--such as employer-sponsored health insurance,
           automobile liability insurance, and workers' compensation
           insurance--that should be paying claims mistakenly billed to
           Medicare. Secondary payer activities also include recouping
           Medicare payments made for claims not first identified as the
           responsibility of other insurers.
           o  Benefit integrity involves efforts to identify, investigate,
           and refer potential cases of fraud or abuse to law enforcement
           agencies that prosecute fraud cases.
           o  Provider education communicates information related to Medicare
           coverage policies, billing practices, and issues related to fraud
           and abuse both to providers identified as having submitted claims
           that were improper, and to the general provider population.

           CMS also uses MIP to fund support for the five activities, such as
           certain information technology systems, fees for consultants,
           storage of CMS records, and postage and printing. The agency
           allocates the cost of this support to the five activities,
           depending on which of the activities is receiving support. Table 1
           provides information on specific MIP activities performed by the
           contractors. Appendix III provides examples of key tasks performed
           by each of these contractors.

20Medicare defines DME as equipment that serves a medical purpose, can
withstand repeated use, is generally not useful in the absence of an
illness or injury, and is appropriate for use in the home. DME includes
items such as wheelchairs, hospital beds, and walkers. Medicare defines
prosthetic devices (other than dental) as devices that are needed to
replace a body part or function. Prosthetic devices include artificial
limbs and eyes and cardiac pacemakers. Medicare defines orthotic devices
to include leg, arm, back, and neck braces that provide rigid or semirigid
support to weak or deformed body parts or restrict or eliminate motion in
a diseased or injured part of the body. Medicare-reimbursed DME supplies
are items that are used in conjunction with DME and consumed during the
use of the equipment-such as drugs used for inhalation therapy-or items
that need to be replaced on a frequent, usually daily, basis-such as
surgical dressings.

Table 1: MIP Activities Performed by Specific Types of Medicare
Contractors

                                                       COB            DAC     
Activity      Intermediaries Carriers MACsa PSCs contractor NSC contractor 
Auditb              0M          0m     0m    0M      0m     0m      0m     
Medical             0M          0M     0m    0M      0m     0m      0m     
review                                                          
Secondary           0M          0M     0M    0m      0M     0m      0m     
payer                                                           
Benefit             0m          0m     0m    0M      0m     0M      0M     
integrityc                                                      
Provider            0M          0M     0M    0M      0m     0m      0m     
education                                                       

Source: GAO analysis of CMS information.

Legend: 0M Contractor performs this activity; 0m Contractor does not
perform this activity or supports other contractors that have primary
responsibility for performing this activity.

aThis information pertains to the four MACs that were selected by CMS in
January 2006. The MAC selected in July 2006 will perform audit, medical
review, secondary payer, and provider education activities. This
contractor will also support a PSC that performs the benefit integrity
activity.

bAudits of cost reports are conducted for the benefits paid under Part A,
the part of the program that pays for the services of institutional
providers, such as hospitals. All of the other activities are conducted
for both Parts A and B.

cIntermediaries, carriers, and MACs do not have primary responsibility for
benefit integrity, but they do provide support to the PSCs that perform
this activity.

     MIP Funding for All Five Activities Has Generally Increased over Time

For fiscal years 1997 through 2005, CMS generally increased the amount of
funding for each of its five program integrity activities, but the amount
of the funding provided and the percentage increase have varied among the
activities. Provider education received the largest percentage increase in
funds, while audit and medical review received the largest amount of funds
overall. (See fig. 2.) CMS increased its allocation for provider education
by about 590 percent from fiscal year 1997 through fiscal year 2005. This
increase was due, in part, to CMS's decision in fiscal year 2002 to use
MIP funds for outreach activities to groups of like providers, which had
not previously been funded through MIP. CMS will be able to further
increase expenditures for program integrity in fiscal year 2006. In
addition to the maximum of $720 million originally appropriated under
HIPAA for fiscal year 2006, DRA increased the maximum by an additional
$112 million, for a total of $832 million.21 CMS plans to use some of the
$112 million to address potential fraud, waste, and abuse in the new
Medicare prescription drug benefit.22

21For fiscal year 2006, DRA appropriated $100 million to MIP in general
and $12 million for the Medi-Medi program, for a total of $112 million. In
addition to the $12 million appropriated in fiscal year 2006 for the
Medi-Medi program, the statute also appropriated $24 million for fiscal
year 2007, $36 million for fiscal year 2008, $48 million for fiscal year
2009, and $60 million for fiscal year 2010 and each subsequent fiscal year
for the Medi-Medi program.

22The President's budget for fiscal year 2007 has proposed funding for MIP
beyond the HIPAA-specified maximum amount of $720 million. The proposal is
part of a governmentwide effort to provide a specified level of
discretionary funding for a defined period for program integrity
activities.

Figure 2: MIP Expenditures by Activity, Fiscal Years 1997 through 2005

In each year from fiscal year 1997 through fiscal year 2005, CMS generally
increased the amount of MIP funds spent for each of its five program
integrity activities, as figure 2 shows. In addition to the increase in
the amount of funding for provider education, the expenditures for audit
increased 45 percent during the same period. As figure 3 shows,
expenditures for medical review increased from fiscal year 1997 to fiscal
year 2001 to almost $215 million-about 81 percent-and, since fiscal year
2001, decreased to about $166 million, or about 23 percent. Overall,
expenditures for medical review increased 40 percent from fiscal year 1997
to fiscal year 2005. During this period, expenditures for secondary payer
increased 49 percent, and for benefit integrity, expenditures increased 89
percent. (See fig. 3 for the amount of expenditures by activity in fiscal
years 1997, 2001, and 2005 and app. II, table 3, for more detailed
information on the amount of expenditures for each activity in each year.)

Figure 3: Spending for the Five MIP Activities for Fiscal Years 1997,
2001, and 2005

Note: The total expenditures for fiscal year 1997 ($437.9 million) include
$1.2 million in "other" expenditures that CMS did not include under a
particular MIP activity.

Increased spending for provider education stemmed, in part, from provider
concerns about an increased burden on them in the medical review process.
In 2001, we reported that as CMS increasingly focused on ensuring program
integrity, providers were concerned about what they considered to be
inappropriate targeting of their claims for review.23 Further, providers
asserted that they may have billed incorrectly because of their confusion
about Medicare's program rules. To address these concerns, CMS developed a
more data-driven approach for conducting medical review and also increased
its emphasis on provider education. CMS officials explained that medical
review would help identify providers that were billing inappropriately,
and provider education would focus on individuals' specific billing errors
to eliminate or prevent recurrence of the problems. In addition, beginning
in fiscal year 2002, spending for the provider education activity
increased significantly because CMS began to use MIP funds for what the
agency called provider outreach. Provider outreach focuses on
communicating with groups of providers about Medicare policies,
initiatives, and significant programmatic changes that could affect their
billing. This information is conveyed through seminars, workshops,
articles, and Web site publications. Previously, provider outreach had
been funded outside of MIP, as part of CMS's program management budget.
Provider education spending increased from $17 million in fiscal year
2001-before provider outreach was added to the provider education
activity-to $53.5 million in fiscal year 2002. In fiscal year 2005,
funding for the provider education activity reached $70 million.24

23GAO, Medicare Management: CMS Faces Challenges in Safeguarding Payments
While Addressing Provider Needs, GAO-01-1014T (Washington, D.C.: July 26,
2001).

In comparing the share of funds spent on each program integrity activity,
from fiscal year 1997 through fiscal year 2005, we found that CMS
generally spent the largest share on audit, averaging about 31 percent,
and on medical review, averaging about 27 percent. CMS spent less on
secondary payer, averaging 21 percent, and benefit integrity, averaging 15
percent. In contrast, during this period, CMS spent the smallest
percentage on provider education, which averaged about 6 percent of MIP
expenditures. See figure 4 for information on the percentage of funds
allocated to each activity. (For more detail, see table 4 in app. II.)

24In fiscal year 2005, expenditures for the provider education activity
totaled $70 million, which consisted of $36.7 million for provider
outreach and $33.3 million for provider education.

