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GAO-09-838R: 

United States Government Accountability Office: 
Washington, DC 20548: 

July 20, 2009: 

The Honorable Thomas R. Carper:
Chairman:
The Honorable John McCain:
Ranking Member:
Subcommittee on Federal Financial Management, Government Information, 
Federal Services, and International Security:
Committee on Homeland Security and Governmental Affairs:
United States Senate: 

The Honorable Tom Coburn, M.D.
United States Senate: 

Subject: Improper Payments: Responses to Posthearing Questions Related 
to Eliminating Waste and Fraud in Medicare and Medicaid: 

On April 22, 2009, we testified[Footnote 1] before your subcommittee at 
a hearing entitled, "Eliminating Waste and Fraud in Medicare and 
Medicaid." At that hearing, we discussed federal agencies' progress in 
estimating and reducing improper payments, as well as existing 
challenges for federal agencies to fully meet the requirements of the 
Improper Payments Information Act of 2002 (IPIA).[Footnote 2] Further, 
our testimony provided an overview of implementation of IPIA with 
respect to the Medicare and Medicaid programs by the Centers for 
Medicare and Medicaid Services (CMS), a component of the Department of 
Health and Human Services (HHS). 

This letter responds to a May 29, 2009, request for responses to 
questions for the record related to our April 22, 2009, testimony. Our 
responses are based on work associated with previously issued GAO 
reports (see Related GAO Products at the end of this correspondence), 
data included in HHS's fiscal year 2008 annual financial report (AFR), 
and data reported for fiscal year 2008 by CMS. We conducted our work 
from May 2009 to July 2009 in accordance with all sections of GAO's 
Quality Assurance Framework that are relevant to our objectives. The 
framework requires that we plan and perform the engagement to obtain 
sufficient and appropriate evidence to meet our stated objectives and 
to discuss any limitations in our work. We believe that the information 
and data obtained, and the analysis conducted, provide a reasonable 
basis for any findings and conclusions in this product. Your questions, 
along with our responses, follow. 

1. What do you see as the biggest challenge for CMS to provide an 
estimate for improper payments under Medicare Part D? 

With total outlays of about $46 billion in fiscal year 2008, Medicare 
Part D is the last significant part of Medicare for which the 
department has yet to develop an estimate of improper payments. CMS 
testified in April 2009 that it is on track to develop that 
methodology, but a completion date was not provided. We have not yet 
evaluated CMS's current efforts to develop a methodology for estimating 
improper payments associated with Medicare Part D (Prescription Drug 
Benefit). 

In developing its estimate, it will be important for CMS to determine 
where the vulnerabilities and risks exist in the Medicare Part D 
structure and operations that could impact CMS's ability to effectively 
detect, measure, and ultimately reduce improper payments. In HHS's 
fiscal year 2008 AFR, the department reported that it had calculated 
payment error rates for two components of Medicare Part D but also that 
its measurement was not fully implemented. Also, it will be important 
to consider HHS's Office of Inspector General (OIG)-identified concerns 
about CMS's implementation of internal controls to ensure payment 
accuracy as well as inadequate analysis of claims data. 

2. Has GAO identified any problems with the current process for 
reviewing and paying Medicare claims that would make the program more 
vulnerable to fraudulent claims? 

We have identified several weaknesses with the current process for 
reviewing Medicare claims. Limitations in the number of medical reviews 
conducted leave the home health benefit--within the Medicare program-- 
vulnerable to improper payments, including payments resulting from 
fraud and abuse. We reported in February 2009 that in fiscal year 2007, 
only 0.5 percent of the more than 8.7 million home health agency (HHA) 
claims processed were subjected to prepayment review by Medicare's 
contractors.[Footnote 3] The contractors focused primarily on claims 
submitted by HHAs whose billing patterns differed from their peers on 
measures such as cost per episode. Of those claims that were reviewed, 
over 40 percent were denied in whole or in part. Furthermore, the 
contractors rarely performed postpayment medical reviews to recover 
funds previously paid in error, even when the HHA was identified as 
billing improperly through prepayment review. Thus, although the 
limited claims-review process that was performed was valuable in 
reducing potential improper payments, the extent of errors found would 
suggest that both prepayment and postpayment medical reviews should be 
increased to more effectively avoid or recoup overpayments. 

