Chairman Barton, Chairman Bilirakis, Chairman Horn, and Members of the distinguished
Subcommittees here today, I am pleased to have this opportunity to discuss with you the findings
of the Fiscal Year (FY) 1997 Chief Financial Officers (CFO) audit by the Department of Health
and Human Services Office of the Inspector General (OIG). As you know, this is the second
year that the OIG conducted this comprehensive audit, which looks at our financial statements
and whether we pay claims properly.
I am pleased to report that this year's audit demonstrates that corrective actions initiated
following the first such audit last year are having an impact. We are getting our books in order.
We have cleaned up our accounts payables, We have corrected our accounting problem with the
Social Security Administration, and are making progress on our accounts receivables.
Since the beginning of this Administration, we have taken unprecedented steps to fight health
care waste, fraud and abuse. We already are achieving record success in increasing fraud and
abuse investigations, indictments, convictions, fines, penalties, and restitutions. Last year,
Medicare alone saved an estimated $7.5 billion mostly by preventing inappropriate payments
through audits, medical reviews, and making sure other insurers who cover our beneficiaries pay
claims that are not Medicare's responsibility. And, nearly $1 billion was returned to the
Medicare Trust Fund, thanks to our partnership with the HHS Inspector General, Department of
Justice, state and local authorities. We have continued to step up our crackdown on waste fraud
and abuse, and many of these new initiatives are not reflected in this year's OIG audit report.
The OIG estimates that improper Medicare payments in FY 1997 ranged from 7 percent ($12.1
billion) to 16 percent ($28.4 billion), with a point estimate of 11 percent ($20.3 billion).
Although the FY 1997 point estimate of the error rate is $3 billion less than the FY 1996 point
estimate, based on the limited sample of Medicare claims reviewed in both FYs 1996 and 1997,
the IG is unable to conclude that this year's error rate is statistically different from last year's
The OIG issued a qualified opinion rather than a disclaimer of opinion. The Health Care
Financing Administration has corrected two items which were disclaimed in last year's audit. All
of these acts demonstrate that HCFA has made substantial progress in addressing both
operational and financial reporting issues in the short time since last year's audit.
We believe that the actions we have taken are having an effect. Still, much remains to be done.
Clearly, a 7 to 16 percent for a claims error rate is not acceptable. As you know, combating
waste, fraud and abuse in Medicare is one of my top priorities. We will continue to aggressively
implement corrective actions to address the error rate.
One area in which we need your help is in enacting the President's budget proposals to allow us
to collect user fees. The Administration has put forth a proposal to collect $395 million in user
fees that will be dedicated to doubling the number of audits and increasing medical reviews and
other efforts to fight waste, fraud and abuse. An additional $264.5 million in user fees for
provider enrollment, survey and certification, and duplicate, unprocessable or paper claims are
also needed to increase scrutiny and promote program integrity.
We also need your help in passing contractor reform legislation that will increase competition for
Medicare contractor business, give us much-needed leverage to negotiate with contractors, and
allow us to hold contractors accountable. Legislation for both these proposals was sent to
Congress in February.
It is important to stress that we cannot determine what portion of the improper, payments
identified in the audit were due to fraud and abuse. Many of the erroneous payments were due to
inadequate documentation, which is not synonymous with fraud and abuse. It does not
necessarily mean the service was not rendered or that it was not medically appropriate.--It--does
mean we must continue working diligently with providers to improve documentation. Success in
improving documentation will help bring the error rate down.
We also expect the estimate of improper payments to decrease because of other steps to increase
the crackdown on fraud, waste and abuse begun by the Clinton Administration in 1993. For
example, in March of this year we published a regulation allowing us to hire special program
safeguard contractors who will bring a new energy to our program integrity efforts. That is only
one of several additional new steps taken since the end of the fiscal year examined in the audit.
Other steps taken since the period covered by the audit include tightening entry standards and
requiring surety bonds for home health agencies expanding on-site inspection for durable
medical equipment suppliers and community mental health centers, and obtaining authority to
bar felons from participating in Medicare and Medicaid.
The audit of HCFA's financial statements was conducted in accordance with the Chief Financial
Officers Act. In 1994, President Clinton signed the Government Reform and Management Act,
which made changes to the Chief Financial Officers Act by requiring government-wide and
department-wide financial statements. This legislation, which originated in Chairman Horn's
Subcommittee, was meant to improve systems of accounting, financial management, and internal
controls throughout the Federal government to help reduce waste and promote efficiency, and to
provide Congress with complete, reliable, and timely information on the financial status of the
Chairman Horn, your leadership in this area is yielding tangible results. Such audits were never
done before, and they provide a valuable roadmap directing us to areas that need attention. The
results of the FY 1996 audit helped improve our accounting systems and highlighted areas in
which our operations could be tightened. We have cleaned up our accounts payable problems,
our Social Security Administration receivables are no longer disclaimed. And we are doubling
the number of audits and increasing medical reviews by more than 10 percent.
The results of the FY 1997 audit will once again sharpen our focus on areas that need prompt
attention. Today I will first discuss the audit findings, and then focus on the corrective actions
HCFA is taking.
In conducting this audit, the OIG found that, based on the information sent in to us by providers
on their claims, our contractors paid the claims correctly 98 percent of the time. The true error
rate was found only when the OIG invested a great deal of resources into visiting HCFA
contractors, requesting supporting documentation from providers, and actually reviewing the
medical records of 8,048 fee-for-service claims paid in FY 1997 for 600 beneficiaries. The error
rate identified by the OIG could only be found by requesting supporting documentation and
medical records from providers. Human review of medical documentation identified these
errors; automated review alone will not solve this problem. This is a very expensive, labor
intensive process, and we do not have resources to do this kind of extensive investigation for
In the case of 1,097 of the claims, the auditors found that the provider's files could not support
that the claim was in accordance with Medicare laws and regulations. By projecting these results
to the general Medicare population, the OIG arrived at a midpoint estimate of $20.3 billion in
improper payments nationwide or about 11 percent of the total Medicare fee-for-service benefit
payments. Due to the limited size and variance of the sample, however, the true level of
improper payments could range from 7 to 16 percent. I remain committed to aggressively
rooting out claims for services which are medically unnecessary, insufficiently documented,
noncovered by Medicare, or incorrectly coded.
Documentation problems are the single largest factor in our error rate. Like other insurers,
Medicare regulations require providers and suppliers to submit claims for the services they bill
and maintain documentation to substantiate the claim. When the OIG requested documentation
from the provider to back up a claim, documentation was not complete in 25 percent of cases.
In 4 percent of cases documentation was never furnished. That is down substantially from 14
percent in FY 1996, and we would like to thank the provider groups with whom we have worked
since last year to educate their members on the importance of cooperating with this audit.
The OIG also noted that 14.5 percent of the error rate was attributable to documentation which
was unavailable because of ongoing criminal or civil investigations. I must caution that these
cases are under investigation and we do not know for sure whether they are actual cases of fraud
or even improper payments.
I would also like to stress that these documentation problems do not appear to be related to what
some providers consider to be the complexity of documentation requirements. If that were the
case, more errors would be classified as incorrect coding where the provider billed for a different
level of service than was actually provided, instead of as insufficient documentation where we
find that the only documentation is a note stating that the patient is "stable."
Lack of Medical Necessity
The second largest factor in improper payments is claims for services that are not medically
necessary. Thirty six percent of the improper claims were identified by medical professionals
who found that the documentation provided did not show that the service was medically
necessary. These cases include obvious abuses:
- A hospital which admitted a patient five years after a stroke to provide medication and physical
therapy for 37 days. Our Peer Review organizations axe developing pilot programs for detecting
and preventing this kind of inappropriate admission.
- A home health agency which provided $3,000 in services to a beneficiary who did not qualify
for the benefit. We are taking many steps to crack down on home health waste, fraud, and abuse,
including tougher standards for agencies to enter the program, increased scrutiny for those
already in, and a new payment system with incentives to provide only medically necessary care.
Incorrect coding is another significant problem that we are addressing. Payment for services is
based in part on how complex a service is. A provider receives a larger payment for more
intensive services: Providers use the medical industry's standard coding system to indicate the
intensity of the medical treatment on a claim. In 14 percent of the improper payments, medical
professionals who reviewed the documentation concluded that the service was not as complex as
the provider claimed, and that Medicare had therefore paid too much. Submitting claims for a
higher level than actually provided is known as "upcoding." It is also important to note that the
OIG found a handful of cases in which the provider down-coded and so was underpaid for the
services performed. The audit, however, reports the net improper payment.
Finally, about 2 percent of the improper payments were for services not covered under Medicare
benefits. Such claims were carefully disguised to look like Medicare-covered services, but upon
review of the documentation, medical professionals concluded they were for services that
fee-for-service Medicare by law does not cover such as routine physical examinations, routine
ear and eye examinations and most routine foot care.
Durable Medical Equipment
Durable Medical Equipment (DME) is one of the most problematic areas in Medicare in terms of
program integrity. It was not included in last year's CFO audit, but is included this year.
Therefore, caution is in order before any direct comparisons are made between this year's results
and last year's. The audit found that nearly 10 percent of the error rate was due to DME claims,
suggesting that we are concentrating our efforts through Operation Restore Trust and other
initiatives to address DME waste, fraud and abuse in the right places.
More than 80 percent of the incorrect payments found in the 1997 audit occurred in five areas:
physician services (29 percent), inpatient hospital services (20 percent), home health agencies
(13 percent), outpatient hospital services (10 percent), and durable medical equipment (8
percent). The remaining 28 percent were made in other categories. Two of these categories,
home health and skilled nursing facilities are, along with (DME), high-priority areas for
investigation as part of our Operation Restore Trust anti-fraud initiative. Several additional
initiatives, discussed later in this testimony, are underway to address home health and DME
Even before last year's audit was released, HCFA began a set of aggressive corrective actions
that address problems outlined in the CFO audit and help stop improper payments, including:
recouping identified overpayments, increasing claims review and audits, stepping up efforts to
educate providers, working to revise documentation guidelines so they are more comprehensive
and easier to use, and developing and adopting more sophisticated technologies for detecting
fraud, waste and abuse.
First and foremost, we are recovering the improper payments identified by the OIG. We have
already recovered 95 percent of the overpayments identified in the FY 1996 sample. We have
intensified payment recovery efforts overall, and our contractors will immediately begin
collecting the improperly paid Medicare monies identified in the FY 1997 audit. And we will
instruct our contractors to evaluate providers identified in the OIG audit report for more
Second, we are increasing the level of medical review from 80 million in FY 1997 to 89 million
in FY 1998. We also are asking for authority to collect user fees that will allow us to do even
more. We have increased funding by $53 million over FY 1997 levels for medical review. We
also are conducting thorough prepayment reviews of documentation on a random sample of
physician office visit claims throughout this fiscal year. So far about five thousand of these
claims have been denied or reduced because physicians failed to adequately document the claim.
We are now working to develop a substantive testing process which will help determine whether
services are actually rendered and medically necessary, allow for projection of a national claims
error rate, and help to spot areas for improvement. HCFA and our Peer Review Organizations
are developing pilot programs to test ways to ensure the medical necessity of inpatient hospital
claims. The projects will focus on identifying unnecessary admissions, unnecessary
readmissions, and the necessity of billings for specific cardiac procedures.
Third, HCFA is emphasizing the need for clear and complete documentation. HCFA is working
to engage the provider community in a campaign to promote correct coding and documentation.
We have held meetings with the professional provider organizations to explain the audit findings
and to enlist their help in addressing problems identified in the CFO audit, including publication
of information on provider documentation guidelines and on the CFO audit in their materials and
We are working with the AMA and medical societies throughout the country to refine the
documentation guidance so it is easier to use. We will participate in a meeting the AMA is
hosting on April 27 with leaders and billing experts from the national medical specialty societies
on how to improve these revised guidelines before they are implemented.
We have increased by 15 percent the number of physician medical directors at our claims
processing contractors. These physicians help develop medical review policies and educate the
providers about coding, billing and payment policies.
Fourth, HCFA will support the use of existing technology and explore new technology to aid our
contractors in identifying improper claims. These efforts include our Correct Coding Initiative,
our enhanced Customer Information System, and hiring of special statistical analysis contractors.
Correct Coding -- Implemented in 1996, the Correct Coding Initiative is a package of more than
93,000 automated edits we require contractors to have in their claims processing systems. This
initiative saved almost $217 million in the first year of implementation alone. HCFA will
continue to develop coding and produce additional edits to enhance contractor databases.
Enhanced HCFA Customer Information System (HCIS) --- The HCIS, which was first used as a
part of Operation Restore Trust, enables HCFA and its contractors to view provider or service
utilization data at several levels including the national the state, contractor, provider type, or
individual provider. For example, if I were trying to find out how many times a certain service
had been billed in a state, I could obtain that information through the HCIS database. As a result,
audits or reviews can be focused, rapidly and inexpensively, on a particular level. HCFA will
continue to refine the HCIS which has been particularly helpful in providing rapid access to
beneficiary and provider utilization data.
Statistical Analysis Contractor --- HCFA is procuring new statistical analysis contractors who
will provide comprehensive ongoing analysis of trends, utilization rates, billing patterns, referral
patterns and related information. These contracts will be modeled after our successful work with
Palmetto Government Benefits Administrator, Inc., the statistical analysis contractor who has
supported our four Durable Medical Equipment Regional Contractors (DMERCs) in detecting
specific areas of fraudulent behavior. As an example, through their analysis the contractor has
identified fraudulent billing practices for nebulizers and related drugs, and many abusive
practices for incontinence supplies, surgical dressings, parenteral & enteral nutrition and
We estimate the DMERCs have made changes in their payment policies that have saved the
Medicare program in excess of $200 million. They have also used this data to trigger provider
renews, support fraud investigations, and target enrollment verification activities.
We hope to have a statistical analysis contractor in place this year. We published a proposed
regulation on March 28, 1998 outlining parameters for hiring this and other special program
MEDICARE ANTI-FRAUD INITIATIVES
The Clinton Administration has focused unprecedented attention on the fight against fraud and
abuse, and we continue to step up these efforts. These actions complement our CFO Audit
corrective actions and help in the effort to stop improper payments, even though many are not
reflected in this year's OIG audit report.
Our Medicare Integrity Program system of payment safeguards identifies and investigates
suspicious claims throughout Medicare, and ensures that Medicare does not pay claims that other
insurers should pay. These safeguards comprise a comprehensive system which attempts to
identify improper claims before they are paid, to prevent the need to "pay and chase." HCFA's
current strategy for program integrity focuses on prevention and early detection. Activities
include: Medicare Secondary Payer, medical review, cost report audits and anti-fraud activities.
These safeguards return $17 for every $1 spent, and saved $7.6 billion in FY 1997 by preventing
inappropriate payments through audits, medical reviews and making sure that Medicare does not
pay for claims owed by private insurers.
Actions undertaken since the close of the FY 1997 CFO audit addressing durable medical
equipment fraud and abuse include:
Expanded On-Site Visits --- Visits by Medicare staff as part of Operation Restore Trust and
studies by the HHS Inspector General show that many purported DME suppliers have only mail
drops and no actual offices. Site visits to two thousand suppliers in five states with the most
suspected DME fraud problems resulted in 650 suppliers being ejected or rejected by Medicare
in FY 1997. HCFA is expanding site visits for DME suppliers nationwide this year.
Additional Standards for DME Suppliers-- Medicare proposed a regulation on January 20 to
make it more difficult for unscrupulous DME suppliers to enter Medicare and to strengthen
enforcement against such suppliers. Among the new supplier requirements are:
- a surety bond of at least $50,000,
- a ban on DME telemarketing and a requirement for a physical location with
working business phone at that location,
- a prohibition on reassigning supplier numbers, and
- criminal and civil sanctions for false information on billing number applications.
