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Testimony on Controlling Medicare Payment for Overutilized Services by Gary Kavanagh
Deputy Director
Bureau of Program Operations
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Government Reform and Oversight, Subcommittee on Human Resources and Intergovernmental Relations
February 8, 1996

Mr. Chairman and Members of the Subcommittee:

Thank you for the invitation to testify on the Health Care Financing Administration's (HCFA) management of contractors' prepayment screens to prevent payment for inappropriate claims. HCFA is committed to protecting beneficiaries and the integrity of the Medicare Trust Funds by ensuring that claims processing is done in a timely, equitable manner that minimizes the program's vulnerability to losses due to inappropriate payments or abuse.

Medicare contractors are our front line of defense against inappropriate and fraudulent claims. We are actively working to improve our contractors' ability to detect and prevent payment of inappropriate claims before they are paid. HCFA and its Contractors share the goal of paying claims right the first time. We want to avoid paying inappropriately and then "chasing" after overpayments.

HCFA's national strategy to prevent overutilization and payment of improper claims is centered around our local contractors and their medical directors, operating in a decentralized but coordinated fashion. Contractors are expected to identify areas of abuse, develop appropriate medical review policies, educate providers, and implement prepayment screens. We support and coordinate the contractors' efforts through regional and national forums to share information about possible abuses and local medical review policies designed to address these abuses, and to develop model policies that may be adopted by many contractors. HCFA then holds each contractor accountable for its medical review activities and evaluates them regularly on their performance.

HCFA's strategy involves an array of methods, including using focused medical review, which employs prepayment screens and local and model medical review policy, experimenting with new anti-fraud and abuse technology, and developing the Medicare Transaction System. We are continuously improving our array of tools as we learn more about the nature of abuse and overutilization. For example, we have recently contracted with the Los Alamos National Laboratory to analyze our Medicare data bases and, among other things, to develop state-of-the- art pattern recognition software designed to identify fraud and abuse on a pre-pay basis. We appreciate the help of the General Accounting Office in identifying not only sources of abuse, but also suggestions of methods with which to combat the abusive practices. The balance of this statement discusses in more detail our current methods and the steps we are taking to improve them.

HCFA's Strategy for Focused Medical Review

Beginning in 1993, HCFA adopted the focused medical review strategy, which requires each contractor to develop criteria for selecting claims for prepayment review. Focused medical review is a process through which contractors target services that are vulnerable to abuse in their area and take appropriate steps to address them through prepayment screening and development of local and model medical review policies. Focused medical review is one of our most effective and most promising tools for helping to ensure that claims are paid properly. Since a major element of our program integrity strategy is to ensure that claims are paid correctly in the first place, we have been placing increasing emphasis on these techniques, and we expect to develop them much further in the future. HCFA's strategy in this area has evolved over time as we have gained experience with prepayment review.

Previously, we had required contractors to use uniform, national screens for a variety of items and services. We concluded that this approach was not cost effective, because patterns of inappropriate claims vary substantially from one part of the country to another and the provider community was well aware of what was being screened. Indiscriminate use of the same screens everywhere meant that many contractors were screening for things that did not present particular problems in their areas and that they could not shift their limited resources to deal with more pressing local problems.

The development of medical review policy on a local basis is key to our strategy. The Medicare contractors are closest to the source of the problems and have the most intimate knowledge of abuses and their perpetrators. Thus, we believe that Medicare contractors should have some discretion, with appropriate oversight, to take actions quickly within the realm of their knowledge and resources. What the problems are and how they can be resolved may vary from locality to locality, and our focused medical review methodology takes this variability into account and permits effective action by the contractors.

One tool for selecting items and services to target has been analysis of local utilization patterns that differ substantially from national utilization patterns. Contractors are expected to rely on other sources of information, including the local medical community, HCFA, other contractors, the Inspector General, or the General Accounting Office in deciding which items and services are most subject to overutilization or abuse. In addition, HCFA uses its historical utilization databases to provide contractors with analysis of variations in practice and utilization patterns across the country.

Once contractors have implemented a local medical review policy, the contractors use a combination of steps to combat problems in their locality. One of their most important functions is to educate Medicare providers about their policies, since most providers operate in good faith and adjust their billing practices to conform to what they know and understand about Medicare policy. In addition, contractors institute prepayment screens to identify providers who continue, in the face of established policy, to bill incorrectly. Postpayment medical review is also instituted where providers are identified as being consistently abusive.

