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HHS 12
Increase Third-Party Liability Reimbursements for Medicaid


Texas Medicaid can recover funds for its clients from “third-party” insurers such as private insurers, Medicare and health maintenance organizations. To help it do so, the Texas Health and Human Services Commission (HHSC) should contract for third-party recovery separately from its fiscal intermediary contract and use the new contract to incorporate measures to improve recoveries for clients eligible for both Medicaid and Medicare. Texas also should consolidate its recovery activities within HHSC and designate some HHSC personnel as law enforcement officers to give them better access to information such as databases on property and casualty claims, and thus allow them to monitor third-party insurers more easily.


Medicaid is the state’s largest health care program for low-income clients. By federal law, it pays its benefits only after most other health insurance coverage has been exhausted. Attempts to recover funds from other insurers for Medicaid clients are called “third-party recoveries.”

Texas Medicaid third-party recovery functions involve the Texas Health and Human Services Commission (HHSC) and the Texas Department of Human Services (DHS), as well as outside contractors that process Medicaid claims for payment and a third-party liability subcontractor.

During fiscal 2001, Texas Medicaid recovered about $40 million from third-party payers such as Medicare, military health insurance programs, private health insurance, health maintenance organizations and other health plan organizations, as well as refunds from recipients. Medicaid also achieved an estimated $208 million in cost avoidance, usually by rejecting claims that could be paid by another entity; ensuring that third-party payers cover claims before Medicaid; and verifying that nursing home treatments are billed appropriately.[1]

While this success is heartening, Texas Medicaid could further improve its recovery process.

Third-party liability

Texas contracts with the National Heritage Insurance Company (NHIC) for the recovery of payments from third-party insurers. NHIC, in turn, subcontracts with a company specializing in third-party recoveries for Medicaid. Texas maintained a separate contract for third-party recoveries activities in the early 1990s but later incorporated the responsibility into its main contract with NHIC to simplify its oversight responsibilities.

Texas Medicaid further modified its arrangement with its main contractor in fiscal 2001, prior to the transfer of Medicaid from the Texas Department of Health to HHSC. Among other problems, this modification shifted the costs involved in making third-party recoveries from NHIC to the state.[2]

The NHIC contract is up for renewal, with an award expected in January 2003. The state has a chance to restructure the contract to give it more control over its third-party recoveries by once again contracting directly with a third-party recovery contractor. This would give the state clearer control of the recovery process and guarantee that it receives its money’s worth.

Medicaid/Medicare dual eligibility

Low-income beneficiaries who qualify for both Medicare and Medicaid are called “dual eligibles.” In 1997, nationwide about 83 percent of dual-eligible clients qualified for full Medicaid benefits, while the remainder—mostly those with slightly higher incomes—qualified for lesser Medicaid subsidies for some portion of their payments due under Medicare.[3] Texas Medicaid pays about $300 million annually toward Medicare “crossover” claims for dual eligibles. Of these payments, Texas Medicaid ultimately recovers just 1 percent from Medicare, or $2.5 million annually.[4]

Four companies—TrailBlazer Health Enterprises, LLC, Mutual of Omaha Insurance Company, RHHI-Blue Cross Blue Shield of South Carolina and DMERC-Blue Cross Blue Shield of South Carolina—process Texas’ Medicare health care claims. TrailBlazer provides third-party liability (TPL) information for Texas Medicaid claims. The other companies do not provide the state with such data because they lack electronic claims payment or patient encounter databases. At present, Texas is not seeking third-party recoveries on about $1 million to $1.5 million of crossover claims because of a lack of adequate data.

Medicare often denies payment for some health care claims for dual-eligible clients; the claims then are sent to Medicaid for payment. In other instances, providers simply find Medicaid’s billing process easier than Medicare and elect to bill only Medicaid. Still other providers may bill both Medicare and Medicaid for the same client and service. Without adequate information-sharing between the two programs, Medicaid cannot determine the extent of such duplicate billing.

When Medicare denies a claim from a dual-eligible client, Texas Medicaid pays for the services it covers without challenging the denial. The Medicaid programs of Massachusetts, Connecticut, New York and New Jersey, by contrast, all make efforts to examine and challenge such denials. Massachusetts, for instance, contracts with the University of Massachusetts Medical Center, on a per-case basis, to pursue home health care reimbursements from Medicare. This arrangement saves the state about $5 million annually. Massachusetts also funded an initial amount to set up the program. The medical center also works on similar cases for New York and recently filed about $480 million in claims for the state.

