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The U.S. Department of Health and Human Services today reported that improper Medicare payments to hospitals, doctors and other health care providers declined dramatically last year to the lowest error rate since the government initiated comprehensive audits three years ago. The findings are included in an audit report prepared by the Department's Office of Inspector General.

The error rate for fiscal year 1998 was an estimated 7.1 percent, representing estimated improper payments of $12.6 billion. This compares with an error rate of 11 percent in FY 1997, representing an estimated $20.3 billion; and 14 percent in FY 1996, representing an estimated $23.2 billion in improper payments.

"Today's report by the Inspector General is welcome proof that our zero tolerance policy against waste, fraud and abuse is paying off," HHS Secretary Donna E. Shalala said. "We still have a big job to do in eliminating improper Medicare payments, but with a 45 percent reduction in improper payments in just two years, we are making real progress."

OIG auditors with the support of medical experts reviewed a comprehensive statistically valid sample of Medicare fee-for-service claim expenditures and supporting medical records to determine the accuracy and legitimacy of the claims. They looked at a statistical selection of 600 beneficiaries nationwide with 5,540 claims valued at $5.6 million and determined that 915 of the claims did not comply with Medicare laws and regulations.

By projecting the sample results over the universe of Medicare fee-for-service benefit payments, which totaled $176.1 billion during the fiscal year, the OIG calculated that $12.6 billion was the mid point in the estimated range of improper payments.

HHS Inspector General June Gibbs Brown called the 45-percent reduction in overpayments since FY 1996 "a truly remarkable improvement," and said she was "encouraged by the determined and concerted effort of the Secretary, the Health Care Financing Administration, the Department of Justice, the Congress and the provider community to effectively address the overpayment problem. This clearly demonstrates what can be accomplished when we work cooperatively to solve such significant problems."

She noted that the improper payments, as with past years, could range from inadvertent mistakes to outright fraud and abuse; the portion of the error rate attributable to fraud could not be quantified.

The two major problem areas were identified as billing for services that were not medically necessary and upcoding services to secure a higher reimbursement than justified. They combined to account for about $9.3 billion of the estimated $12.6 billion in improper payments. Another $2.1 billion in overpayments was attributed to documentation discrepancies, and the remaining $1.2 billion to billing for services not covered by Medicare, and other types of errors.

Hospitals, physicians and home health agencies accounted for more than 77 percent of the improper payments, with approximately 39 percent of the erroneous claims attributable to hospitals, nearly 26 percent to physicians, and almost 13 percent to home health agencies. Skilled nursing facilities, non-prospective payment system (PPS) hospitals, laboratories, end stage renal disease centers, ambulance companies, ambulatory surgical centers, durable medical equipment suppliers and hospices were responsible for the balance of the improper payments, in that order. Virtually all major provider groups had significant error reductions from FY 1996.

The overwhelming majority of these improper payments (90 percent) were detected through medical reviews coordinated by the Inspector General. When these claims were submitted for payment to Medicare contractors, they contained no visible errors.

Examples of improper payments include a community mental health center that was paid $21,421 for services later determined by medical reviewers to be medically unnecessary. In another case, a skilled nursing facility billed Medicare $10,428 for a 51-day skilled-nursing stay by an elderly patient. Because medical records showed that the patient received only maintenance-level, non-skilled care, the payment was denied. In a third case, a physician billed Medicare $871 for 40 hospital visits.

The medical records, however, supported only 18 visits. In each of these instances, and in all other cases where improper payments were specifically identified, action was taken to deny the claim and to recover the overpayment.

Inspector General Brown attributed the reduction in improper payments to several factors including improved program oversight and enforcement and greater compliance by health care providers with Medicare's billing rules. She credited the HCFA for requiring more extensive prepayment reviews of types of claims identified as vulnerable to improper payments, and the provider community for working aggressively with the HCFA to better ensure that they understand and abide by the reimbursement rules.

"We are very pleased with this evidence of our substantial progress over the last year, even as we continue to accelerate our efforts against waste, fraud and abuse," said HCFA Administrator Nancy-Ann DeParle. AI want to thank the Inspector General and our partners at the Department of Justice, as well as members of Congress who have helped give us the enforcement tools and financial resources necessary to turn the tide of waste and fraud in Medicare."

Medicare, the federal health care program that pays doctor, hospital and other medical bills for the nation's elderly and disabled, served 39 million beneficiaries in FY 1998 and incurred about $210 billion in benefit payments, including about $33 billion in managed care expenditures. More than 860 million claims were processed during the fiscal year by the private insurance companies that contract with the government to pay Medicare claims.

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