Medicare: Excessive Payments for Medical Supplies Continue Despite
Improvements (Letter Report, 08/08/95, GAO/HEHS-95-171).

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

 REPORTNUM:  HEHS-95-171
     TITLE:  Medicare: Excessive Payments for Medical Supplies Continue 
             Despite Improvements
      DATE:  08/08/95
   SUBJECT:  Claims processing
             Medical expense claims
             Medicare programs
             Internal controls
             Contractor performance
             Medical supplies
             Program abuses
             Fraud
             Overpayments

             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


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


Report to the Ranking Minority Member, Subcommittee on Labor, Health
and Human Services, Education, and Related Agencies, Committee on
Appropriations, United States Senate

August 1995

MEDICARE - EXCESSIVE PAYMENTS FOR
MEDICAL SUPPLIES CONTINUE DESPITE
IMPROVEMENTS

GAO/HEHS-95-171

Excessive Medical Supply Payments

(101310)


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

  DME - durable medical equipment
  DMERC - durable medical equipment regional carrier
  HCFA - Health Care Financing Administration
  HCPC - HCFA Common Procedure Code
  HHS - Department of Health and Human Services
  OBRA1993 - Omnibus Budget Reconciliation Act of 1993
  OIG - Office of Inspector General
  VA - Department of Veterans Affairs

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


B-258070

August 8, 1995

The Honorable Tom Harkin
Ranking Minority Member
Subcommittee on Labor, Health
 and Human Services, Education,
 and Related Agencies
Committee on Appropriations
United States Senate

Dear Senator Harkin: 

In fiscal year 1994 alone, Medicare was billed over $6.8 billion for
medical supplies.  Congressional hearings and government studies have
shown that Medicare has been extremely vulnerable to fraud and abuse
in its payments for medical supplies, especially surgical dressings. 
For example, hearings before the Senate Appropriations Subcommittee
on Labor, Health and Human Services, Education, and Related Agencies
last year identified a case in which Medicare paid over $15,000 worth
of claims for a month's supply of surgical dressings for one patient,
apparently without reviewing the reasonableness of the claims before
payment. 

Until recently, medical suppliers had considerable freedom in
selecting the Medicare contractors that would process and pay their
claims.  Some exploited this freedom by "shopping" for contractors
with the weakest controls and highest payment rates.  To address this
problem, Medicare revised its payment rules to preclude suppliers
from contractor shopping and established four regional contractors to
specialize in processing these and similar types of claims. 

This report responds to your request that we determine the (1)
circumstances allowing payment for unusually high surgical dressing
claims and (2) adequacy of Medicare's internal controls to prevent
paying such claims.\1 To make these determinations, we obtained
information from Office of Inspector General (OIG) and Health Care
Financing Administration (HCFA) officials at the Department of Health
and Human Services (HHS) and visited three types of contractors that
process and pay Medicare claims.  See appendix I for a more detailed
description of our scope and methodology. 


--------------------
\1 Surgical dressings may also come under the broader category of
medical supplies.  In this report, we use the term medical supplies
when this is the case.  When referring solely to surgical dressings,
we use that term. 


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

Although HCFA has made improvements to prevent contractor shopping,
unwarranted expenditures persist for several reasons.  First, many
Medicare contractors still lack internal controls that would reliably
identify suspicious medical supply claims before payment.  Following
are examples of the lack of controls: 

  Contractors that pay medical supply claims submitted by nursing
     homes, home health agencies, and other institutional providers
     do so without knowing specifically what they are being asked to
     pay for on behalf of beneficiaries.  Submitted claims lack
     sufficient detail, for example, to inform contractors whether
     they are being asked to pay more than $21,000 for a pacemaker or
     $.75 for a gauze pad. 

  None of the four regional contractors automatically reviewed
     high-dollar claims for newly covered surgical dressings.  This
     explains why a contractor paid $23,000 for surgical dressings
     when the appropriate payment was $1,650. 

  Medicare does not have a systematic way of detecting duplicate
     bills submitted to different types of Medicare contractors, and
     we found some evidence that duplicate payments occur. 

Second, Medicare payment rates for surgical dressings are high
compared with wholesale and many retail prices.  For example,
Medicare pays $2.32 for a gauze pad whose wholesale price is $.19 and
that another government agency purchases for $.04. 

HCFA and its contractors know about these problems and have tried to
address some of them.  Though the problems persist, these efforts
have provided more and better information to define the problem. 
This information suggests that inadequate controls are causing
Medicare to lose hundreds of millions of dollars.  HCFA could curtail
these losses by establishing procedures to (1) identify what Medicare
is being asked to pay for, (2) prevent duplicate payments, and (3)
identify high-dollar, high-volume claims that should be reviewed
before payment.  Further, HCFA needs the legislative authority to set
payments at rates more favorable to large-volume purchasers. 


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

Medicare provides health insurance coverage for approximately 37
million elderly and disabled people under two parts:  part A,
primarily hospital insurance, and part B, supplementary insurance. 
HCFA, which administers the Medicare program, contracts with
insurance companies (called "fiscal intermediaries" for part A and
"carriers" for part B) to process, review, and pay claims for covered
services. 

Payments for medical supplies are made under either of Medicare's two
parts.  Medical supply claims submitted by hospitals or other
institutions, such as nursing homes or home health agencies, are paid
by 43 local fiscal intermediaries.  Medical supply claims submitted
by noninstitutional providers, such as physicians or medical supply
companies, are paid by carriers.  Thus, the same supply item can be
billed to Medicare for an individual under two completely different
payment systems, one for part A and another for part B.  Under part
A, the payment is generally made on the basis of reasonable costs. 
Under part B, the payment is made using a fee schedule established by
HCFA. 

Historically, part B fraud and abuse have plagued Medicare, and HCFA
has recently reformed its operations.  In October 1993, acting under
specific statutory authority,\2 HCFA started transferring carrier
claims processing responsibility for durable medical equipment (DME);
prosthetics; orthotics; and medical supplies, including surgical
dressings, from 32 local carriers to 4 regional carriers.  These
carriers are commonly referred to as durable medical equipment
regional carriers (DMERC). 

In March 1994, after lobbying by suppliers and manufacturers, among
others, HCFA greatly expanded its surgical dressing benefit,
broadening the types of dressings covered and the conditions under
which they would be covered.  For example, the benefit was expanded
to cover payment for various types and sizes of gauze pads that
Medicare previously did not cover.  Also, the duration of coverage
was extended from 2 weeks to whatever is considered medically
necessary. 


--------------------
\2 42 U.S.C.  1395m(a)(12). 


   PAYMENT CONTROL WEAKNESSES LED
   TO WIDESPREAD ABUSES
------------------------------------------------------------ Letter :3

DME claims have long been abused, in part, because of fundamental
weaknesses in Medicare payment controls.  In response to these
weaknesses, HCFA has recently implemented significant changes in the
processing of DME claims to reduce Medicare's vulnerability to this
particular fraud and abuse. 


      LACK OF SYSTEMWIDE CONTROLS
      LED TO LARGE LOSSES
---------------------------------------------------------- Letter :3.1

Before DME claims processing was transferred to the 4 regional
carriers in 1993, each of the 32 carriers paid DME claims, which
represented a small part of the total claims each carrier processed. 
Under this process, HCFA did not require its contractors to implement
basic controls before payment that would identify and set aside for
review those claims with unusually high per-patient expenditures or
improbably large quantities of supplies.  Without such controls, some
DME suppliers billed for equipment never delivered, higher cost
equipment than delivered, or totally unnecessary equipment or
supplies.  Further, suppliers frequently engaged in contractor
shopping.  Although, they might deliver equipment or supplies to
beneficiaries in one state, they would bill a contractor in another
state because that contractor paid more for the items delivered or
had relatively weak payment controls for the equipment or supply
items. 

These weaknesses explain why Medicare contractors processed, without
questioning, claims that later proved to be fraudulent or abusive. 
For example, as reported by the OIG, Medicare paid

  an estimated $20 million in claims for unneeded nutritional
     supplements and feeding kits;

  approximately $5.2 million in claims for oxygen concentrators,
     nebulizers, medications, and tests either not needed or not
     delivered;

  approximately $500,000 in claims for unneeded transcutaneous
     electrical nerve stimulators; and

  $7 million in claims for orthotic body jackets that should not have
     been paid. 


      CLAIMS PROCESSING SYSTEM
      REFORMED TO LIMIT LOSSES
---------------------------------------------------------- Letter :3.2

Establishing four regional carriers to process and oversee DME
claims, including surgical dressings, eliminated some of the
weaknesses that allowed prior abuses to flourish.  The regional
carriers are better able to prevent Medicare payments for unusually
high medical supply claims for two key reasons. 

