Medicare: Inadequate Review of Claims Payments Limits Ability to Control
Spending (Letter Report, 04/28/94, GAO/HEHS-94-42).

Medicare overpayments of millions of dollars are being made because of
inadequate safeguards by contractors who process Medicare claims and
inattention by the federal Health Care Financing Administration (HCFA).
Carriers use inaccurate or incomplete data in compiling statistical
reports profiling doctors and other providers. Their focused reviews to
identify irregular billing patterns and unusual spending trends suffer
from HCFA's failure to spell out appropriate analysis methods and
outcome measures. As a result, HCFA cannot be sure that Medicare
carriers are systematically targeting providers or services that most
warrant attention. Shortcomings in carriers' claims review activities
exist, in part, because HCFA lacks meaningful requirements for--and the
data needed to measure--carriers' postpayment review performance.
Shortcomings also persist because funds earmarked for postpayment review
have not kept pace with the growth in Medicare claims or as a percentage
of the carriers' overall administrative budget.

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

     TITLE:  Medicare: Inadequate Review of Claims Payments Limits 
             Ability to Control Spending
      DATE:  04/28/94
   SUBJECT:  Health care services
             Health care costs
             Program abuses
             Billing procedures
             Contractor performance
             Health insurance
             Health insurance cost control
IDENTIFIER:  Medicare Program
             HCFA Contractor Performance Evaluation Program
             North Carolina
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================================================================ COVER

Report to the Chairman, Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce, House of Representatives

April 1994



Medicare:  Inadequate Review of Payments

=============================================================== ABBREV

  CPEP - Contractor Performance Evaluation Program
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services

=============================================================== LETTER


April 28, 1994

The Honorable John D.  Dingell
Chairman, Subcommittee on Oversight
 and Investigations
Committee on Energy and Commerce
House of Representatives

Dear Mr.  Chairman: 

The federally funded Medicare program is the nation's largest payer
of health care benefits.  Because Medicare accounts for nearly 15
percent of all money spent on health care in the United States, it is
important that those who administer the program--the Health Care
Financing Administration (HCFA) and its contractors--curb unnecessary
and mistaken payments. 

Medicare's program for analyzing paid claims--called postpayment
review--is intended to warn Medicare officials of costly payment
problems, such as a provider's billing for an improbable number of
diagnostic tests, the rapid spending growth of ambulance services and
cholesterol tests, or the unexplained high use of foot care and
chiropractic services.  Postpayment review, typically performed by
Medicare's claims processing contractors, is HCFA's primary means for
systematically identifying which providers are inappropriately
billing the program and why the program spends so much for certain
medical services.  The purpose of our review was to assess the
adequacy of Medicare contractors' postpayment review activities. 

------------------------------------------------------------ Letter :1

In recent years, Medicare's fastest-growing expenditure has been for
physician, outpatient, and other health services, such as diagnostic
tests and medical supplies.  Spending for these services, covered
under part B of Medicare, increased from $38.3 billion in 1989 to
$50.3 billion in 1992, an average annual increase of almost 10

\1 Medicare part B is administered nationwide by 32 carriers.  These
are Blue Shield plans and private insurers such as CIGNA, Aetna, and
Transamerica.  Carriers are responsible for paying Medicare part B
claims, implementing controls to safeguard program dollars, and
providing information services to beneficiaries and providers. 

---------------------------------------------------------- Letter :1.1

To constrain rising costs, Medicare's part B claims processing
contractors, referred to as carriers, use postpayment review to
detect major payment problems.  These problems include a broad range
of inappropriate and abusive billing practices, as shown in figure 1. 

   Figure 1:  Examples of Payment
   Problems Identified Through
   Postpayment Review

   (See figure in printed

Historically, carriers' postpayment review methods have concentrated
on examining the practice patterns of individual physicians or
suppliers, an approach known as profiling.  The object of profiling
is to identify providers who bill for many more services per patient
than their peers.  Until recently, carriers' profiling analyses
relied on gross measures of individual provider behavior. 

In 1993, HCFA developed a new emphasis on data analysis.  Calling its
approach focused medical review, HCFA required carriers to better
focus their profiling efforts and to begin identifying general
spending patterns and trends that would allow them to determine the
causes for unusually high spending.  Carriers are now required to
examine spending for specific services or procedures largely by
comparing their own spending amounts for certain procedures with
these procedures' spending averages across carriers. 

Using profiling and focused medical review, as well as leads from
beneficiaries and others, carriers identify payment problems and
initiate corrective actions, including education letters that notify
providers of billing errors, audits of providers' claims, recovery of
amounts misbilled, and suspension of flagrant offenders.  HCFA
prescribes the range of actions carriers can take, but generally does
not specify protocols to follow in taking these actions. 

