Medicare: Inherent Program Risks and Management Challenges Require
Continued Federal Attention (Testimony, 03/04/97, GAO/T-HEHS-97-89).

GAO discussed efforts to fight fraud and abuse in the Medicare program.

GAO noted that: (1) it is not surprising that because of the program's
size, complexity, and rapid growth, Medicare is a charter member of
GAO's high risk series; (2) in this year's report on Medicare, GAO is
pleased to note that both the Congress and the Health Care Financing
Administration, the Department of Health and Human Services' agency
responsible for running Medicare, have made important legislative and
administrative changes addressing chronic payment safeguard problems
that GAO and others have identified; and (3) however, because of the
significant amount of money at stake, GAO believes that the government
will need to exercise constant vigilance and effective management to
keep the program protected from financial exploitation.

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

 REPORTNUM:  T-HEHS-97-89
     TITLE:  Medicare: Inherent Program Risks and Management Challenges 
             Require Continued Federal Attention
      DATE:  03/04/97
   SUBJECT:  Health care programs
             Managed health care
             Program abuses
             Health maintenance organizations
             Claims processing
             Health insurance cost control
             Requirements definition
             ADP procurement
             Cost effectiveness analysis
             Medical information systems
IDENTIFIER:  HCFA Medicare Transaction System
             Medicare Program
             HHS Operation Restore Trust
             NCQA Health Plan Employer Data and Information Set
             Medicare Risk Contract Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives

For Release on Delivery
Expected at 10 a.m.
Tuesday, March 4, 1997

MEDICARE - INHERENT PROGRAM RISKS
AND MANAGEMENT CHALLENGES REQUIRE
CONTINUED FEDERAL ATTENTION

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

GAO/T-HEHS-97-89

GAO/HEHS-97-89T


(101543)


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

  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  HMO - health maintenance organization
  HIPAA - Health Insurance Portability and Accountability Act of 1996
  MTS - Medicare Transaction System
  HEDIS 3.0 - Health Plan Employer Data and Information Set

MEDICARE:  INHERENT PROGRAM RISKS
AND MANAGEMENT CHALLENGES REQUIRE
CONTINUED FEDERAL ATTENTION
============================================================ Chapter 0

Madam Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss efforts to fight fraud and
abuse in the Medicare program, one of the largest entitlement
programs in the federal budget.  In fiscal year 1996, federal
spending for Medicare was $197 billion.  Program expenditures have
been growing at about 9 percent per year.  Moreover, the trust fund
that pays for hospital and other institutional services is projected
to be depleted within 5 years.  As you know, while changes to
Medicare are being sought to help control program costs, the Congress
is concerned that billions of dollars of these costs are lost to
fraudulent and wasteful claims. 

Today, I would like to address Medicare's fee-for-service and managed
care programs.  More specifically, with regard to these two programs,
I'd like to highlight the problems bearing on protecting taxpayer and
beneficiary interests in Medicare, initiatives recently taken by the
Congress and federal agencies addressing these problems, and several
remaining concerns. 

In summary, it is not surprising that because of the program's size,
complexity, and rapid growth, Medicare is a charter member of our
high risk series.  (See the list of related GAO products at the end
of this statement.) In this year's report on Medicare, we are pleased
to note that both the Congress and the Health Care Financing
Administration (HCFA), the Department of Health and Human Services'
(HHS) agency responsible for running Medicare, have made important
legislative and administrative changes addressing chronic payment
safeguard problems that we and others have identified.  However,
because of the significant amount of money at stake, we believe that
the government will need to exercise constant vigilance and effective
management to keep the program protected from financial exploitation. 


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

In 1996, Medicare's fee-for-service program covered almost 90
percent, or 33 million, of Medicare's beneficiaries.  Physicians,
hospitals, and other providers submit claims to Medicare to receive
reimbursement.  HCFA administers Medicare's fee-for-service program
largely through an administrative structure of claims processing
contractors.  In 1965, when the Medicare program was enacted, the law
called for insurance companies--like Blue Cross and Blue Shield,
Travelers, and Aetna--to process and pay claims because of their
expertise in performing these functions.  As Medicare contractors,
these companies use federal funds to pay health care providers and
beneficiaries and are reimbursed for their administrative expenses
incurred in performing the work.  Over the years, HCFA has
consolidated some of Medicare's operations, and the number of
contractors has fallen from a peak of about 130 to about 70 in 1996. 
Generally, intermediaries are the contractors that handle part A
claims submitted by "institutional providers" (hospitals, skilled
nursing facilities, hospices, and home health agencies); carriers are
those handling part B claims submitted by physicians, laboratories,
equipment suppliers, and other practitioners. 

