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Testimony on HCFA's FY 1996 Medicare Audit by June Gibbs Brown
Inspector General
U.S. Department of Health and Human Services

Before the House Committee on Ways and Means, Subcommittee on Health
July 17, 1997

Good morning, Mr. Chairman. I am June Gibbs Brown, Inspector General of the Department of Health and Human Services (HHS), and I am pleased to report to you on our audit of the Health Care Financing Administration's (HCFA) Fiscal Year (FY) 1996 financial statements. With me this morning is Joseph E. Vengrin, Assistant Inspector General for Audit Operations and Financial Statement Activities.

My testimony today will focus on our extensive review of the correctness of Medicare payments and the reliability of HCFA's financial reports. Further details are provided in our report which is being released at this hearing.

Before beginning my testimony, I want to acknowledge the cooperation and support we received during this audit from the Department and HCFA. A review of this magnitude and complexity could not have been carried out without HCFA's excellent cooperation and assistance in making available medical review staff at the Medicare contractors and the peer review organizations (PRO). We look forward to working with them again on the FY 1997 audit. Also, I would like to point out that this audit was performed in close cooperation with the General Accounting Office (GAO) due to HCFA's significance in the consolidated financial statements of the Federal Government, which GAO has the responsibility to audit. The GAO participated extensively in various segments of the audit and provided significant contributions.

We undertook this audit as part of our implementation of the Government Management Reform Act of 1994 which requires audited financial statements. As you know, the intended purpose of financial statements is to provide a complete picture of agencies' financial operations, including what they own (assets), what they owe (liabilities), and how they spend taxpayer dollars. The purpose of our audit was to independently evaluate the reliability of such statements. While we issued audit reports on portions of HCFA's financial statements in previous FYs, this year marks our first comprehensive financial statement audit of HCFA.

Medicare Claims Testing

The HCFA is the largest single purchaser of health care in the world. With expenditures of approximately $300 billion, assets of $175 billion, and liabilities of $50 billion, HCFA is also the largest component of HHS. Medicare and Medicaid outlays represented 33.2 cents of every dollar of health care spent in the United States in 1996.

In view of Medicare's 38 million beneficiaries, 800 million claims processed and paid annually, complex reimbursement rules, decentralized operations, and health care consumers who may not be alert to improper charges, the Medicare program is inherently at high risk for payment errors. Medicare, like other insurers, makes payments based on a standard claims form. Providers typically bill Medicare using standard procedure codes without submitting detailed supporting medical records. However, Medicare regulations specifically require providers to retain supporting documentation and to make it available upon request. Because of the high risk in health insurance reimbursement and its dollar magnitude in relation to financial statement impact, i.e., $168.6 billion in Medicare fee-for-service claims, we embarked on a comprehensive review of claims expenditures and supporting medical records.

Our primary objective was to determine whether Medicare benefit payments were made in accordance with Title XVIII of the Social Security Act (Medicare) and implementing regulations. Specifically, we examined whether services were: (1) furnished by certified Medicare providers to eligible beneficiaries; (2) reimbursed by Medicare contractors in accordance with prescribed Medicare laws and regulations; and (3) medically necessary, accurately coded, and sufficiently documented in the beneficiaries' medical records.

This is the first time in the history of the Medicare program that a comprehensive, statistically valid sample of Medicare fee-for-service claims has ever been taken to determine the correctness of payments. The results of our claim testing corroborate past program findings that the Medicare program is inherently vulnerable to improper provider billing practices.

We estimate that during FY 1996 net overpayments totaled about $23.2 billion nationwide, or about 14 percent of total Medicare fee-for-service benefit payments. These improper payments could range from inadvertent mistakes to outright fraud and abuse. We cannot quantify what portion of the error rate is attributable to fraud. Specifically, 99 percent of the improper payments were detected through medical record reviews coordinated by the Office of Inspector General (OIG) in conjunction with medical personnel. When these claims had been submitted for payment to Medicare contractors, they contained no visible errors.

