Medicare: Greater Investment in Claims Review Would Save Millions (Letter
Report, 03/02/94, GAO/HEHS-94-35).

Given soaring U.S. health care costs and shrinking budgets for many
government programs, Congress is concerned that Medicare pay only for
appropriate medical services without compromising the quality of care
provided to beneficiaries. One of the several ways that Medicare ensures
proper payments is through the medical review function performed by
contractors--called carriers--who process and pay claims for physician
services, diagnostic tests, and other Medicare part B services. Review
activities are designed to prevent spending on inappropriate, medically
unnecessary, or excessive services. This report assesses a Health Care
Financing Administration (HCFA) demonstration that involves medical
review operations at five carriers: three of these were given added
management flexibility and funding to enhance their medical review
function and two served as comparisons. This report discusses whether
(1) the improved medical review activities at the demonstration carriers
produced measurable savings or benefits to the claims process; (2) more
medical review funding for other carriers would be cost-effective; and
(3) HCFA's medical review oversight needs improvement.

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

 REPORTNUM:  HEHS-94-35
     TITLE:  Medicare: Greater Investment in Claims Review Would Save 
             Millions
      DATE:  03/02/94
   SUBJECT:  Medicare programs
             Medical services rates
             Health care services
             Medical expense claims
             Health care cost control
             Health services administration
             Health maintenance organizations
             Eligibility determinations
             Medical information systems
             Claims processing

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


Report to the Chairman, Committee on the Budget, House of
Representatives

March 1994

MEDICARE - GREATER INVESTMENT
IN CLAIMS REVIEW WOULD SAVE
MILLIONS

GAO/HEHS-94-35

Medicare


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

  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services

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


B-251373

March 2, 1994

The Honorable Martin O.  Sabo
Chairman, Committee on the Budget
House of Representatives

Dear Mr.  Chairman: 

In this era of soaring U.S.  health care costs and increased fiscal
austerity in government programs, the Congress is concerned that the
Medicare program pay only for appropriate medical services without
compromising the quality of care provided to Medicare beneficiaries. 
One of the several ways Medicare ensures appropriate payment is
through the medical review function performed by contractors--called
carriers--who process and pay claims for physician services,
diagnostic tests, and other Medicare part B services. 

Medical review encompasses a range of review activities carriers
design to prevent spending on inappropriate, medically unnecessary,
or excessive services.  The key elements of the medical review
program are the use of medical policies (e.g., allowing only one
payment to a physician for an inpatient hospital visit per
beneficiary per day unless medical necessity is documented),
computerized prepayment reviews (called "screens"), and trained and
knowledgeable review staff. 

Medical policies serve as the underpinning of Medicare's efforts to
safeguard claims payments.  Typically, a medical policy is
established when claims payment experience shows the tendency of a
service to be overprescribed or misprescribed and medical practice
norms exist for this service.  The Health Care Financing
Administration (HCFA), which administers Medicare for the Department
of Health and Human Services (HHS), has given carriers the principal
responsibility for developing medical policy; medical necessity
decisions therefore reflect local physician practice patterns.  One
example of a medical policy involves concurrent care, which occurs
when two or more physicians treat the same patient on the same day in
an inpatient hospital or nursing home.  Claims reflecting such
situations are flagged for review by carrier medical review staff. 
For concurrent care to be covered, the medical review staff must
ensure that management of an active medical problem is documented in
the hospital or nursing home chart on the date of service.  Claims
for services not covered by a medical policy generally trigger no
medical review and, if they are for covered services, are
automatically paid in the amount allowed by Medicare. 

In fiscal year 1993, HCFA budgeted about $1.1 billion to administer
Medicare's part B program.  Of this amount, carriers were expected to
spend $94 million to medically review 9 percent of all Medicare
claims.  In the 3 previous years, the carriers' savings resulting
from medical review ranged from $1.0 billion to $1.2 billion
annually, nearly the equivalent of the entire carrier administrative
budget for each year, or an average of 11 times the amount invested. 

In a March 1992 letter, the former Chairman of the House Budget
Committee asked us to assess a HCFA demonstration project.  This
project, referred to as the flexibility demonstration project,
involves medical review operations at five carriers:  three of these
(referred to as demonstration carriers) were given added management
flexibility and funding to enhance their medical review function and
two served as comparisons.  We examined whether (1) the improved
medical review activities at the demonstration carriers produced
measurable savings or benefits to the claims process, (2) additional
medical review funding for other carriers would be cost-effective,
and (3) HCFA's medical review oversight needs to be improved. 


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

Medicare carriers' intensified efforts to identify unusual spending
patterns and trends netted increased savings, making the greater
funding of medical review activities worthwhile:  this is the lesson
of HCFA's flexible funding and management demonstration project. 
Over the life of the project, each of the demonstration carriers
saved about twice as much as the comparison carriers, or about $2.84
compared with $1.34 saved per claim.  Demonstration carriers achieved
these savings by taking some very basic actions, namely,

  employing more medical review staff--over twice the number employed
     by the comparison carriers,

  using more computerized controls to flag questionable claims for
     review--four times the number used by the comparison carriers,
     and

  reviewing a much larger volume of services before payment--nearly
     four times the number reviewed by the comparison carriers. 

With additional resources, the demonstration carriers were able to
focus on examining spending data for individual procedures.  The
Louisiana carrier, for example, found that between 1988 and 1991 its
payment for certain foot care services jumped more than
threefold--from about $511,000 to about $1.9 million.  Having
detected this trend, the carrier tightened medical policies and
computerized controls, and by 1992 its payments for these services
dropped to about $620,000--about one-third the 1991 level. 

Despite these greater achievements, the demonstration carriers
received performance ratings similar to those of the comparison
carriers.  HCFA's criteria for evaluating carrier performance, which
entailed meeting minimal review and savings quotas, offered no
incentives for carriers to improve their medical review programs for
the purpose of saving Medicare benefit dollars. 


