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Management Issue 3:
Identifying and Reducing Improper Payments

Why This Is a Challenge

Insurance claim forms with coins spilled across them

Improper payments are a significant problem, costing billions of dollars annually across federal programs. In November 2009, the President signed Executive Order 13520, Reducing Improper Payments and Eliminating Waste in Federal Programs, and in July 2010, the Improper Payments Elimination and Recovery Act (IPERA) was enacted. The purpose of the Executive Order and IPERA is to reduce improper payments by intensifying efforts to eliminate payment error, waste, fraud, and abuse in the major programs administered by the federal government, including the Department's health care programs, while continuing to ensure that federal programs serve and are accessible by their intended beneficiaries.

In 2010, the Office of Management and Budget (OMB) designated 14 programs as "high error." CMS administers five of these high-error programs: Medicare FFS; Medicare Part D; Medicare Advantage; Medicaid; and the Children's Health Insurance Program (CHIP). For FY 2010, the Department reported improper payments totaling more than $70 billion in Medicare FFS, Medicare Advantage, and Medicaid. HHS's Administration for Children and Families (ACF) also administers programs susceptible to improper payments. For example, ACF estimated that its Child Care program's national error rate equaled 13 percent and ACF programs accounted for $1 billion in improper payments in 2010.

Improper payments are divided into four categories: unsupported services, medically unnecessary services, incorrect billings, and other noncovered cost or error types. These are the core payment issues within the Department. OIG has recently completed and has underway several reviews that focus on improper payments. One review identified over 700 providers that routinely had errors over a 4-year period (2005 through 2008).

Progress in Addressing the Challenge

The Department has taken actions to address some improper payment vulnerabilities. CMS uses the Comprehensive Error Rate Testing (CERT) program to measure the Medicare FFS error rate and as a guide in developing corrective actions to reduce improper payments. CMS analyzes the CERT improper payment data and uses the results to provide feedback to Medicare contractors to enhance their medical reviews, focus on high risk areas, and reduce improper payments. Also, Medicare's automated systems have edits in place to detect and reject payment for medical services that are physically impossible, such as a hysterectomy for a male beneficiary, and "medically unlikely," such as services claimed for which the quantity billed exceeds acceptable clinical limits.

CMS developed the Payment Error Rate Measurement (PERM) program to review improper payments for Medicaid and CHIP FFS claims, managed care claims, and beneficiary eligibility. Though causes of improper payments vary from State to State, PERM helps CMS identify trends and common errors across States. Based on PERM results, States are required to submit Corrective Action Plans (CAP) 90 days after they are notified by CMS of their error rates. Many States' CAPs focus on provider education to reduce improper payment rates.

CMS contracts with Recovery Auditors to help detect and correct past improper payments so that CMS can implement actions that will prevent future improper payments. CMS has made policy and manual changes and local system edits, and CMS Medicare Administrative Contractors have conducted local provider education.

CMS has also developed a methodology to estimate an error rate for its Medicare Advantage program and implemented processes and procedures to reduce administrative and documentation errors, the two most prevalent error types in the Medicare Advantage program. Additionally, ACF has also begun to measure error rates for its Child Care, Foster Care, and Head Start programs and provided staff to serve on OMB improper payments teams.

The Department is also examining techniques used by private sector entities to reduce improper payments. CMS is conducting data analysis and predictive modeling to identify improper claims in Medicare FFS and is considering requiring prior authorizations for certain services. CMS is also exploring ways to leverage existing compliance programs within the provider community to educate providers about payment vulnerabilities.

What Needs To Be Done

The Department should continue to develop error rates for additional programs to comply with IPERA requirements. Medicare Part D and CHIP are slated to have projected error rates in the 2011 and 2012 reporting periods, respectively.

Further, the Department should use historical improper payment data to identify the root causes of improper payments and develop, implement, and track a Department CAP. In addition, for Medicare FFS claims, CMS should also continue to monitor its payment systems to identify additional edits and prepayment reviews that could identify suspicious claims and prevent improper payments. The Department should continue to identify best practices in the private sector that it can use to avoid improper payments. It should also expand its provider education efforts around program requirements and improper payment vulnerabilities. (See Challenge 10, Grants Management and Administration of Contract Funds, for additional information regarding improper payments.)

Key OIG Resources

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