Medicare: HCFA Faces Challenges to Control Improper Payments (Testimony,
03/09/2000, GAO/T-HEHS-00-74).

Pursuant to a congressional request, GAO discussed the Health Care
Financing Administration's (HCFA) efforts to control improper payments
in the Medicare program, focusing on the ongoing and emerging challenges
HCFA faces in safeguarding Medicare payments.

GAO noted that: (1) major information gaps exist in the Medicare
program--in both traditional Medicare and Medicare Choice--that impede
HCFA's ability to minimize program losses attributable to improper
payments; (2) in traditional Medicare, HCFA does not have a clear
picture of the individual or relative performance of Medicare's claims
administration contractors, which are responsible for safeguarding the
program's fee-for-service payments that totalled about $171 billion in
fiscal year 1999; (3) HCFA also lacks sufficient information on newly
designed payment systems to determine whether providers have delivered
excessive services or stinted on patient care to inappropriately
maximize payments; (4) as for Medicare Choice, HCFA similarly lacks the
data needed to monitor the appropriateness of payments made to health
plans and the services Medicare enrollees receive; (5) owing to a failed
attempt in the 1990s to modernize Medicare's multiple information
systems, HCFA's current systems remain seriously outmoded; and (6)
without effective systems, the agency is not well-positioned to collect
and analyze data regarding beneficiaries' use of services--information
that is essential to managing the program effectively and safeguarding
program payments.

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

 REPORTNUM:  T-HEHS-00-74
     TITLE:  Medicare: HCFA Faces Challenges to Control Improper
	     Payments
      DATE:  03/09/2000
   SUBJECT:  Health care programs
	     Health insurance
	     Erroneous payments
	     Internal controls
	     Medical information systems
	     Health services administration
	     Program abuses
	     Fraud
	     Managed health care
	     Contract oversight
IDENTIFIER:  Medicare Choice Program
	     Medicare Program
	     HCFA Medicare Transaction System
	     Supplementary Medical Insurance Trust Fund
	     Hospital Insurance Trust Fund

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   * For Release on Delivery
     Expected at 9:30 a.m.

Thursday, March 9, 2000

GAO/T-HEHS-00-74

MEDICARE

HCFA Faces Challenges to Control Improper Payments

        Statement of Leslie G. Aronovitz, Associate Director

Health Financing and Public Health Issues

Health, Education, and Human Services Division

Testimony

Before the Subcommittee on Labor, Health and Human Services, and Education,
Committee on Appropriations, U.S. Senate

United States General Accounting Office

GAO

Medicare: HCFA Faces Challenges to Control Improper Payments

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today as you discuss Medicare program integrity
issues. You have heard from the Department of Health and Human Services
Office of the Inspector General (HHS OIG) and the Health Care Financing
Administration (HCFA) about their efforts to quantify improper payments in
the Medicare program. Specifically, the OIG has reported a fee-for-service
claims error rate for the past several years and HCFA is planning to
estimate an error rate for each claims administration contractor, which
could help guide efforts to reduce inappropriate payments. Although we
believe these efforts are worthwhile, Medicare error rates provide only a
partial picture of program vulnerabilities. My remarks today will focus on
areas of vulnerability, highlighting the ongoing and emerging challenges
HCFA faces in safeguarding Medicare payments.

In summary, major information gaps exist in the Medicare program-in both
traditional Medicare and Medicare+Choice-that impede HCFA's ability to
minimize program losses attributable to improper payments. In traditional
Medicare, HCFA does not have a clear picture of the individual or relative
performance of Medicare's claims administration contractors, which are
responsible for safeguarding the program's fee-for-service payments that
totaled $171 billion in fiscal year 1999. HCFA also lacks sufficient
information on newly designed payment systems to determine whether providers
have delivered excessive services or stinted on patient care to
inappropriately maximize payments. As for Medicare+Choice, HCFA similarly
lacks the data needed to monitor the appropriateness of payments made to
health plans and the services Medicare enrollees receive. Owing to a failed
attempt in the 1990s to modernize Medicare's multiple information systems,
HCFA's current systems remain seriously outmoded. Without effective systems,
the agency is not well-positioned collect and analyze data regarding
beneficiaries' use of services-information that is essential to managing the
program effectively and safeguarding program payments.

In Traditional Medicare, Claims Oversight Problems Remain and Improved
Payment Methods Can Still Be Gamed

Better Vigilance Needed Over Medicare Contractors

In recent years, incidents have occurred in which Medicare's contract
bill-payers themselves-the front-line of defense against provider fraud and
abuse and erroneous Medicare payments-had engaged in fraudulent or otherwise
improper activities. However, HCFA rarely uncovered these cases through its
own oversight efforts. The reason, in part, is that the agency relied on
contractors' self-certifications of management controls and contractors'
self-reported data on performance and seldom made independent validations of
contractor-provided information. In a number of the contractor integrity
cases, poor management controls and falsified data were recurring themes.

