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Management Challenge 5:
Fighting Fraud and Waste in Medicare Parts A & B

Why This Is a Challenge

While all fraud is waste, not all waste is fraud. Waste is inefficiency that may be, for example, a medically unnecessary service, inefficient delivery of care, inflated prices, excess administrative costs, or prevention failures, and as such, addressing it is a multi-dimensional problem. (For challenges related to maximizing value in health care, see Management Challenge 2.) The Department must take necessary steps to address improper payments and payment inefficiencies that waste Medicare dollars and divert finite resources away from beneficiary care and services. In fiscal year (FY) 2013, CMS reported an error rate of 10.1 percent for Medicare Fee-for-Service. This exceeds the 10-percent threshold set by the Improper Payments Elimination and Recovery Act of 2010 (IPERA) and is an increase from FY 2012.

Waste. OIG work has spotlighted various types of waste in Medicare Parts A & B:

  • Hospital Billing Errors: Our reviews of hospital's billing compliance have consistently found inappropriate claims for inpatient and outpatient services. Some of the most common problems include billing for short inpatient stays that should have been billed as outpatient or outpatient-with-observation services, transfers to other hospitals or post-acute care, incorrect diagnosis codes that result in higher payments, same-day discharges and readmissions, billing separately for services that should be bundled into the inpatient bill, and unreported credits from medical device manufacturers.
  • Improper Payments to Skilled Nursing Facilities (SNFs): SNFs billed one-quarter of all claims in error in FY 2009, resulting in $1.5 billion in inappropriate Medicare payments. The majority of the claims in error were upcoded, i.e., the SNF reported a higher level of therapy than was provided, resulting in an inflated payment. In other cases, a SNF provided a higher level of therapy than the Medicare patient needed or could benefit from.
  • Misaligned Payment Rates: OIG compared Medicare payments for 20 high-volume/high-expenditure lab tests to payments by State Medicaid and Federal Employees Health Benefit plans and found that Medicare paid between 18 and 30 percent more than other payers. Medicare could have saved up to $901 million in 2011 if it had paid providers at the lowest established rate in each geographic area. In another example, Medicare's bundled payments for global surgery fees have not always been adjusted to reflect evolving physician practices; in certain instances, the OIG has found that fewer services are provided than assumed in Medicare's payment model. Revising the payment methodology to more closely reflect the services typically provided in medical care today could result in more efficient provision of surgical services.

RACs are one important tool that CMS uses to identify and recover improper payments. In FYs 2010 and 2011, RACs identified errors in half of all claims they reviewed, resulting in improper payments totaling more than

$1 billion. CMS took corrective actions to address the majority of vulnerabilities identified by the RACs in FYs 2010 and 2011. However, CMS may not be taking full advantage of this tool, as it did not evaluate the effectiveness of its corrective actions therefore, significant improper payments continue. In addition, CMS's RAC performance evaluations did not include metrics to evaluate compliance with all contract requirements.

Fraud. Fraud is one significant cause of waste in Medicare, resulting in funds being paid for services or products that were not rendered, were not medically necessary, or did not meet quality standards. Curbing fraud is vital to conserving scarce health care resources and protecting beneficiaries, and the Department must continue to direct all necessary resources toward fraud prevention, detection, and remediation. Adding to this challenge, fraud is a crime of deception, and perpetrators design their schemes to make claims appear legitimate.

Fraud schemes shift over time, but certain Medicare services have been consistent targets. OIG work has consistently raised concerns about fraud in Medicare Parts A & B. For example, OIG investigations continue to uncover durable medical equipment (DME) suppliers, home health agencies, community mental health centers, ambulance operators, and outpatient therapy providers that are defrauding the Medicare program. In national assessments, OIG has identified questionable billing patterns by home health agencies and community mental health centers and is conducting similar analysis of questionable billing by ambulance providers.

