Medicare: HCFA Could Do More to Identify and Collect Overpayments (Letter
Report, 09/07/2000, GAO/HEHS/AIMD-00-304).

In fiscal year 1999, contractors collected $8.7 billion, or about 70
percent of the $12.6 billion in Medicare overpayments. HCFA and its
contractors used identification techniques, such as medical reviews, to
ensure service appropriateness, interim payments review and audits of
cost reports for providers that are paid on the basis of their costs,
and reviews to determine if another entity has primary payment
responsibility. However, HCFA lacks information to measure the
effectiveness of contractors' overpayment identification activities.
Recovery auditors use identification techniques similar to those already
in use. GAO suggests that Congress consider increasing HCFA's funding to
bolster its postpayment review program. Contractors transfer
overpayments they cannot collect to HCFA, which has had limited
collection success. HCFA officials said that they do not have the
resources needed to pursue collection on the large volume of eligible
debt. GAO recommends that HCFA immediately refer overpayments as they
become more than 180 days delinquent to a designated debt collection
center or to the Treasury Department for collection. HCFA has already
recognized that specialized contractors improve overpayment
identification; it now has 12 firms to assist in its program safeguard
efforts. HCFA is resolving complex challenges about how to compensate
the firms, handle coordination and privacy issues, and oversee the
firms' activities.

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

 REPORTNUM:  HEHS/AIMD-00-304
     TITLE:  Medicare: HCFA Could Do More to Identify and Collect
	     Overpayments
      DATE:  09/07/2000
   SUBJECT:  Debt collection
	     Health insurance
	     Health insurance cost control
	     Claims processing
	     Overpayments
	     Government collections
	     Internal controls
	     Contract oversight
IDENTIFIER:  Medicare Integrity Program
	     Medicare Secondary Payer Program
	     Medicare Program

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GAO/HEHS/AIMD-00-304

Appendix I: Comments From the Health Care Financing
Administration

38

Appendix II: GAO Contacts and Staff Acknowledgments

43

Table 1: Medicare Accounts Receivable 22

Table 2: Medicare Claims Administration Contractors' New Accounts Receivable
and Collections 22

DCIA Debt Collection Improvement Act of 1996

DRG diagnosis-related group

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HHA home health agency

HIPAA Health Insurance Portability and Accountability Act of 1996

IRS Internal Revenue Service

MIP Medicare Integrity Program

MSP Medicare secondary payer

OIG HHS Office of Inspector General

PRO peer review organization

PSC program safeguard contractor

SSA Social Security Administration

Health, Education,
and Human Services Division

B-283654

September 7, 2000

The Honorable Dan Burton
Chairman
House Committee on Government Reform
House of Representatives

Dear Mr. Chairman:

The Health Care Financing Administration (HCFA), within the Department of
Health and Human Services (HHS), is the nation's largest health insurer. It
administers the Medicare program, which paid approximately $200 billion in
total benefits and covered nearly 40 million beneficiaries in fiscal year
1999. The vast majority of beneficiaries--about 85 percent--chose to receive
their benefits under the traditional fee-for-service program.1 Although most
participating providers comply with Medicare billing rules, the inadvertent
errors or intentional misrepresentations that do occur result in
overpayments?money owed back to Medicare. In its fiscal year 1999 financial
statements, HCFA's overpayments that had not yet been recovered?classified
as accounts receivable for accounting purposes?totaled $7.3 billion at the
end of the fiscal year.

Recovery auditing is a service conducted by private firms to identify and
sometimes collect overpayments for clients such as health insurance
companies. In the second session of the 106th Congress, the House of
Representatives passed H.R. 1827, the Government Waste Corrections Act of
2000, which you sponsored, requiring use of recovery auditing for federal
programs that directly purchase goods and services. Because Medicare's
fee-for-service program pays claims to providers and suppliers for goods and
services provided to beneficiaries, Medicare is excluded from the bill.
Because of your concerns regarding Medicare overpayments, you asked us to
answer the following questions: (1) How do HCFA and its contractors identify
potential overpayments, and would techniques used by recovery auditors
improve overpayment identification? (2) How well do HCFA and its contractors
collect overpayments once they are identified, and would the services of
recovery auditors improve HCFA's collection efforts?

(3) What challenges would HCFA face if it were required to hire recovery
auditors to augment its overpayment identification and collection
activities?

To address these questions, we reviewed HCFA policies and procedures, and
examined its current and planned efforts to identify and collect
overpayments. We also met with representatives from four HCFA contractors
that process and pay claims and take steps to minimize overpayment losses.
We discussed with these contractors how they identified and collected
Medicare overpayments. We also obtained and analyzed financial reports from
HCFA and the four contractors and examined HCFA's implementation of the Debt
Collection Improvement Act of 1996 (DCIA). We also met with representatives
of several recovery audit firms and several of their clients to determine if
the techniques they use might be applicable to Medicare.

Finally, to determine the implementation challenges HCFA might face if it
were to use the services of recovery auditors, we interviewed HCFA officials
and contractor, recovery auditor, and medical association representatives.
We also reviewed the HHS Office of Inspector General's (OIG) and our prior
work. We performed our work from September 1999 to July 2000 in accordance
with generally accepted government auditing standards.

Despite HCFA's efforts to pay claims correctly in its $167 billion
fee-for-service Medicare program, several billions of dollars in Medicare
overpayments occur each year. It is therefore critical that HCFA undertake
effective postpayment activities to identify overpayments expeditiously.
HCFA's claims administration contractors use several postpayment techniques
to identify overpayments. These include medical review to ensure
appropriateness of services, reviews of interim payments and audits of cost
reports for providers that are paid on the basis of their costs, and reviews
to determine if another entity besides Medicare has primary payment
responsibility. The contractors identify and collect billions of dollars
through these activities, but how well each contractor performs them is not
clear because HCFA currently lacks the information it needs to measure the
effectiveness of contractors' overpayment identification activities. While
recovery auditors may also save money for clients, such as state Medicaid
agencies, by identifying overpayments, the identification techniques they
use are generally similar to those already used by HCFA and its contractors.
This does not mean that HCFA could not benefit from a stronger focus on
specific postpayment activities. However, doing so may require additional
program safeguard funding so as not to shift funds away from HCFA's other
efforts, such as prepayment review to prevent overpayments. The Congress has
given HCFA assured funding for program safeguard activities; however, the
funding level is about one-third less (on a per-claim basis) than it was in
1989 and, although it will increase until 2003, it will only keep pace with
expected growth in Medicare expenditures. For fiscal year 1999, based on
HCFA estimates, the Medicare Integrity Program saved the Medicare program
more than $17 for each dollar spent--about 55 percent from prepayment
activities and the rest from postpayment activities. Because these
activities can bring a positive return, GAO suggests that the Congress
consider increasing HCFA's funding to bolster its postpayment review
program.

Overpayment collections, made principally by the claims administration
contractors, totaled $8.7 billion during fiscal year 1999, or about 70
percent of the $12.6 billion in overpayments identified during the year.
Different factors affect contractors' ability to collect overpayments,
including the type of overpayment, the promptness with which it is
identified, and the financial condition of the overpaid provider.
Contractors transfer overpayments they are unable to collect to HCFA, but
HCFA's success in collecting them is limited. HCFA could increase
collections if it fully implemented DCIA, which generally requires that
debts delinquent over 180 days be transferred to the Department of the
Treasury and, in certain cases, a Treasury-designated debt collection
center. Treasury and the Treasury-designated debt collection center at HHS
conduct varied collection activities, which include contracting with private
companies to collect debt, such as certain Medicare overpayments. Treasury's
standards require the use of techniques similar to those used by recovery
auditors. HCFA has two pilot projects under way to transfer some delinquent
overpayments to Treasury's designated debt collection center, but the
projects are limited to large-value, aged overpayments, rather than all
eligible delinquent debt. HCFA plans to expand its pilot projects from some
to all of its claims administration contractors. However, it has established
minimum thresholds for referrals for collection that are higher than the
Treasury and debt collection center will accept because HCFA says that it
does not have the resources needed to pursue collection on the large volume
of debt below its thresholds. To promote improved collections, GAO
recommends that HCFA fully implement DCIA by immediately referring
overpayments as they become over 180 days delinquent to the designated debt
collection center to be collected or, where appropriate, to be referred to
Treasury for collection, while continuing efforts to clear its backlog of
aged receivables.

