Medicare: Control Over Fraud and Abuse Remains Elusive (Testimony,
06/26/97, GAO/T-HEHS-97-165).

GAO discussed the problem of fraud and abuse in the Medicare program,
focusing on: (1) the anti-fraud-and-abuse tools available to Medicare;
(2) the extent to which and how effectively they are used by the Health
Care Financing Administration (HCFA); and (3) recent legislative
activity aimed at improving program safeguards.

GAO noted that: (1) GAO selected Medicare as one of the initial programs
to be included in GAO's high-risk efforts because of the program's size,
complexity, and rapid growth; (2) in addition, HCFA's efforts to fight
Medicare fraud and abuse have not been adequate to prevent substantial
losses because the tools available over the years have been
underutilized or not deployed as effectively as possible; (3) because of
budget constraints, the number of reviews of claims and related medical
documentation and the site audits of providers' records have dwindled
significantly; (4) in addition, HCFA's management of its claims
processing controls and Medicare's automated information systems has
been unsatisfactory; (5) as a result, Medicare's information systems and
the staff monitoring have been less than effective at spotting
indicators of potential fraud, such as suspiciously large increases in
reimbursements, improbable quantities of services claimed, or duplicate
bills submitted to different contractors for the same service or supply;
(6) because of acknowledged system weaknesses, HCFA is in the process of
acquiring a new multimillion-dollar automated system called the Medical
Transaction System (MTS); (7) MTS is intended to replace Medicare's
multiple automated systems and is expected to enhance significantly its
fraud and abuse detection capabilities; (8) however, HCFA has not
effectively managed the process for acquiring this system; (9) less than
adequate oversight has also resulted in little meaningful action taken
against Medicare health maintenance organizations (HMO) found to be out
of compliance with federal law and regulations; (10) other than
requiring corrective action plans, HCFA has not sanctioned poor
performing HMOs, using such tools as excluding these HMOs from the
program, prohibiting continued enrollment until deficiencies are
corrected, or notifying beneficiaries of the HMOs cited for violations;
(11) accumulated evidence of in-home sales abuse coupled with high rates
of rapid disenrollment for certain HMOs also indicate that some
beneficiaries are confused or are being misled during the enrollment
process and are dissatisfied once they become plan members; and (12)
recent and proposed legislation, chiefly the Kassebaum-Kennedy
legislation, also known as the Health Insurance Portability and
Accountability Act of 1996, and the budget reconciliation legislation n*

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

 REPORTNUM:  T-HEHS-97-165
     TITLE:  Medicare: Control Over Fraud and Abuse Remains Elusive
      DATE:  06/26/97
   SUBJECT:  Claims processing
             Health care programs
             Fraud
             Program abuses
             Proposed legislation
             Internal controls
             Medical expense claims
             Health maintenance organizations
             Medical information systems
IDENTIFIER:  Medicare Program
             HCFA Medicare Transaction System
             Hospital Insurance Trust Fund
             HHS Operation Restore Trust
             GAO High Risk Program
             Medicaid Managed Care Program
             
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Cover
================================================================ COVER


Before the Permanent Subcommittee on Investigations, Committee on
Governmental Affairs, U.S.  Senate

For Release on Delivery
Expected at 9:00 a.m.
Thursday, June 26, 1997

MEDICARE - CONTROL OVER FRAUD AND
ABUSE REMAINS ELUSIVE

Statement of Leslie G.  Aronovitz, Associate Director
Health Financing and Systems Issues
Health, Education, and Human Services Division

GAO/T-HEHS-97-165

GAO/HEHS-97-165T


(101577)


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

  EOMB - Explanation of Medicare Benefits
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  HIPAA - Health Insurance Portability and Accountability Act of 1996
  HMO - health maintenance organization
  MTS - Medicare Transaction System

MEDICARE:  CONTROL OVER FRAUD AND
ABUSE REMAINS ELUSIVE
============================================================ Chapter 0

Madam Chairman and Members of the Subcommittee: 

We are pleased to be here today as you discuss the problem of fraud
and abuse in the Medicare program.  Because Medicare is one of the
largest, most expensive programs in the federal budget, its spending
has been the subject of numerous legislative proposals in recent
years by the Congress and the administration.  In fiscal year 1996,
Medicare expenditures totaled about $200 billion, and the program's
Hospital Insurance Trust Fund is expected to be depleted by 2001.  At
the same time, millions of dollars are being spent inappropriately
because of the fraudulent and abusive billing practices of health
care providers, thus prompting congressional concern about program
vulnerabilities. 

My comments today will focus on both the fee-for-service and managed
care programs.  Specifically, I would like to highlight the
anti-fraud-and-abuse tools available to Medicare; the extent to which
and how effectively they are used by the Health Care Financing
Administration (HCFA), the agency responsible for administering the
program; and recent legislative activity aimed at improving program
safeguards. 

The information I am presenting today is based on recent GAO studies
and the three High Risk Series reports on Medicare we have issued
since 1992.  The high-risk reports are the products of GAO's special
effort, begun in 1990 and supported by the Senate Committee on
Governmental Affairs, to review federal program areas identified as
high risk because of vulnerabilities to waste, fraud, abuse, and
mismanagement.  (See Related GAO Products at the end of this
statement.)

In brief, we selected Medicare as one of the initial programs to be
included in our high-risk efforts because of the program's size,
complexity, and rapid growth.  In addition, HCFA's efforts to fight
Medicare fraud and abuse have not been adequate to prevent
substantial losses because the tools available over the years have
been underutilized or not deployed as effectively as possible. 

