Report 97023 Summary - December 1997

Department of Health Services: The Department Does Not Use Its Automated Payment System To Detect Certain Ineligible Outpatient Claims

Results in Brief

The Department of Health Services (department) is the state agency with overall responsibility for the $17 billion California Medical Assistance Program (Medi-Cal), which provides medical care to any person who meets the eligibility criteria established by law. The Selective Provider Contracting Program (contracting program) is a Medi-Cal subsidiary program established in 1982, which allows the State to contract with approximately 260 hospitals to provide inpatient care at a negotiated rate. The negotiated rate covers designated services during the inpatient stay and precludes separate billing on outpatient claims for those services. For fiscal year 1996-97, Medi-Cal paid approximately $2.6 billion for inpatient services, most of which was paid through the contracting program. In addition, Medi-Cal paid approximately $1.2 billion for outpatient services, some of which relates to the contracting program. Most of these claims were processed through the department's complex automated payment system.

This report focuses on the effectiveness of controls over payment of hospital claims for the contracting program. We performed our review in conjunction with the United States Department of Health and Human Services, Office of Inspector General, which proposed the collaboration because it considered the contracting program to be at high risk for errors or abuse.

Our review disclosed that the contracting program has existed for 15 years without careful attention by the department and the commission to the intent of certain contract provisions or the possibility of designing and implementing edits to enforce those provisions. As a result, the department pays ineligible claims because its automated payment system cannot identify them. The department also does not perform complete post-payment audits that include recovery of ineligible payments. Currently, if a hospital submitted a claim for an inpatient at the contracted rate and a separate outpatient claim for a service covered in the inpatient rate, it could receive payment for both.

Further, until recently, the department had not designated a program coordinator to plan and organize activities among its various units responsible for developing and implementing edits related to hospital contracts. In addition, the department has indicated that until 1995, it did not have the capability to implement edits for the contracting program.

As a result of these deficiencies, we estimate that the department overpaid providers by approximately $1.6 million during fiscal year 1996-97. However, without controls such as edits in the automated payment system and audits of paid claims, the potential for ineligible payments is much greater. Specifically, we identified the following conditions:

· The automated database that identifies procedures covered in the contracted inpatient rate contains numerous errors. The database did not fully agree with the provisions of any of the ten contracts we reviewed.

· The department's proposed method to address related diagnoses is inadequate.

· The department has not proposed an efficient method for addressing outpatient claims covered during the pre-admission period. Its proposal involves manual adjudication of claims, a labor-intensive process.

· The department proposed to develop and implement edits before it analyzed certain relevant issues.

Until it addresses these and any other problems discovered during a thorough testing process, the department will continue to make ineligible payments and use staff resources inefficiently even after it activates edits for the contracting program.


To ensure that the contracting program is administered systematically, the department's program coordinator should exercise appropriate oversight of the program and the department should do the following:

· Examine the contracts the California Medical Assistance Commission has negotiated with hospitals to identify all provisions that affect the eligibility of outpatient claims for payment. This examination should be a joint effort of the commission and all department units involved in administering the contracting program. Further, the same units should give similar attention to proposed changes in new contracts within the formal review period to assess the impact of the changes on program administration.

· Address specific concerns pertaining to the implementation of the edits. In particular, the department should develop an accurate database for use in identifying procedures covered under each hospital's contractual inpatient rate. The department should also develop a more thorough edit for identifying related diagnoses. Further, the department should design an efficient system for addressing the 24-hour pre-admission period provisions of contracts.

· Analyze the impact of all relevant issues pertaining to the edits during their development and, if necessary, refine the edits to address these special situations.

· Thoroughly test the edits and compare test results to contract provisions. The department should address any additional problems identified during this test phase.

· Establish interim procedures to be used prior to complete implementation of the edits, such as post-payment audits, that specifically assess hospitals' compliance with the provisions of the contracting program.

The department should activate the contracting program edits in the automated payment system only after completing these steps.

Agency Comments

The department agrees with the overall recommendation to implement contracting program edits in the automated payment system. The department will explore the specific recommendations mentioned above and, where appropriate, make adjustments or corrections to current procedures and programs. In addition, the department stated that it identified other potential cost-saving program modifications that it may not have identified without this audit.