Medicare Spending: Modern Management Strategies Needed to Curb Billions
in Unnecessary Payments (Letter Report, 09/19/95, GAO/HEHS-95-210).

Pursuant to a congressional request, GAO examined Medicare's
vulnerability to provider exploitation and ways to remedy Medicare fraud
and abuse.

GAO found that Medicare is vulnerable to billions of dollars in
unnecessary payments, since Medicare: (1) pays higher than market rates
for certain services and supplies; (2) anti-fraud and abuse controls do
not systematically prevent the payment of claims for improbably high
charges or manipulated billing codes; and (3) checks on the legitimacy
of providers do not adequately detect the potential for fraud. In
addition, GAO found that: (1) Medicare has not used the health care
management strategies that have helped private payers alleviate
weaknesses; (2) Medicare pricing methods and utilization controls have
not adapted to current health care financing and delivery changes; (3)
the uncertain line between adequate managerial control and excessive
government intervention explains the differences in the ways Medicare
and private health insurers administer their respective plans; and (4)
Medicare should implement a strategy to remedy its weaknesses that
includes competitive payment rates, enhanced fraud detection, and more
rigorous criteria for granting authorization to bill the program.

--------------------------- Indexing Terms -----------------------------

     TITLE:  Medicare Spending: Modern Management Strategies Needed to 
             Curb Billions in Unnecessary Payments
      DATE:  09/19/95
   SUBJECT:  Medicare programs
             Health care cost control
             Medical services rates
             Internal controls
             Questionable payments
             Health maintenance organizations
             Billing procedures
             Medical expense claims
IDENTIFIER:  HCFA Medicare Transaction System
             Medicaid Program
             Civilian Health and Medical Program of the Uniformed 
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================================================================ COVER

Report to the Chairman, Human Resources and Intergovernmental
Relations Subcommittee, Committee on Government Reform and Oversight,
House of Representatives

September 1995



Medicare Spending


=============================================================== ABBREV

  CHAMPUS - Civilian Health and Medical Program of the Uniformed
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  HMO - health maintenance organization
  MRI - magentic resonance imaging
  MTS - Medicare Transaction System
  VA - Department of Veterans Affairs

=============================================================== LETTER


September 19, 1995

The Honorable Christopher Shays
Chairman, Human Resources and
 Intergovernmental Relations Subcommittee
Committee on Government Reform and Oversight
House of Representatives

Dear Mr.  Chairman: 

The 104th Congress has been examining ways for Medicare to avoid
spending billions of dollars in unnecessary payments.  Specifically,
your Subcommittee has been exploring the legal and administrative
enforcement tools available to Medicare to act against those
providers who defraud or abuse the program, the beneficiary, and the
taxpayer.  Although strengthening enforcement is critical, an earlier
phase of fraud fighting--identifying the program's vulnerabilities
and the measures needed to curb losses--is an equally vital
component.  Therefore, you asked us to examine the weaknesses
responsible for Medicare's vulnerability to provider exploitation and
ways to remedy them. 

To develop this information, we drew from an extensive body of GAO
work over the last few years focusing on Medicare fraud and abuse. 
(See the list of related GAO products at the end of this report.) We
supplemented this work with interviews of officials in various
offices of the Health Care Financing Administration (HCFA), including
the Bureau of Policy Development, Bureau of Program Operations,
Office of Legislative and Intergovernmental Affairs, and the Office
of the Administrator, and with HCFA contractors. 

------------------------------------------------------------ Letter :1

Medicare's vulnerability to billions of dollars in unnecessary
payments stems from a combination of factors.  First, Medicare pays
higher than market rates for certain services and supplies.  For
example, Medicare pays more than the lowest suggested retail price
for more than 40 types of surgical dressings.  (In one case, Medicare
pays 86 cents for a 36-cent gauze pad.) Second, Medicare's collection
of anti-fraud-and-abuse controls does not systematically prevent the
unquestioned payment of claims for improbably high charges or
manipulated billing codes.  Third, Medicare's checks on the
legitimacy of providers are too superficial to detect the potential
for scams.  These weaknesses are aggravated by the fact that
Medicare's efforts to address them, as well as its efforts to
penalize wrongdoers, are too slow to be effective in curbing
avoidable costs or deterring further fraud and abuse. 

Various health care management strategies help private payers
alleviate these problems, but these strategies are not generally used
in Medicare.  The program's pricing methods and controls over
utilization, consistent with health care financing and delivery 30
years ago, are not well aligned with today's major financing and
delivery changes.  To some extent, the predicament inherent in public
programs--the uncertain line between adequate managerial control and
excessive government intervention--helps explain the dissimilarity in
the ways Medicare and private health insurers administer their
respective "plans."

We believe a viable strategy for remedying the program's weaknesses
consists of adapting the health care management approach of private
payers to Medicare's public payer role.  Such a strategy would focus
on pre-enforcement efforts and would include (1) more competitively
developed payment rates, (2) enhanced fraud and abuse detection
efforts through modernized information systems, and (3) more rigorous
criteria for granting authorization to bill the program. 

------------------------------------------------------------ Letter :2

Medicare is the nation's largest single payer of health care costs. 
In 1994, it spent $162 billion, or 14 percent of the federal budget,
on behalf of about 37 million elderly and disabled people. 
Approximately 90 percent of Medicare beneficiaries obtained services
on an unrestricted fee-for-service basis; that is, patients chose
their own physicians or other health care providers, with charges
sent to the program for payment.  This set-up mirrored the nation's
private health insurance indemnity plans, which prevailed until the

Since then, revolutionary changes have taken place in the financing
and delivery of health care.  Greater competition among hospitals and
other providers has enabled health care buyers to be more
cost-conscious.  Private payers, including large employers, use an
aggressive management approach to control health care costs.  HCFA,
within the Department of Health and Human Services (HHS), is
Medicare's health care buyer.  HCFA's pricing of services and
controls over utilization have been carefully prescribed by
interrelated statute, regulation, and agency policy. 