There are also weaknesses with respect to selecting claims to review in 
Medicare Fee-for-Service. In January 2007, we reported on shortfalls in 
the automated prepayment controls that are used to deny durable medical 
equipment, prosthetics, orthotics, and supplies (DMEPOS) claims that 
should not be paid or to identify claims that should be 
reviewed.[Footnote 4] For example, CMS's contractors responsible for 
the medical review of these claims did not have edits with predesigned 
thresholds in place to identify claims for review that were part of an 
atypical increase in billing.[Footnote 5] Further, there are weaknesses 
in monitoring home health agencies' claims. We found that CMS did not 
routinely send verification of services billed by the HHAs to the 
authorizing physicians, to determine whether the type and frequency of 
home health visits were consistent with what physicians had authorized. 
[Footnote 6] 

In addition to the weaknesses with the current Medicare claims review 
process, we found that failure to effectively screen health providers 
before granting them billing privileges also increases the program's 
vulnerability to fraudulent claims. In September 2005, we reported on 
weaknesses in standards, procedures, and oversight of the screening 
process for DMEPOS suppliers,[Footnote 7] which could leave the program 
vulnerable to fraudulent claims activities. Despite some improvements, 
in July 2008, we reported on deficiencies in CMS's enrollment and 
inspection process for DMEPOS suppliers that would allow them to 
fraudulently bill Medicare for unnecessary supplies or supplies from 
nonexistent suppliers.[Footnote 8] As part of our investigation, we 
created fictitious DMEPOS companies to which CMS granted billing 
privileges despite having no clients and no inventory. Those billing 
privileges could have allowed the fictitious companies to bill Medicare 
for potentially millions of dollars for nonexistent supplies. We also 
reported that criminals who create similar fictitious DMEPOS companies 
typically steal or illegally buy Medicare beneficiary numbers and 
physician identification numbers and use them to repeatedly submit 
bogus claims. HHS acknowledged that CMS's oversight of DMEPOS suppliers 
contains gaps in oversight that still require improvements. In 
addition, we identified issues with screening potential and current 
home health agencies that may enable problem providers to enter and 
remain in the Medicare program. For example, we reported that CMS does 
not require its home health contractors responsible for screening 
applications to verify the criminal history of persons named on the 
application. 

Health care fraud is a serious financial drain on our health care 
system. HHS reported in its fiscal year 2008 AFR that an estimated 
$17.2 billion of Medicare Fee-for-Service and Medicare Advantage claims 
were improperly paid for reasons such as medically unnecessary services 
and insufficient documentation. It is unclear how much of this estimate 
resulted from fraudulent claims. Our work to uncover vulnerabilities to 
fraud in the Medicare program focused on specific areas as discussed 
above; consequently, opportunities for fraud may also exist in other 
areas of the Medicare program. 

3. Is there any reason CMS cannot include penalties in its Medicare 
Administrative Contractor contracts for paying improper or fraudulent 
claims that you are aware of? 

Consistent with the Social Security Act[Footnote 9] and applicable 
federal procurement regulations, CMS may include provisions in Medicare 
Administrative Contractor (MAC) contracts to: (1) prescribe the costs 
incurred by MACs in processing and paying Medicare claims that CMS may 
reimburse; (2) provide incentives or disincentives related to payment 
accuracy; and (3) hold MACs and their employees liable for improper or 
fraudulent claims payments under limited circumstances.[Footnote 10] 
Otherwise, neither the Social Security Act nor applicable federal 
procurement regulations expressly provides for CMS to reduce amounts 
owed to MACs under their contracts or to assess charges against MACs 
for improper or fraudulent claims payments. 