Because of budget constraints, the number of reviews of claims and
related medical documentation and the site audits of providers'
records have dwindled significantly.  This means, for example, that a
home health provider has only a slim chance of having its claims, its
year-end cost reports, or its actual provision of services carefully
scrutinized by Medicare.  In addition, HCFA's management of its
claims processing controls and Medicare's automated information
systems has been unsatisfactory.  As a result, Medicare's information
systems and the staff monitoring claims have been less than effective
at spotting indicators of potential fraud, such as suspiciously large
increases in reimbursements, improbable quantities of services
claimed, or duplicate bills submitted to different contractors for
the same service or supply.  Because of acknowledged system
weaknesses, HCFA is in the process of acquiring a new
multimillion-dollar automated system called the Medicare Transaction
System (MTS).  MTS is intended to replace Medicare's multiple
automated systems and is expected to enhance significantly its fraud
and abuse detection capabilities.  However, HCFA has not effectively
managed the process for acquiring this system.  Now schedule delays
and growing cost projections--from a $151 million estimate made in
1992 to about a $1 billion estimate this year--have forced HCFA to
halt much of the system's development while the agency reassesses its
acquisition plans. 

Less than adequate oversight has also resulted in little meaningful
action taken against Medicare health maintenance organizations (HMO)
found to be out of compliance with federal law and regulations. 
Other than requiring corrective action plans, HCFA has not sanctioned
poor performing HMOs, using such tools as excluding these HMOs from
the program, prohibiting continued enrollment until deficiencies are
corrected, or notifying beneficiaries of the HMOs cited for
violations.  Accumulated evidence of in-home sales abuses coupled
with high rates of rapid disenrollment for certain HMOs also indicate
that some beneficiaries are confused about or are being misled during
the enrollment process and are dissatisfied once they become plan
members.  In addition, consumer information that could help
beneficiaries distinguish the good plans from the poor performers is
not made publicly available, limiting the ability of beneficiaries to
make informed choices about competing plans.  This in turn limits the
ability of consumer choice to drive out poor quality. 

Recent and proposed legislation--chiefly the Kassebaum-Kennedy
legislation, also known as the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), and the budget reconciliation
legislation now being considered by the Congress--refocus attention
on various aspects of Medicare fraud and abuse.  The implementation
of the enacted provisions, such as additional funding for special
antifraud initiatives and the promise of proposed legislation, such
as the authority to prevent all convicted felons from becoming
Medicare providers, offer the potential to reduce Medicare losses
attributable to unwarranted payments.  But HCFA's history of lengthy
delays in implementing legislation gives cause for concern about
whether the authorities granted will be acted on promptly and
effectively. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Established under the Social Security Amendments of 1965, Medicare is
a two-part program:  "hospital insurance," or part A, which covers
inpatient hospital, skilled nursing facility, hospice, and home
health care services; and "supplementary medical insurance," or part
B, which covers physician and outpatient hospital services,
diagnostic tests, and ambulance and other health services and
supplies.  Medicare falls under the administrative jurisdiction of
HCFA, within the Department of Health and Human Services (HHS).  HCFA
administers both traditional fee-for-service Medicare and HMOs under
contract that are permitted to enroll Medicare beneficiaries. 


      FEE-FOR-SERVICE PROGRAM
-------------------------------------------------------- Chapter 0:1.1

In 1996, Medicare's fee-for-service program covered almost 90
percent, or 35 million, of Medicare's beneficiaries.  Physicians,
hospitals, and other providers submit claims to Medicare to receive
payment for services they have provided to beneficiaries.  HCFA
administers Medicare's fee-for-service program largely through a
network of about 70 claims processing contractors, that is, insurance
companies--like Blue Cross and Blue Shield plans, Mutual of Omaha,
and CIGNA--that process and pay Medicare claims.  In fiscal year
1996, contractors processed about 800 million Medicare claims. 

As Medicare contractors, these companies use federal funds to pay
health care providers and beneficiaries and are reimbursed for their
administrative costs incurred in performing the work.  They are also
responsible for the payment safeguard activities intended to protect
Medicare from paying inappropriately.\1 The contractors have broad
discretion in conducting these activities, resulting in significant
variations across contractors in implementing payment safeguards. 

Generally, intermediaries are the contractors that handle claims
submitted by "institutional providers" (hospitals, skilled nursing
facilities, hospices, and home health agencies); carriers are those
handling claims submitted by physicians, laboratories, equipment
suppliers, and other practitioners. 


--------------------
\1 Although under section 202 of HIPAA, the HHS Secretary is
authorized to enter into contracts with entities other than its
current contractors to perform payment safeguard activities, HCFA has
not yet awarded any contracts of this type. 


      MANAGED CARE PROGRAM
-------------------------------------------------------- Chapter 0:1.2

Medicare's managed care program covers a growing number of
beneficiaries--nearly 5 million at the end of 1996--who have chosen
to enroll in an HMO to receive their medical care rather than
obtaining services from individual providers.  The managed care
program, which is funded from both the part A and part B trust funds,
consists mostly of risk contract HMOs that enrolled about 4 million
Medicare beneficiaries as of the end of 1996.\2 These HMOs are paid a
monthly amount, fixed in advance, by Medicare for each beneficiary
enrolled rather than for each service provided.  In this sense, the
HMO has a "risk" contract because, regardless of what it spends for
each enrollee's care, the HMO assumes the financial risk of providing
all needed health care in return for the payments received.  HMOs
profit if their costs of providing services are lower than the
predetermined payment but lose if their costs are higher than the
Medicare payment. 


--------------------
\2 Other Medicare managed care plans include cost contract HMOs and
health care prepayment plans.  Cost contract HMOs allow beneficiaries
to choose health services from their HMO network or outside
providers.  Health care prepayment plans cover only part B services. 
Together, both types of plans enroll fewer than 2 percent of the
Medicare population. 