HCFA contracts with about 72 private companies--such as Blue Cross
and Aetna--to handle claims screening and processing and to audit
providers.  Each of these commercial contractors works with its local
medical community to set coverage policies and payment controls in
addition to those that have been established nationally by HCFA.  As
a result, billing problems involving waste, fraud, and abuse are
handled, for the most part, at the contractor level.  This
arrangement was prompted when the program was established in the
mid-1960s by concerns that the federal government, which lacked
extensive claims processing expertise and experience, would prove
incapable of providing service comparable to that of private

------------------------------------------------------------ Letter :3

Most observers agree that the majority of Medicare providers seek to
abide by program rules and strive to meet beneficiaries' needs.  But
certain characteristics of the program and the way it is administered
create a climate ripe for abuse by some providers.  For many supplies
and services, Medicare reimbursement far exceeds market rates. 
Scrutiny of incoming claims is often inadequate to reveal overpricing
or oversupply.  And providers are allowed to participate in the
program without sufficient examination of their qualifications and
their business and professional practices. 

---------------------------------------------------------- Letter :3.1

Unlike the more prudent payers, Medicare pays substantially higher
than market rates for many services.  For example: 

  The HHS Office of Inspector General reported in 1992 that Medicare
     paid $144 to $211 each for home blood glucose monitors when drug
     stores across the country sold them for under $50 (or offered
     them free as a marketing ploy).\1 HCFA took nearly 3 years to
     reduce the price to $59. 

  For one type of gauze pad, the lowest suggested retail price is
     currently 36 cents.  The Department of Veterans Affairs (VA)
     pays only 4 cents.  Medicare, however, pays 86 cents for this
     pad.  Indeed, Medicare pays more than the lowest suggested
     retail price for more than 40 other surgical dressings. 
     Medicare pays more than VA for each of the nine types of
     dressing purchased by both VA and Medicare.  For all practical
     purposes, HCFA is prohibited from adjusting the prices for these
     and similar

  Medicare was billed $8,415 for therapy to one nursing home
     resident, of which over half--$4,580--was for charges added by
     the billing service for submitting the claim.  This bill-padding
     is permissible because, for institutional providers, Medicare
     allows almost any patient-related costs that can be documented. 

HCFA contacts told us that resources are not available to routinely
check market prices for items covered by Medicare.  Yet excessive
payment rates unnecessarily increase Medicare costs and can encourage
an oversupply of services.  Further, our work has shown how costly
technology proliferates when HCFA does not review payment rates
during the time that a technology matures, its procedures become more
widely used, and providers' costs per procedure decline.  Magnetic
resonance imaging (MRI) equipment is a case in point, as we reported
in 1992.\3

High Medicare payments for MRI scans supported a proliferation of MRI
machines in some states.  In the absence of systematic adjustment,
the Congress has had to act several times, specifically reducing
rates for various covered benefits, such as overpriced procedures,
selected durable medical equipment items, clinical lab tests,
intraocular lenses, CT scans, and MRIs. 

\1 Home blood glucose monitors enable individuals to determine the
adequacy of their blood glucose levels.  The manufacturers have an
incentive to promote the sale of their brand of monitor to ensure
future sale of related test strips.  According to HCFA, the income
generated in 1 month by the sale of test strips can exceed the total
income generated from the sale of the monitors. 

\2 42 U.S.C.  1395m(i) required HCFA to establish a fee schedule for
surgical dressings based on average historical charges.  However,
when the benefit was expanded to cover new categories of dressings,
HCFA did not have data on the charges for these categories.  HCFA
used as a proxy the median price in supply catalogs.  The median is
necessarily higher than the lowest price (given any variation at
all).  HCFA cannot change the methodology for determining the fee
schedule, nor can it adjust the schedule if retail prices decrease. 
While HCFA is authorized to increase payments annually based on the
consumer price index, it lacks authority to reduce such payments. 

\3 Medicare:  Excessive Payments Support the Proliferation of Costly
Technology (GAO/HRD-92-59, May 27, 1992). 

---------------------------------------------------------- Letter :3.2

Medicare's claims processing contractors employ a number of automated
controls, some highly sophisticated, to prevent or remedy
inappropriate payments.\4 Although these measures are effective in
some instances, our work shows that improbable charges or unlikely
payments sometimes escape the controls and go unquestioned. 

For example, contractors who process Medicare claims for medical
equipment and supplies do not necessarily review high-dollar claims
for newly covered surgical dressings.\5

One contractor paid $23,000 when the appropriate payment was $1,650. 
Similarly, Medicare paid a psychiatrist over a prolonged period for
claims that represented, on average, nearly 24 hours a day of
services.  The contractors' automated controls, however, did not flag
either of these questionable billings. 

In addition, Medicare controls to detect code manipulation, a type of
billing abuse that affects all insurers, are limited.  In
congressional testimony in May 1995, we reported the results of our
study of private sector computer software controls used to detect
coding abuses.\6

We compared what Medicare actually paid providers against what would
have been allowed by four commercial firms that market computerized
systems to detect miscoded claims.\7 We invited each firm to
reprocess 200,000 statistically selected claims that Medicare paid in
1993.  On the basis of this sample, we estimated that, had Medicare
used this commercial software, the government would have realized
substantial savings.\8

\4 Some controls are designed to stop processing when claims do not
meet certain conditions for payment.  For example, one control flags
claims that exceed the allowed threshold of 12 chiropractic
manipulations a year per beneficiary.  Other controls automatically
deny claims or recalculate payment amounts.  A third kind of control,
postpayment review of data, is intended to enable Medicare to spot
patterns and trends of unusually high spending. 

