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) 1997 financial statements. With me
today is Joseph E. Vengrin, Assistant Inspector General for Audit Operations and Financial
This year marks our second comprehensive financial statement audit of HCFA. We undertook
this audit as part of our implementation of the Government Management Reform Act of 1994
which requires audited financial statements. The 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 HCFA's statements. The full results of this year's audit are provided in
our report which is being released at this hearing. My testimony today will highlight the
I would like to begin by acknowledging the cooperation and support we received from the
Department, HCFA, and the General Accounting Office (GAO). A review of this magnitude and
complexity would not have been possible without HCFA's assistance in making available
medical review staff at the Medicare contractors and the peer review organizations. Also, I want
to point out that we worked closely with GAO, which is responsible for auditing the consolidated
financial statements of the Federal Government. The HCFA is one of the most significant
agencies included in these Government wide statements.
Let me also add that the financial statement audit process, in and of itself, has been extremely
valuable in identifying control weaknesses that directly affect the Government's ability to protect
our tax dollars. I intend to continue our collaboration with GAO and the Department to ensure
that identified weaknesses are corrected.
My testimony today will focus first on our Medicare claim testing and then on HCFA's financial
Medicare Claim Testing Overview
The HCFA is the largest single payer of charges for health care goods and services in the world.
Like other insurers, Medicare makes payments based on a standard claim 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
Medicare payments and the dollar impact on the financial statements (i.e., $177.4 billion in
fee-for-service claims in FY 1997), we made a comprehensive review of claim 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 Medicare laws
and regulations; and (3) medically necessary, accurately coded, and sufficiently documented in
the beneficiaries' medical records.
Through detailed medical and audit review of a statistical selection of 600 beneficiaries
nationwide with 8,048 fee-for-service claims processed for payment during FY 1997, we found
that 1,907 claims did not comply with Medicare laws and regulations. By projecting these
sample results, we estimated that FY 1997 net improper payments totaled about $20.3 billion
nationwide, or about 11 percent of total Medicare fee-for-service benefit payments. This is
the mid-point of the estimated range, at the 95 percent confidence level, of $12.1 billion to
$28.4 billion, or about 7 percent to 16 percent.
While this year's point estimate is $3 billion less than last year's point estimate of $23.2 billion,
we cannot conclude that the current error rate is statistically different. However, there is
persuasive evidence that more medical documentation was obtained this year, which had a
substantial effect on reducing the mid-point estimate. There is also evidence that some of the
drop is due to sampling variability. Sampling variability means that this year's results could
differ from last year's simply because selecting different claims with different dollar values and
errors will inevitably produce a different estimate of improper payments.
Payment errors primarily resulted from provider billings for services that were insufficiently
documented, medically unnecessary, incorrectly coded, or noncovered. As was the case last
year, the 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.
Through medical record reviews which we coordinated, medical personnel detected almost all of
the improper payments in our sample. When these claims were submitted for payment to
Medicare contractors, they contained no visible errors. It should be noted that the HCFA
contractors' claim processing controls were generally adequate for (1) ensuring beneficiary and
provider Medicare eligibility, (2) pricing claims based on information submitted, and (3)
ensuring the services as billed were allowable under Medicare rules and regulations. However,
these controls were not effective in detecting the types of errors we found.
In view of Medicare's 38 million beneficiaries, 853 million claims processed and paid annually,
decentralized operations, and the current estimate of $213 billion in improper payments, we have
concluded that the Medicare program remains inherently at high risk for payment errors.
