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Challenge 4: Fighting Waste and Fraud and Promoting Value in Medicare Parts A and B

Why This Is a Challenge

To secure the future of health care for Medicare beneficiaries, the Department must be vigilant in reducing wasteful spending and promoting better health outcomes at lower costs. The Institute of Medicine estimated that 30 percent of U.S. health spending (public and private) in 2009—roughly $750 billion—was wasted.1

Waste in health care programs is a multi-dimensional problem. Key areas of focus for reducing waste in Medicare Parts A and B include reducing improper payments, fighting fraud, fostering economical payment policies, and transitioning from volume to value in health care. HHS faces challenges—and opportunities—in each of these areas.

Reducing Improper Payments. CMS reported an error rate of 10.1 percent for Medicare fee for service (Parts A and B), corresponding to an estimated $36 billion in improper payments in FY 2013. This measure includes payments for unnecessary services, billing or coding errors, and payments for claims that did not meet documentation or other Medicare coverage requirements. Medicare's pending transition to a new system of diagnosis codes, the ICD-10, may bring implementation challenges or potential increases in improper billing as providers transition to the new codes. (See Management Challenge 8 for more information on error rate measurement and reporting.)

Challenges affect every stage of the payment process, from making the initial payment accurately to adjudicating overpayment recoveries. OIG has documented high Medicare improper payment rates for various services, including home health services and evaluation and management services. OIG audits of hospitals have uncovered and sought to remedy improper billing and payments for a myriad of issues, such as incorrect billing for transfers to post-acute care and inaccurate patient diagnosis codes. Accurate billing by hospitals for short inpatient stays versus outpatient observations has been an area of considerable challenge and concern for the Department, hospitals, and beneficiaries.

CMS relies on contractors for most of these crucial functions; however, OIG has identified deficiencies in contractor performance and in CMS's oversight of contractors that process Medicare claims and that audit and recover overpayments. Finally, the Department is facing significant challenges in adjudicating provider appeals of Medicare overpayment recoveries, including (1) a substantial backlog of appeals at the administrative law judge (ALJ) level (third level of appeals), (2) inconsistent determinations among the ALJs and between the ALJs and Qualified Independent Contractors (second level of appeals), and (3) insufficient CMS participation in the appellate process.

Preventing and Responding to Fraud. Curbing fraud is vital to conserving scarce health care resources and protecting beneficiaries. Fraud schemes shift over time, but certain Medicare services have been consistent targets. For example, OIG investigations continue to uncover fraud schemes and questionable billing patterns by durable medical equipment (DME) suppliers, home health agencies, community mental health centers, clinical laboratories, ambulance transportation suppliers, and outpatient therapy providers. CMS's contractors play a key role in fighting Medicare fraud. However, CMS is not realizing the full potential of this oversight tool. For example, OIG found that CMS contractors' program integrity efforts were limited with respect to home health and community mental health services, even though these services are known as fraud risk areas.

Fostering Economical Payment Policies. As a result of certain payment policies that OIG has identified, Medicare pays significantly different amounts for the same services for similar patients in different settings. For example, Medicare pays significantly more for services performed in an outpatient hospital department than for the same services performed in an ambulatory surgical center (ASC). While not all patients can safely receive services in an ASC, for low-risk patients that do not need hospital-level care at an outpatient hospital department, Medicare could save billions of dollars by paying for their services at ASC rates. In another example, Medicare generally reduces payments to hospitals for patients with early discharges to post-acute care, such as care provided in a skilled nursing facility, to avoid overlapping payments for the hospital care and the post-acute care. However, Medicare does not reduce hospital payments if a patient's early discharge is to hospice care.

Transitioning From Volume- to Value-Based Payment. Experts generally agree that the incentives created by paying for health care on the basis of the volume of items or services furnished, as in Medicare's fee-for-service program, contribute to waste by encouraging unnecessary utilization and fragmented, poor quality care. HHS is transitioning to value-based payments in Medicare, which are intended to produce better quality of care at lower costs by rewarding high-quality care, penalizing low-quality care, or enhancing care coordination. Models involve, for example: accountable care organizations (ACOs), value-based payments for hospitals, penalties for hospital readmissions, pay-for-performance systems, shared savings programs, gainsharing, care coordination payments, and bundled payments.

Designing bundled payment methodologies that reimburse for items and services across separate provider settings will pose additional challenges. Many value-based payment mechanisms rely on complex data, electronic health information, and sophisticated quality and performance measures. To be effective, the data must be correct and timely, the metrics meaningful, and the information usable.