Not surprisingly, our report last year on HCFA's efforts to monitor the
Medicare claims administration contractors identified many weaknesses. For
years, HCFA's contractor evaluation process lacked the consistency that
agency reviewers needed to make comparable assessments of contractor
performance. HCFA reviewers had few measurable performance standards and
little agencywide direction on monitoring contractor's payment safeguard
activities. Under these circumstances, the reviewers in HCFA's 10 regional
offices, who were responsible for conducting contractor evaluations, had
broad discretion to decide what and how much to review as well as what
disciplinary actions to take against contractors with performance problems.
This highly discretionary evaluation process allowed key program safeguards
to go unchecked and led to an inconsistent treatment of contractors with
similar performance problems.

In addition to having a weak evaluation process, HCFA had not made its
multiple units that were responsible for contractor oversight adequately
accountable. Responsibility for various aspects of contractor activities was
splintered across many central office components, while regional staff who
conducted day-to-day oversight were not directly accountable to any
particular central office unit.

HCFA has taken a number of promising steps to address these weaknesses and
to achieve the following goals:

   * Greater consistency. HCFA has begun using national review teams to
     conduct contractor evaluations. The teams combine the expertise and
     dual perspective of central and regional office staff.
   * Improved accountability. HCFA established an executive-level position
     at its central office with ultimate responsibility for contractor
     oversight and recently announced plans for four positions in the field,
     reflecting the four groupings of regional offices known as consortia.
     The four consortium representatives responsible for contractor
     oversight will report both to the central office executive and to their
     respective consortium administrators.
   * Independent verification. To address the need for independent
     verification of internal controls and contractor-reported data, HCFA
     hired a public accounting firm to develop standard review procedures
     and evaluation methodologies.
   * More meaningful error rates. HCFA has an initiative, as you have heard
     today, to develop a separate error rate for each contractor. It plans
     to hire a "validation" contractor to randomly sample processed claims
     and recheck the processing and payment decisions made. From the
     results, HCFA could not only develop an objective measure of contractor
     performance but also identify which categories of services or provider
     types are the source of improper billing practices, thus targeting
     areas that need improvement.

Because these steps were taken recently, we have not evaluated their success
in addressing the agency's long-standing, fundamental problems in overseeing
its contractors.

Opportunities to Game New Payment Methods Difficult to Control Without
Adequate Management Information

Under the old payment methods, post-acute care providers were reimbursed
their costs (within certain limits) for all the services delivered. Under
the new methods, known as prospective payment, these providers are, or soon
will be, paid a prospective rate per unit of care. The expectation is that
prospective payment systems will encourage the efficient delivery of care by
reducing a provider's incentive to deliver excessive services or incur
unnecessary costs. Providers face the risk of loss if their costs exceed
their payments, while those that can furnish care for less than the
prospective payment rate will retain the difference. However, a new
opportunity for providers to inappropriately boost revenues exists under
this approach: providers could skimp on services and compromise the
patient's quality of care. Because HCFA does not have the analytic tools
available to identify and document underservice, any resulting improper
payments would not be captured by error rates as currently constructed. In
fiscal year 1999, Medicare's payments for skilled nursing facility and home
health care together totaled $28 billion.

Not all patients require the same amount of care, so the rate paid for each
patient is "case-mix" adjusted to take into account the nature of the
patient's condition and expected care needs.

These adjustments are required to ensure that providers serving patients
with more intensive care needs receive adequate payments and, conversely,
that providers are not overcompensated for patients with lower care needs.
Used in conjunction with a prospective per-unit payment, case-mix adjustment
is intended to reduce the incentive to inappropriately increase profits by
furnishing more or fewer services than are needed. However, several
analytical problems make ensuring the appropriate payment for each patient a
thorny issue, as illustrated by the following types of post-acute care
services.

   * Skilled nursing facility care. Under the skilled nursing facility
     prospective payment system, facilities receive a payment for each day
     of a patient's care, adjusted for case mix. This approach was intended
     to control the rapid growth in certain skilled nursing facility care
     costs. As we reported last year, however, the case-mix adjustment
     methodology is flawed. The case-mix groups that influence payment
     amounts for each patient are defined largely by service use rather than
     by actual patient need. Thus, a facility could increase a patient's
     reported service use merely to increase payments.