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

Between January 1989 and September 1991, HCFA conducted a study to
determine whether giving carriers greater management
discretion--hence, flexibility--over medical review, as well as
additional funding, would result in program improvements.  Table 1
identifies the five carriers involved in the study and the role of
each. 



                           Table 1
           
                Carriers Involved in the HCFA
                    Demonstration Project

State(s)            Carrier             Purpose in project
------------------  ------------------  --------------------
Arizona/Nevada      Aetna               Comparison

Georgia             Aetna               Demonstration

Indiana             Associated          Demonstration
                    Insurance
                    Companies, Inc.

Louisiana           Blue Cross Blue     Demonstration
                    Shield of Arkansas

North Carolina      Equicor             Comparison
------------------------------------------------------------
The demonstration carriers were allowed to modify their medical
review operations and were given a minimum 12-percent increase in
funds for medical review activities, whereas the comparison carriers
were to perform their medical review operations with no modifications
to their medical review process and no additional money.  (See apps. 
I through V for more information about the carriers in this study.)
For our review, we visited HCFA headquarters; HCFA regional offices
in Atlanta, Chicago, and Dallas; and all carriers involved in the
demonstration project.  We reviewed documents and discussed the
project with officials at each of these locations.  We performed our
work between April 1992 and June 1993 in accordance with generally
accepted government auditing standards. 


   DEMONSTRATION CARRIERS' EFFORTS
   HAVE BEEN PRODUCTIVE
------------------------------------------------------------ Letter :3

Demonstration carriers have been far more successful than the
comparison carriers in avoiding payments for inappropriate, medically
unnecessary, or excessive medical services and in developing more
effective ways to detect areas for Medicare savings. 


      DEMONSTRATION CARRIERS SAVED
      MILLIONS THROUGH INCREASED
      MEDICAL REVIEW
---------------------------------------------------------- Letter :3.1

Overall, medical review savings rates for demonstration carriers have
been, on average, about twice those of the comparison carriers.  For
example, in fiscal year 1991, Indiana's medical review savings were
4.4 percent of its total Medicare benefit spending, whereas North
Carolina's medical review savings were only 2.0 percent.  (See fig. 
1.)

   Figure 1:  Medical Review
   Savings as a Percent of
   Medicare Benefit Spending

   (See figure in printed
   edition.)

The common difference between the demonstration and comparison
carriers was that HCFA provided the demonstration carriers more money
to improve their medical review activities.\1 Indiana and Louisiana
carrier officials estimated that over the life of the project they
received additional funds of about $1.1 million and $600,000,
respectively.  When the project began, the Georgia carrier had just
replaced the carrier that previously served the state and could not
estimate its additional funding.  Its overall medical review program,
however, was more expensive than the other demonstration carriers,
costing about twice as much per claim, in part because the Georgia
carrier subcontracted its medical review function to HealthCare
Compare, a firm specializing in that service.\2

The demonstration carriers

  spent 200 percent more on medical review (relative to their total
     Medicare expenditures) than did the comparison carriers,

  employed 283 percent more medical review staff--one staff person
     for every $17.5 million in benefit payments compared with the
     comparison carriers' one staff person per $54 million in benefit
     payments,

  had 759 percent more nurses on their medical review staffs than the
     comparison carriers, and

  reviewed an average of 373 percent more services each year before
     payment. 

The demonstration carriers' medical review costs for fiscal year 1990
ranged from $2.1 million to $5.7 million, or from 25 to 62 cents per
claim, while the comparison carriers' costs ranged from $1.1 million
to $1.8 million, or 14 cents per claim.  (See fig.  2.)

   Figure 2:  Comparison of 1990
   Medical Review Costs per Claim
   Processed

   (See figure in printed
   edition.)

The value to Medicare of the demonstration carriers' added investment
in medical review programs is apparent from the resulting program
savings.  The demonstration carriers saved from $2.19 to $3.18 per
claim, whereas the comparison carriers saved between $0.93 and $1.78
per claim in fiscal year 1990.  After deducting medical review costs,
the demonstration carriers' savings were still 1.7 times those of the
comparison carriers for the period.  (See fig.  3.)

   Figure 3:  Comparison of Net
   Medical Review Savings, 1989-91

   (See figure in printed
   edition.)


--------------------
\1 HCFA initially intended the demonstration project to test whether
medical review programs would be improved if carriers were given more
managerial flexibility as well as more funding.  Early in the
project, however, HCFA made several major changes nationally, which
extended to all carriers the operational flexibility initially
extended only to the demonstration carriers.  This minimized the
differences in operating conditions between the demonstration and the
comparison carriers and our findings focus on the funding aspect of
the program. 

\2 HCFA could not specifically identify the total funds committed to
this demonstration carrier. 


      DEMONSTRATION CARRIERS HAVE
      DEVELOPED ANALYTIC CAPACITY
      AND MEDICAL POLICIES
---------------------------------------------------------- Letter :3.2

The demonstration carriers have achieved higher medical review
savings by committing more resources to improving their analytic
tools, medical policies, and other payment controls to identify
claims for inappropriate or unnecessary services.  Moreover, the
demonstration carriers had the staffing needed to review the larger
number of questionable claims being flagged as a result of their
enhanced medical review efforts. 

With the resources to redesign their medical review programs, the
demonstration carriers substantially increased their ability to avoid
making inappropriate payments.  Specifically,

  Indiana hired a computer programmer for the medical review area,
     installed new computer software to generate improved medical
     review reports, and developed reporting systems to highlight
     questionable spending patterns;

  Louisiana produced reports showing 5-year expenditure trends for
     individual services and supplies and used test screens to
     identify the extent of problems; and

  Georgia subcontracted with an independent medical review firm that
     already had the capability to analyze patterns of health care
     services to detect providers who tend to use more services than
     average, or services that appear to be overused. 