\5 In March 1994, Medicare's surgical dressing benefit was greatly
expanded to include various types and sizes of gauze pads not
previously covered and to extend the duration of coverage to whatever
is considered medically necessary. 

\6 See Medicare Claims Billing Abuse:  Commercial Software Could Save
Hundreds of Millions Annually (GAO/T-AIMD-95-133) and Medicare
Claims:  Commercial Technology Could Save Billions Lost to Billing
Abuse (GAO/AIMD-95-135), both issued May 5, 1995. 

\7 Providers bill their charges to Medicare according to an official
book of procedure codes.  By manipulating these codes, a provider can
charge Medicare more than the appropriate code would permit. 

\8 HCFA reports that new controls over claims processing, instituted
since 1993, are also likely to help Medicare avoid unnecessary costs. 

---------------------------------------------------------- Letter :3.3

For certain provider types, Medicare's requirements to obtain
authorization to bill the program are so superficial that these
providers' credibility cannot be assumed.  The result is that, too
often, Medicare loses large sums to providers and suppliers that
never should have been authorized to serve program beneficiaries. 
This problem has become more acute as providers that are less
scrutinized or more transient than doctors and hospitals use
elaborate, multilayered corporations to bill Medicare. 

The following examples from our work and that of the HHS Inspector
General show instances in which wrongdoers obtained Medicare provider
numbers and billed the program extensively over the past several

  Five clinical labs (to which Medicare paid over $15 million in
     1992) have been under investigation since early 1993 for the
     alleged submission of false claims.  The labs' mode of operation
     was to bill Medicare large sums over 6 to 9 months; whenever a
     lab received inquiries from Medicare, it went out of business. 

  A therapy company added $170,000 to its Medicare reimbursements
     over a 6-month period, while providing no additional services,
     by creating a "paper organization" with no space or employees. 
     The company simply reorganized its nursing home and therapy
     businesses to allocate a large portion of its total
     administrative costs to Medicare. 

  A medical supply company serving nursing facility patients obtained
     more than 20 different Medicare provider numbers for companies
     that it controlled.  The companies, all in the same state, were
     nothing more than shells that allowed the supplier to spread its
     billings over numerous provider numbers to avoid detection of
     its overbillings. 

The conditions of program participation for Medicare providers range
from stringent to minimal, according to the type of service or supply
provided.  For most provider categories, these conditions are
established by statute.\9

  For some professionals, such as physicians, state licensure is
     required.  Licensing boards typically perform background checks
     on the applicant's medical education, disciplinary actions, and
     related information.\10 However, states are slow to take action
     to penalize health care providers that engage in abusive billing

  Institutional providers (hospitals, clinics, home health agencies,
     rehabilitation agencies, and others) are surveyed and certified
     by state agencies as meeting Medicare requirements (and perhaps
     additional state conditions).  However, unscrupulous
     institutions have found various ways to circumvent these

  Nonmedical providers, such as suppliers of medical equipment, have
     historically been subject to few such provisions.  Even though
     HCFA has recently taken steps to improve the application process
     in this area, where the number of providers is growing rapidly,
     in some respects the requirements remain superficial.  In 1993,
     a newly established National Supplier Clearinghouse began
     issuing supplier numbers to providers submitting claims for
     durable medical equipment, prosthetics, orthotics, and supplies. 
     To apply for a supplier number, the provider must complete a
     detailed application, but privacy concerns preclude the
     Clearinghouse from verifying the accuracy of social security and
     tax identification numbers required on the application.  Also,
     the Clearinghouse does not routinely perform background checks
     on the owners or verify that supplier facilities really exist. 

HCFA's Program Integrity Group is currently examining ways of
limiting participation of suppliers and providers to those that
appear to be legitimate business entities.  Medicare contractors are
currently piloting the use of commercial databases that compile
information on the stability and business histories of providers and
suppliers as one way of screening out those with high-risk potential. 

\9 While the Secretary of HHS may impose additional requirements--and
has done so in some instances--these must relate directly to
patients' health or safety.  See, for example, 42 U.S.C.  1395x(e)(9)
for hospitals and 1395x(o)(6) for home health agencies. 

\10 This is done using sources such as the American Medical
Association profile, kept on all licensed physicians; the Federation
of State Medical Boards' data bank; and the National Practitioners
Data Bank. 

------------------------------------------------------------ Letter :4

Whether because of strict constraints imposed by statute or because
of its own burdensome regulatory and administrative procedures, HCFA
is slow and often ineffectual in addressing problems involving
overpricing, inadequate payment controls, or abusive providers. 

---------------------------------------------------------- Letter :4.1

In a recent letter to a congressional subcommittee, the HHS Inspector
General characterized as "absurd" the situation limiting HCFA's
ability to make timely adjustments to payment levels.\11 The
Inspector General's Office identified home glucose monitors (the item
cited earlier as being sold for $50 while Medicare paid up to 4 times
as much) as an overpriced item in 1992.  The final notice
establishing special payment limits (about $59) for this item was
published in the Federal Register on January 1995.  HCFA documented
that the process required to lower the reimbursement for these
monitors, under the agency's "inherent reasonableness" authority,
took almost 3 years (see fig.  1).  The Inspector General estimates
that this delay cost Medicare $10 million.  Industry sources
characterized this response as "speedy," noting that few suppliers
commented on the proposed rule, thus allowing it to become final with
little change. 

   Figure 1:  HCFA's Process for
   Using Inherent Reasonableness

   (See figure in printed

Source:  HCFA's Bureau of Policy Development. 

