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Testimony on CFO Audit by Nancy-Ann Min DeParle
Administrator
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Before the Committee on Commerce, Subcommittee on Health and Environment & Subcommittee on Oversight and Investigations; and also before the Committee on Government Reform and Oversight, Subcommittee on Government Management, Information and Technology
April 24, 1998

Chairman Barton, Chairman Bilirakis, Chairman Horn, and Members of the distinguished Subcommittees here today, I am pleased to have this opportunity to discuss with you the findings of the Fiscal Year (FY) 1997 Chief Financial Officers (CFO) audit by the Department of Health and Human Services Office of the Inspector General (OIG). As you know, this is the second year that the OIG conducted this comprehensive audit, which looks at our financial statements and whether we pay claims properly.

I am pleased to report that this year's audit demonstrates that corrective actions initiated following the first such audit last year are having an impact. We are getting our books in order. We have cleaned up our accounts payables, We have corrected our accounting problem with the Social Security Administration, and are making progress on our accounts receivables.

Since the beginning of this Administration, we have taken unprecedented steps to fight health care waste, fraud and abuse. We already are achieving record success in increasing fraud and abuse investigations, indictments, convictions, fines, penalties, and restitutions. Last year, Medicare alone saved an estimated $7.5 billion mostly by preventing inappropriate payments through audits, medical reviews, and making sure other insurers who cover our beneficiaries pay claims that are not Medicare's responsibility. And, nearly $1 billion was returned to the Medicare Trust Fund, thanks to our partnership with the HHS Inspector General, Department of Justice, state and local authorities. We have continued to step up our crackdown on waste fraud and abuse, and many of these new initiatives are not reflected in this year's OIG audit report.

The OIG estimates that improper Medicare payments in FY 1997 ranged from 7 percent ($12.1 billion) to 16 percent ($28.4 billion), with a point estimate of 11 percent ($20.3 billion). Although the FY 1997 point estimate of the error rate is $3 billion less than the FY 1996 point estimate, based on the limited sample of Medicare claims reviewed in both FYs 1996 and 1997, the IG is unable to conclude that this year's error rate is statistically different from last year's error rate.

The OIG issued a qualified opinion rather than a disclaimer of opinion. The Health Care Financing Administration has corrected two items which were disclaimed in last year's audit. All of these acts demonstrate that HCFA has made substantial progress in addressing both operational and financial reporting issues in the short time since last year's audit.

We believe that the actions we have taken are having an effect. Still, much remains to be done. Clearly, a 7 to 16 percent for a claims error rate is not acceptable. As you know, combating waste, fraud and abuse in Medicare is one of my top priorities. We will continue to aggressively implement corrective actions to address the error rate.

One area in which we need your help is in enacting the President's budget proposals to allow us to collect user fees. The Administration has put forth a proposal to collect $395 million in user fees that will be dedicated to doubling the number of audits and increasing medical reviews and other efforts to fight waste, fraud and abuse. An additional $264.5 million in user fees for provider enrollment, survey and certification, and duplicate, unprocessable or paper claims are also needed to increase scrutiny and promote program integrity.

We also need your help in passing contractor reform legislation that will increase competition for Medicare contractor business, give us much-needed leverage to negotiate with contractors, and allow us to hold contractors accountable. Legislation for both these proposals was sent to Congress in February.

It is important to stress that we cannot determine what portion of the improper, payments identified in the audit were due to fraud and abuse. Many of the erroneous payments were due to inadequate documentation, which is not synonymous with fraud and abuse. It does not necessarily mean the service was not rendered or that it was not medically appropriate.--It--does mean we must continue working diligently with providers to improve documentation. Success in improving documentation will help bring the error rate down.

We also expect the estimate of improper payments to decrease because of other steps to increase the crackdown on fraud, waste and abuse begun by the Clinton Administration in 1993. For example, in March of this year we published a regulation allowing us to hire special program safeguard contractors who will bring a new energy to our program integrity efforts. That is only one of several additional new steps taken since the end of the fiscal year examined in the audit. Other steps taken since the period covered by the audit include tightening entry standards and requiring surety bonds for home health agencies expanding on-site inspection for durable medical equipment suppliers and community mental health centers, and obtaining authority to bar felons from participating in Medicare and Medicaid.