Using their new capabilities, the demonstration carriers identified
payments that could be lowered by implementing new medical policies
and prepayment screens.  For example, the Indiana carrier found an
unexpected increase in billings for a specialized glaucoma test.  By
developing a medical policy that clearly defined when the carrier
would pay for such a test, reimbursements dropped from $229,772 in
1988 to $10,497 in 1992.  In Louisiana, trend analysis indicated that
spending on noninvasive vascular testing by podiatrists increased by
about one-third--from $1.27 million to $1.7 million between 1988 and
1989.  After the carrier implemented a new medical policy defining
the medical circumstances under which the carrier would allow the
claim, spending dropped by 35 percent from the 1989 level--nearly
$600,000.  (App.  VI provides more examples of medical review
savings.)

Unlike the demonstration carriers, the comparison carriers did not
modify their medical review activities significantly during the study
period.  In particular, they did not develop new data analysis
methods that could enable them to identify such payment problems as
the inappropriately rapid growth of claims for certain medical
services or supplies.  With little means to evaluate the medical
policies and claims review activities, comparison carriers developed
or revised significantly fewer medical policies than did the
demonstration carriers.  Furthermore, they made fewer changes to
their computer screens and other medical review activities. 

The following section shows the differences between the demonstration
and comparison carriers in their activities to identify ways to avoid
inappropriate payments during the 1989-91 period. 

The demonstration carriers

  spent more on medical policy development:  The carriers with the
     highest savings (Indiana and Georgia) in the final year of the
     project spent about 10 percent of their medical review budgets
     on medical policy development in 1989, the first year of the
     demonstration.  The other carriers spent about 3 percent on
     policy development that year. 

  developed more medical policies:  The demonstration carriers
     developed more new policies than the comparison carriers.  The
     Indiana carrier, for example, developed 42 new medical policies
     in fiscal year 1990, whereas the Arizona carrier developed only
     5 new screens throughout the entire project period. 

  implemented more prepayment screens:  At project end, the
     demonstration carriers were on average employing 66
     carrier-specific computer screens, over 2.5 times the number of
     the comparison carriers.  (Specifically, Indiana had 60 screens;
     Georgia, 89; and Louisiana, 50, by the end of fiscal year 1991.)

  reviewed a much larger percentage of claims dollars:  The
     demonstration carriers reviewed nearly 4.6 times the dollar
     volume of claims resulting from carrier-specific prepayment
     screens than those reviewed by the comparison carriers. 

Because of their heightened efforts to identify payment problems and
implement carrier-specific prepayment edits, the demonstration
carriers saved Medicare nearly 350 percent more than the amounts
saved by the comparison carriers on their carrier-specific edits. 
Specifically, during the project period, the demonstration carriers
averaged Medicare savings of $39.3 million per carrier for their
carrier-specific prepayment edits, while the comparison carriers
averaged $8.8 million per carrier for their edits.  The carriers'
savings from their carrier-specific prepayment edits are shown in
figure 4. 

   Figure 4:  Comparison of
   Savings From Locally Developed
   Prepayment Screens

   (See figure in printed
   edition.)

The comparison carriers' more limited medical review budget was a
significant factor discouraging them from developing more medical
policies and prepayment edits.  Arizona carrier officials told us,
for example, that the workload created by existing medical policies
and screens overwhelmed the carrier's staff.  Adding new medical
policies and prepayment edits would only generate an increased
workload and was therefore not a significant consideration during the
project period. 

The demonstration carriers' higher medical review budgets allowed
them to employ more staff, which greatly increased their ability to
undertake medical review initiatives.  During the project period, on
average, the demonstration carriers had 2.8 times more medical review
staff than the comparison carriers.  The demonstration carriers also
had over 7.5 times the number of nurses as the comparison carriers. 
With more nurses, they could implement many more prepayment screens;
such screens can add significantly to medical reviewers' workloads by
identifying more claims that are questionable and require medical
review.  This provided them greater ability to develop new medical
policies and to undertake other more complicated medical review
functions.  The demonstration carriers' more substantial investment
in medical review staffing was cost effective for Medicare, returning
(after expenses) an average $672,000 dollars per medical review staff
member each year.\3


--------------------
\3 The comparison carriers saved on average nearly $1 million each
year per medical review staff member after expenses.  The higher
comparison carrier savings are an indication that the demonstration
carriers may have been experiencing some diminishing returns as they
nearly tripled their staffing relative to the comparison carriers. 
The demonstration carriers' overall savings, however, provide an
indication that they did not approach the point where adding staff
would become nonproductive. 


   INCREASED FUNDING HAS YIELDED
   SUBSTANTIAL PROGRAM SAVINGS
------------------------------------------------------------ Letter :4

The demonstration project illustrates that spending more money on
medical review activities can yield substantial Medicare program
savings.  Yet, nationally, HCFA has decreased funding for medical
review.  Decreased funding translates directly into fewer medical
review staff and fewer claims reviewed before payment.  Although this
is likely to result in increased Medicare spending for unnecessary
services, funding was decreased to save administrative dollars during
a period of severe budgetary constraints. 


      DECLINING FUNDING FOR
      MEDICAL REVIEW
---------------------------------------------------------- Letter :4.1

Nationally, funding for medical review declined on a per claim basis
from 1989 to 1992.  In 1989, Medicare spent 23.1 cents per claim for
medical review compared with 17.5 cents per claim in 1992, about a
25-percent decrease.  To help carriers cope with the declining
medical review budget, HCFA decreased the carriers' medical review
workload.  In 1989, HCFA set targets for carriers to suspend and
review 20 percent of all claims.  Because of continuing declines in
per claim funding, HCFA reduced this target to 15 percent in 1991, 9
percent in 1992-93, and 5 percent for 1994.  To place the 1994
suspension rate target in perspective, the demonstration carriers as
a group achieved their significant savings by suspending over 10
percent of their fiscal year 1991 claims for medical review--twice
the number of suspensions expected by HCFA for fiscal year 1994. 

Since the project ended, even the demonstration carriers are
beginning to feel the pinch of decreasing money for medical review. 
With less money to spend on medical review activities than they had
during the last year of the project, officials in two demonstration
carriers stated that new medical policies and screens implemented
during the project were already generating sufficient work for their
available staffing.  Consequently, they were not planning to maintain
their prior level of effort to develop new medical policies and
companion prepayment edits.  Officials at the Indiana carrier pointed
out that implementing new policies and edits causes increased
provider inquiries and more suspended claims to review.  Such
additional workload cannot be accommodated because the carriers'
medical review budgets are declining. 


      BUDGET PROCESS MAKES CARRIER
      FUNDING INCREASES UNLIKELY
---------------------------------------------------------- Letter :4.2

Increasing funding for medical review could save Medicare
substantially more than it costs.  Nevertheless, in the current
budget environment doing so appears unlikely.  Medical review and
other activities funded out of Medicare's administrative
appropriations come under discretionary spending and must compete for
scarce dollars against programmatic funding. 

In the past we have recommended that the Congress consider amending
the Budget Enforcement Act of 1990 to treat Medicare safeguard
activities in the same manner that the act treats Internal Revenue
Service compliance activities.\4 This would allow increased funding
of Medicare program safeguard activities without decreasing funding
to other programs.  We continue to believe this recommendation
warrants consideration because it would allow the Congress more
flexibility to consider funding increases for Medicare program
safeguards solely on their merit--that is, their potential to reduce
overall Medicare costs. 


--------------------
\4 Under the Budget Enforcement Act, if additional appropriations are
made for Internal Revenue Service compliance activities, federal
discretionary spending limits are automatically increased.  This
permits additional funding for these activities without necessitating
spending cuts elsewhere.  Our recommendation to amend the Budget
Enforcement Act is included in a May 1991 report, Medicare:  Further
Changes Needed to Reduce Program and Beneficiary Costs
(GAO/HRD-91-67). 


   CURRENT HCFA EVALUATIONS OF
   CARRIER PERFORMANCE DO NOT
   PROVIDE INCENTIVES TO CARRIERS
   TO INCREASE MEDICAL REVIEW
------------------------------------------------------------ Letter :5

Lacking additional funds, carriers have few incentives to improve
medical review activities on their own.  Carriers target their
resources according to the functions on which HCFA will base their
performance evaluation.  HCFA's carrier performance evaluation
criteria for medical reviews, however, do not use measures that would
encourage or reward carriers for improving medical review programs. 

Although HCFA evaluates whether carriers apply existing medical
policies accurately in calculating claims payment, it does not assess
(1) the appropriateness of carriers' existing medical policies, (2)
the adequacy of carriers' medical policies to safeguard Medicare
payments, or (3) the scope and effectiveness of carriers' prepayment
edits.  Additionally, HCFA does not collect or evaluate carriers'
medical policies or sufficient information on the effectiveness of
computerized screens to permit comparison among carriers. 

Carrier performance evaluation criteria can be met by carriers
whether they improve their medical review programs or not.  For
example, throughout the demonstration project period, both comparison
carriers exceeded HCFA's overall medical review standards although
HCFA reported that medical review activities at these carriers
remained basically unchanged.  In fact, in 1991 HCFA awarded a higher
medical review score to one comparison carrier than it did to a
demonstration carrier with 2.5 times the reported savings.  The
cost-effectiveness of the demonstration carrier was not considered to
be high enough to receive maximum points on this standard.  After
expenses, however, this demonstration carrier's medical review
efforts saved Medicare $3.41 per processed claim, while the
comparison carrier saved Medicare $1.79 per claim. 

During the project, HCFA used cost-benefit ratios as one of its
performance standards for medical review programs.  In all 3 years,
the comparison carriers exceeded the ratios.  In fiscal year 1992,
the year after the demonstration project ended, HCFA shifted from a
cost-benefit ratio to an absolute savings goal.  However, the savings
goals were not meaningful.  Because they were set so low, almost
every carrier met its goal before the year was half over, according
to HCFA officials. 

One comparison carrier's proposal to trim certain medical review
edits illustrates the problem that results from low savings goals and
the absence of alternative measures of performance to give carriers
the right incentives.  Specifically, the North Carolina carrier's
Medicare director, in a staff memorandum, suggested eliminating all
carrier-initiated screens in fiscal year 1992 because ".  .  .  the
medical review savings goal for '92 [was] significantly less than
what [they were achieving] in '91." The carrier had no incentive to
review additional claims or save Medicare additional money once
targets had been reached.  In fiscal year 1991, these screens had
saved Medicare over $2.6 million. 

In 1993, HCFA dropped all savings goals and instituted new evaluation
criteria to encourage carriers to enhance their data analysis
capabilities.  Based in part on lessons learned from the
demonstration study, HCFA developed a new performance
standard--focused medical review--which emphasizes carrier data
analysis capabilities.  Specifically, HCFA's fiscal year 1993 medical
review standards require each carrier to identify and take corrective
action on 40 services or procedures, for which utilization rates are
unusually high compared with all other carriers.  Under its focused
medical review requirements, HCFA is beginning to require that
carriers improve their capabilities for identifying and correcting
problems that result in unnecessary Medicare expenditures.  HCFA's
efforts are still in a very early stage, however, and carrier
performance requirements regarding development of medical policies
and prepayment screens remain minimal.  Moreover, continuing problems
with funding will also constrain HCFA's efforts to achieve more from
its carrier medical review activities. 


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

The achievements of the demonstration carriers suggests that other
carriers can substantially improve their medical review operations if
HCFA provides them with adequate funding and other incentives to do
so.  Successfully transferring the results of the demonstration
program to the general carrier network depends on whether HCFA
provides carriers with adequate funding and other incentives to
operate competent medical review programs.  Without this stimuli,
carriers are not likely to undertake initiatives to improve their
medical review programs.  Despite the large payoff to Medicare,
medical review provides no payoff to carriers; in fact, better
medical review costs carriers more money and complicates their basic
jobs as claims processors. 

