Improper Payments in Federal Healthcare Programs

Introduction

As required by law, federal agencies operating programs that make payments (or reimbursements) derived from federal funds or resources must review their programs and identify those that are susceptible to significant improper payments.¹ This legislation includes health care programs and payments made by the federal government to private health plans or providers. As part of the mandated review effort, the federal government must also develop and implement corrective action plans for any programs associated with high levels of improper payments. In this month’s blog, we explain what constitutes improper payments, how much money has been considered improperly paid, and what types of actions have been taken to track and address improper payments. In particular, we will focus on government programs involving medical record review.

What are improper payments?

There are several conditions for improper payments as defined by the federal government, including when:

• a payment was made but should not have been made,
• federal funds go to the wrong recipient,
• the recipient receives an incorrect amount of funds,
• the recipient uses the funds in an improper manner, and
• documentation is not available to verify the appropriateness of the payment.

The last reason is the most relevant to health care programs which rely on the information from medical claims and/or medical record documentation for reimbursement. These include payments such as claims-based payments under the Medicare fee-for-service (FFS) program, risk-adjusted capitated payments under Medicare Advantage (MA), the risk adjustment transfer payments for plans in health insurance exchanges authorized by the Affordable Care Act (ACA), and medical bills reimbursed in the VA Community Care Program (CCP).

How are improper payments tracked?

For this question, we will focus on health care programs such as MA, Medicare FFS, and the VA CCP. Each of these programs requires the use of claims data, known as “encounters” for private plan claims, and/or medical record documentation (e.g., physician notes that support the information on claims data) to determine payment amounts. For these types of programs, the federal government generally uses a sample of claims or encounter records, along with associated medical record documentation. The federal government audits the sample of claims and/or associated medical records to determine if the payments to private health plans and providers were properly made under the applicable agency’s policies on coverage, coding, and billing.

For example, in the case of MA, the focus of improper payments is on errors in beneficiary risk scores. The primary component of most beneficiary risk scores is clinical diagnoses submitted by the MA plan largely identified through encounters. If medical record documentation (e.g., clinical notes) does not support the diagnoses submitted to the Centers for Medicare & Medicaid Services (CMS) for payment, the risk scores may be inaccurate and result in payment errors. Thus, the federal government reviews the medical records for support of the diagnoses submitted by MA plans for a stratified random sample of MA enrollees receiving risk-adjusted payments. The auditing process for the MA improper payment measure process is similar to the contract-level audits described in a previous blog, with a key difference being that a national sample is used instead of a sample specific to an MA health plan contract). In this case, values derived from a national sample are extrapolated to create a program-wide estimate of improper payments.

How much money has been estimated as improperly paid?

Amounts of improper payments vary significantly by federal agency and program. The Office of Management and Budget (OMB) is responsible for identifying high-risk programs. These programs have estimates of improper payments resulting in monetary loss that exceed $100 million annually. Several health care related programs fall into this category, including MA, Medicare FFS, and the VA CCP. In the figure below, we show the estimated improper payment percentages for these programs during FY 2021. The improper payment percentage is calculated as the proportion of total program payments that are associated with improper payments.

Improper Payment Rate for Medicare FFS, MA, and VA CCP in FY 2021

Source: U.S. Department of the Treasury in coordination with the U.S. Department of Justice and Office of Management and Budget. Annual Improper Payment Datasets available at: https://www.paymentaccuracy.gov/payment-accuracy-the-numbers/

On a percentage basis, the vast majority of payments are made properly. However, each of these programs are associated with billions of dollars in improper payments ($25 billion for Medicare FFS, $23.2 billion for MA, and $2.3 billion for VA CCP in FY 2021). It is important to note that the estimated improper payments represent both overpayments and underpayments. While estimated overpayments exceed underpayments for most programs, including these three, underpayments can still be substantial. For example, FY 2021 underpayments were estimated to be over $8 billion in the MA program, accounting for roughly one-third of program improper payments.

What are the drivers of improper payments?

As mentioned above, insufficient documentation is a major reason for improper payments. Across all of the programs run by the Department of Health and Human Services(HHS), including all Medicare and Medicaid related programs, insufficient documentation accounts for 72% (over $110 billion) of improper payments. Most of these errors are due to instances where information required for payment is missing; at the time of review, the federal agency did not have sufficient documentation to discern whether the payment was proper or improper. Consequently, improper payments due to insufficient documentation are considered overpayments and HHS has always made recoveries on payments with insufficient documentation, even after review has ceased and multiple attempts to obtain documentation to support the payment have been made.

Programs that rely on risk adjustment tend to have more issues with discrepant information versus insufficient information. For example, insufficient documentation comprises about 7% of improper payments for the MA program, whereas medical record discrepancies lead to the majority of MA improper payments (58% or over $13 billion). These inconsistencies result from differences in the diagnoses submitted on plan encounters and the diagnoses supported in medical record documentation. Such discrepancies can lead to overpayments, as well as underpayments in the case where evidence for more reimbursable diagnoses are found during the review process. In general, underpayments are due to underreporting of information on claims or encounters.

What mitigation strategies have federal agencies taken to avoid improper payments?

For health care claims and risk-adjusted payments, mitigation strategies have largely included additional sampling and auditing of documentation that supports reimbursement. As part of the corrective action plan for the MA program, contract-level audits on contract-specific samples are conducted to recoup overpayments from participating MA plans. In addition, plans are required to implement processes to review the information submitted for payment pre-submission. CMS conducts audits on the MA plan efforts to address medical record documentation deficiencies or discrepancies. CMS also offers training on program integrity efforts for MA plan participants. Government oversite agencies, such as the U.S. Government Accountability Office (GAO) and the Office of Inspector General (OIG), may also conduct reviews. For example, the GAO identified significant deficiencies and made recommendations to CMS to improve the MA improper payment review and recovery process. The OIG has been conducting contract-level audits similar to those performed by CMS, which have resulted in recommendations for substantial payment recoveries.

Why do improper payments matter to private health plans and providers?

There are several reasons why health plans and providers should care about the efforts that the federal government are taking to address improper payments. The obvious reason is that private health plans or providers participating in various federally funded health care programs may have to return payments deemed improper. Additionally, when health plans and providers are underpaid, resource constraints can affect beneficiary care. Given the magnitude of the annual error rate, nearly every plan and provider, and thus beneficiary, is (or will be) impacted. The first line of defense is for plans and providers to take steps to ensure diagnosis and risk factors are sufficiently and accurately documented before submitting for payment.

It is also important to note that all program participants must comply with reporting and auditing whether definitively associated with improper payments or not. Generally speaking, programs associated with high improper payments are more likely to have burdensome oversight. The associated burdens of that oversight are shared by all participants. These efforts can be particularly arduous to programs involving medical record review. We have discussed in prior blogs how labor intensive it can be to track down and review medical records. For example, challenges in acquiring documentation include administrative burdens (e.g., making multiple phone calls or emails), provider abrasion, retrieval costs, and disconnects between state and federal regulation. Such challenges increase with a plan’s share of out-of-network providers.

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¹Key legislation includes the Improper Payments Information Act of 2002 (IPIA) and its amendments the Improper Payments Elimination and Recovery Act of 2010 (IPERA) and the Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA).