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
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
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
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.
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
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)
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:
- Develop a system that objectively and periodically estimates improper
payments and disclose the range of such overpayments in its financial
- Develop a national error rate to focus corrective actions and measure
performance in reducing improper payments.
- Enhance prepayment and postpayment controls by updating computer systems
to better detect improper Medicare claims.
- 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.
- 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.
- 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.