Medicare Home Health Agencies: Overpayments Are Hard to Identify and Even
Harder to Collect (Letter Report, 04/28/2000, GAO/HEHS/AIMD-00-132).

Pursuant to a congressional request, GAO reviewed the Health Care
Financing Administration's (HCFA) oversight of the amounts of
overpayments home health agencies (HHA) owe Medicare, focusing on: (1)
whether HCFA quickly identifies and collects overpayments from closed
HHAs; (2) the accuracy of the overpayment amounts HCFA reported for
closed Texas HHAs; and (3) whether HCFA can effectively record and track
overpayments due from closed agencies.

GAO noted that: (1) HCFA is slow to identify amounts closed HHAs owe
Medicare and collects little of the overpayments due from such HHAs
following their closure; (2) because HHAs receive interim payments based
on estimates of what their allowable costs will be, Medicare claims
administration contractors must retrospectively adjust the payments
after receiving and reviewing a report of an agency's costs; (3) HHAs
have 5 months after they close to submit their final cost report to the
contractors; (4) contractors generally take 18 months to make a final
determination of the amount, if any, a closed HHA owes; (5) contractors
have been discouraged from making quicker determinations for closed HHAs
because doing so would disrupt timely determinations in cost reports
from operating HHAs; (6) GAO found that little has been collected from
the 15 closed Texas HHAs that HCFA reported as owing the most money; (7)
in late 2000, HCFA plans to implement the home health prospective
payment system mandated by the Balanced Budget Act of 1997, which will
involve predetermined payments for home health services; (8) HCFA's
proposed home health prospective payment system should reduce the
potential for overpayments to HHAs because payment amounts would not be
adjusted retrospectively to reflect allowable HHA costs; (9) GAO's
estimate of the overpayments due from the 15 closed HHAs differs
significantly from the estimate HCFA initially reported; (10) using the
same definition of an overpayment as HCFA, GAO estimated that these HHAs
could owe $68 million--one-third of HCFA's initial $209 million
estimate; (11) two factors accounted for the difference: (a) contractor
staff made errors entering data into one of HCFA's overpayment recording
and tracking system, such as a $4.6 million duplicate entry; and (b)
HCFA's initial query of this overpayment recording and tracking system
did not specify that superseded transactions be excluded from the
reported overpayments; (12) about $43 million of GAO's $68 million
overpayment estimate stems primarily from unfiled cost reports; (13)
HCFA's inability to accurately record and track overpayments has been a
consistent weakness documented in its financial statement audits from
fiscal year (FY) 1996 through FY 1999; (14) HCFA's contractors record
and track overpayment activity for HHAs and other providers using a
variety of fragmented and overlapping computer systems but do not always
reconcile the data from these various systems; and (15) HCFA implemented
several interim measures in 1999 to improve the reliability of its
overpayment information and is planning additional improvements,
however, they could take years to implement.

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

 REPORTNUM:  HEHS/AIMD-00-132
     TITLE:  Medicare Home Health Agencies: Overpayments Are Hard to
	     Identify and Even Harder to Collect
      DATE:  04/28/2000
   SUBJECT:  Overpayments
	     Health insurance
	     Debt collection
	     Home health care services
	     Medical expense claims
	     Financial management systems
	     Government collections
	     Internal controls
	     Reporting requirements
IDENTIFIER:  Medicare Program
	     Medicare Prospective Payment System
	     Medicare Interim Home Health Payment System
	     Texas
	     HCFA Provider Overpayment Report System
	     HCFA System Tracking for Audit and Reimbursement

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GAO/HEHS/AIMD-00-132

Appendix I: Comments From the Health Care Financing Administration

24

27

Table 1: Overpayment Amounts for 15 Closed HHAs in Texas With the Largest
HFCA-Reported Overpayments 15

Figure 1: The Number of Medicare-Certified HHAs That Closed, Fiscal Years
1997-99 7

BBA Balanced Budget Act of 1997

HCFA Health Care Financing Administration

HHA home health agency

HHS Department of Health and Human Services

IPS interim payment system

PIP periodic interim payment

POR Provider Overpayment Report

PPS prospective payment system

Health, Education, and
Human Services Division

B-284164

April 28, 2000

The Honorable Pete Stark
Ranking Minority Member
Committee on Ways and Means
House of Representatives

The Honorable Lloyd Doggett
House of Representatives

Medicare, the nation's largest health care payer, provides insurance
coverage to elderly and disabled Americans. Administered by the Health Care
Financing Administration (HCFA) within the Department of Health and Human
Services (HHS), Medicare covers both inpatient and outpatient services,
including services for homebound beneficiaries. Home health care, consisting
of skilled nursing, therapy, and related services, was until 1997 one of
Medicare's fastest growing benefits. Between 1990 and 1997, spending for
home health care more than quadrupled, from $3.7 billion to $17.8 billion.
At the same time, the number of Medicare-certified home health agencies
(HHA) almost doubled--reaching 10,500--with nearly one in five located in
Texas. Since 1997, however, both the rate of growth and the number of HHAs
have declined.

The Balanced Budget Act of 1997 (BBA) was particularly important in
controlling Medicare's home health spending.1 This act mandated that HCFA
implement a new prospective payment system (PPS). Until this system is
implemented, the act requires that agencies be paid under a cost-based
interim payment system (IPS). IPS imposes limits on agencies' cost-based
payments that are intended to control both cost per visit and the average
cost per beneficiary an agency serves.

