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Testimony on the Role of Fiscal Intermediary Fraud Units in Combating Fraud, Waste, and Abuse by Penny Thopmson
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Commerce, Subcommittee on Oversight & Investigations
July 14, 1999

Chairman Upton, Congressman Klink, distinguished Subcommittee members, I am pleased to have this opportunity to discuss the Health Care Financing Administration's (HCFA) management of fiscal intermediaries in their efforts to combat fraud, waste, and abuse in the Medicare program. I would like to thank the Department of Health and Human Services Office of Inspector General (IG) and the General Accounting Office (GAO) for the invaluable assistance they have provided HCFA in improving and enhancing our oversight of the contractors. We are committed to improving our management and oversight of contractor activities and are making solid progress in addressing the IG's findings in their November 1998 Report, Fiscal Intermediary (FI) Fraud Units.

The results of the Fiscal Year 1998 Chief Financial Officer's (CFO) audit of HCFA by the IG are evidence of the progress we have made over the last few years. This year's audit shows that we have cut the Medicare payment error rate in half in just two years, from 14 percent to 7 percent. That 7 percent represents 12.6 billion taxpayer dollars, which is a big step forward. But it is still too high and we must be diligent in sustaining and increasing the improvement we have made thus far.

Since the Clinton Administration took office, the Department of Health and Human Services has taken a number of steps to implement a "zero tolerance@ policy for fraud, waste, and abuse. To do this, we must assure that Medicare pays the right amount, to a legitimate provider, for covered, reasonable, and necessary services for an eligible beneficiary. Achieving this goal is one of our top priorities at HCFA. With help from Congress, our contractors, providers, beneficiaries, and our many other partners, we have achieved record success in assuring proper payments. We also have made considerable progress in fighting fraud by increasing investigations, indictments, convictions, fines, penalties, and restitutions.

To this end, we developed a Comprehensive Plan for Program Integrity, which was released in March 1999. Its development began a year earlier when we sponsored an unprecedented national conference on waste, fraud, and abuse in Washington, D.C., with broad representation from our many partners in this effort. The bulk of the conference consisted of discussions on how we could build on the highly successful Operation Restore Trust demonstration project, in which we increased collaboration with law enforcement and other partners to target known problem areas.

Groups of experts, including private insurers, consumer advocates, health care providers, state health officials, and law enforcement representatives, shared successful techniques and explored new ideas for ensuring program integrity. Their suggestions were synthesized and analyzed to determine the most effective strategies and practices already in place, and the new ideas that deserved further exploration. The result was our Comprehensive Plan for Program Integrity.

One of the ten key areas included in this plan is related to improving the effectiveness of medical review and fraud detection within our contractors, including the fiscal intermediaries (FI) that process Medicare claims.

Improving Medicare Contractor Performance Evaluation. In order to enhance our ongoing contractor oversight and provide consistency in our review processes, HCFA implemented a new National Contractor Performance Evaluation Strategy in May. This new effort is a nationwide, multi-tiered approach and focuses our review on key, high risk contractors and program benefits categories. Our evaluation strategy for fiscal 1999 includes ten core evaluation areas such as millennium compliance, accounts receivable, audit quality, standards for timely processing of claims and customer service, as well as follow-up on performance improvement plans that we required contractors to submit based on program deficiencies identified during our fiscal 1998 reviews.

National teams comprised of HCFA regional and central office staff are evaluating the fraud and abuse operations, as well as other functions of a number of fiscal intermediaries and carriers, including the five Regional Home Health Intermediaries and the four Durable Medical Equipment Regional Carriers. In conducting their reviews, the teams will use a standardized fraud and abuse review protocol, and team members will participate in reviews at multiple contractors, thus helping to ensure the consistency of our evaluations across different contractors.

We also have established specific, objective standards for contractor benefit integrity performance that have been incorporated into our Contractor Performance Evaluation (CPE) review protocol. These standards provide consistent guidance to contractors as to what improvements are needed. The CPE system uses a standard data set to measure FI fraud units= performance in accomplishing established performance objectives.