To accomplish our objective, we used a stratified, multistage sample design. The first stage
consisted of a selection of 12 contractor quarters during FY 1997 (10 from the first, second, and
third quarters and 2 from the fourth quarter). The selection of the contractor quarters was based
on probabilities proportional to the FY 1996 Medicare fee-for-service benefit payments. The
second stage consisted of a stratified random sample of 50 beneficiaries from each contractor
quarter. The resulting sample of 600 beneficiaries produced 8,048 claims valued at $5.4 million
for review. The population from which the sample was drawn represented $177.4 billion in
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 peer review organizations (PRO)) to assess the medical
records and to determine whether the services billed were reasonable, medically necessary,
adequately documented, and coded in accordance with Medicare reimbursement rules and
We contacted each provider in our sample by letter requesting copies of all medical records
supporting services billed. In the event that we did not receive a response, we made numerous
follow-up contacts by letter, telephone calls, and/or onsite visits. Concurrent with the medical
review, we made additional detailed claim reviews, focusing on previously identified improper
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
This year's sample results confirm our FY 1996 results. As noted in the chart on the next page,
substantial Medicare improper payments continue to be prevalent in four types of health care
providers: physician, inpatient prospective payment system (PPS) hospital, home health agency,
and outpatient hospital. Specifically, these providers:
- Did not adequately document the basis for their claims or, in some cases, provided no
- Billed for services that were not medically necessary;
- Billed for higher priced procedure codes than supported by the beneficiaries' medical records;
- Billed for services that were not allowable by Medicare.
| Estimated Improper Payments by Type of Provider in FY 1997
|Inpatient PPS Hospital
|Home Health Agency
|Other Types of Providers
The next chart shows the types of errors found as a percentage of the total improper payments.
|Estimated Improper Payments by Type of Error in FY 1997
|No Documentation Due to Investigations
| Insufficient Documentation
| Subtotal: Documentation errors
|Lack of Medical Necessity
|Noncovered or Unallowable Services
Further details on these error categories follow.
Documentation Problems. Two types of providers, physicians and outpatient services,
consistently had the most documentation problems; they accounted for 52 percent of this error
category in FY 1997 and 47 percent in FY 1996. Medicare regulation, 42 CFR 482.24(c),
specifically requires providers to maintain medical records that contain sufficient documentation
to justify diagnoses, admissions, treatments, and continued care. However, documentation
problems represented the most pervasive error category in both years' samples.
The overall error category of documentation includes three components: (1) no documentation
provided after repeated attempts, (2) no documentation due to extenuating circumstances (under
investigation), and (3) insufficient documentation. These three components accounted for about
$9 billion, or 44 percent of the $20.3 billion in improper payments.
The "no documentation" category dropped from $3.25 billion for FY 1996 to $850 million for
FY 1997. This reduction, we believe, was attributable to the OIG and HCFA outreach efforts to
inform providers of our FY 1996 audit results and aggressive action to obtain requested medical
records. In fact, we obtained almost 98 percent of the medical records requested for sample
claims for providers that were not under investigation.
With respect to the providers that were under investigation, we were prohibited from requesting
medical records. Our sample included 151 claims being investigated by the OIG Office of
Investigations and 16 claims being investigated by the Medicare contractors' fraud and abuse
units. Because we could not test the validity of these claims, we considered them invalid for
determining whether total fee-for-service expenditures were fairly presented. It should be noted
that these claims could be valid or erroneous (including fraudulent).
Some examples of documentation problems follow:
- A hospital outpatient department was paid $785 for eight outpatient physical therapy
services. Because the hospital's medical records supported only three of the eight visits,
the medical reviewers concluded that Medicare had overpaid $491.
- A durable medical equipment supplier received almost $3,000 for renting an electric
hospital bed with pressure pad, as well as wound care supplies. The supplier did not
respond to our requests for medical records, and we found that its office, which had a
current lease, had been vacated. As a result, we referred the supplier to our Office of
Investigations and notified the contractor of our actions.
- A skilled nursing facility received $1167 for a beneficiary's 19-day stay, but the medical
records contained no indication that skilled nursing care had been provided. As a result,
the entire payment was denied.
Lack of Medical Necessity. In both years, errors in inpatient hospital and home health agency
claims accounted for over 60 percent of this error category. A lack of medical necessity was the
second highest error category for both FYs 1996 and 1997.