Following the passage of BBA, a large number of HHAs closed. Between October
1997 and September 1999, more than 2,350 Medicare-certified HHAs left the
program. Approximately 650 HHAs closed in Texas alone, or almost one-quarter
of all closures nationwide. Before BBA, the number of HHAs in Texas had
increased significantly, from 961 in October 1994 to 1,949 in October 1997.
Texas was also one of several states where the number of visits per user was
much higher than the national average and one of the states identified as
having higher rates of unnecessary and uncovered home health visits. HCFA
initially reported to you that the closed Texas agencies collectively owed
Medicare $627 million. HCFA subsequently revised its figure for HHAs with
the largest reported overpayment amounts after further reviewing information
contained in its reporting and tracking systems.

Because of your concerns about the potentially significant amounts that the
HHAs in Texas owed Medicare, you asked us to determine (1) whether HCFA
quickly identifies and collects overpayments from closed HHAs, (2) the
accuracy of the overpayment amounts HCFA reported for closed Texas HHAs, and
(3) whether HCFA can effectively record and track overpayments due from
closed agencies. As we discussed with your offices, we conducted work to
address your questions as part of a broader review we are conducting of
HCFA's processes for identifying and recovering Medicare overpayments.

During the assignment, we reviewed Medicare claims administration contractor
procedures for identifying and collecting overpayments from closed HHAs. We
interviewed representatives at two contractors that are responsible for
processing and paying HHA claims, including the contractor that has primary
responsibility for HHAs in Texas. We selected 15 Texas HHAs that this
contractor had served and that HCFA reported as owing the largest amounts to
Medicare when they closed. From a review of accounting and other records, we
prepared an updated estimate of the overpayment amounts the 15 HHAs owed. We
asked HCFA officials about their processes for (1) identifying and
collecting overpayments from closed HHAs and (2) recording and tracking
overpayments for both ongoing and closed HHAs. Finally, we interviewed HCFA
officials responsible for initially identifying the amounts closed HHAs in
Texas owed. We also used work from our recently issued reports as well as
work related to the Chief Financial Officers Act audit of HCFA's financial
statements that identified problems with how HCFA records and tracks
overpayments. We conducted our work between October 1999 and March 2000 in
accordance with generally accepted government auditing standards.

HCFA is slow to identify amounts closed HHAs owe Medicare and collects
little of the overpayments due from such agencies following their closure.
Because HHAs receive interim payments based on estimates of what their
allowable costs will be, Medicare claims administration contractors must
retrospectively adjust the payments after receiving and reviewing a report
of an agency's costs. Agencies have 5 months after they close to submit
their final cost report to the contractors; contractors then generally take
18 months to make a final determination of the amount, if any, a closed HHA
owes. Contractors have been discouraged from making quicker determinations
for closed agencies because doing so would disrupt timely determinations on
cost reports from operating agencies. Not surprisingly, we found that little
has been collected from the 15 closed Texas HHAs that HCFA reported as owing
the most money; closed HHAs typically have few assets or other resources to
repay Medicare. Later this year, HCFA plans to implement the home health
prospective payment system mandated by BBA, which will involve predetermined
payments for home health services. HCFA's proposed home health prospective
payment system should reduce the potential for overpayments to HHAs because
payment amounts would not be adjusted retrospectively to reflect allowable
agency costs.

Our estimate of the overpayments due from the 15 closed HHAs differs
significantly from the estimate HCFA initially reported. Using the same
definition of an overpayment as HCFA, we estimate that these agencies could
owe $68 million--one-third of HCFA's initial $209 million estimate. Two
factors accounted for nearly all the difference. First, contractor staff
made errors entering data into one of HCFA's overpayment recording and
tracking systems, such as a $4.6 million duplicate entry. Second, HCFA's
initial query of this overpayment recording and tracking system did not
specify that superseded transactions be excluded from the reported
overpayments. This type of error, for example, resulted in overstating one
agency's overpayments by $4 million. About $43 million of our $68 million
overpayment estimate stems primarily from unfiled cost reports. Although it
is likely that most of Medicare's payments were allowable, to provide
agencies an incentive to file cost reports on time HCFA deems the entire
amount paid to an agency during the reporting period to be an overpayment
when no cost report is filed.

HCFA's inability to accurately record and track overpayments has been a
consistent weakness documented in its financial statement audits from fiscal
year 1996 through fiscal year 1999. The fiscal year 1998 audit, for example,
reported that HCFA lacked an integrated financial management system to track
overpayments and their collection and that its procedures to ensure that
overpayments were valid and supported were inadequate. HCFA's contractors
record and track overpayment activity for HHAs and other providers using a
variety of fragmented and overlapping computer systems but do not always
reconcile the data from these various systems. For example, contractor staff
incorrectly keyed data from one of the contractor's systems into a HCFA
system, erroneously reporting $77 million in overpayments for one Texas HHA
in 1998. No edits are in place to identify such errors. HCFA implemented
several interim measures in 1999 to improve the reliability of its
overpayment information and is planning additional improvements; however,
they could take years to implement.

