Report No.: GAO/HR-93-6 Date: December 1992
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Author: United States General Accounting Office
Addressee: High-Risk Series
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Overview
- The Problem
- The Causes
- Gao's Suggestions for Improvement
Contractor Network Complicates Program Management
Management Weaknesses Contribute to Unnecessary Expenditures
- Inadequate Management and Reduced Funding Weaken Payment Safeguards
- Flawed Hcfa Policies Expose Medicare to Waste and Abuse
- Weak Billing Controls Invite Exploitation of Medicare
Challenges Are Common to All Health Payers
- Rolling Labs Case Illustrates Systemic Health Insurance Problems
- Need for National Commission
Conclusions and Action Needed
Related GAO Products
High-Risk Series
- Lending and Insuring Issues
- Contracting Issues
- Accountability Issues
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Office of the Comptroller General
Washington, DC 20548
December 1992
The President of the Senate
The Speaker of the House of Representatives
In January 1990, in the aftermath of scandals at the Departments of Defense
and Housing and Urban Development, the General Accounting Office began a
special effort to review and report on federal government program areas that
we considered "high risk."
After consulting with congressional leaders, GAO sought, first, to identify
areas that are especially vulnerable to waste, fraud, abuse, and
mismanagement. We then began work to see whether we could find the fundament
al
causes of problems in these high-risk areas and recommend solutions to the
Congress and executive branch administrators.
We identified 17 federal program areas as the focus of our project. These
program areas were selected because they had weaknesses in internal controls
(procedures necessary to guard against fraud and abuse) or in financial
management systems (which are essential to promoting good management,
preventing waste, and ensuring accountability). Correcting these problems is
essential to safeguarding scarce resources and ensuring their efficient and
effective use on behalf of the American taxpayer.
This report is one of the high-risk series reports, which summarize our
findings and recommendations. It describes our concerns over the Medicare
program's efforts to safeguard program dollars. Weaknesses in the Health Car
e
Financing Administration's management of the program and insufficient fundin
g
of safeguard activities expose Medicare to unnecessary loss through waste,
fraud, and abuse.
Copies of this report are being sent to the President-elect, the Democratic
and Republican leadership of the Congress, congressional committee and
subcommittee chairs and ranking minority members, the Director-designate of
the Office of Management and Budget, and the Secretary-designate of Health a
nd
Human Services.
The federally funded Medicare program is the nation's largest payer of healt
h
care benefits. In 1991 the program enrolled about 35 million beneficiaries a
nd
processed about 600 million claims, paying physicians and other providers ov
er
$110 billion in medical benefits--about 15 percent of all the money spent on
health care in the United States. All health insurers, including more than
1,000 private payers, face the need to control these high costs and are
seeking to curb unnecessary expenditures lost through waste, fraud, and abus
e.
Medicare is administered by the Health Care Financing Administration (HCFA),
an agency of the Department of Health and Human Services (HHS). By law, HCFA
contracts with private insurance companies to process Medicare claims and pa
y
providers on the government's behalf and monitors the contractors'
performance.
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THE PROBLEM
In recent years, the Medicare program has lost billions of dollars to waste,
fraud, and abuse. Though Medicare's losses cannot be quantified precisely,
health industry experts estimate that fraud and abuse could account for as
much as 10 percent of the nation's total health care costs.
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THE CAUSES
HCFA relies on numerous contractors to process Medicare's claims and to
protect program funds through review activities called payment "safeguards."
However, HCFA's inability to properly manage contractors' safeguard activiti
es
and too little money earmarked for these activities have left Medicare dolla
rs
exposed to loss and waste. For example, we have found that:
-- Although many Medicare beneficiaries call in to complain about waste and
abuse, contractors have often failed to investigate these complaints. In
one case, follow-up on complaints about eye care services led to a
provider's agreement to refund over
2.5 million to the federal government.
-- Hospitals owed Medicare over $170 million in overpayments, but contractor
s
did little to reclaim the money. HCFA, moreover, was unaware of contracto
r
inaction because it had no systems to monitor this information.
-- Contractors paid an estimated $2 billion in claims that should have been
paid by other health insurers.
Medicare is vulnerable to exploitation for other reasons: payment policies
permit excessive reimbursement rates for certain services, such as high-tech
and laboratory services, and loose controls over who can bill Medicare have
made the pursuit of fraudulent providers difficult.
