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Health > 25. Medicare Prepayment Controls

More widespread use of prepayment edits could reduce improper payments and achieve other cost savings for the Medicare program, as well as provide more consistent coverage nationwide.

Why This Area Is Important

The Centers for Medicare & Medicaid Services (CMS) has estimated that $29.6 billion—or 8.5 percent—of the $350 billion in payments for services provided to about 37 million beneficiaries in the traditional Medicare fee-for-service program in 2012 were improper.[1] In part due to Medicare’s susceptibility to improper payments, GAO has designated it as a high-risk program. To better ensure the program’s integrity, CMS has stated that one of its key goals is to pay Medicare claims properly the first time—that is, to ensure that payments go to legitimate providers in the right amounts for reasonable and necessary services covered by the program for eligible beneficiaries. One strategy that CMS uses to achieve this goal is the application of controls called prepayment edits, which are instructions programmed into claims processing systems to compare claims data to Medicare requirements in order to approve or deny claims or flag them for further review. For example, an edit may deny payment for quantities of service that exceed those provided under normal medical practice or that are anatomically impossible, such as more than one appendectomy on the same beneficiary.

Many prepayment edits are designed to ensure that claims comply with Medicare coverage, payment, and coding policies. These policies may be established by law, by CMS, or by the contractors that process Medicare claims for CMS. The national Medicare coverage and payment policies set by CMS include national coverage determinations, which describe the circumstances under which Medicare will cover particular items or services nationwide, as well as policies on payments to providers and coverage limitations contained in the Medicare Claims Processing Manual and other CMS documents. In addition, each contractor has the authority to develop local coverage determinations that delineate the circumstances under which services will be considered “reasonable and necessary”[2] and therefore covered in the geographic area in which that contractor processes claims, as long as these policies do not conflict with national policies established by CMS or by law. Prepayment edits may be implemented either at CMS’s direction or independently by contractors. Because of the volume of claims processed—4.8 million per business day—most of the prepayment edits implemented by CMS and its contractors are automated, meaning that if a claim does not meet the criteria of the edit, it is automatically denied. Other prepayment edits are manual, meaning that they flag claims for review by trained contractor staff.

GAO reported in March 2011 that weaknesses exist in CMS’s prepayment controls for durable medical equipment claims, and these weaknesses may lead to contractors failing to identify potentially fraudulent claims.[3] In November 2012, GAO examined further opportunities for CMS to improve and expand upon prepayment controls.

[1]An improper payment is any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. Improper Payments Elimination and Recovery Act of 2010, Pub. L. No. 111-204, § 2(e), 124 Stat. 2224, 2227 (codified at 31 U.S.C. § 3321 note).

[2]The Medicare program has defined certain categories of items and services as being eligible for coverage, and it excludes from coverage items or services that are determined not to be “reasonable and necessary” for the diagnosis and treatment of an illness or injury or to improve functioning of a malformed body part. 42 U.S.C. § 1395y(a)(1)(A). CMS determines which services are covered under what conditions within the broad categories defined in law.

[3]These weaknesses were reported in GAO, Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue, GAO-11-318SP (Washington, D.C.: Mar.1, 2011) and progress identified in Follow-up on 2011 Report: Status of Actions Taken to Reduce Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue, GAO-12-453SP (Washington, D.C.: Feb. 28, 2012) as part of an overall examination of cost-saving efforts involving claim reviews.

What GAO Found

As GAO reported in November 2012, prepayment edits saved Medicare at least $1.76 billion in fiscal year 2010, according to CMS data, but savings could have been greater had CMS improved its processes for implementing edits based on national coverage, payment, and coding policies and encouraged more widespread use of effective local edits by contractors. GAO illustrated this point by analyzing paid Medicare claims from fiscal year 2010 for consistency with a few national policies and local coverage determinations, where payments could have been prevented through the use of prepayment edits. GAO’s analysis identified $14.7 million in payments that appeared to be inconsistent with four national coverage or coding policies and therefore may have been overpayments. GAO also identified more than $100 million in payments that were inconsistent with three selected local coverage determinations and that could have been identified using automated edits.[1] The latter payments were not necessarily improper, because not all contractors had local coverage determinations in place to prohibit them. However, these payments illustrate the potential savings that could have been achieved if these edits and the local coverage determinations on which they were based had been implemented nationwide.

Although CMS has three processes in place to identify the need for and to develop prepayment edits based on national policies, these processes have weaknesses that diminish their effectiveness in preventing improper payments. Comparing the processes to Standards for Internal Control in the Federal Government,[2] GAO found weaknesses, including the (1) lack of specific time frames for implementing edits and other corrective actions; (2) lack of centralization in the implementation of some edits, which leads to inconsistencies; (3) incomplete assessment of whether edits are working as intended; and (4) lack of full documentation of the processes. For example, CMS has sometimes assigned responsibility to contractors to independently program edits based on national coverage determinations for the geographic areas in which they process claims, because there is a queue for implementing system changes centrally, and the contractors can sometimes implement edits more quickly. CMS officials acknowledged that having multiple contractors program some of these edits may have led to inconsistent implementation of national coverage policy, particularly since each contractor must update the edits regularly to reflect changes in the coding system used for claims. GAO’s analysis of fiscal year 2010 Medicare claims found cases where inconsistent implementation of national coverage determinations may have led to improper payments. Specifically, of the $14.7 million in potential overpayments related to national policies, GAO found $6.1 million in payments that appeared to be inconsistent with three selected national coverage determinations.