Medicare's home health benefit covers skilled nursing; physical,
occupational, and speech therapy; and home health aide services provided in
beneficiaries' homes. To qualify for home health services, a beneficiary
must be confined to his or her residence; require intermittent skilled
nursing, physical therapy, or speech therapy; and be under a written plan of
care signed by a physician. Only home health agencies that have been
certified as meeting Medicare's conditions of participation are allowed to
bill the program.2

Medicare home health expenditures increased at an average annual rate of
approximately 25 percent between 1990 and 1997--almost three times faster
than the rate for the Medicare program overall. During this period, the
number of Medicare-certified HHAs almost doubled to 10,524 at the end of
fiscal year 1997. However, as shown in figure 1, the number of HHAs that
closed has increased each year since fiscal year 1997--the year the Congress
passed BBA. By the end of fiscal year 1999, the number of HHAs had declined
approximately 20 percent, to 8,172.3

Figure 1: The Number of Medicare-Certified HHAs That Closed, Fiscal Years
1997-99

Closures are either voluntary, as when an HHA goes out of business, or
involuntary, as when the agency fails to meet Medicare's quality of care or
financial standards and is terminated from the program. Closure statistics
also include agencies that merge with another HHA and continue to serve
Medicare beneficiaries. Labeling mergers as "closures" is misleading, but
HCFA's data systems cannot distinguish mergers from closures. We reported in
May 1999 that agencies that closed after BBA was enacted shared many of the
characteristics of agencies that opened in the 1990s.4 That is, they were
disproportionately urban, free standing, and for profit; however, compared
with agencies that remained open, the closed agencies tended to be newer,
treated fewer beneficiaries, provided more services per user, and had
declining numbers of patients. We also reported that despite these closures,
beneficiaries' access to services appeared to be unaffected.

To control rapidly rising home health care expenditures while ensuring the
appropriate provision of services, PPS, mandated by BBA, is a payment system
intended to reward efficient providers and financially penalize inefficient
ones. However, in recognition of the time needed to develop PPS, coupled
with the need to control spending growth immediately, BBA prescribed IPS.
Under IPS, HHAs receive interim payments throughout the year that are based
on the projected allowable per-visit costs and, in some cases, the projected
volume of services for Medicare beneficiaries.5 After the HHA's cost
reporting year is over, agencies file cost reports specifying their costs of
serving Medicare beneficiaries. Under IPS, Medicare pays these costs up to a
cost-per-visit cap, which BBA reduced from the prior per-visit cap, and up
to an average annual per-beneficiary limit, which BBA added.6 When the
interim payments exceed or fall short of the actual costs Medicare will pay,
agencies return or receive the difference. Through the application of the
payment limits, IPS attempts to control the costs and amount of services
provided to beneficiaries. IPS will be in effect only for several more
months; the new PPS is scheduled for implementation at the beginning of
fiscal year 2001. As proposed by HCFA, this system will pay HHAs
predetermined rates for home health services.7

Five Medicare contractors, called regional home health intermediaries, are
responsible for paying home health agencies.8 To help ensure that the
interim payments are aligned with what Medicare will ultimately pay, the
five contractors periodically conduct interim rate reviews of each agency.
During these reviews, which generally take several months to complete, the
contractors compare an agency's interim payment rates with cost information
submitted by the agency and the agency's audit history. Rates may increase
or decrease as a result of the reviews, and the agency may owe Medicare
money or be owed money by Medicare. At the end of its fiscal year, or upon
closure, each agency is responsible for submitting a report of its costs to
the Medicare contractor. HCFA requires its contractors to conduct several
types of cost report reviews to determine whether the agency has been
overpaid or underpaid for the reporting period. These reviews also take
months to complete. Once a contractor has identified an overpayment, it is
responsible for notifying the agency and requesting immediate payment. If
payment is not made within 15 days, the contractor can withhold payments to
the agency until the overpayment has been repaid; interest also accrues on
any balances unpaid longer than 30 days. If a contractor is unable to
collect all outstanding overpayments from an HHA, the contractor should
refer the debt to HCFA for collection. If HCFA is unable to make the
collection, it is required under the Debt Collection Improvement Act of 1996
to transfer debt that is 180 days delinquent to the Department of the
Treasury or a designated debt collection center.

Unless HHAs' interim payment rates were reduced, BBA payment changes created
the potential for large overpayments to HHAs in Texas and elsewhere. First,
IPS resulted in new payment limits that substantially lowered payments for
many HHAs. Agencies in Texas were particularly affected because they
provided more visits per user on average than did HHAs in most other states
and, thus, were under greater pressure to reduce their per-patient costs.
Agencies can take several steps to adjust costs to the new limits. These
include balancing their mix of low-cost and high-cost patients, reducing
their costs overall, increasing the proportion of low-cost patients treated,
or doing some combination of these activities. By not taking such steps,
agencies increased their potential to be overpaid following the
implementation of the new IPS rates.

Second, information on the new payment limits was not available for months
following the effective date of IPS, and HHAs continued to be paid at the
earlier, and in some cases higher, interim rates. Specifically, under BBA,
HCFA was required to publish the per-visit limits by January 1, 1998, and
the new per-beneficiary limits by April 1, 1998, which HCFA did. However,
the limits took effect on October 1, 1997. Only after these notices were
published could contractors begin recalculating each agency's interim
payments and then actually adjust them. Some HHAs incurred large
overpayments between October 1997 and the date when the agencies' interim
rates were adjusted. Some of these agencies also closed because they were
unable to repay their Medicare debt.

Identifying amounts closed HHAs owe under IPS is a slow process that reduces
the potential for collecting overpayments. Contractor overpayment
determinations generally depend on the receipt of a cost report, yet HHAs
have up to 5 months to file such reports after they close. And it is not
until about 18 months following the receipt of the cost report that
contractors generally make final determinations of the amounts, if any, that
closed HHAs owe. Further, contractors are discouraged from making these
final overpayment or underpayment determinations more quickly for closed
agencies because doing so would affect their determinations on cost reports
from operating agencies. We found that once an HHA closes, little of an
overpayment is collected, because closed agencies generally lack cash and
other assets to repay the debt. Implementing PPS should virtually eliminate
overpayments except in cases of fraud or abuse. As proposed by HCFA, this
new payment method will pay a predetermined amount per unit of service,
adjusted for patient characteristics that affect the cost of care, and will
not involve retrospective reviews of an agency's interim payments and costs.
Overpayments should result only from HHAs' improperly claiming payments for
patients, not from the amounts of payment per patient.