The MAC contracts contain requirements for MACs to take certain actions 
and implement certain plans to manage Medicare trust fund finances and 
achieve payment accuracy.[Footnote 11] Under the MAC contracts, CMS 
reimburses MACs for the allowable, allocable, and reasonable costs of 
these efforts. While not considered a penalty, CMS may disallow any 
costs claimed by a MAC related to claims and payment processing, 
including finance and payment management, that fail to meet these 
standards.[Footnote 12] 

The Secretary of HHS is authorized to develop MAC-specific performance 
requirements and provide incentives to MACs to provide quality service 
and promote efficiency.[Footnote 13] This is consistent with provisions 
in the Federal Acquisition Regulation, subpart 16.4, that authorize the 
use of positive and negative incentives in incentive-type, cost- 
reimbursement contracts. These provisions appear to authorize 
performance standards in the MAC contracts related to making proper 
payments that would be considered in determining the amount of the fee 
earned by the contractor under a cost-plus-award-fee type contract or 
other incentive-type contract, as mutually agreed to by both the 
government and the contractor. 

CMS has developed mechanisms--within the framework established by the 
statute--to encourage MACs to perform effectively and efficiently such 
as establishing an award fee program.[Footnote 14] Currently, we have 
ongoing work to examine how CMS has assessed the performance of the 
MACs. During our preliminary work, we noted that CMS has developed 
specific performance metrics as part of the award fee program to 
provide an incentive for MACs to achieve desired results. One of those 
metrics includes measuring a MAC's payment accuracy and ability to 
reduce improper claims payments. Because the MAC contracts have been 
awarded relatively recently, it is too soon to evaluate the 
effectiveness of providing an award fee for meeting a payment-accuracy 
metric. 

With respect to improper or fraudulent benefit payments made by a MAC, 
section 1874A(d)(3) of the Social Security Act provides that a MAC 
shall not be held liable to the United States for payments made by its 
certifying or disbursing officers unless the MAC acts with reckless 
disregard of its contractual obligations or with intent to defraud the 
United States. It also provides that this exemption from liability does 
not extend to violations of the False Claims Act.[Footnote 15] The 
False Claims Act authorizes a court to impose a civil penalty on a 
person for certain acts, including knowingly presenting or causing to 
be presented to an officer or employee of the United States a false or 
fraudulent claim for payment or approval. 

We are providing copies of this correspondence to interested parties. 
This correspondence is also available on GAO's home page at [hyperlink, 
http://www.gao.gov]. Should you have any questions on matters discussed 
in this correspondence or need additional information, please contact 
me at (202) 512-9095 or by e-mail at dalykl@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this correspondence. Key contributors to this 
correspondence are listed in enclosure I. 

Signed by: 

Kay L. Daly:
Director:
Financial Management and Assurance: 

Enclosures: 

[End of section] 

Enclosure I: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Kay L. Daly, (202) 512-9095 or dalykl@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above Sabrina Springfield, Assistant 
Director; Sheila Avruch; LaSherri Bush; Richard Cambosos; F. Abe 
Dymond; Joy Kraybill; Crystal Lazcano; Sarah-Lynn McGrath; Olivia 
Smith; and David Yoder. 

[End of section] 

Related GAO Products: 

Improper Payments: Progress Made but Challenges Remain in Estimating 
and Reducing Improper Payments. [hyperlink, 
http://www.gao.gov/products/GAO-09-628T]. Washington, D.C.: April 22, 
2009. 

Medicare: Improvements Needed to Address Improper Payments in Home 
Health. [hyperlink, http://www.gao.gov/products/GAO-09-185]. 
Washington, D.C.: February 27, 2009. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January 
2009. 

Medicare Part D: Some Plan Sponsors Have Not Completely Implemented 
Fraud and Abuse Programs, and CMS Oversight Has Been Limited. 
[hyperlink, http://www.gao.gov/products/GAO-08-760]. Washington, D.C.: 
July 21, 2008. 

Medicare: Covert Testing Exposes Weaknesses in the Durable Medical 
Equipment Supplier Screening Process. [hyperlink, 
http://www.gao.gov/products/GAO-08-955]. Washington, D.C.: July 3, 
2008. 

Medicare: Improvements Needed to Address Improper Payments for Medical 
Equipment and Supplies. [hyperlink, 
http://www.gao.gov/products/GAO-07-59]. Washington, D.C.: January 31, 
2007. 

Medicare: More Effective Screening and Stronger Enrollment Standards 
Needed for Medical Equipment Suppliers. [hyperlink, 
http://www.gao.gov/products/GAO-05-656]. Washington, D.C.: September 
22, 2005. 