The audit of HCFA's financial statements was conducted in accordance with the Chief Financial Officers Act. In 1994, President Clinton signed the Government Reform and Management Act, which made changes to the Chief Financial Officers Act by requiring government-wide and department-wide financial statements. This legislation, which originated in Chairman Horn's Subcommittee, was meant to improve systems of accounting, financial management, and internal controls throughout the Federal government to help reduce waste and promote efficiency, and to provide Congress with complete, reliable, and timely information on the financial status of the federal government.

Chairman Horn, your leadership in this area is yielding tangible results. Such audits were never done before, and they provide a valuable roadmap directing us to areas that need attention. The results of the FY 1996 audit helped improve our accounting systems and highlighted areas in which our operations could be tightened. We have cleaned up our accounts payable problems, our Social Security Administration receivables are no longer disclaimed. And we are doubling the number of audits and increasing medical reviews by more than 10 percent.

The results of the FY 1997 audit will once again sharpen our focus on areas that need prompt attention. Today I will first discuss the audit findings, and then focus on the corrective actions HCFA is taking.

AUDIT FINDINGS

In conducting this audit, the OIG found that, based on the information sent in to us by providers on their claims, our contractors paid the claims correctly 98 percent of the time. The true error rate was found only when the OIG invested a great deal of resources into visiting HCFA contractors, requesting supporting documentation from providers, and actually reviewing the medical records of 8,048 fee-for-service claims paid in FY 1997 for 600 beneficiaries. The error rate identified by the OIG could only be found by requesting supporting documentation and medical records from providers. Human review of medical documentation identified these errors; automated review alone will not solve this problem. This is a very expensive, labor intensive process, and we do not have resources to do this kind of extensive investigation for every claim.

In the case of 1,097 of the claims, the auditors found that the provider's files could not support that the claim was in accordance with Medicare laws and regulations. By projecting these results to the general Medicare population, the OIG arrived at a midpoint estimate of $20.3 billion in improper payments nationwide or about 11 percent of the total Medicare fee-for-service benefit payments. Due to the limited size and variance of the sample, however, the true level of improper payments could range from 7 to 16 percent. I remain committed to aggressively rooting out claims for services which are medically unnecessary, insufficiently documented, noncovered by Medicare, or incorrectly coded.

Documentation

Documentation problems are the single largest factor in our error rate. Like other insurers, Medicare regulations require providers and suppliers to submit claims for the services they bill and maintain documentation to substantiate the claim. When the OIG requested documentation from the provider to back up a claim, documentation was not complete in 25 percent of cases.

In 4 percent of cases documentation was never furnished. That is down substantially from 14 percent in FY 1996, and we would like to thank the provider groups with whom we have worked since last year to educate their members on the importance of cooperating with this audit.

The OIG also noted that 14.5 percent of the error rate was attributable to documentation which was unavailable because of ongoing criminal or civil investigations. I must caution that these cases are under investigation and we do not know for sure whether they are actual cases of fraud or even improper payments.

I would also like to stress that these documentation problems do not appear to be related to what some providers consider to be the complexity of documentation requirements. If that were the case, more errors would be classified as incorrect coding where the provider billed for a different level of service than was actually provided, instead of as insufficient documentation where we find that the only documentation is a note stating that the patient is "stable."

Lack of Medical Necessity

The second largest factor in improper payments is claims for services that are not medically necessary. Thirty six percent of the improper claims were identified by medical professionals who found that the documentation provided did not show that the service was medically necessary. These cases include obvious abuses:

• A hospital which admitted a patient five years after a stroke to provide medication and physical therapy for 37 days. Our Peer Review organizations axe developing pilot programs for detecting and preventing this kind of inappropriate admission.
• A home health agency which provided $3,000 in services to a beneficiary who did not qualify for the benefit. We are taking many steps to crack down on home health waste, fraud, and abuse, including tougher standards for agencies to enter the program, increased scrutiny for those already in, and a new payment system with incentives to provide only medically necessary care.