As part of the annual contractor performance evaluation, HCFA holds contractors accountable for their focused medical review activities by requiring them to report on and evaluate their choices for items and services to target and to defend the process they have used to set priorities.

Prepayment Review Techniques

A prepayment screen operates by pulling selected claims from the routine claims processing flow and evaluating them before they are approved for payment. This review can occur in two ways: electronically, also called auto-adjudication, or through examination by trained personnel. Auto-adjudication screens can be expected to use fewer contractor resources, as long as they are used carefully so that any resulting denials of claims are appropriate. Inappropriate denial of claims is not only wrong, but it leads to appeals that require substantial resources to resolve. We agree that, particularly given our resource constraints, we should expand our use of appropriate auto-adjudication screens where this makes sense and in accord with medical review policy, and we are actively doing so.

Of course, auto-adjudication is not appropriate for all claims. Decisions regarding medical necessity are not always simple, and further information, which may not be on the claim, may be required to make an accurate payment decision on a claim evaluated against medical necessity criteria. For these claims, prepayment screens may simply suspend processing of the claim for manual review by trained staff Although manual review is more resource-intensive than auto- adjudication, it is also an essential component of contractors' efforts to avoid making inappropriate payments.

Medicare prepayment review screens must, of course, accord with Medicare coverage and payment policy. Where screens involve decisions about medical necessity, they must accord with medical review policy developed in consultation with the medical community. Contractors, through their carrier medical directors, establish local medical review policies in consultation with the provider community and other local medical experts. This consultative procedure for establishing medical review policies produces better policies by giving us the advantage of significant medical advice, and it helps insure acceptance of the resulting policies by providers. It means, however, that we cannot simply import prepayment review screens without first ensuring they are in accord with medical review policy.

Addressing Widespread Problems

We recognize that some problems may extend beyond local contractor areas and may even be national in scope. These problems can be identified by a variety of means, including data analysis of trends and patterns, contractor medical professional knowledge of actual and potential abuses, and help from the law enforcement community, including the Office of Inspector General. Our understanding is that these are the same sources that were used by the GAO to identify potential national problems.

GAO has criticized our focused medical review procedure, arguing that the process does not address nationwide overutilization of medical procedures. However, GAO does not address the issue of how HCFA might determine the level of utilization that is appropriate. An increase in nationwide utilization of a particular service does not by itself indicate an inappropriate level of utilization.

We agree that better methods need to be developed to identify and stop true overutilization at the national level, and we are exploring ways this can be done. As part of our strategic plan, we have made becoming a leader in health care information resources management a goal for HCFA. As part of achieving this goal, we plan on continuing to develop better methods by which we can analyze our historical health care utilization databases to identify national variations in practice and utilization patterns. This analysis will enable us to better direct the focus of local contractors to areas of potential over-utilization.

When HCFA or our contractors recognize the possibility of a widespread problem from whatever source, the issue is presented to the contractor medical directors at large, through one of over 20 regional and national workgroups convened by HCFA. The primary goal of these workgroups is to develop model policies that can be adopted by local contractors.

The use of model policy enhances uniformity and consistency in local policy, and permits more policies to be developed efficiently. Prepayment screens and edits can follow, where possible. Without the necessary policy to support them, it is not effective to develop pre-payment screens for denial of claims, since the denials will not be upheld through the appeal process. This model policy process combines the best of both worlds taking advantage of the knowledge and expertise at the local level, while it offers the efficiency and consistency of a more centralized process.

The carrier medical directors are currently developing model medical review policies for each of the six services discussed by the GAO report. They have established seven model medical policies to date and are actively working on 33 more.

HCFA is in the process of creating a centralized data base of all local and model medical policies. Contractors will be able to review other contractors' local policies and use them to help create their own policies. The database has been a pilot project and is undergoing final modifications. It will be accessible to contractors, in a user- friendly form, by April 1996. The database will be updated as new policies are developed to maximize its usefulness to Medicare contractors.

Correct-Coding Initiative and the Medicare Fee Schedule

HCFA has already undertaken a variety of activities to promote the development of more effective and efficient claims processing edits to prevent inappropriate payments. For example, in January 1992, HCFA implemented a fee schedule for payment of Medicare physicians' services, which involved specification of payment policies applicable to many services. In preparation for the implementation of the fee schedule, we developed an initial set of bundling and payment edits for contractors to use. Refining these edits has been an ongoing process, involving iterations in each of several years. These edits, for example, preclude duplicate payment when a claim includes both a comprehensive procedure code and codes for component parts of the procedure.