First, the ability of suppliers to shop for contractors with the
highest payments and weakest controls has been eliminated.  With only
four regional carriers, HCFA has better standardized the amount that
Medicare pays for medical supplies and the controls used to detect
and prevent payment of problem claims.  Claims must be submitted to
the regional carrier responsible for payments in the state where the
beneficiary resides rather than the carrier allowing the highest
payment. 

Second, medical supply and surgical dressing claims can receive more
attention from regional carriers than local carriers because these
claims are a larger portion of the regional carriers' workloads.  As
a result, the regional carriers should be better able to detect and
prevent inappropriate payments for abnormally expensive surgical
dressing claims. 


   SIGNIFICANT VULNERABILITIES
   CONTINUE DESPITE IMPROVEMENTS
------------------------------------------------------------ Letter :4

HCFA's recent efforts to prevent abuses in medical supply claims
apply only to part B claims submitted to regional carriers, which
represent half of Medicare's total medical supply payments.  Claims
processed by fiscal intermediaries are still subject to some of the
same fraud and abuse problems that have historically plagued medical
supply claims.  Further, despite the improvements, medical supply
claims submitted to the regional carriers are still subject to
significant abuse. 


      FISCAL INTERMEDIARIES DO NOT
      KNOW WHAT SUPPLIES THEY PAY
      FOR
---------------------------------------------------------- Letter :4.1

Fiscal intermediaries pay medical supply claims without knowing
specifically what they are being asked to pay for on behalf of
beneficiaries.  The claims submitted by providers have no detailed
information that would allow fiscal intermediaries to assess the
claims' reasonableness.  This lack of detail exists because HCFA
guidance allows providers to bill all medical supplies under 10 broad
codes; billed items are not listed by type or amount. 

A code frequently used to record medical supplies is code 270
(medical/surgical supplies and devices- general classification),
which we found included many different items, such as a $21,437
pacemaker, a $.75 sterile sponge, and even daily rental charges of
$59 for an aqua pad.  Consequently, unless fiscal intermediaries
identify these claims for review and request additional documentation
before payment, they will pay for the claims without knowing what the
specific purchase was or whether it was covered or medically
necessary.  For example, a fiscal intermediary processed a code 270
claim for more than $21,000 without any review.  At our request, the
fiscal intermediary asked the provider to submit medical records and
a list of items billed under this claim.  After the fiscal
intermediary reviewed the documentation to support this claim, it
denied more than $13,000 in charges because the medical records
contained no doctor's orders for the billed items. 

In total, we requested the fiscal intermediary to obtain the medical
records and an itemized list of supplies supporting 85 high-dollar
medical supply claims submitted by 38 providers during a 1-month
period.  All of these claims had been processed without any review. 
The results of the fiscal intermediary's subsequent review are as
follows: 

  Eighty-nine percent of the claims for which documentation was
     received and reviewed (42 of 47) should have been totally or
     partially denied. 

  Almost 61 percent of the dollars billed for medical supplies
     ($193,147 of $316,824) should have been denied for various
     reasons, including, among others, items not medically necessary,
     items not covered by Medicare or covered as part of routine or
     administrative costs, no documentation of supplies used, no
     doctor's orders, and no itemized list of supplies.  (See app. 
     II for detailed information.)\3

  Forty-five percent of the claims for which documentation was not
     returned (38 of 85), totaling $487,412, was subsequently denied. 

  One claim was determined to be potentially fraudulent because the
     beneficiary's condition required none of the $2,404 in medical
     supplies billed.  A further review, by the fiscal intermediary's
     fraud and abuse unit, of the same provider's claims for this
     beneficiary for the previous 5 months resulted in the
     identification of an additional $20,393 in potentially
     fraudulent medical supply charges. 

Fiscal intermediaries obtain similar or better results when they
conduct their own prepayment reviews of medical supply claims.  For
example, a fiscal intermediary used a computerized payment control to
identify all medical supply claims (code 270) in excess of $500
submitted between October and December 1993.  After reviewing
documentation supporting the claims, the fiscal intermediary denied
69 percent of the dollars billed ($59,542 of $86,046). 


--------------------
\3 In addition to the medical supplies that should have been denied
on these claims, the fiscal intermediary reviewers also identified
another $174,489 for items other than medical supplies that should
have been denied.  Consequently, total denials for these claims
should have been $367,636 or an average of $7,822 for each claim
reviewed.  (See app.  III for detailed information on the denial of
nonmedical supplies.)


      LEGISLATION PARTIALLY
      ADDRESSES PROBLEM
---------------------------------------------------------- Letter :4.2

The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) partially
addressed the problem of providers not submitting documentation that
would allow fiscal intermediaries to adequately assess medical supply
claims.\4 OBRA 1993 provided essentially for certain supplies,
including surgical dressings, to be paid on the basis of the fee
schedule that regional carriers use for the part B program.  As a
result, providers must submit to fiscal intermediaries claims that
itemize the specific supplies and quantities being billed.  Because
the provision does not apply to all medical supplies, many other
types of medical supplies are still billed using broad codes that do
not adequately describe the type and amount of such supplies. 

The provision does not at all apply to surgical dressings supplied by
a home health agency.  As a result, home health agencies, which
billed Medicare for almost half a billion dollars of medical supplies
in fiscal year 1994, can continue to submit claims for surgical
dressings without the detailed itemization required of other types of
providers billing for these items. 


--------------------
\4 Public Law 103-66, sec.  13544, 107 Stat.  312, 589. 


      REGIONAL CARRIERS STILL LACK
      SIGNIFICANT CONTROLS
---------------------------------------------------------- Letter :4.3

For Medicare part B claims, the regional carriers have not adopted
important fraud and abuse controls for many surgical dressing items. 
Specifically, the 29 surgical dressings covered by the expanded
Medicare surgical dressing benefit have no formal medical policies
specifying the conditions under which payment is to be made.\5
Without these policies, regional carriers cannot implement systematic
controls to identify questionable claims for review.  As a result,
they pay many high-dollar, high-volume claims without review. 

We found that the utilization level--the number of dressings billed
per beneficiary--was, on average, nearly three times higher for the
newly covered dressings--that is, those for which no formal medical
policies apply.  Moreover, on average, the dressings that have no
medical policies exceeded the expected utilization level, as
determined by recommended industry and draft regional carrier
standards.  In some cases, the average number of dressings billed per
beneficiary was four times greater than expected. 

Formal medical policies for the newly covered dressings cannot be
adopted until the surgical dressing industry and others have been
allowed to comment on them.  HCFA expanded surgical dressing coverage
and instructed regional carriers to pay for newly covered surgical
dressings before the carriers had a chance to develop new medical
policies.  As a result, most claims for surgical dressings for which
no medical policies apply are being paid and will continue to be paid
without a routine review to determine whether the amount of dressings
billed is reasonable or medically necessary.  HHS estimates that this
process will be completed and medical policies will be effective
October 1, 1995. 

We asked officials at one regional carrier to identify high-dollar
claims it paid.  While the claims the carrier identified for us were
subject to some review before payment, the review only applied to
those dressings that had a formal medical policy.  As a result,
thousands of dollars were paid for surgical dressings that were not
needed and the claims for which were not subject to review because
they did not have formal medical policies. 

For example, in the case of one beneficiary, the carrier--over 3
months and on the basis of a formal medical policy--had denied over
$8,500 worth of claims for dressings and sterile saline before paying
$23,000.  However, in performing the review we requested, the carrier
determined that only $1,650 of the $23,000 for dressings should have
been paid because the beneficiary's condition did not appear to
justify the use of large quantities of dressings.  The $23,000 had
been paid without review for medical necessity because no formal
medical policies applied to most of the surgical dressings. 
Therefore, no internal policies were in place to trigger a review of
these dressings. 

Without such policies, suppliers have exploited Medicare with little
risk of ever having to repay the program.  Following are examples of
this exploitation: 

  One supplier regularly billed Medicare for 60 or more transparent
     films per beneficiary per month.  For some beneficiaries the
     supplier billed for 120 or more films a month.  Recommended
     industry standards suggest the need for no more than 24 films
     per beneficiary per month.\6

  Another supplier billed Medicare an average of 268 units of tape
     per beneficiary during a 15-month period.\7 The average for all
     suppliers was 60 units during the 15-month period.  Some
     beneficiaries received between 180 to 720 units of tape in 1
     month.  Using a 10-yard roll of tape, a common industry length,
     these beneficiaries would have been wrapped in 60 to 240 yards
     of tape per day. 