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GAO'S SUGGESTIONS FOR IMPROVEMENT
HCFA needs to exercise stronger leadership in managing the Medicare program.
In particular, it needs to improve oversight of contractors' activities aime
d
at reducing waste, fraud, and abuse. HCFA also needs to reduce payments that
are excessive and to tighten controls over who is allowed to bill the Medica
re
program. Finally, the Congress should modify budget procedures--that is, all
ow
increased safeguard funding without having to cut spending elsewhere--to all
ow
adequate and stable Medicare contractor funding for safeguard activities to
be
appropriated.
We have also emphasized that the threat of insurance fraud and abuse is
endemic not just to Medicare but to the entire health care system. In a rece
nt
report and at congressional hearings, we have asked the Congress to consider
establishing a national health insurance fraud commission--
omposed of public and private insurers, among others--that would develop
recommendations for combating health care fraud and abuse.
CONTRACTOR NETWORK COMPLICATES PROGRAM MANAGEMENT
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Medicare is the fourth largest item in the federal budget after defense,
social security, and interest payments on the national debt. Moreover, the
program has grown considerably. Since 1975, beneficiary enrollment has grown
from 25 million to about 35 million, while claims volume has increased by ov
er
450 percent. In recent years, Medicare benefit outlays rose by
0 percent, from about $70 billion in 1985 to over $110 billion in 1991.
The Medicare program operates through a complicated administrative structure
More than 80 contractors process, pay, and review claims. This structure has
been shaped by Medicare's historical dependence on private insurers to perfo
rm
claims processing and payment review tasks.
To pay providers accurately and promptly, the law that established the
Medicare program in 1965 provided for contracting with insurance
companies--Blue Cross and Blue Shield plans and other private insurers. This
arrangement was pragmatic in that insurance companies had both claims-
rocessing experience and an understanding of the medical practices of their
communities. Payment safeguard activities have also been largely
contractor-managed operations, permitting contractors broad discretion in
acting to protect Medicare program dollars. As a result, there are significa
nt
variations in contractors' implementation of Medicare's payment safeguard
policies.
MANAGEMENT WEAKNESSES CONTRIBUTE TO UNNECESSARY EXPENDITURES
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Over the years, the quality of contractors' administration of Medicare has
been uneven, and HCFA has not adequately managed the contractor network to
identify and correct program weaknesses. HCFA's lax management of the
contractors has contributed to billions of dollars lost to waste, fraud, and
abuse. For example, contractors have allowed complaints of fraud to go
uninvestigated; had failed, until recently, to collect over $170 million of
overpayments to hospitals and other providers; and have paid nearly $2 billi
on
in claims that should have been paid by other insurers. Furthermore, certain
Medicare payment policies have been overly generous and have unintentionally
discouraged providers billing the program from prescribing services
judiciously. Finally, in just a single case of fraud, Medicare lost over $5
million due to loose controls over who can bill the program.
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INADEQUATE MANAGEMENT AND REDUCED FUNDING WEAKEN PAYMENT SAFEGUARDS
HCFA has not carefully monitored Medicare's payment safeguard activities,
which vary by contractor and are left largely to the contractor's discretion
Moreover, reduced funding by the Congress for payment safeguard operations h
as
caused contractors to focus more on paying claims quickly than on reviewing
the accuracy of payments made.
For example, until recently, HCFA provided virtually no guidance to Medicare
contractors regarding the investigation of beneficiary complaints--a primary
source of fraud, waste, and abuse leads. Contractors' failure to adequately
investigate beneficiary complaints of provider fraud and abuse results in
missed opportunities to (1) identify billings for services not rendered,
2) recover overpayments, (3) impose penalties, and (4) send a message to the
provider community that fraudulent or abusive behavior will not be tolerated
One case demonstrates the value of dealing with beneficiary complaints
effectively. In that case, beneficiary complaints prompted the contractor
initially to pursue a provider for billing irregularities. Upon further
investigation, 100 apparently similar complaints surfaced, encompassing abou
t
300 fraudulent claims. The provider involved agreed to refund over $2.5
million to the federal government. HCFA has recently issued guidance
instructing contractors on the proper handling of beneficiary complaints.