Incorrect Coding

Incorrect coding is another significant problem that we are addressing. Payment for services is based in part on how complex a service is. A provider receives a larger payment for more intensive services: Providers use the medical industry's standard coding system to indicate the intensity of the medical treatment on a claim. In 14 percent of the improper payments, medical professionals who reviewed the documentation concluded that the service was not as complex as the provider claimed, and that Medicare had therefore paid too much. Submitting claims for a higher level than actually provided is known as "upcoding." It is also important to note that the OIG found a handful of cases in which the provider down-coded and so was underpaid for the services performed. The audit, however, reports the net improper payment.

Noncovered Services

Finally, about 2 percent of the improper payments were for services not covered under Medicare benefits. Such claims were carefully disguised to look like Medicare-covered services, but upon review of the documentation, medical professionals concluded they were for services that fee-for-service Medicare by law does not cover such as routine physical examinations, routine ear and eye examinations and most routine foot care.

Durable Medical Equipment

Durable Medical Equipment (DME) is one of the most problematic areas in Medicare in terms of program integrity. It was not included in last year's CFO audit, but is included this year. Therefore, caution is in order before any direct comparisons are made between this year's results and last year's. The audit found that nearly 10 percent of the error rate was due to DME claims, suggesting that we are concentrating our efforts through Operation Restore Trust and other initiatives to address DME waste, fraud and abuse in the right places. COR

RECTIVE ACTIONS

More than 80 percent of the incorrect payments found in the 1997 audit occurred in five areas: physician services (29 percent), inpatient hospital services (20 percent), home health agencies (13 percent), outpatient hospital services (10 percent), and durable medical equipment (8 percent). The remaining 28 percent were made in other categories. Two of these categories, home health and skilled nursing facilities are, along with (DME), high-priority areas for investigation as part of our Operation Restore Trust anti-fraud initiative. Several additional initiatives, discussed later in this testimony, are underway to address home health and DME issues.

Even before last year's audit was released, HCFA began a set of aggressive corrective actions that address problems outlined in the CFO audit and help stop improper payments, including: recouping identified overpayments, increasing claims review and audits, stepping up efforts to educate providers, working to revise documentation guidelines so they are more comprehensive and easier to use, and developing and adopting more sophisticated technologies for detecting fraud, waste and abuse.

First and foremost, we are recovering the improper payments identified by the OIG. We have already recovered 95 percent of the overpayments identified in the FY 1996 sample. We have intensified payment recovery efforts overall, and our contractors will immediately begin collecting the improperly paid Medicare monies identified in the FY 1997 audit. And we will instruct our contractors to evaluate providers identified in the OIG audit report for more extensive review.

Second, we are increasing the level of medical review from 80 million in FY 1997 to 89 million in FY 1998. We also are asking for authority to collect user fees that will allow us to do even more. We have increased funding by $53 million over FY 1997 levels for medical review. We also are conducting thorough prepayment reviews of documentation on a random sample of physician office visit claims throughout this fiscal year. So far about five thousand of these claims have been denied or reduced because physicians failed to adequately document the claim. We are now working to develop a substantive testing process which will help determine whether services are actually rendered and medically necessary, allow for projection of a national claims error rate, and help to spot areas for improvement. HCFA and our Peer Review Organizations are developing pilot programs to test ways to ensure the medical necessity of inpatient hospital claims. The projects will focus on identifying unnecessary admissions, unnecessary readmissions, and the necessity of billings for specific cardiac procedures.

Third, HCFA is emphasizing the need for clear and complete documentation. HCFA is working to engage the provider community in a campaign to promote correct coding and documentation. We have held meetings with the professional provider organizations to explain the audit findings and to enlist their help in addressing problems identified in the CFO audit, including publication of information on provider documentation guidelines and on the CFO audit in their materials and newsletters.