Supplier abuse is not limited to surgical dressings; other medical
supply items for which no formal policies or systematic controls
apply have also been exploited: 

  At least four suppliers regularly billed Medicare for 30 or more
     drainage bottles a month for each beneficiary.  This is 90 times
     more than the proposed standard of one bottle every 3 months.\8
     The number of drainage bottles billed by these suppliers was 79
     percent of all bottles billed to the regional carrier. 

  One supplier billed Medicare an average of nine urinary leg bags
     per beneficiary a month.  For some beneficiaries, the supplier
     billed for one leg bag a day or 15 times more than the proposed
     standard of two leg bags a month.\9 In total, this supplier
     billed Medicare for 50,834 leg bags or 21 percent of all leg
     bags billed to the regional carrier over 15 months. 


--------------------
\5 See appendix IV for a description of all Medicare-covered surgical
dressings, including the 29 newly covered dressings for which no
medical policies apply. 

\6 According to the Wound Ostomy and Continence Nurses Society's and
the Health Industry Distributors Association's draft recommendations
on utilization levels for surgical dressings, up to two transparent
films can be used per dressing change.  In addition, these types of
dressings should be changed no more than two to three times per week. 

\7 According to the Health Industry Distributors Association, normal
usage of tape is no more than two rolls per dressing change. 

\8 According to the regional carriers' draft payment and coverage
policy, drainage bottles are usually changed once every 3 months. 

\9 According to the regional carriers' draft payment and coverage
policy, leg bags are usually replaced twice a month. 


      MEDICARE SYSTEM VULNERABLE
      TO DUPLICATE PAYMENTS
---------------------------------------------------------- Letter :4.4

Medicare can pay for the same item twice because it does not have
effective tests to determine whether both regional carriers and
fiscal intermediaries are paying for the same surgical dressings,
medical supplies, and other items.  Surgical dressings and many
medical supplies can be billed to either fiscal intermediaries or
regional carriers.  If suppliers submit claims for the same items to
both types of contractors, only one should pay the claim.  For
example, if a fiscal intermediary pays a nursing home for surgical
dressings, a regional carrier should not pay the supplier for the
same dressings.  Conversely, if a regional carrier pays a supplier
for surgical dressings, the fiscal intermediary should not pay the
nursing home that used the dressings. 

Medicare does not have an effective control to prevent both types of
contractors from paying for the same medical supplies or surgical
dressings.  As part of Medicare's claims processing system, all
claims received by contractors are compared with historical
beneficiary data to verify eligibility for payment and benefits. 
HCFA uses this system to conduct many types of computerized controls
to determine if payment for the claims should be approved or
rejected.  The system does not check, however, to see if items paid
by regional carriers have already been paid by fiscal intermediaries
or whether items paid by fiscal intermediaries have already been paid
by regional carriers.  We identified a case in which a computerized
control for duplicate items would have prevented Medicare from paying
twice for the same item.\10 In this case, the fiscal intermediary
paid a nursing home for two bedside drainage bags used by a patient
during a 1-month stay.  A regional carrier also paid a supplier for
30 drainage bags allegedly provided to the same patient while in the
nursing home.  If a duplicate payment control had existed, the
regional carrier would not have made the duplicate payment. 


--------------------
\10 We randomly selected 25 of the 85 high-volume, high-dollar claims
that the fiscal intermediary reviewed at our request to determine the
appropriateness of the payments made.  On the basis of dates of
service, we determined that 6 of these 25 claims were potential
duplicate payments.  Of these six claims, we found one duplication
and another that appeared to be a duplicate payment.  In the latter
case, we could not be sure of the duplicate payment because the
supplier did not provide the fiscal intermediary with requested
documentation supporting the claim. 


   MEDICARE SURGICAL DRESSING
   PAYMENTS GENERALLY EXCESSIVE
------------------------------------------------------------ Letter :5

Medicare's fee schedule payments for surgical dressings are generally
excessive when compared with wholesale prices, prices paid by the
Department of Veterans Affairs (VA), and even retail prices. 
Overall, we estimate that HCFA could save substantial amounts if its
fee schedule was calculated on the basis of lower available prices. 
For example, as shown in table 1, if HCFA paid wholesale prices for
44 surgical dressings, total savings would be almost $20 million or
almost 35 percent of what it now pays.  Potential savings for just
nine dressings would be more than $9 million if HCFA paid at the
lowest rate, that which VA paid for dressings.  We even identified
potential savings of more than $2 million for nine surgical dressings
if HCFA paid at the lowest retail rates found at four Los
Angeles-area drug stores. 



                          Table 1
          
           Potential Medicare Savings on Surgical
                         Dressings


Type      Number
of            of
price   dressing                                   Percent
compar         s       Fee  Compared                of fee
ed      compared  schedule     price     Dollars  schedule
------  --------  --------  --------  ----------  --------
Wholes        44  $57,113,  $37,388,  $19,725,19     34.54
 ale                   852       654           7
Lowest        44  48,089,9  25,762,1  22,327,741     46.42
 retail                 36        98
Actual         9  17,984,2  15,967,8   2,016,337     11.21
 retail                 35        98
VA             9  17,055,0  7,871,64   9,183,401     53.85
                        44         3
----------------------------------------------------------
Note:  See appendix V for detailed tables for each type of price
compared. 

HCFA's method of calculating the fee schedule for surgical dressings
caused these high payments.  OBRA 1993 required HCFA to establish a
fee schedule for surgical dressings by computing the average
historical charges for the dressings.  Because of the expansion of
the surgical dressing benefit, however, HCFA did not have data on
historical charges.  Instead, HCFA used a gap-filling process to
establish the fee schedule:  HCFA used retail surgical dressing
supply catalogs to create a price list for each type of covered
surgical dressing.  The price of the median-priced dressing for each
type became the fee schedule price.  For example, HCFA identified 13
different alginate dressings 16 square inches or less (HCFA Common
Procedure Code K0196).  The retail prices of the dressings ranged
from $3.14 to $19.07.  The fee schedule price was set at $6.62, the
median-priced or sixth dressing on HCFA's list.  The lowest wholesale
price for this type of dressing is $1.88. 

If HCFA makes a mistake in calculating the fee schedule, it can
correct the mistake (for example, by using wholesale prices instead
of retail prices).  However, HCFA may not change the methodology for
determining the fee schedule nor may it adjust the fee schedule if
dressing prices decrease.  Therefore, if, as one HCFA official told
us, the prices of surgical dressings fall as more manufacturers
produce the many types of surgical dressings that HCFA now pays for,
HCFA cannot lower the fee schedule to reflect the change in market
condition.  Instead, Medicare will pay a price that is even higher,
relative to the market prices, than it pays today. 

For certain DME items--but not for surgical dressings and other
medical supplies--the Secretary of HHS may adjust prices that are
inherently unreasonable.\11 In these cases, the authority is very
limited and involves a complex set of procedures that can take a long
time to complete.  For example, it took HCFA nearly 3 years to reduce
the price it was paying for home blood glucose monitors from a
nationwide range of $144 to $211 to $58.71, even though they were
widely available for about $50 and, in some cases, provided free as a
means of obtaining customers for the disposable items associated with
this test equipment.  Because of the time and resources involved,
HCFA only uses this process for one item at a time. 

Before 1987, individual Medicare carriers had the authority to
increase or decrease prices to reflect local market conditions.\12
The process for doing so, which included notifying area suppliers and
publishing the new prices, could be completed in less than 90 days. 
If HCFA or the carriers had the authority to adjust excessive prices
in a timely manner, they could save millions in program dollars.  A
HCFA official told us, however, that it devotes no resources to
routine monitoring of medical equipment and supply prices.  As a
result, discrepancies in price between what Medicare pays and what
other large-volume buyers pay go undetected. 


--------------------
\11 42 U.S.C.  1395m(a)(10)(B). 

\12 The Omnibus Budget Reconciliation Act of 1987 (P.L.  100-203,
sec.  4062(b), 101 Stat.  1330, 1330-100) effectively eliminated the
carriers' inherent reasonableness authority regarding DME,
prosthetics, and orthotics paid for through the fee schedule and
prohibited HCFA from using such authority until 1991.  The Medicare
Catastrophic Coverage Act of 1988 (P.L.  100-360, sec. 
411(g)(1)(B)(xiii), 102 Stat.  683, 782) provided that HCFA's
authority could be exercised only through a burdensome regulatory
process that previously had been applied only to physician services
and includes publication in the Federal Register. 


   HCFA INITIATIVES SHOW PROMISE
------------------------------------------------------------ Letter :6

HCFA recently created a framework that eventually will allow it to
identify and begin addressing fraud and abuse associated with medical
supply claims.  For the first time, HCFA will have data to begin
assessing the size and scope of fraud and abuse and its contractors'
performance in addressing them.  In addition, these data will allow
HCFA to assess options for addressing program weaknesses. 

