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Management Issue 2:
Identifying and Reducing Improper Payments

Why This Is a Challenge

Improper payments cost Federal programs billions of dollars annually. An improper payment is any payment that should not have been made or that was made in an incorrect amount and includes overpayments and underpayments. For FY 2011, the Department reported improper payments totaling more than $64 billion in the Medicare and Medicaid programs and $754 million in Administration for Children and Families (ACF) programs.

The Office of Management and Budget (OMB) identified nine HHS programs as susceptible to significant improper payments: Medicare fee-for-service (FFS or Parts A and B), Medicare Advantage (Part C), the Medicare Prescription Drug Benefit (Part D), Medicaid, the Children's Health Insurance Program (CHIP), Foster Care, Head Start, Temporary Assistance for Needy Families (TANF), and the Child Care and Development Fund.

Despite departmental efforts to reduce improper payments, OIG has found vulnerabilities in the Department's ability to identify and eliminate improper payments. CMS relies largely on contractors to prevent and identify improper payments in Medicare and Medicaid. Challenge 6, Ensuring Efficiency and Effectiveness of Medicare and Medicaid Program Integrity Contractors, addresses specific issues associated with contractor oversight and effectiveness. OIG's analyses of Medicare and Medicaid claims data have revealed improper billing patterns and payments for many services. For instance, OIG found that improper payments to skilled nursing facilities cost Medicare $1.5 billion in 2009. Skilled nursing facilities frequently billed for more intensive services than were provided or needed by beneficiaries. In another example, OIG identified hundreds of millions of dollars in improper Medicaid payments for personal care services across several States.

In addition, the Department did not fully comply with Executive Order 13520 in its fiscal year 2010 quarterly reports on high-dollar improper payments. The Department's quarterly reports were incomplete and therefore cannot be used to adequately assess the level of risk of each of the Department's programs or to determine the extent of existing oversight activities.

Progress in Addressing the Challenge

A stamper marking a document for stop payment

Because of statutory prohibitions that may hinder reporting for TANF and CHIP, the Department did not report improper payment estimates for 2011 as required, and the Department also had two programs with improper payment rates exceeding 10 percent. OIG found that as a result, the Department was not in substantial compliance with the Improper Payments Elimination and Recovery Act of 2010 (IPERA). However, OIG also found that the Department was in compliance with elements of OMB's guidance for IPERA reporting for five of the nine programs deemed to be susceptible to significant improper payments: Medicare FFS, Medicare Part D, Medicaid, Foster Care, and Head Start. The Medicare Prescription Drug Benefit program reported an error rate for the first time in FY 2011. The Department reported reductions in improper payment rates for five of the six programs for which it previously reported improper payment rates (i.e., Medicare FFS, Medicare Advantage, Medicaid, Head Start, and the Child Care and Development Fund). Although the Department reduced the improper payment rate for Medicare Advantage from 14.1 percent to 11 percent and for the Child Care and Development Fund from 13.3 percent to 11.2 percent, rates for both programs remain above 10 percent.

The Department has taken actions to address some improper payment vulnerabilities. CMS uses the Comprehensive Error Rate Testing (CERT) program as a way 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. Additionally, 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. OIG is examining the extent to which Medicare contractors meet error rate reduction plan requirements and the extent to which implementation of these plans affects overall contractor evaluation. Error rate reduction plans describe the corrective actions that contractors plan to take to lower the CERT paid-claims error rate and provider-compliance error rate in their jurisdictions.

To prevent recurrence of improper payments, CMS has made policy and manual changes and has implemented local system edits and CMS Medicare Administrative Contractors have conducted local provider education. Moreover, the ACA expanded the Recovery Audit Contractors (RAC) program from Medicare FFS to identify improper payments in Medicaid and Medicare Parts C and D for recovery and corrective action. OIG work underway is evaluating the results of the RAC program in Medicare.

The Department is also examining techniques used by private sector entities to identify improper payments. In 2011, CMS implemented the Fraud Prevention System (FPS), which is an advanced predictive analytic technology used to conduct data analysis and predictive modeling, to identify improper payment claims as they enter the payment system, and to detect and generate alerts for suspicious billing behavior across provider types. (See Challenge 3, Preventing and Detecting Medicare and Medicaid Fraud, for more discussion of FPS and predictive analytics.) Additionally, CMS recently started a demonstration to require prior authorizations for certain power mobility devices in seven States with high populations of fraud and error-prone providers. CMS is also exploring ways to leverage existing compliance programs within the provider community to educate providers about payment vulnerabilities.

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 Medicaid payments vary from State to State, PERM helps CMS identify trends and common errors across States. On the basis of 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.

In addition, the Department is strengthening its program integrity efforts by working with its OpDivs and StaffDivs to identify and prioritize programmatic risks. (See Challenge 7, Grants Management and Administration of Contract Funds, for additional information regarding improper payments.)

What Needs To Be Done

The Department is slated to publish a projected error rate for CHIP in the 2012 reporting period. The Department should continue to develop error rates for additional programs, including TANF, to comply with IPERA requirements.

HHS has developed CAPs for the programs for which it reports improper payment rates that, if implemented as designed, could be effective in further reducing improper payments. OIG has recommended that HHS consider changes to its quarterly reporting on high-dollar overpayments that include developing a comprehensive list of overpayments using all potential sources of information and reporting any high-dollar overpayments made by the five State-administered programs (i.e., Medicaid, CHIP, TANF, Foster Care, and the Child Care and Development Fund.) Further, the Department should use historical improper payment data to identify the root causes of improper payments. In addition, for Medicare FFS claims, CMS should 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 further prevent improper payments. It should also expand its provider education efforts around program requirements and improper payment vulnerabilities. Implementation of planned program integrity initiatives, such as evaluating and monitoring risks, identifying and addressing cross-cutting issues, resolving reported grantee audit findings, and sharing best practices across HHS, will help the Department achieve its goal of integrating program integrity into all aspects of its operations and culture. (See Challenge 7, Grants Management and Administration of Contract Funds, for additional information regarding improper payments.)

Key OIG Resources

Management Issue 3: Preventing and Detecting Medicare and Medicaid Fraud

Office of Inspector General, U.S. Department of Health and Human Services | 330 Independence Avenue, SW, Washington, DC 20201