      MEDICARE FRAUD
-------------------------------------------------------- Chapter 0:1.3

Fraud and abuse encompass a wide range of improper billing practices
that include misrepresenting or overcharging with respect to services
delivered.  Both result in unnecessary costs to Medicare; but a fraud
conviction requires proof of intent to defraud.  Abuse typically
involves actions that are inconsistent with Medicare billing rules
and policies.  As a practical matter, whether and how a wrongful act
is addressed can depend on the size of the financial loss incurred
and the quality of the evidence establishing intent.  For example,
small claims are generally not pursued as fraudulent because of the
cost involved in investigation and prosecution. 

The pursuit of fraud often begins with the contractors, which conduct
reviews of submitted claims and respond to beneficiary complaints. 
They develop cases for referral to the HHS Inspector General for
possible criminal or civil prosecution and administrative sanction. 
Potential fraud cases referred to the Inspector General require
careful documentation by the contractor, entailing data analyses,
claims audits, interviews with patients, and reviews of medical
records. 

Inspector General investigations can involve, among other things,
additional interviews or analyses of medical records, and subpoena of
financial records.  If satisfied that the evidence warrants
prosecution, the Inspector General forwards the case to a U.S. 
Attorney, within the Department of Justice.  The U.S.  Attorney then
decides whether to accept the case for prosecution.  If an
indictment, and finally, a conviction are obtained, further work is
necessary to establish administrative sanctions and recover
overpayments.  Thus, although the mechanics to pursue Medicare fraud
are in place, the high level of resources and interagency
coordination required for case development can stall the pursuit of a
case at many junctures and delay the resolution of a case for many
years. 


   MEDICARE'S ANTI-FRAUD-AND-ABUSE
   EFFORTS CONSIST LARGELY OF
   CONTRACTORS' PAYMENT SAFEGUARDS
---------------------------------------------------------- Chapter 0:2

HCFA relies on payment safeguards that consist largely of
contractors' efforts to detect improprieties both before and after
claims have been paid.  In addition to complaints contractors receive
from beneficiaries, detection efforts include prepayment reviews of
providers' claims, and postpayment analyses, such as reviews of
claims data and audits of provider costs.  (See table 1.)



                                         Table 1
                         
                              Medicare's Controls to Detect
                                  Inappropriate Payments

Control              How it works
-------------------  --------------------------------------------------------------------
Leads from           Beneficiaries use Explanation of Medicare Benefits to alert Medicare
beneficiaries        of claims for services not provided, suspiciously high charges, or
                     other indications of potential fraud.

Prepayment review    Computer edits check claims for compliance with such administrative
                     requirements as the submission of all necessary information.

                     Computer edits automatically deny claims that are duplicates of
                     others already processed by that system.

                     Computer screens suspend for manual review claims that do not appear
                     to comply with medical necessity or coverage criteria.

Postpayment review   Focused medical review. Provider-targeted: Examining historical
                     data, analysts compare providers' claims against those of their
                     peers to identify high billers; past or future claims of high
                     billers may be targeted for more extensive review. Service-
                     targeted: Analysts examine expenditure data to identify medical
                     services for which spending has been unusually high; past or future
                     claims for these services may be subjected to more intensive
                     reviews.

                     Comprehensive claims audit. Reviewers examine in greater depth
                     providers' billings found through leads from beneficiaries, focused
                     medical review, or other sources to show irregularities.

                     Audit of cost reports. Auditors verify the reasonableness of costs
                     reported annually by institutional providers that are reimbursed on
                     a cost basis.
-----------------------------------------------------------------------------------------

      BENEFICIARY LEADS GENERATED
      FROM PAYMENT NOTICES
-------------------------------------------------------- Chapter 0:2.1

The Explanation of Medicare Benefits (EOMB), which is a notice to
beneficiaries detailing the services their provider billed for and
Medicare payment decisions, is one type of payment safeguard.  Many
fraud cases begin with beneficiary calls to Medicare contractors,
HCFA, the HHS Inspector General, the Federal Bureau of Investigation,
state licensing agencies, and professional associations.  These
calls, officially termed complaints, are often triggered by EOMBs
that show providers' bills for services never received, items never
ordered, or suspiciously high charges for services or supplies
received. 


      PREPAYMENT CLAIMS SCREENING
-------------------------------------------------------- Chapter 0:2.2

One of Medicare's key payment safeguard activities--performed by the
claims processing contractors--is the prepayment screening of claims
for compliance with administrative billing procedures and medical
coverage policies.  Edits and screens are programmed into claims
processing software that trigger the suspension of incomplete or
erroneous claims.  For example, if a provider's billing number or
beneficiary identification number is incomplete or otherwise
incorrect, the computer automatically holds the claim until the data
are corrected.  Edits automatically deny duplicate claims.  Screens
will also halt processing when claims do not meet certain medical
necessity or coverage conditions for payment.  For example, a screen
developed for echocardiography might suspend the processing of a
claim for which the documented diagnosis was indigestion; in such a
case, the claim would receive further review by contractor staff. 


      POSTPAYMENT REVIEW
-------------------------------------------------------- Chapter 0:2.3

Another payment safeguard performed by contractor staff is
postpayment review, which consists of efforts to detect
irregularities.  These efforts include (1) focused medical reviews,
in which an examination of claims data focuses on either the billings
of a particular provider or the expenditures for a particular
service; (2) comprehensive audits of claims submitted by suspect
providers; and (3) audits of providers' cost reports.  Postpayment
reviews can lead to the strengthening of payment policies that in the
future will disallow or reduce unwarranted Medicare reimbursements
for certain services. 

Focused medical reviews involve reviewers examining claims data to
find patterns that deviate from a norm.  For example, they look for
aberrancies in an individual provider's billing patterns by
profiling, or identifying providers who bill for many more services
per patient than their peers.  Reviewers also look for aberrancies in
expenditure data for a specific service or procedure largely by
comparing the total amounts the contractor spent for a particular
service with spending in previous periods and with other contractors'
spending for that service.  The outcome of focused medical reviews
can include more comprehensive reviews, also called audits, of
providers' claims. 