HCFA began investigating a second overpriced item, oxygen equipment,
in November 1994.  The Inspector General estimates that, if Medicare
were able to pay the same price for oxygen concentrators as that paid
by the Department of Veterans Affairs, it could realize as much as
$4.2 billion over 5 years.  As an immediate remedy, the Inspector
General recommended a congressionally mandated reduction of 25 to 50
percent in Medicare's payment rates for oxygen services and

A HCFA official explained that HCFA lacked resources to deal with
questions of reasonable pricing for more than one item at a time,
though the agency would like to compare prices for about 80 of the
supplies and services that are most costly overall.  In December
1994, the Secretary of HHS announced an initiative to "dramatically
shorten" the time it takes to issue final regulations to 24 months. 
The current regulatory process within HHS is shown in figure 2.  HCFA
has not yet developed its implementation plan under this initiative. 

   Figure 2:  HCFA's Regulatory

   (See figure in printed

Source:  HCFA's Bureau of Policy Development. 

We have stated repeatedly in congressional testimony that, in pricing
services more competitively, Medicare should streamline the processes
required to revise excessive payment rates.  Consistent with this
conclusion, the Inspector General states that HCFA "[...] should not
have to spend valuable resources conducting studies and issuing
formal rules just to adjust its payments to the going rate." Possible
remedies suggested by the Inspector General include allowing the HHS
Secretary to set maximum prices on the basis of simple market
surveys, or, if the formal rulemaking process is preserved, allowing
the Secretary to make an interim adjustment in fees while the studies
and rulemaking take place. 

\11 Letter dated July 25, 1995, to the Chairman, Subcommittee on
Oversight and Investigations, Committee on Commerce, House of

---------------------------------------------------------- Letter :4.2

Despite HCFA's awareness of weaknesses in its controls over payment
of claims--the program's chief administrative function--its
enhancement of these controls is problematic.  In the current fiscal
environment, resources are particularly scarce.  In addition,
Medicare's existing computer systems and related software for
processing and paying claims do not adequately detect Medicare
billing abuses. 

Effective monitoring and analysis of claims both before and after
payment often demand the investment of time by qualified
professionals.\12 For example, claims control activities carried out
by Medicare's claims processing contractors include singling out
individual claims for review in the course of automated checks and
determining whether denial is appropriate.  Payments may be delayed
while claims undergo further review or attempts are made to recover
previous overpayments.  Contractor staff also conduct postpayment
analyses to detect aberrant patterns of billing. 

In recent years, contractor funding on a per claim basis has
declined, as shown in table 1.  As a consequence, contractors have
had to shut off automated controls, or screens, that screen claims
for coding errors and billing abuses.  When running, the screens flag
questionable claims that are suspended for further review.  Several
contractors short on qualified staff to review suspended claims
therefore shut off some screens to avoid accumulating a backlog of
unpaid claims that would compromise their ability to meet prompt
payment standards. 

                                Table 1
                     Per Claim Funding of Medicare
                  Contractors for Selected Activities

                                          1989    1995  adjust  Adjust
                                        budget  budget  ed for  ed for
                                        (actua  (estim  inflat  inflat
Activity                                    l)   ated)     ion     ion
--------------------------------------  ------  ------  ------  ------
Medical review of claim                  $0.32   $0.15    54.4    61.8
All payment safeguards                    0.74    0.50    32.7    43.6
Total contractor budget                   2.74    2.05    25.1    37.2
In the past, we have recommended augmenting anti-fraud-and-abuse
activity funding by exempting Medicare's safeguard activities from
the discretionary spending cap imposed by the Budget Enforcement Act
of 1990.  Although this proposal has its advocates, scorekeeping
rules preclude the Congressional Budget Office from scoring the
anticipated savings from enhanced safeguard activities as an offset
to their cost.  HHS has proposed a funding alternative that would
entail the creation of a revolving trust fund for Medicare safeguard
activities.  At this time information on the HHS proposal is
incomplete, making it too soon to determine the extent to which the
revolving fund approach would produce scorable savings.\13

In addition to funding declines, automation limitations impair
Medicare's efforts to curb abuses.  Improvements lie ahead in the
form of the Medicare Transaction System (MTS), but this system is not
scheduled to be fully implemented until September 1999.  MTS is
intended to replace the 10 existing automated systems used by
contractors at 56 sites for processing and paying claims.  With a
single, integrated system, HCFA hopes to improve administrative
efficiency, enhance its ability to manage contractors, and place
greater emphasis on safeguarding program dollars.  According to the
HCFA Administrator, MTS will track all claims for each beneficiary
and be able to identify suspicious activities. 

We have recommended that, in the interim, HCFA take advantage of
available off-the-shelf software.  The agency is currently evaluating
certain software packages to determine their potential utility for
the Medicare program.  HCFA officials said that they have to resolve
three key issues:  whether commercial system rules match or can be
modified to match Medicare payment policies; to what extent
commercial firms would be willing to disclose information about their
systems in order to allow physicians and other interested parties to
comment on Medicare policies; and what would be the cost and
technical feasibility of installing the commercial software on
existing contractor claims processing systems, especially in light of
their pending replacement by MTS.  On the basis of our discussions
with commercial firms, we believe that these reservations can be

\12 Some controls, such as those included in the commercial software
discussed earlier, deny or adjust claims payments "automatically,"
that is, without human intervention.  These controls, however, are
not applicable to all claims. 

\13 For a detailed discussion of alternatives for funding
anti-fraud-and-abuse activities, see GAO/HEHS-95-263R (forthcoming). 