Contractor evaluations center on the contractors':

  • Use of proactive and reactive techniques in detecting and developing fraud cases;
  • Use of corrective actions, such as payment suspensions, Civil Monetary Penalties, overpayment assessments, pre-payment or post-payment claims reviews, edits, and claims denials;
  • Proper development of fraud cases before referral to law enforcement entities; and
  • Effectiveness of working relationships with internal and external partners.

Improving Contractor Referral Practices. In December 1998, President Clinton announced that HCFA is now "requiring all Medicare contractors to notify the government immediately when they learn of any evidence of fraud, so that we can detect patterns of fraud quickly and take swift action to stop them.@ To implement this, in December 1998 we issued a Program Memorandum to all contractors clarifying their obligation to protect the Medicare Trust Funds, and we are requiring contractors to take all necessary administrative action to prevent or recover inappropriate payments. This includes a reminder that contractors refer all cases of suspected fraud to the IG.

National Contractor Training. Beginning in May and continuing through July 1999, HCFA, the IG, and the Department of Justice (DOJ), conducted contractor training sessions for all Medicare contractor fraud units across the country to ensure timely and appropriate referral of fraud cases. We provided our contractors with expert guidance on how best to identify and develop cases of fraud for further investigation by law enforcement authorities. During the course of training, contractor program integrity personnel, HCFA central and regional office staff, as well as law enforcement personnel learned the proper procedures, documentation processes, and analytical methods necessary to ensure that the IG and law enforcement can take aggressive action and successfully prosecute all legitimate fraud cases.

Using Technology. We are always looking for ways to use technology to help us Apay it right.@ To ensure we are taking advantage of the latest in anti-fraud technology, we recently completed a comprehensive survey of software employed by our contractors to detect fraud and abuse. We are now expanding that survey to identify private sector tools. Our goal is to establish a system to routinely evaluate emerging technologies to ensure we possess the most effective tools for fighting Medicare fraud. We plan to undertake an analysis of these tools and their effectiveness in concert with our law enforcement partners.

Improving Qualifications of Contractor Program Integrity Staff. We will require both current and future contractors to ensure that their program integrity staff have the knowledge and skills critical for their jobs. Contractors will be required to demonstrate that they have appropriate staff to meet program integrity objectives. In particular, we are requiring contractor fraud units to implement training programs focused on fraud detection techniques, interviewing, and data analysis.

Quality Improvement Program. As recommended by the IG, we also are requiring each contractor to establish a Quality Improvement program that is tailored to best suit their particular operational procedures. The Quality Improvement program must be approved by the appropriate HCFA regional office. To assist the contractors in developing these programs, we will be sharing "best practice" findings gathered by our regional office staff, as well as providing technical assistance through our Fraud Unit Improvement Task Force.

Feedback from Performance Reviews. We also want to build on effective practices now employed in our fraud units and develop constructive solutions to common problems. At the end of the Fiscal Year 1999 contractor review cycle, we are holding a conference for our national and regional contractor review team members to provide an opportunity for all our reviewers to share their experiences, including contractor problems and best practice information, face-to-face.

Implementing the Medicare Integrity Program. In May, HCFA named 12 businesses with expertise in conducting audits, medical reviews, and other program integrity activities, to be the first-ever Medicare Integrity Program (MIP) contractors. MIP, as authorized under the Health Insurance Portability and Accountability Act, allows us to hire special contractors whose sole responsibility is ensuring Medicare program integrity. Until now, only the insurance companies who process Medicare claims have been able to conduct audits, medical reviews, and other program integrity activities. Under this new authority, we are contrActing with these 12 firms to bring new energy and ideas to this essential task.

MIP allows us to issue Task Orders for any or all program integrity activities. And provides us a pool of contractors who are available to undertake work before we solicit proposals for specific contractors' workloads. We also will be able to turn to these contractors on-the-spot when various situations arise, such as the appearance of new fraud schemes or the departure of another contractor.