Review Methodology

To accomplish our objective, we used a multistage, stratified sample design. The first stage consisted of a random selection of 12 contractor quarters during FY 1996, and the second stage consisted of a random sample of 50 beneficiaries from each contractor quarter. The resulting sample of 600 beneficiaries produced 5,314 claims for review. The population from which the sample was drawn represented $168.6 billion in fee-for-service payments.

We reviewed all claims processed for payment for each selected beneficiary during the 3-month period. Specifically, we used medical review personnel from HCFA's Medicare contractors (fiscal intermediaries and carriers) and PROs who regularly assess medical records to determine whether services billed were reasonable, medically necessary, adequately documented, and coded correctly in accordance with Medicare reimbursement rules and regulations. We asked the Medicare contractors to send a letter to each provider in our sample to obtain copies of all medical records supporting services billed. In the event that a response was not received, a second letter was sent, and in most instances additional telephone calls were made. Throughout the medical review, we coordinated OIG and medical review efforts to ensure consistency and accuracy.

Concurrent with the medical review, we made additional detailed claims reviews, focusing on past incorrect billing practices, to determine whether: (1) the contractor paid, recorded, and reported the claim correctly; (2) the beneficiary and the provider met all Medicare eligibility requirements; (3) the contractor did not make duplicate payments or payments for which another primary insurer should have been responsible (Medicare secondary payer); and (4) all services were subjected to applicable deductible and co-insurance amounts and were priced in accordance with Medicare payment regulations.

Projecting the 1,577 claims not meeting Medicare laws and regulations to the total FY 1996 fee-for-service Medicare benefit payments, we estimated that the range of improper payments at the 95 percent confidence level is $17.8 billion to $28.6 billion, or 11 percent to 17 percent. Therefore, we used the midpoint of this range, or $23.2 billion (about 14 percent of the $168.6 billion in processed fee-for-service payments) as the projected estimate of improper payments. However, the precision of the dollar estimate by specific type of claim and type of error is not sufficient to use for benchmarking purposes. This information is being provided to HCFA in order that appropriate corrective action can be taken. Also, this estimate of improper payments does not take into consideration waste (excessive pricing) and numerous kinds of outright fraud, such as phony records or kickbacks.

Types of Errors Found

As shown in the following chart, most of the errors we found fell into four general categories: (1) documentation, which includes both insufficient and no documentation; (2) lack of medical necessity; (3) incorrect coding; and (4) noncovered/unallowable services. table has been deleted from text

Lack of Documentation. The most pervasive error type in our sample is insufficient or no documentation, which accounts for $10.8 billion, or approximately 47 percent, of the $23.2 billion in improper payments. This can be further broken down between insufficient documentation totaling $7.596 billion (33 percent) and no documentation totaling $3.250 billion (14 percent). As previously indicated, if providers failed to submit documentation or submitted insufficient documentation, the contractors generally requested supporting medical records at least three times before determining the payment to be improper. Medicare regulation, 42 CFR 482.24(c), specifically requires providers to maintain medical records that contain sufficient documentation to justify diagnoses, admissions, treatments performed, and continued care.

Some examples of documentation problems follow:

  • Skilled Nursing Facility (SNF). A hospital-based SNF was paid $9,365 for a 25-day skilled nursing stay even though the medical records did not support the need for skilled care.

    Examples of incorrect coding follow:

    • Inpatient Hospital. One beneficiary had three separate hospital inpatient admissions during a 3-month period. Medicare paid $8,533 for each admission under one diagnosis-related group (DRG). Based on the medical records, the medical reviewer concluded that all three claims should have been paid under a less extensive and less costly DRG that paid $6,290, resulting in a total overpayment of $6,729.

    • Physician. A physician billed Medicare for a hospital emergency room visit for "treatment of a medical problem of high severity that requires urgent evaluation by the emergency room physician" when the medical records support only treatment for problems of moderate severity.

      Another physician billed Medicare for subsequent hospital care requiring "a medical decision of high complexity by the provider" when it should have been for medical care "that is straightforward or of low complexity."

