Testimony
Before the Senate Appropriations Committee
Subcommittee on Labor, Health and Human Services, Education


Medicare Waste, Fraud & Abuse

Statement of
June Gibbs Brown
Inspector General
Department of Health and Human Services

March 9, 2000


Good morning, Mr. Chairman. I am June Gibbs Brown, Inspector General of the Department of Health and Human Services. With me today is Joseph E. Vengrin, Assistant Inspector General for Audit Operations and Financial Statement Activities. I am pleased to report to you on the Health Care Financing Administration's (HCFA) progress in reducing Medicare payment errors and in presenting reliable financial information.

My statement today will focus first on our audit of Fiscal Year (FY) 1999 Medicare fee-for-service payments. This was our fourth annual estimate of the extent of fee-for-service payments that did not comply with laws and regulations. As part of our analysis, we profiled all 4 years' results and identified specific trends, where appropriate, by the major types of errors found and the types of health care providers whose claims were erroneous. Then I will briefly describe the significant findings of our audit of HCFA's FY 1999 financial statements, which is required by the Government Management Reform Act of 1994. The purpose of financial statements is to accurately portray agencies' financial operations, including what they own (assets), what they owe (liabilities), and how they spend taxpayer dollars. The purpose of our audit was to independently evaluate the statements.

Before I begin, I would like to acknowledge the cooperation and support we received from the Department, HCFA, and the General Accounting Office (GAO). The HCFA's assistance in making available medical review staff at the Medicare contractors and the peer review organizations (PRO) was invaluable in reviewing benefit payments. 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 Department is one of the most significant agencies included in these Governmentwide statements.

MEDICARE PAYMENT ERRORS

Overview

With expenditures of approximately $316 billion, assets of $212 billion, and liabilities of $39 billion, HCFA is the largest component of the Department. The HCFA is also the largest single purchaser of health care in the world. In 1999, Medicare and Medicaid outlays represented 33.7 cents of every dollar of health care spent in the United States. In view of Medicare's 39.5 million beneficiaries, 870 million claims processed and paid annually, complex reimbursement rules, and decentralized operations, the program is inherently at high risk for payment errors.

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, regulations specifically require providers to retain supporting documentation and to make it available upon request.

As part of our first audit of the HCFA financial statements for FY 1996, we began reviewing claim expenditures and supporting medical records. At HCFA's request, we have continued these reviews because of the high risk of Medicare payment errors and the huge dollar impact on the financial statements ($169.5 billion in FY 1999 fee-for-service claims).

Our primary objective each year has been 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 HCFA's Medicare contractors in accordance with Medicare laws and regulations; and (3) medically necessary, accurately coded, and sufficiently supported in the beneficiaries' medical records.

Sampling Methodology

To accomplish our objective, we used a multistage, stratified sample design. The first stage consisted of a selection of 12 contractor quarters for FY 1999. The selection of the contractor quarters was based on probabilities proportional to the FY 1998 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 5,223 claims valued at $5.4 million for review.

For each selected beneficiary during the 3-month period, we reviewed all claims processed for payment. We first 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. Then medical review staff from the Medicare contractors (fiscal intermediaries and carriers) and PROs assessed the medical records to determine whether the services billed were reasonable, adequately supported, medically necessary, and coded in accordance with Medicare reimbursement rules and regulations.

Concurrent with the medical reviews, we made additional detailed claim reviews 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 under Medicare secondary payer requirements; and (4) all services were subjected to applicable deductible and co-insurance amounts and were priced in accordance with payment regulations.

Sample Results

Through detailed medical and audit review of a statistical selection of 600 beneficiaries nationwide with 5,223 fee-for-service claims processed for payment during FY 1999, we found that 1,034 claims did not comply with Medicare laws and regulations. By projecting these sample results, we estimated that FY 1999 net payment errors totaled about $13.5 billion nationwide, or about 7.97 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 $9.1 billion to $17.9 billion, or 5.4 percent to 10.6 percent, respectively. As in past years, the payment errors could range from inadvertent mistakes to outright fraud and abuse, such as phony records or kickbacks. We cannot quantify what portion of the error rate is attributable to fraud.

Medical professionals detected 92 percent of the improper payments. 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 that the services as billed were allowable under Medicare rules and regulations. However, their controls were not effective in detecting the types of errors we found.

Historical Analysis of Error Rates

Our analysis of payment errors from FY 1996 through FY 1999 demonstrates HCFA's continued vigilance in monitoring and reducing payment errors. This year's $13.5 billion estimate is, in fact, $9.7 billion less than the FY 1996 estimate. In addition, our audit results clearly show that the majority of health care providers submit claims to Medicare for services that are medically necessary, billed correctly, and sufficiently supported. For both FYs 1998 and 1999, we estimated that over 90 percent of fee-for-service payments contained no errors. This is a very positive reflection on the diligence of the health care provider community to comply with Medicare reimbursement requirements. However, our analysis shows that unsupported and medically unnecessary services continue to be pervasive problems. These two error categories accounted for more than 70 percent of the total improper payments over the 4 years.

The attached chart presents an historical analysis of improper payments by major error categories:
(1) unsupported services, (2) medically unnecessary services, (3) incorrect coding, and (4) noncovered services and miscellaneous errors.

Unsupported Services

Unsupported services represented the largest error category every year except FY 1998, when they dropped dramatically. This year we saw a $3.4 billion increase over last year's estimate; however, these errors remained below the levels found in FYs 1996 and 1997.

Medicare regulation, 42 CFR 482.24(c) specifically requires providers to maintain records that contain sufficient support to justify diagnoses, admissions, treatments performed, and continued care. When the records were insufficient or missing, medical reviewers could not determine whether services billed were actually provided to Medicare beneficiaries, the extent of the services, or their medical necessity. It should be noted that HCFA upheld 99 percent of the overpayments identified in the FY 1998 sample and recovered about 87 percent; the remaining 13 percent has not been collected due to an ongoing investigation.

This year's estimated $5.5 billion in unsupported services consisted of $4.5 billion in claims for which medical review staff found that the documentation was insufficient to support the billed services and $1 billion in claims for which no documentation was provided. These errors were largely attributable to three provider groups: home health agencies ($1.7 billion), durable medical equipment (DME) suppliers ($1.6 billion), and physicians ($1.1 billion).

Some examples of unsupported services follow:


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