Figure 4: Percentage of MIP Funds Allocated to the Five Program Integrity
Activities, Fiscal Years 1997 and 2005, and Average for Fiscal Years 1997
through 2005

Note: Percentages for fiscal year 1997 exclude the $1.2 million in "other"
expenditures, which accounted for less than 1 percent of the total
allocation for that fiscal year.

          CMS's Current MIP Funding Allocation Approach Has Weaknesses

CMS officials told us that they generally had allocated MIP funds to the
five activities based predominantly on historical funding, but sometimes
considered high-level priorities. However, this approach does not take
into account data or information on the effectiveness of one activity over
the other in ensuring the integrity of Medicare or allow CMS to determine
if activities are yielding benefits that are commensurate with the amounts
spent. For example, while CMS has noted that benefit integrity and
provider education activities have intangible value, the agency has not
routinely collected information to evaluate their comparative
effectiveness. Furthermore, CMS has not fully assessed whether MIP funds
are appropriately allocated within the audit, medical review, benefit
integrity, and provider education activities. For example, audit's role
has changed as Medicare's payment methods have changed in the last decade,
but it continues to have the largest share of MIP funding.

MIP Funds Allocated Primarily on a Historical Basis

According to agency officials, CMS allocates funds for the five activities
based primarily on an analysis of previous years' spending and may also
consider other information when developing the MIP budget, such as current
expenditures by individual contractors.25 CMS officials told us that they
may also consider the agency's high-level priorities. For example, in
fiscal year 2004, CMS began to increase funds to expand the scope of its
annual study to estimate Medicare improper payment rates, and in fiscal
year 2002, it increased its MIP allocation for provider education.

CMS does not have a means to compare quantitative data or qualitative
information on the relative effectiveness of MIP activities that it could
use in allocating funds. Instead, it calculates the quantitative benefits
for two, and assesses the qualitative benefits-which are not objectively
measured-for the other three. In fiscal year 2005, for its medical review
and secondary payer activities, CMS tracked dollars saved in relation to
dollars spent-a quantitative measure that the agency calls a return on
investment (ROI).26

Having an ROI figure is useful because it measures the effectiveness of an
individual activity so that its value can be compared with that of another
activity. As of fiscal year 2005, secondary payer had an ROI of $37 for
every dollar spent on the activity, and medical review had an ROI of $21
for every dollar spent. CMS tracked the ROI for audit, but by fiscal year
2002, audit's reported contribution to ROI fell to almost zero. (See fig.
5 and app. II, table 5, for additional ROI details.)

25According to CMS officials, before determining budget amounts for
medical review, they analyze both last year's and current expenditures by
individual contractor. A contractor might not be spending the full amount
allocated to it for various reasons, such as staff turnover.

26A CMS official also indicated that the agency considers medical review
to have a sentinel effect in discouraging providers that might be
considering defrauding Medicare. However, this effect is not possible to
measure.

Figure 5: CMS Reported ROI for Secondary Payer, Medical Review, and Audit,
Fiscal Years 1997 through 2005

CMS officials told us that the decrease in the ROI for audit was due to
the implementation of prospective payment systems (PPS),27 under which
Medicare pays institutional providers fixed, predetermined amounts that
vary according to patients' need for care.28 Until fiscal year 2001,
audits had achieved an ROI that was generally $9 or more for every dollar
spent conducting them, by disallowing payment for individual costs that
should not have been paid by Medicare under the previous payment method.
Under PPS, CMS's methods for paying providers changed. However, the
information system that had been used to track ROI began to incorrectly
calculate the savings from audit because it had not been adjusted for the
new payment method. According to agency officials, CMS is implementing a
different way to track audit savings, and an overall ROI. It will focus on
the savings from disallowing items that directly affect an individual
provider's payment under a PPS, such as bad debts and the number of
low-income patients hospitals serve. It will track the amounts related to
these add-on payments actually paid by Medicare to, or recouped from, the
provider after an audit. The difference between the amount paid prior to
the audit and the amount paid after the audit (assuming there has been an
adjustment) would be the savings.

27In 1983, legislation required the establishment of PPS for inpatient
hospital services. Social Security Amendments of 1983, Pub. L. No. 98-21,
S: 601(e), 97 Stat. 65, 152-62. Before then, Medicare had generally paid
providers based on their reported costs, and audit disallowances of
reported costs led to savings. Under PPS, payment rates are generally not
based on individual providers' costs, but are typically set for groups of
services, with payment amounts varying by the intensity of need for care
by patients served. From 1998 through 2002, CMS implemented PPS for
skilled nursing facilities (nursing homes), hospital outpatient
departments, home health agencies, and inpatient rehabilitation
facilities.

However, all audit functions do not result in measurable savings. For
example, in its written comments on a draft of this report, CMS noted that
many audit functions funded by MIP do not have an ROI. CMS stated that
these include processing cost reports for data collection purposes,
correcting omissions on providers' cost reports, implementing court
decisions, and issuing notifications concerning Medicare payments. In
addition, CMS stated that some of these activities are mandated by law,
while others have significant value to the Medicare Payment Advisory
Commission (MedPAC), which is an independent federal commission;
providers; provider associations; and actuaries.

From fiscal year 1997 through fiscal year 2005, CMS developed qualitative
assessments of the impact of benefit integrity and provider education.
According to CMS, the agency develops such assessments when the savings
generated by MIP activities are impossible or difficult to identify.
Nevertheless, CMS officials told us that these activities provide value to
the program in helping to ensure proper Medicare payments. For example,
CMS officials said that benefit integrity contributes to the work of
federal law enforcement agencies, which investigate and prosecute Medicare
fraud and abuse. CMS officials also noted that they consider benefit
integrity to have a sentinel effect in discouraging entities that may be
considering defrauding the Medicare program, but this effect is impossible
to measure.

28For example, the basic PPS payment for hospitals is determined by the
diagnoses of the patients that they serve, with the specific
diagnosis-related payments based on the average weighted costs of
hospitals to provide care to patients in 1981, adjusted upwards over time.
In addition, a hospital's payment rates are further adjusted based on
factors specific to the hospital, including providing an additional
payment to hospitals that treat an unusually large number of low-income
patients or that offer graduate medical education. Certain items, such as
bad debt expense, are also paid based on a hospital's reported costs.

CMS indicated that trying to measure the results of the contractors'
benefit integrity activities could create incentives that undermine the
value of their work. For example, counting the number of cases referred to
law enforcement for further investigation could lead the contractors to
refer more cases that were less fully developed. However, other agencies
that investigate or prosecute fraud, such as HHS and the Department of
Justice, keep track of their successful cases, recoveries, and fines to
demonstrate their results. Similarly, CMS could assess the degree to which
each of its contractors had contributed to HHS and the Department of
Justice's successful investigations and prosecutions.

In regard to educating providers on appropriate billing practices, CMS may
be missing opportunities to evaluate its contractors' performance.
Provider education can help reduce billing errors, according to CMS.
However, according to an OIG report, CMS has not evaluated the strategies
used to modify the behavior of providers through education to determine if
these strategies are achieving desired results.29

CMS has noted the intangible value inherent in benefit integrity and
provider education activities, but the agency has not routinely collected
information to evaluate their comparative effectiveness in ensuring
program integrity. Further, as discussed earlier, correct information on
audit's effectiveness, based on an ROI, has not been available for the
last several years. Consequently, CMS is not able to determine if some of
the funds spent for benefit integrity, provider education, and audit-about
$396 million, or 56 percent of MIP funds in fiscal year 2005-could be
better directed to secondary payer or medical review. Nevertheless, CMS
officials told us that they plan to decrease the allocation to medical
review and increase the allocation to provider education.

29Department of Health and Human Services, Office of Inspector General,
Carrier Medical Review Progressive Corrective Action, OEI-02-03-00300
(Washington, D.C.: October 2005).

