Further, HCFA is responsible for monitoring HMOs to ensure that all Medicare requirements are met, including that HMOs’ reports of beneficiaries’ institutional status are accurate. 1.) HCFA based the higher payment rates for institutional status on historical evidence that beneficiaries living in these types of facilities had greater medical needs and higher medical costs than those who lived in the community. However, some facilities classified by HMOs as institutions clearly did not serve seniors with serious health problems. Facilities of this nature pose continued challenges in appropriately determining which beneficiaries should be classified as institutionalized for payment purposes. In a 1995 memorandum to HCFA headquarters, for example, the director of a HCFA region’s managed care operations noted that “the manual provides no guidance regarding the level of care provided to residents [needed to qualify for institutional status]” and that “HCFA has the obligation to provide better guidance to plans regarding the types of facilities which may be designated as ‘institutions.’”
On July 24, 1997, HCFA issued a policy letter that narrowed the definition of eligible institutions effective January 1, 1998. HCFA Allows HMOs a 3-Year Period to Adjust Payments for Institutional Enrollees

Verifying HMOs’ historical institutional status data is even more difficult than ensuring the accuracy of current data. The period of time being scrutinized is longer, and HCFA’s policy of allowing HMOs 3 years to correct institutional status data and adjust payments accordingly compounds the problem. HCFA’s Oversight Fails to Ensure Accurate Payments

Our review and the Inspector General audits underscore the need for HCFA to improve its oversight of the HMO data used in determining Medicare payments to HMOs. HCFA Lacks a Systematic Approach to Recovering Overpayments

HCFA’s procedures do not ensure that Medicare overpayments are recovered when HMO data reporting errors are found. However, beyond the limited number of beneficiary records reviewed during routine monitoring visits, HCFA does not attempt to verify HMO data or the results of HMOs’ self-audits. Variation in Expected Costs for Institutional Beneficiaries Provides Opportunities for Overpayment

Although HCFA uses the institutional risk adjuster to take into account the expected higher costs of health care for institutionalized beneficiaries, research on the risk adjuster indicates that institutional residence is actually only weakly related to a beneficiary’s expected health care costs. HCFA’s new definition of eligible institutions includes certified nursing facilities but generally excludes assisted living facilities. HCFA’s use of unaudited HMO data to determine payments to HMOs engenders little confidence in the accuracy of the data and resulting payments. Even when serious HMO reporting errors—resulting in substantial overpayments—have been discovered, HCFA may wait 2 years or more before checking to see if the HMO has implemented a revised data gathering and reporting system. Recommendations to the Administrator of the Health Care Financing Administration

To better protect the integrity of Medicare capitation payments, we recommend that the HCFA Administrator take the following actions:
Establish a system to estimate and recover total overpayments when institutional status data errors are detected. Allow HMOs to revise records and claim retroactive payment adjustments for beneficiaries with institutional status only when HMO records have been verified by an independent third party. Conduct timely follow-up reviews of those HMOs found to have submitted inaccurate institutional status data.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Health Care Financing Administration's (HCFA) oversight of Medicare payments to health maintenance organizations (HMO) for institutionalized beneficiaries, focusing on: (1) the criteria HCFA uses to determine a beneficiary's institutional status; (2) the methods HCFA employs to ensure that HMOs properly classify beneficiaries as institutionalized; and (3) whether the higher capitation rate for beneficiaries who live in institutions is justified by higher health care costs.

What GAO Found

GAO noted that: (1) HCFA's broad definition of institution allowed HMOs to claim institutional status for individuals residing in facilities not likely to house sicker-than-average seniors; (2) some of the facilities GAO visited that HMOs had classified as institutional residences provided no medical care but rather offered a menu of recreational activities for seniors capable of living independently; (3) HCFA acted on GAO's findings and those of others by narrowing the definition of eligible institutions, effective January 1, 1998; (4) even with more stringent criteria, however, HCFA relies on the HMOs to determine which beneficiaries qualify for institutional status; and conducts only limited reviews to confirm the accuracy of HMO records; (5) studies by the Department of Health and Human Services Inspector General reviewing the accuracy of HMO institutional status data support GAO's finding that HCFA's reviews are not adequate to detect the extent of errors or overpayments resulting from HMOs' misclassification of beneficiaries; (6) the task of ensuring accurate data may be further complicated by HCFA's policy that allows HMOs 3 years to retroactively change institutional status data in beneficiary records; (7) the lack of a systematic approach for identifying errors limits HCFA's efforts to recover overpayments and ensure that appropriate payments are made to HMOs; (8) HCFA generally waits 2 years to verify that HMOs have corrected inaccurate recordkeeping systems, even when serious errors have been identified; (9) HCFA continues to use 20-year-old cost data in determining the payment rates for institutionalized enrollees and, as a result, HCFA overcompensates HMOs for their enrolled, institutionalized beneficiaries; (10) this overpayment problem may be corrected when HCFA implements a revised set of risk factors in 2000; (11) however, provisions of the Balanced Budget Act of 1997 that use 1997 rates as the basis for 1998 and future rates effectively preclude a revision to the institutional risk factor at this time; (12) while HCFA has revised its definition of eligible institutions, concerns remain that HCFA's oversight of payments for institutional status is inadequate; (13) HCFA has no system to estimate and recover total overpayments when institutional status errors are detected or to verify HMOs' retroactive adjustment requests; and (14) further, HCFA does not ensure timely review of those HMOs found to have submitted inaccurate institutional status data, and its use of outdated cost data in determining payments continues to overcompensate HMOs for institutionalized enrollees.