GAO also reported a weakness in the structure of CMS’s Medically Unlikely Edits, which deny payment for services when the quantity billed by the same provider on the same day is above limits set by CMS. CMS sets these quantity limits at a level not likely to be provided on a single day under normal medical practice to a single beneficiary, such as daily doses of drugs that far exceed the maximum quantity that a provider would prescribe under most circumstances. Medically Unlikely Edits are designed to look for excess quantities of services billed on an individual line of a single claim, but Medicare claims can have multiple lines for services. As a result, the limits for Medically Unlikely Edits can be exceeded if the excess quantities are broken up and claimed on multiple lines or on multiple claims. CMS allows exceptions to the limits when providers believe the services are clinically appropriate, and providers can include special codes called modifiers on these claims to indicate why the services were clinically appropriate. However, of the $14.7 million in potential overpayments related to national edits, GAO found $8.6 million in potential overpayments for claims that exceeded the limits for Medically Unlikely Edits and did not include appropriate modifiers. The vast majority of these payments ($8.2 million) were for claims in which the excess quantity of services was spread over multiple claim lines.

GAO also reported that CMS could do more to encourage contractors to implement prepayment edits at the local level. Specifically, CMS could inform contractors about edits that other contractors had implemented based on their local coverage determinations and that these other contractors considered particularly effective in preventing the largest amount of payments for services they did not consider reasonable and necessary. More widespread use of such edits could have led to more consistent coverage throughout the country and to savings for the Medicare program as a whole. Currently, CMS does not have a complete, accurate, and centralized source of information on edits that would enable the agency to identify contractors’ most effective edits and facilitate information sharing.

In addition, the financial incentives CMS offers to contractors to promote use of effective edits are relatively small. Under the terms of their contracts, contractors may earn an incentive, known as an award fee, based on performance, in addition to reimbursement for allowable costs and a fixed base fee. Although CMS increased by 12 percent the funding available to contractors for activities related to prepayment edits and associated claims review in fiscal year 2011, the award fees allocated to the one performance area most directly related to prepayment edits and associated claims review accounted for 3 percent or less of the pool of award fees available to any contractor. Award fee dollars allocated to this area ranged from about $20,000 to about $82,000—out of total award fees ranging from $1 million to $3.2 million—for those contractors whose award fee plans included this area in fiscal year 2011.

[1]These local coverage determinations were unrelated to the national coverage and coding policies that GAO analyzed.

[2]GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

Actions Needed

To achieve cost savings and help ensure proper payment, GAO recommended in November 2012 that the Administrator of CMS take the following five actions:

  • centralize within CMS the development and implementation of automated edits based on national coverage determinations to ensure greater consistency;


  • develop written procedures to provide guidance to agency staff on all steps in the processes for developing and implementing edits based on national policies, including time frames for taking corrective actions and methods for assessing the effects of corrective actions;


  • implement Medically Unlikely Edits that assess all quantities provided to the same beneficiary by the same provider on the same day, so providers cannot avoid claim denials by billing for services on multiple claim lines or multiple claims without including modifiers that reflect a declaration that quantities above the normal limit are reasonable and necessary;


  • improve the data collected about local prepayment edits to enable CMS to identify the most effective edits and the local coverage policies on which they are based and disseminate this information to contractors for their consideration; and


  • assess the feasibility of providing increased incentives to contractors to implement effective prepayment edits.

While the specific potential financial benefit of these actions cannot be quantified because the number of new edits that could be implemented at the national or local level—and the payments they would prevent—is not known, GAO’s work illustrates that greater use of effective prepayment edits could help to reduce potential improper payments, generate savings to the Medicare program, and promote greater consistency in coverage nationwide.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from the product listed in the related GAO products section. GAO analyzed Medicare claims for consistency with selected coverage policies, reviewed CMS and contractor documents, and interviewed officials from CMS and selected contractors. GAO assessed the processes to identify the need for and implement edits against its standards for internal controls. Table 18 in appendix IV lists the program GAO identified that might have opportunities for cost savings or revenue enhancement.

Agency Comments & GAO Contact

In commenting on the November 2012 report on which this analysis is based, the Department of Health and Human Services generally concurred with GAO’s recommendations and stated that CMS was taking or planned to take steps to address them.

GAO provided a draft of this report section to the Department of Health and Human Services for review and comment. The Department of Health and Human Services provided technical comments, which were incorporated as appropriate.

For additional information about this area, contact Kathleen M. King at (202) 512-7114 or

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