CMS officials stated that they are developing two initiatives that will
give the agency objective measures of the results of the audit and
provider education activities. As discussed earlier, CMS is implementing a
revised methodology for calculating the ROI for audit. In addition, it is
trying to develop information on the effectiveness of provider education.
A CMS official explained that the agency is adding a provider education
component to its program integrity management reporting system.30 This
component will potentially allow CMS to develop an ROI figure for provider
education by correlating educational efforts to a decrease in claim
denials and provide a measure of the quantitative benefits of this
activity. This component is scheduled to begin operating in the summer of
2006.

CMS Does Not Ensure That Funds Are Allocated in an Optimal Way within Activities

After CMS has allocated funds to each of the five MIP activities, it must
decide how to further distribute those funds to pay contractors that carry
out each one. For example, in fiscal year 2004, after CMS allocated about
$135 million for medical review to be conducted by intermediaries and
carriers, it then distributed those funds to pay 28 intermediaries and 24
carriers that were conducting medical review at that time. However, given
vulnerabilities for improper payment, contractor workload, and the
relative effectiveness of activities performed, CMS has not always taken
steps to ensure that it has allocated funds in an optimal way within its
activities. Nevertheless, CMS has used information on relative savings to
decide on funding allocations within the secondary payer activity.

  Allocations for Medical Review, Provider Education, and Benefit Integrity Are
  Not Based on Vulnerabilities

Medical review, provider education, and benefit integrity are activities
for which allocation of MIP funds may not be optimal, because our analysis
suggests that CMS has not allocated funds within these activities based on
information concerning contractor vulnerabilities. Such vulnerabilities
include the potential for fraudulent billing in different locations and
the amount of potential benefit payments at risk in the contractor's
jurisdiction. For example, CMS estimated that the contractor that handled
claims for DME, orthotics, prosthetics, and supplies in a jurisdiction
that included Texas and Florida-two states experiencing high levels of
fraudulent Medicare billing-improperly paid 11.5 percent of its 2004
claims-or $474.9 million-which was a higher improper payment rate than
that of other contractors paying these types of claims. As we previously
reported, our analysis indicated this contractor received almost a third
less funds for medical review per $100 in submitted claims in fiscal year
2003 than the amount given to contractors in other regions with less risk
of fraudulent billing.31 Our most recent analysis indicated that the
imbalance in fund allocation did not change in fiscal years 2004 and 2005.
We could not determine the rationale for this allocation beyond what was
historically budgeted for this contractor.

30CMS began implementing the first phase of this system in 2000 and fully
implemented it in 2004.

The amount of medical review funds allocated to individual contractors is
not directly tied to the amount of benefits that they pay, which is a key
measure of potential risk. For example, in fiscal year 2004, one
contractor paid out $66 million in benefits and received about 28 cents in
medical review funds for each $100 in benefits paid. In contrast, another
contractor paid out considerably more in benefits-about $5 billion in
fiscal year 2004-and received about 7 cents in medical review funds for
each $100 in benefits paid.

Further, CMS has not adjusted the amount of funding for individual
contractors to educate providers based on their relative risks. A CMS
official told us that the amount of provider education funding is
generally aligned with the amount allocated for medical review, regardless
of the value of the benefits that the contractor pays.

Similarly, the amount of MIP funds provided to PSCs is not directly tied
to the amount of benefits paid in jurisdictions for which they have
responsibility for benefit integrity. For example, CMS spent about $75
million for work performed by PSCs under 13 benefit integrity task orders.
The PSCs averaged about 3 cents for each $100 in paid claims in the
jurisdictions for which they conducted benefit integrity tasks.32 However,
the amount of MIP funding paid to the PSCs to conduct benefit integrity
activities varied from about 1 cent to about 7 cents for each $100 in
claims paid. Further, our analysis showed no clear relationship between
funds provided to PSCs and their responsibilities for conducting benefit
integrity activities in jurisdictions with high incidences of fraudulent
Medicare billing. For example, one PSC received about 4 cents for
conducting benefit integrity work for each $100 in paid claims for benefit
integrity work in a jurisdiction that included Florida, which is at high
risk for fraudulent billing. In contrast, PSCs received the same level of
funding to conduct benefit integrity work in states at lower risk for
fraudulent billing, including Iowa, Montana, Pennsylvania, and Wyoming.

31GAO, Medicare: CMS's Program Safeguards Did Not Deter Growth in Spending
for Power Wheelchairs, GAO-05-43 (Washington, D.C.: Nov. 17, 2004).

32Task orders were effective for about 1 year, and beginning task order
dates ranged from November 1, 2004, through January 25, 2005.

  Audit's Role Has Changed, but Funding Allocations May Not Be Optimal

During the last decade, Medicare has significantly changed how it pays
institutional providers-such as hospitals and nursing homes-that it
audits.33 To align with the payment method changes, CMS has modified its
audit focus to items in the cost report that can affect payments under a
PPS. However, these audits can affect a much smaller proportion of
Medicare's payments under a PPS than audits of costs under the previous
payment method. Given the magnitude of the payment method change, CMS has
not evaluated whether funds within the audit activity should be further
reallocated to potentially generate greater savings to the Medicare
program by addressing the accuracy of reported costs that may be used to
determine payment increases.

CMS distributes funds to its contractors to conduct certain tasks, such as
inputting data from; reviewing; and, if needed, auditing cost reports
submitted by its institutional providers in order to settle, or agree
upon, the reported costs.34 CMS's audit contractors are also required to
conduct wage index reviews35 and assist with intermediary hearings and
appeals of settled cost reports. For several years, CMS has had a backlog
of cost reports to settle, and the agency has made a priority of reducing
the backlog. Other priorities include more closely scrutinizing those
providers that are still paid based on their costs-such as critical access
hospitals-and conducting required audits.

33CMS officials indicated that although the hospital inpatient PPS was
implemented in 1983, the major changes to payment methods occurred
beginning in 1998 and later as prospective payment was introduced for
skilled nursing facilities, hospital outpatient departments, and home
health agencies.

34Institutional providers are required to submit cost reports and CMS is
required to settle them, even though most institutional providers are paid
through a prospective payment method.

35As part of the methodology for determining prospective payments to
hospitals, CMS is required to adjust standardized amounts for area
differences in hospital wage levels by a factor, which is known as the
wage index. The wage index reflects the relative hospital wage level (in
the geographic area of the hospital) compared to the national-average
hospital wage level. Through a survey, CMS obtains hospital wages and
wage-related costs. As part of the process of adjustment, contractors
conduct reviews of the submitted data and the supporting documentation.

For providers paid under a PPS, CMS has shifted its audit focus to the few
items that could affect a provider's payments if disallowed. These include
bad debt, payments for graduate medical training, and the number of
low-income patients that hospitals serve. CMS has also shifted more audit
resources to hospitals because more items on their cost reports can affect
calculations of a provider's add-on payments.

CMS does not know the amount of MIP funds that are associated with audits
of different types of providers or specific issues, such as bad debt.
However, in fiscal year 2004, CMS began to separately track some audit
costs, such as those for desk reviews,36 audits, and wage index reviews.
This provided some information on how audit funds were being spent.
According to CMS officials, tracking the costs of individual audits at a
provider or issue level would be difficult and costly because multiple
issues are audited at the same time and the complexity of individual
audits varies for the same provider type. Nevertheless, more detailed
information on audit costs-such as at the provider level-than CMS
currently tracks could provide it with a better understanding of the value
of its current mix of tasks, particularly if it could associate the costs
with the savings from the audits. This could provide CMS with information
on whether it needs to change the balance of funding for those tasks-for
example, whether it should focus more attention on bad debt or other areas
of the cost report for specific types of providers.

Further, CMS's audit function continues to focus on verifying specific
aspects of the provider's cost report that affect its individual payment.
This type of audit generally addresses a small portion of providers'
Medicare payments, while under a PPS, a much greater portion of the
payments are based on overall industry costs.37 Each year, MedPAC advises
the Congress on whether the Medicare PPS rates for institutional providers
should increase, decrease, or remain constant. However, MedPAC generally
does not have a set of audited cost reports that validate the information
it uses in its assessments of providers, such as hospitals' allocations of
their costs. According to MedPAC, the current audit process reveals little
about the accuracy of the Medicare cost information.38 For example, while
CMS audits individual providers through full or partial audits, it does
not allocate funds to audit a panel of providers, such as hospitals, which
could provide a means to highlight areas where cost reporting accuracy is
problematic. Without accurate information, CMS cannot ensure that payments
to hospitals properly reflect their costs and provide reliable information
that can be a factor in determining whether rates should change or remain
constant.