HCFA and its contractors are using techniques similar to recovery auditing
for identification and collection of overpayments. In addition, HCFA has
already recognized that the use of specialized contractors to improve
overpayment identification may be beneficial and is currently contracting
with such companies. Under authority provided by the Health Insurance
Portability and Accountability Act (HIPAA) of 1996, HCFA has contracted with
12 firms to assist in its program safeguard efforts. Implementation is
progressing as HCFA resolves complex challenges regarding how to compensate
the firms, deal with the administrative burdens these firms place on the
claims administration contractors, handle coordination and privacy issues,
and determine how to oversee the firms' activities--virtually the same
challenges HCFA would need to address if it hired recovery auditors. If a
particular recovery auditing firm offered postpayment expertise that met
HCFA's needs, HCFA could contract with it and gain its expertise within the
agency's existing program safeguard contracting structure.

The Medicare program utilizes a variety of payment methods to reimburse
providers for the services it covers. Hospital insurance, or Part A, covers
inpatient hospital, skilled nursing facility, and hospice care, and certain
home health services. Supplemental medical insurance, or Part B, covers
physician and outpatient hospital services, diagnostic tests, and other
medical services and supplies. Depending on the service, HCFA pays Part A
providers based on their costs, or on a prospective payment basis designed
to cover the cost of providing a bundle of services related to a particular
medical condition. In contrast, Part B providers are typically paid for each
individual service, based on a fee schedule. To ensure that only services
the statute specifies are covered, Medicare has extensive policies and rules
about what constitutes covered services. It is not surprising, therefore,
that providers are sometimes overpaid for their services.

Medicare claims are paid by a network of private health insurance companies
hired by HCFA, such as Blue Cross and Blue Shield plans, Mutual of Omaha,
and CIGNA. Contractors that process Part A claims are referred to as fiscal
intermediaries, while those that process Part B claims are called carriers.
In fiscal year 1999, fiscal intermediaries processed about 133 million
claims representing $124 billion in payments, while carriers processed about
721 million claims and paid benefits of about $43 billion. Fiscal
intermediaries and carriers also perform activities related to safeguarding
Medicare payments. These include using prepayment computer edits to prevent
potential overpayments, conducting postpayment medical reviews, determining
whether other insurers should pay before Medicare, and auditing reports of
providers' costs to determine if any costs are overstated or not allowed by
Medicare. HCFA uses specialized contractors to supplement these program
safeguard efforts.

Claims administration contractors have principal responsibility for claims
processing and administration. Specifically, they contract with HCFA to (1)
receive claims; (2) judge their appropriateness; (3) pay appropriate claims
promptly; (4) identify potentially incorrect or fraudulent claims or
fraudulent providers, and withhold payment if justified; and (5) identify
and recover overpayments. The contractors are expected to manage Medicare's
funds in a fiscally responsible way, effectively address provider and
beneficiary inquiries, and establish a process for handling provider and
beneficiary appeals of claims decisions.

Until the HIPAA of 1996 established the Medicare Integrity Program (MIP),
only claims administration contractors performed program safeguard
activities. Under HIPAA, HCFA has the authority to enter into contracts with
a variety of firms?not just insurance companies?to perform certain
safeguard-related functions or undertake specific program initiatives to
promote Medicare's integrity. For example, one such initiative is aimed at
the early detection of fraudulent and abusive billing in three Midwestern
states. Under MIP, HCFA has contracted with 12 firms known as program
safeguard contractors (PSCs) that compete among themselves to perform
program safeguard work detailed in individual task orders. These MIP
contractors can subcontract with other companies that may have special
expertise to help them perform particular task orders. As of June 2000, HCFA
had issued a total of 10 task orders--each for a defined set of program
safeguard services provided over a specified time period.

In addition to providing HCFA with new contracting authority, HIPAA provided
HCFA with predictable increases in program safeguard funding. Before HIPAA,
contractor program safeguard activities were funded from contractors'
general program management budgets, which also covered contractors' costs
for processing claims. This meant that program safeguard activities had to
compete for funding with other contractor activities that might have higher
priority. For example, funding system improvements to ensure that claims
were paid promptly might require a shift in funding allocations, as would
emergencies or new HCFA initiatives. By contrast, HIPAA provides HCFA with
assured funding levels for program safeguard activities. Program safeguard
expenditures totaled $438 million in fiscal year 1997?the first year of
MIP?and HIPAA provides for increased funding in each subsequent year through
fiscal year 2003, when the program safeguard appropriation is expected to
total $720 million.

Most of HCFA's accounts receivable are the result of overpayments that have
yet to be recovered from providers. Overpayments to providers result from a
variety of inadvertent errors or intentional misrepresentations. The
following are the four main categories of Medicare overpayments:2

ï¿½ Coverage, medical necessity, or documentation issues?Medicare should pay
claims only for services that are medically necessary, meet Medicare
coverage requirements, and are properly documented to indicate that the
service took place as reflected in the claim. Claims can appear to be
correct even though they do not meet these conditions. For example, a home
health agency may receive reimbursement for services on behalf of a
beneficiary who did not meet the program requirements of being homebound.

ï¿½ Provider billing errors?Providers make manual or automated billing errors,
either of which can lead to overpayments. For example, if a physician's
billing clerk enters the wrong procedure code on a claim, the physician may
receive a larger reimbursement for a more comprehensive office visit than
the visit that actually occurred.

ï¿½ Cost reporting errors?For services paid on the basis of provider costs,
providers receive interim payments based on their projected allowable costs.
If costs are later disallowed, providers will have to return these
overpayments.

ï¿½ Medicare secondary payer (MSP) debt?These debts occur when Medicare pays
for a service that subsequently is determined to be the responsibility of
another payer.3 These include certain cases in which beneficiaries (1) have
other health insurance coverage provided by their employer or their spouse's
employer (2) have occupational injuries or illnesses that would be covered
by workers' compensation (3) have injuries which are covered by liability
insurance or a settlement arising from an accident; or (4) are receiving
care for end-stage renal disease during the first 30 months of their
treatment and have other health insurance coverage.

Recovery auditing has been used in various industries, including health
care, to identify and collect overpayments for about the last 30 years.
Recovery audit firms that specialize in health issues contract with private
insurance companies, state Medicaid agencies, managed care plans, and
employee group health plans. In some cases, clients rely exclusively on
recovery audit firms to identify and collect overpayments. In other cases,
they supplement their own internal capabilities with the services of
recovery audit firms. These firms generally focus on overpayment
identification but will also collect identified overpayments. Typically,
they are paid a contingency fee based on a percentage of the overpayments
that they or their clients collect. Fees vary depending on such factors as
the type of overpayment involved and the degree of difficulty associated
with identifying and collecting it.

Recovery audit firms employ a variety of techniques to identify
overpayments. For example, one firm may use proprietary software to analyze
a large database of claims to identify potential overpayments while another
may have specially trained staff review medical records for potentially
inappropriately billed services. Recovery audit firms may also collect
overpayments through such means as issuing demand letters to providers or
negotiating an amount to be returned to the client.

Identification

In the last several years, HCFA has increased its emphasis on prepayment
activities that help contractors avoid payment errors. Correct payment
involves several prepayment processing steps to determine whether the claim
is for covered, medically necessary and reasonable services; is provided to
an eligible beneficiary; and contains a valid provider number. All claims go
through a variety of computerized prepayment edits designed to ensure they
are correct on their face?for example, to ensure that they are not duplicate
payments. In addition, many claims go through prepayment medical reviews
that are either automated or performed by contractor staff. However, the
tremendous volume of Medicare claims processed by each contractor makes it
impractical to manually review more than a small fraction of claims prior to
payment. For example, in fiscal year 1998, only about 1 in 8 claims were
medically reviewed prior to payment and only about 1 in 16 underwent any
type of manual prepayment review. As a result, adequate postpayment review
is critical to ensuring that overpayments are identified in a timely way.

In conducting postpayment reviews to identify potential overpayments,
contractors primarily focus on three program safeguard
activities?postpayment medical review, reviews and audits of cost-based
reimbursement payments, and MSP reviews. These activities are described
below:

Postpayment medical review. Overpayments due to claims that are medically
unnecessary, insufficiently documented, or for noncovered services and that
were not identified through prepayment edits must generally be discovered
through contractor postpayment medical review. By reviewing paid claims
data, contractors identify patterns that could indicate potential abuse. For
example, contractor staff may review billing patterns for certain procedure
codes and find unusual increases in utilization over time or significant
utilization differences among providers. Once a potential problem is
identified, contractors typically sample a provider's claims and request
documentation from the provider for selected claims to determine if they
were paid properly or if overpayments occurred.

