Key Issues > High Risk > Medicare Program & Improper Payments
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Medicare Program & Improper Payments

The Centers for Medicare & Medicaid Services (CMS) made some progress reducing improper payments but needs to take further action to address Medicare’s financial and oversight challenges.

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In calendar year 2017, Medicare financed $702 billion worth of health services for approximately 58 million elderly and disabled beneficiaries. This represents approximately 17 percent of federal spending, and spending is expected to increase significantly over the next ten years. Due to its size, complexity, and susceptibility to mismanagement and improper payments, we first designated Medicare as a high-risk program in 1990. Medicare continues to challenge the federal government because of (1) its outsized impact on the federal budget and the health care sector as a whole, (2) the large number of beneficiaries it serves, and (3) the complexity of its administration.

Medicare also faces a significant risk with improper payments—payments that either were made in an incorrect amount or should not have been made at all—which reached an estimated $48 billion in fiscal year 2018. CMS—which administers and oversees the Medicare program—should continue to take actions to prevent and reduce improper payments in the program.

Enforcement of Tax LawsSince our 2017 High-Risk Report, Medicare program officials have continued to address challenges in managing the program better. First, CMS has made progress in addressing improper payments. Specifically, CMS has demonstrated it is now meeting the capacity criterion, has maintained its leadership commitment to addressing Medicare improper payments, and partially meets the remaining three criteria.

The Medicare program has faced challenges in three additional broad segments—(1) payments, provider incentives, and program management under Medicare fee-for-service (FFS); (2) Medicare Advantage (MA) and other Medicare health plans; and (3) design and oversight of the Medicare program and the effects on beneficiaries. We are not rating CMS’s progress against the high-risk criteria for the remaining three segments for two main reasons. First, the Medicare program is subject to frequent legislative updates to provider payments and other policies. This active congressional participation in the details of the program means that many factors are outside of the agency’s control. Second, the Medicare program is in a profound state of transition from a payment system that rewards providers based on the volume and complexity of health care services they deliver to one that ties payments to the quality and efficiency of care. While this shift ultimately may save money and lead to beneficiaries receiving better care, it may be several years before we can judge the results.

Since we added Medicare to our High-Risk List in 1990, we have made more than 700 recommendations related to this high-risk area, 28 of which were made since the last high-risk update in February 2017. As of December 2018, more than 80 recommendations remain open.


Improper Payments

Enforcement of Tax LawsSince our 2017 High-Risk Report, the capacity criterion has progressed from partially met to met and ratings for the remaining four criteria remain unchanged.

Leadership commitment: met. CMS has continued to demonstrate leadership commitment by naming a new Director for the Center for Program Integrity (CPI)—CMS’s centralized entity for Medicare and Medicaid program integrity issues—and implementing some of our recommendations. In December 2017, we reported CMS has committed to reducing fraud—one source of improper payments—by creating an organizational culture and structure conducive to fraud risk management.

Capacity: met. CPI’s budget and resources have increased over time, and the agency has established work groups and interagency collaborations to extend its capacity. For example, CMS allocated additional staff to CPI after Congress provided additional funding. CPI’s full-time equivalent positions increased from 177 in 2011 to 419 in 2017. In August 2017, we reported CMS’s Fraud Prevention System, which analyzes claims to identify health care providers with suspect billing patterns, has also helped speed up certain investigation processes. Further, the Healthcare Fraud Prevention Partnership has helped improve information sharing among payers inside and outside of the government.

Action plan: partially met. CMS continues to identify and report progress on corrective actions related to Medicare improper payments. It reported this progress in the Department of Health and Human Services’ (HHS) annual Agency Financial Report and started a Medicare FFS action plan based on our suggestions. However, work remains to be done to meet this criterion. As of October 2018, CMS’s action plan had yet to include clear metrics and timeframes as we suggested, and does not address MA—the private plan alternative to FFS, or Medicare Part D—the outpatient prescription drug program. In addition, as we reported in December 2017, CMS has neither conducted a complete fraud risk assessment nor created a risk-based antifraud strategy for Medicare. This strategy, if implemented, would allow the agency to better ensure it is addressing the full portfolio of risks and strategically targeting the most significant fraud.