36A desk review determines the acceptability of the cost report; the need
for audit; and if needed, the depth of audit to be performed.

37CMS audit priorities include reviewing providers under PPS for non-PPS
payments made through the cost report, including those associated with bad
debts; graduate medical education; indirect medical education;
disproportionate share hospitals, which provide care to an unusually large
proportion of low-income patients; and organ acquisition. Priorities also
include focusing on providers not recently audited and on specific types
of providers, including those still reimbursed on a cost basis, such as
critical access and cancer hospitals and end-stage renal disease
facilities. Under the Balanced Budget Act of 1997, CMS is required to
audit end-stage renal disease facilities every 3 years (Pub. L. No.
105-33, S: 4558(a), 111 Stat. 251, 463).

CMS might find it cost-effective to gather additional information because
audits have the potential to give the Congress better information on
hospitals' costs. For example, by law, CMS is required to periodically
conduct audits of end-stage renal disease (ESRD) facilities, which care
for patients who must rely on dialysis treatments to compensate for kidney
failure. CMS broadened its audit plan for these facilities to include a
review not only of bad debts, but also to validate the costs of a selected
number of items that are paid through PPS.39 CMS officials indicated that
their audits of these facilities generated only limited savings, usually
related to bad debts, so they did not consider these audits very valuable.
However, as a result of these audits, MedPAC officials stated in 2005 that
these facilities had a greater margin-or ratio of Medicare payments to

38Medicare Payment Advisory Commission, Report to the Congress: Sources of
Financial Data on Medicare Providers (Washington, D.C.: June 2004). This
report mentions several possibilities for using audit to obtain more
accurate data, including making that an objective of the audit, focusing
audit attention on the section of the cost report that deals with a
hospital's total financial performance data, conducting full scale
audits-which MedPAC estimates can take from 1,000 to 2,000 hours of
auditors' time to complete, or targeting audits to suspected areas within
cost reports to determine reporting accuracy.

39Contractors typically develop an "audit program," or plan, which
identifies the audit objectives, issues, transactions, or cost report
entries to audited, reviewed, or verified; the audit steps to be
performed; and the tests to be applied.

costs-than their cost reports suggested.40 This information was factored
into MedPAC's recommendation about the amount of payment increase needed
in calendar year 2007. Setting appropriate payment increases for hospitals
is potentially more important to Medicare than for ESRD facilities because
payments to participating inpatient hospitals represented about $116
billion, or about 40 percent of Medicare's benefit payments in fiscal year
2004. CMS officials agreed that gathering this information might be
valuable, but indicated that they did not currently have sufficient
funding to conduct this data validation in addition to their current
efforts funded as part of audit.

  CMS Used Savings Information to Optimize Allocation of Secondary Payer Funds

In contrast to provider education and audit, CMS collects information on
the relative savings from specific secondary payer functions and has used
this information to decide on funding allocations within the secondary
payer activity. CMS allocates funds to, and calculates savings for, about
16 secondary payer functions. Among these functions are (1) a data match
that helps identify instances when a Medicare beneficiary was covered by
other insurance and (2) the initial enrollment questionnaire, which
gathers insurance information on beneficiaries before they become eligible
for Medicare. Within secondary payer, for fiscal year 2005, savings for
the 16 functions ranged from less than 1 percent to 49 percent of savings
of over $5 billion for all of the functions.

CMS officials told us that they have used relative savings information for
secondary payer functions as one factor in determining whether to
increase, decrease, or terminate funding for the functions within this
activity. For example, according to CMS officials, in fiscal year 2005,
savings for one secondary payer function-voluntary reporting of primary
payer information to CMS by health insurance companies-increased by about
65 percent over fiscal year 2004. Further, savings from this effort
continue to increase. CMS is planning to maintain or expand funding to it.
However, CMS officials said that after confirming their relatively low
savings, they had terminated certain other efforts to identify secondary
payer claims. The terminated efforts included (1) a second questionnaire
sent as follow-up to determine whether a beneficiary who is claiming
Medicare benefits for the first time has other health insurance that would
be responsible for paying the claim and (2) an effort to determine whether
certain trauma codes contained in a claim could indicate that another
insurer, such as worker's compensation, could be the primary payer.

40The margin-the difference between Medicare payments and providers' costs
for services to Medicare beneficiaries expressed as a percentage of
payments-is one of the factors MedPAC uses in developing a recommendation.
MedPAC reported in 2004 that preaudit costs for ESRD facilities were 4
percent higher than postaudit costs in 1996 based on the audited cost
reports it reviewed. Audits reveal the difference between allowable and
nonallowable costs. There is generally a several year time lag during
which CMS's contractors receive and audit cost reports, which is why
MedPAC had to rely upon the 1996 audited cost reports in 2004.

        Future Programmatic Changes Will Affect MIP Funding Allocations

The Medicare program is undergoing significant changes for which there is
little precedent. These include the addition of the new Part D
prescription drug benefit and the reform of Medicare contracting. Both
will require CMS to make new choices in how it should allocate its MIP
funds to best address its program integrity challenges. CMS's current
allocation approach-which agency officials characterized as primarily
relying on previous fiscal year funding allocations for each activity, and
to each contractor, to determine current allocations-will not be adequate
to address emerging program integrity risks and ongoing programmatic
changes. In addition, as contracting reform proceeds, CMS intends to
increase its use of MIP funds to reward contractors to encourage superior
performance. However, the usefulness of award payments as a tool to
encourage contractors to perform MIP tasks effectively depends on how well
CMS can develop, and consistently apply, performance measures to gauge
differences in the quality of performance.

CMS's Current MIP Allocation Approach Is Not Adequate to Address Emerging Risks

CMS's current allocation approach will not be adequate to address
Medicare's emerging program integrity risks related to the prescription
drug benefit. Over the next 10 years, total expenditures for the
prescription drug benefit, which was implemented in January 2006, are
projected to be about $978 billion, while total expenditures for the
Medicare program are projected to be about $6.1 trillion.41 CMS and others
have stated that the prescription drug benefit is at risk for significant
fraud and abuse. In December 2005, an assistant U.S. attorney noted that
the Medicare prescription drug benefit would be vulnerable to a host of
fraud and abuse schemes unless better detection systems are developed.
According to CMS, the prescription drug benefit may be vulnerable to fraud
and abuse in particular areas, including beneficiary eligibility, fraud by
pharmacies, and kickbacks designed to encourage certain drugs to be
included by the plans administering the benefit. To respond to these
challenges, CMS has selected eight private organizations, called Medicare
prescription drug integrity contractors (MEDIC), to support CMS's benefit
integrity and audit efforts.42

41Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, 2006 Annual Report of the
Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds (Washington, D.C.: May 1,
2006).

Because the Medicare prescription drug benefit is in the early stages of
implementation, CMS does not yet have data to estimate the level of
improper payments or information to determine the level of program
integrity funds needed to address emerging vulnerabilities. As a result,
it is not clear whether, in the future, CMS will need to shift funds from
program integrity activities for Parts A and B to protect the Part D drug
benefit from potential fraud and abuse. For fiscal year 2006, $112 million
beyond the HIPAA limit of $720 million has been appropriated for CMS to
support program integrity activities. The President's Budget for fiscal
year 2007 has also proposed additional funds for fiscal year 2007 and
fiscal year 2008. CMS plans to use some of the additional funding provided
under DRA for fiscal year 2006 to support Part D program integrity
efforts. For example, CMS plans to spend $14 million over the next fiscal
year to fund efforts by MEDICs to protect the prescription drug benefit by
performing selected tasks, such as analyzing data to identify instances of
potential fraud and abuse. In addition, CMS plans to spend about $33
million on Part D information technology systems to track data related to
beneficiary eligibility and to collect, maintain, and process information
on Medicare covered and noncovered drugs for Medicare beneficiaries
participating in Part D. See appendix IV for more information.