   * Home health care. Under the home health prospective payment system to
     be implemented in October, Medicare will pay agencies a per-episode
     rate for up to 60 days of services for a patient. Payment will be the
     same regardless of the number of days of care or visits actually
     provided, and there are no limits on the number of episodes a
     beneficiary could have. This approach is intended to reward home health
     agencies for constraining service use within an episode by encouraging
     efficient service delivery. However, with no limits on the number of
     episodes provided, providers continue to have the opportunity to
     increase aggregate payments. In addition, defining an adequate level of
     services within an episode is a problem, given a lack of agreed-upon
     standards for the appropriate use of home health care. Further, HCFA
     does not have the monitoring capability to determine-in time to make a
     difference to the beneficiary-whether the services provided within an
     episode are too few to be considered adequate care.
   * Inpatient rehabilitation therapy. The prospective payment system for
     rehabilitation facilities to be phased in beginning October 2000 is
     expected to be based on a single payment for all services provided
     during a stay, like the payment for acute-care hospitals. This approach
     is intended to reward providers that deliver care efficiently. However,
     it will be difficult to devise controls to keep facilities from merely
     discharging patients earlier. The shorter stays would reduce the
     facilities' costs but may not achieve the appropriate level of
     rehabilitation for the patient. Such an outcome could not only
     jeopardize the quality of a beneficiary's care but also raise costs for
     Medicare if more post-acute care is needed after discharge.

Medicare+Choice Has Its Own Set of Integrity Issues

Broadly speaking, the following three situations illustrate the program
integrity issues that potentially exist in Medicare+Choice. First, plans
could purposely seek to attract and retain only those beneficiaries who are
relatively healthy and low-cost. Second, plans could fail to deliver
required services to beneficiaries. Finally, since payment rates are based
in part on plan-provided information, erroneous or misreported data could
lead to inappropriate payments. Previous work by us and the HHS OIG has
uncovered instances in which plans received inappropriate payments or did
not deliver services that they were paid to deliver. Although the full
extent of these problems is not known, the available information suggests
that HCFA needs to improve its capacity to monitor plan performance and
ensure that payments are appropriate and that plans fulfill their
obligations. The following elaborates on the program integrity challenges in
Medicare+Choice.

   * Favorable selection of healthier beneficiaries. Plans gain financially
     when their enrolled Medicare beneficiaries are, as a group, healthier
     than beneficiaries in traditional Medicare-a phenomenon known as
     favorable selection. This gain occurs because healthy beneficiaries
     cost less to serve than chronically or acutely sick beneficiaries and
     Medicare's payment is not adequately "risk adjusted" to reflect that
     fact. Our recent work examining those who join Medicare+Choice plans
     confirms varying degrees of favorable selection among the health plans.
     This enrollment pattern could have a benign explanation: healthy
     beneficiaries may be more willing to enroll than sick beneficiaries,
     who could have attachments to providers that might not belong to the
     selected plan's provider network. However, it is also possible that
     some plans-through their marketing practices or provider incentive
     arrangements-attract healthier beneficiaries and have more of their
     sick members disenroll. Regardless of the cause, the consequences of
     favorable selection in the presence of an inadequate risk adjuster are
     huge-resulting in billions of dollars in excess payments.

   * Failure to deliver required services. Plans could also profit by not
     providing services that they are paid to deliver. Last year we reported
     that a large Medicare+Choice plan provided a prescription drug benefit
     with less coverage than it agreed to in its contract with HCFA. This
     case was discovered in our review of plan marketing materials, which
     found that several plans distributed misleading, inaccurate, or
     incomplete information about covered benefits. Until recently, when
     plans started submitting data on hospital admissions, HCFA had no
     systematic information regarding the services managed care enrollees
     received. Instead, the agency relied, and to a great extent continues
     to rely, on beneficiaries being aware of the services to which they are
     entitled and complaining when those services are not provided. This
     weak oversight mechanism cannot ensure program integrity. Medicare is a
     complex program, and many beneficiaries do not understand what benefits
     the program covers. Flawed plan marketing materials contribute to the
     misunderstandings. In addition, beneficiaries may not know where or how
     to complain. We reported last year that several plans failed to
     adequately inform beneficiaries that they could appeal a plan's
     decision to deny services or payment for services.
   * Misreported or erroneous data that increase payments. A final area of
     potential concern relates to the data used for payment purposes. For
     example, in 1998 we reported that some plans took advantage of an
     overly broad Medicare definition to classify healthy beneficiaries
     living in retirement communities as living in "institutions" and
     thereby substantially increase their Medicare payments. HCFA has since
     adopted our recommendation to tighten the definition of an institution
     for payment purposes, but the extent to which the new definition is
     being enforced is uncertain. The OIG has reported numerous instances in
     which erroneous data resulted in inappropriate plan payments. For
     example, the OIG found cases in which Medicare paid plans for deceased
     beneficiaries and for beneficiaries receiving services in traditional
     Medicare. The OIG also found plans that inappropriately collected
     enhanced payments by misreporting their beneficiaries' institutional
     status. Reliable information about plan enrollees will become even more
     critical in the future as Medicare phases in a new risk adjustment
     methodology. Under this new methodology, payment rates will be
     determined largely by provider encounter data submitted by plans. Any
     errors in the encounter data will thus result in inaccurate plan
     payments.

