Audit Report - A-07-95-00828

Office of Audit

Potential for Contracting with Medical Provider Networks to Purchase Consultative Examinations - A-07-95-00828 - 5/14/97

This final report discusses the results of our audit to determine the potential for the Social Security Administration (SSA) to realize cost savings and program benefits from increasing its use of competitive contracting with medical providers to purchase consultative examinations (CE). The objective of our audit was to determine if the State Disability Determination Services (DDS) could achieve cost savings by using medical provider networks to perform CEs.

Currently, DDSs for the States of New York, Michigan, and Oregon use contracts to purchase a portion of their CEs. During Fiscal Year (FY) 1995, these three State DDSs claimed that competitive contracts resulted in CE cost savings totaling about $11.9 million. Moreover, officials from the three DDSs noted that the contracts also resulted in improved timeliness and quality of CEs.

We surveyed 28 medical provider networks and identified 17 which were interested in contracting with DDSs to perform CEs. Two providers informed us that they would perform CEs in four States at fees ranging from 10 to 15 percent less than the DDS fee schedule amounts if guaranteed a minimum volume of CE services.

We have concluded that SSA could realize cost savings if the DDSs increased the use of contracts for CEs with medical provider networks. If the CE fee discounts offered by two providers for four States are representative of potential savings in all States, SSA could have realized from $11.3 million to $33.9 million in cost savings during FY 1995. In addition, DDS officials in the three States with contracted CEs stated that the contract providers have been able to improve the timeliness and quality of CEs by implementing specific time frames and training. We are recommending that SSA direct State DDSs to negotiate contracts with medical provider networks for volume discounts on CE services to the maximum extent possible.

SSA agreed that the use of negotiated contracts with medical provider networks for volume discounts on CE services may reduce CE costs and improve the quality and timeliness of CEs. However, SSA is not yet prepared to direct State DDSs to negotiate contracts. SSA plans to provide DDSs with our listing of potential contractors (Appendix A) and also intends to conduct an evaluation of the feasibility and cost-effectiveness of negotiated contracts.

We reviewed this issue in a prior report (see page 3) and again in this report, and we believe that the potential for contracting with medical provider networks is excellent. We have identified several medical provider networks interested in contracting and found that three States were already successfully contracting at substantial savings. We believe that, pending the results of SSA`s planned evaluation of the subject, SSA should direct DDSs to negotiate contracts with medical provider networks for volume discounts on CE services to the maximum extent possible.

BACKGROUND

The disability process begins when a person, referred to as a claimant, completes an application for Social Security Disability Insurance (DI) and/or Supplemental Security Income disability benefits. Each year there are more than two million applications submitted to SSA field offices (FO). The application, or claim, includes information that relates to the individual`s claimed disability. SSA’s FO verifies the claimant`s nonmedical eligibility requirements. After SSA’s FO determines that the claimant meets the nonmedical eligibility requirements, the claim is forwarded to the DDS for a medical determination of disability in accordance with Federal regulations.

The DDS is responsible for obtaining and reviewing medical evidence sufficient to make a determination as to whether the claimant is disabled under the law. In making disability determinations, DDSs obtain medical evidence from claimants` treating sources. However, when there is not sufficient medical evidence to make a determination, DDSs purchase CEs. CEs include physical and mental examinations, radiological tests, laboratory tests, and special diagnostic studies. DDSs purchase CEs from three medical provider groups: (1) individual physicians and psychologists; (2) health care facilities, such as group practices, clinics, and hospitals; and (3) providers that specialize in performing CEs.

Each State is responsible for determining the rates of payment to be used by the DDS for purchasing CEs. Most States use fee schedules which specify the rates of payment allowable for CEs. Since each State is responsible for determining its rates, the CE fees vary greatly among DDSs. However, the rates may not exceed the highest rate paid by Federal or other Government agencies in the State for similar types of services. SSA reimburses DDSs for 100 percent of the necessary costs incurred in purchasing CEs. As shown in the following table, total annual CE costs exceed $200 million and have continued to increase.