Medicare Contracting Changes Will Affect MIP Allocations

Another significant programmatic change that will affect future MIP
funding allocations is Medicare contracting reform. MMA required CMS to
transfer all claims administration work, which includes selected program
integrity activities, to MACs by October 2011. CMS plans to transfer all
work to the MACs by July 2009-about 2 years ahead of MMA's specified time
frame. Contracting reform will affect MIP funding allocations because of
(1) changes in contractors' responsibilities for program integrity
activities and their jurisdictions, (2) the potential for operational
efficiencies, and (3) increasing use of MIP funds for contractor award
payments.

42Some of the main functions of the MEDICs will include identifying and
investigating potential fraud and abuse, developing cases for referral,
acting as liaisons to law enforcement agencies, and providing audit
services. MEDICs may be assigned various types of audits, such as audits
of the information provided to CMS by the plans administering the Part D
benefits, the plans' required fraud and abuse compliance plans, and plans'
services to beneficiaries. In addition, CMS plans to determine an improper
payment rate for the prescription drug benefit, and at least one of the
MEDICs may assume that task. CMS used start-up funds in fiscal year 2005
for the prescription drug benefit, which were not part of MIP funds, to
conduct the competition to select the MEDICs.

The transition to MACs will change some contractors' program integrity
responsibilities and require reallocation of MIP funds among them. The new
MACs will be responsible for paying claims that were previously processed
by intermediaries and carriers, but CMS has decided that MACs will not be
performing all of the MIP activities that they previously conducted. For
example, PSCs performed medical reviews of claims in some contractors'
jurisdictions, but this activity will be performed by almost all of the
MACs in the future.43 Further, contractors' jurisdictions will change as
23 MACs assume the work previously performed by a total of 51 Medicare
intermediaries and carriers, within the confines of 15 newly designated
geographic jurisdictions.44 The PSCs conducting benefit integrity work
will be aligned with the MACs in the 15 jurisdictions. In some cases, one
PSC may be aligned with more than one MAC jurisdiction.

According to CMS officials, Medicare contracting reform will lead to
operational efficiencies and savings that would mostly be due to more
effective medical review. For example, CMS anticipates that greater
incentives for MACs to operate efficiently and adopt industry innovations
in the automated medical review of claims will result in total estimated
trust fund savings of $650 million for Medicare from fiscal year 2006 to
fiscal year 2011. Having program integrity activities operate more
effectively could give CMS additional flexibility to reallocate some
funding while achieving reductions in improperly paid claims. However, we
have not validated CMS's estimate, and in our August 2005 report on CMS's
plan for implementing Medicare contracting reform, we raised concerns
about the uncertainty of savings estimates, which were based on future
developments that are difficult to predict.45

43The first four MACs selected in January 2006 will process DME,
prosthetics, orthotics, and supply claims and will not be responsible for
medical review of the claims they process. Three PSCs will conduct medical
review for these claims.

44Fifteen MACs will each process both Part A and Part B claims in 1 of the
15 jurisdictions. In addition, 4 MACs will process DME, prosthetics,
orthotics, and supply claims, and 4 MACs will process home health and
hospice claims in 4 jurisdictions that encompass the 15 Part A and Part B
jurisdictions.

As part of contracting reform, CMS plans to increase its allocation of MIP
funds that are used as award payments to encourage superior performance of
program integrity activities by contractors. Award payments that are tied
to appropriate performance measures could encourage contractors to conduct
MIP activities effectively and introduce innovations, such as developing
new analytical approaches to enhance the medical review process.
Intermediaries and carriers, both of which conduct some program integrity
activities, are currently paid on the basis of their costs, generally
without financial incentives to encourage superior performance.46 In
contrast, CMS currently offers award payments to other types of
contractors that conduct program integrity activities, including four MACs
that were selected in January 2006, PSCs, the COB contractor, NSC, and the
DAC contractor. As early as 2009, or when all administrative work has been
transferred to MACs, CMS will be offering the opportunity to be selected
for award payments to all contractors that conduct program integrity
activities.47

The usefulness of using MIP funding for award payments to encourage
contractors to conduct program integrity tasks effectively depends on how
well CMS can develop, and consistently apply, performance measures to
gauge differences in the quality of performance. In 2004, CMS conducted a
study to evaluate whether the agency could reduce improper payments by
using award payments for contractors to lower their paid claims error
rates, which represent the amount of claims contractors paid in error
compared with their total fee-for-service payments. According to CMS, the
outcome of that pilot was positive, and CMS plans to use award payments in
the future as part of its strategy for reducing improper payments.
However, as we reported in March 2006, CMS will need to refine its measure
of contractor-specific improper payments, which would enhance its ability
to evaluate their performance of medical review and provider education
activities.48 Further, even when CMS has developed measures to assess the
performance of contractors that conduct MIP activities, it has not always
effectively or consistently applied them. For example, the OIG recently
reviewed the extent and type of information provided in evaluation reports
on PSCs' performance in detecting and deterring fraud and abuse. The OIG
found that although the evaluation reports were used as a basis to assess
contractors' overall performance, they did not consistently include
quantitative information on the activities contractors performed or their
effectiveness.

45GAO, Medicare Contracting Reform: CMS's Plan Has Gaps and Its
Anticipated Savings Are Uncertain, GAO-05-873 (Washington, D.C.: Aug. 17,
2005).

46Prior to MMA, CMS's authority to contract using other payment methods
was restricted.

47In addition to the 4 MACs that were selected in January 2006 and 1 that
was selected in July 2006, CMS plans to select 18 MACs from September 2007
through September 2008.

                                  Conclusions

We designated the Medicare program as high risk for fraud, waste, abuse,
and mismanagement in 1990, and the program remains so today. To address
this ongoing risk and reduce the program's billions of dollars in improper
payments, CMS must use Medicare's program integrity funding as effectively
as possible. Further, Medicare's susceptibility to fraud is growing, as it
addresses the challenges of adding a prescription drug benefit to the
program. Despite Medicare's increasing vulnerability, CMS has generally
not changed its allocation approach for MIP funding. In 2006, a decade
after MIP was established to support Medicare program integrity
activities, CMS officials state that the primary basis for their
allocation of funds is how they have been allocated in the past. However,
programmatic changes for Medicare's contractors and emerging risks for the
Part D prescription drug benefit suggest that CMS needs to modify its
approach for deciding on funding allocations for-and within-the five
program integrity activities. Also supporting the need for CMS to assess
its current allocation approach is that the agency's funding decisions do
not routinely take into account quantitative data or qualitative
information on the relative effectiveness of its five program integrity
activities or contractors' vulnerabilities. Without considering
information or data, CMS cannot judge whether funds are being spent as
effectively as possible or if they should be reallocated. CMS is
developing two new measures that may help the agency evaluate the relative
effectiveness of provider education and the audit activity. Better
information about MIP activities' effectiveness should assist CMS in
making more prudent management and funding allocation decisions.

48GAO, Medicare Payment: CMS Methodology Adequate to Estimate National
Error Rate, GAO-06-300 (Washington, D.C.: Mar. 24, 2006).

                      Recommendation for Executive Action

To better ensure that MIP funds are appropriately allocated among and
within the five program integrity activities, we recommend that CMS
develop a method of allocating funds based on the effectiveness of its
program integrity activities, the contractors' workloads, and risk.

                       Agency Comments and Our Evaluation

In its written comments on a draft of this report, CMS stated that it
generally agreed with our recommendation to develop a method of allocating
MIP funds based on the effectiveness of the agency's program integrity
activities, Medicare contractors' workloads, and risk. However, the agency
expressed concern that the report appeared to emphasize the use of ROI, a
quantitative measure that tracks dollars saved in relation to dollars
spent, as a way to allocate funds. CMS stated this quantitative measure
can be an indicator of effectiveness, but noted that such a measure cannot
serve as the sole basis for informing funding decisions. The agency stated
that some of its MIP activities had benefits that could not be easily
quantified. CMS agreed on the value of allocating funds based on risk and
provided information on programmatic changes that would help it do so. The
agency also noted the efforts it had recently made to strengthen program
integrity.