Peer review organizations (PROs) are independent physician organizations
located in each state that work under contract to HCFA. They conduct
postpayment medical review for Medicare claims involving inpatient
services.4 PROs are primarily responsible for ensuring that care provided
Medicare beneficiaries is medically necessary, reasonable, is provided in an
appropriate setting, and meets professionally accepted standards of quality.
If, in the course of their reviews, the PROs discover overpayments, they are
supposed to refer the cases to the appropriate fiscal intermediary for
payment adjustment.

Interim rate reviews and cost report audits. These activities are performed
by fiscal intermediaries to determine whether the payments made to providers
paid on the basis of their costs accurately reflect their allowable costs.
Interim rate reviews allow contractors to adjust payment rates during the
fiscal year after comparing a provider's interim payment rates with its
previous cost information, its Medicare payments, and its audit history.
These reviews may result in revisions to providers' interim payment rates
for the remainder of the year if it is found that the provider was being
overpaid or underpaid. Once a provider files its year-end cost report, it is
reviewed and may be audited to determine whether there are overpayments or
underpayments relating to the costs claimed by the provider.5

MSP reviews. HCFA officials estimate that about 8 percent of beneficiaries
have medical claims that are potentially the responsibility of another
health insurer, liability insurer, or workers' compensation program. MSP
reviews seek to identify such primary sources of payment and recoup any
primary payments made by the Medicare program. HCFA and its contractors use
a variety of techniques to find MSP cases. Contractors send a questionnaire
to each new beneficiary 3 months prior to their entitlement to Medicare
benefits to determine if the beneficiary or spouse is employed and has group
health insurance coverage. Medicare beneficiary information is also matched
periodically with Social Security Administration (SSA) and Internal Revenue
Service (IRS) data on employment status and earnings. If beneficiaries are
identified as employed and earning less than $10,000 per year, contractors
may elect not to send questionnaires to employers asking about the
beneficiary's employment and health insurance coverage. In addition, some
private insurance companies have agreed (voluntarily or as part of a legal
settlement with HCFA) to share information on their policyholders. Finally,
if a claim is submitted with certain diagnosis codes indicating traumatic or
work-related injury, contractors automatically send the beneficiary a letter
requesting information about a potential lawsuit, automobile liability
insurance, or workers' compensation coverage. In a recent report, the HHS
OIG took steps to identify beneficiaries who had other primary sources of
coverage and concluded that HCFA's current MSP questionnaire and data match
activities successfully identified most of the beneficiaries with other
coverage that the OIG was able to identify. However, it estimated that $56
million had been paid out improperly in 1997 to certain beneficiaries who
had other insurance that had not been identified by HCFA's questionnaire and
data match activities.6

HCFA has contracted with a coordination-of-benefits contractor under MIP to
consolidate and improve many of the MSP functions currently performed by the
claims administration contractors. In addition, several claims
administration contractors have taken lead roles in identifying potential
MSP recoveries from nationwide class action lawsuits, such as the product
liability case involving breast implants.

Providers themselves are a major source of information on overpayments. Most
providers make an honest effort to bill Medicare correctly, but when errors
are discovered through their own internal reviews, our work showed that many
providers notify their contractor. Often they send payment along with a
corrected claim, so the contractor learns of the overpayment at the same
time it is recovered.

Identification Activities

HCFA currently has limited information available to measure how effective
the contractors are in identifying Medicare overpayments. The HHS OIG's
annual estimate of improper payments within the Medicare fee-for-service
program provides some indication of national error rates, but is not
designed to measure individual contractor performance.

The HHS OIG's analysis of a sample of Medicare claims for fiscal year 1999
estimates that improper payments totaled about $13.5 billion, or about 8
percent of all Medicare fee-for-service payments.7 The main reasons for
improper payments were insufficient documentation to support a claim and
lack of medical necessity for a service or procedure. While the HHS OIG
estimates improper payments at the national level, the sample size does not
allow HCFA to draw conclusions on contractor-specific performance. The OIG's
analysis also does not take into account that an overpayment may have been
identified and recovered by the contractor during its postpayment review
activities.

HCFA is developing the Comprehensive Error Rate Testing program to better
evaluate individual contractor performance. When this program is
implemented, an independent firm will periodically review a random sample of
claims to determine if the contractors' payment decisions were appropriate.
HCFA officials expect that this program will enable the agency to develop
error rates specific to each contractor and for different types of benefits
and providers. While the program will provide HCFA with additional data on
contractor overpayment error rates, it is being designed as a management
tool to identify problem areas. It will not identify specific claims beyond
claims in the sample that were paid in error during the covered time period.
The program will be implemented this fiscal year, beginning with the
contractors that process and pay claims for durable medical equipment and
supplies, and will include all claims administration contractors by the end
of fiscal year 2002. It is too early to determine how the information
generated by this program will be used to improve contractor effectiveness
by restructuring overpayment identification methods.

HCFA's Current Efforts

We found that the techniques used by recovery auditors were similar to those
already employed by HCFA's contractors in their postpayment review, MSP, and
other program safeguard activities. While the techniques are similar, the
specific application--such as what factors trigger a more extensive
review?affect how well overpayments are identified. The recovery auditing
techniques most applicable to the Medicare program?data mining,
diagnosis-related group (DRG) validation, cost report audits, and
third-party liability reviews?are part of current postpayment review
activities. HCFA's decision to concentrate its program safeguard resources
on prepayment, rather than postpayment, activities in recent years is
justified given the cost-effectiveness of error prevention. However, the
result is that postpayment review activities have been reduced for some
types of claims: only about 565,000 claims were subject to postpayment
medical review in fiscal year 1998, compared to approximately 960,000 claims
in fiscal year 1995?a drop of over 40 percent. HCFA may be missing
opportunities to identify significant overpayments through postpayment
activities. However, any increase in these efforts would likely require
additional program safeguard funding to ensure that prepayment reviews are
not decreased.

Investment in evaluation of the most cost-effective postpayment review
activities for identifying overpayments would be worthwhile. HCFA has
limited ability to do this kind of evaluation now because it cannot measure
the effectiveness of each contractor's program safeguard activities by type
of activity.

Data Mining Programs Identify Aberrant Billing Patterns

The large number of computerized claims processed by Medicare lends itself
to the application of data mining techniques. Data mining involves
specialized software programs that analyze large volumes of claims data to
identify potential overpayments. The programs typically contain specific
algorithms used to identify billing errors and abusive practices, and are
based on the insurer's policies, procedures, and contractual arrangements,
as well as common sense. HCFA's claims administration contractors currently
use data mining and statistical analysis as part of their postpayment review
activities. Since 1993, HCFA also has contracted with a specialized
statistical analysis contractor to perform large-scale analysis of durable
medical equipment claims. Data mining can identify many potentially
inappropriate payments, but determining which ones are actual overpayments
takes additional investigation. Currently, the contractors only have the
resources to investigate situations in which the data indicate potential
large-scale abusive practices.

Several of HCFA's program safeguard contractors also specialize in data
mining and the manipulation of large data sets. For example, one program
safeguard contractor is preparing algorithms and analyzing national data to
identify potential fraud that occurred during the critical months leading to
the year 2000. Another program safeguard contractor is conducting data
mining activities to support development of medical policies and the early
detection of fraudulent and abusive billing in three Midwestern states.

Recovery auditors also use data mining to identify overpayments for their
clients. For example, in 1999 a recovery auditor under contract with a state
Medicaid program subjected 3 years of paid claims to its data mining edits
and identified $52 million in overpayments. These overpayments were approved
for collection by an independent state review board. Another recovery
auditor found, through its data mining efforts, that a state Medicaid agency
was paying 10 times that amount allowed for an asthma inhaler because
providers were billing based on the drug's unit dosage?which represents part
of a gram?rather than by the gram.

DRG Validation Currently Receives Low Priority

Medicare's payments for hospital inpatient services are determined on the
basis of the beneficiary's diagnosis. These diagnoses are grouped for
payment, with each DRG designed to reflect the bundle of services and
supplies required to treat different medical conditions. Overpayments can
result if a DRG reflects a more serious--and expensive--condition than the
beneficiary actually had. Some recovery auditors validate DRGs for their
clients, such as private insurers who have adopted Medicare's DRG coding
system for inpatient claims. According to the representatives of one PRO,
while DRG validation was an area of emphasis for PROs in the 1980s and early
1990s, this activity was not a high priority in recent years for the PROs.
The PROs, rather than the claims administration contractors, review hospital
inpatient DRG-based claims.