Monitoring: partially met. CMS made progress to improve monitoring in some areas, such as its oversight of Medicare provider education efforts. However, to make further progress, CMS needs to implement our open recommendations related to overseeing its enrollment screening process and evaluating Medicare Administrative Contractor effectiveness in preventing improper payments. CMS should also monitor metrics developed for its improper payment action plan.

Demonstrated progress: partially met. Estimated improper payment rates declined more than one percent from fiscal year 2016 to 2018 for all parts of Medicare—to 8.12 percent, 8.10 percent, and 1.66 percent for FFS, MA, and Medicare Part D, respectively. However, according to the Office of Management and Budget, the rate and amount of improper payments made in Medicare still represent some of the highest in the government. Many of our recommendations that could further lower these rates remain open. For example, CMS has not implemented recommendations to improve MA improper payment recovery or sought legislative authority to permit payment for recovery auditors to conduct prepayment claims reviews. Reviewing Medicare claims before payment can prevent improper payment. Further, CMS made some progress implementing recommendations related to expanding the use of prior authorizations based on our April 2018 report. However, CMS has yet to fully implement prior authorization expansion to additional items and services with high improper payment rates.

Payments, Provider Incentives, and Program Management under Medicare Fee-for-service

As CMS progresses towards full implementation of its value-based payment system, it will be important for the agency to use reliable quality and efficiency measures and methodological approaches that maximize the number of physicians for whom value can be determined.

We have not rated this segment because (1) the Medicare program is subject to frequent legislative updates to provider payments and other policies and (2) the Medicare program is currently in a state of transition from a payment system that rewards providers based on volume and complexity of health care services to one that ties payment to the quality and efficiency of care.

Appeals process. In May 2016, we reported Medicare had seen significant growth in the number of appeals submitted by providers, beneficiaries, and others dissatisfied with the program’s decisions to deny or reduce payments for claims. While CMS has implemented a more efficient way to adjudicate repetitive claims as we had recommended, other recommendations regarding the appeals process remain open, as discussed later in this section.

Medicare program management. CMS has faced challenges managing the Medicare program, including efforts to improve program efficiency and provide better service to beneficiaries. For example, we reported in September 2016 that implementation of the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies Competitive Bidding Program had resulted in Medicare savings, and available evidence did not indicate widespread effects on beneficiary access; however, stakeholders have reported some specific access issues, such as difficulty locating contract suppliers that will furnish certain items. CMS suspended its competitive bidding program as of January 1, 2019, to further assess concerns raised by stakeholders and to determine whether changes were needed to improve the program’s overall effectiveness.

Hospital value-based purchasing program. The Hospital Value-Based Purchasing program provides financial incentives to acute-care hospitals to provide efficient, high-quality care to Medicare beneficiaries. In June 2017, we reported some hospitals with high efficiency scores received bonuses despite having relatively low quality scores. This contradicts CMS’s intention to reward high-quality care provided at a lower cost. We have an open recommendation related to the hospital value-based purchasing program, discussed later in this section. 

Cancer hospitals. Unlike teaching hospitals paid under Medicare’s prospective payment systems (PPS), the methodology for paying PPS-exempt cancer hospitals (PCH) provides little incentive for efficiency. In our February 2015 report, we recommended Congress consider requiring Medicare to pay PCHs in the same manner it pays PPS teaching hospitals, or provide the Secretary of HHS with the authority to otherwise modify how Medicare pays PCHs. We have an open matter related to cancer hospitals, discussed later in this section.