Other Medicare actions to assure that DME suppliers are legitimate include:
requiring periodic training on billing procedures for new and existing suppliers,
eliminating 36,000 supplier billing numbers that had not been used for at least one year,
eliminating the chance they will be exploited by scam operators,
modifying the DME application form to obtain additional information about prospective DME
suppliers, and seeking authority to charge all applicants an application fee that will help us fund
increased enforcement efforts.
Home Health Initiatives -- Several actions have been taken to fight home health waste, fraud and
abuse. On September 15, 1997 the President announced a moratorium on new home health
agencies (HHAs) until Medicare could implement a range of new rules and management tools
that enhance oversight of HHAs and ensure that new Medicare home health agencies are not
"fly-by-night" or low quality providers. The moratorium was lifted earlier this year with the
publication of a regulation requiring all HHAs that participate in Medicare to:
Obtain a surety bond of at least $50,000, and have enough capital to fund operations for the first
In addition, we have taken administrative steps to require HHAs to:
- reveal "related business interests that can be the conduit for fraudulent and abusive
- serve at least 10 patients before they are admitted to the Medicare program so that their quality
of care can be reviewed.
We believe initiatives we have taken are already impacting home health spending. We believe it
is no coincidence that Medicare spending growth for home health care has slowed to just 5.4
percent in FY 1997 from rates that had exceeded 25 percent a year.
Later this year Medicare will issue regulations to require HHAs to re-enroll every three years,
which will help us weed out problem providers. And the President has proposed assessing a fee
on providers so we can do more audits that help ensure that Medicare only pays appropriate
RECENT LAWS AND LEGISLATIVE PROPOSALS
Thanks to the work of these committees and this Congress we now have more tools we need to
fight fraud and abuse, many of which are not reflected in this year's OIG audit. These tools from
the Balanced Budget Act let us:
- exclude providers convicted of felonies or health related crimes;
- levy new civil monetary penalties on hospitals who contract with providers who have been
excluded from Medicare;
- levy civil monetary penalties on providers who take kickbacks;
- require provider applicants to provide Social Security numbers and employer identification
numbers so we can check the applicant histories; and
- tighten eligibility for home health services so providers can no longer game the system by
certifying that a patient is eligible for home health service simply because they need blood
The Health Insurance Portability and Accountability Act also for the first time created a stable
source of funding for fraud control, which in FY 1998 will total almost $120 million. It also
gave us authority to contract with special program integrity contractors.
Through additional tools provided in the Balanced Budget Act, new anti-fraud initiatives and our
corrective action plan, I believe HCFA will continue to take steps in the fight direction to reduce
the national error rate of improper claims identified in the CFO Audit.
President Clinton's budget includes several proposals to continue our success in fighting health
care fraud, waste, and abuse. These measures would save an additional $2 billion in health care
expenditures over five years and help pay for the expansion of Medicare eligibility to the near
elderly. The proposals include:
- more subpoena and injunction authority;
- penalties for physicians who falsely certify that an individual meets Medicare requirements;
- eliminating fraudulent use of bankruptcy protections that allow providers engaging in fraudulent
practices to avoid paying penalties and returning the money they owe;
- establishing fines for providers who pay kickbacks to induce referrals;
- stopping providers from pretending to furnish partial hospitalization services in a beneficiary's
home or in an inpatient or residential setting.
- and user fees to fund important activities such as audits, reviews, provider- enrollment, and
survey and certification efforts.
Obviously, the President's budget proposals and the Balanced Budget Act provisions have not
been implemented and are not reflected in the OIG audit report. We are confident that those
actions will be reflected in next year's OIG report.
The other function of the CFO Audit is to determine whether HCFA's internal accounting
mechanisms are in order. In public accounting terms, the purpose of an audit is to permit the
auditors to issue a report as to whether the financial statements are presented fairly and in
conformity with generally accepted accounting principles. There are four types of audit reports:
- an unqualified opinion, which means the financial statements are fairly presented;
- a qualified opinion, which means the financial statements are fairly presented except for the effects
of a matter or matters as described in the Auditor's report:
- an adverse opinion, which means
the financial statements are not presented fairly; and,
- a disclaimer of opinion, which states
that the auditor does not express an opinion on the financial statements and gives all the
substantive reasons for the disclaimer.