Once an agency closes, it has 5 months to submit its final cost report--the
same time afforded operating HHAs to submit cost reports for the preceding
fiscal year.9 Contractor representatives told us that after 5 months,
responsible officials from closed HHAs are often no longer available to
provide contractor staff with access to necessary financial documents or to
answer questions. Moreover, during the 5-month period, closed HHAs continue
to be paid for services that were provided before they closed, unless the
agencies had outstanding overpayments from earlier years' activities. In
fact, some Medicare payments received after closure may subsequently be
determined to be overpayments. For example, one of the 15 closed Texas HHAs
was paid $669,000 after it closed but did not file a cost report covering
this payment. When an agency fails to file a cost report, all the payments
made to it during the reporting period are deemed an overpayment. As of
December 1999, the contractor had recouped $70,000.

Once a cost report is received, overpayments can be identified at any of
several stages of the contractor's review. For example, the contractor may
find that the HHA cost report, as filed, indicates that the agency has been
overpaid. Also, cost reports may undergo a desk review by the contractor,
generally within 60 days of receipt. During these limited reviews,
contractors may identify overpayments from the submitted documentation.
Contractors also identify overpayments during cost report audits, but few
cost reports from either closed or ongoing HHAs undergo this type of review.
In fiscal year 2000, for example, HCFA expects contractors to audit about
12.5 percent of all HHA cost reports.10 HHAs are selected for audit on the
basis of such factors as their total reimbursement and average number of
visits per patient. Some are audited randomly. Given HCFA's limited audit
resources and closed HHAs' historical inability to repay debt, it is
understandable that HCFA has not concentrated its audit efforts on closed
agencies.

All cost reports go through a settlement process in which contractors make a
final determination of how much Medicare reimbursement the HHA has earned
and whether Medicare or the agency is owed money. However, it is generally
not until about 18 months after contractors receive the cost report that
final settlement occurs. HCFA does not require contractors to settle cost
reports from closed HHAs more quickly. Moreover, contractors'
representatives said that they are discouraged from doing so because it
disrupts the order in which reports for other agencies are settled. That is,
settling a closed HHA's cost report more quickly delays the settlement of
other cost reports, which is inconsistent with HCFA's goals for settling all
cost reports in a timely manner.

Contractors may also identify overpayments by conducting an interim rate
review after an agency closes. During these reviews, contractors compare the
agency's interim reimbursement rates with previous cost information the
agency has submitted, Medicare payments, the IPS per-visit and
per-beneficiary limits, and the agency's audit history. Decisions on whether
to conduct these reviews depend on factors such as the agency's size,
dollars at risk, and the time since the contractor's last interim rate
review of the agency. The reviews may result in revisions to the agency's
interim payments and determinations of underpayments or overpayments. These
reviews, too, take time to conduct. We found that the contractor conducted
such reviews of 5 of the 15 closed HHAs in Texas that we reviewed and that
they were performed between 3 and 5 months after closure. Overpayments
ranged from $20,000 to $362,000.

Closed HHAs

In addition to the time lags built into the process for identifying
overpayments to closed HHAs, we found that the contractor did not always
follow the specified procedures, allowing overpayments from the Texas HHAs
to remain undetected for years without making efforts to collect them. This
also resulted in the agencies owing more to Medicare when they closed. For
example, one of the closed HHAs did not file its 1994, 1995, and 1996 cost
reports until July 1997. They were 30, 16, and 4 months late, respectively.
The agency was overpaid each year, the overpayments for the 3 years totaling
$3.5 million. In each case of late cost report filing, the contractor should
first have notified the agency that it would suspend payments until it
received the cost report. Then, if the agency still did not file its cost
report, the contractor should have recorded the entire amount paid to the
agency during the reporting period as an overpayment and transferred
responsibility for collecting the overpayment to HCFA. In this case, the
contractor did neither. It was not until September 1999--more than 6 months
after the agency closed--that the contractor settled the three cost reports
and asked the HHA to repay Medicare.

We also found several cases in which the contractor did not conduct timely
cost report settlements. In one case, for example, a Texas HHA filed its
1995 cost report in January 1996. The contractor should have settled this
report in 1997. However, the actual cost report settlement that identified a
$171,000 overpayment did not occur until 1999, almost 2 years late and 2
months after the agency closed. In another case, the contractor received an
agency's 1995 cost report in May 1996. The settlement that should have
occurred by 1998 did not take place until late 1999, by which time the
agency had been closed for almost a year. The agency owed Medicare $15,500
from this settlement.

Apparently, the first case discussed was one of the few in which the
contractor did not conduct timely cost report settlements in fiscal year
1997. HCFA provided information stating that the contractor was timely in
settling nearly 95 percent of the cost reports due for settlement that
fiscal year. In fiscal year 1998, however, HCFA did not evaluate the
contractor's performance in this area, in part because the contractor's
workload nearly doubled from absorbing the workload of a different
contractor that left Medicare. In fiscal year 1999, the contractor was
timely in settling approximately 75 percent of the cost reports received;
HCFA attributed the reduction to its cuts in the contractor's budget.

Effective HCFA oversight to ensure that its contractors are requiring timely
submission of HHA cost reports, and subsequently settling them in a timely
way, is critical to sound program management in general and, in particular,
to reducing the amounts HHAs owe Medicare when they close. However, as we
noted in an earlier report, HCFA's oversight process has weaknesses that
impede its review of contractors' performance.11 Although HCFA requires
contractors to certify annually that they have sound internal management
controls over all their Medicare operations, we found that it rarely checks
to ensure that the controls are working as required.