---------------------------------------------------------- Letter :4.3

Currently, providers who defraud or otherwise abuse health care
payers have little chance of being prosecuted or having to repay
fraudulently obtained money.  Few cases are pursued as fraud.  Even
when they are, many are settled without conviction, penalties are
often light, and providers frequently continue in business.  These
are characteristics of health care fraud (and of white-collar crime
in general) and are not confined to Medicare.  They are variously
attributed to the complexity of cases, lack of resources, necessity
for interagency coordination, and uncertainty of outcome.  In recent
testimony before this Subcommittee, the Special Counsel for Health
Care Fraud at the Department of Justice noted that health care fraud
cases are extremely resource-intensive and are among the most
document-intensive of all white-collar crime.\14

Ironically, incentives for certain providers to challenge HCFA's
pursuit of wrongdoing are embedded in Medicare law.  Under 42 U.S.C. 
1395x(v), certain provider types, such as home health agencies and
skilled nursing facilities, are able to sue HCFA and its contractors
and have their legal expenses reimbursed by Medicare--even if the
provider's suit is unsuccessful.  In one case, Medicare allowed a
home health agency under investigation for defrauding Medicare to
receive reimbursement for legal expenses of nearly $3 million. 
Contractor officials believe that there is a direct relationship
between the home health agency's history of litigious behavior and
Medicare's practice of reimbursing legal expenses in this manner. 

\14 Statement of Gerald M.  Stern, Special Counsel, Health Care
Fraud, Department of Justice, concerning Medicare and Medicaid fraud
and abuse, June 15, 1995. 

-------------------------------------------------------- Letter :4.3.1

Various entities are involved in the identification and pursuit of
potentially fraudulent activities, including not only Medicare
contractors and HHS but also law enforcement agencies at all levels. 
The lack of resources hampers investigations and leads to extended
delays in case resolution.  Our recent investigation of inappropriate
therapy billings for Medicare beneficiaries in nursing homes\15
traced one case from the initial beneficiary complaint through its
close-out by the HHS Inspector General.  This case took almost 3
years, and the resolution was inconclusive. 

Pursuit of Medicare fraud typically involves Medicare's claims
processing contractors and the HHS Inspector General's headquarters
and regional offices.  As the first line of defense, the contractors
are the recipients of beneficiary complaints, a significant source of
fraud case leads, and of referrals made by HCFA.  Fraud units at each
contractor site investigate leads and refer persuasive cases to the
HHS Inspector General, whose regional and headquarters offices decide
whether to become further involved and whether to seek civil or
administrative sanctions.\16 The California region's Inspector
General said that his region's practice is to seek civil monetary
penalties only in those cases with significant potential for
financial recovery in terms of both amount of fraud and
collectibility.  In 10 to 20 percent of cases a year, the provider
declares bankruptcy or has no identifiable assets.  The Inspector
General does not--and cannot afford to--pursue those cases.  We were
told "this is a cash-based industry, and it is very hard to recover

Many fraud cases are negotiated among the various parties involved
before going to trial to explore possible plea bargains.  While the
cases are developed at regional Inspector General offices, which are
also empowered to negotiate lower-dollar cases (those with settlement
values under $100,000), they must still be reviewed and approved by
headquarters, which has only three qualified and available
negotiators for the entire country.  Cases settled through such
negotiation offer providers an opportunity to avoid being excluded
from (prohibited from billing) Medicare.  Ninety percent of cases
judged by the Inspector General to have merit are settled through

\15 Medicare:  Tighter Rules Needed to Curtail Overcharges for
Therapy in Nursing Homes (GAO/HEHS-95-23, Mar.  30, 1995). 

\16 The HHS Inspector General has no authority to pursue criminal
action; this is the province of the Department of Justice, which can
also initiate civil actions in federal court.  In Medicare cases,
Inspector General investigators provide the information on which the
Department of Justice bases its decision.  The Inspector General may
also refer cases to local or state law enforcement agencies if the
cases are declined by the Department of Justice. 

-------------------------------------------------------- Letter :4.3.2

The Secretary of HHS has the authority to exclude health care
providers from Medicare for a number of reasons, and has delegated
these authorities to the HHS Inspector General.  Program exclusion is
mandatory following convictions for Medicare or Medicaid
program-related crimes or for patient abuse and neglect.  Under other
conditions, the Inspector General can exercise judgment as to whether
exclusion is appropriate. 

Despite egregious cases of Medicare fraud, however, corporate
providers have been allowed to continue their program participation. 
In one of the more significant federal health care fraud prosecutions
to date, a clinical laboratory company acknowledged over $100 million
in fraud committed as part of a nationwide scheme against Medicare,
Medicaid, and the Civilian Health and Medical Program of the
Uniformed Services (CHAMPUS)\17 over a 4-year period.  The lab was
allowed to negotiate a civil settlement including language that
specifically permitted its continued participation in all three

According to the Inspector General, very few companies or other
entities are excluded from the program:  over the past 10 years, 90
percent of the exclusions have targeted individuals.  In fiscal year
1994, there were 1,265 exclusions, of which 471 were mandatory and
794 permissive.  However, almost one-half (566) were for failure to
repay student loans; only 289 were for Medicare-related convictions. 

The dissemination of excluded provider information is not always
prompt, despite recent improvements in the process of notifying
contractors and other affected parties.  California's Regional
Inspector General for Investigations also told us that providers who
continue to bill after exclusion are not always caught right away. 
Nor is exclusion necessarily effective--providers who move from state
to state or who use more than one provider number may continue to
obtain Medicare reimbursement. 

The HHS Inspector General is working with HCFA to seek a nationwide
uniform provider agreement that prohibits paying excluded
individuals.  They are also seeking expanded authority to act against
culpable owners of excluded companies.  Currently, the owner of such
a company is free to reincorporate or start another business without
fear of exclusion. 