HCFA's consolidation of DME and medical supply claims processing at
four regional carriers provides comprehensive national data--that
were not available previously--on utilization and payments.  These
data will allow HCFA to identify, on a nationwide basis, DME and
medical supplies that may be subject to overutilization and
inappropriate billing.  In 1993, HCFA also developed a programwide
emphasis on data analysis.  Calling its approach focused medical
review, HCFA required contractors to begin identifying general
spending patterns and trends that would allow them to identify
potential problems. 

Fiscal intermediaries have started implementing this approach and
have recently begun compiling and analyzing claims payment and
utilization data.  So far, some intermediaries have identified the
different types and number of claims that Medicare may be
inappropriately paying.  For example, one type of review conducted by
an intermediary we visited resulted in 85 percent of the claims
reviewed during a 1-month period being denied--a total of $5.8
million in program savings.  Moreover, some intermediaries have
estimated the dollars that Medicare can potentially save by
tightening prepayment review controls.  The intermediary we visited
identified eight other problem areas, in addition to those that it
was already reviewing, that should be reviewed because of such things
as precipitous increases in utilization rates.  This intermediary
estimated potential savings of $57 million by implementing the
additional reviews, but it did not have the resources to do so. 

Armed with its new information from DMERCs and focused medical review
program reports, HCFA is now much better positioned than in past
years to provide HHS, the Office of Management and Budget, and the
Congress with concrete information on contractor activities that save
program dollars.  This information could include, for example,
explicit documentation on the savings achievable from efforts to stop
paying unwarranted or overpriced claims. 


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

HCFA has taken some initial steps to address Medicare medical supply
and surgical dressing payment abuses.  Transferring the processing to
regional carriers--and the accompanying greater standardization of
payment policies and better information to detect problem claims--are
important steps in combatting fraud and abuse. 

Medicare's vulnerability to overpaying for surgical dressing claims
will persist, however, for several reasons: 

  Many claims for surgical dressings lack sufficient detail for
     Medicare fiscal intermediaries to assess what they are being
     asked to pay for. 

  Medicare contractors have not yet developed the administrative
     capabilities to detect questionable claims for many surgical
     dressings. 

  Though the same patient may receive surgical dressings paid by
     either a part A intermediary or part B carrier, HCFA has no
     controls to detect duplicate bills. 

  Medicare's payment rates for dressings are high compared with
     wholesale and many retail prices. 


   RECOMMENDATIONS TO THE
   SECRETARY OF HHS
------------------------------------------------------------ Letter :8

The Secretary should direct the Administrator of HCFA to

  require that bills submitted to fiscal intermediaries itemize
     supplies;

  develop and implement prepayment review policies as part of the
     process of implementing any new or expanded Medicare coverage;
     and

  establish procedures to prevent duplicate payments by fiscal
     intermediaries and carriers. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :9

The fee schedule approach to setting prices provides a good starting
point for setting appropriate Medicare prices.  HCFA, however, needs
greater authority and flexibility to quickly adjust fee schedule
prices when market conditions warrant such changes.  To allow
Medicare to take advantage of competitive prices, the Congress should
consider authorizing HCFA or its carriers to promptly modify prices
for DME and other medical supplies.  For this to work effectively,
however, HCFA or the carriers must devote adequate resources to
routine price monitoring. 


   HHS COMMENTS AND OUR EVALUATION
----------------------------------------------------------- Letter :10

HHS commented on a draft of our report in a letter dated July 18,
1995 (see app.  VI).  In an overall comment, HHS stated that several
ongoing Medicare initiatives involving the four regional carriers are
already addressing the problems highlighted in this report. 
Specifically mentioned were the use of information from processed
claims to identify for prepayment review suspicious suppliers and
high-dollar, high-volume claims; prepayment screens to detect
egregious utilization of a supply item; and comprehensive medical
reviews of suppliers whose billing patterns indicate possible
overutilization. 

As we have stated in this report, a number of HCFA initiatives show
promise.  We specifically mentioned that transferring the claims
processing for DME and supplies to four regional carriers gives HCFA
the ability to identify overutilization and inappropriate billing. 
We also mentioned that the programwide emphasis on data analysis
through focused medical review identifies potential problem areas. 
While such initiatives are promising, we do not believe that they or
the other promising activities of the four regional carriers address
all the problems identified in this report. 

For example, HHS disagreed with our first recommendation that bills
submitted to fiscal intermediaries itemize supplies.  HHS stated that
it had assessed the benefit of requiring providers to itemize home
health supply bills and found that the additional contractor and
provider cost and burden outweighed the value of the itemization.  As
an alternative, HHS stated that it is assessing the benefit of
requiring fiscal intermediaries to suspend for prepayment review
those bills with excessive charges.  Also, HHS believed that it was
important to note that HCFA does not pay billed charges for this type
of claim. 

Without itemized bills, fiscal intermediaries cannot determine what
type or amount of supplies they pay for.  While it is true that HCFA
does not pay the billed charges for this type of claim, to conclude
that the cost settlement process will somehow account for all
overpayments is inaccurate.  Overpayments will still be made for
unnecessary or excessive supplies or those not covered by Medicare. 

HHS concurred with our second recommendation and said that it had
acted to implement it.  The action described, however, appears to be
in response to the past expansion of surgical dressing benefits
rather than plans for new or expanded Medicare coverage.  For
example, although agreeing that prepayment edits should be used to
prevent inappropriate payment when coverage policy changes, HHS
stated that a revised regional medical review policy for the recently
expanded surgical benefits will be effective October 1, 1995.  HHS
also stated that it is important to ensure that the regional carriers
have the flexibility to establish their own edits based on
aberrancies found in their region. 

While the policies on the expanded surgical dressing benefit need to
be implemented as soon as possible to protect benefit dollars, our
recommendation would require that medical policies be developed and
approved before any further changes in benefit coverage are made. 
Without medical policies, carriers cannot establish prepayment edits
for items newly covered because of changes in Medicare benefits.  As
we discussed, regional carriers have been paying claims for 29 newly
covered dressings for nearly a year and a half without medical policy
or prepayment edits--that is, without a review of the claims'
reasonableness or medical necessity. 

Concerning our recommendation that procedures be established to
prevent duplicate payments by carriers and intermediaries, HHS stated
that identifying duplicate claims is difficult when they are sent to
different part A and part B contractors because the claims are
submitted with different codes and supplier numbers and then
processed using different payment schedules and processing systems. 
In what it described as an effective alternative, HHS stated that
HCFA currently uses "conflict edits" through the Common Working File
system to alert contractors to conflicting payment situations.  For
example, if part B is being billed for outpatient supplies for a
specific date and part A receives an inpatient claim for the same
patient covering the same period, the system generates an alert. 
Questionable claims are then manually reviewed before payment,
according to HHS.  In the future, with Medicare's new claims
processing system, the Medicare Transaction System, HHS stated that
it will be simpler to identify duplicate claims because the same
system will process part A and part B claims in the same format. 

As a result of OBRA 1993, surgical dressings can be identified with
the same codes regardless of which contractor, part A or part B,
processes and pays a claim.  Combining a common identification code
with the Common Working File's ability to identify claims for which
part A and part B contractors both receive a claim for the same
beneficiary covering the same time period allows contractors to
easily identify a potential duplicate payment.  This ability applies
to all medical supplies that use the same identification code.  For
example, we identified one case in which Medicare paid twice for a
supply item using the same code for both the part A and part B
contractor. 

The Common Working File duplicate payment alert, or conflict edit,
does not entirely prevent Medicare from paying for the same item
twice.  The system generates an alert only when an institutional
provider, such as a nursing home or home health agency, has billed
the intermediary before the supplier has billed the regional carrier. 
More importantly, officials at the four DMERCs told us that they do
not investigate or review claims identified by the duplicate payment
alert.  Instead, they pay the claims without reviewing for
duplication. 

Concerning the matter for congressional consideration, HHS has stated
that on several occasions since 1987, it has submitted legislative
proposals to the Congress to simplify the process it may use to
adjust or limit fee schedule amounts. 

HHS also made a number of technical and other comments that we
considered in finalizing this report. 


--------------------------------------------------------- Letter :10.1

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

Please call me on (202) 512-7119 if you or your staff have any
questions about this report.  Major contributors are listed in
appendix VII. 