In recent years, HCFA has been concerned with reducing program
administration costs and has significantly reduced per-claim medical
review funding, which means fewer claims are subjected to medical
review.  With or without increased funding, however, HCFA needs to
encourage carriers to be more vigilant in safeguarding Medicare
program dollars.  The absence of key evaluation criteria allows HCFA
to characterize a wide range of performance as acceptable, which does
not challenge carriers to continue to improve. 


   RECOMMENDATION
------------------------------------------------------------ Letter :7

We recommend that the Secretary of HHS direct the HCFA Administrator
to take better advantage of carrier medical review activities by
developing precise measures of carrier performance in such key
medical review areas as

  the effectiveness of carrier data analysis capabilities,

  the adequacy of carrier medical policies,

  the scope and effectiveness of prepayment screens, and

  the significance of carrier medical review savings. 

This will enable HCFA to assume a larger role in reducing Medicare
expenditures by holding carriers more accountable for medical review
efforts. 


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

In commenting on our recommendations, HHS focused on recent
activities that HCFA has undertaken to improve carriers' medical
review programs and the agency's ability to oversee those programs. 
HHS expressed some concern about developing contractor evaluation
standards that would require contractors to meet specific savings
goals, such as a minimum cost-benefit ratio.  HHS believes that
savings standards can give contractors incentives to focus
excessively on achieving savings at the expense of performing other
carrier medical review functions, such as the development of
effective provider education activities.  We agree that it would be
inappropriate for HCFA to focus exclusively on savings when assessing
a carrier's medical review performance.  The amounts carriers save
provide only one of several performance measures that we believe HCFA
needs to develop.  HHS noted that HCFA recently let a contract to
help the agency develop better performance measures.  We believe this
initiative and the other initiatives HHS cites in its comments
provide HCFA a good start toward developing better Medicare
contractor performance measures and, ultimately, more effectively
managing the Medicare program. 

In its technical comments on the draft report, HHS also explained how
carriers develop medical policies and apply them to make medical
necessity determinations.  HHS, however, did not address our basic
concern that HCFA does not assess the appropriateness or adequacy of
carrier medical policies.  We have considered other HHS comments and
incorporated them as appropriate.  (HHS comments are included as app. 
VII.)


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

We are sending copies of this report to the appropriate Senate and
House committees and subcommittees, the Secretary of Health and Human
Services, the Administrator of HCFA, and the Director of the Office
of Management and Budget.  We will make additional copies available
to other interested parties upon request. 

If you or your staff have any questions about this report, please
call me on (202) 512-7123.  Other major contributors are listed in
appendix VIII. 

Sincerely yours,

Leslie G.  Aronovitz
Associate Director, Health Financing Issues


AETNA:  COMPARISON CARRIER FOR
ARIZONA/NEVADA
=========================================================== Appendix I

Aetna has been the Medicare carrier for Arizona and Nevada since the
program's inception.  The Arizona/Nevada Aetna operation, located in
Phoenix, Arizona, is part of the national Aetna organization that
also services Medicare part B claims in Alaska, Georgia, Hawaii, New
Mexico, Oklahoma, Oregon, and Washington.  The Health Care Financing
Administration selected it as a comparison carrier for the study to
provide a contrast with the Aetna carrier for Georgia, which HCFA
selected as a demonstration carrier. 



                          Table I.1
           
               Information on Medical Review in
                   Arizona/Nevada, 1989-92

                                1989    1990    1991    1992
----------------------------  ======  ======  ======  ------
Beneficiary population         587.9   614.8   642.0   707.4
 (thousands)
Benefit payments (millions)   $559.4  $634.1  $668.4  $719.4
Claims volume (millions)         6.8     7.8     8.5     9.3
Administrative cost            $12.0   $13.8   $14.4   $16.0
 (millions)
Medical review cost             $1.0    $1.1    $1.2    $0.9
 (millions)

Medical review staff
------------------------------------------------------------

Prepayment
------------------------------------------------------------
Nurses                           0.5     0.5     0.5     0.5
Other                            6.0     6.0     6.0     6.0

Postpayment
------------------------------------------------------------
Nurses                           1.5     1.5     1.5     1.5
Other                            3.0     3.0     3.0     3.0
Total staff                     11.0    11.0    11.0    11.0
Medical review savings          $9.0   $13.8   $16.4   $16.9
 (millions)
Medical review savings/          1.6     2.2     2.5     2.3
 benefit payments (percent)
Medical review savings per     $1.33   $1.78   $1.93   $1.81
 claim
------------------------------------------------------------

AETNA:  DEMONSTRATION CARRIER FOR
GEORGIA
========================================================== Appendix II

Aetna replaced Prudential as the Georgia part B carrier on January 1,
1989 (also the start of the demonstration).  The Georgia Aetna
operation, located in Savannah, Georgia, is part of the national
Aetna organization that also services Medicare part B claims in
Alaska, Arizona, Hawaii, Nevada, New Mexico, Oklahoma, Oregon, and
Washington. 

At the same time Aetna became the Georgia carrier, HCFA awarded
HealthCare COMPARE, an independent provider of health care
utilization review services, the Medicare part B medical review
subcontract for Georgia for the length of the 33-month demonstration. 
This organizational separation of the medical review function was
unique among carriers. 

The transition to a new carrier in Georgia was particularly difficult
for two reasons.  First, Aetna planned to establish a new
claims-processing office, but did not provide its clerks enough
training to process claims effectively in the time it had prior to
becoming operational.  Second, HCFA made a last-minute decision to
subcontract the medical review function, instead of relying on Aetna
staff for this.  The subcontractor, HealthCare COMPARE, had little
time to set up its operation, determine how its review policies would
affect providers, and inform providers of the changes they should
expect.  As a consequence, claims processing slowed, backlogs grew,
processing errors increased, beneficiaries were confused, and
providers' finances were strained by payment interruptions.  At the
demonstration's end, Aetna assumed the Georgia medical review
function from HealthCare COMPARE. 