SSA issued instructions in mid-1991 directing SSA regional offices (RO) to work with DDSs to determine the feasibility of using competitive contracts to purchase CEs from medical providers (Program Operations Manual System [POMS] PM E00233.001). SSA instructions further stated that the use of competitive contracts should substantially reduce CE costs and improve the quality and timeliness of CEs (POMS DI 39542.205C).

The Department of Health and Human Services, Office of Inspector General (HHS/OIG), issued an audit report, January 24, 1995, on the use of contracts for purchasing CEs in the Kansas City region (A-07-93-00731). The report stated that the Kansas DDS achieved cost savings from using negotiated rates to buy a large number of CEs from one medical provider. However, the SSA RO did not determine if other States could have used contracts to buy CEs at costs below DDS fee schedules. SSA agreed that cost savings can result from contracting for CEs and stated that the Agency would continue to encourage the State DDSs to assess the feasibility of using contracts and negotiated agreements to purchase CEs. However, SSA has not required the States to use negotiated agreements with medical providers to purchase CEs.

One reason we believe that contracts should reduce CE costs is the number of managed health care organizations (medical provider networks) which operate facilities in different States. These medical provider networks can achieve cost savings through economies of scale, such as sharing sophisticated technology and purchasing large volumes of medical products at reduced costs. Some of these savings can be passed on to DDSs as lower medical fees in return for purchasing large numbers of CEs.

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SCOPE OF AUDIT

Our audit was conducted in accordance with generally accepted government auditing standards. Our objective was to determine if the State DDSs could achieve cost savings by expanding the use of competitive contracts with medical provider networks. We did not review internal controls because such a review was not needed to achieve our audit objective. We also did not independently verify documentary SSA and DDS evidence used in this report.

Initial audit field work was done from March 1995 to October 1995. During the period July 1996 through August 1996, supplemental work was performed to obtain additional information from the 20 provider networks which had expressed an interest in contracting for CEs with DDSs. To achieve our objective, we:

• reviewed SSA instructions regarding CEs;
• reviewed the 1994 American Hospital Association`s listing of medical provider networks;
• obtained documentation on CE expenditures from SSA officials in Baltimore, Maryland;
• obtained fee schedules for each DDS from the regional SSA Disability Programs Branches;
• contacted 28 medical provider networks to determine their interest in contracting with DDSs;
• determined savings in CE costs that could be achieved by contracting with medical provider networks; and
• interviewed New York, Michigan, and Oregon DDS officials and obtained documentary evidence on their contracts with CE providers.

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RESULTS OF REVIEW

SSA could realize cost savings and other benefits if the State DDSs were to increase the use of competitive contracts to purchase CEs. Despite procedures encouraging DDSs to use contracts to purchase CEs, only three States have awarded contracts to medical provider networks. Our survey of 28 provider networks identified 17 providers with over 1,900 medical facilities nationwide that expressed an interest in contracting with SSA for CEs. Two of the providers were willing to provide estimated discounts on CE fee schedules from selected DDSs. The remaining 15 providers were either not responsive or unwilling to estimate fee discounts to the Office of the Inspector General staff on an informal basis. If SSA was able to get comparable fee reductions negotiated for all States, the potential cost savings for FY 1995 would have totaled from $11.3 million to $33.9 million, depending on the portion of CEs contracted and the discount percentages offered.

The use of contracts for purchasing CEs by the New York, Michigan and Oregon DDSs resulted in reported cost savings, as well as improved timeliness and quality. The three DDSs reported cost savings for FY 1995 totaling about $11.9 million. The contracts specified time limits for scheduling and reporting results of CEs which were less than the average time frames for noncontract providers. Also, the DDSs reported positively on the quality of contracted medical services.

THREE DDSs CURRENTLY CONTRACT FOR CEs

New York DDS

The New York DDS has used contracted CEs for over 10 years, with nine CE contracts currently in effect. In FY 1995, the DDS purchased 50 percent of its CEs through the nine contracts at fees ranging from 27 to 49 percent less than the fees specified in the DDS` fee schedule. By contracting, the DDS reported cost savings of $11.6 million during FY 1995.