If the billing problems appear to be widespread among providers,
carriers may also take a combination of steps that include (1)
strengthening payment policies or procedures that will disallow or
reduce Medicare reimbursement for certain services; (2) developing
early detection controls, called prepayment edits, which flag
questionable claims for review before payment; and (3) instructing
providers about local or national payment policies through education

---------------------------------------------------------- Letter :1.2

To examine carriers' postpayment methods, we interviewed officials
and reviewed documents both at HCFA and 11 Medicare carriers--Aetna
(Arizona), Blue Shield of Florida, Aetna (Georgia), Health Care
Service Corporation (Illinois), Associated (Indiana), Blue Shield of
Kentucky, Blue Shield of Arkansas (Louisiana), Blue Shield of
Maryland, CIGNA (North Carolina and Tennessee), and Transamerica
Occidental (Southern California).  We also examined postpayment
review activities--carriers' data analysis, audits, and recovery
actions--and HCFA's oversight of carrier performance, especially its
use of performance indicators, to assess results.  We conducted our
work between May 1992 and February 1994, in accordance with generally
accepted government auditing standards. 

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

HCFA does not pay enough attention to Medicare carriers' analyses of
payments made and therefore misses opportunities to identify perhaps
millions of dollars in excessive payments.  Among other things,
Medicare carriers use claims data to identify billing abuses and
excessive payments for services.  Recent HCFA mandates have tried to
enhance carriers' analyses of claims data, but carriers' analysis
methods to examine provider billing behavior and Medicare spending
trends remain inadequate. 

Carriers use inaccurate or incomplete data in compiling statistical
reports profiling physicians and other providers; their focused
reviews to identify irregular billing patterns and unusual spending
trends suffer from HCFA's failure to specify appropriate analysis
methods and outcome measures.  As a result, HCFA cannot ensure that
Medicare carriers are systematically targeting providers or services
that most warrant investigation and corrective action.  Procedural
and legal constraints related to Medicare also hinder carrier efforts
to act against abusive providers. 

Shortcomings in carriers' claims review activities exist, in part,
because HCFA lacks meaningful requirements for-- and the data needed
to measure--carriers' postpayment review performance.  HCFA measures
how well carriers adhere to required procedures; it does not assess
the extent to which carriers' recovery efforts or payment controls
save program dollars or deter future abuse.  In addition,
shortcomings persist because funds allotted to postpayment review
have not kept pace with Medicare's growth in claims or as a
percentage of the carriers' total administrative budget. 

To ensure that carriers improve their reviews of paid claims, HCFA
needs to better direct Medicare's program safeguard efforts.  To do
this, HCFA should expand guidance and technical assistance for
carriers' development of data analysis methods.  It should also
address constraints on carriers' authority to act against abusive
providers.  Finally, HCFA should establish relevant measures of
effective performance and use these measures to assess carriers'
claims review performance. 

------------------------------------------------------------ Letter :3

Postpayment review enables carriers to identify billing practices
that unnecessarily increase Medicare costs.  HCFA does not examine
these data, however, for the purpose of addressing excessive spending
nationwide or by individual carriers; HCFA staff are responsible for
monitoring compliance with reporting requirements that are procedural
rather than analytical in nature. 

In general, HCFA holds carriers responsible for establishing controls
over spending in the Medicare program.  Carriers accomplish this
through postpayment analyses, which involve automated reviews of paid
claims files to highlight questionable claims or suspicious billing
patterns.  Nurses and claims analysts on the carriers' medical review
staffs then review the claims to determine what actions should be
taken.  Examples from the carriers that we visited demonstrate how
postpayment reviews have prompted corrective actions, helping to
reduce unnecessary Medicare expenditures: 

  A case in Louisiana illustrates the use of postpayment review to
     identify needed changes in medical policy.  By examining
     spending trends for individual procedures, the carrier found
     that in 1991 it paid significantly more for foot care services
     than in prior years.  Specifically, the carrier's payment for
     five foot care services jumped more than threefold--from about
     $470,000 to about $1.8 million--between 1988 and 1991.  The
     carrier suspected that podiatrists were performing routine foot
     care but fragmenting their bills to reflect five separate foot
     care procedures.  In 1991, the carrier developed a medical
     policy delineating the difference between routine foot care and
     the other procedures.  After implementing the policy in fiscal
     year 1992, the carrier's payments for these five procedures
     dropped to about $620,000--about a third of its payments for the
     five procedures in 1991.  Without a written medical policy,
     carriers have little basis for denying a claim. 