HCFA also did not give adequate guidance to Medicare contractors on recoveri
ng
hospital overpayments. The refundable amounts, referred to by hospitals as
credit balances, typically occurred when both Medicare and other insurers
mistakenly paid for the same service or when Medicare paid twice for the sam
e
service. Many of the hospitals' credit balances had been outstanding for
several years, despite attempts by some to repay the money.
The contractors we visited were doing little to identify amounts owed Medica
re
or to ensure that refunds were promptly recovered. Subsequently, in 1992 HCF
A
instructed Medicare contractors to have hospitals report amounts owed and to
recover the mistaken payments. Over 9,000 hospitals and other providers
reported $171.7 million in Medicare overpayments, of which $109.9 million ha
d
been repaid as of June 1992. HCFA recently implemented a reporting and
tracking system to monitor such overpayments and ensure that they are prompt
ly
recovered.
These problems may be partly related to budget cutbacks that have affected
program administration. Although Medicare's payment safeguard activities hav
e
been consistently cost-effective--returning over $11 for every $1 spent sinc
e
1989--
ontractor budgets for these functions have not kept pace with the growth in
claims volume. Specifically, from 1989 to 1992, claims volume rose by about
40
percent, while contractors' funding for payment safeguards was cut by about
4
percent.
Medicare's secondary payer program demonstrates Medicare's exposure to loss
resulting from these cutbacks. In 1990 and 1991, we found a large inventory
of
potential mistaken Medicare payments that were not being investigated.
Contractors were doing little to recover these claims, at least in part
because their funding for these activities had been significantly reduced.
In mid-1991 HCFA implemented a system to track the outstanding amounts from
the mistakenly paid claims. Contractors reported unrecovered payments
amounting to over $1.1 billion, along with a large backlog of additional
claims for which overpayments had not been determined. We estimated that an
investigation of these additional claims would reveal another
1 billion in mistaken payments owed by primary insurers. In 1992 the Office
of
Management and Budget released additional money to the contractors for
recovery activities.
In its fiscal year 1993 budget, HHS increased funding for Medicare's payment
safeguard activities to $395.7 million, or 15.4 percent over the previous
year's funding. The increase will allow contractors to begin replacing staff
lost to cutbacks in prior years and begin accommodating the growing claims
workload. Hiring and training the necessary staff and implementing expanded
safeguard programs will take time; for this reason, the assurance of stable
safeguard funding is needed. Payment safeguard activities save Medicare much
more than they cost, but under federal budget procedures, safeguard funding
can be increased only by cutting spending elsewhere. We believe the Congress
should consider modifying the budget procedures to better ensure adequate an
d
stable funding of Medicare's contractor safeguard activities. [ Footnote 1:
Under the Budget Enforcement Act of 1990, the Congress provided for increasi
ng
appropriations for Internal Revenue Service compliance activities without
necessitating spending cuts elsewhere. We suggest using this method of fundi
ng
compliance activities as a model. ]
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FLAWED HCFA POLICIES EXPOSE MEDICARE TO WASTE AND ABUSE
Several Medicare payment policies have left the program vulnerable to provid
er
abuse or excessive spending. For example, Medicare's high payment rates for
advanced technology services have encouraged needless proliferation of
diagnostic radiology equipment in certain localities. In addition, other
policies overcompensate laboratory providers and health maintenance
organizations (HMOs) for services rendered.
New medical technologies tend to spread rapidly once they are declared
eligible for Medicare reimbursement. As new technology matures, reductions i
n
equipment costs, improvements in efficiency, and increased utilization can
decrease unit costs. In some cases, however, Medicare payment rates have not
been lowered to reflect these decreased costs. This has encouraged the
proliferation of high-cost, low-volume providers.
For example, Medicare payments for magnetic resonance imaging (MRI) services
are based partly on the charges allowed by local Medicare contractors in the
mid-1980s. The 1991 payment levels in some localities were more than twice a
s
high as in others, reflecting wide geographic disparities in the historicall
y
allowed charges. Despite efforts to standardize Medicare's payment for MRI
services, HCFA did not fully adjust such payments to reflect declining unit
costs. Accordingly, in 1992 we recommended that HCFA periodically adjust
payment rates for these services and for other evolving technologies to
reflect costs incurred by high-volume, efficient providers.
