Identifying Medicare's costliest services and making them more efficient is a massive detective operation. The government knows overbilling and fraud are widespread, and it is cracking down on abuses, but where else can it look?

Medical equipment and home health services are two areas Medicare officials will need to examine closely. According to a recent study funded by the Commonwealth Fund and published in the journal Health Affairs, these services are worthwhile targets for investigation.

When investigators look at potential abuses in Medicare payments, they try to identify and isolate problems by looking at payment patterns. Do certain doctors bill more than average for similar services? Do some areas seem to cost more than others for medical equipment?

The Commonwealth Fund study identified geographic variations in durable medical equipment and home health care billings as "a possible indication of fraud and abuse." All told, 13 services in 60 communities were examined based on claims data from 2004–2006. 

The greatest variation in the use of these services was in wheelchairs, diabetes care supplies and physician-administered drugs, such as chemotherapy. Home health services were also suspect.

According to the Commonwealth Fund study, "The variation in use in the durable medical equipment and home health categories is large enough to warrant further study and possibly policy interventions, the authors say. Both may be susceptible to fraud and abuse, in part, because physicians are not held accountable for utilization after the prescription is made. Patient cost-sharing could reduce inefficiencies in certain services, like home health. For others—including specialist visits and imaging—pay-for-performance, prospective payment systems, and value-based insurance designs may promote greater efficiency."

Michael Reinemer, vice president of communications and policy at the American Association of Homecare, said that the data used in the study is outdated. Reinemer said significant regulatory requirements put into place since 2006 have dramatically changed the landscape of the durable medical equipment industry, making fraud and waste much less common.

Starting October 2009, the CMS put into place new rules governing reimbursement for certain durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) suppliers. The new requirements for suppliers include being accredited and having a surety bond. According to the CMS, these requirements help assure product and service quality and help prevent fraud in the Medicare program.

Reinemer said that, as a result, fraud and waste have largely moved out of the home medical medical equipment sector. "No fly-by-night criminal or scam artist is going to jump through those expensive, time-consuming financial and regulatory hurdles, which is why you seldom read about fraud in this sector occurring in 2010 or after," he said.

But the Commonwealth Study infers that because doctors often do not monitor the use of medical equipment and supplies directly, there are opportunities for overbilling. While the study didn't delve into specific amounts of money that are being wasted, other investigators have laid the groundwork for probing abuses.

In the 2008, the Government Accountability Office (GAO) estimated that at least $1 billion is being lost to fraudulent operations being billed to Medicare. GAO auditors wanted to understand how sham companies set up operations and were able to submit bills and receive payments from Medicare, so they set up two shell medical equipment companies with fabricated contracts. Despite the fact that the fake firms had no inventory, Medicare eventually approved them for payment.

According to the GAO report, "Schemes to defraud the Medicare program have grown more elaborate in recent years. In particular, the Department of Health and Human Services has acknowledged Centers for Medicare & Medicaid Service's (CMS) oversight of suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) is inadequate to prevent fraud and abuse. Specifically, weaknesses in the DMEPOS enrollment and inspection process have allowed sham companies to fraudulently bill Medicare for unnecessary or nonexistent supplies."

As a Congressional watchdog, the GAO has provided several recommendations to Medicare to stem fraud in recent years. The health care system is slowly embracing them and has made progress rooting out fraud with the help of state officials and the Department of Justice.

The GAO cited one of its key suggestions in its report published in early May that, "CMS require contractors to automate prepayment controls to identify potentially improper claims for medical equipment and supplies, expand current regulations to revoke billing privileges for home health agencies with improper billing practices, designate authorized personnel to evaluate and address vulnerabilities in payment systems, and enhance payment safeguards for physicians who use advanced imaging services."

This is a tall order for Medicare and will require it to not only change its culture, but audit sales and use of medical equipment and supplies on a large scale. In the past, the system has not acted well as its own auditor, allowing unscrupulous vendors to take advantage of the lack of oversight.

To its credit, though, Medicare has been gradually improving its bidding process with home medical equipment vendors. The CMS claims it has saved some 32 percent in equipment reimbursements in eight cities (Charlotte, Cincinnati, Cleveland, Dallas, Kansas City, Miami, Orlando, and Riverside, Calif.) through a new program.

While the home health equipment industry is highly critical of this program,  Medicare will expand it to other cities as the system becomes more efficient at policing the cost and use of equipment in homecare settings.

Reinemer's organization reported that, "Essentially, CMS has used the bidding process to cut prices to unsustainable levels, while significantly reducing the number of providers allowed to care for Medicare patients."

Look for CMS and other government auditors to become even more aggressive in rooting out fraud and overbilling as Medicare seeks ways to reduce operating costs. It's part of a long-range effort that's only getting its feet wet.