Claims audits are typically conducted for providers whose billings
have shown irregularities.  In these cases, contractors review a
sample of claims for the provider's patients to determine whether
services were appropriate--that is, medically necessary, covered by
Medicare, and actually provided--and whether they were billed in
compliance with Medicare rules.  Audits are resource-intensive, often
involving medical record reviews and patient and provider interviews. 
If audits disclose that Medicare has paid for unnecessary or
inappropriate services, the contractor attempts to recover
overpayments. 

Focused medical review also generates the information contractors
need to decide which services need medical review policies, which in
turn typically serve as the basis for developing a computerized
medical necessity screen, as discussed earlier.  With the exception
of some national policies, contractors develop their own medical
review policies to address "local" payment issues.  For example,
after examining several years of data on spending for foot care
services, a contractor determined that total spending for foot care
services increased fourfold--from about $470,000 to about $1.8
million in a 3-year period.  From this and other postpayment review
information, the contractor developed a medical review policy
covering foot care under certain conditions.  This policy served as
the basis for the contractor's development of a computer software
screen for foot care services.  Within a year, the contractor's
payments for foot care procedures dropped to about $620,000, or a
third of what had been paid the previous year. 

Audits of cost reports submitted by providers paid under cost-based
reimbursement are another postpayment review tool.  Such
providers--including hospital outpatient departments, skilled nursing
facilities, and home health agencies--are reimbursed not on the basis
of a fee schedule or the charge for a service but on the basis of the
"reasonable" cost to provide the service. 

Reimbursement to such institutional providers occurs in several
steps.  First, Medicare contractors make "interim" payments based on
the provider's historical costs and current cost estimates.  These
payments help defray the ongoing costs of providing services to
Medicare beneficiaries.  Second, at the end of each year, the
providers submit reports that detail their operating costs throughout
the preceding year and specify the share related to the provision of
Medicare services.  Using this information, intermediaries make
interim adjustments to the payments made to the provider.  Third, the
intermediary can conduct either "desk audits" or more detailed
reviews of the cost reports, including "field audits," to determine
the appropriate final payment amounts. 


   BUDGET CONSTRAINTS HAVE
   WEAKENED EFFORTS TO REVIEW
   CLAIMS, DETER ABUSE
---------------------------------------------------------- Chapter 0:3

Over the last 7 years, HCFA and its claims processing contractors
have struggled to carry out critical claims review and provider audit
activities with a budget that, on a per-claim basis, was declining
substantially.  For example, between 1989 and 1996, the number of
Medicare claims climbed 70 percent to over 800 million, while during
that same period, claims review resources grew less than 11 percent. 
Adjusting for inflation and claims growth, the amount contractors
could spend on review shrank from 74 cents to 48 cents per claim. 
(See fig I.1.)

The deterioration of Medicare's controls over home health payments
exemplifies the effect of the inadequate funding of payment
safeguards.  Between 1988 and 1996, Medicare spending for home health
care grew from $2.1 billion to $18 billion and by the year 2000 is
projected to exceed $21 billion (see fig.  I.2).  Along with
increasing expenditures, the number of home health agencies has also
increased--from about 5,800 to over 9,000. 

However, as we reported in 1996, Medicare's review of home health
claims greatly decreased in the 1990s, despite the dramatic rise in
home health care expenditures.\3

Because of budgetary constraints in recent years, contractors'
reviews of home health claims plummeted from 62 percent in 1987 to a
target of 3 percent in 1996.\4 The infrequency of the intermediaries'
medical review of claims and limited physician involvement in
overseeing home health agencies' plans of care have made it nearly
impossible to determine whether the beneficiary receiving home health
services qualified for the benefit, needed the care being delivered,
or even received the services being billed to Medicare.  Also,
because of the small percentage of claims selected for review, home
health agencies that billed for noncovered services are much less
likely to be identified than was the case a decade earlier. 

Similarly, the percentage of cost reports audited has declined;
between 1991 and 1996, the chances that any institutional provider's
cost report would be subject to a detailed review fell from about 1
in 6 to about 1 in 13.  Because of the time needed to schedule and
conduct audits, intermediaries can take 2 years or more to reach a
final settlement.  Tentative settlements that differ substantially
from the amount ultimately determined to be due a provider cause
underpayments or excessive payments that can remain outstanding for 2
years or more. 

Concern about home health fraud and abuse is not new.  Nearly two
decades ago, HCFA began gathering information that this Subcommittee
used to launch a review in 1981 of certain home health agencies
operating in the Chicago metropolitan area.  The findings and
recommendations of the Subcommittee's 1981 report still resonate
today.  Among the recommendations made in 1981, several are
particularly germane in light of current anti-fraud-and-abuse
legislative activity, namely the Kassebaum-Kennedy legislation, and
budget reconciliation provisions currently being considered by both
houses of Congress: 

  -- The Subcommittee recommended not reducing intermediaries'
     budgets for auditing home health agencies to keep pace with
     program growth.  Medicare payment safeguard funding nevertheless
     did decline since 1989 until the passage of the
     Kassebaum-Kennedy legislation, which now ensures stable funding
     for program safeguards through 2003 and allows HCFA to count on
     stable funding in the coming years.  However, per-claim
     expenditures for medical review and other controls will remain
     below the 1989 level after adjusting for inflation. 

  -- The Subcommittee noted that the government had no viable
     mechanism by which it could recoup overpayments.  In a report
     just released, we suggested that the Congress consider directing
     HCFA to start a demonstration that would assess home health
     agencies found to be habitual abusive billers for the costs of
     performing the follow-up audit work required to estimate
     overpayment amounts.\5

  -- The Subcommittee recommended that, to recoup overpayments, HCFA
     regulations require bonding of new agencies and agencies found
     to be habitual abusers and that HCFA expedite its promulgation
     of these regulations.  The regulations, however, were never
     finalized.  The budget reconciliation bill proposes that certain
     providers billing Medicare, including home health agencies, post
     a surety bond for at least $50,000.  This would make bonding a
     statutory requirement rather than an option left to HCFA's
     discretion. 