    • Noncovered/Unallowable Services. Unallowable services account for an estimated $1.2 billion, or about 5 percent, of the $23.2 billion in imprope5 percent, of the $23.2 billion in improper payments. The medical industry uses a standard coding system to bill Medicare for services provided. For most of the coding errors, the medical reviewer determined that the documentation submitted by the provider supports a lesser reimbursement code. However, we did find a few instances of downcoding which were offset against identified upcoding situations.

    Following are some examples of noncovered or unallowable services identified during our review:

    • Physician Claims. A physician billed Medicare for an electrocardiogram and various laboratory tests. After reviewing the provider's medical records, the medical reviewer concluded the billed services should be denied because the services were performed as part of the beneficiary's routine yearly physical examination, which is not a Medicare-covered service.

    • Hospital Outpatient. A patient was evaluated for foot orthotics, and impressions were taken to make soft arch supports. Arch supports are not covered by Medicare. Although the patient signed a hospital form acknowledging that arch supports were not covered by Medicare, the claim was billed as though it were a Medicare-covered service.

    • SNF Services. Most of the errors occurred when the SNF billed Medicare separately for various routine services already included in its flat-rate reimbursement.

A further analysis of the errors, as illustrated in the chart herein, shows that 88 percent of the $23.2 billion in improper payments occurred within 6 provider types: (1) inpatient prospective payment system (PPS), (2) physician, (3) home health agency, (4) outpatient, (5) skilled nursing facility, and (6) laboratory.

Estimated amount of Improper Payments
By Type of Error/Provider table has been deleted from text

We believe that it would be prudent for HCFA to focus corrective action in these specific provider groups. We have provided HCFA a detailed list of certain procedure codes that have a high frequency of error.

Conclusions and Recommendations: Claims Testing

The HCFA uses numerous prepayment and postpayment safeguards to prevent or detect improper Medicare fee-for-service benefit payments. For instance, prepayment edits help ensure that billed services are paid accurately and timely, but they do not always detect the improper services that we identified, i.e., undocumented, medically unnecessary, or upcoded services. The HCFA's postpayment medical review is generally effective for identifying abuse and overutilization and for detecting payments for unsubstantiated, medically unnecessary, and noncovered services. However, funding limitations have significantly constrained medical review to the extent that currently only about 3 of every 1,000 providers are subjected to postpayment medical review audit.

Due to limited funding, resources devoted to prepayment and postpayment review have not kept pace with the increase in claims or questionable billing practices by providers. However, even the best developed prepayment and postpayment controls at the contractor level may not be sufficient to prevent or detect material Medicare program losses resulting from excessive, unnecessary, or unsubstantiated provider services. Therefore, HCFA needs to consider stronger deterrents to reduce improper benefit payments and to protect the solvency of the Medicare trust funds.

As our results indicate, a significant opportunity exists for providers to: (1) bill for services that are excessive or not medically necessary; (2) bill for services that are unsubstantiated by the beneficiaries' medical records; and (3) improperly code services to obtain higher Medicare payment than the appropriate code would permit. Existing risks are sharply increased by the significant growth in Medicare claims and expenditures, the inherent complexities of the Medicare program, and restricted funding for program safeguards to deter abusive providers.

To ensure provider compliance with Medicare reimbursement rules and regulations, stronger oversight by HCFA is needed. Among the more important issues HCFA faces in the immediate future is preserving the solvency of the Medicare trust funds. As part of its strategic plan to safeguard these funds, we recommend that HCFA:

  1. Develop a system that objectively and periodically estimates improper payments and disclose the range of such overpayments in its financial statements.

  2. Develop a national error rate to focus corrective actions and measure performance in reducing improper payments.

  3. Enhance prepayment and postpayment controls by updating computer systems to better detect improper Medicare claims.

  4. Direct contractors to expand provider training to further emphasize the need to maintain medical records that contain sufficient documentation and the penalties for not doing so.

  5. Direct contractors to make followup evaluations of specific procedure codes we identified with high error rates and consider whether identified providers should be placed on prepayment medical review.