Decisions on medical necessity were made by the contractor or PRO medical staff using
Medicare reimbursement rules and regulations. They followed their normal claim review
procedures to determine whether the medical records supported the claims, as illustrated in the
- A beneficiary who had been hospitalized 5 years earlier was admitted to a hospital
to increase her strength. Rehabilitation therapies included occupational, physical,
and speech therapies, as well as continuation of routine medications. Based on a
review of the medical records, the PRO concluded that the documentation did not
support the medical necessity for 37 days ($38,672) of inpatient hospital care.
- A $2,915 home health agency claim for home care visits, including skilled nursing
services, was denied because the skilled services were medically unnecessary.
Our interview with the beneficiary determined that he left home daily and therefore did not
meet the definition of "homebound" necessary for Medicare coverage of home health
- Although an ambulance service billed $7,844 for transporting a beneficiary from a
nursing home to a dialysis center, the medical reviewer determined that the beneficiary
could have traveled safely by far less expensive means.
Incorrect coding is the third highest error category this year, representing 15 percent of the total
improper payments. Over 90 percent of these errors pertained to inpatient hospital and physician
claims for both FYs 1996 and 1997.
The medical industry uses a standard coding system to bill Medicare for services provided. For
most of the coding errors, the medical review staff determined that the documentation submitted
by the providers supported a lower reimbursement code. However, we did find a few instances
of downcoding which were offset against identified upcoding situations.
Some examples of incorrect coding follow:
- A physician was paid $162 for providing critical care of an unstable, critically ill patient
requiring the constant attendance of the physician in a hospital inpatient setting.
According to the medical reviewer, the records submitted by the provider did not support
this level of care but rather a noncritical, high-complexity hospital visit valued at $60. This
resulted in a $102 overpayment.
- A hospital was paid $22,229 for an inpatient's surgical procedure based on the principal
and secondary diagnosis codes on the claim. The PRO found that the secondary diagnosis
code, which indicated complications, was not supported. The PRO's deletion of this code
produced a lesser valued diagnosis related group of $10,151, resulting in a $12,078
- An equipment supplier was paid $535 for a gel pressure pad for a beneficiary's mattress.
Based on the medical records, the medical reviewer concluded that the supplier had
actually provided a pressure pad for a wheelchair, which is reimbursed at $123. This error
resulted in an overpayment of $412.
"Medicare unallowable services" are defined as those that Medicare will not reimburse because
the services do not meet Medicare reimbursement rules and regulations. About 73 percent of the
errors in this category were attributable to physician claims in FY 1997.
Following are some examples of noncovered or unallowable services:
A physician was paid $114 for a beneficiary's office visit, electrocardiogram, and various other
laboratory tests. Based on the medical records, the reviewer determined that payment should be
denied because the services were performed as part of a routine physical examination, which is
not covered by Medicare.
- A podiatrist was paid a total of $57 for two claims for providing routine foot care
(clipping of toenails). Medicare pays for routine foot care only under limited
circumstances, such as for the treatment of infected nails. The medical reviewer concluded
that the care provided ,was routine preventive care, which is not covered, and the claim was
Conclusions and Recommendations: Claim Testing
To obtain Medicare reimbursement, providers are required to retain supporting documentation
and make it available upon request. As with last year's results, the majority of the improper
claims in our sample did not contain any visible errors. However, a significant portion of the
errors we found were attributable to insufficient documentation on the part of providers that
claimed payments. We also identified numerous errors for services that were not medically
necessary, upcoded to obtain higher Medicare payment than the appropriate code would permit,
or noncovered or unallowable.
We acknowledge that too little time has elapsed for HCFA to fully implement our prior year's
recommendations and to significantly reduce the error rate. Specifically, we recommended last
year that HCFA:
- Develop a system that objectively and periodically estimates improper payments and
disclose the range of such improper payments in its financial statements.
- 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 follow-up 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
The HCFA generally concurred with these recommendations and has developed a corrective
action plan to reduce the Medicare payment error rate to 10 percent by the year 2002.