HCFA's efforts to guard against inappropriate payments have been
largely contractor-managed operations, leaving the fiscal
intermediaries and carriers broad discretion over how to protect
Medicare program dollars.  As a result, there are significant
variations in contractors' implementation of Medicare's payment
safeguard policies. 

Medicare's managed care program covers a growing number of
beneficiaries--nearly 5 million in 1996--who have chosen to enroll in
a health maintenance organization (HMO) to receive their medical care
rather than purchasing 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 and enrolled about
4 million Medicare beneficiaries in 1996.\1 The HMOs are paid a
monthly amount, fixed in advance, by Medicare for each beneficiary
enrolled.  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 health care within a fixed
budget.  HMOs profit if their cost of providing services is lower
than the predetermined payment but lose if their cost is higher than
the payment. 


--------------------
\1 Other Medicare HMOs 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 may cover only part B services.  Together, both
types of plans enroll fewer than 2 percent of the Medicare
population. 


   RECENT FUNDING, OTHER
   INITIATIVES REVITALIZE WANING
   EFFORTS TO REVIEW CLAIMS, DETER
   ABUSE
---------------------------------------------------------- Chapter 0:2

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 seriously
declining.  For example, between 1989 and 1996, the number of
Medicare claims climbed 70 percent to 822 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 38 cents per claim. 


      IMPLICATIONS OF REDUCED
      FUNDING FOR PAYMENT
      SAFEGUARDS
-------------------------------------------------------- Chapter 0:2.1

Consider the effect of inadequate funding on reviewing home health
claims.  After legislation in 1985 more than doubled claims review
funding, contractors did medical necessity reviews for 62 percent of
the home health claims processed in 1986 and 1987.  By 1989, however,
contractors' claims review target had been lowered to 3.2 percent. 
One HCFA official noted that home health agencies are aware that
their Medicare intermediary reviews only a small number of claims
and, therefore, they can take chances billing for noncovered
services. 

The plunge in the number of cost report audits has also weakened
Medicare's efforts to avoid paying excessive costs.  Providers
subject to these audits are those paid under Medicare's cost-based
reimbursement systems--such as hospital outpatient departments,
skilled nursing facilities, and home health agencies.  These
providers are reimbursed on the basis of the actual costs of
providing services, rather than on charges.  Each year, cost-based
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, the intermediaries
determine how much Medicare should reimburse the provider
institutions, some of which have received interim Medicare payments
throughout the year based on estimates of expected costs.  Without an
audit of the provider's cost report, however, the intermediary can
only reconcile the figures provided and cannot determine the
appropriateness of the costs reported.  In practice, only a fraction
of providers is subject to audits.  Between 1991 and 1996, the
chances, on average, that an institutional provider would be audited
fell from about 1 in 6 to about 1 in 13. 


      THE IMPACT OF RECENT
      LEGISLATION AND OTHER
      INITIATIVES
-------------------------------------------------------- Chapter 0:2.2

With the passage of the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), the cycle of declining funding
for anti-fraud-and-abuse activities has been broken.  For fiscal year
1997, the act boosts the contractors' budget for program safeguard
activities to 10 percent higher than it was in 1996; by 2003, the
level will be 80 percent higher than in 1996, after which it remains
constant.  These additional amounts, however, essentially stabilize
per-claim safeguard expenditures at about 1996's level.  For example,
we project that payment safeguard spending for 2003 will be just over
one-half the level of 1989 spending after adjusting for inflation. 

In addition to funding, the act has several other provisions to
improve vigilance over Medicare benefit dollars, including specifying
the flexibility to use contractors other than those processing claims
to perform utilization review, provider audit, and other safeguard
activities; establishing a program run jointly by the Department of
Justice and HHS to coordinate federal, state, and local law
enforcement efforts against fraud in Medicare and other health care
payers; establishing a national health care fraud data collection
program; and enhancing penalties and establishing health care fraud
as a separate criminal offense. 

