American College of Physicians: Internal Medicine — Doctors for Adults ®

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Audit finds Medicare plagued by $23 billion in improper payments

From the September 1997 ACP Observer, copyright 1997 by the American College of Physicians.

By Deborah Gesensway

After conducting the first comprehensive audit of Medicare fee-for-service claims, federal investigators have concluded that the nation's largest health insurance program is fraught with improper payments.

In testimony before the House Ways and Means Committee this summer, Health and Human Services (HHS) Inspector General June Gibbs Brown said that the government in 1996 overpaid hospitals, doctors, home health agencies, nursing homes and laboratories $23.2 billion, or 14% of Medicare's total billings.

Auditors compared 5,314 claims from 600 randomly selected beneficiaries with documentation in medical records to see if the services billed were medically necessary, adequately documented and correctly coded. Auditors did not look into issues such as excessive pricing, phony records or kickbacks.

In all, auditors found that 1,577 of the claims they reviewed—almost a third—did not meet Medicare standards. They found the following problems:

  • Almost half of the improper payments—47%—had insufficient or no documentation in the medical record to back up a claim. Ms. Brown cited the example of a physician who was paid $523 for 10 hospital visits, but whose records supported billing for only two visits, resulting in a $386 overpayment. Nearly a third of providers ignored repeated requests from auditors for medical documentation of their claims.
  • Another 37% of improper payments were due to a lack of medical necessity, such as payments for skilled physical therapy for patients with no functional diagnosis requiring physical therapy.
  • Incorrect coding was at the root of another 8.5% of the overpayments. Auditors checked codes by comparing the code with the documentation in the medical record to support that level of code.
  • Payments made for noncovered services accounted for 5% of the problem. In one case, a physician billed Medicare for an electrocardiogram and various laboratory tests that should have been denied because they were performed as part of an annual physical examination, a service that Medicare does not cover.
  • Hospitals and clinics received the largest share of improper payments (35%). Other major recipients included doctors (22%), home health agencies (16%) and nursing homes (10%).

HCFA Administrator Bruce C. Vladeck, PhD, told Congress that the audit raises questions about who is responsible for improper payments: health care providers guilty of improper billing and/or poor documentation, or Medicare carriers who erroneously pay their bills. Annually, 800 million claims for $168.6 billion are processed and paid for Medicare's 38 million beneficiaries. Ms. Brown said that the complex and decentralized reimbursement process is "inherently at risk for payment errors."

One thing is clear: As a result of this study, physicians and hospitals can look forward to more of a crackdown on fraud and abuse, with new anti-fraud initiatives included in the new federal budget. Currently, Dr. Vladeck said, Medicare saves $14 for every dollar spent on payment safeguard and other anti-fraud activities. Total HHS spending for anti-fraud, waste and abuse efforts in Medicare and Medicaid is $599 million in FY 1997, up from $452 million five years earlier.

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