Contracting has also improved the DDS’ processing times for CEs. The contracts specify that CEs be scheduled within 7 days of the DDS’ request and that medical reports be submitted to the DDS within 5 days after the CE is performed. The DDS officials could not provide us with statistics on the time required to schedule CEs and medical reports from noncontract providers; however, they stated that contracting resulted in improved timeliness. DDS officials also stated that the quality of contracted CEs was improved because the contractors` physicians were trained in making the disability assessments.

Michigan DDS

The Michigan DDS has been contracting for 2 years and currently has two CE contracts in effect. In FY 1995 the DDS purchased 25 percent of its CEs through the two contracts, at fees ranging from 1 to 9 percent less than those specified in the DDS’ fee schedule. During FY 1995, the DDS realized CE cost savings of $146,827 by contracting.

In addition to cost savings, contracting has improved the timeliness of CE services. The contracts require that CEs be scheduled within 4 days from the date the CE is requested by the DDS. According to DDS officials, the average time to schedule CEs with noncontract providers was 18 days. Also, the contracts require that CE reports be submitted to the DDS within 4 days from the date of the CE. According to DDS officials, the average time to receive reports from noncontract medical providers was 14 days.

DDS officials stated that the contractors` physicians were trained to make disability assessments and that they were satisfied with the quality of the CEs. In FY 1995, the Michigan DDS conducted a survey to determine the level of service that claimants were receiving from the two CE contractors. The survey concluded that claimants had a positive viewpoint on the level of service received from these contractors.

Oregon DDS

The Oregon DDS has contracted for CEs for about 12 years and has 23 contracts in effect. A DDS official stated that during FY 1995, approximately 60 percent of CEs were purchased from CE contractors at fees ranging from 10 to 39 percent below the fees paid to noncontract providers. As a result, the DDS realized CE cost savings of approximately $180,000.

The Oregon DDS official also stated that contracting for CEs has improved the timeliness of CE services. The contracts require that claimants be scheduled for a CE within 2 weeks from the date of the DDS’ request. According to the official, the average scheduling time for CEs with noncontract providers was 3 weeks. The DDS official stated that the contract also requires that medical reports be received within 7 days after the CE. The DDS official stated that the report receipt time for noncontractors ranged from 14 to 20 days. The DDS official also stated that the quality of CEs provided by the contractors has improved because the physicians were trained in making disability assessments.

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MEDICAL PROVIDER NETWORKS

We initially found that 20 of the 28 medical provider networks we contacted were interested in contracting with DDSs to perform CEs. We later recontacted those 20 providers to determine if they would offer discounts on the fees paid by DDSs for CEs. Two providers, mdsi Physician Group (mdsi) and Columbia/HCA Healthcare Corporation (Columbia/HCA), were willing to offer estimated fee discounts to perform CEs in certain States if contractually guaranteed a minimum quantity. These providers operate in 7 and 36 States respectively, and could offer a wide range of CE medical services. The results of our recontacts with these two provider networks are discussed below. Three of the 20 providers recontacted indicated that they were no longer interested in contracting to perform CEs. A listing of the 17 providers interested in CE contracts and the results of our recontacts are shown in Appendix A.

MDSI Physician Group

The mdsi has 48 health care facilities in 7 States. The mdsi performed about 40,000 CEs in those 7 States during FY 1995. We provided mdsi with DDS` fee schedules, the number of CEs purchased, and CE costs for FY 1994 for two States in which it operates, California and Washington. We asked mdsi to estimate the volume of CEs it could perform and the estimated percentage reduction it could offer on DDS fee schedules.

California DDS

The mdsi estimated that it would perform CEs at 10 percent below the California DDS’ fee schedule amounts if guaranteed 75 to 95 percent of the CEs purchased by the Fresno, San Diego, and Sacramento DDS offices in California. During FY 1994, those offices expended $13,105,433 to purchase CEs. Assuming that mdsi contracted for 75 to 95 percent of those CEs at a 10 percent discount, the California DDS could have saved between $982,907 to $1,245,016. Detailed data on the California DDS offices and mdsi facilities is shown as Appendix B.