                          Table II.1
           
               Information on Medical Review in
                       Georgia, 1989-92

                                1989    1990    1991    1992
----------------------------  ======  ======  ======  ------
Beneficiary population         692.9   708.1   725.1   788.1
 (thousands)
Benefit payments              $440.9  $624.7  $666.9  $709.1
 (millions)
Claims volume                    6.8     9.2    10.7    11.5
 (millions)
Administrative cost            $19.0   $22.5   $22.6   $19.8
 (millions)
Medical review cost             $5.4    $5.7    $4.9    $2.3
 (millions)

Medical review staff
------------------------------------------------------------

Prepayment
------------------------------------------------------------
Nurses                          13.0    19.0    12.0     9.0
Other                           23.5    18.5    14.5    11.0

Postpayment
------------------------------------------------------------
Nurses                           3.0     8.0    10.0     8.0
Other                            1.0     2.0     2.0     1.0
Total staff                     40.5    47.5    38.5    29.0
Medical review savings         $23.5   $29.4   $41.5   $36.4
 (millions)
Medical review savings/          5.3     4.7     6.2     5.1
 benefit payments (percent)
Medical review savings per     $3.48   $3.18   $3.87   $3.16
 claim
------------------------------------------------------------

ASSOCIATED INSURANCE COMPANIES,
INC.:  DEMONSTRATION CARRIER FOR
INDIANA
========================================================= Appendix III

Associated Insurance Companies, Inc., located in Indianapolis,
Indiana, has been the Medicare contractor for both part A and part B
claims for Indiana since Medicare's inception.  According to carrier
officials, prior to the demonstration the Indiana carrier relied
almost exclusively on HCFA-mandated screens for medical review
savings. 

Indiana carrier officials envisioned Associated's role as a
demonstration carrier in this study as a vehicle for improving
Associated's medical review program.  Associated received about $1.1
million in additional funding over the 3 years of the demonstration. 
To facilitate improvements, the Indiana carrier reorganized its
corporate structure by consolidating the part A and part B medical
review functions into a single unit.  In conjunction with the
consolidation, the carrier (1) developed a database for analyzing
payment practices; (2) hired an assistant for the Medical Director, a
computer programmer, and additional managers and medical review
staff; and (3) purchased new statistical software and computer time
to run complicated reports. 

On October 1, 1991, Associated reorganized its overall corporate
structure.  According to carrier officials, the restructuring
concentrated operational activities in order to focus accountability,
spread costs over several subsidiaries, and improve responsiveness to
customers.  This reorganization included creating a subsidiary,
AdminaStar Federal, to oversee its Medicare operations, and another
subsidiary, AdminaStar Solutions, to market its data analysis
programs, derived during the demonstration, to other clients,
including the part B carriers in the states of Alabama, Minnesota,
and South Carolina. 



                         Table III.1
           
               Information on Medical Review in
                       Indiana, 1989-92

                                1989    1990    1991    1992
----------------------------  ======  ======  ======  ------
Beneficiary population         725.8   737.2   748.8   803.4
 (thousands)
Benefit payments (millions)   $468.4  $510.9  $527.7  $572.4
Claims volume (millions)         7.6     8.5     9.6    10.6
Administrative cost            $16.8   $15.2   $17.1   $18.5
 (millions)
Medical review cost             $2.6    $2.1    $2.3    $2.3
 (millions)

Medical review staff
------------------------------------------------------------

Prepayment
------------------------------------------------------------
Nurses                           7.0     7.0     7.0     6.0
Other                            4.0     5.0     5.5     7.0

Postpayment
------------------------------------------------------------
Nurses                           8.0     5.0     5.5     7.0
Other                            2.0     2.0     2.0     2.0
Total staff                     21.0    19.0    19.5    21.0
Medical review savings         $12.6   $18.7   $23.4   $22.8
 (millions)
Medical review savings/          2.7     3.7     4.4     4.0
 benefit payments (percent)
Medical review savings per     $1.66   $2.19   $2.43   $2.14
 claim
------------------------------------------------------------

BLUE CROSS BLUE SHIELD OF
ARKANSAS:  DEMONSTRATION CARRIER
FOR LOUISIANA
========================================================== Appendix IV

Blue Cross Blue Shield of Arkansas became the Louisiana carrier for
Medicare part B claims on January 1, 1985.  The Louisiana carrier has
two physical locations:  prepayment functions located in Baton Rouge,
Louisiana, and postpayment functions located in Little Rock,
Arkansas.  Gradually, the carrier has been shifting workload from
Little Rock to Baton Rouge; however, this has been slowed by the
shortage of nurses, used as reviewers, in the Baton Rouge area. 

According to carrier officials, Louisiana's medical review program
prior to the demonstration relied primarily on manually identified
problem areas and referrals.  Even so, its medical review program was
well-established at the start of the project.  For example, in 1987
the carrier's medical review savings were twice as high as Indiana's. 
At the start of the demonstration, Louisiana employed 64 locally
developed medical review computer screens--about four times the
number of screens employed by Arizona/Nevada and about one and
one-half times the number of screens for North Carolina and Georgia. 

The Louisiana carrier estimated it received an additional $600,000
over the life of the study--considerably less than either Georgia or
Indiana and limiting the carrier's ability to hire staff.  For
example, in fiscal year 1991, the carrier requested an additional
$329,000 for nursing staff and clerical and system support; however,
HCFA provided only $169,300. 

At the end of the demonstration, the Louisiana carrier encountered
severe difficulties in retaining nurses for medical review and began
using specially trained claims analysts instead. 