CMS expressed concern about our discussion in the draft report concerning
the use of ROI as a way to quantitatively measure effectiveness and to
allocate MIP funds. CMS stated that the agency cannot provide funding
based exclusively on an ROI because some activities, including benefit
integrity, do not lend themselves to an ROI measurement and others, such
as audit, are governed by statutory requirements. CMS also stated that in
allocating MIP funds, it is critical that it consider factors other than
ROI, including historical funding, because MIP funding has not increased
since 2003.

Our report indicates that an ROI is an important factor that should be
considered in allocating funds, but cannot be the sole consideration. Our
conclusions reflect our support of an approach that takes into account the
qualitative benefits of program integrity activities. Our report discusses
agency officials' views on the difficulty of developing quantitative
measures for the benefit integrity activity. We also provide information
on CMS officials' qualitative assessments of the positive impact of
benefit integrity and provider education. For example, our report notes
that according to CMS officials, these benefits include discouraging
entities that may be considering defrauding the Medicare program and
helping to ensure proper Medicare payments. Both quantitative and
qualitative assessments of effectiveness-to the extent they can be
developed-could help CMS determine whether MIP funds are being wisely
invested or if they should be reallocated.

CMS also commented on the allocation of MIP funds to Medicare contractors
based on workload and risk. CMS noted that contracting reform and the
introduction of MACs will result in contractors' workloads being more
evenly distributed. In addition, CMS noted that it is developing award fee
measures for contractors' medical review activities, including
establishing performance goals for the Comprehensive Error Rate Testing
program contractor-specific error rate. CMS agreed with us that risk is a
factor that should be considered in allocating funds.

CMS stated that it is committed to identifying and investigating better
approaches to allocate resources to support critical agency functions,
including using its new contracting authority to introduce incentives for
Medicare fee-for-service claims processing contracts and consolidating
Medicare secondary payer activities. CMS also noted that it is using
state-of-the-art systems and expertise to aggressively fight waste and
abuse in the program, continues to work closely with its contractors to
help ensure that providers receive appropriate education and guidance in
areas where billing problems have been identified, and has expanded
oversight of the new Medicare Part D prescription drug benefit. In
addition, CMS discussed recent program integrity efforts and successes,
including reducing the number of improper fee-for-service Medicare
payments and addressing fraud across all provider types by coordinating
the activities of CMS, law enforcement, and Medicare contactors in Los
Angeles, California, and Miami, Florida.

We have reprinted CMS's letter in appendix V. CMS also provided us with
technical comments, which we incorporated in the report where appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will send copies to the Secretary of HHS,
the Administrator of CMS, appropriate congressional committees, and other
interested parties. We will also make copies available to others upon
request. This report will also be available at no charge on GAO's Web site
at http://www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (312) 220-7600 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made major contributions to this
report are Sheila K. Avruch, Assistant Director; Hazel Bailey; Krister
Friday; Sandra D. Gove; and Craig Winslow.

Sincerely yours,

Leslie G. Aronovitz Director, Health Care

Appendix I: Objectives, Scope, and Methodology

To provide information on the amount of funds allocated to the five
Medicare Integrity Program (MIP) activities over time, we interviewed
officials from the Centers for Medicare & Medicaid Services (CMS). We
obtained information concerning MIP funding allocations for audit, medical
review, secondary payer, benefit integrity, and provider education for
fiscal years 1997 through 2005. We also analyzed allocations within these
activities. Further, we obtained and analyzed related financial
information, including CMS's planned and actual expenditures, savings, and
return on investment (ROI) calculations for fiscal year 1997 through
fiscal year 2005; CMS financial reports; and presidential and Department
of Health and Human Service (HHS) budget proposals for fiscal years 2006
and 2007. Because most MIP expenditures are for activities related to the
Medicare fee-for-service plan, our analyses focused on those expenditures.
We reviewed relevant legislation, such as the Health Insurance Portability
and Accountability Act of 1996 (HIPAA); the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA); and the Deficit
Reduction Act of 2005 (DRA). We reviewed pertinent reports and
congressional testimony, including our own and those of CMS and the HHS
Office of Inspector General (OIG), related to program integrity
requirements.

To examine the approach that CMS uses to allocate MIP funds, we
interviewed CMS officials regarding factors they consider when allocating
MIP funds. We reviewed related documentation provided to us by CMS,
including budget development guidelines; manuals, such as the Financial
Management Manual; operating plans; and selected workload data. We also
reviewed information on individual projects, such as information
technology systems. We also reviewed pertinent GAO reports and testimony
and Medicare Payment Advisory Commission reports. We did not independently
examine the internal and automated data processing controls for CMS
systems from which we obtained data used in our analyses. CMS subjects its
data to limited reviews and periodic examinations and relies on the data
obtained from these systems as evidence of Medicare expenditures and to
support CMS's management and budgetary decisions. Therefore, we considered
these data to be reliable for the purposes of our review.

In addition, we interviewed CMS officials regarding changes in the
Medicare program that may affect MIP funding allocations, including CMS's
plans to support activities to detect fraud and improper billing for the
new Part D prescription drug benefit and MIP activities to be performed by
contractors in the future. We also interviewed CMS officials concerning
performance measures and evaluations of contractors. We reviewed related
documentation, including the statement of work for the Medicare
prescription drug integrity contractors; plans for Medicare contracting
reform; policies and procedures associated with CMS's measurement of
contractor performance; standards and performance measures, such as the
Comprehensive Error Rate Testing program; various manuals, including the
Medicare Program Integrity Manual; and an OIG report on performance
evaluations of program safeguard contractors (PSC). We also reviewed CMS's
evaluations of contractor performance. We performed our work from August
2005 through August 2006 in accordance with generally accepted government
auditing standards.

Appendix II: Information on MIP Funding, Expenditures, and ROI

The following tables contain details on MIP funding, expenditures,
allocations, and ROI. Table 2 shows MIP funding ranges under HIPAA. Table
3 shows the amounts of MIP expenditures allocated to each of the program
integrity activities. Table 4 shows the percentage of MIP funds allocated
to the program integrity activities. Table 5 shows the ROI for three of
the program integrity activities.

Table 2: Fiscal Year MIP Funding Ranges under HIPAA

Dollars in millions                               
Amount              1997 1998 1999 2000 2001 2002 2003 and later years 
Not less than       $430 $490 $550 $620 $670 $690                 $710 
Not more than        440 500a  560  630  680  700                 720b 

Source: GAO analysis of HIPAA and DRA.

aThis amount does not include the $50 million in supplemental program
integrity funds made available by HHS's fiscal year 1998 appropriation.

bThis amount does not include the $112 million for fiscal year 2006, which
was included in DRA.

Table 3: Amount of MIP Expenditures Allocated to the Five Program
Integrity Activities, Fiscal Years 1997 through 2005

Dollars in                                                          
millions                                                            
Activity      1997   1998   1999   2000   2001   2002   2003   2004   2005 
Audit       $143.3 $187.2 $177.3 $193.8 $209.5 $205.4 $221.9 $210.2 $207.6 
Medical      118.6  158.3  178.7  196.0  214.8  193.2  162.4  166.5  165.9 
review                                                              
Secondary    102.0  108.5  103.6  128.5  140.6  138.5  143.5  152.1  151.5 
payer                                                               
Benefit       62.7   78.5   86.8   91.3   95.5  102.4  119.4  113.1  118.5 
integrity                                                           
Provider      10.1   12.1    9.9   14.6   17.0  53.5a   65.1   70.3   70.0 
education                                                           
Total      $437.9b $544.6 $556.3 $624.2 $677.4 $693.0 $712.3 $712.2 $713.5 

Source: GAO analysis of CMS data.

aFrom fiscal year 2002, provider education includes amounts for both
provider education and provider outreach.

bFiscal year 1997 total also includes $1.2 million for "other" MIP
expenditures.