--------------------
\3 Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996). 

\4 Because the 3-percent target applied to all part A claims, the
actual proportion of home health claims reviewed, which are a subset
of part A claims, could actually be as low as 1 percent. 

\5 See Medicare:  Need to Hold Home Health Agencies More Accountable
for Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). 


   MANAGEMENT PROBLEMS ALSO AFFECT
   PAYMENTS AND OPERATIONS
---------------------------------------------------------- Chapter 0:4

Independent of the question of adequate funding is the issue of
whether available safeguard dollars are being used as effectively as
possible.  HCFA has not taken full advantage of the controls
contractors could use to screen for inappropriate claims.  Moreover,
despite deficiencies that might have been corrected in Medicare's
current claims processing systems, HCFA has concentrated its
management efforts on the development of a new system. 


      HCFA HAS NOT ROUTINELY MADE
      AVAILABLE TO CONTRACTORS
      INFORMATION ON EFFECTIVE
      PAYMENT CONTROLS
-------------------------------------------------------- Chapter 0:4.1

One chronic problem is that HCFA has not coordinated contractors'
payment safeguard activities.  For example, as was planned when the
program was set up, part B carriers establish their own medical
policies and screens, which are the criteria used to identify claims
that may not be eligible for payment.  Certain policies and the
screens used to enforce them have been effective in helping some
Medicare carriers avoid making unnecessary or inappropriate payments. 
However, the potential savings from having these policies and screens
used by other carriers have been lost, as HCFA has not adequately
coordinated their use among carriers.  For example, as we reported in
1996, for just 6 of Medicare's top 200 most costly services in 1994,
the use of certain carriers' medical policy screens by all of
Medicare's carriers could have saved millions to hundreds of millions
of dollars annually.\6 However, HCFA has not led in this area and the
opportunity to avoid significant Medicare expenditures has been lost. 
(See fig.  I.3.)


--------------------
\6 Medicare:  Millions Can Be Saved by Screening for Overused
Services (GAO/HEHS-96-49, Jan.  30, 1996). 


      INFORMATION MANAGEMENT
      PROBLEMS SLOW EFFORTS TO
      UNCOVER FRAUD AND ABUSE
-------------------------------------------------------- Chapter 0:4.2

HCFA's unsatisfactory management of a major systems acquisition
project--MTS--has serious consequences for the ability of HCFA and
its contractors to improve fraud and abuse monitoring activities. 
Ideally, as we reported in 1994,\7 a system like MTS would allow
"on-line" claims processing, enabling contractors' systems to compare
claims against other claims already submitted on behalf of the
beneficiary, other claims submitted by the provider, and other claims
for the same procedure or item.  Without this capability,
contractors' processing systems are not programmed to screen for
suspiciously large increases in reimbursements over a short period or
improbable quantities of services claimed for a single day of care. 
The following examples cited in our previous work highlight the
problem: 

  -- In the fourth quarter of 1992, a Medicare contractor paid a
     supplier $211,900 for surgical dressing claims.  For the same
     quarter a year later, the contractor paid the same supplier more
     than $6 million without becoming suspicious, despite the
     2,800-percent increase in the amount paid. 

  -- A contractor paid claims for a supplier's body jackets\8 --with
     no questions asked--that averaged about $2,300 per quarter for
     five consecutive quarters and then jumped to $32,000, $95,000,
     $235,000, and $889,000 over the next four quarters. 

  -- A contractor reimbursed a clinical psychology group practice for
     individual psychotherapy visits of 45 to 50 minutes.  Three
     psychologists in the group were billing for, and allegedly
     seeing, from 17 to 42 nursing facility patients per day.  On
     many days, the leading biller of this group would have had to
     work more than 24 uninterrupted hours to provide the services he
     claimed. 

  -- A contractor paid a podiatrist $143,580 for performing surgical
     procedures on at least 4,400 nursing facility patients during a
     6-month period.  For these services to be legitimate, the
     podiatrist would have had to serve at least 34 patients a day, 5
     days a week. 

In the last two cases cited, the contractors did not become
suspicious until they received complaints from family members and
beneficiaries themselves.  This failure to discover unusual increases
or unusually high amounts billed by a particular provider or for a
particular service or supply item makes Medicare vulnerable to
billing schemes. 

MTS was also expected to, among other things, provide on-line access
to beneficiary patient histories.  Currently, Medicare's part A and
part B systems are incompatible, making it difficult to spot schemes
that involve billing both parts for the same service.  Specifically,
Medicare's discrete part A and part B processing systems are not
designed to easily identify, on-line, all of the medical services and
devices billed on behalf of an individual beneficiary.  As a result,
providers can improperly bill both parts with little danger of
detection.  In our 1995 review of medical supply payments, for
example, we noted that the same supply item can be billed on behalf
of an individual beneficiary to both an intermediary and a carrier.\9
We found instances of duplicate payments and noted that contractors
lacked effective tests to determine whether both carriers and
intermediaries paid for the same items.  The HHS Inspector General
has reported similar problems with payments for other services, such
as ambulance transportation and diagnostic laboratory tests.\10

The promise of MTS, however, could be delayed indefinitely.  We
recently reported that, in the 5 years between 1992 and 1997,
estimated MTS development and implementation costs have jumped
sevenfold from $151 million to about $1 billion.\11 This is
symptomatic of various project management weaknesses we have
previously reported, namely, that HCFA had not completely defined its
requirements 2 years after awarding a systems development contract;
HCFA's MTS development schedule has had significant overlap among the
various system-development phases, increasing the risk that
incompatibilities and delays will occur; and HCFA has not adequately
managed MTS as an investment as evidenced by the lack of a
satisfactory cost-benefit analysis or consideration of viable
alternatives.  After major problems and delays with its MTS
development contract, HCFA announced on April 4, 1997, that it was
halting all MTS fee-for-service software development for 90 days. 