DRG validation involves verification that a provider classified a patient
within the DRG code that accurately reflects the patient's condition as
described in the discharge information. According to recovery auditors,
bills are sometimes miscoded because providers base their codes on the
patient's medical complaints, rather than on the physician's diagnosis. DRG
validation should be based on a patient's principal diagnosis and procedure
code information contained in the medical record. The validation is done by
staff who have been trained in applying medical coding terminology to
medical records information; clinical judgment is not necessarily required.
HCFA's Payment Error Prevention Program, which all PROs must undertake,
recently has increased the priority they must give to reviewing hospital
claims for billing accuracy as well as quality of care.8 However, two
contractors we visited reported that they rarely, if ever, receive reports
from the PROs on overpayments that the PROs have identified.

Increased Review of Provider Cost Information Could Benefit Medicare

Review of provider cost report financial information is a cost-effective way
to identify overpayments. In 1999, cost report reviews and audits of
providers not covered by a prospective payment system resulted in
disallowing $2.7 billion, or about 10 percent of the total costs claimed by
providers. However, as prospective payment systems replace cost-based
reimbursement, fewer overpayments of this type will occur.9 We found that
the two intermediaries we visited use cost report audits and rate reviews as
the primary means of identifying overpayments for Part A providers. One
contractor representative estimated a return of $13 saved for every dollar
spent conducting the audits. Although the number of cost reports audited
between 1995 and 1998 has increased, a large percentage of cost reports are
still never audited by HCFA's contractors. For example, in fiscal year 2000,
HCFA expects contractors to audit only about 12 percent of the cost reports
submitted by home health agencies and 25 percent of those submitted by
single-facility hospitals. It can take up to 2 years after the end of the
provider's fiscal year to reach a final settlement on the provider's costs
that are allowable by Medicare. So, even though HCFA is changing its payment
methods, cost report audits and rate reviews will continue to be important
program safeguards for several years. HCFA's financial auditors estimated
that if all cost reports submitted by providers not under prospective
payment had been fully audited, HCFA might have been able to identify an
additional $600 million in fiscal year 1999 overpayments.

It is not necessary to perform a complete audit to identify overpayments.
For example, contractors can conduct focused reviews that examine only
certain aspects of the cost report. HCFA has encouraged intermediaries to
concentrate on these focused reviews. This allows the intermediaries to
stretch their audit resources by concentrating on areas yielding the most
return, and increases the number of providers whose records are reviewed.

Some fiscal intermediaries have contracted with private firms to augment
their cost report audit efforts, albeit with mixed results. For example, one
intermediary we visited told us that these firms require substantial
up-front training on Medicare's rules and generally had a rate of return
lower than with the intermediary's own internal auditors.

Some recovery auditing firms specialize in focused reviews of provider
financial records, such as credit balance audits. HCFA requires its
institutional providers to submit quarterly credit balance reports
identifying whether the provider owes Medicare money. However, although
these reports are required, HCFA's intermediaries do not routinely conduct
credit balance audits outside the context of a full cost report audit.
Credit balance audits involve an on-site review of accounting and medical
records, and tracing transactions through the accounting system to identify
cases in which a provider has been overpaid and not returned the money to
the insurer. HCFA is currently developing a statement of work for a
contractor to evaluate (1) credit balance reporting policies, procedures,
and practices in place at selected Medicare claims administration
contractors and (2) HCFA's oversight of those contractors' efforts, so that
the contractor can recommend improvements.

Improved Access to Information in MSP Reviews Would Benefit Medicare

HCFA's contractors conduct postpayment MSP reviews by attempting to identify
possible alternative sources of health insurance coverage with primary
payment responsibility. Contractors' ability to identify MSP debt is
hampered by private insurance companies' and employer group health plans'
unwillingness to share information about their enrollees with HCFA. GAO has
long recognized that private insurance companies and employers are in the
best position to routinely identify policyholders and employees who might be
eligible for Medicare. Some recovery auditors have developed proprietary
databases that contain insurance company enrollment information and other
data that could potentially help Medicare identify beneficiaries with other
health insurance. However, HCFA might not be able to access this information
if the insurance companies involved were unwilling to share beneficiary
data.

One recovery audit firm we spoke with that specializes in third-party
liability performs its work for 20 state Medicaid agencies. This
organization maintains a database containing Medicaid recipient enrollment
data along with enrollment data from commercial health insurance plans,
Medicare contractors, and Blue Cross and Blue Shield plans. The firm
conducts many different types of data matches that involve multiple,
successively applied matches, and augments its data match techniques by
reviewing employer wage files, credit bureau information, Department of
Motor Vehicles data, state vital statistics files and property records to
identify possible casualty, tort, and estate sources of payment.

As previously mentioned, HCFA matches Medicare data with employment and
earnings data maintained by the IRS and the SSA to identify beneficiaries
who may have health insurance through their employer or their spouse's
employer. However, there can be a 2-year time lag between when a beneficiary
or spouse is employed and when contractors can confirm the information about
employment. Information on employment is reported to IRS after the fact. IRS
must then prepare the employment information, which is made available for
matching with Medicare beneficiary data. Contractors then confirm it by
querying employers. As a result, even with current data match activities,
Medicare can have paid for claims long before another liable insurer is
identified. Even more time will pass before any funds can be recouped.

Commercial insurers share information with each other on their beneficiaries
to determine which beneficiaries have more than one source of insurance. It
is advantageous for companies to share this information because, for some
beneficiaries, an insurer will be the secondary payer. If firms do not try
to coordinate their benefit payments, they may both pay as the primary
payer.

Better access to health insurers' beneficiary data could help HCFA identify
MSP cases by providing more current data. However, because Medicare is
generally the secondary payer to other insurers, it may not be to other
insurers' advantage to share beneficiary data with HCFA. At present,
insurers are under no obligation to inform HCFA that some of their
policyholders are Medicare beneficiaries unless there is a court settlement
requiring such data sharing. HCFA has had to pursue certain insurance
companies--some with related corporations that are Medicare contractors--in
federal civil court for refusing to pay before Medicare when the government
contends that Medicare should have been the secondary payer. From 1995 to
1999, HCFA reached settlements that totaled almost $66 million in cases in
which a related company was a Medicare carrier or intermediary, including
the national Blue Cross Blue Shield Association, Blue Cross Blue Shield of
Florida, Blue Cross Blue Shield of Massachusetts, Blue Cross Blue Shield of
Michigan, Transamerica, and Travelers. As a result of these legal
settlements, some major insurers have agreed to share data, but some of
these settlements are about to expire. While insurers can voluntarily share
data on their policyholders with HCFA, few have opted to participate,
thereby reducing HCFA's ability to identify claims that are the
responsibility of another insurer.

If private insurers were required to share information on their
policyholders, HCFA could more easily determine which Medicare beneficiaries
had other health insurance. In the late 1980s, HCFA proposed?but did not
obtain?legislation granting it access to private insurers' policyholder
data. Insurer reporting provisions were included in the President's budget
proposals for both fiscal years 2000 and 2001, but these provisions were not
accepted by the Congress. Without such a requirement, the recovery auditing
firm we visited told us that access to some of the private insurer and
Medicaid data they used would have to be negotiated with each of the
participating insurers before they could be used for Medicare.

Additional Efforts May Require Increased Funding

While Medicare would be likely to benefit from additional efforts to
identify overpayments, further efforts may require increased funding. As it
has sought to run the program economically, HCFA has been left with fewer
and fewer dollars to pay for administering a program that has grown in
volume and whose management involves increasingly complex tasks. The
Congress has recognized the importance of ensuring that Medicare have
adequate program safeguards in place and has developed an assured funding
stream for these activities through MIP. For fiscal year 2000, $630 million
was appropriated for MIP. The amounts appropriated will grow until fiscal
year 2003, when funding will reach $720 million.

However, funding dedicated to program safeguards in fiscal year 2000 is
still about one-third less (on a per-claim basis) than it was in 1989. Based
on estimates of the growth of trust fund expenditures, our analysis
indicates that MIP funding, as a percentage of program dollars, will be less
in 2003 than it is today. It will still represent little more than
one-quarter of 1 percent of Medicare program expenditures.

With this funding, HCFA and its contractors carry out a range of program
safeguard activities, with an emphasis on prepayment reviews designed to
prevent overpayments. If HCFA were to increase its overpayment
identification activities, it likely would have to do it by curtailing other
types of program safeguard activities, such as these prepayment reviews.
HCFA has estimated significant returns from both its prepayment and
postpayment MIP activities. While it is difficult to isolate the dollar
savings attributable to a single year's funding, based on HCFA estimates for
fiscal year 1999, MIP saved the Medicare program more than $17 for each
dollar spent--about 55 percent from prepayment activities and the rest from
postpayment activities.