Table 4: Percentage of MIP Funds Allocated to the Five Program Integrity
Activities, Fiscal Years 1997 through 2005

Activity           1997 1998 1999 2000 2001 2002 2003 2004 2005 Average 
Audit                33   34   32   31   31   30   31   30   29      31 
Medical review       27   29   32   31   32   28   23   23   23      27 
Secondary payer      23   20   19   21   21   20   20   21   21      21 
Benefit integrity    14   14   16   15   14   15   17   16   17      15 
Provider education    2    2    2    2    3    8    9   10   10       6 
Total              100a  100  100  100  100  100  100  100  100     100 

Source: GAO analysis of CMS data.

Notes: These amounts also include supporting activities, such as
information technology. Numbers do not always add to 100 percent because
of rounding.

aPercentages for fiscal year 1997 exclude $1.2 million in "other
expenditures" for that year, which accounted for less than 1 percent of
the total.

Table 5: Reported ROI for Audit, Medical Review, and Secondary Payer
Activities, Fiscal Years 1997 through 2005

Activity         1997 1998  1999  2000 2001 2002 2003 2004 2005 
Audit           $11.6 $8.9 $15.7 $12.6 $3.7 $0.0 $0.0 $0.0 $0.0 
Medical review   23.6 22.5  21.1  22.2 23.1 21.8 28.0 24.0 20.5 
Secondary payer  33.1 30.1  32.2  24.3 26.8 30.9 32.0 31.7 37.4 

Source: GAO analysis of CMS data.

Notes: Based on dollars saved in relation to dollars invested. CMS does
not track ROI for benefit integrity or provider education activities.

Appendix III: Key Tasks Performed by Contractors That Conduct MIP
Activities

                  Medicare contractors                                        
Activity       conducting activity       Examples of key tasks performed
Audits         Fiscal intermediaries        o  Hospitals, nursing homes,   
                  (intermediaries), one        home health agencies, and      
                  PSC, and MAC selected in     other institutional providers  
                  July 2006                    that are-or have been- paid on 
                                               a cost reimbursement basis     
                                               submit cost reports to CMS.    
                                               Cost reports provide a         
                                               detailed accounting of what    
                                               costs have been incurred, what 
                                               costs the provider is charging 
                                               to the Medicare program, and   
                                               how such costs are accounted   
                                               for by the provider.           
                                               o  Contractors review all or   
                                               part of the cost report to     
                                               assess whether costs have been 
                                               properly allocated and charged 
                                               to the Medicare program.       
                                               o  Contractors determine if    
                                               the cost report is acceptable  
                                               or if it needs further review. 
                                               o  In some instances,          
                                               contractors may conduct        
                                               on-site cost report audits,    
                                               which include the review of    
                                               financial records and related  
                                               documentation supporting costs 
                                               and charges.                   
Medical review Intermediaries, carriers,    o  Contractors identify        
                  and PSCs, and MAC            billing errors made by         
                  selected in July 2006        providers through analysis of  
                                               claims data; take action to    
                                               prevent errors, address        
                                               identified errors, or both;    
                                               and publish local coverage     
                                               policies to provide guidance   
                                               to the public and medical      
                                               community concerning items and 
                                               services that are eligible for 
                                               Medicare payment.              
                                               o  Most medical reviews do not 
                                               require a manual review of     
                                               medical records. Often         
                                               contactors conduct medical     
                                               reviews simply by examining    
                                               the claim itself, usually      
                                               using automated methods.       
Secondary      Coordination of benefits     o  The COB contractor          
payer          (COB) contractor,            collects, manages, and         
                  intermediaries and           maintains information          
                  carriers, and Medicare       regarding health insurance     
                  administrative               coverage for Medicare          
                  contractors (MAC)            beneficiaries.                 
                                               o  To gather information to    
                                               properly adjudicate submitted  
                                               claims, the COB contractor     
                                               sends questionnaires to newly  
                                               enrolled Medicare              
                                               beneficiaries and employers to 
                                               solicit information about      
                                               beneficiaries' health          
                                               insurance coverage.            
                                               o  The COB contractor also     
                                               collects secondary payer data  
                                               from providers, insurers,      
                                               attorneys, and some state      
                                               agencies.                      
                                               o  The COB contractor uses     
                                               data match programs to         
                                               identify claims that should    
                                               have been paid by another      
                                               insurer. When information      
                                               indicates that a beneficiary   
                                               has other health insurance,    
                                               the COB contractor initiates a 
                                               secondary payer claims         
                                               investigation.                 
                                               o  Intermediaries and carriers 
                                               also conduct secondary payer   
                                               operations, including          
                                               prepayment activities in       
                                               conjunction with the COB       
                                               contractor, and they recover   
                                               erroneous secondary payer      
                                               payments.                      
Benefit        PSCs, the National           o  Contractors are tasked with 
integrity      Supplier Clearinghouse       preventing, detecting, and     
                  (NSC), and the data          deterring Medicare fraud.      
                  analysis and coding (DAC)    o  PSCs conduct medical        
                  contractor                   reviews to support fraud       
                                               investigations, analyze data   
                                               to support medical reviews,    
                                               process fraud complaints,      
                                               develop fraud cases, conduct   
                                               provider education related to  
                                               fraud activities, and support  
                                               law enforcement entities.      
                                               o  Once a case is developed,   
                                               PSCs refer it to the OIG or to 
                                               law enforcement for            
                                               prosecution.                   
                                               o  NSC reviews and processes   
                                               applications from              
                                               organizations and individuals  
                                               seeking to become suppliers of 
                                               medical equipment and supplies 
                                               in the Medicare program.       
                                               o  NSC verifies suppliers'     
                                               application information;       
                                               conducts on-site visits to the 
                                               prospective suppliers; issues  
                                               supplier authorization         
                                               numbers, which allow suppliers 
                                               to bill Medicare; and          
                                               maintains a central data       
                                               repository of information      
                                               concerning suppliers.          
                                               o  NSC also periodically       
                                               reenrolls active suppliers and 
                                               uses data to assist with fraud 
                                               and abuse research.            
                                               o  The DAC contractor conducts 
                                               ongoing data analysis and      
                                               reporting of trends related to 
                                               supplier billing for medical   
                                               equipment and supplies and     
                                               provides ongoing feedback to   
                                               the PSCs.                      
Provider       Intermediaries, carriers,    o  When billing problems are   
education      MACs, and PSCs               identified through medical     
                                               reviews, contractors take a    
                                               variety of steps to educate    
                                               providers about Medicare       
                                               coverage policies, billing     
                                               practices, and issues related  
                                               to fraud and abuse.            
                                               o  Contractors may conduct     
                                               group training sessions,       
                                               including seminars and         
                                               workshops; send informational  
                                               letters to providers; arrange  
                                               for teleconferences; conduct   
                                               site visits; and provide       
                                               information on their Web       
                                               sites.                         

Source: GAO analysis of CMS documents.

Appendix IV: CMS's Planned Spending of $100 Million Provided by DRA

For fiscal year 2006, DRA provided $112 million in MIP funds beyond the
annual HIPAA limit of $720 million. Of this amount, DRA specified that $12
million was for the Medi-Medi program and $100 million was for MIP in
general. Table 6 provides information on CMS's planned spending of $100
million in general MIP funds provided by DRA, including spending related
to the Part D prescription drug benefit.