We are working with the AMA and medical societies throughout the country to refine the documentation guidance so it is easier to use. We will participate in a meeting the AMA is hosting on April 27 with leaders and billing experts from the national medical specialty societies on how to improve these revised guidelines before they are implemented.

We have increased by 15 percent the number of physician medical directors at our claims processing contractors. These physicians help develop medical review policies and educate the providers about coding, billing and payment policies.

Fourth, HCFA will support the use of existing technology and explore new technology to aid our contractors in identifying improper claims. These efforts include our Correct Coding Initiative, our enhanced Customer Information System, and hiring of special statistical analysis contractors.

Correct Coding -- Implemented in 1996, the Correct Coding Initiative is a package of more than 93,000 automated edits we require contractors to have in their claims processing systems. This initiative saved almost $217 million in the first year of implementation alone. HCFA will continue to develop coding and produce additional edits to enhance contractor databases.

Enhanced HCFA Customer Information System (HCIS) --- The HCIS, which was first used as a part of Operation Restore Trust, enables HCFA and its contractors to view provider or service utilization data at several levels including the national the state, contractor, provider type, or individual provider. For example, if I were trying to find out how many times a certain service had been billed in a state, I could obtain that information through the HCIS database. As a result, audits or reviews can be focused, rapidly and inexpensively, on a particular level. HCFA will continue to refine the HCIS which has been particularly helpful in providing rapid access to beneficiary and provider utilization data.

Statistical Analysis Contractor --- HCFA is procuring new statistical analysis contractors who will provide comprehensive ongoing analysis of trends, utilization rates, billing patterns, referral patterns and related information. These contracts will be modeled after our successful work with Palmetto Government Benefits Administrator, Inc., the statistical analysis contractor who has supported our four Durable Medical Equipment Regional Contractors (DMERCs) in detecting specific areas of fraudulent behavior. As an example, through their analysis the contractor has identified fraudulent billing practices for nebulizers and related drugs, and many abusive practices for incontinence supplies, surgical dressings, parenteral & enteral nutrition and urological supplies.

We estimate the DMERCs have made changes in their payment policies that have saved the Medicare program in excess of $200 million. They have also used this data to trigger provider renews, support fraud investigations, and target enrollment verification activities.

We hope to have a statistical analysis contractor in place this year. We published a proposed regulation on March 28, 1998 outlining parameters for hiring this and other special program integrity contractors.

MEDICARE ANTI-FRAUD INITIATIVES

The Clinton Administration has focused unprecedented attention on the fight against fraud and abuse, and we continue to step up these efforts. These actions complement our CFO Audit corrective actions and help in the effort to stop improper payments, even though many are not reflected in this year's OIG audit report.

Our Medicare Integrity Program system of payment safeguards identifies and investigates suspicious claims throughout Medicare, and ensures that Medicare does not pay claims that other insurers should pay. These safeguards comprise a comprehensive system which attempts to identify improper claims before they are paid, to prevent the need to "pay and chase." HCFA's current strategy for program integrity focuses on prevention and early detection. Activities include: Medicare Secondary Payer, medical review, cost report audits and anti-fraud activities. These safeguards return $17 for every $1 spent, and saved $7.6 billion in FY 1997 by preventing inappropriate payments through audits, medical reviews and making sure that Medicare does not pay for claims owed by private insurers.

Actions undertaken since the close of the FY 1997 CFO audit addressing durable medical equipment fraud and abuse include:

Expanded On-Site Visits --- Visits by Medicare staff as part of Operation Restore Trust and studies by the HHS Inspector General show that many purported DME suppliers have only mail drops and no actual offices. Site visits to two thousand suppliers in five states with the most suspected DME fraud problems resulted in 650 suppliers being ejected or rejected by Medicare in FY 1997. HCFA is expanding site visits for DME suppliers nationwide this year.

Additional Standards for DME Suppliers-- Medicare proposed a regulation on January 20 to make it more difficult for unscrupulous DME suppliers to enter Medicare and to strengthen enforcement against such suppliers. Among the new supplier requirements are:

• a surety bond of at least $50,000,
• a ban on DME telemarketing and a requirement for a physical location with working business phone at that location,
• a prohibition on reassigning supplier numbers, and
• criminal and civil sanctions for false information on billing number applications.

