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Statement by
Timothy B. Hill
Chief Financial Officer
Centers for Medicare and Medicaid Services

Medicare Program Integrity 

Committtee on Ways and Means
Subcommittee on Health and Oversight and Investigations
U.S. House of Representatives

Thursday March 8, 2007

Good afternoon Chairman Stark, Chairman Lewis and distinguished Members of the Subcommittees.  I am pleased to be here today to discuss the Centers for Medicare and Medicaid Services’ (CMS) efforts to improve the accuracy and integrity of payments under the Medicare program. 

Responsible and efficient stewardship of taxpayer dollars are critical goals of this Administration, as evidenced by the government-wide effort to improve financial management under the President’s Management Agenda (PMA).  Under the PMA, federal agencies are mobilizing people, resources, and technology to identify improper payments in high risk programs, establishing aggressive improvement targets, and implementing corrective actions to meet those targets expeditiously.  Consistent with these efforts, CMS is firmly committed to ensuring the highest measure of accountability within the Medicare program.  As part of that commitment, the President’s FY 2008 budget requests $183 million in discretionary HCFAC funding to build upon programs with a proven record for maintaining the integrity of the Medicare Trust Fund. 

Background on Medicare

Medicare is a Federal health insurance program that provides comprehensive health insurance to about 43 million people.  About 36 million individuals are entitled to Medicare because they are over the age of 65 and about 7 million beneficiaries under age 65 are entitled because of disability; those under age 65 generally begin to get Medicare after they have been entitled to Social Security disability cash benefits for 24 months.  Net Medicare spending for 2007 is projected to be about $372 billion.

The majority of Medicare spending is in fee-for-service (FFS), with hospital and physician services currently representing the largest shares of this spending.  The FFS component of Medicare also covers a wide range of other items and services, including home health care, ambulance services, medical equipment, and preventive services.  CMS processes claims and makes payments for FFS Medicare benefits through contracts with private companies: Carriers, Fiscal Intermediaries (FIs), and Durable Medical Equipment Medicare Administrative Contractors (DME MACs), and Quality Improvement Organizations (QIOs).[1]  During 2007, CMS estimates that Medicare contractors will process well over one billion claims from providers, physicians, and suppliers for items and services that Medicare covers.  Medicare contractors review claims submitted by providers to ensure payment is made only for Medicare-covered medical services that are reasonable and necessary, for eligible individuals.  In addition, CMS contracts with Program Safeguard Contractors (PSCs) to detect and deter Medicare fraud and abuse.  Quality Improvement Organizations (QIOs) are contractors that ensure that payment is made only for medically necessary services and investigate beneficiary complaints about quality of care.

In addition to FFS, Medicare also pays private plans.  The Medicare Advantage plans, which include coordinated care plans, regional preferred provider organizations and private FFS plans, generally provide more benefits at a lower cost to beneficiaries.  Both local and regional plans must provide all original Medicare benefits.  In 2006, about 17 percent of beneficiaries were enrolled in Medicare Advantage local plans.  

The Improper Payments Information Act of 2002

Given the staggering size of Medicare program expenditures, even small payment errors can represent a significant impact to the Federal treasury and taxpayers.  For this reason, CMS, as part of a sound financial management strategy, has a relatively long history of using improper payment calculations as a tool to preserve the fiscal integrity of Medicare.  CMS uses improper payment calculations to identify the amount of money that has been inappropriately paid, identify and study the causes of the inappropriate payments, and focus on strengthening internal controls to stop the improper payments from continuing.

In 1996, the Department of Health and Human Services’ (DHHS) Office of Inspector General (OIG) began estimating improper payments in the Medicare FFS program as part of the Chief Financial Officer’s Audit.  The OIG produced FFS error rates from FY 1996 to FY 2002. Beginning in FY 2003, CMS, working with the OIG, implemented a much more robust process – the Comprehensive Error Rate Testing (CERT) program – to assess and measure improper payments in the Medicare FFS program.  The CERT program not only produces a national paid claims error rate, but also very specific improper payment rates. These include:

  • contractor-specific improper payment rates – which measure the accuracy of our claims processors;
  • provider-type specific improper payment rates – which measure how well the providers who care for our beneficiaries are preparing and submitting claims to the program; and
  • other management related information - which provides insight into payment errors by region and reason.

Thus, in 2002 when the IPIA was enacted, CMS needed to make only minor changes to our ongoing processes for FFS Medicare to come into compliance with the Office of Management and Budget (OMB) guidance on the IPIA.  In fact, CMS has gone beyond the scope of the IPIA requirements and OMB guidelines to calculate additional improper payment rates for FFS Medicare, as discussed earlier.  This enhanced scrutiny reflects the Agency’s increased commitment to use more detailed data and analysis to identify and eliminate improper payments.