Table 6: CMS's Planned Spending of MIP Funds Provided by DRA

Category                     Amount  Description                           
Information technology  $33,100,000  CMS developed several information     
                                        technology systems to implement the   
                                        prescription drug benefit. These MIP  
                                        funds from DRA are partially          
                                        supporting these systems. They        
                                        include the following:                
                                                                              
                                           o  Medicare Drug Data Processing   
                                           System contains summary            
                                           prescription drug claim            
                                           information on all Medicare        
                                           covered and noncovered drug        
                                           events, including non-Medicare     
                                           drug events, for Medicare          
                                           beneficiaries. Each time a         
                                           beneficiary fills a prescription   
                                           drug covered under Part D, plans   
                                           must submit a summary record       
                                           called the prescription drug event 
                                           (PDE) record to CMS. The PDE       
                                           record contains prescription drug  
                                           cost and payment data that will    
                                           enable CMS to make payments to     
                                           plans and otherwise administer the 
                                           Part D benefit.                    
                                           o  Medicare Advantage Prescription 
                                           Drug System will be a stand-alone  
                                           system that will include the       
                                           processing of all enrollment and   
                                           disenrollment transactions         
                                           associated with the Part D         
                                           benefit.                           
                                           o  Medicare Beneficiary Database   
                                           tracks data related to beneficiary 
                                           eligibility for Part D.            
Reviews of requested     20,000,000  Medicare has financial limitations on 
exceptions to therapy                payments for certain types of therapy 
cap                                  services provided to a beneficiary    
                                        during a calendar year-called therapy 
                                        caps.a DRA allows CMS to grant        
                                        exceptions to these therapy caps, as  
                                        long as the services are medically    
                                        necessary for the beneficiary. CMS    
                                        will use these DRA funds to review    
                                        supporting documentation for requests 
                                        for exception to the therapy cap      
                                        amounts to determine whether the      
                                        services are medically necessary and  
                                        whether the exception should be       
                                        granted.                              
Information technology   15,000,000  CMS is consolidating data generated   
infrastructure                       by Medi-Medi and Parts B and D into   
                                        an integrated data repository.b MIP   
                                        funds are to be used to help develop  
                                        the information technology            
                                        infrastructure to achieve this task.  
Medicare prescription    14,000,000  In November 2005, CMS awarded one     
drug integrity                       task order to the enrollment and      
contractor (MEDIC)                   eligibility MEDIC, which is tasked    
                                        with identifying and addressing       
                                        potential fraud, waste, and abuse in  
                                        the early implementation of the Part  
                                        D benefit. This task order will be in 
                                        effect until CMS selects three        
                                        regional MEDICs and one MEDIC to act  
                                        as a data integrator. CMS plans to    
                                        select these MEDICs later this        
                                        summer.                               
Part D and Medicare       8,749,732  These funds are to be used to monitor 
Advantage activities                 and audit Part D and Medicare         
                                        Advantage activities. Several types   
                                        of audits are to be carried out for   
                                        Part D.c Funds, for example, will be  
                                        used for Part D compliance monitoring 
                                        and auditing activities.              
Audits of Adjusted        4,077,000  A Medicare Advantage plan's ACRP      
Community Rate                       identifies the health services that   
Proposals (ACRP)                     will be provided to beneficiaries,    
                                        the estimated costs of providing      
                                        these health services, and the        
                                        estimated payments the plan will      
                                        receive-so that CMS can ensure that   
                                        the plans are using any excess        
                                        payments as allowed by law. CMS will  
                                        use these DRA funds to conduct        
                                        required audits in order to evaluate  
                                        the reasonableness of ACRPs.d Prior   
                                        to this year, these audits were paid  
                                        by MIP funds provided through HIPAA.  
Contingency funds         5,073,268  CMS is reserving these funds to be    
                                        allocated later in the fiscal year.   
Total                  $100,000,000  

Source: GAO analysis of CMS and DRA information.

aThe term therapy caps refers to limitations on Medicare payments for
certain outpatient rehabilitation services, which were initiated by the
Balanced Budget Act of 1997. Pub. L. No. 105-33, S: 4541(c), 111 Stat.
251, 456-57. As of January 1, 2006, caps are in effect for occupational
therapy and outpatient physical therapy and speech-language pathology
received by Medicare beneficiaries. For services received in 2006,
beneficiaries may request an exception to the caps based on medical
necessity. In addition, such necessity will be deemed present if a
decision is not made on a request within 10 business days of its receipt.
DRA S: 5107, 120 Stat. 4, 42 (to be codified at 42 U.S.C. S: 1395l(g)(5)).

bThis amount does not include the $12 million specifically provided for
the Medi-Medi program by DRA for fiscal year 2006.

cCMS will do regularly scheduled audits and do focused and targeted audits
when questionable findings are identified through contractor activities,
such as data analysis. In instances of allegations of fraud, waste, or
abuse, MEDICs will conduct audits. Also, CMS has planned a 3-year
comprehensive, regularly scheduled audit cycle for Part D plans, because
MMA required audits of financial records for at least one-third of all
Part D prescription drug plans each year. MMA S: 101(a)(2), 117 Stat. 2100
(to be codified at 42 U.S.C. S: 1395w-112(b)(3)(C)).

dCMS is required to audit the financial records of at least one-third of
the participating Medicare Advantage Plans (formerly called
Medicare+Choice Plans) annually. 42 U.S.C. S: 1395w-27(d)(1) (2000).

Appendix V: Comments from the Centers for Medicare & Medicaid Services

(290473)

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www.gao.gov/cgi-bin/getrpt? GAO-06-813 .

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For more information, contact Leslie G. Aronovitz at (312) 220-7600 or
[email protected].

Highlights of GAO-06-813 , a report to the Chairman, Committee on Finance,
U.S. Senate

September 2005

MEDICARE INTEGRITY PROGRAM

Agency Approach for Allocating Funds Should Be Revised

Since 1990, GAO has considered Medicare at high risk for fraud, waste,
abuse, and mismanagement. The Medicare Integrity Program (MIP) provides
funds to the Centers for Medicare & Medicaid Services (CMS)-the agency
that administers Medicare-to safeguard over $300 billion in program
payments made on behalf of its beneficiaries. CMS conducts five program
integrity activities: audits; medical reviews of claims; determinations of
whether Medicare or other insurance sources have primary responsibility
for payment, called secondary payer; benefit integrity to address
potential fraud cases; and provider education. In this report, GAO
determined (1) the amount of MIP funds that CMS has allocated to the five
program integrity activities over time, (2) the approach that CMS uses to
allocate MIP funds, and (3) how major changes in the Medicare program may
affect MIP funding allocations.

What GAO Recommends

GAO recommends that CMS develop an approach for allocating funds that is
based on the effectiveness of the activities, contractors' workload, and
risk. CMS generally agreed with GAO's recommendation. CMS also stated that
a quantitative measure can be an indicator of effectiveness, but
emphasized that such a measure cannot serve as the sole basis for
informing funding decisions.

For fiscal years 1997 through 2005, CMS's MIP expenditures generally
increased for each of the five program integrity activities, but the
amount of the increase differed by activity. Since fiscal year 1997,
provider education has had the largest percentage increase in
funding-about 590 percent, while audit and medical review had the largest
amounts of funding allocated. In fiscal year 2006, funding for MIP will
increase further to $832 million, which includes $112 million in funds
that CMS plans to use, in part, to address potential fraud and abuse in
the new Medicare prescription drug benefit.

MIP Expenditures for the Five Program Integrity Activities, Fiscal Year
2005

CMS officials told us that they have allocated MIP funds to the five
program integrity activities based primarily on past allocation levels.
Although CMS has quantitative measures of effectiveness for two of its
activities-the savings that medical review and secondary payer generate
compared to their costs-it does not have a means to determine the
effectiveness of each of the five activities relative to the others to aid
it in allocating funds. Further, CMS has generally not assessed whether
MIP funds are distributed to the contractors conducting each program
integrity activity to provide the greatest benefit to Medicare.

Because of significant programmatic changes, such as the implementation of
the Medicare prescription drug benefit and competitive selection of
contractors responsible for claims administration and program integrity
activities, the agency's current approach will not be adequate for making
future allocation decisions. For example, CMS will need to allocate funds
for program integrity activities to address emerging vulnerabilities that
could affect the Medicare prescription drug benefit. Further, through
contracting reform, CMS will task new contractors with performing a
different mix of program integrity activities. However, the agency's
funding approach is not geared to target MIP resources to the activities
with the greatest impact on the program and to ensure that the contractors
have funding commensurate with their relative workloads and risk of making
improper payments.
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