Accordingly, we offer no additional recommendations. We expect that HCFA's testimony today
will address the specific corrective actions being taken.
Fiscal Year 1996 Disclaimer Issues
Before discussing HCFA's FY 1997 financial statements, I would like to touch on two pivotal
issues resulting in our disclaimer of opinion on the FY 1996 financial statements. Specifically,
we were not able to gather sufficient evidence on the validity or reasonableness of:
Medicare Accounts Payable. As of September 30, 1996, reported Medicare accounts
payable totaled $301 billion and comprised 71 percent of total liabilities. These payables
represented 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
- Supplementary Medical Insurance (SMI) Revenue (Part B Medicare). The Social
Security Administration (SSA) 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 was not audited by SSA 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. Therefore, we could not
determine whether the corresponding Federal match of $61.7 billion was appropriate.
Fiscal Year 1997 Qualification Issues
This year, we are pleased to report that HCFA has revised its methodology for estimating
Medicare accounts payable, and our auditors were satisfied as to the reasonableness of the
resulting estimate. With respect to the SMI issue, we were able to audit this revenue for FY 1997
by working in coordination with GAO and the SSA's OIG. As a result, our overall opinion on
HCFA's financial statements has advanced from a disclaimer for FY 1996 to a qualification for
FY 1997. In accounting terms, a disclaimer of opinion means that we were not able to determine
whether the financial statements were fairly presented because the documentation was not
adequate or available to support the reported amounts. A qualification indicates that we still
found documentation problems, as discussed below, but not to the extent that would necessitate a
Medicare/Medicaid Accounts Receivable. Medicare contractors did not maintain adequate
documentation to support reported accounts receivable activity and to provide adequate audit
trails. As a result, we could not determine if the reported $2.5 billion Medicare accounts
receivable balance was fairly presented. For instance:
- We could not obtain reasonable assurance of the completeness and support for $266
million in accounts receivable that a contractor reported as transferred to other Medicare
contractors during its transition from the Medicare program. In addition, HCFA has been
unable to reconcile, through its quarterly contractor financial reports, the $266 million to
the acquiring contractors. Based on our review, procedures were either not established or not
followed among HCFA and the contractors to confirm and reconcile the transferred accounts
- At 9 of the 11 contractors reviewed, we were unable to obtain assurance of the completeness of
account receivable balances because detailed subsidiary ledgers could not support the balances
reported to HCFA. For example, one contractor could not provide subsidiary ledgers for $21
million of the $86 million balance reported to HCFA. Another contractor "plugged" the
"reclassified/adjusted" amount by almost $758,000 to reconcile the ending subsidiary balance to
the balances reported to HCFA but was unable to explain the variance.
In addition, we were unable to perform sufficient procedures to satisfy ourselves as to the
of the $450 million Medicaid accounts receivable balance.
Cost Report Settlements. In FY 1997, of 35,079 provider cost reports received, 33,000 were
subjected to desk review. Of that total, just over 5,000 providers were selected for audit.
Although HCFA has a cost report audit process, the provider audit function 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 the contractors' provider audit function, there is little assurance that amounts
eventually paid to providers through the final cost report settlement process meet Medicare
guidelines for reasonableness and appropriateness. We were unable to extend our procedures to
determine what adjustments, if any, were necessary to the FY 1997 cost settlement payments of
$2.4 billion recorded by HCFA or to determine the potential impact of such adjustments on the
approximately $5 billion year end cost settlement estimate included in Medicare other
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. 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 additional claims to prepayment and postpayment medical review. I
am pleased that HCFA and the Department's Chief Financial Officer are aggressively pursuing 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 1998
financial statements. As we did in the last 2 years, we will conduct comprehensive
fee-for-service claim testing. In addition, we will place a high priority on ensuring that HCFA
has established an adequate internal control structure for Medicare accounts receivable activity.
I welcome your questions.