Progress in Addressing the Challenge

Overall, the Department has implemented many of OIG's recommendations for combating waste and fraud in Medicare, resulting in cost savings, improved program operations, and enhanced protections for beneficiaries. In FY 2013, OIG audits and investigations resulted in expected recoveries of $5.8 billion in stolen or misspent funds across Department programs. In addition, OIG reported estimated savings of more than $19 billion resulting from legislative and regulatory actions supported by OIG recommendations. The Health Care Fraud and Abuse Control Program (a joint program of the Department, CMS, OIG, and the Department of Justice (DOJ) to fight waste, fraud, and abuse in Medicare and Medicaid) returned more than $8 for every $1 invested. Medicare Fraud Strike Forces, led by OIG and DOJ, have demonstrated success in investigating and prosecuting fraud and shutting down criminal networks.

CMS has taken actions intended to improve the integrity and accuracy of billing for numerous types of services. For example, CMS implemented (1) a provision of the Affordable Care Act that practitioners who certify Medicare patients as eligible for home health services must document their face-to-face encounters with those patients and (2) a demonstration project that requires prior authorization for scooters and power wheelchairs in seven states with high incidences of fraud and improper payments for these items. CMS is working with home health service providers and practitioners to improve the low initial rates of compliance with this requirement. CMS continues to work to address hospital billing for short inpatient stays and outpatient observation stays, which has significant impacts on Medicare spending, beneficiary cost-sharing, and hospital revenue.

OIG has also noted reductions in Medicare billing and payments for certain services and geographic areas with known fraud risks. For example, following high-intensity law enforcement activities and administrative actions by CMS, billing and payments for home health services and community mental health services declined significantly in fraud hot spots. CMS has also instituted temporary moratoria on the enrollment of new home health agencies in the Miami, Chicago, Fort Lauderdale, Detroit, Dallas, and Houston areas and ambulance transportation suppliers in the Houston and Greater Philadelphia areas. Additionally, CMS continues to develop its Fraud Prevention System (FPS). OIG certified CMS's reported $54 million in actual savings and $210 million in unadjusted savings resulting from year 2 of the FPS, representing a positive return on investment of $1.34 for every $1.

CMS has reported improvements to its oversight and measurement of its contractors' performance and its follow-up on improper payment vulnerabilities that contractors identify. The Department also continues to focus on resolving the backlog of Medicare appeals by providers.

CMS has implemented and is administering ACO programs, value-based purchasing programs, the Bundled Payment for Care Improvement initiative, the Health Care Innovation Awards program, the State Innovation Model program, and others. In September 2014, CMS reported first performance year results for the Medicare Shared Savings Program (MSSP) showing that 53 MSSP ACOs earned shared savings payments of more than $300 million and held spending $652 million below their targets; in total, the Medicare Trust Fund will save approximately $345 million.

What Needs To Be Done

Despite progress in key areas, further actions are needed to protect Medicare from waste and fraud. CMS needs to better ensure that Medicare makes accurate and appropriate payments. When Medicare improper payments occur, CMS needs to identify and recover them in a timely manner. CMS must also implement safeguards, as needed, to prevent recurrence. CMS relies on contractors for most of these crucial functions; therefore, ensuring effective contractor performance is essential. Finally, the Medicare appeals system needs fundamental changes to resolve issues about improper payments efficiently, effectively, and fairly. OIG has recommended numerous actions to advance these outcomes.

With respect to promoting value in Medicare, the Department should continue to prioritize the effective transition to value-based payment mechanisms and the development and refinement of quality, outcomes, and performance metrics. Data systems supporting programs that link payment to quality and value must be scrutinized for timeliness, accuracy, and completeness. CMS should continue to strengthen its program integrity tools and apply them as needed to ensure integrity in new models. As demonstration programs continue to unfold, the Department should carefully monitor for successes and benefits that can be scaled and replicated, as well as for potential problems—including inefficiencies, misaligned incentives, or abuses. As with any innovation and experimentation, missteps may occur; it is critical that the Department take effective and appropriate actions to address such missteps and prevent their recurrence.

Key OIG Resources

1Institute of Medicine, "Best Care at Lower Cost: The Path to Continuously Learning Health Care in America," September 6, 2012.

Challenge 5: Ensuring Quality in Nursing Home, Hospice, and Home- and Community-Based Care

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