As a transitional step to MTS, HCFA has begun consolidating its three
intermediary part A systems and six carrier part B systems into one
part A claims system and one part B claims system.  Having a single
system for each part will allow better editing of claims, but it does
not provide some of the benefits that were expected from MTS.  Among
these are the on-line capability to identify, before payment is made,
whether (1) an item or service billed to part A has also been billed
to part B and vice versa and (2) a billed item or service is
consistent with the other items and services billed on behalf of an
individual.  The fate of MTS remains uncertain.  HCFA officials said
they would use the 90-day period to examine alternative methods for
achieving their MTS goals. 


--------------------
\7 Medicare:  New Claims Processing System Benefits and Acquisition
Risks (GAO/HEHS/AIMD-94-79, Jan.  25, 1994). 

\8 A body jacket is a custom-fitted spinal brace made of a rigid
plastic material that conforms to the body and largely immobilizes
it. 

\9 Medicare:  Excessive Payments for Medical Supplies Continue
Despite Improvements (GAO/HEHS-95-171, Aug.  8, 1995). 

\10 Ambulance Services for Medicare End-Stage Renal Disease
Beneficiaries:  Medical Necessity, OEI-03-90-02130 (Washington, D.C.: 
HHS Office of Inspector General, Aug.  17, 1994); Ambulance Services
for Medicare End-Stage Renal Disease Beneficiaries:  Payment
Practices, OEI-03-90-02131 (Washington, D.C.:  HHS Office of
Inspector General, Mar.  9, 1994); and Review of Separately Billable
End-Stage Renal Disease Laboratory Tests, #A-01-96-00513 (Washington,
D.C.:  HHS Office of Inspector General, Oct.  1, 1996). 

\11 For a detailed account of MTS costs and development problems, see
Medicare Transaction System:  Success Depends Upon Correcting
Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16,
1997). 


   INEFFECTIVE OVERSIGHT LEAVES
   BENEFICIARIES VULNERABLE TO HMO
   QUALITY PROBLEMS
---------------------------------------------------------- Chapter 0:5

Some have argued that moving beneficiaries into managed care--that
is, into a "claimless" environment--would eliminate problems of fraud
and abuse.  Unlike fee-for-service providers, physicians, hospitals,
and other providers do not submit a per-service claim for
reimbursement.  Instead, they are paid by the HMO, which in turn is
paid a monthly amount by Medicare for each beneficiary enrolled. 
However, our work shows that another set of problems exists in
Medicare's managed care program, which enrolls more than 10 percent
of Medicare's 39 million beneficiaries and is growing by about 85,000
beneficiaries per month. 

Under managed care, where fixed monthly payments are made per
beneficiary rather than per service, strategies to exploit Medicare
are based on the incentive to underserve rather than overserve the
beneficiary.  Risk contract HMOs, Medicare's principal managed care
option, can offer an attractive alternative to the traditional
fee-for-service program because risk HMOs typically cover additional
benefits and cost beneficiaries less money.  However, in recent
years, we have reported that some Medicare HMOs have not complied
with federal standards and that HCFA's monitoring of these HMOs has
been weak.  For example, in 1995, we reported that, despite efforts
to improve its HMO monitoring, HCFA conducted only paper reviews of
HMOs' quality assurance plans, examining only the description rather
than the implementation of HMOs' quality assurance processes.\12

Moreover, HCFA was reluctant to take action against noncompliant
HMOs, even when there was a history of abusive sales practices,
delays in processing beneficiaries' appeals of HMO decisions to deny
coverage, or poor-quality care. 

In a 1996 report, we discussed the value of releasing HMO performance
data to Medicare beneficiaries as having the potential to reduce the
occurrence of abusive marketing practices.\13 We found that cases
developed from beneficiary complaints and other HCFA documentation
revealed violations of Medicare regulations prohibiting certain
marketing practices, such as activities that mislead, confuse, or
misrepresent.  Some examples follow: 

  -- At least 20 beneficiaries were inappropriately enrolled in an
     HMO after attending the same sales seminar in August 1995.  The
     beneficiaries thought they were signing up to receive more
     information but later discovered the sales agent had enrolled
     them in the plan. 

  -- In January 1995, a beneficiary was notified by his medical group
     before an appointment that he was now enrolled in another plan. 
     The beneficiary had no idea how this could be, as he had not
     intended to change plans.  Though the beneficiary signs with an
     "X," the new enrollment application was signed with a legible
     cursive signature.  HCFA reenrolled the beneficiary in his
     former plan but took no action against the plan or the sales
     agent. 

  -- One plan's marketing activities resulted in enrolling an
     81-year-old woman.  In the first months of membership, she
     visited her doctor, who was in the plan's provider network. 
     When she later visited a non-network physician who had also been
     one of her regular providers, Medicare denied her claims because
     of her HMO enrollment.  She then requested to disenroll and told
     HCFA that if she had understood the requirement to visit
     specific providers, she would not have enrolled in the HMO. 
     HCFA disenrolled her from the plan effective with her use of
     non-network providers. 

Despite many beneficiary complaints, HCFA does not take advantage of
opportunities to use market forces to prod competitors to offer
better quality services.  HCFA collects, but does not systematically
or routinely analyze, data on HMO activities that could be used to
measure performance.  Putting these data in the hands of
beneficiaries could allow them to identify and select plans with
better records and give HMOs incentives to improve their performance. 