\17 CHAMPUS is a federal medical program for military dependents and
retirees that pays for care received from civilian hospitals,
physicians, and other providers. 

------------------------------------------------------------ Letter :5

Medicare does not use (or in some cases use widely enough) private
sector strategies to manage three of the factors that attract
unscrupulous providers--excessive payment rates, inadequate
safeguards over billing, and ineffective controls over providers. 
For example, private insurers and managed care organizations commonly
use pricing strategies that take advantage of their buying power and
of the competitive marketplace.  These private payers also employ a
range of techniques focusing on utilization:  they examine tests and
procedures for their appropriateness and their volume, and they
screen providers for their practice styles and quality of care.  Some
price and utilization strategies that could have applicability to
Medicare are detailed in table 2. 

                                         Table 2
                         Commonly Used Private Sector Strategies
                              and Applicability to Medicare

                                                   HCFA's current
Private sector strategy        Description         practice            HCFA explanation
-----------------------------  ------------------  ------------------  ------------------
Prompt reaction to market      Change prices       Prices generally    Pertinent statute
prices                         quickly when        not adjusted for    generally permits
                               paying more than    declines in the     appropriate
                               competitively       price of product    adjustments only
                               necessary           or service\a        after a complex

Negotiate with select          Selectively         Same payments       Statute does not
providers                      contract with       generally made to   permit providers
                               providers to        any provider        to be excluded
                               deliver certain     selected by         unless they engage
                               services, such as   beneficiary to      in certain
                               hip replacements,   provide services    prohibited
                               at a specific                           practices\c

Competitive bidding and        Set prices for      Prices are set      Statute generally
negotiations                   services or         under complex       provides only for
                               service packages    formulas, but       all area providers
                               based on            demonstration       to be paid the
                               competitive         involving           same amount for
                               process             competitive         service;\d
                                                   procedures is       legislation
                                                   proposed            prohibits proposed

Preferred provider network     Promote use of a    Payments generally  Statute guarantees
                               network of          made to any         beneficiary
                               selected providers  provider selected   freedom to choose
                               meeting price,      by beneficiary to   providers;\f
                               practice style,     provide medical     limited statutory
                               and quality         services            authority to
                               criteria                                contract with
                                                                       managed care

Preadmission review            Require prior       No prior approval   No viable
                               approval of         of                  statutory
                               hospitalization     hospitalizations    authority for
                               for select          for any procedures  requiring prior
                               procedures                              approval; statute
                                                                       interference with
                                                                       practice of

Case management                Assist high-cost    Assistance not      Statute prohibits
                               patients in         provided to         interference with
                               selecting           patients in         practice of
                               appropriate         selecting services  medicine\i
                               services            efficiently

Contract with utilization      Use companies       HCFA contracts      Statute provides
review companies               specializing in     with private        no specific
                               utilization review  entities--          authority for
                               to monitor and      generally           contracting with
                               adjudicate claims   insurance           utilization
                                                   companies--to       control
                                                   process claims\j    organizations\k

Greater use of commercial      Use off-the-shelf   HCFA directs        HCFA concerned
technology to detect billing   software that       contractors to      about adaptability
abuses                         flags billing       develop system      and relevance to
                               problems and        capabilities,       Medicare
                               automatically       without guidance
                               adjusts payments    on use of specific

\a For example, although 42 U.S.C.  1395u(b)(8) and (9) provide HCFA
with authority to adjust payments when the established rates under a
fee schedule are found to be inherently unreasonable, detailed
procedures are mandated that include a lengthy notice and comment

\b For example, 42 U.S.C.  1395m(a)(10)(B) provides HCFA with
authority to adjust prices for durable medical equipment, excluding
surgical dressings, but only after completion of a cumbersome
administrative process.  The one time this process was used, it took
3 years to complete. 

\c 42 U.S.C.  1320a-7 provides for mandatory and permissive exclusion
of providers who are, for example, convicted of certain
program-related crimes. 

\d 42 U.S.C.  1395f establishes conditions of and limitations on
payment for services. 

\e In 1985, HCFA started the process to perform a demonstration of
competitive bidding related to laboratory services, and it was set to
begin in 1987.  That year and in several subsequent years, however,
provisions were included in the respective budget reconciliation laws
specifically prohibiting its implementation.  Eventually, HCFA
abandoned plans for the demonstration, but has since requested
authority to introduce competitive bidding, without success. 

\f 42 U.S.C.  1395a, the so-called freedom of choice provision,
expressly provides that beneficiaries may obtain health services from
any willing provider. 

\g 42 U.S.C.  1395mm authorizes HCFA to contract with certain managed
care entities to provide care to Medicare beneficiaries under
prescribed circumstances. 

\h 42 U.S.C.  1395. 

\i 42 U.S.C.  1395. 

\j These companies may arrange for utilization review to be done
under subcontract. 

\k 42 U.S.C.  1395h provides detailed authorization for HCFA to
contract with private entities without competitive procedures to
handle part A claims, and 42 U.S.C.  1395u provides similar authority
for part B claims. 

------------------------------------------------------------ Letter :6

Three principles on which Medicare was founded--as interpreted by
HCFA, providers, the courts, and the Congress--help explain why
Medicare practices and private payer management strategies are

  First, the government must not interfere in medical practice.\18
     Medicare legislation essentially delegated many day-to-day
     administrative decisions to private insurers to further lessen
     the risk of undue federal interference and to better ensure that
     Medicare would treat its beneficiaries no differently than the
     privately insured.\19 The functions delegated include
     establishing policies to determine when services provided are
     medically necessary--and today most such "medical policies" are
     still established by Medicare's private contractors. 