Outmoded Information Systems Limit HCFA's Ability to Manage Medicare

A major structural issue underlies HCFA's efforts to safeguard Medicare
payments: the need for reliable management information. This is true whether
the information pertains to payment of claims, new post-acute care payment
methods, or Medicare+Choice payments. To protect taxpayer dollars from
unnecessary program spending, HCFA needs the information to ensure that
claims payments are accurate and that payment rates are set at the
appropriate level. To protect beneficiaries from providers' withholding
needed services, HCFA needs information on beneficiaries' health status and
use of services. The following are among HCFA's major information
challenges:

   * Traditional Medicare. In addition to a long-standing need to upgrade
     its claims analysis capabilities, HCFA requires information on patient
     health needs. As discussed earlier, major gaps in information make
     prospective payment systems vulnerable to manipulation, thus
     undermining the potential for the prospective payment approach to
     constrain Medicare costs. For example, payments for skilled nursing
     facility and home health care would be more accurate if linked to
     patient need rather than to service use, but HCFA has only begun
     collecting the data necessary to develop standards of appropriate care.
   * Medicare+Choice. As with the case-mix adjuster for post-acute care
     payment methods, Medicare needs an improved risk adjustment system to
     ensure that payments better reflect the expected health care costs of
     managed care enrollees. Recently, HCFA launched several initiatives,
     including a beneficiary satisfaction survey, the collection of selected
     self-reported plan performance measures, and the collection of hospital
     admissions data to improve Medicare's risk adjustment methodology.
     Collection of more comprehensive encounter data is planned for the
     future. However, HCFA lacks a coordinated strategy to analyze these
     data and use the results to improve its oversight responsibilities.

HCFA's information needs are not being met with Medicare's existing
fragmented and aged set of computerized information systems. Seriously
affected are the systems that support traditional Medicare, Medicare+Choice,
and HCFA's financial management efforts.

In the early 1990s, HCFA launched a systems acquisition initiative to
replace Medicare's multiple, contractor-operated claims processing systems
with a single and more technologically advanced system, called the Medicare
Transaction System (MTS). HCFA envisioned that a modernized, single system
would (1) save administrative dollars and simplify making system changes,
(2) enhance HCFA's ability to manage the Medicare contractors by obtaining
uniformly formatted, comparable data, and (3) greatly improve the ability to
spot, both on-line and after payment, improper billing practices. Although
MTS was based on the sound notion that a comprehensive, integrated system
was needed, it failed operationally, through a series of planning and
implementation missteps. HCFA's failure to acquire an integrated system left
the program with numerous aging information systems that needed year 2000
renovation.

Similarly, HCFA's managed care information systems, developed a decade ago,
may have reached their capacity to accommodate modifications associated with
an increasingly complex and demanding program. An outside firm's assessment
of HCFA's managed care information capacity found, among other problems,
that the current system makes it difficult to extract information for policy
decisions and program management; is labor-intensive to modify and validate;
and, because of its batch processing structure, does not provide timely
information on beneficiary enrollment or other plan transactions.

Finally, with regard to financial management, HCFA cannot ensure that key
financial data are reliable and available or that sensitive beneficiary data
are kept confidential. In repeated annual audits, the OIG found that HCFA's
and the contractors' systems can be penetrated, leaving sensitive claims and
medical record information inadequately protected. The focus on year 2000
system renovations has, in part, delayed HCFA's efforts to address the
security weaknesses identified. HFCA also lacks an integrated accounting
system to examine Medicare expenditures at the contractor level, depending
instead on labor-intensive processes to prepare financial statements. HCFA
has an initiative under way to develop an integrated accounting system, but
it will not be fully operational until 2004 at the earliest.

While it is clear from the problems outlined that investment in HCFA's
information systems is warranted, such an investment must be coupled with a
clear strategy to ensure that investment is made wisely. In efforts to run
the program economically, HCFA has been left with fewer and fewer
administrative dollars to handle increasingly complex tasks. In 1998, HCFA's
administrative expenses represented about 1 percent of its outlays from the
Hospital Insurance Trust Fund and about 2 percent of outlays from the
Supplementary Medical Insurance fund. Even after accounting for marketing
costs and profit, no private health insurer would attempt to manage such a
large and complex program with so small an administrative budget. HCFA's
ability to provide assistance to beneficiaries, monitor the quality of
provider services, and protect against fraud and abuse is dependent on
adequate administrative funding. Nevertheless, providing increased funds for
upgrading systems would be imprudent without an effective strategic plan.
Such a plan would, among other things, envision how to transform the data
collected into useful management information. We are aware that HCFA has
started down this path, and we will be interested in its evolving planning
efforts.

Conclusions

to answer any questions you or other Subcommittee Members may have.

GAO Contacts and Acknowledgments

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