Hospital-physician consolidation. Because Medicare often pays more for services performed in a hospital outpatient department than a physician’s office, hospitals may have an incentive to acquire physician practices and hire physicians as salaried employees—a financial arrangement known as vertical consolidation. In December 2015, we reported that, from 2007 through 2013, the number of vertically consolidated hospitals increased from about 1,400 to 1,700 and the number of vertically consolidated physicians increased from 96,000 to 182,000. In our December 2015 report, we recommended Congress direct the Secretary of HHS to equalize payment rates between hospital outpatient departments and physician offices for evaluation and management office visits, and other services as appropriate. We have an open matter related to hospital-physician consolidation, discussed later in this section.

While Congress enacted legislation to exclude services furnished by off-campus hospital outpatient departments from higher payment, this exclusion does not apply to services furnished by providers under construction or billing as hospital outpatient departments prior to November 2015, or to services provided by on-campus hospital outpatient departments. However, CMS has taken some action. In November 2018, CMS issued a final rule capping payment rates for certain services furnished by off-campus hospital outpatient departments existing or under construction in 2015 at the physician fee schedule rate. Since these services furnished by these off-campus hospital outpatient departments are currently paid under a higher rate, the payment cap would equalize payment rates for clinical visits between settings. The application of the payment cap will take place over 2 years. In 2019, 50 percent of the payment reduction will be applied and in 2020 and subsequent years, 100 percent of the payment reduction will be applied. However, CMS’s authority to implement this rule has been challenged in federal district court.

Medicare Advantage and Other Medicare Health Plans

The MA program provides health care coverage to Medicare beneficiaries through private health plans. The number and percentage of Medicare beneficiaries enrolled in MA has grown steadily over the past several years, increasing from approximately 10 million (21 percent of all Medicare beneficiaries) in 2008 to about 19 million (32 percent of all Medicare beneficiaries) in 2017. Similar to the FFS program, the MA program has been in a period of transition. For example, in April 2018, CMS finalized guidance for 2019 intended to provide more flexibility to sponsors of MA plans in how they design plans, such as by expanding the types of supplemental benefits plans can offer to include services that compensate for physical impairments.

We have not rated this segment because (1) the Medicare program is subject to frequent legislative updates to provider payments and other policies and (2) the Medicare program is currently in a state of transition from a payment system that rewards providers based on volume and complexity of health care services to one that ties payment to the quality and efficiency of care.

Network adequacy. In August 2015, we reported on shortcomings in CMS’s criteria for determining network adequacy, how the agency oversees MA organizations’ adherence to its requirements, and how it ensures enrollees are properly notified about provider network changes. We have an open recommendation related to network adequacy, discussed later in this section.

MA plan payment adjustments. In January 2012 and 2013, we reported that CMS’s adjustments to account for differences between FFS and MA providers’ coding of medical diagnoses were too low, resulting in billions of excess payments to MA plans. We have an open recommendation related to MA plan payment adjustments, discussed later in this section.

Encounter data. As we reported in January 2017, CMS has begun to use encounter data—claims-like data collected from the sponsors of MA plans—in its methodology for risk adjusting payments to MA plans. While the encounter data were intended to improve the accuracy of risk adjustment, the data have yet to be fully validated. We have an open recommendation related to the encounter data, discussed later in this section.

Design and Oversight of the Medicare Program and the Effects on Beneficiaries

The design and CMS’s oversight of the Medicare program affect both beneficiaries’ out-of-pocket costs and the quality and safety of care they receive. Medicare FFS’s benefit design does not include a cap on the maximum cost-sharing amount a beneficiary can be responsible for during a given year for covered services, which could leave beneficiaries vulnerable to catastrophic costs, especially if they do not have supplemental insurance. In addition, Medicare spending can affect the premiums beneficiaries pay. In 2018, the Medicare Trustees estimated Medicare spending will grow at a faster rate than workers’ earnings and the economy overall, which will impose a significant burden on many Medicare beneficiaries and the country. With regard to quality, CMS reported that Medicare Quality Improvement Organizations provided oversight that helped to prevent tens of thousands of beneficiaries from being admitted or readmitted to hospitals, and reduced the number of nursing home patients with pressure ulcers or who were restrained, from fiscal years 2011 through 2014.