Sincerely yours,

Sarah F.  Jaggar
Director, Health Financing
 and Policy Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To identify the circumstances allowing the payment of unusually high
surgical dressing claims, we interviewed OIG officials from HHS and
reviewed past OIG and GAO reports on Medicare fraud and abuse
problems.  We also visited Transamerica, one of the many carriers
that processed medical supply claims before the creation of the four
regional carriers.  This carrier was judgmentally selected. 

To determine the adequacy of Medicare's internal controls, we visited
Blue Cross of California, a fiscal intermediary that processes claims
submitted by institutional providers; and CIGNA, one of the four
regional carriers responsible for processing durable medical
equipment (DME) and medical supply claims submitted by suppliers. 
These contractors were judgmentally selected.  To supplement work
performed at these locations and broaden our areas of analysis, we
obtained information on medical supply and surgical dressing claims
and payment safeguards from the remaining 42 fiscal intermediaries
and three regional carriers.  We also discussed the adequacy of
contractors' internal controls and obtained information about these
controls from HCFA officials at HHS. 

In addition, we requested the two contractors that we visited, Blue
Cross of California and CIGNA, to review medical records and other
documentation for selected high-dollar medical supply claims to
determine whether the records supported the need for services or
items billed to Medicare.  Further, we obtained recommended
utilization standards from a trade association for medical supply
distributors and a national association of specialty nurses for
wound, ostomy, and continence care and compared the standards with
actual utilization levels found on claims submitted by suppliers. 

We compared the fee schedule that Medicare uses to pay suppliers of
surgical dressings with prices obtained from a wholesale surgical
dressing supplier, four retail drugstores, the Department of Veterans
Affairs, and a HCFA-generated surgical dressing price list.  We also
reviewed HCFA procedures to determine if any would prevent regional
carriers and fiscal intermediaries from paying duplicate claims for
medical supplies and surgical dressings. 

We performed our work between May 1994 and June 1995 in accordance
with generally accepted government auditing standards. 


MEDICAL SUPPLY CHARGES DENIED
========================================================== Appendix II

                                                                Percen
                                                Submit            t of
                                                   ted  Denied  charge
                                                charge  charge       s
Claim number                                         s       s  denied
----------------------------------------------  ------  ------  ------
1                                               $5,737  $5,737     100
2                                                  157      25      16
3                                                2,404   2,404     100
4                                                  373     373     100
5                                                  752     349      46
6                                               13,254     262       2
7                                                1,545   1,545     100
8                                                  400       0       0
9                                               10,161   8,738      86
10                                               6,216     680      11
11                                               7,921   7,194      91
12                                              21,071  13,154      62
13                                               6,196   3,206      52
14                                               1,743      34       2
15                                               5,965       0       0
16                                                 676     215      32
17                                               8,218     224       3
18                                              18,479   8,106      44
19                                               3,432   3,432     100
20                                                 366     366     100
21                                                 190       0       0
22                                               2,957      24       1
23                                               3,607      78       2
24                                               1,108   1,019      92
25                                               2,313   2,281      99
26                                               3,860   2,889      75
27                                               2,041   1,573      77
28                                              33,363  33,363     100
29                                               2,145   2,145     100
30                                                 633     383      61
31                                               2,871     490      17
32                                               2,121     344      16
33                                               7,968      80       1
34                                              53,869  44,517      83
35                                              11,331  11,331     100
36                                                 642       0       0
37                                              11,192     149       1
38                                               6,707   6,707     100
39                                              18,101  18,101     100
40                                                 481     481     100
41                                               5,926   5,926     100
42                                                 518     296      57
43                                               3,876     442      11
44                                              12,465     176       1
45                                               6,124       0       0
46                                               1,059      18       2
47                                               4,290   4,290     100
Total                                           $316,8  $193,1      61
                                                    24      47
----------------------------------------------------------------------

NONMEDICAL SUPPLY CHARGES DENIED
========================================================= Appendix III

                                                Submit
                                                   ted  Denied  Percen
                                                charge  charge       t
Claim number                                         s       s  denied
----------------------------------------------  ------  ------  ------
1                                               $9,328  $7,836      84
2                                                1,600       0       0
3                                                5,113   5,113     100
4                                                2,644     969      37
5                                                2,665      16       1
6                                               10,218   7,025      69
7                                                  188       0       0
8                                                3,315       0       0
9                                                4,319       0       0
10                                               3,498       0       0
11                                               9,612     208       2
12                                              45,649   5,103      11
13                                              42,246       0       0
14                                               9,889   4,940      50
15                                                 620       0       0
16                                               9,449     945      10
17                                               6,972       0       0
18                                               2,556   2,556     100
19                                               1,335       0       0
20                                               7,743       0       0
21                                               2,995       0       0
22                                               4,850       0       0
23                                              75,259  75,259     100
24                                               5,700       0       0
25                                               2,924       0       0
26                                               5,494      46       1
27                                               9,612      45       0
28                                               3,882      30       1
29                                              101,71  29,460      29
                                                     0
30                                               3,272   3,272     100
31                                               1,340       0       0
32                                               5,919      22       0
33                                               2,815   2,815     100
34                                              19,636  19,636     100
35                                                 519     519     100
36                                               3,830       0       0
37                                               6,303      82       1
38                                               4,634   1,277      28
39                                              10,412   1,059      10
40                                                 514       0       0
41                                               6,256   6,256     100
Total                                           $456,8  $174,4      38
                                                    35      89
----------------------------------------------------------------------