Other Medicare actions to assure that DME suppliers are legitimate include: requiring periodic training on billing procedures for new and existing suppliers, eliminating 36,000 supplier billing numbers that had not been used for at least one year, eliminating the chance they will be exploited by scam operators, modifying the DME application form to obtain additional information about prospective DME suppliers, and seeking authority to charge all applicants an application fee that will help us fund increased enforcement efforts.

Home Health Initiatives -- Several actions have been taken to fight home health waste, fraud and abuse. On September 15, 1997 the President announced a moratorium on new home health agencies (HHAs) until Medicare could implement a range of new rules and management tools that enhance oversight of HHAs and ensure that new Medicare home health agencies are not "fly-by-night" or low quality providers. The moratorium was lifted earlier this year with the publication of a regulation requiring all HHAs that participate in Medicare to: Obtain a surety bond of at least $50,000, and have enough capital to fund operations for the first three months.

In addition, we have taken administrative steps to require HHAs to:

• reveal "related business interests that can be the conduit for fraudulent and abusive activities, and
• serve at least 10 patients before they are admitted to the Medicare program so that their quality of care can be reviewed.

We believe initiatives we have taken are already impacting home health spending. We believe it is no coincidence that Medicare spending growth for home health care has slowed to just 5.4 percent in FY 1997 from rates that had exceeded 25 percent a year.

Later this year Medicare will issue regulations to require HHAs to re-enroll every three years, which will help us weed out problem providers. And the President has proposed assessing a fee on providers so we can do more audits that help ensure that Medicare only pays appropriate provider costs.

RECENT LAWS AND LEGISLATIVE PROPOSALS

Thanks to the work of these committees and this Congress we now have more tools we need to fight fraud and abuse, many of which are not reflected in this year's OIG audit. These tools from the Balanced Budget Act let us:

• exclude providers convicted of felonies or health related crimes;
• levy new civil monetary penalties on hospitals who contract with providers who have been excluded from Medicare;
• levy civil monetary penalties on providers who take kickbacks;
• require provider applicants to provide Social Security numbers and employer identification numbers so we can check the applicant histories; and
• tighten eligibility for home health services so providers can no longer game the system by certifying that a patient is eligible for home health service simply because they need blood drawn.

The Health Insurance Portability and Accountability Act also for the first time created a stable source of funding for fraud control, which in FY 1998 will total almost $120 million. It also gave us authority to contract with special program integrity contractors.

Through additional tools provided in the Balanced Budget Act, new anti-fraud initiatives and our corrective action plan, I believe HCFA will continue to take steps in the fight direction to reduce the national error rate of improper claims identified in the CFO Audit.

President Clinton's budget includes several proposals to continue our success in fighting health care fraud, waste, and abuse. These measures would save an additional $2 billion in health care expenditures over five years and help pay for the expansion of Medicare eligibility to the near elderly. The proposals include:

• more subpoena and injunction authority;
• penalties for physicians who falsely certify that an individual meets Medicare requirements;
• eliminating fraudulent use of bankruptcy protections that allow providers engaging in fraudulent practices to avoid paying penalties and returning the money they owe;
• establishing fines for providers who pay kickbacks to induce referrals;
• stopping providers from pretending to furnish partial hospitalization services in a beneficiary's home or in an inpatient or residential setting.
• and user fees to fund important activities such as audits, reviews, provider- enrollment, and survey and certification efforts.

Obviously, the President's budget proposals and the Balanced Budget Act provisions have not been implemented and are not reflected in the OIG audit report. We are confident that those actions will be reflected in next year's OIG report.