Additional investment seems likely to yield additional positive returns.
However, it is important that both current funding and any additional
investment be spent as effectively as possible. In addition, investments in
these activities should not be expanded beyond levels likely to yield
positive returns. Additional information on the relative effectiveness of
these activities could help guide HCFA in its allocation of funds, but
precisely measuring the effect of MIP funding efforts is difficult. Savings
realized today may result from activities begun several years ago. For
example, postpayment activities such as medical review can be used to
identify program vulnerabilities that can be addressed in the future through
automated prepayment edits and manual reviews. Therefore, while their
immediate return on investment can be relatively low, such postpayment
activities may lead to future prepayment savings.

Reliable information on the relative value of specific program safeguards
could help HCFA target its program integrity efforts. However, at present,
HCFA lacks the detailed data that can provide the best estimates of returns
from specific program safeguard activities. For example, HCFA does not have
information on whether automated or manual prepayment medical reviews
generate the most savings. Similarly, HCFA does not know which contractors
are realizing the highest return on investment from their program safeguard
activities. To remedy this information gap, HCFA will implement a new
Program Integrity Management Reporting system for carriers and
intermediaries in fiscal year 2001. This system will be used to collect
information that HCFA expects will allow it to report savings and provide
details by contractor, program activity, and provider type. The system will
generate monthly reports, which should allow HCFA to more closely monitor
and direct their program integrity activities. HCFA plans to audit the
information input into the system to verify its accuracy.

HCFA's claims administration contractors are initially responsible for
recovering the overpayments they identify. Often they do this by offsetting
subsequent payments to providers but this is not possible when, for example,
providers leave the program and stop billing Medicare for services. While
contractors collect most of the identified overpayments, they still are
unable to collect several billion dollars each year. This has resulted in a
growing and aging accounts receivable balance that totaled $7.3 billion at
the end of fiscal year 1999. If accounts receivable have been delinquent for
over 180 days, the contractors must transfer collection responsibility to
HCFA's regional offices, which we found typically are unsuccessful in
collecting the transferred debt. In addition, HCFA has not fully implemented
DCIA, which generally requires agencies to transfer debt over 180 days
delinquent to the Treasury or a Treasury-designated debt collection center.
The designated debt collection center for certain Medicare debts?the HHS
Program Support Center?contracts with a private debt collection company and
uses other collection techniques similar to those used by recovery
auditors.10 Therefore, we do not believe that recovery auditors are
necessary to assist HCFA in improving overpayment collections. Instead, our
work showed that HCFA could benefit most by accelerating its compliance with
DCIA's requirements and referring debt to the Program Support Center.

Delinquent

The results of our analysis of HCFA's accounts receivable, shown in tables 1
and 2, indicate that the amount of Medicare's identified overpayments
collected increased between fiscal years 1998 and 1999, both in total and
separately for parts A and B. Specifically, collections rose from $7.5
billion in fiscal year 1998 to $8.7 billion in fiscal year 1999?a 16 percent
increase. At the same time, however, the value of the new accounts
receivable identified increased from $10.1 billion to $12.6 billion over the
2 years, or by 25 percent. The difference between the collection and
overpayment identification rates resulted in a fiscal year 1999 ending
accounts receivable balance of $7.3 billion, as over $3 billion of
uncollectable accounts receivable were written off by HCFA under a special
initiative to remove old debt from HCFA's accounts receivable. Further,
although not shown in the table, a large percentage of the ending accounts
receivable balance each year was more than 6 months delinquent--40 percent
in fiscal year 1998 and 45 percent in fiscal year 1999.11 HCFA's claims
administration contractors are responsible for nearly all of the
collections.

(Dollars in Billions)

                   Fiscal year 1998       Fiscal year 1999
                   Part A  Part B  Total  Part A Part B  Total
 Beginning balance $3.4    $2.2    $5.5   $4.9   $2.5    $7.4
 Ending balance    4.9     2.5     7.4    5.4    2.0     7.3

Notes: Dollar amounts represent principal amounts only and represent
accounts receivable from provider and beneficiary overpayments, civil
monetary penalties and other restitutions, fraud and abuse, managed care,
Medicare premiums, and audit disallowances. Numbers may not add due to
rounding.

Sources: DHHS HCFA Financial Report, Fiscal Year 1998 (Baltimore, Md.: Feb.
1999); and DHHS Health Care Financing Administration Financial Report,
Fiscal Year 1999 (Baltimore, Md.: Feb. 2000).

(Dollars in Billions)

                         Fiscal year 1998       Fiscal year 1999
                         Part A  Part B  Total  Part A Part B  Total
 New accounts receivable $7.5    $2.6    $10.1  $9.3   $3.3    $12.6
 Collections             5.7     1.8     7.5    6.3    2.4     8.7

Notes: Dollar amounts represent principal amounts only. These figures
reflect only claims administration contractors' accounts receivable. They do
not include accounts receivable from provider and beneficiary overpayments
transferred to the HCFA regional offices, HCFA central office, Treasury, or
the HHS Program Support Center. The figures also do not include accounts
receivable from managed care and Medicare premiums and may not include those
associated with civil monetary penalties and other restitutions, such as
fraud and abuse cases referred to law enforcement. Therefore, figures in
this table cannot be combined with figures in table 1.

Sources: internal HCFA documents?HCFA Form H751 A and B, Status of Accounts
Receivable, for Fiscal Years 1998 and 1999.

Contractors are generally able to collect many overpayments immediately, by
offsetting them against current payments due. However, contractors' ability
to collect Medicare overpayments is affected by a number of different
factors, including the type of overpayment, the promptness with which the
overpayment was identified, and whether the provider is still in business
and participating in Medicare. These factors are discussed below.

Type of overpayment. We found that contractors were much more successful in
collecting overpayments identified in cost report audits and medical reviews
than those identified through MSP activities. In fiscal year 1998, for
example, less than 10 percent of MSP receivables nationally were collected,
versus about 62 percent of non-MSP receivables. This low rate of MSP
collections is not surprising for several reasons. First, contractors are
only required to send one demand letter to the responsible party requesting
payment of MSP overpayments, whereas up to three demand letters are sent on
other types of receivables. Second, other insurers often dispute that they
are responsible for payment. Third, MSP collection rates are also affected
by potential conflict of interest or lack of diligence: the claims
administration contractors may themselves be responsible for payment and may
not be quick to collect on those receivables. For example, in 1999, HCFA
hired a private accounting firm to review Medicare accounts receivable at 15
contractors. At one contractor, the firm identified 91 MSP overpayments more
than 6 months old totaling $290,000 that the contractor's private operations
owed Medicare but had not yet repaid.

Prompt collection of overpayments and provider participation in Medicare.
Contractors have not always followed procedures that require prompt efforts
to collect overpayments they identify. This affects their ability to collect
what becomes aging debt. For example, home health agencies (HHA) are
required to submit annual reports of their Medicare costs to the fiscal
intermediaries. All cost reports then go through a settlement process that
may identify overpayments.12 At one contractor, we identified several cases
in which the contractor did not conduct timely cost report settlements. The
contractor was 2 years late in settling one HHA's cost report and, in
another case, a cost report settlement that should have occurred in 1996 did
not take place until late 1999. Collections are even more difficult when
providers terminate their Medicare participation. For example, in a recent
GAO report regarding overpayments due from 15 HHAs in Texas that closed
between October 1997 and July 1999, we found that HCFA had collected $5.3
million, or about 7 percent of the $73 million due from the closed
agencies.13

Legal proceedings. When a provider has filed for bankruptcy, the
contractor's collection activities are subject to review and approval of the
bankruptcy court. Whether any of the bankrupt provider's Medicare
overpayments are eventually collected depends on the results of the
bankruptcy proceedings. Contractors' collection abilities are also affected
when providers who owe the program money are under investigation by the HHS
OIG or involved in litigation with the Department of Justice. In such cases,
contractors must suspend their collection efforts until resolution occurs. A
substantial amount of overpayments cannot be collected because the debtors
are involved in bankruptcy proceedings or litigation. According to HCFA,
$845 million in overpayments cannot be collected because they are protected
under bankruptcy proceedings. In addition, $147 million cannot be collected
because of litigation.

Debt that the contractors cannot collect is referred to HCFA for collection.
However, we found that contractors do not always refer debt in a timely way.
Even when debt is referred appropriately, we found that the age and type of
debt HCFA receives makes it difficult to collect. In addition, HCFA's
recording and tracking systems are unreliable, further complicating
collection efforts.