We have not rated this segment because (1) the Medicare program is subject to frequent legislative updates to provider payments and other policies and (2) the Medicare program is currently in a state of transition from a payment system that rewards providers based on volume and complexity of health care services to one that ties payment to the quality and efficiency of care.

End-stage renal disease. In October 2015, we reported that only a small fraction of Medicare patients had used the Kidney Disease Education benefit, which provides pre-dialysis education intended to inform treatment decisions. Benefit utilization may be limited because of statutory limitations on the types of providers who are permitted to furnish the benefit and on the patients eligible to receive it. We have an open recommendation related to the Kidney Disease Education benefit, discussed later in this section. 

Prescription Opioids. In October 2017, we reported that while CMS oversees the prescribing of drugs at a high risk of abuse, it does not analyze data specifically on opioids. We have three open recommendations related to prescription opioids, one of which is discussed later in this section.

Improper Payments

To better prevent, identify, and recover improper payments across all parts of the Medicare program, CMS should fully implement our open recommendations related to Medicare program integrity. CMS should:

  • seek legislative authority to allow the Recovery Auditors to conduct prepayment reviews in addition to postpayment claims reviews;
  • provide Medicare Administrative Contractors—contractors that process and pay Medicare claims—with written guidance on how to accurately calculate and report savings from prepayment claim reviews;
  • improve the processes for selecting contracts to include in its risk adjustment data validation audits—audits of MA organizations that help CMS recover improper payments in cases where beneficiary diagnoses are unsupported by medical records;
  • take steps, based on the results from evaluations, to continue prior authorization, such as by resuming paused demonstrations, extending demonstrations, or by identifying new opportunities to expand prior authorization to additional items and services; and
  • provide and require fraud-awareness training to its employees, conduct fraud risk assessments, and create an antifraud strategy for Medicare, including an approach for evaluation.

Payments, Provider Incentives, and Program Management under Medicare Fee-for-service

We have recommended to the Secretary of HHS or CMS several actions, including the following:

  • The Secretary of HHS should direct relevant agencies to modify the various Medicare appeals data systems to collect consistent data, including data on appeal categories and appeal decisions.
  • CMS should revise the formula for calculating a hospital’s total performance score under the Hospital Value-Based Purchasing Program or take other actions so the efficiency score does not have a disproportionate effect on the total performance score.

Congressional Actions Needed

We have also identified areas that would require Congressional actions to be addressed:

  • In our February 2015 report, we recommended that Congress consider requiring Medicare to pay PCHs as it pays PPS teaching hospitals, or provide the Secretary of HHS with the authority to otherwise modify how Medicare pays PCHs. In doing so, Congress should provide that all forgone outpatient payment adjustment amounts be returned to the Supplementary Medical Insurance Trust Fund.
  • As mentioned above, Medicare pays for evaluation and management services in all hospital outpatient departments regardless of whether they are deemed on-campus or off-campus. Congress should consider equalizing payment rates Medicare pays for certain health care services, as we suggested in December 2015, between all hospital outpatient settings, and return the associated savings to the Medicare program.

Medicare Advantage and Other Medicare Health Plans

We have recommended to CMS several actions, including to:

  • augment MA network adequacy criteria to address provider availability;
  • take steps to improve the accuracy of risk score adjustments by, for example, accounting for additional beneficiary characteristics such as sex and health status; and
  • (1) establish specific plans and time frames for using encounter data for all purposes other than risk adjusting payments to MA organizations; and (2) complete all the steps necessary to validate the data, including performing statistical analyses, reviewing medical records, and providing MA organizations with summary reports on findings.

Design and Oversight of the Medicare Program and the Effects on Beneficiaries

We have recommended to CMS several actions, including to:

  • examine the Kidney Disease Education benefit and, if appropriate, seek legislation to revise provider and patient eligibility criteria for the benefit; and
  • take three actions related to prescription opioids, including Identifying the number of at-risk beneficiaries receiving high doses of opioids
Looking for our recommendations? Click on any report to find each associated recommendation and its current implementation status.