SURGICAL DRESSINGS COVERED BY
MEDICARE IN 1995
========================================================== Appendix IV

                                          Newly covered by
HCFA Common                                       surgical
Procedure     Description and unit of             dressing
Code          purchase                           expansion
------------  --------------------------  ----------------
A4460         Elastic bandage, per roll                  X
               (e.g., compression
               bandage)
A4649         Surgical supplies,
               miscellaneous
K0154         Wound pouch, each
K0196         Alginate dressing, wound
               cover, pad size 16 square
               inches or less, each
               dressing
K0197         Alginate dressing, wound
               cover, pad size more than
               16 but less than or equal
               to 48 square inches, each
               dressing
K0198         Alginate dressing, wound
               cover, pad size more than
               48 square inches, each
               dressing
K0199         Alginate dressing, wound
               filler, per 6 inches
K0203         Composite dressing, pad                    X
               size 16 square inches or
               less, with any size
               adhesive border, each
               dressing
K0204         Composite dressing, pad                    X
               size more than 16 but
               less than or equal to 48
               square inches, with any
               size adhesive border,
               each dressing
K0205         Composite dressing, pad                    X
               size more than 48 square
               inches, with any size
               adhesive border, each
               dressing
K0206         Contact layer, less than                   X
               16 square inches, each
               dressing
K0207         Contact layer, more than                   X
               16 but less than or equal
               to 48 square inches, each
               dressing
K0208         Contact layer, more than                   X
               48 square inches, each
               dressing
K0209         Foam dressing, wound
               cover, pad size 16 square
               inches or less, without
               adhesive border, each
               dressing
K0210         Foam dressing, wound
               cover, pad size more than
               16 square inches but less
               than or equal to 48
               square inches, without
               adhesive border, each
               dressing
K0211         Foam dressing, wound
               cover, pad size more than
               48 square inches, without
               adhesive border, each
               dressing
K0212         Foam dressing, wound
               cover, pad size 16 square
               inches or less, with any
               size adhesive border,
               each dressing
K0213         Foam dressing, wound
               cover, pad size more than
               16 square inches but less
               than or equal to 48
               square inches, with any
               size adhesive border,
               each dressing
K0214         Foam dressing, wound
               cover, pad size more than
               48 square inches, with
               any size adhesive border,
               each dressing
K0215         Foam dressing, wound                       X
               filler, per gram
K0216         Gauze, nonimpregnated, pad
               size 16 square inches or
               less, without adhesive
               border, each dressing
K0217         Gauze, nonimpregnated, pad
               size more than 16 square
               inches but less than or
               equal to 48 square
               inches, without adhesive
               border, each dressing
K0218         Gauze, nonimpregnated, pad
               size more than 48 square
               inches, without adhesive
               border, each dressing
K0219         Gauze, nonimpregnated, pad
               size 16 square inches or
               less, with any size
               adhesive border, each
               dressing
K0220         Gauze, nonimpregnated, pad
               size more than 16 square
               inches but less than or
               equal to 48 square
               inches, with any size
               adhesive border, each
               dressing
K0221         Gauze, nonimpregnated, pad
               size more than 48 square
               inches, with any size
               adhesive border, each
               dressing
K0222         Gauze, impregnated, other                  X
               than water or normal
               saline, pad size 16
               square inches or less,
               without adhesive border,
               each dressing
K0223         Gauze, impregnated, other                  X
               than water or normal
               saline, pad size more
               than 16 square inches but
               less than or equal to 48
               square inches, without
               adhesive border, each
               dressing
K0224         Gauze, impregnated, other                  X
               than water or normal
               saline, pad size more
               than 48 square inches,
               without adhesive border,
               each dressing
K0228         Gauze, impregnated, water                  X
               or normal saline, pad
               size 16 square inches or
               less, without adhesive
               border, each dressing
K0229         Gauze, impregnated, water                  X
               or normal saline, pad
               size more than 16 square
               inches but less than or
               equal to 48 square
               inches, without adhesive
               border, each dressing
K0230         Gauze, impregnated, water                  X
               or normal saline, pad
               size more than 48 square
               inches, without adhesive
               border, each dressing
K0234         Hydrocolloid dressing,
               wound cover, pad size 16
               square inches or less,
               without adhesive border,
               each dressing
K0235         Hydrocolloid dressing,
               wound cover, pad size
               more than 16 square
               inches but less than or
               equal to 48 square
               inches, without adhesive
               border, each dressing
K0236         Hydrocolloid dressing,
               wound cover, pad size
               more than 48 square
               inches, without adhesive
               border, each dressing
K0237         Hydrocolloid dressing,
               wound cover, pad size 16
               square inches or less,
               with any size adhesive
               border, each dressing
K0238         Hydrocolloid dressing,
               wound cover, pad size
               more than 16 square
               inches but less than or
               equal to 48 square
               inches, with any size
               adhesive border, each
               dressing
K0239         Hydrocolloid dressing,
               wound cover, pad size
               more than 48 square
               inches, with any size
               adhesive border, each
               dressing
K0240         Hydrocolloid dressing,                     X
               wound filler, paste, per
               fluid ounce
K0241         Hydrocolloid dressing,                     X
               wound filler, dry form,
               per pram
K0242         Hydrogel dressing, wound
               cover, pad size 16 square
               inches or less, without
               adhesive border, each
               dressing
K0243         Hydrogel dressing, wound
               cover, pad size more than
               16 square inches but less
               than or equal to 48
               square inches, without
               adhesive border, each
               dressing
K0244         Hydrogel dressing, wound
               cover, pad size more than
               48 square inches, without
               adhesive border, each
               dressing
K0245         Hydrogel dressing, wound
               cover, pad size 16 square
               inches or less, with any
               size adhesive border,
               each dressing
K0246         Hydrogel dressing, wound
               cover, pad size more than
               16 square inches but less
               than or equal to 48
               square inches, with any
               size adhesive border,
               each dressing
K0247         Hydrogel dressing, wound
               cover, pad size more than
               48 square inches, with
               any size adhesive border,
               each dressing
K0248         Hydrogel dressing, wound
               filler, paste, per fluid
               ounce
K0249         Hydrogel dressing, wound                   X
               filler, dry form, per
               gram
K0251         Specialty absorptive                       X
               dressing, wound cover,
               pad size 16 square inches
               or less, without adhesive
               border, each dressing
K0252         Specialty absorptive                       X
               dressing, wound cover,
               pad size more than 16
               square inches but less
               than or equal to 48
               square inches, without
               adhesive border, each
               dressing
K0253         Specialty absorptive                       X
               dressing, wound cover,
               pad size more than 48
               square inches, without
               adhesive border, each
               dressing
K0254         Specialty absorptive                       X
               dressing, wound cover,
               pad size 16 square inches
               or less, with any size
               adhesive border, each
               dressing
K0255         Specialty absorptive                       X
               dressing, wound cover,
               pad size more than 16
               square inches but less
               than or equal to 48
               square inches, with any
               size adhesive border,
               each dressing
K0256         Specialty absorptive                       X
               dressing, wound cover,
               pad size more than 48
               square inches, with any
               size adhesive border,
               each dressing
K0257         Transparent film, 16
               square inches or less,
               each dressing
K0258         Transparent film, more
               than 16 but less than or
               equal to 48 square
               inches, each dressing
K0259         Transparent film, more
               than 48 square inches,
               each dressing
K0261         Wound filler, not                          X
               elsewhere classified,
               gel/paste, per fluid
               ounce
K0262         Wound filler, not                          X
               elsewhere classified, dry
               form, per gram
K0263         Gauze, elastic, all types,                 X
               per linear yard
K0264         Gauze, nonelastic, per                     X
               linear yard
K0265\a       Tape, all types, per 18                    X
               square inches
K0266         Gauze, impregnated, other                  X
               than water or normal
               saline, any width, per
               linear yard
----------------------------------------------------------
\a Before 1995, tape was recorded as HCPC A4454 and the unit of
purchase was a roll of tape. 


FEE SCHEDULE PRICES COMPARED WITH
OTHER AVAILABLE PRICES
=========================================================== Appendix V

To estimate total 1995 surgical dressings expenditures, we multiplied
the number of surgical dressings purchased by the regional carriers
in 1994 by the 1995 fee schedule prices and the other comparison
prices.  For each category of surgical dressing identified by HCFA
Common Procedure Codes (HCPC), we obtained the total units of
surgical dressings purchased by all four regional carriers from the
regional carrier responsible for compiling and analyzing DME claim
data for all four regional carriers.  We used this information in
conjunction with surgical dressing pricing data to make several
pricing comparisons.  For all comparisons, estimated expenditures
under HCFA's surgical dressing fee schedule were calculated by
multiplying the number of units purchased in 1994 by the 1995 fee
schedule price for that code.  These calculations were done for each
HCPC and then totaled to get overall expenditures. 

Table V.1 illustrates our comparison of fee schedule prices with
wholesale prices.  It ranks the categories of surgical dressings from
the category in which the fee schedule is the furthest above the
wholesale dressing price to the category in which the fee schedule is
the furthest below the wholesale price.  We obtained wholesale
pricing information from a national medical supplier's 1994-1995 mail
order catalog.  We identified a dressing in 44 of the HCPC surgical
dressing categories.  We calculated a per dressing, or unit, price
for each of the 44 categories by taking the best wholesale price and
dividing it by the number of dressings, or units, that would be
provided at that price.  The prices for each category were multiplied
by the number of units of dressings purchased in that category in
1994 to get total expenditures in each category.  We used these data
to determine what total expenditures would be if HCFA paid wholesale
prices rather than the fee schedule prices.  As table V.1 indicates,
HCFA would pay almost $20 million less for surgical dressings in the
44 categories if it paid the lower wholesale prices. 



                                    Table V.1
                     
                      Fee Schedule Compared With the Lowest
                                 Wholesale Prices