HCFA's low rate of collection for transferred debt is attributed in large
part to the age and type of debt HCFA receives. HCFA regional office staff
informed us that this debt is difficult to collect due to such factors as
provider bankruptcy or closure. In addition, it is generally recognized by
HCFA and contractor representatives that the longer an overpayment is
outstanding, the less likely it is that it will be collected. At one of the
intermediaries in our study, accounts receivable transferred to HCFA in
fiscal year 1998 totaled $59.8 million; of that amount, HCFA collected $2.1
million as of June 2000--a 3.5 percent collection rate.

When contractors are unable to offset payment or otherwise recover an
overpayment from a provider, they are supposed to refer the receivable to
their respective HCFA regional offices for review. If regional office staff
find that the contractor has taken all appropriate collection actions, the
contractor may transfer the receivable to HCFA, which then assumes
responsibility for collection through its regional offices. We found that
contractors were not always referring receivables appropriately to HCFA
regional offices, thus preventing it from initiating its own collection
activities.

Although contractors are supposed to refer uncollected debt to HCFA
according to time frames set out by HCFA's regional offices, we found that
this does not always happen. For example, one contractor we visited told us
that referring receivables to its HCFA regional office was a relatively low
priority because of the unlikelihood that HCFA would be able to collect
them. As a result of untimely referral, the chances that HCFA could collect
the debt are substantially reduced because the debt becomes increasingly
delinquent.

Another problem related to contractor referrals is inconsistent regional
office guidance to contractors. We found that in one HCFA region,
contractors were asked to refer receivables less than $1,000 to be written
off.14 At another region, the referral threshold was $50 and the region made
the decision whether to write off the debt or pursue collection. Within
HCFA, only the regional offices have the authority to authorize the writeoff
of government debt. They are allowed to exercise this authority consistent
with their judgment regarding the cost-effectiveness and potential for
recovery of these debts.

Finally, we found that the various systems HCFA regional offices used to
track and report transferred receivables were neither consistent nor
reliable. For example, one region provided us with current information on
the status of each receivable; however, because many of the overpayments did
not exceed $600, they were not included in HCFA's automated tracking system
and, as a result, the information had to be compiled for us manually.
Another region generated detailed computer data for its Part A receivables,
including information on outstanding balances, collection activities, and
notes about their collection status. However, this same region could not
provide any information on the status of Part B accounts receivable due to
problems with its computer files. Because of problems like these, HCFA does
not have reliable data on how well it collects debt transferred to it by
contractors.

Ineffective tracking and reporting systems may also result in receivables
being recorded in error. For example, in our report on the identification
and collection of overpayments from closed HHAs, we noted that a contractor
made a $76.9 million keypunch error when entering overpayment information
into one of HCFA's central overpayment recording systems. Further, we noted
that ineffective management of Medicare accounts receivable was found to be
a consistent problem in HCFA's financial statement audits for fiscal years
1996 through 1999.15 The fiscal year 1998 audit, for example, disclosed
deficiencies in nearly all aspects 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. HCFA's fiscal year 1999 financial
statement audit report noted that despite significant improvements, controls
over accounts receivable continued to be a material weakness.16 HCFA has
plans to replace its fragmented accounts receivable tracking and reporting
systems with a single integrated one, but this will not be implemented until
September 2001 at the earliest. In March 2000, we made a number of
recommendations to the HCFA Administrator to improve financial management
and accountability of the Medicare program, including that HCFA develop a
comprehensive financial management improvement strategy.17

HCFA agreed with our recommendations and committed itself to aggressively
address shortcomings in its financial management of Medicare. For example,
in an effort to clean up its financial records in preparation for its fiscal
year 1999 financial statement audit, HCFA initiated a one-time project to
write down its oldest delinquent receivables. This effort resulted in HCFA's
and its contractors' writing off delinquent receivables that were at least 6
years old. Over $3 billion was written off by HCFA and its contractors in
fiscal year 1999. Receivables less than 6 years old, however, remain on the
financial records; whether they are collectable remains in question.

DCIA mandates that HCFA and other federal agencies refer all eligible debt
over 180 days delinquent to the Treasury or a Treasury-designated debt
collection center for collection activities. In 1999, Treasury granted a
waiver for HHS to continue to service certain debts including MSP debt and
debt related to unfiled cost reports and to be designated as a debt
collection center for that purpose.18 Within HHS, the Program Support Center
is the Treasury-designated debt collection center.19 As such, it is
responsible for attempting to collect referred debt related to MSP or
unfiled cost reports, and for referring all other types of Medicare debt to
the Treasury for collection. At Treasury, collection can be attempted
through Treasury's offset program and various other debt collection tools,
such as referral to private collection agencies.20 Although the act is now
over 4 years old, HCFA has not fully implemented DCIA and will not be
referring all eligible receivables until the end of fiscal year 2002, at the
earliest, because of the work involved in certifying that the debt amount is
correct and still outstanding.21

To improve management of its accounts receivable, HCFA analyzed its debt,
performed a one-time writeoff of very old debt, and established two pilot
projects to refer eligible debt to the Program Support Center. To address
the issue of aging receivables, HCFA wrote off all debt that it determined
could not be offset and that was more than 6 years old, and referred the
remainder of the 6-year-old (or older) debt to the Program Support Center
for collection. This was done in preparation for its annual financial
statement audit.

As mentioned earlier, HCFA's objective for its two pilot projects was to
develop a process for contractors to expedite the transfer of eligible Part
A debt to the Program Support Center. HCFA concentrated its pilots on older,
high-value Part A debt rather than newly eligible delinquent debt. One pilot
deals with MSP debt valued at more than $5,000 or more and is up to 6 years
old, while the other pilot deals with non-MSP debt, primarily related to
cost report audits, of $100,000 or more. Under the pilots, contractors
record eligible delinquent debt in a HCFA central office database that is
used to transmit the debt to the Program Support Center for collection.
Before they refer this debt to the Program Support Center, contractors must
validate it by reviewing records and ensuring that the debt is still
uncollected and that the debt balance is correct. Validation is necessary
because HCFA's systems for recording and tracking overpayments are
unreliable. In addition, contractors must seek to collect the receivable by
issuing a demand letter that indicates that nonpayment will result in
referral to the Program Support Center.

HCFA plans to expand its non-MSP pilot to all of its intermediaries and
carriers by October 2000; the time frame for expanding the other pilot is
uncertain. However, even under its planned efforts, certain types of
eligible debt will be excluded. For example, HCFA has established a $600
threshold for transferring non-MSP debt and tentatively plans to continue
with its $5,000 threshold for MSP debt, even though the Program Support
Center will accept any eligible debt over $25. This leaves a large amount of
debt?almost half of all Part B delinquent debt, for example?with no avenue
for collection beyond the contractors' current techniques. This also means
that delinquent debt newly eligible for transfer below these thresholds will
not qualify for referral. HCFA officials told us that they selected the $600
and $5,000 thresholds in part because they do not have the resources
necessary to validate the large volume of aged, delinquent debt below these
amounts. However, collection industry statistics as well as Treasury's
collection experience to date have shown that collection rates are generally
higher on debts with smaller dollar balances and debts that are less
delinquent.

The Program Support Center and Treasury use many standard collection
techniques in their debt recovery efforts, such as attempting to locate
debtors that have ceased operations, issuing demand letters, and reporting
information to credit bureaus. They also refer debt to the Department of
Justice for litigation, and to Treasury's offset program, where certain
federal agency payments can be offset to satisfy claims. To assist them,
both the Program Support Center and Treasury contract with private
collection agencies that are paid contingency fees for their collection
efforts. For example, for their collection services, the Program Support
Center retains 15 percent of the amount collected and the remainder is
returned to the Medicare Trust Funds. HCFA is not charged for debt that has
been transferred but cannot be collected.

It is too early to evaluate the effectiveness of Treasury and the Program
Support Center in collecting Medicare debt transferred to them. However,
they have been able to collect some aged, delinquent debt for which HCFA and
its contractors had terminated active collection action?in fiscal year 1999,
HCFA transferred $341 million in delinquent debt to the Program Support
Center of which $1.8 million has been collected.

We did not find potential for HCFA to improve collections of Medicare
overpayments through the use of recovery auditors. Both the claims
administration contractors and the recovery auditors we spoke with use the
same basic technique of initiating collections by issuing a demand letter to
providers. Demand letters provide details regarding the overpayment, and
request prompt payment from the provider. For providers still in the
Medicare program, claims administration contractors can simply withhold
funds from future payments. Other collections by both the contractors and
recovery auditors depend on the debtor's sending a check. The techniques
that recovery auditors use would not provide HCFA with collection techniques
that differ from those provided by the Treasury and the Program Support
Center. Both already use private collection agencies to assist them in
collecting delinquent debt. In addition, the Treasury can offset providers'
overpayments against certain other federal agency payments--a process not
available to recovery auditors.