Calculating improper payment rates is only one step in the process.  Remediation is the key part of CMS IPIA compliance activities.  CMS, through its contractors, including the Carriers, FIs, DME MACs and QIOs use the error rates to identify where problems exist and target improvement efforts.  The cornerstone of these efforts is our annual Error Rate Reduction Plan (ERRP), which includes agency level strategies to clarify CMS policies and implement new initiatives to reduce FFS Medicare improper payments.  In the past, ERRPs have included plans to conduct special pilot studies (i.e. electronic medical record submission pilot) and specific education-related initiatives.  CMS also directs Carriers, DME MACs, and FIs to develop local efforts to lower the FFS Medicare error rate by targeting provider education and claim review efforts to those services with the highest improper payments.  The type and nature of the errors we see in the program all lend themselves to different types of corrective actions to mediate them.

For example, a primary cause of Medicare payment errors in the past has been providers not submitting the medical record documentation needed to verify the appropriateness of payment in response to our requests for documentation.   Many providers were concerned that submitting medical records to a CMS contractor would be in violation of the Health Insurance Portability and Accountability Act (HIPAA) regulations.  However, the HIPAA Privacy Rule permits disclosure of protected health information to carry out treatment, payment or health care operations.  Thus, we expanded our education efforts to ensure that providers understand that responding to our requests does not violate HIPAA.

Another significant cause of errors has been providers not submitting the appropriate types of medical record documentation to support the types of services billed to the Medicare program. CMS implemented a number of corrective actions to reduce these types of errors, including education and more intensive efforts to locate and contact providers.  These corrective actions have resulted in an 83 percent decrease in documentation errors since 2004.

CMS also uses contractor-specific error rates to evaluate the performance of the contractors that process Medicare claims.  While our previous contracting authority, limited CMS’s ability to take action against contractors with high error rates, implementation of Medicare Contracting Reform (MCR) enacted by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) is changing the contracting process and the contractor incentive structure.  One key outcome of this initiative is the ability to use incentives to get our contractors to eliminate improper payments.  In 2004, CMS conducted a study to evaluate whether the Agency could reduce improper payments by using award fees as incentives for contractors to lower their paid claims and provider compliance error rates.  The outcome of that pilot was positive and CMS plans to use award fees as incentives in the future to reduce improper payments as part of MCR.

We believe our efforts in Medicare have been a success.  In November 2006, HHS reported a Medicare FFS paid claims error rate of 4.4 percent, a significant decrease from the 5.2 percent reported in 2005, and significantly lower than the 10.1 percent rate reported in FY 2004.  We have far exceeded our expectations, having reduced the error rate beyond the 2006 goal of 5.1 percent.  With continued monitoring and error reducing efforts we aim to achieve our future targets of 4.3 percent in 2007, 4.2 percent in 2008, and 4.1 percent in 2009. 

Figure 1:

We also are looking carefully at IPIA compliance for the new prescription drug benefit (Part D) and the expanded Medicare Advantage. CMS recruited staff during FY 2006 to oversee the development of payment error rates for Part C, Part D, and Retiree Drug Subsidy programs.  CMS also awarded a contract to assist with the error rate development for these programs.  During FY 2007, the contractor is performing a risk assessment and developing a pilot methodology to evaluate a selected risk element in each program. 

Finally, CMS, along with the States, have a strong interest in strengthening financial oversight and ensuring payment accuracy in the Medicaid program. The States provide a crucial first line of defense in safeguarding Medicaid program dollars. At the Federal level, our primary roles are to exercise proper oversight and review of State financial practices and to provide guidance and support for the States' program integrity efforts.  To comply with the IPIA of 2002 and implementing guidance by OMB, CMS began measuring improper payments in Medicaid and the State Children’s Health Insurance Program (SCHIP). In an effort to nationally implement IPIA for the Medicaid program, CMS published a proposed rule in August, 2004 which required states to measure improper payments in their Medicaid programs.  Subsequently, CMS published an interim final rule in August 2006, lessening the burden of this process on the states.  We hope to publish a final rule in the Fall.  A component Medicaid FFS error rate will be reported in the FY 2007 PAR and full Medicaid and SCHIP rates will be reported in the FY 2008 PAR.  The goals of the Payment Error Rate Measurement (PERM) project are: 

  • to report a national program error rate in the PAR for each fiscal year measured;
  • to reduce improper payments in Medicaid and SCHIP through States’ corrective actions; and
  • to have States initiate recovery of erroneously paid Federal funds in these programs as identified through the PERM program.

Fraud, Waste and Abuse

As previously mentioned, CMS’ actions to safeguard Federal funds are not just limited to the error rate programs described in this testimony.  Program and fiscal integrity oversight is an integral part of CMS’ financial management strategy, and a high priority is placed on detecting and preventing fraud, waste and abuse.    To that end, CMS has made significant changes to its program integrity activities in recent years. 