I am very pleased to say that HCFA has resolved two major financial statement shortcomings on
which we received a disclaimer in last year's audit. The Medicare accounts payables estimating
methodology as successfully revised, and the Supplemental Medical Insurance premium
withholding by the Social Security Administration was successfully audited.
Accounts payable ($27.4 billion) represents costs incurred but not paid as of the end of the fiscal
year. In previous years, the payable was a byproduct of the trust fund projections. With advice
from a national public accounting firm, HCFA, developed a revised methodology, collected data,
and this allowed the OIG to estimate a revised Medicare payable.
Also, importantly, we have gotten our books in order with the Social Security Administration.
The majority of Supplemental Medical Insurance premiums ($19.1 billion) are withheld by the
Social Security Administration (SSA) from beneficiaries' Social Security checks and transferred
to the Part B trust fund. This year auditing was possible at both the Social Security
Administration and HCFA.
The FY 1997 OIG audit does highlight areas where HCFA must focus attention in financial
reporting. These include constructing a uniform audit trail for Medicare and Medicaid accounts
receivable, developing an auditing methodology for the cost report settlement process, and
establishing internal controls for Medicare liabilities, financial management controls and
electronic data processing controls-
Medicare/Medicaid Accounts Receivable
Of HCFA's $225 billion annual expenditures, the OIG disclaimed a total of $2.5 billion for
Medicare and $450 million for Medicaid. The auditors could not be sure the receivable number
was correct due to the lack of general ledgers and other documentation at most Medicare
contractors. Concerns were also expressed about internal controls. Because states' use different
accounting systems their reporting of receivables is inconsistent.
HCFA's long range goal is to standardize contractors' claims processing systems making it
possible to have an integrated accounting system. However, these require extensive system
changes which will not be possible with the resources currently allocated to making the agency
and its contractors Year 2000 compliant. Our short term corrective actions will focus on using
the contractors' existing subsidiary systems to improve the quality of data, and to identify and
document the audit trails necessary to support and validate the data reported to HCFA.
Cost Report Settlements
The OIG was unable to determine an appropriate way to audit the cost settlement process, in
which our contractors audit cost reports submitted by providers. Desk reviews are done for all
cost reports, and some providers' cost reports are audited using either a full or limited scope
HCFA's approach has been to focus our limited audit resources on those providers that have a
greater potential for overpayment in order to recover misspent Medicare funds and to provide a
sentinel effect on all providers. The OIG has not challenged the quality of the current process
and, in fact, has recognized its high cost-savings ratio.
Government audit standards would allow the OIG to rely on HCFA's provider audit process if it
were based upon a methodology that would select a representative sample of cost reports to be
audited. Presently, it is not possible for the OIG to review a sub-sample of the HCFA audits and
develop a statistically valid national error rate, or to ensure that the number reported on the
financial statement is "fairly represented" as an accurate reflection of HCFA's liability.
HCFA plans to work with the OIG further to address this. However, it is important to note that
the advent of more Medicare prospective payment systems will greatly reduce cost reporting.
Internal controls provide reasonable assurance that transactions are properly recorded and
accounted for, safeguarded against loss, and in compliance with laws and regulations. They
include such things as separation of duties delegation of authorities, and access to and
accountability for resources. For example, HCFA is updating instructions for financial reporting,
as well requiring that components develop internal operating procedures that clearly identify
For electronic data processing (EDP), HCFA has introduced a systems security initiative to
aggressively address vulnerabilities found through the OIG's and our own reviews. Our goal is
to be able to maintain the tightest security as the business environment in which we operate
changes, and to integrate security into every aspect of our information technology management
While there is work to be done for HCFA to improve the results of the CFO audit, I am pleased
with the progress the agency has made in one year in both reducing the estimate of improper
payments and getting its financial statements in order. We have made tremendous strides, and
with your help and support, we will continue to make needed improvements that will ensure that
the Medicare program is well managed, financially sound, and free from waste, fraud, and