These 12 selected contractors are now eligible to compete for specific work assignments. Beginning with the six initial Task Orders also released in May, contractors will be selected for each of the following tasks:

  • Conducting cost-report audits for large health-care chains. Through careful review of the way large health care chains allocate their home office costs, this task will ensure that Medicare pays providers appropriately.
  • Preventing possible Year 2000 threats to program integrity. This task involves conducting national data analyses to detect and prevent potential risks of fraud and abuse during the critical months surrounding the millennium change.
  • Conducting on-site reviews of Community Mental Health Centers (CMHC). These reviews will build on HCFA's ongoing CMHC initiative and require qualified mental health professionals to conduct unannounced visits to CMHCs to ensure they provide the services required by law and meet all other applicable federal and state requirements.
  • Identifying effective areas to target for national provider education. Under this task the contractor will provide analysis of data and trends, surveys of health-care providers, and other research to develop target areas for a national provider educational plan.
  • Performing data analysis and other activities to support the fraud units in New England. This work will support the efforts of the relatively small fraud units at New England=s Part A Medicare contractors, which will continue their current workload and staffing levels. The contractor will analyze regional data and develop fraud cases.
  • Ensuring providers comply with settlement agreements with the IG. This work involves on-site reviews of providers who have established corporate integrity agreements to ensure the contractors meet the terms of the agreement as well as follow proper procedures.

Overall Contractor Management

The improvements discussed above are part of a larger initiative to improve our management of the contractors in all areas. I would like to take a few moments to highlight some aspects of this larger strategy. I also would like to express our appreciation to the GAO for the recommendations that they have provided us in this regard.

One of the first, and among the most important, steps we took was to restructure and consolidate HCFA's management of the contractors. In November 1998, we established the position of Deputy Director for Medicare Contractor Management as part of the Center for Beneficiary Services. Marjorie Kanof, M.D., is directly responsible for all contractor management activities within the Agency. Dr. Kanof previously served as a Medical Director of Blue Cross of Massachusetts and has firsthand knowledge of both contractor performance and HCFA's oversight.

In order to ensure the overall financial integrity of the Medicare program, we are taking action to ensure the accuracy of all of our contractors= internal financial controls and reported performance data. To this end, we are planning to contract with an Independent Public Accounting (IPA) firm to develop standard review procedures and methodologies for evaluating the documentation submitted by the contractors during the annual self-certification of their internal controls. In addition to preparing individual contractor review reports, the IPA will provide the contractors with information on best practices, as well as ways to improve management control certification processes and evaluation activities. Based on the results of these internal reviews, we are considering conducting additional audits to examine in detail the adequacy of the contractors' internal control policies, procedures, and documentation. And we anticipate issuing a contract to develop protocols for validating data reported to HCFA by the contractors.

We also are developing a new management reporting system, called Program Integrity Management Reporting (PIMR), to assist us in measuring contractor performance in the area of program integrity. This new procedure will use data derived directly from the contractors' claims processing systems, as opposed to the current system which relies on self-reported data, and will significantly increase the reliability and usefulness of the data.

We also are developing a business strategy for Medicare fee-for-service contractor operations, taking into account both our past experience and current environmental factors, including the changing business environment for Medicare contractors. One of our primary goals is to be more consistent in our management of fee-for-service contractor performance. The validation of several strategic management approaches, through limited pilot programs, will be critical to this effort. For example, our experience with the new MIP Program Safeguard Contractors will provide valuable information to us on how we can improve our contrActing processes and oversight. Furthermore, we have established the Medicare Contractor Oversight Board, which provides Executive leadership and establishes guiding principles for HCFA's oversight of the Medicare fee-for-service contractor network.

Finally, the Administration has proposed comprehensive contrActing reform legislation numerous times since 1993. If enacted, this legislation would provide the Secretary with more contrActing flexibility, bring Medicare contrActing more in line with standard contrActing procedures used throughout the Federal government, and create an open marketplace so we do not have to rely on a steadily shrinking pool of contractors.


We are making substantial progress in fighting fraud, waste, and abuse in the Medicare program and ensuring that we pay right. We realize that more work needs to be done. And we are committed to continuing to build on the improvements we have made in our management and oversight of our contractors. We appreciate this Committee's leadership in this area, and the important work that our colleagues at the IG have done in highlighting areas that need improvement. I thank the Committee for holding this hearing and I am happy to answer any questions you may have.

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