Medicare payments for laboratory services are also excessive. Laboratories'
profit rates from Medicare business substantially exceed their overall profi
t
rates, indicating that Medicare's fee schedules are too high. Comparable
profit rates would mean that Medicare is neither subsidizing nor being
subsidized by other payers. By reducing Medicare payments for laboratory
services to equalize profit rates, Medicare would save approximately $150
million annually. Accordingly, we asked the Congress in 1991 to consider
legislation that would cap Medicare's payments for clinical laboratory tests
and would ensure that Medicare's contribution to laboratory profits not exce
ed
the laboratories' overall profit rate. Capping fees at 76 percent of the
median of all fee schedules would accomplish this goal.
Medicare's flat-rate payments to HMOs can also be abused by providers.
Medicare pays HMOs a flat monthly fee per enrollee based on the average cost
of serving a Medicare beneficiary in the fee-for-service sector. Studies
suggest that HMOs attract healthier-
han-average beneficiaries, however, and that HCFA does not adjust the paymen
t
rate to reflect the lower cost and utilization level of an HMO's healthier
beneficiaries. As a result, HMOs have received payments estimated to be more
than Medicare's costs would have been if the enrollees had remained in the
fee-for-service sector. [ Footnote 2: Mathematica Policy Research, Inc., _T
he
Impact of the Medicare Demonstrations on the Use and Cost of Services, Final
Report_, January 31, 1989. ]
Other problems related to HMOs include the potential underprovision of
services (such as failing to order appropriate diagnostic tests or failing t
o
follow up on abnormal test results) and the violation of requirements that
protect Medicare beneficiaries from unfair marketing practices and from
inappropriate denial of claims for services. Over the past 5 years HCFA has
experienced recurring problems with its enforcement of Medicare requirements
regarding provision of services, marketing practices, and other practices
aimed at protecting Medicare beneficiaries. Accordingly, in 1991 we
recommended that HCFA establish policies that make the terms for sanctioning
HMOs explicit in order to prevent the abuse of program dollars and to protec
t
Medicare beneficiaries. We also asked the Congress to consider giving HCFA
greater discretion to suspend Medicare enrollment or impose civil monetary
penalties when HMOs fail to correct compliance deficiencies promptly.
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WEAK BILLING CONTROLS INVITE EXPLOITATION OF MEDICARE
Control over the issuance of billing identification numbers, known as provid
er
numbers, is a long-standing program weakness that makes Medicare seriously
vulnerable to fraud. Under some contractors' procedures, certain types of
providers applying for billing identification numbers receive little scrutin
y
of their qualifications or of their business and investment relationship to
other medical facilities. For these providers, contractors have difficulty
identifying whether an applicant has been disciplined by the program, has
outstanding Medicare debts, or has the financial wherewithal to maintain
solvent business operations. In addition, HHS's Office of the Inspector
General reports that Medicare contractors often cannot identify or deactivat
e
numbers for providers that have lost the legal authority to practice. [
Footnote 3: _Carrier Maintenance of Medicare Provider Numbers_, Department
of
Health and Human Services, Office of Inspector General (OEI-06-89-00870, May
1991). ]
Limited controls over provider numbers were an integral part of a
multimillion-dollar fraud scheme involving mobile physiology labs, referred
to
as the "rolling labs" scheme. Fraudulent billings were masked behind at leas
t
30 different corporate names and Medicare provider numbers. The multiple
provider numbers greatly complicated contractors' efforts to detect
suspiciously high volumes of tests. In 1987 Medicare successfully prosecuted
laboratory operators involved in the scheme, and one owner was imprisoned.
However, Medicare has been unable to recover overpayments to providers
affiliated with the scheme.
To respond to ownership and provider number problems, HCFA has recently issu
ed
regulations and guidance to improve contractor control over the acquisition
of
provider numbers. Included are provisions requiring noninstitutional provide
rs
to submit information on owners or individuals with management interests and
requiring applicants seeking to qualify as equipment suppliers to meet certa
in
standards.
CHALLENGES ARE COMMON TO ALL HEALTH PAYERS
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Several aspects of the rolling labs scheme discussed above illustrate the
vulnerability of Medicare and the other health insurers to fraud. Efforts to
address fraud and abuse present all health payers with common difficulties.
hese include the considerable costs involved in investigating and prosecutin
g
fraud and abuse, the difficulty of recovering lost monies, and the need to
balance monetary controls with concerns over excessive regulations.