Once an HHA closes, there is little likelihood of HCFA's collecting all the
outstanding overpayments that cost report reviews and interim rate
adjustments have identified. Some HHAs rely almost exclusively on Medicare
for their revenue and have few assets. Without other revenue streams or
assets, HHAs may not have funds available to repay Medicare. For the 15
closed Texas HHAs that we reviewed, we found that the contractor had
collected approximately $5.3 million, or just 7 percent of the total
overpayments owed. For example, one of the Texas agencies closed in January
1998 and had outstanding overpayments for 1998 of $209,150; none of this
debt had been collected by December 1999. Another of the Texas HHAs closed
in 1998 with overpayments from earlier years of $3.7 million, of which only
about $200,000 had been collected.

Bankruptcy can further complicate overpayment collection efforts and reduce
potential collections. Once an HHA has filed for bankruptcy, the
contractor's collection activities are subject to the review and approval of
the bankruptcy court. Whether any of the bankrupt agency's Medicare
overpayments are eventually repaid depends on the results of the bankruptcy
proceedings. Of the 15 closed HHAs in Texas, 3 were in bankruptcy as of
December 1999.

HCFA reported that 642 Medicare-certified HHAs in Texas closed between
October 1997 and July 1999 and that these agencies collectively owed
Medicare $627 million.12 HCFA generated its overpayment amounts from its
Provider Overpayment Report (POR) system, which records and tracks
overpayments from HHAs and other types of providers, both ongoing and
closed. Our analysis showed that HCFA significantly overstated the amounts
that the 15 closed Texas HHAs with the largest reported overpayments owed.
Additionally, we found that almost two-thirds of the overpayments resulted
from unfiled cost reports. To provide an incentive for HHAs to file timely
cost reports, HCFA deems the entire amount paid to the agency during the
reporting period to be an overpayment when cost reports are overdue. HCFA
knows that it is likely that at least some of the payments were appropriate
and allowable.

As is shown in table 1, HCFA reported that the 15 closed Texas agencies owed
Medicare about $209 million, or one-third of the overpayments due from all
the closed Texas HHAs.13 However, we estimate that these HHAs owed $68
million, or one-third what HCFA originally reported.

Table 1: Overpayment Amounts for 15 Closed HHAs in Texas With the Largest
HFCA-Reported Overpayments

 HHA   HCFA's reported    GAO's estimated       Primary reason for
       overpayment        overpayment           difference

 1     $21,939,652        $18,341,695           HCFA amount includes
                                                contractor data entry error

 2     6,145,572          1,381,737             HCFA extracted POR data
                                                incorrectly

 3     9,533,916          1,494,121             HCFA extracted POR data
                                                incorrectly

 4     5,749,580          3,688,232             HCFA extracted POR data
                                                incorrectly

 5     5,983,577          563,908               HCFA extracted POR data
                                                incorrectly

 6     5,053,679          599,598               HCFA extracted POR data
                                                incorrectly

 7     79,247,220         2,365,262             HCFA amount includes
                                                contractor data entry error

 8     16,853,645         2,356,325             HCFA extracted POR data
                                                incorrectly

 9     8,473,051          2,738,402             HCFA amount includes
                                                contractor data entry error

 10    9,567,131          126,379               HCFA extracted POR data
                                                incorrectly
                                                HCFA overpayment amount
 11    8,077,040          5,943,379             exceeds Medicare payment to
                                                HHA for the year

 12    6,697,425          5,334,822             HCFA amount includes
                                                contractor data entry error

 13    6,722,368          9,139,407             HCFA amount includes
                                                contractor data entry error

 14    6,404,648          7,319,658             HCFA amount includes
                                                contractor data entry error

 15    12,319,664         6,555,153             HCFA extracted POR data
                                                incorrectly
 Total $208,768,168       $67,948,078

Most of these overpayments are for services provided in 1996, 1997, and
1998; however, some are for the costs of home health services provided as
far back as 1994. For example, HHA 12 did not file its 1994 and 1995 cost
reports until July 1997. In September 1999, the contractor settled the 1994
cost report and determined that the agency was overpaid approximately
$474,000 and that it owed an additional $158,000 in penalties.14 The
contractor also settled the 1995 cost report in September 1999 and
identified a $955,000 overpayment plus $169,000 in penalties. This same
agency had additional overpayments of approximately $3.5 million, including
penalties and interest, related to its fiscal year 1996, 1997, and 1998
activities. This amount included $1.7 million related to overpayments from a
September 1999 desk review of the agency's 1996 cost report and $1.6 million
related to unfiled cost reports for 1997 and 1998.

We found that three primary types of errors explain nearly all the
difference between our overpayment estimate of approximately $68 million and
the approximately $209 million that HCFA reported.15

ï¿½ Contractors' errors entering data into the POR system, such as keypunch
errors, failure to enter appropriate data, and duplicate entries, totaled
about $100 million. One keypunch mistake alone for HHA 7 resulted in an
erroneous reporting of a $76.9 million overpayment for 1998. In another
case, the contractor entered a $4.6 million overpayment amount twice for the
same HHA.