  A Tennessee case in which the carrier compared payments per
     beneficiary for selected services to those of other carriers
     also shows that postpayment review can identify needed policy
     changes.  By comparing payments, carrier officials learned in
     1989 that the carrier was paying pathologists for consultations
     with other doctors when the test results could be interpreted by
     the requesting physician.  The carrier revised its medical
     policy, and reimbursements for these consultations declined from
     more than $2,700,000 in 1988 to about $10,650 in 1992. 

  An Illinois case shows how physician profiling can identify
     unnecessary tests.  By comparing an individual internist's
     practice pattern to the average pattern of all internists, the
     Illinois carrier identified a physician who was billing for an
     improbably high number of cholesterol tests, among others.  The
     carrier produced detailed reports that highlighted the billing
     problem and assessed the physician for nearly $30,000 in claims
     for unnecessary services. 

HCFA could also use postpayment review to assess its contractors'
performance in managing Medicare benefit dollars.  Through
postpayment review analysis of the number of services that carriers
reimbursed per Medicare beneficiary, for example, HCFA could get
significant information about a carrier's ability to make benefit
payments appropriately.  As shown in figure 2, some carriers
reimbursed several times the number of services per beneficiary
reimbursed by other carriers for selected services.  Such comparisons
would enable HCFA to explore reasons for variations in service use
rates and spending, and, with the understanding gained, improve the
management of the contractors.  HCFA does not use the data, however,
for these purposes. 

   Figure 2:  Allowed Services per
   1,000 Medicare Enrollees for
   Selected Procedures at 11

   (See figure in printed

------------------------------------------------------------ Letter :4

HCFA has little assurance that Medicare carriers systematically
target providers or services that most warrant investigation and
corrective action.  Only recently has HCFA begun emphasizing that
carriers analyze such factors as spending trends to detect, by
procedure, unusual levels or growth of spending.  In principle, these
new data analysis initiatives can greatly improve Medicare's payment
review efforts.  The data that carriers use to perform these
analyses, however, are often inaccurate or incomplete.  Carriers
acknowledge these data weaknesses but have little incentive to
correct them.  HCFA does not require that data problems be corrected
and does not fund carriers to do so. 

---------------------------------------------------------- Letter :4.1

Profiling is a technique used by public and private payers to screen
providers' practice and billing patterns for overuse of services or
billing problems.  Private-sector payers commonly use profiling as a
means of selecting providers to participate in their medical service
networks.  In Medicare, the profile reports that carriers generate
are intended to target providers that appear to be abusive billers or
whose billing patterns are otherwise questionable.\2 Over the years,
carriers have acknowledged that their profile reports are generally
limited with respect to identifying the billing practices that most
warrant audits or other corrective actions. 

Carriers consider profiling important in targeting providers with
suspect billings, but they have not corrected the problems that limit
its usefulness because HCFA has neither required nor funded such
actions.  Better profiling reports can increase Medicare's savings by
making carriers more effective at identifying and correcting their
most serious payment problems.  Additional Medicare savings, however,
do not produce additional revenue for carriers; in fact, carriers
generally incur additional costs to achieve savings.  Thus, absent
specific requirements and reimbursement by HCFA, carriers lack an
incentive to improve profiling reports. 

HCFA requires that carriers' profiling reports calculate averages for
the carriers' use to identify physicians and suppliers who bill, per
patient, substantially more services than their peers.  The reports
are not always reliable, however, because HCFA does not require that
carriers adequately account for factors that result in appropriate
differences in physicians' practices.  Following are particular
drawbacks of carriers' profile reports: 

  They do not adjust for differences in providers' mix of patients. 
     For example, an internist who treats older, more severely ill
     patients might appear to be providing too many higher level
     services when compared to the average internist. 

  They do not flag referral patterns that would reveal deceptive
     billing practices.  Medical suppliers and laboratories provide
     services on the basis of referrals from physicians.  Because
     profile reports do not include data on physicians' referrals,
     however, carriers cannot screen for physicians who refer
     unusually high volumes of patients for particular services or
     supplies.  At one carrier we visited, for example, postpayment
     review staff could not use profiling to detect that a physician
     had referred an unusually large number of patients for supplies
     from a particular company.\3

  They rely on inaccurate classifications of physicians' specialties. 
     Profiling results can be distorted when, for example, a cancer
     specialist is classified as an internist and measured against
     other internists on the number of laboratory tests rendered. 
     Since cancer specialists perform a relatively high number of
     laboratory tests, misclassified internists would appear to have
     significantly exceeded normal rates for laboratory tests when
     compared to all internists.\4