CMS's contractors play a key role in fighting Medicare fraud. However, there are indications that CMS is not realizing the full potential of this oversight tool. In 2011, OIG found that four of the Zone Program Integrity Contractors (ZPICs) did not identify any vulnerabilities related to home health, despite this being a source of numerous fraud investigations and convictions at that time, and the ZPICs varied substantially in their efforts to detect and deter fraud. Medicare also inappropriately paid some home health agencies with suspended or revoked billing privileges. In another review, we found that only one of nine Medicare Administrative Contractors (MACs) performed activities to detect and deter fraud by community mental health centers (another provider type known to have high risk for fraud) in 2010; most of these activities were part of a CMS-led special project. Other contractors performed minimal activities to detect and deter fraudulent billing by community mental health centers, despite having jurisdiction over fraud-prone areas. Additionally, Medicare paid community mental health centers that did not comply with its requirements after their revocations were effective and while their revocations were being processed.

Progress in Addressing the Challenge

The Department has made progress in its fight against fraud in Medicare Parts A & B. The Health Care Fraud Prevention and Enforcement Action Team (HEAT) operations, including the Medicare Fraud Strike Force teams, have demonstrated reductions in claims submitted to Medicare and payments made by Medicare for Part A & B services susceptible to fraud, including DME suppliers, home health agencies, and community mental health centers. Medicare Fraud Strike Force operations also have taken down ambulance and outpatient therapy fraud schemes. Significantly, CMS for the first time used the provider enrollment moratoria authority granted by the ACA. CMS instituted 6-month moratoria on the enrollment of new home health agencies in the Miami and Chicago areas, and ambulance suppliers in the Houston area. CMS continues to use its payment suspension authority to stop payments to certain providers and suppliers suspected of fraud. Another of CMS's major tools in fraud prevention is the Fraud Prevention System - this is discussed in Management Challenge 8.

CMS reported that it has improved its performance metrics for the ZPICs for all contracts that take effect in FY 2014. According to CMS, these new metrics will evaluate the contractors' performance in critical program integrity areas, including the accuracy and timeliness of implementing payment suspensions and revocations. CMS also reported efforts to improve coordination between RACs and ZPICs. It added to the RAC Statement of Work a requirement to meet with the ZPICs at least quarterly to discuss potential fraud referrals and trends they are seeing in the applicable jurisdictions.

The Department has also made progress in combatting waste in Medicare Parts A & B. CMS issued a final rule to implement its Hospital Readmissions Reduction Program, effective October 1, 2012, under which Medicare payments may be reduced to applicable hospitals with high patient readmission rates. In that same final rule, CMS also expanded its list of existing hospital-acquired conditions with some updated billing codes and added two new conditions to this list. CMS also issued a final rule in August 2013 that modifies and clarifies review and payment rules regarding inpatient hospital admissions and services under Parts A & B, which it expects will lower improper payments in this problem area.

In addition, the Department continues to implement the Competitive Bidding Program for DME, which holds promise for addressing prior OIG findings that Medicare paid significantly more than market prices for many types of DME. Regarding global surgery fees, CMS indicated that it will continue to work in conjunction with the American Medical Association Relative Value Update Committee and relevant specialty societies to identify potentially mis-valued services. CMS annually reviews hundreds of codes, many of which are codes with global surgery periods. CMS also continues to monitor hospice claims at each MAC through inclusion of hospice as part of their medical review strategies for the year.

What Needs To Be Done

Fraud in Medicare Parts A & B remains a major challenge, and experience shows that schemes migrate among provider and supplier types as well as geographically. The Department must improve its use of data and program integrity tools to address shifting fraud schemes. For example, CMS should consider instituting additional temporary enrollment moratoria for certain types of providers in geographic areas at significant risk for fraud. Also, CMS should implement the surety bond requirement for home health agencies, and CMS should consider increasing surety bond amounts above $50,000 for those home health agencies with high overall Medicare payment amounts.

CMS should continue to build on its progress in addressing program integrity contractor performance and oversight challenges, including developing additional performance evaluation metrics, particularly for high-risk providers such as home health agencies and community mental health centers in fraud-prone areas. CMS also should facilitate increased collaboration between RACs and program integrity contractors and provide training to RACs to help them refer potential fraud, as appropriate.

More needs to be done to reduce improper payments. For instance, CMS should increase and expand reviews of claims by SNFs and follow up with SNFs that billed in error. CMS should also address payment inefficiencies, such as adjusting bundled payments for surgery fees, and should seek legislative fixes where necessary, for example, by seeking legislative authority to reduce Medicare payments for lab tests.

Key Resources

Management Challenge 6: Preventing Improper Payments and Fraud in Medicare Advantage

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