  Second, Medicare beneficiaries should be free to choose their own
     health care providers.\20 However, many of the private sector
     innovations credited with cost savings rely on managed care
     approaches that structure and constrain that choice.  Staff- and
     group-model health maintenance organizations (HMO) explicitly
     restrict a patient's choice of health care providers (for
     example, to a set of plan-approved physicians and hospitals),
     while looser forms of managed care, such as preferred provider
     networks, give financial disincentives to the patient who
     chooses providers outside the plan-approved list.  Although
     Medicare offers an HMO option to beneficiaries, HCFA has only
     limited statutory authority to pursue other managed care

  Third, as a public program, Medicare changes require public input
     and hence can be cumbersome and time-consuming.  Past experience
     suggests that changes made by HCFA will typically be contested. 
     Given the high stakes for providers, legal challenges are apt to
     be pursued vigorously by those who fear that program changes
     would result in their receiving lower payments.  Although the
     ultimate outcome is always uncertain, litigation--whatever the
     outcome--can take years to resolve.\22 Consequently, in
     considering cost-saving initiatives, HCFA must weigh the
     resulting expense and disruption as well as the risk of ultimate
     failure against anticipated savings.  These circumstances may
     foster HCFA's reluctance to act without specific statutory

These principles were consistent with the predominantly
fee-for-service and unmanaged method by which health care was
delivered and paid for three decades ago.  Today, however, HCFA's
capabilities to manage Medicare are misaligned with the state of the
art in health care delivery and financing.  For example, HCFA and its
contractors generally do not

  negotiate with providers for discounts; promptly change prices to
     match those available in the market; or competitively bid prices
     for widely used items or services, such as pacemakers,
     intraocular lenses, cataract surgery, and wheelchairs.  This has
     resulted in Medicare paying higher prices than other large
     payers.  The HHS Inspector General estimates that the use of
     competitive bidding to price laboratory services, for example,
     could save $1.4 billion over 5 years.\24

  differentiate between providers who meet utilization, price, and
     quality standards and those who do not, and provide incentives
     to encourage beneficiaries to use the "preferred providers."
     This has hampered Medicare's ability to encourage beneficiaries
     to use providers meeting certain standards. 

  use preadmission review or other utilization control practices to
     curb the excessive or unnecessary provision of expensive
     procedures, or use case management to coordinate and monitor
     high-cost patients' multiple services and specialists.  This has
     limited Medicare's ability to emphasize cost efficiency in its
     dealings with those suppliers, physicians, and institutions that
     habitually provide excessive services. 

\18 42 U.S.C.  1395. 

\19 42 U.S.C 1395h provides authority and detailed instructions for
HCFA to contract with such entities to handle part A claims, while 42
U.S.C.  1395u provides similar guidance related to part B. 

\20 42 U.S.C.  1395a, the so-called freedom-of-choice provision,
expressly provides that beneficiaries may obtain health services from
any willing provider. 

\21 42 U.S.C.  1395mm authorizes HCFA to contract with certain
managed care entities to provide care to Medicare beneficiaries under
prescribed circumstances.  Our analysis suggests, however, that under
the current statutory prescriptions this has not harnessed the
cost-saving potential of managed care.  See our recent testimony,
Medicare Managed Care:  Program Growth Highlights Need to Fix HMO
Payment Problems (GAO/T-HEHS-94-174, May 24, 1995). 

\22 For example, HCFA has in recent years made a more diligent effort
to recover payments made mistakenly when other private insurers would
have paid for a medical service.  In 1989, the Congress permitted
HCFA to begin performing a data match with the Internal Revenue
Service to help identify such mistaken payments, with the result that
millions have been recovered and millions more were expected to be
recovered.  This effort was dealt a serious blow, however, when a
federal court ruled in 1994 that HCFA is bound by the claims filing
deadlines set by private insurers and may not recover from
third-party administrators who handle claims processing for private
insurers (Health Ins.  Ass'n of America, Inc.  v.  Shalala, 23 F.3d
412 (D.C.  Cir.  1994), cert.  denied, 115 S.Ct.  1095 (1995).  As a
result, HCFA may be unable to recover millions in mistaken payments
and may have to repay some funds previously recovered.  See our
testimony on this subject, Medicare's Secondary Payer Program: 
Actions Needed to Realize Savings (GAO/T-HEHS-95-92, Feb.  23, 1995). 

\23 The courts are not the only forum where those questioning HCFA's
exercise of its Medicare responsibilities might seek redress.  In
1985, HCFA started the process to perform a demonstration of
competitive bidding for laboratory services, and it was set to begin
in 1987.  That year and for several subsequent years, however,
provisions were included in the respective budget reconciliation acts
prohibiting its implementation.  Eventually, HCFA abandoned plans for
the demonstration, but has since requested authority to introduce
competitive bidding without success. 

\24 For further discussion of competitive bidding and negotiation
strategies, see Medicare Managed Care:  Program Growth Highlights
Need to Fix HMO Payment Problems (GAO/T-HEHS-95-174, May 24, 1995). 

------------------------------------------------------------ Letter :7

Billions of Medicare dollars are spent on unnecessary payments. 
Despite the current competitive health care market, Medicare often
pays more than the market price for medical services and supplies. 
In addition, Medicare does not use available state-of-the art
technology to screen claims for overcharging or overutilization, even
though payment of claims for services provided constitutes the
program's chief administrative function.  Finally, while the number
of nonmedical providers billing for services and supplies is on the
rise, Medicare does little to scrutinize the legitimacy of these

Constrained by statute, burdened by regulatory and administrative
procedures, or reluctant to engage in expensive litigation with an
uncertain outcome, Medicare's response to problems is generally too
slow to be effective.  Pricing changes are slow or infeasible and
penalties for wrongdoers are weakened through delay.  In addition,
grim fiscal realities dampen the prospect of HCFA's ability to
enhance payment controls.  Because Medicare's anti-fraud-and-abuse
efforts are funded out of the government's discretionary
appropriations, funding must compete with funding for other programs
under the discretionary caps. 