                                       Fee
                                    schedu                                Potent
                                        le                                   ial
                                    relati                                saving
                                    onship  Number                        s from
              HCFA    1995              to      of  Estimated             lowest
            Common     fee  Lowest  wholes   units        fee  Estimated  wholes
Number of   Proced  schedu  wholes     ale  purcha   schedule  wholesale     ale
dressings      ure      le     ale  prices  sed in  expenditu  expenditu  purcha
compared      Code  prices  prices      \a    1994        res        res     ses
----------  ------  ------  ------  ------  ------  ---------  ---------  ------
1            K0220   $2.32   $0.19   12.21  26,655    $61,840     $5,064  $56,77
                                                                               5
2            K0240   11.03    2.65    4.16  21,885    241,392     57,995  183,39
                                                                               6
3            K0248   14.63    3.56    4.11  744,95  10,898,66  2,652,033  8,246,
                                                 3          2                630
4            K0209    6.75    1.79    3.77  577,01  3,894,831  1,032,851  2,861,
                                                 2                           980
5            K0197   14.81    3.97    3.73  47,500    703,475    188,575  514,90
                                                                               0
6            K0263    0.26    0.07    3.71  2,782,    723,557    194,804  528,75
                                               913                             3
7            K0262    0.99    0.27    3.67  118,86    117,671     32,092  85,579
                                                 0
8            K0222    1.91    0.54    3.54  170,52    325,707     92,085  233,62
                                                 7                             2
9            K0196    6.62    1.88    3.52  262,13  1,735,347    492,818  1,242,
                                                 7                           529
10           K0249    0.78    0.24    3.25  179,11    139,713     42,989  96,724
                                                 9
11           K0257    1.38    0.44    3.14  156,35    215,775     68,798  146,97
                                                 9                             7
12           K0238   20.53    8.03    2.56   7,357    151,039     59,077  91,963
13           K0259    9.85    3.92    2.51  87,202    858,940    341,832  517,10
                                                                               8
14           K0203    3.77    1.58    2.39  144,54    544,923    228,376  316,54
                                                 2                             7
15          A4454\    2.18    1.03    2.12  6,248,  13,622,60  6,436,368  7,186,
                 b                             901          4                236
16           K0212    8.74    4.32    2.02  120,83  1,056,054    521,986  534,06
                                                 0                             9
17           K0224    3.25    1.64    1.98  23,525     76,456     38,581  37,875
18           K0223    2.17    1.14    1.90  235,85    511,797    268,870  242,92
                                                 1                             7
19           K0251    1.80    0.95    1.89  197,42    355,358    187,550  167,80
                                                 1                             8
20           K0237    7.12    3.82    1.86  14,725    104,842     56,250  48,593
21           K0229    3.25    1.84    1.77  769,83  2,501,974  1,416,502  1,085,
                                                 8                           472
22           K0236   24.54   14.83    1.65   7,754    190,283    114,992  75,291
23           K0211   26.46   18.00    1.47  37,113    982,010    668,034  313,97
                                                                               6
24           K0243   11.10    7.64    1.45  289,10  3,209,077  2,208,770  1,000,
                                                 6                           307
25           K0258    3.87    2.72    1.42  502,24  1,943,684  1,366,104  577,58
                                                 4                             1
26           A4460    1.00    0.73    1.37  84,803     84,803     61,906  22,897
27           K0234    5.89    4.30    1.37  182,24  1,073,435    783,662  289,77
                                                 7                             3
28           K0245    6.54    4.99    1.31  46,441    303,724    231,741  71,984
29           K0264    0.44    0.34    1.29  5,592,  2,460,710  1,901,458  559,25
                                               523                             2
30           K0247   21.42   16.78    1.28   2,373     50,830     39,819  11,011
31           K0204    3.18    2.58    1.23  192,76    612,996    497,336  115,66
                                                 6                             0
32           K0242    5.47    4.53    1.21  416,09  2,276,062  1,884,928  391,13
                                                 9                             3
33           K0255    2.73    2.58    1.06  46,859    127,925    120,896   7,029
34           K0199    4.76    4.59    1.04  216,51  1,030,597    993,790  36,807
                                                 2
35           K0154   11.98   13.26    0.90  12,161    145,689    161,255  (15,56
                                                                              6)
36           K0254    1.10    1.58    0.70  18,837     20,721     29,762  (9,042
                                                                               )
37           K0219    0.86    1.39    0.62  66,828     57,472     92,891  (35,41
                                                                              9)
38           K0246    8.93   16.95    0.53  25,157    224,652    426,411  (201,7
                                                                             59)
39           K0214    9.27   22.30    0.42   3,415     31,657     76,155  (44,49
                                                                              7)
40           K0253    0.81    2.57    0.32  593,34    480,613  1,524,907  (1,044
                                                 9                         ,294)
41           K0241    2.31    7.52    0.31   4,606     10,640     34,637  (23,99
                                                                              7)
42           K0216    0.07    0.23    0.30  23,790  1,665,302  5,471,707  (3,806
                                              ,031                         ,405)
43           K0252    0.49    1.62    0.30  1,103,    540,757  1,787,809  (1,247
                                               586                         ,052)
44           K0217    0.39    1.30    0.30  1,918,    748,257  2,494,189  (1,745
                                               607                         ,932)
Total                                       48,091  $57,113,8  $37,388,6  $19,72
                                              ,529         52         54   5,197
--------------------------------------------------------------------------------
\a The figures in this column compare the wholesale prices with the
fee schedule prices.  If the figure in this column is 1, the lowest
wholesale price and fee schedule price are the same.  Figures greater
than 1 indicate the number of times that the fee schedule price is
greater than the lowest wholesale price.  For example, the fee
schedule price for K0220 ($2.32) is 12.21 times greater than the
wholesale price ($.19).  In contrast, figures less than 1 indicate
that the fee schedule is lower than the lowest wholesale price. 

\b Before 1995, tape was recorded as HCPC A4454 and the unit of
purchase was a roll of tape.  We used the pricing and utilization
data for HCPC A4454 to estimate 1995 expenditures. 

Table V.2 illustrates our comparison of fee schedule prices with the
lowest available retail prices.  The table ranks the categories of
surgical dressings from the dressing category in which the fee
schedule is the furthest above the lowest retail dressing price to
the category in which the fee schedule is the furthest below the
lowest retail price.  We used the surgical dressing price lists HCFA
developed to establish the surgical dressing fee schedule prices. 
HCFA had a price list for 44 surgical dressing categories with prices
stated at the 1992 base year price.  We identified the lowest price
dressing in each of the 44 surgical dressing categories and inflated
the prices to 1995 levels using the inflation factors established by
the Congress.  We then multiplied the lowest retail prices for each
category by the number of units purchased in those categories in
1994.  We totaled the expenditures in all categories and compared
this figure with what HCFA would pay using the 1995 fee schedule.  As
table V.2 illustrates, HCFA would pay over $22 million less for
surgical dressings in the 44 categories if it paid the lowest retail
price. 



                                    Table V.2
                     
                     Fee Schedule Compared With Lowest Retail
                                      Prices

                                                                          Potent
                                       Fee                                   ial
                                  schedule  Number                        saving
Number      HCFA    1995          relation      of  Estimated  Estimated  s from
of        Common     fee           ship to   units        fee     lowest  lowest
dressing  Proced  schedu  Lowest    lowest  purcha   schedule     retail  retail
s            ure      le  retail    retail  sed in  expenditu  expenditu  purcha
compared    Code  prices  prices  prices\a    1994        res        res     ses
--------  ------  ------  ------  --------  ------  ---------  ---------  ------
1          K0245   $6.54   $0.66      9.85  46,441   $303,724    $30,651  $273,0
                                                                              73
2          K0203    3.77    0.42      8.88  144,54    544,923     60,708  484,21
                                                 2                             6
3          K0264    0.44    0.10      4.49  5,592,  2,460,710    542,475  1,918,
                                               523                           235
4          K0242    5.47    1.30      4.22  416,09  2,276,062    540,929  1,735,
                                                 9                           133
5          K0216    0.07    0.02      3.22  23,790  1,665,302    475,801  1,189,
                                              ,031                           502
6          K0254    1.10    0.35      3.16  18,837     20,721      6,593  14,128
7          K0243   11.10    3.66      3.04  289,10  3,209,077  1,058,128  2,150,
                                                 6                           949
8          K0263    0.26    0.09      2.99  2,782,    723,557    250,462  473,09
                                               913                             5
9          K0211   26.46   10.22      2.59  37,113    982,010    379,295  602,71
                                                                               5
10         K0257    1.38    0.53      2.59  156,35    215,775     82,870  132,90
                                                 9                             5
11         K0219    0.86    0.36      2.39  66,828     57,472     24,058  33,414
12         K0212    8.74    3.69      2.37  120,83  1,056,054    445,863  610,19
                                                 0                             2
13         K0262    0.99    0.44      2.27  118,86    117,671     52,298  65,373
                                                 0
14         K0259    9.85    4.35      2.26  87,202    858,940    379,329  479,61
                                                                               1
15         K0238   20.53    9.56      2.15   7,357    151,039     70,333  80,706
16         K0196    6.62    3.13      2.11  262,13  1,735,347    820,489  914,85
                                                 7                             8
17         K0235   15.16    7.29      2.08  27,368    414,899    199,513  215,38
                                                                               6
18         K0258    3.87    1.95      1.99  502,24  1,943,684    979,376  964,30
                                                 4                             8
19         K0248   14.63    7.48      1.96  744,95  10,898,66  5,572,248  5,326,
                                                 3          2                414
20         K0222    1.91    0.98      1.95  170,52    325,707    167,116  158,59
                                                 7                             0
21         K0224    3.25    1.85      1.76  23,525     76,456     43,521  32,935
22         K0209    6.75    3.92      1.72  577,01  3,894,831  2,261,887  1,632,
                                                 2                           944
23         K0236   24.54   14.32      1.71   7,754    190,283    111,037  79,246
24         K0237    7.12    4.29      1.66  14,725    104,842     63,170  41,672
25         K0223    2.17    1.37      1.58  235,85    511,797    323,116  188,68
                                                 1                             1
26         K0234    5.89    3.97      1.48  182,24  1,073,435    723,521  349,91
                                                 7                             4
27         K0220    2.32    1.58      1.47  26,655     61,840     42,115  19,725
28         K0210   17.94   12.48      1.44  98,034  1,758,730  1,223,464  535,26
                                                                               6
29         K0199    4.76    3.55      1.34  216,51  1,030,597    768,618  261,98
                                                 2                             0
30         K0253    0.81    0.61      1.33  593,34    480,613    361,943  118,67
                                                 9                             0
31         K0251    1.80    1.39      1.29  197,42    355,358    274,415  80,943
                                                 1
32         K0244   35.38   27.90      1.27  75,058  2,655,552  2,094,118  561,43
                                                                               4
33         K0229    3.25    2.80      1.16  769,83  2,501,974  2,155,546  346,42
                                                 8                             7
34         K0204    3.18    2.82      1.13  192,76    612,996    543,600  69,396
                                                 6
35         K0240   11.03    9.80      1.13  21,885    241,392    214,473  26,919
36         K0217    0.39    0.35      1.12  1,918,    748,257    671,512  76,744
                                               607
37         K0197   14.81   13.24      1.12  47,500    703,475    628,900  74,575
38         K0249    0.78    0.73      1.07  179,11    139,713    130,757   8,956
                                                 9
39         K0246    8.93    8.60      1.04  25,157    224,652    216,350   8,302
40         K0241    2.31    2.26      1.02   4,606     10,640     10,410     230
41         K0247   21.42   21.19      1.01   2,373     50,830     50,284     546
42         K0255    2.73    2.72      1.00  46,859    127,925    127,456     469
43         K0214    9.27    9.27      1.00   3,415     31,657     31,657       0
44         K0252    0.49    0.50      0.98  1,103,    540,757    551,793  (11,03
                                               586                            6)
Total                                       41,946  $48,089,9  $25,762,1  $22,32
                                              ,124         36         98   7,741
--------------------------------------------------------------------------------
\a The figures in this column compare the lowest retail prices with
fee schedule prices.  If the figure in this column is 1, the lowest
retail price and fee schedule price are the same.  Figures greater
than 1 indicate the number of times that the fee schedule price is
greater than the lowest retail price.  For example, the fee schedule
price for K0245 ($6.54) is 9.85 times greater than the lowest retail
price ($.66).  In contrast, figures less than 1 indicate that the fee
schedule is lower than the lowest retail price. 