Another important fraud-fighting effort is the 2-year, multiagency
project called Operation Restore Trust.  Participating agencies
include the HHS Inspector General, HCFA, and the Administration on
Aging, as well as the Department of Justice and various state and
local agencies.  The project targets Medicare abuse and misuse in the
areas of home health, nursing homes, and medical equipment and
supplies.  In its first year, Operation Restore Trust reported
recovering $42.3 million in inappropriate payments:  $38.6 million
were returned to the Medicare trust fund and $3.7 million to the
Treasury as a result of these efforts.  It also resulted in 46
convictions, imposed 42 fines, and excluded 119 fraudulent providers
from program participation.  In addition, many of the targeted home
health agencies were decertified.  Operation Restore Trust is
scheduled to be closed out as a demonstration project in May 1997. 
This effort, as well as HCFA's progress in adopting fraud and abuse
detection software and its development of a national provider
tracking system, is discussed further in our high risk report. 


      MANAGEMENT PROBLEMS ALSO
      AFFECT MEDICARE PAYMENTS AND
      OPERATIONS
-------------------------------------------------------- Chapter 0:2.3

Notwithstanding funding increases, several problems independent of
adequate funding and related to HCFA's oversight of Medicare have
implications for curbing unnecessary spending and conducting program
operations effectively.  One chronic problem is that HCFA has not
coordinated contractors' payment safeguard activities.  For example,
as was anticipated 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 highly effective in helping some Medicare carriers avoid making
unnecessary or inappropriate payments.  However, the potential
savings from having these policies and screens used by all carriers
have been lost, as HCFA has not adequately coordinated their use
among carriers.  For example, for just six 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 in the
millions to hundreds of millions of dollars annually.  However,
HCFA's leadership has been absent in this area, resulting in the loss
of opportunity to avoid significant Medicare expenditures. 

In addition, several technical and management problems have hampered
HCFA's acquisition of the Medicare Transaction System (MTS), a major
claims processing system that aims at consolidating the nine
different claims processing systems Medicare currently uses.  First,
HCFA had not completely defined its requirements 2 years after
awarding a systems development contract.  Second, HCFA's MTS
development schedule has had significant overlap among the various
system-development phases, increasing the risk that incompatibilities
and delays will occur.  Finally, HCFA has conducted the MTS project
without adequate information about the system's costs and benefits. 

Before MTS is completed, HCFA must oversee several essential
information management transitions in the Medicare claims processing
environment.  One involves the shifting of claims processing
workloads from contractors who leave the program to other remaining
contractors.  Similar workload shifts in the past have produced
serious disruptions in processing claims promptly and accurately,
delays in paying physicians, and the mishandling of some payment
controls.  A second issue involves HCFA's plan to consolidate
Medicare's three part A and six part B systems into a single system
for each part.  This plan will require several major software
conversions.  A third issue involves the "millennium"
problem--revising computerized systems to accommodate the year-digit
change to 2000.  HCFA does not yet have plans for monitoring
contractors' progress in making their systems "millennium compliant."


   MEDICARE MANAGED CARE INCURS
   SEPARATE RISKS
---------------------------------------------------------- Chapter 0:3

Risk contract HMOs, Medicare's principal managed care option, bear
their own set of risks for taxpayers and beneficiaries.  These plans
currently enroll about 10 percent of Medicare's population and have
shown rapid enrollment growth in recent years.  Because HMOs have
helped private sector payers contain health care costs and limit the
excess utilization encouraged by fee-for-service reimbursement, these
HMOs have cost-control appeal for Medicare, while offering potential
advantages to beneficiaries. 

However, as we recently testified, a methodological flaw in HCFA's
approach to paying HMOs has produced excess payments for some plans. 
Moreover, because higher HMO enrollment produces higher excess
payments, enrolling more beneficiaries in managed care could increase
rather than lower Medicare spending unless the method of setting HMO
rates is revised. 

A second problem, of particular concern to beneficiaries, is that
HCFA has been lax in enforcing HMO compliance with program standards,
while not keeping beneficiaries adequately informed of the benefits,
costs, and performance of competing HMOs.  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.  Moreover, the agency 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 patterns of poor quality care. 