Washington DDS

The mdsi estimated that it would perform CEs at fees 15 percent below the DDS’ fee schedule amounts if contractually guaranteed 65 to 90 percent of the CEs purchased by the Washington DDS. During FY 1994, the DDS expended $3,466,876 to purchase CEs. Assuming that mdsi had contracted for 65 to 90 percent of the CEs purchased by the DDS during FY 1994 at a 15 percent discount, the Washington DDS could have saved between $338,020 and $468,028. Detailed data on the Washington DDS offices and mdsi facilities is shown as Appendix C.

Columbia/HCA Healthcare Corporation

The Columbia/HCA is one of the Nation`s largest medical provider networks, with operations in 36 States and a total of 471 health care facilities. We provided Columbia/HCA with State DDS fee schedules, the number of CEs purchased, and CE dollars expended in FY 1994 for two States in which Columbia/HCA has operations, Texas and Florida. We asked Columbia/HCA to estimate the volume of CEs it could perform and the estimated percentage it could discount the DDS fee schedules.

Texas DDS

Columbia/HCA estimated that it would perform CEs at fees 10 percent below the DDS’ fee schedule amounts if guaranteed 50 to 100 percent of the CEs purchased by the Texas DDS. During FY 1994, the Texas DDS expended $17,335,538 to purchase 116,879 CEs. Assuming that Columbia/HCA performed 50 to 100 percent of the CEs purchased by the DDS at a 10 percent discount, the Texas DDS could have saved between $866,777 and $1,733,554. Moreover, with 98 facilities located in 50 different cities, it appears that Columbia/HCA could perform CEs throughout Texas without the DDS incurring extensive claimant travel costs.

Florida DDS

The Columbia/HCA estimated that it would perform CEs at fees 10 percent below the Florida DDS’ fee schedule amounts if contractually guaranteed 50 to 100 percent of the CEs purchased by the Florida DDSs. During FY 1994, the Florida DDSs expended $6,850,647 to purchase CEs. Assuming that Columbia/HCA had contracted for 50 to 100 percent of the CEs purchased by the DDSs during FY 1994 at a 10 percent discount, the Florida DDS could have saved between $342,532 and $685,065. Detailed data on the Florida DDS offices and provider facilities in the State is shown as Appendix D. The number and distribution of facilities would appear to limit travel costs of claimants to a reasonable amount.

CONTRACTING CAN IMPROVE TIMELINESS

Contracting with medical provider networks could improve the timeliness of CEs. For example, mdsi improved the timeliness of CEs purchased by the Colorado DDS. In October 1995, mdsi opened a health care clinic in the same facility as the Denver SSA District Office for the sole purpose of providing CEs to SSA disability claimants. According to mdsi officials, the CE reports are provided to the DDS within 72 hours following the CE. The mdsi officials stated their willingness to expand this operation to other States, such as California and Washington, if SSA and the DDSs expressed an interest.

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CONCLUSION AND RECOMMENDATION

Currently, the New York, Michigan, and Oregon DDSs contract with medical providers to purchase CEs. These DDSs have realized cost savings of $11.9 million and improved timeliness through the purchase of quality CE services from medical providers. We identified 17 medical provider networks that were interested in contracting with DDSs to perform CEs. Two providers were willing to estimate that they could perform CEs at fees ranging from 10 to 15 percent less than fee schedules in four States if contractually guaranteed a minimum volume of CE services. If these results are representative of potential savings in all States, SSA could have achieved savings of $11.3 million to $33.9 million during FY 1995 by contracting nationwide with provider networks. Thus, contracting with medical provider networks for CEs can provide DDSs with cost savings and improve timeliness and quality.

Recommendation

We are recommending that SSA direct State DDSs to negotiate contracts with medical provider networks for volume discounts on CE services to the maximum extent possible. The Agency could have expected to realize savings in FY 1995 ranging from $11.3 million to $33.9 million if the contractual discounts offered for four States disclosed in this report are representative of savings achievable in all States.