Health Care Fraud: Schemes to Defraud Medicare, Medicaid, and Private 
Health Care Insurers. [hyperlink, 
http://www.gao.gov/products/GAO/T-OSI-00-15]. Washington, D.C.: July 
25, 2000. 

[End of section] 

FOOTNOTES 

[1] GAO, Improper Payments: Progress Made but Challenges Remain in 
Estimating and Reducing Improper Payments, [hyperlink, 
http://www.gao.gov/products/GAO-09-628T] (Washington, D.C.: Apr. 22, 
2009). 

[2] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

[3] GAO, Medicare: Improvements Needed to Address Improper Payments in 
Home Health, [hyperlink, http://www.gao.gov/products/GAO-09-185] 
(Washington, D.C.: Feb. 27, 2009). 

[4] GAO, Medicare: Improvements Needed to Address Improper Payments for 
Medical Equipment and Supplies, [hyperlink, 
http://www.gao.gov/products/GAO-07-59] (Washington, D.C.: Jan. 31, 
2007). 

[5] Due to the absence of the threshold edits, we found that from the 
first quarter of 2003 through the first quarter of 2005, 225 suppliers 
increased their billing to Medicare by $500,000 and 50 percent from at 
least one 3-month period to the next. 

[6] [hyperlink, http://www.gao.gov/products/GAO-09-185]. 

[7] GAO, Medicare: More Effective Screening and Stronger Enrollment 
Standards Needed for Medical Equipment Suppliers, [hyperlink, 
http://www.gao.gov/products/GAO-05-656] (Washington, D.C.: Sept. 22, 
2005). 

[8] GAO, Medicare: Covert Testing Exposes Weaknesses in the Durable 
Medical Equipment Supplier Screening Process, [hyperlink, 
http://www.gao.gov/products/GAO-08-955] (Washington, D.C.: July 3, 
2008). 

[9] Act of Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended, 42 U.S.C. 
secs. 301 et seq. 

[10] As required by section 911 of the Medicare Prescription Drug, 
Improvement and Modernization Act of 2003 (MMA), CMS is replacing its 
Medicare Part A and Part B claims payment contractors (fiscal 
intermediaries and carriers) with MACs. This process must be completed 
by October 1, 2011. On behalf of CMS, MACs provide Medicare Part A and 
Part B claims processing and benefit payment services for providers and 
suppliers, among other functions. CMS awards cost-plus-award-fee type 
contracts to MACs, meaning that MACs are reimbursed for their 
allowable, allocable, and reasonable costs plus an award fee, up to 
amounts prescribed in the contracts, calculated using criteria in an 
award fee plan, in addition to a base fee amount. These contracts 
generally are subject to the Federal Acquisition Regulation (FAR), 
which includes rules, standards, and requirements for the awarding, 
administration, and termination of government contracts. 

[11] Under section 1874A of the Social Security Act, as amended by 
section 911 of MMA (42 U.S.C. § 1395kk-1), and the terms of their 
contracts with CMS, MACs receive and review Medicare Part A and Part B 
claims and approve those that comply with applicable laws, regulations, 
and CMS policies. To cover claims paid, the MACs draw on funds from a 
benefits account held by the commercial bank. CMS issues a letter of 
credit to authorize the funds into the benefits account. Payments may 
be made only by disbursing officers designated in writing by the MAC, 
based on the authorization of a separate certifying officer designated 
in writing by the MAC. (MACs are required by their contracts to account 
for benefit payments separately from their administrative costs.) 

[12] Agencies may assess penalties for indirect costs submitted for 
payment that contain indirect costs expressly unallowable or determined 
unallowable pursuant to FAR §§ 42.709 through 42.709-6. 

[13] 42 U.S.C. § 1395kk-1(b). 

[14] CMS also employs other tools to detect improper payments and fraud 
in the Medicare payment system, such as engaging Program Safeguard 
Contractors under the Medicare Integrity Program and Recovery Audit 
Contractors. 

[15] 31 U.S.C. §§ 3729-3731. Individual certifying and disbursing 
officers are afforded the same exemption from liability. 

[End of section] 

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