These drawbacks limit the effectiveness of carrier profiling reports
for targeting providers to audit.  Generally, carriers audit
providers that profiling reports suggest as having egregious billing
problems.  Audits are done to identify and recover inappropriate
Medicare payments.  An official at one carrier that we visited
estimated that more than 95 percent of providers identified by
profiling reports do not merit an audit, because the reports do not
discriminate between providers committing one-time billing errors and
habitual misbillers.  Winnowing the list of targeted providers
therefore requires a disproportionate amount of time and staff
relative to carrier resources.  At several carriers, postpayment
review staff rely heavily on beneficiary complaints or other
referrals for fraud and abuse leads, depending on a fortuitous rather
than systematic identification of providers for audit. 

Moreover, carriers have had problems using their profile reports to
help them educate providers.  In 1990, HCFA began instructing
carriers to educate providers whose billings looked significantly
different from their peers based on the carriers' profiling reports. 
However, education letters based on carriers' profiling reports have
created confusion, frustration, and a sense of harassment among
providers.  In fiscal year 1992, for example, when HCFA substantially
changed office visit codes, it required carriers to inform selected
providers that they appeared to have misbilled for services related
to office visits.\5

HCFA asked carriers to select such providers on the basis of their
profiling reports, which resulted in the erroneous targeting of many
providers.  Among those targeted were physicians who only once
provided the service under scrutiny, physicians whose billings
appeared aberrant because their patients required more intensive
services than those of their peer group, and physicians whose
specialty classification was inappropriate. 

\2 A carrier typically produces profile reports twice a year and uses
them as one source of information to identify providers that warrant
an audit because they appear to have abusive billing practices.  For
fiscal year 1993, HCFA required carriers to audit at least 0.5
percent of the providers that billed it.  Depending on the carrier's
audit findings, possible carrier actions include (1) asking the
provider to return amounts that Medicare inappropriately reimbursed;
(2) sending an education letter advising the provider of potential
billing problems; or (3) referring the case to the carrier fraud unit
or HHS Office of Inspector General for further investigation for
potential fraud or abuse. 

\3 An anonymous complaint brought this situation to the carrier's
attention.  The carrier determined that the physician owned the
supply company.  A subsequent HHS Office of Inspector General
investigation found that the physician was part of a fraudulent
scheme to bill Medicare and other plans for unnecessary services and

\4 In 1992, HCFA increased the number of specialty designations it
recognized, and carriers sent letters to physicians asking them to
reclassify themselves.  In commenting on a draft of this report, HCFA
specified that 50,000 physicians chose to reclassify--about 11
percent of the total physician population serving Medicare.  Over
time, therefore, the specialty designation problem will likely be
corrected, as carriers make physicians increasingly aware of
Medicare's reliance on these designations to profile physician

\5 As part of physician payment reform, HCFA changed the codes
physicians use to bill for office, hospital and emergency room
visits, and for consultations.  HCFA instructed carriers to educate
providers whose billings for these codes looked significantly
different from their peers. 

---------------------------------------------------------- Letter :4.2

Carriers also have difficulties implementing HCFA's new claims review
approach called focused medical review.  As a supplement to provider
profiling, this approach seeks to focus, or target, spending patterns
or trends that pose the greatest risk of unnecessary payments. 

Focused reviews are intended to help HCFA and the carriers determine
the causes of rapid spending growth for certain services, explain
wide variations in spending for certain services within or across
states, and identify providers who are driving up expenditures for
certain services.  Although focused reviews hold promise, they are in
an early implementation phase, and poorly defined methods for
conducting analyses limit the carriers' ability to address payment

HCFA's focused review requirements direct carriers to target for
analysis a set number (40) of procedures showing aberrant billing
patterns.  Carriers produce their target list from a data report
compiled by HCFA that includes the carrier's billing data for more
than 2,000 procedure codes and, for comparison, national billing
averages for these codes.\6 HCFA requires the carriers to address the
targeted aberrancies through actions that include issuing education
letters to abusive billers, developing new payment controls, auditing
a provider's claims, and assessing repayments from abusive billers. 
A required minimum (15) of the corrective actions must include
revising carrier medical policies or computerized payment edits. 
Carrier officials charge that HCFA's criteria are not specific enough
to determine which procedure codes showing aberrancies carriers
should select for the required 40, what analysis methods carriers
should use to determine the causes of aberrancy, or how carriers
should determine what constitutes an appropriate response for
correcting problems. 

