Consolidation, prior authorization drive improper Medicare payments to historic low

The Centers for Medicaid and Medicare Services at one point paid providers who accidentally amputated the wrong patient leg. Now, thanks to improper payment regulations, clinicians who excise healthy limbs can’t bill regulators for their service.

“CMS was paying for what they would call never events, or very rare events, like turning individuals from a single amputee to a double amputee,” said Adam Block, associate professor at New York Medical College and principal at Charm Economics.

Improper payment regulations have helped incentivize better patient outcomes and drive savings for the federal government. During fiscal 2021, the Medicare fee-for-service program issued $25 billion in improper payments, or 6.2% of all reimbursements, a decrease from $20.72 billion over the past seven years and a historic low, the Health and Human Services Department reported Monday.

A rise in CMS-required prior authorizations, provider consolidation and tech investment have helped chop Medicare fee-for-service improper payments over the years, analysts say.

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While fraud events receive more attention, claims with administrative errors account for the vast majority of overpayments and underpayments by the federal government. CMS rejects these claims outright—giving providers a chance to resubmit—or catches them in later audits, forcing clinicians to true up on any improper payments received. Fraud is committed by less than 1% of physicians, CMS said.

“A lot of improper payments are not the result of fraud, they are the result of insufficient documentation and codes that are the subject of disagreement between the provider and CMS’ contractors,” said Mike Adelberg, a principal at Faegre Drinker Consulting. “Lower improper payment is good news. But it doesn’t automatically translate into less fraud and abuse.”

CMS credited the drop in inappropriate bills to increased education of providers, which led to a $1.8 billion decrease in improper payments to inpatient rehabilitation facilities from 2018 to 2021. Expanding targeted auditing programs and prior authorization requirements for some durable medical equipment items also sparked a $388 million reduction in improper payments from 2020, the federal agency said.

Much of this work started about a decade ago, after instances of overbilling for power scooters and other items caught regulators’ eyes, Adelberg said. To combat unnecessary spending, regulators introduced prior authorization requirements around certain services. These administrative tasks have been growing in recent years, Adelberg said.

Last year, CMS announced that it was expanding prior authorization requirements for repetitive, scheduled, non-emergent ambulance transport nationally, after a federal analysis found that using a non-emergency vehicle to get some patients to the doctor saved the federal government $550 million over two years.

Along with prior authorization, provider consolidation has also helped cut improper Medicare payments, said Dr. Michael Stearns, specialized consulting director of medical informatics and health language at Wolters Kluwer.

Almost 70% of physicians were employed by hospitals or corporations like private equity firms and health insurers in January 2021, according to an Avalere Health analysis. The company also suggested the COVID-19 pandemic accelerated the trend toward consolidation.

Aligning independent physicians to larger health systems offers them access to software for documenting patient conditions and codes, Stearns said. Consolidation among providers has driven growth in the revenue cycle management space, he added.

Revenue cycle management companies have raised $344.5 million in venture funding in 2021, up 78.8% from $192.6 million last year, according to data from Modern Healthcare’s Digital Health Business and Technology.

Rather than contracting with technology vendors, some health systems like SSM Health are rebadging their revenue cycle workers, adding a bump to business for companies like UnitedHealth Group’s Optum health services arm.

“Now you can get physicians in rooms together and go over documentation and improve compliance,” Stearns said. “Small practices do not really have the bandwidth to be able to absorb that.”

Medicare Advantage insurers, meanwhile, accounted for $23.1 billion in improper payments. Ten percent of all payments for the privatized government program for older adults were improper in fiscal 2021, CMS said. The agency recently changed the way it reviewed Medicare Advantage insurers’ claims, and regulators said they did not have enough data to identify trends from one year to the next.

But going forward, automating coding for clinicians will cut improper payments to both programs, Stearns said. Using technology to document patient conditions will be a harder task to streamline, however, since doctors who are pressed for time may not always write down every patient condition, leaving gaps in data collected. This will continue to pose a threat for improper Medicare payments, he said.

“It’s just really hard to ask them to slow down and document information about a condition that’s not really relevant for that point in time,” Adelberg said. “I think we’ll probably see documentation be the one that’s emerging as the most challenging area for Medicare to fix.”

Medicare and Medicaid have varying improper payments analyses. While Medicare fee-for-service and Medicare Advantage payments are measured at a national level each year, improper payments by the Children’s Health Insurance Program and Medicaid programs’ are calculated by averaging the findings from a portion of states over three years.

Among the government insurance programs for lower-income Americans, CHIP accounted for the greatest share of inappropriate CMS payments, with $5.3 billion, or 31.8% of total reimbursements categorized as improper. State Medicaid programs were responsible for a larger amount of improper payments, however, at $98.7 billion, or 21.6% of total reimbursements.

Fee-for-service Medicare was responsible for 13.9% of total improper payments, while Medicaid managed-care was responsible for 0.04% of improper payments. The error rate for managed care only measures monthly capitation payments at the state level, while fee-for-service payments vary based on service, provider, insurer and other factors.

These rates also must factor in information about enrollee eligibility, which can make it more complex for providers to document than Medicare, said Andy Schneider, a research professor of the practice at the Georgetown University McCourt School of Public Policy. Most improper Medicaid and CHIP payments were due to insufficient documentation around member eligibility, CMS said.

“Medicaid is an income-based program, so you have to figure out what their income is to be eligible or not,” Schneider said. “The dynamics are very, very different, and the operational requirements for an income-tested program are much, much greater than the operational requirements for a social insurance program.”