The problems facing Medicare confront private insurers as well, but
they are armed with a larger and more versatile arsenal of health
care management strategies than HCFA currently has.  These strategies
may not be deployable in every aspect, but in general they offer a
menu of options for devising ways to make Medicare more cost
effective.  Commercial contractors, which play a key role in
administering Medicare, routinely employ management-of-care
approaches and use state-of-the-art technology in their capacity as
private insurers.  If they applied similar approaches to Medicare,
the government might be able to avoid spending substantial sums
unnecessarily.  A more businesslike approach for Medicare would
include the following features: 

1.  The ability to price services and procedures more competitively. 
This could include streamlining processes required to revise
excessive payment rates, and competitively bidding and negotiating

2.  The enhancement of fraud and abuse detection efforts through
better data analysis.  This could include completing the
modernization of Medicare's claims processing and information systems
and expanding the use of state-of-the-art computerized controls. 

3.  Requirements for providers to demonstrate their suitability as
Medicare vendors before being given unrestricted billing rights. 
This could include HCFA's establishment of preferred provider
networks, development of more rigorous criteria for authorization to
bill the program, and use of private entities to provide
accreditation or certification. 

In general, HCFA has been reluctant to adopt private sector business
practices because its authority to do so is, in some cases,
questionable.  We believe that, to redefine its role as prudent
manager of health care costs, HCFA would need to develop a plan
specifying pricing and cost management strategies and would need to
seek explicit authority from the Congress to carry out such

------------------------------------------------------------ Letter :8

We recommend that the Secretary of HHS direct the HCFA Administrator

  develop policies and revise practices so that Medicare can (1)
     price services and procedures more competitively, (2) manage
     payments through state-of-the-art data analysis methods and use
     of technology, and (3) better scrutinize the credentials of
     vendors seeking to bill the program;

  examine the feasibility of allowing Medicare's commercial
     contractors to adopt for their Medicare business such managed
     care features as preferred provider networks, case management,
     and enhanced utilization review; and

  seek the authority necessary from the Congress to carry out these

------------------------------------------------------------ Letter :9

Given the urgency of expediting Medicare program changes that could
lead to substantial savings, the Congress may wish to consider
directing the Secretary of HHS to develop a proposal seeking the
necessary legislative relief that would allow Medicare to participate
more fully in the competitive health care marketplace.  Such relief
could include allowing the Secretary of HHS to set maximum prices on
the basis of market surveys, or, if the formal rulemaking process is
preserved, allowing the Secretary to make an interim adjustment in
fees while the studies and rulemaking take place. 

The Congress may also wish to consider options for granting relief
for the funding declines in Medicare's anti-fraud-and-abuse

----------------------------------------------------------- Letter :10

We provided HHS an opportunity to comment on our draft report, but it
did not provide comments in time to be included in the final report. 

Please call Jonathan Ratner, Associate Director, at (202) 512-7107,
if you or your staff have any questions about this report.  Other
major contributors include Audrey Clayton, Hannah Fein, Edwin
Stropko, and Craig Winslow. 

Sincerely yours,

Janet L.  Shikles
Assistant Comptroller General

============================================================ Chapter 0

Medicare Antifraud Technology Offers Significant Opportunity to
Reduce Health Care Fraud (GAO/AIMD-95-77, Aug.  1995). 

Medicare:  Rapid Spending Growth Calls for More Prudent Purchasing
(GAO/T-HEHS-95-193, June 28, 1995)

Medicare Managed Care:  Program Growth Highlights Need to Fix HMO
Payment Problems (GAO/T-HEHS-95-174, May 24, 1995). 

Medicare:  Reducing Fraud and Abuse Can Save Billions
(GAO/T-HEHS-95-157, May 16, 1995). 

Medicare Claims Billing Abuse:  Commercial Software Could Save
Hundreds of Millions Annually (GAO/T-AIMD-95-133, May 5, 1995). 
Medicare Claims:  Commercial Technology Could Save Billions Lost to
Billing Abuse (GAO/AIMD-95-135, May 5, 1995).  Medicare:  Tighter
Rules Needed to Curtail Overcharges for Therapy in Nursing Homes
(GAO/HEHS-95-23, Mar.  30, 1995). 

Medicare and Medicaid:  Opportunities to Save Program Dollars by
Reducing Fraud and Abuse (GAO/T-HEHS-95-110, Mar.  22, 1995). 
Medicare's Secondary Payer Program:  Actions Needed to Realize
Savings (GAO/T-HEHS-95-92, Feb.  23, 1995). 

Medicare:  High Spending Growth Calls for Aggressive Action
(GAO/T-HEHS-95-75, Feb.  6, 1995). 

High-Risk Series:  Medicare Claims (GAO/HR-95-8, Feb.  1995). 

Medicare:  Inadequate Review of Claims Payments Limits Ability to
Control Spending (GA0/HEHS-94-42, Apr.  28, 1994). 

Health Care Reform:  How Proposals Address Fraud and Abuse
(GAO/T-HEHS-94-124, Mar.  17, 1994). 

Medicare:  Greater Investment in Claims Review Would Save Millions
(GAO/HEHS-94-35, Mar.  2, 1994). 

Medicare:  New Claims Processing System Benefits and Acquisition
Risks (GAO/HEHS/AIMD-94-79, Jan.  25, 1994). 

Medicaid Drug Fraud:  Federal Leadership Needed to Reduce Program
Vulnerabilities (GAO/HRD-93-118, Aug.  2, 1993)