                          Table IV.1
           
               Information on Medical Review in
                      Louisiana, 1989-92

                                1989    1990    1991    1992
----------------------------  ======  ======  ======  ------
Beneficiary population         499.8   507.8   516.9   558.6
 (thousands)
Benefit payments (millions)   $436.1  $489.9  $529.2  $556.6
Claims volume (millions)         6.2     6.8     7.8     8.4
Administrative cost            $12.3   $13.6   $14.7   $15.9
 (millions)
Medical review cost             $1.5    $2.1    $1.7    $1.6
 (millions)

Medical review staff
------------------------------------------------------------

Prepayment
------------------------------------------------------------
Nurses                          11.0     9.0    10.0     5.5
Other                           11.0    11.0    12.0    13.0

Postpayment
------------------------------------------------------------
Nurses                           3.0     4.0     5.0     5.0
Other                            2.0     2.0     2.0     2.0
Total staff                     27.0    26.0    29.0    25.5
Medical review savings         $18.2   $20.1  $20.9\  $18.8\
 (millions)                                        a       a
Medical review savings/          4.2     4.1     3.9     3.4
 benefit payments (percent)
Medical review savings per     $2.94   $2.97   $2.68   $2.24
 claim
------------------------------------------------------------
\a Figures adjusted to maintain consistency of reported savings over
the 3-year period.  Other calculations were adjusted accordingly. 


EQUICOR:  COMPARISON CARRIER FOR
NORTH CAROLINA
=========================================================== Appendix V

Equicor replaced Prudential as the North Carolina carrier for
Medicare part B claims on December 1, 1988.  When Equicor took over
the North Carolina Medicare part B contract, it decided to handle the
North Carolina operations principally out of its existing Nashville,
Tennessee, operations center because Prudential employees stayed with
that company.  Transition problems, such as deterioration in claims
processing, were less severe in North Carolina than in Georgia.  This
was due to the carrier's decision to use existing facilities and its
longer lead time to hire and train staff.  The North Carolina carrier
began hiring and training staff 6 months prior to "live" claims
processing, as opposed to 3 months prior in Georgia.  Because of the
effort required to manage the transition, Equicor officials were
initially reluctant to participate in the demonstration project but
ultimately agreed to become a comparison carrier. 

Originally, almost all of North Carolina's operations were handled
out of Nashville; however, Equicor gradually shifted more of the
workload to its Greensboro, North Carolina, office.  The prepayment
functions are now located in Nashville and postpayment functions are
located in Greensboro.  In 1991, Equicor was bought by CIGNA. 
However, Equicor's Medicare staff was retained by CIGNA because CIGNA
was not in the Medicare business at the time of the takeover. 



                          Table V.1
           
            Information on Medical Review in North
                      Carolina, 1989-92

                                1989    1990    1991    1992
----------------------------  ======  ======  ======  ------
Beneficiary population         841.5   864.8   889.1   986.7
 (thousands)
Benefit payments (millions)   $518.6  $673.1  $726.6      \a
Claims volume (millions)        10.2    13.3      \a      \a
Administrative cost            $15.1   $21.1      \a      \a
 (millions)
Medical review cost             $1.3    $1.8      \a      \a
 (millions)

Medical review staff
------------------------------------------------------------

Prepayment
------------------------------------------------------------
Nurses                           1.0     2.0     2.0     1.0
Other                            7.0     5.0     3.0     6.0

Postpayment
------------------------------------------------------------
Nurses                           2.0     2.0     2.0     2.0
Other                            3.0     4.0     4.0     5.0
Total staff                     13.0    13.0    11.0    14.0
Medical review savings         $10.9   $12.4   $14.7   $11.0
 (millions)
Medical review savings/          2.1     1.8     2.0      \a
 benefit payments (percent)
Medical review savings per     $1.06   $0.93      \a      \a
 claim
------------------------------------------------------------
\a Not available. 


EXAMPLES OF MEDICAL REVIEW SAVINGS
========================================================== Appendix VI


      TRABECULECTOMY
------------------------------------------------------ Appendix VI:0.1

Trabeculectomy is the surgical release of fluid in the eye for
glaucoma patients.  The Louisiana carrier discovered that some
surgeons routinely perform a trabeculectomy when doing cataract
surgery even if glaucoma had not been diagnosed or previously
treated.  The carrier's analysis revealed an increase during 1989 and
1990 in ophthalmologists' billing for trabeculectomy.  In response,
the carrier published a local medical policy in August 1990.  The
medical policy simply required a diagnosis on the claim when the
procedure was done in conjunction with a cataract extraction. 
Reimbursements dropped 8 percent in 1991 and 4 percent in 1992. 



                          Table VI.1
           
             Change in Medicare Expenditures for
                   Trabeculectomy, 1988-92

                                    Amount          Variance
Year                               allowed         (percent)
----------------------------  ------------  ----------------
1988                             $ 479,770
1989                               513,067             + 6.9
1990                               613,989            + 19.7
1991                               562,940              -8.3
1992                               541,031              -3.9
------------------------------------------------------------
Nationally, the Medicare program spent about $45 million on this
procedure in 1992. 


      HOSPITAL BEDS
------------------------------------------------------ Appendix VI:0.2

The Indiana carrier discovered an increase in billings for hospital
bed rentals during fiscal year 1989.  As a result, the carrier
published a local medical policy in December 1989 addressing the
criteria necessary for authorization of hospital bed rentals and also
established internal computer screen parameters on March 1, 1990. 
The medical policy required narrative justification; specified the
medical necessity criteria, such as the patient requiring special
positioning of the body; and defined medical conditions, such as what
constitutes "bedfast." Subsequently, reimbursements dropped 27
percent in 1991 and another 24 percent in 1992. 



                          Table VI.2
           
             Change in Medicare Expenditures for
                    Hospital Beds, 1988-92

                                    Amount          Variance
Year                               allowed         (percent)
----------------------------  ------------  ----------------
1988                            $2,593,532
1989                             2,551,306              -1.6
1990                             2,434,753              -4.6
1991                             1,777,882             -27.0
1992                             1,357,376             -23.7
------------------------------------------------------------
Nationally the Medicare program spent $212 million for hospital beds
in 1992. 


      SERIAL TONOMETRY
------------------------------------------------------ Appendix VI:0.3

Serial tonometry indicates repeated testing over a few hours in a
doctor's office, usually to assess variations in pressure in the eye
of a patient who is suspected of having glaucoma or to monitor
pressure in certain glaucoma patients.  The Indiana carrier
discovered an increase in provider billing for serial tonometry
during fiscal year 1988, which, according to the carrier's medical
review director, was much larger than expected.  As a result, the
carrier published a local medical policy in July 1989 for serial
tonometry.  The medical policy clarified the expected duration and
the uncommon frequency of this test.  Subsequently, reimbursements
for this procedure have dropped each year, starting with a 4-percent
drop in 1989, then 32 percent in 1990, 87 percent in 1991, and
another 45 percent in 1992. 