Table V.3 illustrates our comparison of fee schedule prices with the
lowest retail drugstore prices for similar dressings.  The table
ranks the categories of surgical dressings from the category in which
the fee schedule is the furthest above the lowest retail drugstore
dressing price to the category in which the fee schedule is the
furthest below the lowest retail drugstore price.  We obtained the
actual drugstore prices by visiting and pricing surgical dressings at
four retail drugstores in the Los Angeles area.  We identified and
priced dressings in nine of the surgical dressing categories and
determined the lowest per dressing price in each of the nine dressing
categories.  These figures were then multiplied by the number of
units purchased in those categories in 1994.  We totaled the
expenditures in each category and compared this figure with what HCFA
would pay using the 1995 fee schedule.  As the table illustrates,
HCFA would pay over $2 million less for surgical dressings in the
nine categories if it paid the lower drugstore prices. 



                                    Table V.3
                     
                     Fee Schedule Compared With Lowest Retail
                                 Drugstore Prices

                                       Fee
                                    schedu
                                        le
                                    relati
                                    onship                                Potent
                                        to                                   ial
                                    lowest  Number                        saving
              HCFA    1995          retail      of  Estimated  Estimated  s from
            Common     fee  Lowest  drugst   units        fee     lowest  actual
Number of   Proced  schedu  actual     ore  purcha   schedule     retail  retail
dressings      ure      le  retail  prices  sed in  expenditu  expenditu  purcha
compared      Code  prices  prices      \a    1994        res        res     ses
----------  ------  ------  ------  ------  ------  ---------  ---------  ------
1            K0222   $1.91   $0.51    3.74  170,52   $325,707    $86,969  $238,7
                                                 7                            38
2            K0257    1.38    0.52    2.65  156,35    215,775     81,307  134,46
                                                 9                             9
3            K0219    0.86    0.55    1.56  66,828     57,472     36,755  20,717
4           A4454\    2.18    1.47    1.48  6,248,  13,622,60  9,185,884  4,436,
                 b                             901          4                720
5            K0252    0.49    0.47    1.04  1,103,    540,757    518,685  22,072
                                               586
6            K0217    0.39    0.40    0.97  1,918,    748,257    767,443  (19,18
                                               607                            6)
7            K0263    0.26    0.33    0.78  2,782,    723,557    918,361  (194,8
                                               913                           04)
8            K0216    0.07    0.17    0.41  23,790  1,665,302  4,044,305  (2,379
                                              ,031                         ,003)
9            A4460    1.00    3.87    0.25  84,803     84,803    328,188  (243,3
                                                                             85)
Total                                       36,322  $17,984,2  $15,967,8  $2,016
                                              ,555         35         98    ,337
--------------------------------------------------------------------------------
\a The figures in this column compare the lowest drugstore prices
with fee schedule prices.  If the figure in this column is 1, the
lowest retail drugstore price and fee schedule price are the same. 
Figures greater than 1 indicate the number of times that the fee
schedule price is greater than the lowest retail drugstore price. 
For example, the fee schedule price of K0222 ($1.91) is 3.74 times
greater than the lowest retail drugstore price ($.51).  In contrast,
figures less than 1 indicate that the fee schedule is lower than the
lowest retail drugstore price. 

\b Before 1995, tape was recorded as HCPC A4454 and the unit of
purchase was a roll of tape.  However, in 1995 a new HCPC (K0265) and
description of tape were developed.  We used the pricing and
utilization data for HCPC A4454 to estimate 1995 expenditures. 

Table V.4 illustrates our comparison of fee schedule prices with the
price VA pays for similar dressings.  The table ranks the categories
of surgical dressings from the category in which the fee schedule is
the furthest above the VA price to the category in which the fee
schedule is the furthest below the VA price.  We obtained surgical
dressing supply and price lists from one of the VA's Medical Centers
in the Los Angeles area.  We identified dressings and calculated per
dressing, or unit, prices in nine of the surgical dressing
categories.  We multiplied the lowest per dressing price in each
category by the number of units purchased in those categories in
1994.  We totaled the expenditures in each category and compared this
figure with what HCFA would pay using the 1995 fee schedule.  As
table V.4 illustrates, HCFA would pay over $9 million less for
dressings in the nine categories if it paid VA's lower prices. 



                                        Table V.4
                         
                         Fee Schedule Compared With Department of
                         Veterans Affairs Lowest Purchase Prices

                                                                                Potentia
                                                                                       l
Number                                   Fee                                     savings
of                  1995  Lowest    schedule    Number   Estimated                  from
dressi      HCFA     fee      VA  relationsh  of units         fee   Estimated    lowest
ngs       Common  schedu  purcha       ip to  purchase    schedule          VA        VA
compar  Procedur      le      se   lowest VA      d in  expenditur  expenditur  purchase
ed        e Code  prices  prices    prices\a      1994          es          es         s
------  --------  ------  ------  ----------  --------  ----------  ----------  --------
1          K0220   $2.32   $0.04       58.00    26,655     $61,840      $1,066   $60,773
2          K0257    1.38    0.06       23.00   156,359     215,775       9,382   206,394
3          K0219    0.86    0.04       21.50    66,828      57,472       2,673    54,799
4          K0224    3.25    0.48        6.77    23,525      76,456      11,292    65,164
5          K0253    0.81    0.16        5.06   593,349     480,613      94,936   385,677
6          A4460    1.00    0.41        2.44    84,803      84,803      34,769    50,034
7          K0223    2.17    0.92        2.36   235,851     511,797     216,983   294,814
8        A4454\b    2.18    1.05        2.08  6,248,90  13,622,604   6,561,346  7,061,25
                                                     1                                 8
9          K0258    3.87    1.87        2.07   502,244   1,943,684     939,196  1,004,48
                                                                                       8
Total                                         7,938,51  $17,055,04  $7,871,643  $9,183,4
                                                     5           4                    01
----------------------------------------------------------------------------------------
\a The figures in this column compare the lowest VA prices with fee
schedule prices.  If the figure in this column is 1, the lowest VA
price and fee schedule price are the same.  Figures greater than 1
indicate the number of times that the fee schedule price is greater
than the lowest VA price.  For example, the fee schedule price of
K0220 ($2.32) is 58 times greater than the lowest VA price ($.04). 

\b Before 1995, tape was recorded as HCPC A4454 and the unit of
purchase was a roll of tape.  However, in 1995 a new HCPC (K0265) and
description of tape were developed.  We used the pricing and
utilization data for HCPC A4454 to estimate 1995 expenditures. 




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



(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.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

Edwin P.  Stropko, Assistant Director, (202) 512-7118
Donald J.  Walthall, Assignment Manager
Sam Mattes, Evaluator-in-Charge
Timothy S.  Bushfield, Evaluator
Craig H.  Winslow, Senior Attorney