SSA Comments

SSA agreed that the use of negotiated contracts with medical provider networks for volume discounts on CE services may reduce CE costs and improve the quality and timeliness of CEs. However, SSA is not yet prepared to direct State DDSs to negotiate contracts. SSA plans to provide DDSs with a listing of the medical provider networks included in our report and will suggest that DDSs contact these networks. SSA also plans to conduct an evaluation of the feasibility and cost-effectiveness of negotiated contracts over the next 12 months. Based on that evaluation, the Agency will then determine whether or not to direct States to negotiate contracts. The full text of SSA`s comments is contained in Appendix E to this report.

OIG Comments

SSA received a similar recommendation from an HHS/OIG January 24, 1995 report entitled "Potential Use of Competitive Contracts or Negotiated Agreements by Disability Determination Services to Purchase Consultative Examinations." SSA took action on the recommendation by: (1) surveying all DDSs to determine if they used contracts or negotiated agreements; (2) issuing a July 17, 1995 memorandum to all Regional Commissioners on contracting; and (3) holding a panel discussion on contracting in its August 1995 professional relations conference. However, except for the existing contracts found at the New York, Michigan, and Oregon DDSs, we found no evidence that any contracts were negotiated which resulted in savings.

We have reviewed the potential for contracting with medical provider networks in this report and we believe that the potential is excellent. We found that 17 of 28, or 61 percent, of the medical provider networks contacted were interested in contracting with DDSs to perform CEs. Furthermore, the New York, Michigan, and Oregon DDSs used contracts to purchase a portion of their CEs, resulting in cost savings of $11.9 million during FY 1995. Finally, SSA could have realized as much as $33.9 million in cost savings during FY 1995 if CE discounts offered by 2 providers for 4 States are representative of potential savings in all States. We believe that, pending a brief evaluation, the SSA should direct DDSs to negotiate contracts with medical provider networks for volume discounts on CE services to the maximum extent possible.

- David C. Williams

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APPENDICES

APPENDIX A

1. Interested in contracting for CEs and willing to perform CEs at discounts from certain DDS` fee schedules.
2. Interested in contracting for CEs but not willing to perform CEs at discounted fees for various reasons.
3. Interested in contracting for CEs; however, no response to our inquiry of willingness to perform CEs at discounted fees.
4. Interested in contracting for CEs; however, not willing to give estimated discount until the contract process is initiated by SSA via Request for Proposal.

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APPENDIX B

In FY 1994, mdsi had 27 facilities located in 25 different cities in California. The mdsi has facilities located in four of the six geographical areas in which the California DDS has FOs: Fresno, San Diego, Sacramento, and Los Angeles West; therefore, it appears mdsi had sufficient locations to perform CEs in these locations. The mdsi currently performs CEs for the Fresno, San Diego, and Sacramento DDSs at the fees specified in the California DDS’ fee schedule.

The mdsi has not provided CEs for the Oakland DDS and has provided only limited CEs in Los Angeles West and Los Angeles East. Therefore, mdsi would not provide any estimates of the fee schedule reductions at those locations until a contract was negotiated with SSA.

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APPENDIX C

DATA OBTAINED FROM THE WASHINGTON DDS FOR COST SAVINGS ESTIMATIONS

In FY 1994, mdsi had eight facilities located in eight different cities in Washington. The mdsi has facilities in all three Washington DDS geographical areas.

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APPENDIX D

The following table provides the dollars expended and CEs purchased during FY 1994 at each of the seven Florida DDS FOs.

In FY 1994, Columbia/HCA had 93 facilities located in 57 different cities in Florida, including facilities in all 7 of the Florida DDS geographical areas.

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APPENDIX F

LIST OF CONTRIBUTORS

Office of the Inspector General

William Fernandez, Audit Director
Fredric Uehling, Team Leader
Mark Bailey, Senior Auditor
Barbara Cunningham, Auditor-in-Charge
Tamara Oden, Auditor