In 1994, HCFA contracted with AdminaStar to develop a list of comprehensive and associated component codes that are commonly billed together. The purpose of the contract is to develop methodologies to prevent overpayment of Part B claims whenever manipulation of coding could lead to inappropriately increased payments. AdminaStar identified problematic coding situations after soliciting comment from the medical community. On January 1, 1996, Medicare contractors implemented 84,000 correct coding combinations based on AdminaStar's recommendations. We will have a preliminary evaluation of the results of the AdminaStar edits by July of this year.

Improvements for the Future

HCFA is looking to the future and experimenting with technology to take advantage of methodologies that are just being developed and have not yet been refined for use in the complex environment of Medicare claims. For example, we are piloting new anti-fraud and abuse technology at several contractors and experimenting with some concepts that have not yet been adapted for widespread use, such as pattern recognition software using neural net technology.

In September 1995, HCFA entered into an interagency agreement with the Los Alamos National Laboratory to analyze our Medicare databases and, among other things, to develop pattern recognition software for identification of fraudulent or abusive patterns. Our ultimate goal is the development of prepayment software and other analytical methods to detect and deter fraudulent and improper claims.

The Medicare Transaction System (MTS), which will be phased in from 1997 to 1999, will incorporate state-of-the-art detection and analysis technology that will further enhance our efforts to detect abuse and avoid making inappropriate payments. Beginning with its initial implementation in 1997, the MTS will usher in the next generation of Medicare claims processing and data analysis. Through MTS, contractors will have quick access to national and local claims data to improve their ability to identify unusual utilization patterns and other potential concerns more quickly and efficiently than the current claims processing systems . One of the most significant improvements will be the ability to easily access information on all services delivered to beneficiaries. In addition, contractors will be better able to share best practices, such as efficient local prepayment auto-adjudication edits.

Other Anti-Fraud Activities

The Agency's ongoing efforts to develop efficient, effective prepayment screens and to facilitate sharing of information on screening criteria and local medical policies between contractors is an important part of the Agency's comprehensive anti-fraud and abuse initiative. We want to eliminate any opportunity for unprincipled groups or individuals to "game" the Medicare program. The public rightfully becomes enraged when they read about yet another scheme to steal from or abuse a government program. Minimizing fraud and abuse is one of our top priorities. HCFA and the Office of the Inspector General, in partnership with law enforcement agencies, are implementing a variety of strategies that fully exploit available information to improve detection of fraud and abuse and promote the use of best practices in combating it. Prevention, early detection and management, and coordination and cooperation in enforcement make up the core of our approach.

Through Operation Restore Trust, HCFA has developed partnership agreements to work with national, state and local law enforcement agencies to deter and detect fraudulent and abusive activity in the Medicare program. This initiative includes a major, multi-state demonstration of improved enforcement techniques. The President has proposed expanding and extending the Operation Restore Trust initiative.

While Medicare's payment integrity activities are improving, they need further improvement, and we look forward to working together on this subject with this Subcommittee and others in Congress. To ensure effectiveness of our payment integrity activities, they need stable and reliable funding. The President and Congress have addressed this need by including in various balanced budget plans a provision that would provide stable funding for payment integrity activities, and we urge you and your colleagues to retain such a provision in any further Medicare legislation.


In closing, let me reiterate HCFA's commitment to protecting our beneficiaries and the integrity of the Medicare trust funds by preventing inappropriate payments. As I have described, we have a multi-pronged strategy for addressing issues of overutilization and payment of inappropriate claims. We center our strategy on the local contractors, who know best where the problems are and can deal with them most directly, and we provide coordination and support to help ensure that widespread problems are addressed effectively.

We are continuously attempting to improve our approaches to these problems. Our contractors are developing more effective local medical review policies, and we are working together on model policies that can be adopted widely. We expect to expand Medicare's use of prepayment edits, including auto-adjudication screens where appropriate. In partnership with leading public and private organizations, we are developing "cutting edge"technologies to detect and prevent abuse.

Our efforts to prevent inappropriate payments are part of HCFA's comprehensive strategy to combat fraud and abuse in the Medicare program. We appreciate the Subcommittee's interest in the problems we confront in this area, and we look forward to working with you to improve the Medicare program.

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