FINANCIAL STATEMENTS

The other function of the CFO Audit is to determine whether HCFA's internal accounting mechanisms are in order. In public accounting terms, the purpose of an audit is to permit the auditors to issue a report as to whether the financial statements are presented fairly and in conformity with generally accepted accounting principles. There are four types of audit reports:

1. an unqualified opinion, which means the financial statements are fairly presented;
2. a qualified opinion, which means the financial statements are fairly presented except for the effects of a matter or matters as described in the Auditor's report:
3. an adverse opinion, which means the financial statements are not presented fairly; and,
4. a disclaimer of opinion, which states that the auditor does not express an opinion on the financial statements and gives all the substantive reasons for the disclaimer.

I am very pleased to say that HCFA has resolved two major financial statement shortcomings on which we received a disclaimer in last year's audit. The Medicare accounts payables estimating methodology as successfully revised, and the Supplemental Medical Insurance premium withholding by the Social Security Administration was successfully audited.

Accounts payable ($27.4 billion) represents costs incurred but not paid as of the end of the fiscal year. In previous years, the payable was a byproduct of the trust fund projections. With advice from a national public accounting firm, HCFA, developed a revised methodology, collected data, and this allowed the OIG to estimate a revised Medicare payable.

Also, importantly, we have gotten our books in order with the Social Security Administration. The majority of Supplemental Medical Insurance premiums ($19.1 billion) are withheld by the Social Security Administration (SSA) from beneficiaries' Social Security checks and transferred to the Part B trust fund. This year auditing was possible at both the Social Security Administration and HCFA.

The FY 1997 OIG audit does highlight areas where HCFA must focus attention in financial reporting. These include constructing a uniform audit trail for Medicare and Medicaid accounts receivable, developing an auditing methodology for the cost report settlement process, and establishing internal controls for Medicare liabilities, financial management controls and electronic data processing controls-

Medicare/Medicaid Accounts Receivable

Of HCFA's $225 billion annual expenditures, the OIG disclaimed a total of $2.5 billion for Medicare and $450 million for Medicaid. The auditors could not be sure the receivable number was correct due to the lack of general ledgers and other documentation at most Medicare contractors. Concerns were also expressed about internal controls. Because states' use different accounting systems their reporting of receivables is inconsistent.

HCFA's long range goal is to standardize contractors' claims processing systems making it possible to have an integrated accounting system. However, these require extensive system changes which will not be possible with the resources currently allocated to making the agency and its contractors Year 2000 compliant. Our short term corrective actions will focus on using the contractors' existing subsidiary systems to improve the quality of data, and to identify and document the audit trails necessary to support and validate the data reported to HCFA.

Cost Report Settlements

The OIG was unable to determine an appropriate way to audit the cost settlement process, in which our contractors audit cost reports submitted by providers. Desk reviews are done for all cost reports, and some providers' cost reports are audited using either a full or limited scope approach.

HCFA's approach has been to focus our limited audit resources on those providers that have a greater potential for overpayment in order to recover misspent Medicare funds and to provide a sentinel effect on all providers. The OIG has not challenged the quality of the current process and, in fact, has recognized its high cost-savings ratio.

Government audit standards would allow the OIG to rely on HCFA's provider audit process if it were based upon a methodology that would select a representative sample of cost reports to be audited. Presently, it is not possible for the OIG to review a sub-sample of the HCFA audits and develop a statistically valid national error rate, or to ensure that the number reported on the financial statement is "fairly represented" as an accurate reflection of HCFA's liability. HCFA plans to work with the OIG further to address this. However, it is important to note that the advent of more Medicare prospective payment systems will greatly reduce cost reporting.

Internal Controls

Internal controls provide reasonable assurance that transactions are properly recorded and accounted for, safeguarded against loss, and in compliance with laws and regulations. They include such things as separation of duties delegation of authorities, and access to and accountability for resources. For example, HCFA is updating instructions for financial reporting, as well requiring that components develop internal operating procedures that clearly identify controls.

For electronic data processing (EDP), HCFA has introduced a systems security initiative to aggressively address vulnerabilities found through the OIG's and our own reviews. Our goal is to be able to maintain the tightest security as the business environment in which we operate changes, and to integrate security into every aspect of our information technology management activities.

CONCLUSION