The Program Safeguard Contractors (PSCs) are CMS’ fraud, waste and abuse detection  contractors.  As of 2006, PSC’s were established nationwide across all provider and supplier types in the Medicare fee-for-service program.  The PSCs perform data analysis to identify potential problem areas, investigate potential fraud, develop fraud cases for referral to law enforcement and coordinate Medicare fraud, waste and abuse efforts with CMS’ internal and external partners (e.g., law enforcement, affiliated contractors (intermediaries, carriers, and Medicare Administrative Contractors).

To further supplement the PSCs fraud identification efforts, CMS is making improvements to its own data analysis efforts.  To achieve this, we are collecting vulnerability data from many of our partners, including Medicare contractors, and using a variety of data analysis tools to review Medicare claims data.  Much of our work will focus on addressing vulnerabilities early in their lifecycle, and those that have high estimated dollar impact to the Medicare program.  Our program integrity efforts will focus on the Top 10 vulnerabilities identified through our data analysis and developing corrective actions to address these identified vulnerabilities.  

CMS has taken several specific actions to ensure that Federal dollars are being properly spent and fraudulent billings are stopped when they are detected.  In particular, we created a new satellite office in Los Angeles (LA), California to work in conjunction with an existing satellite office in Miami, Florida to help curtail fraudulent spending in those high risk areas.  Through the combined efforts of the CMS LA satellite office, the PSC and the claims processing contractors operating in California, CMS has collectively identified over $2.1 billion in improper payments in Calendar Years 2005 thru 2006.  This includes the prepayment denial of claims based upon fraud indicators and the postpayment identification of overpayments for claims identified as potentially fraudulent or highly suspect.  The LA office has also conducted a special project that addressed improper billing and potentially fraudulent claims submitted by Independent Diagnostic Testing Facilities (IDTFs) operating in California.  This Special Project resulted in approximately$163 million in denied charges and the termination of Medicare billing privileges for 83 IDTF providers..

Another important program integrity initiative is the Medicare-Medicaid (Medi-Medi) data matching program.  Data mining health care claims for fraudulent activity has been commonplace for several years now.  However, by jointly mining Medicare and Medicaid claims, new patterns are being detected that were not evident when viewed separately.  The knowledge gleaned from our Medi-Medi activities helps both programs identify and address vulnerabilities.  CMS has ten Medi-Medi projects in place in key states and, as mandated by the Deficit Reduction Act of 2005, will expand the program nationwide.   To date, over fifty Medi-Medi cases have been referred to law enforcement, $15 million in overpayments have been referred for collection, and $25 million in improper payments have been denied before payment was made.  This project is contributing to overall reductions in payment errors.

Section 306 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) gave CMS additional authority to pilot a new contracting authority designed to detect improper payments.  This MMA provision directs the Secretary to demonstrate the use of Recovery Audit Contractors (RACs) in identifying Medicare underpayments and overpayments, and collecting Medicare overpayments.  CMS implemented RACs in three states – Florida, New York and California and in FY 2006, the RACs collected $68.6 million in overpayments and identified more than $300 million in improper payments. 

The RAC program is consistent with the President’s Management Agenda objective to prevent improper payments in federal programs.  CMS designed the demonstration to accomplish two specific goals:  to demonstrate whether RACs can identify past improper payments in the Medicare FFS program; and to determine whether the RACs can provide information to CMS that could help prevent future improper payments.  It is clear that the RAC demonstration program accomplishes both of these goals.  Given the success of this effort, Congress mandated the expansion of the RAC effort nationally in the Tax Relief and Health Care Act of 2006.  CMS is now in the process of developing its expansion and implementation plans.

Provider Enrollment

CMS has seen a marked increase in fraud and abuse activities over the past few years that can be directly tied to provider enrollment issues.  These activities are primarily focused in high vulnerability areas of the country such as Los Angeles, Miami and Houston where there are a large number of beneficiaries and providers/suppliers.  CMS has undertaken numerous aggressive actions to tighten the provider enrollment process, provide more rigorous oversight and monitoring once a provider/supplier enrolls in the program, and strengthen the provider revocation process. 

The fraudulent business practices of unscrupulous durable medical equipment, orthotics, prosthetics, and supplies (DMEPOS) suppliers continue to cost the Medicare program billions of dollars.  CMS is implementing new DMEPOS Accreditation Standards which will ensure DMEPOS suppliers meet CMS’ supplier certification standards.  All suppliers of DMEPOS must comply with the CMS quality standards in order to receive Medicare Part B payments and to retain a supplier billing number.  The National Supplier Clearinghouse will not be able to issue a supplier billing number to any non accredited supplier, thus any nonaccredited supplier attempting to bill Medicare, will be automatically ‘kicked-out’ of the system. 