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ROLLING LABS CASE ILLUSTRATES SYSTEMIC HEALTH INSURANCE PROBLEMS
Perpetrators of the rolling labs scheme initially focused their operations o
n
Medicare. However, once their fraudulent activities were uncovered, they
shifted from Medicare to private payers. Both public and private payers foun
d
their attempts to recover overpayments stymied, despite having won
convictions. In studying how the scheme managed to stay viable for several
years, we found that:
-- Considerable losses to the health care system can occur as a result of ev
en
a single scheme. The rolling labs operation is believed to have affected
over 90 percent of the health plans in California and to have involved $1
billion in fraudulent billings. Although Medicare uncovered the operation
and successfully prosecuted certain individuals associated with it, the
program was unable to recover over $5 million, almost the entire amount o
f
the identified Medicare overpayments to the providers involved.
-- Providers can bill insurers with relative ease, because they are often no
t
required to meet specific requirements. The services provided by the
rolling lab do not require licensure in many states, and many insurers do
not have specific requirements for those who can bill for medical service
s.
Because many of the rolling lab billing addresses were post-office boxes,
payers could not identify the location of the labs.
-- The obstacles to prosecuting and recovering losses are daunting. The
rolling lab operators were successfully prosecuted in 1987 by Medicare an
d
in 1990 by private insurers. Private insurers spent $1 million in their
investigative and prosecutorial efforts. Although they won an $18 million
judgment, they have recovered virtually nothing.
-- The replication of similar schemes in southern California suggests that t
he
profitability of health insurance fraud may outweigh the risk of getting
caught. At least six schemes having characteristics similar to the rollin
g
lab are believed to exist in California. Investigators believe such schem
es
are also operating in other states.
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NEED FOR NATIONAL COMMISSION
Fraud and abuse problems beset all health payers. Our recent work demonstrat
es
that Medicare's problems with prosecution and financial recovery are similar
to those facing private health insurers. In addition, privacy concerns have
inhibited payers from sharing data collection techniques or other strategies
that could help identify questionable billing patterns. [ Footnote 4: With
respect to standardizing claims data, HHS has already begun to develop a
national strategy to coordinate independent private insurers with public
payers to streamline the costs of administering health insurance. ] Finall
y,
payers share concerns over how to protect benefit dollars without putting an
undue paperwork burden on providers or requiring them to follow complicated
regulations.
Recently we suggested that the Congress establish a national health insuranc
e
fraud commission to develop ways to enhance the efforts of independent payer
s,
public payers, and state insurance and licensing agencies as well as state a
nd
federal law enforcement agencies. The commission would be responsible for
analyzing trade-offs and developing recommendations to the Congress. It woul
d
address such issues as (1) how insurers can coordinate and fund case
development and prosecution efforts, (2) whether and how to regulate
unlicensed medical facilities, and (3) how insurers can standardize claims
information and billing rules.
CONCLUSIONS AND ACTION NEEDED
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Our work suggests that, to reduce Medicare's risk of financial loss, (1) HCF
A
needs to assume a more active management posture over contractors' program
operations and (2) legislation is needed to assure that HCFA can adequately
and consistently fund contractors' safeguard activities. HCFA's inadequate
oversight of contractor operations, flaws in payment policies, loose control
s
over billing procedures, and weak enforcement actions against noncompliant
HMOs have led to wasteful spending and program fraud and abuse. In addition,
funding of Medicare's payment safeguard activities over the past decade has
fluctuated, has not matched the rising volume of claims, and has hampered
contractor performance of activities that protect program dollars. For each
of
these areas, we have made recommendations to HCFA or the Congress.
We also believe that, with efforts to detect and prosecute health insurance
fraud and abuse fragmented between the independent operations of the various
health insurers, a nationally coordinated effort is needed to combat fraud a
nd
abuse effectively. We have therefore suggested that the Congress establish a
national commission, which could consider such issues as
-- standardization of claims administration,
-- sharing information on individuals suspected of fraudulent or abusive
practices,
-- regulation of providers,
-- the creation of state model statutes, and
-- joint funding of investigations and prosecutions.