Moreover, the reports HCFA provides to carriers for conducting
focused reviews are still evolving and include unreliable data.  The
reports compare a carrier's spending for a service to an average of
what other carriers spend for that service.  The reports have several
problems that will need to be addressed as focused medical review
develops.  Following are examples: 

  The coding of physician specialties is inconsistent across
     carriers.  Since most of the reports provided by HCFA compile
     the data by physician specialty, the spending rates for services
     reported by specialty are distorted by differences in carriers'

  The calculation of spending on the basis of carrier enrollment,
     rather than on the number of beneficiaries served, distorts
     carrier spending rates.  For example, the Florida carrier,
     serving a state that attracts many Medicare beneficiaries during
     the winter, had higher payments per enrolled beneficiary than
     the other carriers visited.\7 Florida's 1992 payments per
     enrollee were 91 percent higher than Indiana's, but the per
     enrollee basis for calculating these rates makes it difficult to
     determine the root causes of the wide variation.  (See app.  I
     showing Medicare payment per enrollee for the carriers visited.)

\6 Carriers can use other data sources, such as internal claims data,
to identify aberrant billings. 

\7 In many cases, people who vacation in states like Florida continue
to maintain their permanent addresses in other states.  Thus, though
the Florida carrier may process these visitors' claims, the visitors
are not counted as Florida residents when HCFA calculates Florida's
per enrollee medical expenditures.  This would overstate those
expenditures and understate the residence states' expenditures. 

------------------------------------------------------------ Letter :5

Even when carriers successfully identify spending irregularities that
suggest abusive billing practices, they do not always effectively
audit involved providers or make significant recoveries.  HCFA does
not require that carriers use audit techniques, such as estimating
overpayments on the basis of samples, that could help carriers get
recoveries commensurate with the losses Medicare incurred.  Moreover,
procedural and legal constraints also limit carrier audit and
recovery efforts. 

Audits entail determining which of a provider's services that
Medicare paid for were unnecessary or inappropriate by reviewing the
medical documentation supporting the provider's claims.  Amounts paid
for unnecessary or inappropriate services are considered overpayments
to the provider. 

One way carriers calculate overpayment amounts--without auditing
hundreds or even thousands of claims--is by auditing a sample of a
provider's claims.  Because of the large volume of claims submitted
by the average provider and the time involved in reviewing a claim,
many carriers audit a sample of providers' claims for efficiency's
sake--they cannot practically examine all of a provider's claims. 
Most carriers estimate a total overpayment amount by projecting the
sampling results.  Without projecting, the dollar amounts determined
from the sample would generally be nominal compared to the amount
likely to be deemed overpaid if the carrier were to audit all the
provider's claims. 

HCFA does not require that carriers sample and project the sampling
results to estimate overpayments.  Two carriers that we visited did
not use audit samples to develop overpayment projection estimates. 
One carrier we reviewed that based its overpayment amounts solely on
the sample of claims audited assessed an average of less than $2,000
per provider audited; by contrast, another carrier we reviewed that
estimated its overpayment amounts on the basis of sample projections
assessed an average of more than $20,000 per provider audited. 

Other limitations on carriers' audit and recovery activities include
the following: 

  Carriers lack the authority to recover overpayments from providers
     who do not accept Medicare assignment.\8 This sometimes results
     in substantial Medicare losses.  In one case, a carrier audited
     a cardiologist who billed more than $75,000 in unnecessary
     services to Medicare beneficiaries in a 6-month period.  Most of
     this amount represented billings for nonassigned claims and
     could therefore not be recovered from the cardiologist.  Given
     this problem with nonassigned claims, certain offenders are
     essentially exempt from repayment. 

  Carriers lack authority to assess overpayments that involve claims
     for care that physicians order from suppliers or laboratories. 
     In one case, a carrier could not collect a $123,000 overpayment
     assessed from a laboratory that provided services shown by the
     carrier to be unnecessary.  An administrative law judge ruled
     that, since the laboratory acted on physicians' orders, the
     laboratory should not be held liable for the costs billed. 
     Carriers cannot assess overpayments from physicians who make
     unnecessary referrals because the referring physicians are not
     the providers that have billed Medicare for the disputed
     supplies or services. 

  HCFA requires carriers to complete provider audits (referred to as
     comprehensive medical reviews) in 1 year if they are to be
     counted toward the carrier's performance goals.  According to
     carrier medical review officials, this requirement dissuades
     carrier staff from doing the complex audits necessary to uncover
     cases involving extensive billing abuses. 