ï¿½ How HCFA extracted data from the POR system accounted for another $50
million in errors. The POR system consists of two parts. One is the Master
File that contains current outstanding overpayment activity for a provider.
For example, the Master File shows that HHA 10 has an outstanding
overpayment of approximately $145,000 due from the settlement of its 1998
cost report. The other is the History File that contains information on all
overpayment transactions associated with the provider and thus serves as an
audit trail. For example, this file shows that HHA 10 initially failed to
file its 1998 cost report, resulting in an overpayment of approximately $4
million. Because HCFA extracted both Master File and History File
information for each of the closed Texas HHAs, it overstated the amounts due
Medicare by including information from the History File that had been
superseded. In the case of HHA 10, HCFA overstated the agency's fiscal year
1998 overpayments by $4 million.

ï¿½ A third type of error relates to the data contained in the POR system. POR
data are not reconciled against information contained in other HCFA data
systems, such as the System Tracking for Audit and Reimbursement that
reports information on Medicare's total annual payments to a provider.
Because there is no reconciliation among the different systems, the POR
system may indicate that an HHA's overpayments for a year, exclusive of
penalties and interest, exceeded its Medicare payments--an impossibility.
For example, HHA 11 received $2.8 million in total Medicare payments during
its fiscal year 1998. Yet HCFA reported that the HHA's overpayments that
year totaled $5.1 million. HCFA's overpayment figure included $2.3 million
because of an interim rate adjustment and $2.8 million because of an unfiled
cost report.16 We found $7 million in these types of errors.

Our $68 million overpayment estimate is net of about $5.3 million--7
percent--collected by withholding payments to the agencies or by extended
repayment arrangements.17 More could have been recouped had the contractor
not made mistakes. For example, HHA 15 had agreed to a 12-month extended
repayment plan related to a $251,500 1996 overpayment but defaulted after
about 6 months. The contractor should have put the agency on 100 percent
withholding 2 months after the agency stopped making payments. In this case,
however, the contractor did not begin withholding until 5 months after the
agency's payments stopped. During this delay, the agency received more than
$800,000 from Medicare, part of which could have been used to repay the
remaining $83,800 due from the agency's outstanding 1996 overpayment.

We found that about $43 million of our $68 million estimate was the result
of documentation problems, primarily unfiled cost reports. In these cases,
it is likely that at least some of, or potentially all, Medicare's payments
were appropriate and allowable; this would result in reducing the amounts
the 15 agencies owed. However, while HCFA could likely estimate whether an
agency was overpaid or underpaid for the reporting period, given the
agency's past history, without a cost report the entire amount paid to an
HHA during the year is deemed an overpayment. The remaining $25 million in
estimated overpayments reflects amounts determined through settlement of
cost reports, interim payment adjustments, or other audit activities.

Overpayments

It is not surprising that HCFA reported inaccurate overpayment information
on closed HHAs in Texas, given its longstanding and systemic problems
accounting for overpayments--its accounts receivable.18 Inaccurate accounts
receivable prevented HCFA from obtaining an unqualified opinion on the
accuracy of its annual financial statements until 1999.19 Contractors track
and report overpayment activity for HHAs and other providers by means of a
variety of fragmented and overlapping systems but are unable to reconcile
the data in these systems--resulting in reporting errors. While HCFA
implemented several interim measures in 1999 to improve the reliability and
completeness of its accounts receivable information, permanent solutions,
such as an integrated accounts receivable tracking and reporting system,
will not be fully implemented until 2001 at the earliest.

Ineffective management of Medicare accounts receivable has been noted as a
consistent problem in HCFA's financial statement audits for fiscal years
1996 through 1999.20 These audits identified numerous recurring control
weaknesses and systems problems with Medicare's accounts receivable. The
fiscal year 1998 audit, for example, disclosed deficiencies in nearly all
facets of HCFA's accounts receivable activity, including the lack of an
integrated financial management system to track overpayments and their
collections as well as inadequate procedures for ensuring that receivables
were valid and supported. In 1999, auditors found that despite significant
improvements in contractors' recordkeeping, controls over accounts
receivable continued to be a material weakness.21

Because HCFA does not have a single integrated system for tracking and
reporting receivables, HCFA and its contractors use several fragmented and
overlapping systems to track overpayment activity. For example, contractors
track HHA overpayments on manual ledger records and in their claims
processing systems and must manually enter information into HCFA's POR
system. Using different, nonintegrated systems increases the risk of errors
and misstatements as we found with overpayments HCFA reported on the 15
closed Texas HHAs. In earlier audits of HCFA's financial statements,
auditors found that reconciliations among the recording and tracking systems
were not always done or were not done properly. In some cases, the different
systems could not be reconciled, either with one another or with the
contractors' quarterly activity reports. During our review, for example, we
found that the contractor did not reconcile its records with the POR system.
This allowed an erroneous report of a $76.9 million overpayment to remain in
POR even though the contractor's own records contained the correct
overpayment amount due from the HHA.

Likewise, HCFA does not reconcile the POR system with other HCFA reporting
systems, such as the System Tracking for Audit and Reimbursement, as an
additional quality control check. We found several instances in which,
because the two systems were not reconciled, HCFA reported an HHA's
overpayment to be greater than the HHA's total Medicare payments for a year.
In one case, for example, HCFA reported that the agency owed $12 million for
its fiscal year 1996 activities. However, Medicare payments to the agency
that year totaled $7 million.

In 1999, HCFA initiated several actions to improve the accuracy and
reliability of the receivable activity and balances reported by its
contractors, including HHA receivables. First, during 1999, HCFA entered
into a reimbursable interagency agreement with the HHS Office of Inspector
General to perform detailed reviews of Medicare receivable balances and
activity at HCFA's central and regional offices. Second, HCFA contracted
with outside consultants to review internal controls and accounts receivable
activity at its 15 largest contractors. Third, HCFA issued new instructions
to its regional offices requiring detailed reviews of receivable balances at
all contractors that were not included in the consultant study. Fourth, HCFA
contracted with other outside consultants to review internal controls at 26
contractors and recommend any needed improvements. And last, HCFA directed
contractors to review their Medicare receivables and recommend items for
possible write-off.