To accommodate suppliers that wish to participate in the Medicare DMEPOS program, CMS will phase-in the accreditation process and require accreditation organizations to prioritize their surveys to accredit suppliers in the selected Metropolitan Statistical Areas and competitive bidding areas.   All suppliers who require accreditation to bid in any CMS conducted DMEPOS competitive bidding need to be given priority by the approved accrediting bodies.  Those suppliers in a non-competitive bidding area will be given a certain time frame in which to become accredited. 

CMS is taking the following steps to better monitor a provider or supplier once it has entered the program:

•         Implement claims specialty editing to ensure suppliers are only paid for items they are properly licensed to provide;

•         Increase the number of random site visits to suppliers;

•         Require greater claims scrutiny for high fraud risk suppliers;

•         Deactivate providers with inactive provider numbers; and

•         Provide additional resources for investigative staff to increase proactive initiatives by the NSC and the PSCs.

CMS is also implementing new strategies to remove fraudulent providers from the Medicare program.  Our LA Office has recently identified situations in which some physicians are submitting claims for services that have not been furnished to a specific individual on the date of service.  These instances include but are not limited to situations where the beneficiary is deceased, the directing physician or beneficiary was not in the state or country when the services were furnished, or when the equipment necessary for testing is not present where the testing is said to have occurred.  We proposed through regulation that CMS have the authority to remove these fraudulent providers from the Medicare program.

Medicare Advantage and Prescription Drug Oversight

CMS has reduced the number of unsettled managed care cost reports.  In FY 2006, CMS reduced the backlog of unsettled managed care cost reports by 16.  Disallowances resulting from FY 2006 settlement activity amounted to about $33.5 million.  For FY 2006, CMS had a rate of return of 36 to 1.  The remaining backlog still represents a challenge to CMS because these cost reports have critical issues that must be resolved with Managed Care Organizations.  These reports may eventually need audit adjustments.  Many of the more recent cost reports sent to audit have fewer issues.

In 2006, CMS developed a suite of tools to oversee the Medicare Prescription Drug Benefit (Part D).  This included development of a Part D audit guide; audit checklists and worksheets; a Part D audit discussion guide; and a Part D audit standard operating procedure.  These tools assist CMS in ensuring the accuracy of Part D payments.

Finally, CMS is using Medicare Drug Integrity Contractors (MEDICs) in the new Part D program to monitor and analyze information to help identify potential fraud; work with law enforcement, prescription drug plans, consumer groups and other key partners to protect consumers and enforce Medicare’s rules; and provide basic tips for consumers so that they can protect themselves from potential scams.  Since November 2005, Delmarva Foundation, the first MEDIC which has an Enrollment & Eligibility Task Order, has addressed over 6758 complaints and conducted over 2000 investigations.  The MEDICs were expanded in September 2006 with two new contracts: Electronic Data Systems (EDS), which operates in the Northern region of the country, and Science Applications International Corporation (SAIC) operating in the South.  In addition, the Delmarva MEDIC was regionalized to serve the Southeast.

Collaboration with Law Enforcement Partners

When instances of fraud or abuse are detected through any of these oversight mechanisms, CMS refers the cases to law enforcement.  CMS has actively partnered with its law enforcement partners at the Department of Justice and HHS Office of Inspector General to aggressively pursue enforcement actions against those providers and suppliers that are found to be deliberately defrauding the Federal health care programs.

For example, in 2006 the Delmarva Foundation, a MEDIC, identified a pattern of so-called “$299 scams.”  Unsuspecting Medicare beneficiaries were being contacted by “agents” attempting to sell non-existent Medicare prescription drug plans for $299.  CMS, in collaboration with Delmarva, responded by warning beneficiaries and their support groups about the scam pattern with a press release and a National Fraud Alert.  Numerous referrals were made to federal law enforcement.  To date, we have assisted beneficiaries in recovering more than $20,000 in funds stolen under these scams.


For eight fiscal years running, auditors have issued an unqualified opinion on CMS’ financial statements.  This accomplishment reflects the Agency’s accountability for the public resources entrusted to us, and the dedication and commitment of our program and financial managers to achieve even stronger financial management.  We will continue to work to fully meet our fiduciary and operating responsibilities to our beneficiaries in years ahead.

[1] With the implementation of Medicare Contracting Reform (MCR) enacted by the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Medicare contractor functions are being consolidated, and all contractors processing Medicare claims are called “Medicare Administrative Contractors” or “MACs.”  Although the durable medical equipment regional carriers (DMERCs) have been fully replaced by the DME MACs, while MCR implementation is underway, the original contractor terms – Carrier and FI – remain commonly used.

Last revised: June 18, 2013