As previously mentioned, recovery audit techniques are, for the most part,
no different from the techniques currently being used in Medicare's program
safeguard activities. However, there is evidence that HCFA could do
more--either in-house, or through its contractors--to identify overpayments,
if it had additional resources. The concept of using recovery auditors to
help HCFA achieve its program integrity goals has been the subject of
controversy. Specific concerns relate to how to compensate recovery
auditors, the possible administrative burden that would be placed on the
current claims administration contractors and providers, responsibilities to
coordinate with law enforcement agencies and to ensure beneficiary privacy,
and HCFA's ability to effectively manage this new set of contractors. These
concerns are discussed below. We found that HCFA is already addressing most
of these same challenges as it implements its PSC activities under MIP.
These contractors, like recovery auditors, are intended to provide HCFA with
new tools and capabilities to protect Medicare from overpayments.

Arguably the most contentious issue regarding Medicare's use of recovery
auditing services relates to compensation. Recovery auditors are typically
paid a contingency fee by private-sector clients, based on a percentage of
the identified overpayments collected. One of the advantages of using
recovery auditing services on a contingency fee basis is that additional
appropriations are not needed to pay these organizations because the payment
comes out of recoveries. However, HCFA and medical associations believe that
providers view contingency fees as a "bounty" system that can damage the
constructive partnership between Medicare and its providers. The contingency
fee is a strong incentive to identify and collect overpayments and may lead
to inappropriate identification and collection efforts by recovery auditors.
A HCFA official noted that providers have raised a similar concern about the
very modest reward available under HIPAA to beneficiaries who uncover fraud.

Instead of paying recovery auditors on a contingency fee basis, HCFA could
compensate them in ways similar to the ways it pays PSCs, including
firm-fixed-price or cost-plus-award-fee contracts. A firm-fixed-price
contract provides for a predetermined payment to the contractor. Payments
are not subject to adjustment based on the contractor's costs; in fact,
there are strong incentives for the contractor to control costs. A
cost-plus-award-fee contract provides for reimbursement of actual costs and
can include incentives for efficiency or performance. HCFA is using each
type of contract in its PSC task orders. Several of the recovery auditors we
met with noted that they would accept other methods of payment besides
contingency fees and thus may be agreeable to providing their services under
one or more of these different types of contracts.

The potential administrative burden that recovery auditors would place on
current claims administration contractors and providers has also been raised
as a concern similar to the situation HCFA faces as it integrates the PSCs
into Medicare's integrity activities. HCFA and claims administration
contractor representatives believe recovery auditors would likely generate
additional inquiries and appeals due to providers and beneficiaries
challenging overpayment decisions, thereby increasing workload and costs of
the claims administration contractors. They also expressed concern that the
claims administration contractors would need to divert staff from their
normal activities to provide recovery audit staff with information about the
claims administration contractors' operations, including local medical
policies that define the conditions under which the contractor will pay for
certain services. Recovery auditors would need to understand the local
medical policies when making determinations on whether the claims were paid
properly. Furthermore, the claims administration contractors and recovery
auditors would need to share data, requiring development of coordination
procedures. Providers, too, are concerned about the potential administrative
burden.

Representatives from two medical associations said that they were concerned
that recovery auditors working in Medicare would request excessive numbers
of medical records from providers, thereby adversely affecting
providers'office operations. Recovery auditor representatives told us that
they do not believe they place excessive demands on providers for medical
records and other information and that they are sensitive to this concern.
Representatives from one recovery auditing organization noted that initial
identification of physician overpayments often involves computer analysis of
claims data, not a review of medical records. As for institutional providers
such as hospitals, representatives of a recovery audit firm and a recovery
auditor client said these providers routinely allow auditors from private
insurance companies to review medical records at their facilities.

Information

Two other issues associated with hiring recovery auditors are coordination
with law enforcement agencies and maintenance of patient information
confidentiality. Representatives from some claims administration contractors
said that their fraud units closely coordinate their investigations with the
HHS OIG and Justice, and that they were concerned that recovery auditors
would inadvertently hinder their investigations. Several medical specialty
group representatives also raised the issue of confidentiality of patient
information, and questioned how HCFA would ensure that recovery auditors did
not release such information or use it for unauthorized purposes.

HCFA has made some provisions for both of these concerns as it implements
its program safeguard contracts. PSCs are required to provide the OIG,
Justice, and the Federal Bureau of Investigation with information related to
potential fraud cases and may also periodically meet with law enforcement
agencies to coordinate ongoing work. In regard to privacy concerns, the
Statement of Work requires the PSCs to comply with the Privacy Act of 1974
and applicable HHS regulations relating to information security.

A final issue regarding Medicare's use of recovery auditors concerns HCFA's
ability to effectively manage and oversee these organizations, given its
other oversight responsibilities. We have reported numerous problems with
HCFA's ability to effectively manage and oversee its current claims
administration contractors. Medical association representatives note that
HCFA has a number of other program safeguard projects under way and have
suggested that HCFA evaluate these results before undertaking any new
initiatives.

HCFA acknowledges that its oversight of the claims administration
contractors can be improved and is taking various steps toward that goal. To
ensure continual oversight of its PSCs, HCFA has already established a
performance evaluation program. Because the PSCs have been operating for
less than a year, HCFA has not formally evaluated any of them, but plans to
assess the PSCs' performance annually against the statement of work and
applicable task order requirements.

Instead of establishing a new contracting structure for recovery auditors,
if their expertise is needed, HCFA could contract with them in the context
of its PSC initiative. In fact, a PSC teamed with a recovery auditor we met
with to bid on one of HCFA's task orders; HCFA, however, selected another
PSC to perform this work.

Although Medicare's claims administration contractors already have extensive
prepayment safeguards in place to help ensure that claims are paid
correctly, Medicare continues to make overpayments totaling billions of
dollars annually. With its recent emphasis on prepayment review, HCFA is
justifiably spending much of its limited program safeguard funds on
identifying erroneous or improper claims before they are paid. However,
thousands of these claims are paid nonetheless, and if not identified during
postpayment reviews, they ultimately are lost in a program that can ill
afford the financial drain on the trust funds. In an effort to tackle its
outstanding overpayment problem, some have suggested that HCFA use the
services of recovery auditors to supplement its program integrity
activities.

We attempted to identify any techniques or tools used by recovery auditors
that could also benefit HCFA. While recovery audit firms we met with have
achieved results on behalf of their private insurance and Medicaid clients,
their techniques are similar to HCFA's current postpayment tools. That is
not to say that Medicare could not benefit from a stronger focus on
postpayment activities to identify additional overpayments. While we believe
that HCFA's effort to balance prepayment and postpayment activities is
sound, more could be done to safeguard Medicare if additional resources were
available.

Since its enactment, HIPAA has provided HCFA with increased and assured
funding for program safeguards, but funding is still less than what was
available in 1989 on a per-claim basis. While this funding is due to
increase in the next several years, it will only keep pace with expected
growth in program expenditures and amounts to little more than one-quarter
of 1 percent of program expenditures. According to HCFA estimates, more than
$17 is saved for every $1 invested in safeguarding Medicare through MIP. We
believe that HCFA must target any new resources to the activities most
likely to result in the greatest payoff. We understand that HCFA is
developing a process to determine the return on its prepayment and
postpayment activities broken down by contractor and activity which, when
completed, should give it greater ability to perform this targeting.

For its MSP activities, HCFA could more effectively identify beneficiaries
who have other primary insurance coverage if insurers were required to share
information on their enrollees. HCFA has had difficulty gaining insurers'
cooperation and has had to sue a number of them to enforce MSP requirements.
If insurers were required to share enrollee information with HCFA, HCFA
could match more current data, and in a more efficient manner, than its
present data matches. However, such a step would require congressional
action.

In regard to collecting overpayments once they have been identified, we
found that HCFA's claims administration contractors do a fairly good job
when providers' current payments can be offset to collect previous
overpayments. However, HCFA's delinquent receivables are a continuing
problem. The longer debt ages, the more difficult it is to collect. HCFA's
practice of offsetting overpayments with future payments gives it leverage
that accounts for much of its collection success, but this option is
typically not available on older debt, because the provider may no longer be
in business, be participating in Medicare, or even be located.