While HCFA's recent write-off efforts have made receivable balances more
reliable in the short term, they do not address the underlying causes for
the weaknesses found in past audits. More permanent solutions to HCFA's
accounts receivable problems could take years to implement. HCFA has long
recognized that it needs to replace its fragmented accounts receivable
tracking and reporting systems with a single integrated system. However,
efforts to develop new systems were delayed by more immediate needs, such as
fixing potential year 2000 computer glitches. HCFA officials told us that
developing new financial management systems is now one of the agency's
highest priorities.

One proposed system, called the Medicare Accounts Receivable System, would
replace the POR system. According to HCFA officials, the new receivables
system will be fully automated and will take overpayment information
directly from the contractors' claims processing systems. It will also
interact with other new financial management systems being developed,
including an automated Medicare general ledger system to better track and
report contractors' financial activity. HCFA hopes to begin implementing the
new Medicare Accounts Receivable System in 2001.

Under IPS, HHAs receive interim cost-based payments that contractors must
adjust retrospectively through activities such as interim rate adjustments,
desk reviews, audits, and final settlements. These activities may or may not
identify overpayments but are usually not performed for months after an
agency closes. There is little likelihood of collecting significant portions
of a closed agency's overpayments because closed agencies have few, if any,
non-Medicare resources or other assets with which to repay their Medicare
debts. The fact that HCFA has collected only about 7 percent of the
overpayments due from the 15 closed Texas HHAs we reviewed attests to this.
It is important to note, however, that the large overpayments to some HHAs
under IPS is a one-time situation related to the change in Medicare's
payment method; overpayment problems for the same reasons and of this
magnitude are unlikely under PPS as proposed by HCFA.

HCFA's initial calculation of what closed HHAs in Texas owed was
significantly overstated because HCFA's POR system for tracking and
reporting overpayments is unreliable and inaccurate. Not only does the POR
system lack edits to check for data entry errors but HCFA does not reconcile
POR data with other HCFA data systems, such as the System Tracking for Audit
and Reimbursement. This has resulted in HCFA's reporting that some providers
owed more money than Medicare actually paid them in a year. While we
estimate that the 15 closed Texas HHAs owe $68 million, two-thirds of this
amount, or $43 million, stems primarily from unfiled cost reports. It is
likely that at least some of the $43 million is allowable and therefore not
an overpayment, but without the cost reports, the entire amount paid to the
agency during the cost report period is deemed an overpayment.

Weaknesses with the POR system reflect HCFA's longstanding and systemic
accounts receivable problems. HCFA has taken interim steps to address these
issues and plans to begin phasing in a single, integrated accounting system
to report and track overpayments in 2001. While this system should help
overcome the problems HCFA has with recording and tracking overpayments, its
effectiveness will not be known until it is operational.

HCFA commented on a draft of this report and generally agreed with its
contents and conclusions.22 (HCFA's letter is printed in appendix I.) In its
comments, HCFA emphasized its commitment to strengthening Medicare's
financial controls and systems and to bringing the agency into accord with
standard government accounting practices. HCFA acknowledged weaknesses in
the POR system that limit its effectiveness as a managerial tool and
outlined both current and future steps to correct these weaknesses. Chief
among these steps is its planned implementation of the Medicare Accounts
Receivable System in 2001. HCFA also noted that it is considering using a
commercial off-the-shelf product as a short-term remedy to some of the
problems with the POR system. The steps HCFA outlined, if properly
implemented, would improve its current accounts receivable systems and could
help manage and safeguard HCFA's programs.

HCFA agreed with our portrayal of the difficulties contractors face in
trying to quickly identify and collect overpayments from closed HHAs. In its
comments, HCFA stated that when HCFA does receive notice of an agency's
intent to leave the program, the contractors determine quickly whether a
provider has outstanding overpayments or the potential for overpayments and
begin withholding any future payments to recover the money. This is a more
positive picture than we found. As our report indicates, the contractor
generally did not make final determinations of the amounts owed until almost
2 years after HHAs closed, and HCFA does not require contractors to settle
cost reports from closed HHAs more quickly than from operating HHAs. While
contractors can conduct interim reviews to estimate any underpayments or
overpayments, for only 5 of the 15 cases we reviewed was an interim review
conducted--all from 3 to 5 months after closure.

HCFA emphasized in its comments that moving to a prospective payment system
for HHAs would help resolve HHA overpayment issues currently confronting
HCFA and its contractors. Strengthening financial controls and modernizing
Medicare's accounting systems would also help resolve financial management
problems. Finally, HCFA affirmed its commitment to protecting the home
health benefit for persons who qualify for it while protecting the financial
integrity of the Medicare program.

As we arranged with your offices, unless you publicly announce the report's
contents earlier, we plan no further distribution of it until 30 days from
the date of this letter. We will then send copies of the report to the
Secretary of Health and Human Services, the Administrator of HCFA,
appropriate congressional committees, and others who are interested. We will
also make copies available to others on request.

If you or your staff have any questions, please call me at (312) 220-7767 or
Sheila Avruch, Assistant Director, at (202) 512-7277. Other major
contributors to this report include Robert Dee, Anna Kelley, Wayne Marsh,
Frank Putallaz, and Suzanne Rubins.

Leslie G. Aronovitz
Associate Director, Health Financing and
Public Health Issues

Comments From the Health Care Financing Administration

Related GAO Products

Medicare Financial Management: Further Improvements Needed to Establish
Adequate Financial Control and Accountability ( GAO/AIMD-00-66, Mar. 15,
2000).