                          Table VI.3
           
             Change in Medicare Expenditures for
                  Serial Tonometry, 1988-92

                                    Amount          Variance
Year                               allowed         (percent)
----------------------------  ------------  ----------------
1988                             $ 229,772
1989                               219,845              -4.3
1990                               148,700             -32.4
1991                                19,200             -87.1
1992                                10,497             -45.3
------------------------------------------------------------
Nationally, the Medicare program spent $5 million on this procedure
in 1992. 


      RIGHT HEART CATHETERIZATION
------------------------------------------------------ Appendix VI:0.4

Right heart catheterization is the placement of a catheter into the
right atrium, ventricle, and pulmonary artery to detect various forms
of heart disease.  The Louisiana carrier discovered an increase in
provider billing for right heart catheterizations during fiscal year
1991.  As a result, the carrier published a local medical policy in
June 1991 for right heart catheterizations.  The medical policy
defined when this procedure is warranted.  Subsequently,
reimbursements dropped 83 percent in 1992, with no increases in
related procedure codes. 



                          Table VI.4
           
             Change in Medicare Expenditures for
             Right Heart Catheterization, 1988-92

                                    Amount          Variance
Year                               allowed         (percent)
----------------------------  ------------  ----------------
1988                             $ 233,286
1989                               206,573             -11.5
1990                               189,871              -8.1
1991                               168,556             -11.2
1992                                28,064             -83.3
------------------------------------------------------------
Nationally, the Medicare program spent $11 million on right heart
catheterizations in 1992. 


      NONINVASIVE VASCULAR TESTING
------------------------------------------------------ Appendix VI:0.5

Noninvasive vascular testing involves studies of the lower
extremities through various forms of pressure, velocity, and wave
form analysis.  The Louisiana carrier's trend analysis revealed a
35-percent increase during 1989 for podiatrist reimbursements for
noninvasive vascular testing.  In response, the carrier published a
local medical policy in August 1990.  The new medical policy limited
the procedure to evaluations prior to scheduled surgery no more than
once a year, required specific documentation, and identified specific
diagnoses and symptoms.  Reimbursements dropped 9 percent in 1991 and
38 percent in 1992. 



                          Table VI.5
           
             Change in Medicare Expenditures for
            Noninvasive Vascular Testing, 1988-92

                                    Amount          Variance
Year                               Allowed         (percent)
----------------------------  ------------  ----------------
1988                            $1,266,546
1989                             1,704,002            + 34.5
1990                             1,943,712            + 14.1
1991                             1,773,416              -8.8
1992                             1,105,515             -37.7
------------------------------------------------------------
Nationally, the Medicare program spent $56 million on this procedure
in 1992. 


      ROUTINE FOOT CARE
------------------------------------------------------ Appendix VI:0.6

Routine foot care includes the cutting or removal of corns or
calluses, trimming of nails, application of skin creams, and other
hygienic and preventive maintenance foot care of both ambulatory and
bedfast patients.  The Louisiana carrier's analysis revealed an
increase in provider billing for five nonroutine foot care-related
procedures from 1989 through 1991.  The carrier suspected that
podiatrists were performing routine foot care but billing for the
five nonroutine foot care procedures that were reimbursed at higher
rates.  In response, the carrier published a local medical policy in
November 1991 for routine foot care.  The medical policy delineated
the difference between routine foot care and the five nonroutine foot
care procedures.  Subsequent to the implementation of the medical
policy, reimbursements dropped from 57 to 86 percent in all five
nonroutine foot care procedure codes, for a total reduction in 1992
of over $1.2 million.  The carrier's analysis also revealed, as
anticipated, that reimbursements for routine foot care increased by
about $47,000 in 1992. 



                          Table VI.6
           
             Change in Medicare Expenditures for
            Various Foot Care Procedures, 1988-92

                                    Amount          Variance
Year                               allowed         (percent)
----------------------------  ------------  ----------------
Code 11700 -D
------------------------------------------------------------
1988                             $ 119,309
1989                               195,090            + 63.5
1990                               300,100            + 53.8
1991                               384,740            + 28.2
1992                               134,603             -65.0

Code 11701 -E
------------------------------------------------------------
1988                                55,230
1989                               134,533           + 143.6
1990                               245,654            + 82.6
1991                               320,837            + 30.6
1992                                43,647             -86.4

Code 11710 -D electric grind
------------------------------------------------------------
1988                               127,871
1989                               233,267            + 82.4
1990                               368,090            + 57.8
1991                               434,783            + 18.1
1992                               186,035             -57.2

Code 11711 -E
------------------------------------------------------------
1988                               106,363
1989                               171,660            + 61.4
1990                               307,365            + 79.0
1991                               394,321            + 28.3
1992                               121,970             -69.1

Code 11730 -A partial or com
------------------------------------------------------------
1988                               102,419
1989                               164,882            + 61.0
1990                               315,020            + 91.1
1991                               344,025             + 9.2
1992                               134,767             -60.8
------------------------------------------------------------
Nationally, the Medicare program spent $190 million on the five
nonroutine foot care-related procedures in 1992. 




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



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
======================================================== Appendix VIII

HEALTH, EDUCATION, AND HUMAN
SERVICES DIVISION,
WASHINGTON, D.C. 

Edwin P.  Stropko, Assistant Director, Health Financing Issues,
 (202) 512-7108
Sibyl Tilson, Senior Evaluator

BOSTON REGIONAL OFFICE

Donald B.  Hunter, Regional Management Representative
Lloyd J.  Miller, Evaluator-in-Charge
Thomas Taydus, Evaluator
Jeannie Thrall, Evaluator