For example, in our 1996 study, we examined HCFA data on HMO
disenrollments--rates at which Medicare beneficiaries quit their HMOs
and join other plans or return to fee-for-service Medicare--as an
indicator of beneficiary satisfaction.  In the Miami market, for
example, we found that in 1995 at one HMO only about 3 of every 25
beneficiaries disenrolled, whereas at another HMO more than 3 of
every 10 beneficiaries disenrolled.  We reported that these
statistics, particularly in combination with complaint data, could
help identify HMOs whose sales agents mislead or fail to adequately
educate new enrollees.  (See fig.  I.4.)

In the case of one Florida HMO, for example, HCFA found--in 1991,
1992, 1994, and 1996--some combination of deficiencies in marketing,
enrollment, quality assurance systems, grievance and appeals
procedures, and access to health services.  Despite the repeated
findings of standards violations at this HMO, HCFA's strongest
regulatory action was to require, after each inspection, a corrective
action plan.  HCFA did not provide Miami area beneficiaries with
information on the inspection findings; at the same time, Medicare
beneficiaries continued to enroll and disenroll in this plan. 


--------------------
\12 Medicare:  Increased HMO Oversight Could Improve Quality and
Access to Care (GAO/HEHS-95-155, Aug.  3, 1995). 

\13 Medicare:  HCFA Should Release Data to Aid Consumers, Prompt
Better HMO Performance (GAO/HEHS-97-23, Oct.  22, 1996). 


   RECENT LEGISLATIVE ACTIVITY
   ADDRESSES ASPECTS OF MEDICARE
   FRAUD AND ABUSE
---------------------------------------------------------- Chapter 0:6

With the passage of the Kassebaum-Kennedy legislation known as HIPAA,
the Congress recently provided important new resources and tools to
fight health care fraud and abuse.  To inform the Congress on the
progress of HIPAA's implementation, we have begun monitoring HCFA's
and the HHS Inspector General's efforts to implement the act.  The
Congress is currently considering additional provisions, as part of
the budget reconciliation legislation, to further strengthen fraud
reduction efforts. 


      LEGISLATIVE ACTIVITY RELATED
      TO FEE-FOR-SERVICE MEDICARE
-------------------------------------------------------- Chapter 0:6.1

HIPAA ensures stable funding and provides for other antifraud
efforts, while pending budget reconciliation legislation addresses
additional aspects of fraud and abuse. 


         HIPAA
------------------------------------------------------ Chapter 0:6.1.1

A key HIPAA provision ensures stable and gradually increasing funds
earmarked for payment safeguard activities.  HIPAA provides up to
$440 million for program safeguards for this fiscal year, with budget
increases scheduled in following years.  For the year 2003 and
beyond, HIPAA ensures funding of between $710 million and $720
million.  However, as we have previously reported, by 2003, per-claim
safeguard expenditures will be at about one-half the level of 1989
expenditures, after adjusting for inflation.\14

Another HIPAA provision enables HCFA to contract with entities other
than the insurers serving as Medicare intermediaries and carriers to
conduct payment safeguard activities, including medical and
utilization review and audits of cost reports.  These contracts,
intended to be awarded to entities with relevant expertise, may help
improve the oversight of claims payment operations by enhancing data
analysis capabilities and avoiding potential conflicts of interest
with the contractor's private business.  HCFA does not yet have a
target date for awarding program safeguard contracts, nor has it
finalized related plans to implement this HIPAA provision. 

HIPAA also provides funding to HHS and the Department of Justice for
combating health care fraud.  For fiscal year 1997, the act provides
an additional $104 million to these two departments, $70 million of
which was specifically allocated to the Office of Inspector General. 
The remaining $34 million was divided between Justice, which received
$24 million, and other HHS agencies, including HCFA, which received
$1.8 million of these funds. 

According to HHS Inspector General officials, the Office of Inspector
General will use its $70 million to, among other things, hire 250
additional investigators, auditors, lawyers, and other analysts to
pursue fraudulent providers.  The Office of Inspector General
recently published its plan for continuing Operation Restore Trust,
an initiative begun in 1995 in response to the rapid growth in
Medicare's spending for home health and nursing home services and
medical equipment and supplies.  This effort, conducted jointly by
HHS and the Department of Justice, operated in five states and
reported identifying almost $188 million in inappropriate payments in
its 2 years of operation.  In expanding Operation Restore Trust, the
Inspector General has opened new investigative offices in six states
this fiscal year.  Officials also told us that, depending on its
final budget, the office is planning to add another eight offices in
fiscal year 1998. 

According to Department of Justice officials, Justice will use its
$24 million to hire 120 new prosecutors who will devote their work
exclusively to prosecuting health care fraud.  Ninety of the new
prosecutors will join U.S.  Attorneys' Offices nationwide.  The
remaining 30 will serve in Justice's Civil and Criminal Divisions in
Washington, D.C.  The Department also intends to hire additional
support staff, including paralegals, auditors, and other analysts. 

HIPAA also mandates the creation of a national data collection system
reporting final adverse actions against health care providers.  The
system is intended to enable greater information-sharing among
federal and state government agencies and health plans.  According to
Inspector General officials, the system is not likely to be fully
operational for at least another 2 years. 


--------------------
\14 High-Risk Series:  Medicare (GAO/HR-97-10, Feb.  1997). 


         PENDING LEGISLATION
------------------------------------------------------ Chapter 0:6.1.2

Earlier we cited provisions in the pending budget reconciliation bill
that address concerns about Medicare's payments for home health
services.  In addition, the legislation contains various other
provisions directed at Medicare fraud and abuse.  Among these are the
following: 

  -- A requirement to implement consolidated billing for nursing
     facility stays not covered by the new prospective payment
     system.  Under such an arrangement, the nursing facility would
     have a greater incentive to monitor the care provided and the
     charges claimed by outside providers and suppliers.  In past
     reports, we have also suggested consolidated billing for
     ancillary services provided in skilled nursing facilities.\15

  -- Authority to refuse to enter into Medicare agreements with
     individuals or entities convicted of felonies.  This gives the
     Inspector General the opportunity to prevent convicted felons
     from becoming Medicare providers. 