HCFA also misses the opportunity to supplement its HMO regulatory
efforts by not keeping the Medicare beneficiary population
well-informed about competing HMOs.  As we reported in 1996, HCFA has
a wealth of data, collected for program administration and contract
oversight purposes, that it does not package or disseminate for
consumer use.  For example, HCFA does not provide beneficiaries with
any of the comparative consumer guides that the federal government
and other employer-based health insurance programs routinely
distribute to their employees and retirees.  Instead, HCFA collects
information only for its internal use--records of each HMO's premium
requirements and benefit offerings, enrollment and disenrollment data
(monthly reports specifying for each HMO the number of beneficiaries
that joined and left that month), records of enrollees' complaints,
and results of certification visits to HMOs.  By not publishing
disenrollment rates or other comparative performance measures, HCFA
misses an opportunity to show beneficiaries which plans have a good
record and hinders HMOs' efforts to benchmark their own performance. 


      INITIATIVES INTENDED TO
      ADDRESS RISK CONTRACT
      PROGRAM PROBLEMS
-------------------------------------------------------- Chapter 0:3.1

HCFA acknowledges the problems we identified in Medicare's risk
contract program.  To tackle the difficulties in setting HMO payment
rates, HCFA has been conducting several demonstration projects that
examine ways to modify or replace the current method of determining
HMO payment rates.  In addition, HIPAA gives HCFA more flexible
sanction authority, such as suspending an HMO's right to enroll
Medicare beneficiaries until deficiencies are corrected, while
providing HMOs the statutory right to develop and implement a
corrective action plan before HCFA imposes a sanction. 

Finally, HCFA is developing several consumer information efforts,
including plans to make HMO comparison charts available on the
Internet.  Providing the information in an electronic format rather
than in print, however, may make it less accessible to the very
individuals who would find it useful.  The information, according to
HCFA, will have to be "downloaded and customized for local
consumption." HCFA expects the primary users of this information to
be beneficiary advocates and Medicare insurance counselors.  HCFA is
also planning a survey to obtain beneficiaries' perceptions of their
managed care plans and does not expect preliminary results before the
end of 1997.  In another key initiative, HCFA is helping to develop a
new version of the Health Plan Employer Data and Information Set
(HEDIS 3.0) that will incorporate measures relevant to the elderly
population.  The measures will enable comparisons to be made among
plans of the enrollees' use of such prevention and screening services
as flu shots, mammography, and eye exams for diabetics.  As of
January 1997, Medicare HMOs are required, from the time they renew
their contract, to report on HEDIS 3.0 clinical effectiveness
measures.  HCFA intends to summarize the results and include them in
comparability charts currently being developed. 


   CONCLUSION
---------------------------------------------------------- Chapter 0:4

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, its
appropriate application of new anti-fraud-and-abuse funds, and the
mitigation of MTS acquisition risks are necessary ingredients to
reduce substantial future losses.  Moreover, as Medicare's managed
care enrollment grows, HCFA must work to ensure that payments to HMOs
better reflect the cost of beneficiaries' care, that beneficiaries
receive information about HMOs sufficient to make informed choices,
and that the agency's expanded authority to enforce HMO compliance
with federal standards is used.  To adequately safeguard the Medicare
program, HCFA needs to meet these important challenges promptly. 


-------------------------------------------------------- Chapter 0:4.1

This concludes my statement.  I am happy to take your questions. 


   CONTRIBUTORS
---------------------------------------------------------- Chapter 0:5

For more information on this testimony, please call Donald C. 
Snyder, Assistant Director, on (202) 512-7204.  Other major
contributors to this statement included Thomas Dowdal and Hannah F. 
Fein. 




RELATED GAO PRODUCTS
=========================================================== Appendix 1


   HIGH RISK SERIES REPORTS ON
   MEDICARE
--------------------------------------------------------- Appendix 1:1

Medicare (GAO/HR-97-10). 

Medicare Claims (GAO/HR-95-8). 

Medicare Claims (GAO/HR-93-6). 


   MEDICARE FEE-FOR-SERVICE
--------------------------------------------------------- Appendix 1:2

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


   MEDICARE MANAGED CARE
--------------------------------------------------------- Appendix 1:3

Medicare HMOs:  HCFA Could Promptly Reduce Excess Payments by
Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-78, Feb. 
25, 1997). 

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


*** End of document. ***