The combined effect of these problems has been to reduce carriers'
effectiveness in recovering misspent Medicare dollars.  Carriers have
voiced these concerns to HCFA for several years, but HCFA has not
addressed them adequately. 

\8 Under Medicare regulations, providers that agree to accept
Medicare rates as payment in full are recognized as having been
assigned the beneficiary's right to receive Medicare reimbursement. 
The claims submitted by providers meeting this condition are termed
assigned.  Claims from providers not accepting assignment are called
nonassigned; these providers are not allowed to receive payment
directly from Medicare and must obtain reimbursement from their
Medicare patients.  HCFA believes that in most cases it is neither
appropriate nor practical to recover overpayments from beneficiaries. 

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

Carriers have little incentive to strengthen their postpayment review
activities.  The standards HCFA uses to hold carriers accountable for
these activities do not address carrier success in identifying and
correcting causes of excessive spending.  In addition, declining per-
claim budgets over the past several years have deterred carriers from
investing in claims review improvements. 

---------------------------------------------------------- Letter :6.1

HCFA's fiscal year 1993 Contractor Performance Evaluation Program
(CPEP) for postpayment review evaluates carriers' compliance with
procedures rather than the achievement of results.  CPEP standards
therefore give HCFA little information on how well carriers' review
methods identify payment problems or to what extent corrective
actions prevent future unnecessary spending.  CPEP does not score
carriers on the outcomes of their postpayment programs, such as
whether their efforts result in recovering overpayments or developing
effective medical policies and automated controls to flag or deny
problem claims.  (See app.  2 detailing CPEP requirements governing
postpayment review activities.)

Outcomes at two carriers that we visited illustrate HCFA's lack of
emphasis on results.  In 1992, one carrier recovered less than
$40,000 in overpayments and established no new medical policies or
automated prepayment controls.  Another carrier recovered about
$700,000 and established more than 50 new medical policies and
prepayment controls.  In CPEP evaluations, both carriers received the
maximum score for their postpayment performance.\9

CPEP standards for postpayment review activities include requirements
for profile reports, provider audits, and focused medical review. 
The requirement for provider profile reports stipulates that carriers
produce the reports twice a year and that the reports include
averages of provider service utilization.  There are no standards for
judging the adequacy of the reports' content to prompt carriers'
corrective actions.  Carrier officials explained that they scarcely
use profile reports, though they incur the cost of preparing the
reports in order to pass CPEP. 

Similarly, the CPEP requirement for provider audits directs the
carriers to audit 0.5 percent of active providers in their billing
jurisdiction.  There are no standards, however, for judging the
results of the audit.  HCFA's carrier evaluations do not distinguish,
for example, between an audit of an abusive biller that results in an
education letter to the provider and one that results in large
overpayment recoveries--despite the heavy resource investment needed
to obtain large recoveries. 

The CPEP requirement for focused medical review, among other things,
stipulates only that carriers identify 40 aberrant spending patterns
and initiate corrective actions.  These include developing at least
15 new or revised medical policies or automated prepayment
screens.\10 CPEP does not score carriers on their effectiveness in
selecting aberrancies or the corrective actions taken. 

Carrier officials explained that their claims review activities are
geared almost entirely toward passing CPEP because HCFA uses the CPEP
scores to determine whether to renew carriers' contracts.  The focus
on CPEP dissuades carriers from undertaking any projects that, though
potentially cost effective, would not improve their CPEP score. 

\9 In fiscal year 1992, the CPEP requirements did not include a
focused medical review criterion requiring carriers to develop 15 new
or revised local policies or prepayment screens. 

\10 In commenting on a draft of this report, HCFA advised us that
carriers are also required to have software in place that supports
local data analyses to investigate areas identified for focused
medical review. 

---------------------------------------------------------- Letter :6.2

Declining budgets, coupled with a budgeting process that does not
reward carrier performance, create strong disincentives for carriers
to initiate improvements independently.  From 1989 through 1992,
funding for carriers' postpayment activities declined on a per claim
basis and as a percentage of the carriers' overall administrative
budgets.  Specifically, funding for carriers' postpayment-related
activities fell

  from 23 cents per processed claim in 1989 to 16 cents per claim in
     1992 or

  as a share of the carriers' total administrative budgets, from 10.6
     percent in 1989 to 7.9 percent in 1992. 

At two carriers that we visited, claims review funding has decreased
by more than 40 percent since 1989 on a per claim basis. 