Medicare Home Health Agencies: Closures Continue, With Little Evidence
Beneficiary Access Is Impaired ( GAO/HEHS-99-120, May 26, 1999).

Medicare Home Health Agencies: Role of Surety Bonds in Increasing Scrutiny
and Reducing Overpayments (GAO/HEHS-99-23, Jan. 29, 1999 ).

Medicare Home Health Benefit: Impact of Interim Payment System and Agency
Closures on Access to Services ( GAO/HEHS-98-238, Sept. 9, 1998).

Medicare: Interim Payment System for Home Health Agencies (
GAO/T-HEHS-98-234, Aug. 6, 1998).

Medicare Home Health Benefit: Congressional and HCFA Actions Begin to
Address Chronic Oversight Weaknesses ( GAO/T-HEHS-98-117, Mar. 19, 1998).

Medicare: Improper Activities by Med-Delta Home Health ( GAO/T-OSI-98-6,
Mar. 19, 1998; GAO/OSI-98-5, Mar. 12, 1998 ).

Medicare Home Health Agencies: Certification Process Ineffective in
Excluding Problem Agencies ( GAO/HEHS-98-29, Dec. 16, 1997).

Medicare Home Health: Success of Balanced Budget Act Cost Controls Depends
on Effective and Timely Implementation ( GAO/T-HEHS-98-41, Oct. 29, 1997).

Medicare Fraud and Abuse: Summary and Analysis of Reforms in the Health
Insurance Portability and Accountability Act of 1996 and the Balanced Budget
Act of 1997 ( GAO/HEHS-98-18R, Oct. 9, 1997).

Medicare: Need to Hold Home Health Agencies More Accountable for
Inappropriate Billings ( GAO/HEHS-97-108, June 13, 1997).

Medicare: Home Health Cost Growth and Administration's Proposal for
Prospective Payment ( GAO/T-HEHS-97-92, Mar. 5, 1997).

Medicare: Home Health Utilization Expands While Program Controls Deteriorate
( GAO/HEHS-96-16, Mar. 27, 1996).

(201004)

Figure 1: The Number of Medicare-Certified HHAs That Closed, Fiscal Years
1997-99 7

Table 1: Overpayment Amounts for 15 Closed HHAs in Texas With the Largest
HFCA-Reported Overpayments 15
  

1. P.L. 105-33 sect.sect. 4601-4616

2. HCFA administers its certification process through state survey agencies,
usually components of state health departments, that assess whether HHAs
deliver quality care and have the appropriate staff, policies and
procedures, medical records, and operational practices to deliver quality
care.

3. During the same 3-year period, there were 1,560 new Medicare-certified
HHAs.

4. Medicare Home Health Agencies: Closures Continue With Little Evidence
Beneficiary Access Is Impaired (GAO/HEHS-99-120, May 26, 1999 ).

5. A small minority of HHAs are paid through a method known as "periodic
interim payments," or PIP, in which level payments are made to an HHA every
2 weeks, based on estimated annual visits and Medicare allowable costs.
Medicare contractors are responsible for reviewing an HHA's PIP payments
every quarter to ensure that the levels are appropriate to the volume of
services being provided.

6. Under IPS, the per-visit cap was based on 105 percent of the national
median per-visit cost. IPS was revised by sect.sect.5101 (b) of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999 (P.L.
105-277), which increased the per-visit cap to 106 percent of the national
median cost.

7. 64 Fed. Reg. 58,133 (Oct. 28, 1999).

8. Throughout this report, we refer to regional home health intermediaries
as contractors.

9. Previously, HHAs had 45 days after they closed to submit their final cost
reports. A HCFA official told us that HCFA changed this requirement because
HHAs complained that 45 days did not give them enough time to make their
financial records final and prepare the final cost report.

10. The 12.5 percent audit requirement pertains to free-standing HHAs.

11. Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).

12. This figure includes interest accrued on unpaid overpayments.

13. Most of the 15 terminated agencies were new entrants to the home health
industry. Only two were Medicare providers before 1991. Medicare payments to
the 15 HHAs for fiscal year 1997 ranged from $1.4 million to $12.8 million.

14. HCFA imposes a penalty for each month that a cost report is filed late.

15. These errors resulted in both increases and decreases to HCFA's original
overpayment amount. Because of this, the total value of the
errors--approximately $159 million--exceeds the $141 difference between our
overpayment estimate and what HCFA reported.

16. While an agency's overpayments for a year cannot exceed its total
Medicare payments for that year, POR data represent valid Medicare
overpayments. In the case of HHA 11, it is appropriate for POR to record
both types of overpayments for fiscal year 1998.

17. HCFA's $209 million overpayment estimate is also net of collections.

18. Overpayments are classified for accounting purposes as accounts
receivable.

19. In 1997 and 1998, HCFA received a qualified opinion on its financial
statements, in part because of deficiencies in accounts receivable
activities at Medicare contractors. Auditors did not express an opinion on
HCFA's 1996 financial statements for several reasons, including contractors'
inability to support their accounts receivable.

20. The Government Management Reform Act of 1994 requires annual financial
statements for the 24 major federal agencies and the U.S. government as a
whole. HCFA has issued audited financial statements for fiscal years
1996-99.

21. A material weakness is a reportable condition in which the design or
operation of one or more of the internal control components does not reduce
to a relatively low level of risk the errors or irregularities in the
amounts that would be material in relation to the financial statements being
audited.

22. HCFA also provided technical comments that we incorporated where
appropriate.
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