  -- Requirement for providers to furnish key identification numbers. 
     Medicare providers must furnish HHS with the Social Security and
     employer identification numbers for themselves and their owners,
     individuals with a controlling interest, and subcontractors in
     which the provider has an ownership interest.  As we discussed
     in our March 1997 report on Medicaid providers, this would allow
     HCFA to trace problem providers through related health care
     organizations and better ensure that excluded individuals are
     not paid by the program.\16


--------------------
\15 Fraud and Abuse:  Providers Target Medicare Patients in Nursing
Facilities (GAO/HEHS-96-18, Jan.  24, 1996). 

\16 Medicaid Fraud and Abuse:  Stronger Action Needed to Remove
Excluded Providers From Federal Health Programs (GAO/HEHS-97-63, Mar. 
31, 1997). 


      LEGISLATIVE ACTIVITY RELATED
      TO MEDICARE MANAGED CARE
-------------------------------------------------------- Chapter 0:6.2

A recent legislative proposal, cosponsored by you, Madam Chairman,
would help make information about beneficiary satisfaction with
Medicare managed care plans publicly available.  Among other things,
the bill, S.  302, would require Medicare HMOs to conduct consumer
satisfaction surveys.  It would also authorize grants to states and
other organizations to disseminate information comparing benefits,
quality and performance, cost information, and the results of the
satisfaction surveys of Medicare managed care plans. 

Also, HIPAA gives HCFA more flexible sanction authority while
providing HMOs the statutory right to greater procedural safeguards. 
In addition to existing authority to terminate an HMO's contract if
the HMO did not meet requirements, HCFA now has the option of
imposing lesser sanctions, such as suspending the HMO's right to
enroll Medicare beneficiaries until the deficiencies are corrected. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 0:7

Many of Medicare's vulnerabilities are inherent in its size and
mission, making it a perpetually attractive target for exploitation. 
That wrongdoers continue to find ways to dodge safeguards illustrates
the dynamic nature of fraud and abuse and the need for constant
vigilance and increasingly sophisticated ways to protect against
gaming the system.  Judicious changes in Medicare's day-to-day
operations involving HCFA's improved oversight and leadership, the
mitigation of MTS acquisition risks, and HCFA's appropriate
application of new anti-fraud-and-abuse funds are necessary
ingredients to reduce substantial future losses.  Moreover, as
Medicare's managed care enrollment grows, HCFA must enhance its
efforts to see that beneficiaries receive sufficient information
about HMOs to make informed choices, and that the agency's authority
to enforce HMO compliance with federal standards is used.  To
adequately safeguard the Medicare program, HCFA needs to meet these
important challenges promptly. 

How HCFA will use the funding and authority provided under HIPAA to
improve its vigilance over Medicare benefit dollars has not yet been
determined.  The outcome is largely dependent on how promptly and
effectively HCFA implements the act's provisions.  As we have
highlighted today, weak monitoring, poor coordination, and delays
have characterized HCFA's past efforts to oversee fee-for-service
contractors, the MTS acquisition process, and Medicare managed care
plans.  Thus, even with the promise of HIPAA and the potential
enactment of additional legislation, the prospects for HCFA's success
in combating Medicare fraud and abuse remain uncertain. 


-------------------------------------------------------- Chapter 0:7.1

Madam Chairman and Members of the Subcommittee, this concludes my
prepared remarks.  I will be happy to answer any questions. 


ADDITIONAL DATA ON MEDICARE
SPENDING AND PROGRAM ACTIVITIES
==================================================== Appendix Appendix

   Figure I.1:  Claims Reviews
   Have Not Matched the Growth in
   Medicare Claims

   (See figure in printed
   edition.)

   Figure I.2:  Rising Costs of
   Medicare Home Health Benefit

   (See figure in printed
   edition.)

   Figure I.3:  Many Contractors
   Do Not Screen Claims for Costly
   Services

   (See figure in printed
   edition.)

   Figure I.4:  Annual
   Disenrollment in Medicare HMOs
   in Miami, 1995

   (See figure in printed
   edition.)

RELATED GAO PRODUCTS

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

Medicare Transaction System:  Success Depends Upon Correcting
Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16,
1997) and related testimony entitled Medicare Transaction System: 
Serious Managerial and Technical Weaknesses Threaten Modernization
(GAO/T-AIMD-97-91, May 16, 1997). 

Nursing Homes:  Too Early to Assess New Efforts to Control Fraud and
Abuse (GAO/HEHS-97-114, Apr.  16, 1997). 

Medicaid Fraud and Abuse:  Stronger Action Needed to Remove Excluded
Providers From Federal Health Programs (GAO/HEHS-97-63, Mar.  31,
1997). 

Medicare (GAO/HR-97-10, Feb.  1997) and related testimony entitled
Medicare:  Inherent Program Risks and Management Challenges Require
Continued Federal Attention (GAO/T-HEHS-97-89, Mar.  4, 1997). 

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

Medicare:  Millions Can Be Saved by Screening Claims for Overused
Services (GAO/HEHS-96-49, Jan.  30, 1996). 

Medicare Transaction System:  Strengthened Management and Sound
Development Approach Critical to Success (GAO/T-AIMD-96-12, Nov.  16,
1995). 

Medicare:  Allegations Against ABC Home Health Care (GAO/OSI-95-17,
July 19, 1995). 

Medicare:  Commercial Technology Could Save Billions Lost to Billing
Abuse (GAO/AIMD-95-135, May 5, 1995). 

Medicare Claims (GAO/HR-95-8, Feb.  1995). 

Medicare:  New Claims Processing System Benefits and Acquisition
Risks (GAO/HEHS/AIMD-94-79, Jan.  25, 1994). 

Medicare Claims (GAO/HR-93-6, Dec.  1992). 


*** End of document. ***