Limited funding discourages carriers from developing innovative
claims review methods that could help deter billing abuses or correct
other payment problems.  Effective claims reviews generate the need
to develop medical policies, implement prepayment controls, and
educate doctors--postpayment activities requiring physicians and
nurses.  The data analyses involved in focused medical reviews
require statisticians and other analysts.  The carriers' inability to
rely on stable funding, however, precludes hiring, training, and
retaining the staff necessary to operate effective postpayment review

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

HCFA's new emphasis on claims data analysis, which the agency calls
focused medical review, is an important and well-intentioned first
step toward systematically tracking excessive Medicare payments. 
HCFA has not, however, paid adequate attention to carriers' data
analysis activities to determine whether carriers are conducting
appropriately focused reviews.  As a result, there is little
assurance that Medicare's most significant payment problems are being
identified and corrected.  Additionally, HCFA has not adequately
addressed procedural limitations that carriers have long reported as
limiting recovery of program losses.  Lastly, HCFA has not held
carriers adequately accountable for the timely identification and
correction of problems in their claims processing and payment
systems.  In sum, HCFA must show greater leadership to stimulate the
development and continuous improvement of carriers' postpayment
review activities.  With its access to extensive health care data and
experience in operating the nation's largest insurance program, HCFA
should be a leader in identifying ways to avoid unnecessary health
care expenditures. 

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

To strengthen carriers' ability to identify and address Medicare
losses to waste and abuse, we recommend that the Secretary direct the
Administrator of HCFA to

  provide carriers guidance and technical assistance to improve
     profiling and focused medical reviews;

  identify legal issues that constrain carriers' audit and recovery
     efforts and make recommendations to the Congress to eliminate
     such constraints;

  amend Medicare procedures, such as those involving the projection
     of sample results, to enhance carriers' audit and recovery
     efforts; and

  revise CPEP evaluation criteria to include outcome measures that
     better assess carriers' postpayment review performance. 

------------------------------------------------------------ Letter :9

In commenting on a draft of this report, HHS generally agreed with
our recommendations.  HHS believes that "...  focused medical review
is the logical alternative when faced with declining payment
safeguard funding and increasing claims processing demands." We
likewise believe it is a reasonable way to deal with a bad budget
situation and minimize losses to Medicare from reduced payment
controls.  Minimizing the damage of declining budgets, however, does
not address our position that HCFA should become a leader in
identifying ways to avoid unnecessary health care expenditures.  Yet
it may be the only acceptable strategy to adopt if the Congress does
not identify ways to adequately fund Medicare's program safeguard
activities.  Following is a summary of HHS's comments on our
recommendations and our response. 

Regarding our first recommendation, HHS stated that HCFA is well on
its way toward providing carriers better guidance and technical
assistance.  HHS emphasized, however, that focused medical review is
in an early stage and that our review took place as carriers were
implementing the program.  HHS is apparently concerned that our
discussion of the limitations we found with focused medical review
may be interpreted as criticism of the concept.  We have revised the
report in several areas to more clearly acknowledge that we believe
that focused medical review is a critical first step that could
better position HCFA to manage Medicare benefit dollars. 

That notwithstanding, focused medical review has a long way to go if
the Medicare program is to become a leader in the area of health care
claims review approaches.  As HHS noted in its technical comments to
the report, prior to HCFA's recent initiative, carriers' medical
review efforts ".  .  .  concentrated on very gross measures of
individual provider behavior." These measures were initially
developed more than a decade ago when HCFA undertook another
initiative to require its carriers to develop better ways to use
claims data for managing program expenditures.  Subsequently, HCFA
did little to encourage carriers to enhance their data analysis
approaches, and this is why, more than 10 years later, some carriers
still have little more in data analysis capabilities than gross
measures of provider performance. 

Because Medicare is the nation's largest insurer as well as the
fourth highest expenditure in the federal budget, the program's lack
of sophisticated data analysis capabilities to manage program dollars
should be viewed as a serious problem.  Focused medical review is
HCFA's approach for the future to help resolve this problem.  This is
why we believe it is important to document current data analysis
problems and limitations within HCFA and its contractor network. 

HHS also concurred with our recommendation to overcome the obstacles
that constrain carriers from acting against abusive providers.  HHS
explained why carriers currently do not recover from such providers,
implying that it foresees difficulties in implementing the
recommendation.  Carriers, over the years, have frequently asked HCFA
to resolve this recovery problem because it allows some providers to
bill beneficiaries (and ultimately the program) inappropriately. 
Continuing to ignore the problem does not seem to us to be a
reasonable course of action for HHS and HCFA.  Given the agency's
discussion of this point, it is not clear whether HHS plans to pursue
this action with HCFA. 