  6. Ensure that contractors adjust their Medicare accounts for improper payments we identified, initiate recovery from the identified providers, and follow up with the providers to correct deficiencies and to determine whether other systemic problems need to be corrected.
Disclaimer of Opinion on HCFA's Financial Statements

Lastly, I would like to focus my testimony on HCFA's financial reporting. We were unable to reach conclusions on several billion dollar accounts in HCFA's FY 1996 financial statements. This does not mean that these numbers are incorrect; rather, they are not supported by current accounting or audit data. The auditing term is a "disclaimer of opinion," which means that we were not able to determine if HCFA's financial statements were fairly presented because the documentation was not adequate or available to support the reported financial statement amounts. Specifically, we were not able to gather sufficient evidence on the validity or reasonableness of the following;

  • Medicare Accounts Payable--services provided at year end but not yet paid. As of September 30, 1996, reported Medicare accounts payable totaled $36.1 billion and comprised 71 percent of total liabilities. These payables represent HCFA's estimate of actual or potential claims for services provided to beneficiaries but not paid at the end of the FY. The HCFA did not provide adequate support for this estimate. Additionally, we were unable to determine, through alternative audit procedures, if the September 30, 1996, Medicare accounts payable balance was fairly presented. Specifically, we could not find support for $18.3 billion of the accounts payable amount using historical claims data adjusted for costs associated with interim payments to providers and settlements from providers' cost reports. Moreover, using expenditure trends to assess the reasonableness of the payables estimate, we noted that Medicare expenditures increased 16 percent while the accounts payable increased 64 percent. Historically, when compared with expenditures, the payables had erratic and inconsistent changes which HCFA could not explain.

  • Supplementary Medical Insurance (SMI) Revenue (Part B Medicare). The Social Security Administration is responsible for withholding premiums from SMI beneficiaries' Social Security checks and for transferring these funds to the SMI trust fund each month. Because the SMI revenue has not been audited and because we lack statutory authority to do this work, we were unable to determine the validity and completeness of the SMI revenue account of $18.9 billion, as well as the Federal match of $61.7 billion.

  • Medicare Accounts Receivable--overpayments to providers owed to HCFA. We could not determine the validity of the $2.68 billion Medicare accounts receivable balance because Medicare contractors did not maintain adequate documentation to support reported accounts receivable activity and to provide adequate audit trails. For example:

  • Some Medicare Part A providers are paid on an interim basis using prior claims activity and related costs (referred to as the periodic interim payment (PIP) method of reimbursement). Some contractors used inconsistent accounting procedures to calculate receivables and payables resulting from the PIP reimbursement process. One contractor, for instance, incorrectly included $700 million as a receivable when in fact all but $32 million was a payable. Also, four contractors did not record either PIP receivables or payables. One additional contractor included a $25 million PIP payable, rather than an $80 million PIP receivable.

    At another contractor location, approximately $7 million could not be reconciled to reported amounts.

  • Cost Report Settlements--HCFA's process for determining final payments to certain institutional providers. About 38,000 institutional providers are paid interim amounts throughout the year and subsequently file a cost report to reconcile actual costs to the interim payments received. The HCFA's cost report audit process is limited to specific issue areas or cost report line items and covers only a limited number of providers. Due to the limited scope of contractors' audits of provider cost reports, we were unable to determine what adjustments, if any, were necessary to the $3 billion in prior-year cost settlements reported in the FY 1996 financial statements.

I appreciate the opportunity to appear before you today and to share our report with you. As demonstrated in our review, unnecessary or improper benefit payments continue to plague the Medicare program. Existing risks are sharply increased by the significant growth in Medicare claims and expenditures, the inherent complexities of the Medicare program, and restricted funding for program safeguards to deter abusive providers. Our review has also demonstrated the need for stronger oversight by HCFA to ensure provider compliance with Medicare reimbursement rules and regulations and the necessity of subjecting claims to medical review. I am pleased to say that HCFA and the Department's Chief Financial Officer are aggressively working on a corrective action plan addressing our concerns.

Finally, I would like to note that we have already started our audit work on HCFA's FY 1997 financial statements. As in FY 1996, we will be performing comparable fee-for-service claims testing. I welcome your questions.

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