We believe HCFA could collect more of its older debt if it fully implemented
the DCIA. HCFA is not transferring all its eligible debt to HHS' Program
Support Center in a timely manner. Under its two pilot projects, HCFA is
focusing on transferring some Part A debt of significant value that may be
as old as 6 years; its plans to expand the pilots to all contractors will
still exclude debt that falls below HCFA's minimum thresholds. While in some
cases the cost of validating debt may exceed the amount collected, this may
be more applicable to very old debt that requires more extensive validation
efforts than to newly eligible debt. It does not seem reasonable to wait
until the end of fiscal year 2002 at the earliest to transfer all eligible
debt, as HCFA plans. Rather, transferring delinquent debt as soon as it
becomes eligible could result in a greater payback to Medicare; the sooner
it is transferred, the more likely that Treasury or the Program Support
Center will be able to collect. Treasury and the Program Support Center use
collection techniques that are similar to, and may be better than, those
available from recovery auditors. As a result, we did not identify any
additional role for recovery auditors in Medicare's overpayment collection
activities.

We do not believe that recovery auditors offer unique benefits to either
identify or collect overpayments that are not available from HCFA's current
contractors and contracting arrangements. Recovery audit firms whose
postpayment expertise coincides with HCFA's needs presumably could perform
their work on specific PSC task orders or for a specified contract. HCFA
could gain the benefit of their expertise without changing its existing and
accepted payment safeguard contracting structure. In regard to contracting
with recovery auditors, providers and others have raised concerns about
issues such as compensation, administrative burden, coordination with law
enforcement, privacy protection, and contractor oversight. HCFA is working
on addressing these same issues as it implements its PSC initiative.

The Congress should consider increasing HCFA's MIP funds to allow an
expansion of postpayment and other effective program safeguard activities,
and require HCFA to report on the financial returns from these and other
program safeguard investments.

Because HCFA has had difficulties gaining the cooperation of health insurers
in identifying beneficiaries covered by other insurance under the Medicare
Secondary Payer Program, the Congress should consider requiring all private
health insurers to comply with HCFA requests for the names and identifying
information of their enrolled beneficiaries.

To improve overpayment identification and collection, we recommend that the
Administrator of HCFA require that the effectiveness of prepayment and
postpayment activities be evaluated to determine the relative benefits of
various prepayment and postpayment safeguards.

In addition, the Administrator should require that all debt be transferred
to HHS' Program Support Center for collection or referral to Treasury for
collection as soon as it becomes delinquent and is determined to be eligible
for transfer. For its current backlog of debt that is determined to be
eligible, HCFA should validate and refer such debt to HHS' Program Support
Center as quickly as possible.

In commenting on this report, HCFA agreed with our matters for consideration
by the Congress and our recommendations to the agency (see app. I). HCFA
noted that it has taken many actions to address program safeguard and
management weaknesses reported by GAO and the HHS OIG. It outlined a number
of activities under way to better prevent overpayments from occurring and to
identify those that have occurred.

In response to our matters for consideration of the Congress, HCFA stated
that having additional funding under MIP would allow HCFA and its
contractors to expand their range of program safeguard activities. In
addition, HCFA stated that requiring insurers to comply with its requests
for names and identifying information on enrolled beneficiaries would help
the agency more effectively identify beneficiaries with other primary
insurance coverage.

In regard to our recommendations to HCFA, the agency agreed with our
recommendation that it should evaluate the relative benefits and
effectiveness of specific prepayment and postpayment tools, and indicated
that a PSC contractor will begin to assist HCFA with this activity soon.
Further, HCFA agreed with our recommendation to transfer all debt to the HHS
Program Support Center for collection or referral to Treasury for collection
as soon as it becomes delinquent and is determined to be eligible. The
agency noted that it had begun the process of transferring its debt nearly
18 months ago and has hired additional staff in both its central and
regional offices to focus on debt referral activities. We acknowledge HCFA's
efforts, but believe that it should broaden its focus to transferring debt
as it becomes delinquent, rather than solely clearing out its backlog of
aged receivables, because debt that has only recently become delinquent
should be simpler to validate and is generally easier to collect. HCFA also
suggested technical changes to the report, which we incorporated where
appropriate.

We are sending copies of this report to the Honorable Nancy-Ann Min DeParle,
Administrator of the Health Care Financing Administration, appropriate
congressional committees and subcommittees, and other interested parties. We
will also make copies available to others on request.

If you have any questions regarding this report, or if we can be of further
assistance, please call me at (312) 220-7600 or Sheila Avruch at (202)
512-7277. Other major contributors to this report are listed in app. II.

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

Comments From the Health Care Financing Administration

GAO Contacts and Staff Acknowledgments

Leslie G. Aronovitz, (312) 220-7600
Sheila Avruch, (202) 512-7277

In addition to those listed above, Kay Daly, Robert Dee, Anna Kelley, James
Kernen, Wayne Marsh, Frank Putallaz, and Suzanne Rubins made key
contributions to this report.

(101881)

Table 1: Medicare Accounts Receivable 22

Table 2: Medicare Claims Administration Contractors' New Accounts Receivable
and Collections 22
  

1. Most beneficiaries have the option to enroll in managed
care?Medicare+Choice?or Medicare's traditional fee-for-service program.

2. In addition, claims administration contractors can make errors that lead
to overpayments. For example, one contractor we visited said that a recent
system processing error caused Medicare to pay claims that should have been
paid by another federal program.

3. MSP debt differs from other types of Medicare program overpayments
because the validity of the service itself is not in dispute; the question
concerns which payer is responsible for primary coverage. In some cases,
contractors may not be aware of the existence of a primary payer. In other
cases, contractors make conditional payments when there are indications that
another payer has not paid promptly but may ultimately be liable. Later,
contractors determine whether other insurance should have paid the claim
and, if so, they attempt to recover the Medicare payment.

4. By law, the PROs are allowed to conduct postpayment medical review of
inpatient hospital claims, including validating the appropriateness of the
codes charged for services provided.

5. In the future, Medicare should have fewer of these overpayments since
prospective payment systems are being implemented for home health, hospital
outpatient, and rehabilitation hospital services.

6. DHHS-OIG, Unidentified Primary Health Insurance: Medicare Secondary Payer
Auxiliary File, OEI-07-98-00180 (June 2000). The OIG's study included about
half of Medicare's beneficiaries.

7. HHS-OIG, Improper Fiscal Year 1999 Medicare Fee-for-Service Payments,
A-17-99-01999 (Feb. 2000).

8. Under this program, which began in fiscal year 2000, the PROs must
address two common inpatient problems--unnecessary admissions and miscoded
claims--and work with the hospitals to improve their billing accuracy.

9. The Balanced Budget Act of 1997 required HCFA to design and implement
prospective payment for skilled nursing facilities, home health agencies,
hospital outpatient surgery, and rehabilitation hospitals.

10. Currently, Treasury's Financial Management Service is the only
government-wide debt collection center. Treasury has granted a waiver for
HHS to continue to service MSP debt, unfiled cost report debt, and health
profession debt, and to be designated as a debt collection center for that
purpose.

11. A non-MSP receivable becomes delinquent if it is not repaid within 30
days of the date of a demand letter and where the provider or supplier has
not entered into a satisfactory extended repayment schedule. Generally, MSP
debt becomes delinquent if it is not repaid within 60 days of the date of a
demand.

12. During cost report settlement, contractors make a final determination of
how much Medicare reimbursement the HHA has earned and whether Medicare or
the agency is owed money.

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

14. A writeoff occurs when an agency determines that a debt is uncollectable
and removes it from its accounting records--that is, it no longer carries it
as a receivable. A writeoff does not extinguish the underlying liability for
the debt.

15. 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
through 1999.

16. 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 the risk that errors or irregularities in the
amounts that would be material in relation to the financial statements being
audited may occur and not be detected in a timely way.

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

18. The waiver was granted subject to several conditions, including a
provision that HHS refer the remainder of its eligible program and
administrative debt to Treasury for collection.

19. The Program Support Center is an operating division within HHS that
provides a variety of financial and administrative support services to
federal agencies.

20. Under Treasury's offset program, delinquent federal debts are collected
through offset of certain other federal agency payments including federal
income tax refunds. Treasury also contracts with a number of private
collection agencies to collect delinquent debt.

21. For more detail on implementation of DCIA, see Debt Collection: Treasury
Faces Challenges in Implementing Its Cross-Servicing Initiative
(GAO/AIMD-00-234, Aug. 4, 2000).
*** End of document ***