HHS did not take issue with our recommendation to amend Medicare
procedures to enhance carriers' audit and recovery efforts.  The
agency did, however, express some concern about requiring carriers
that use sampling to project their results in calculating
overpayments made to providers.  Specifically, HHS stated

     "Mandating projected overpayment and focusing on savings
     generated by denying claims on a .  .  .post-payment basis are
     not consistent with our emphasis on education to get providers
     to bill correctly the first time, and our desire to maintain a
     good relationship with the physician community.  .  .  ."

Education is a key element of any program directed at reducing
unnecessary, erroneous, or inappropriate provider billing, and
Medicare has an extensive provider education program.  It does not
follow, however, that Medicare's emphasis on education is at all
inconsistent with efforts (such as projecting) to recover

The specific objective of Medicare's postpayment review is to
identify and audit providers who appear to have the most abusive
billing practices in the areas served by each carrier.  Carriers are
funded to audit only 5 of every 1,000 providers who bill them each
year, and they select for audit those providers most likely to be
engaged in abusive billing practices.  Thus any provider's chances of
being audited are slim.  Even when audited, however, a provider has
virtually no chance of having to fully reimburse Medicare for
overpayments received from carriers that do not project when
calculating overpayment estimates.  We do not understand how such
carriers' routine forgiveness of providers' debts to Medicare can be
considered educational in a way that would benefit Medicare.  The
lesson taught in these situations would appear to be that, even in
the unlikely event of a Medicare audit, providers will not be
required to repay much of what they owe. 

Lastly, HHS generally agreed with our proposal to revise the
contractor performance evaluation program to include outcome
measures.  HHS expressed some concern about developing contractor
evaluation standards, noting that if not done carefully, such
standards could give contractors ".  .  .  a perverse incentive to
just reach savings goals and .  .  .  increase the `hassle-factor'
effect on the providers involved." We agree that it would be
inappropriate for HCFA to focus exclusively on savings when assessing
a carrier's performance.  Ignoring savings, however, is equally
inappropriate.  The incentives for carriers to be overly aggressive
in meeting savings standards could be easily counteracted by setting
companion standards for ensuring that savings are not bought at the
cost of unwarranted provider hassling.  For example, HCFA could also
set standards related to the frequency and success that providers
experience appealing carrier denials; these measures would be based
on the premise that, when carriers' decisions are infrequently
appealed and overturned, the carriers are not unduly hassling
providers.  HHS noted that HCFA recently let a contract to help the
agency develop better performance measures.  We believe this is a
positive, long overdue action. 

We have considered other HHS comments and incorporated them as
appropriate.  (HHS comments appear in app.  III.)

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

As arranged with the subcommittee staff, unless you publicly announce
its contents earlier, we plan no further distribution of this report
until 30 days from its issue date.  At that time, we will send copies
to other congressional committees, the Secretary of Health and Human
Services, and other interested parties. 

The report was prepared under the direction of Leslie Aronovitz,
Associate Director of Health Financing Issues, who can be reached at
(202) 512-7104 if you have any questions.  Other major contributors
are listed in appendix IV. 

Sincerely yours,

Sarah F.  Jaggar
Director, Health Financing
 and Policy Issues

=========================================================== Appendix I

   Figure I.1:  Payment per
   Enrolled Beneficiary at 11
   Carriers Visited

   (See figure in printed

Payments made have been adjusted for geographic variation using the
geographic consumer price index. 

Benefits do not include those paid for beneficiaries in HMO programs. 

========================================================== Appendix II

-------------------------------------------------------- Appendix II:1

To receive full credit for this criterion, the carrier is required to

  address 40 or more payment aberrancies in the national data or
     other data sources by initiating appropriate corrective actions
     including educational activities of an individual or group,
     prepayment edits, and identification of local medical policies
     to be developed or revised, and

  document that 15 of the corrective actions taken involve developing
     new or revised local medical policies or prepayment screens. 

-------------------------------------------------------- Appendix II:2

To receive full credit for this criterion, the carrier is required to

  profile provider practices by running comparative reports every 6

  select 0.5 percent of their active physician and supplier
     population for audits which must be completed within 1 year,
     examine a provider's billing practices for a period of at least
     6 months, and include a review of at least 15 beneficiaries,

  submit a timely postpayment annual report and a special study, and

  document postpayment actions, including the reasons providers were
     chosen for audit. 

(See figure in printed edition.)Appendix III
========================================================== Appendix II

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

========================================================== Appendix IV

Edwin P.  Stropko, Assistant Director, (202) 512-7108
Leslie Miller, Evaluator-in-Charge
Hannah Fein