Connecticut Medicaid pursues Medicare claims and challenges denials through a contract with the Center for Medicare Advocacy, a nonprofit legal services group for low-income seniors. This group examines home health care claims for dual-eligible clients billed to Medicaid to determine if they are suitable for appeal and, if so, appeals the cases. The center recovers about $20 million from Medicare on $30 million to $35 million in Medicaid home health care claims each a year. Only about half of the cases the center reviews are deemed suitable for appeal. The entire process can require up to nine months, or up to two years if an administrative law judge hears the case. Connecticut also reviews and seeks Medicare coverage for certain illnesses for dual-eligible clients in nursing homes who meet Medicare payment criteria. The center succeeds in recovering payments in about one out of every two cases pursued, collecting about $2.5 million per year.[5]

New Jersey Medicaid collects about $750,000 per year through a Medicare appeals program for home health care.[6]

In July 2002, HHSC began discussing a Medicare appeals initiative for home health claims with its contractor.[7]

A third-party reimbursement contract requiring the vendor to file claims and pursue appeals could help ensure that Medicaid pursues every legitimate method to seek payment from Medicare, which would reduce the payments that must be made by state taxpayers.

Skilled nursing facility and other co-insurance

Texas also could pursue additional recoveries for Medicare-billable payments for skilled nursing facility, home health and similar services. Current Department of Human Services (DHS) rules call for Medicaid to “usually” be the payer of last resort. DHS could strengthen this provision (and make it conform better with federal law) by stating clearly that Medicaid is the payer of last resort. This would send a clear message that nursing homes and other providers should seek payment from Medicare whenever appropriate.

DHS and HHSC do not ensure that all nursing facility care that qualifies for Medicare is billed to the program. Instead, the nursing facility and the patient determine whether Medicare or Medicaid will pay. Although Texas’ number of nursing patients remained relatively stable during the later 1990s, the number of Medicare skilled nursing facility days billed for Medicaid clients was more than 780,000 in fiscal 1998; then dropped to 600,666 days in fiscal 2000; and now is projected to top 775,000 in fiscal 2002.[8] The 2000 drop was related to changes in federal law concerning skilled nursing facility claims that resulted in a shift from Medicare to Medicaid payments.

DHS’s third-party recovery activities for its long-term care program (including nursing homes and related services) cost about $90,000 to $110,000 annually in salary and related expenses. The agency estimates that this effort recovers about $5 million per year.[9]

HHSC recently identified problems with its payment of dual-eligible claims, including Medicare’s failure to ensure that all Medicare outpatient coverage is noted in the appropriate client files. Once again, Medicaid often was used to pay claims that should have been billed to Medicare. Upon receiving this information, HHSC took steps to ensure recovery of these payments. A more aggressive third-party reimbursement effort could be accomplished by consolidating DHS’ existing efforts with HHSC’s, so that all Medicaid third-party recovery tools, including the use of a third-party liability contractor, are used on long-term care claims, and that recovery efforts for long-term care are coordinated fully with Medicaid recoveries for related services such as durable medical supplies and home health and hospice care.

Payment limits for dual-eligible clients

The federal Balanced Budget Act of 1997 allows states to limit payments to providers for dual-eligible clients’ Medicare deductibles and co-payments. State Medicaid programs can choose to pay an amount that, when added to the amount paid by Medicare, equals the total Medicare rate (that is, the Medicare payment plus the patient co-payment and deductible). Alternatively, states can choose to pay only what the state would have paid if the patient were Medicaid-eligible only. In most cases, Medicaid would pay less than regular Medicare rates.

In some instances, when the Medicare-paid portion for the service exceeds the Medicaid rate, no state payment for co-insurance will be made. In other cases, the state’s co-insurance payment will be only the amount that would bring the payment up to the total that Medicaid would have paid. This approach is called the “repricing” of Medicare claims. Providers must consider these amounts payment in full; clients are not liable for any additional charges.

Texas Medicaid has followed this strategy for dual-eligible clients receiving inpatient hospital care since 1998. The state has not, however, done so for Medicare outpatient claims.

HHSC projects that Medicaid outpatient payments for dual-eligible clients will total about $236 million in state and federal funds in fiscal 2002—more than if these clients had been Medicaid recipients only.[10]

Cost avoidance strategies

Cost avoidance strategies shift costs to other health care coverage before Medicaid pays a claim. These techniques are more cost-effective than the recovery of third-party reimbursements, since they usually cost less and produce more savings without collection efforts. At present, however, Medicaid eligibility cards do not list other health insurance coverage or instruct providers to bill those sources first.

Medicaid eligibility information and the card mailed to recipients could be used to convey this information to providers. Claims payment systems also could be changed to provide more searches for other insurance and to ensure that Medicaid pays last.

Other recoveries

Medicaid attempts to recover the costs of providing care for clients who are injured in automobile accidents whenever they have insurance that could pay these costs. Under federal law, Medicaid must pay the claim and then seek reimbursement. Obtaining information on accidents is difficult, however, since it is not readily available from the Department of Public Safety in an electronic format.

Another source of such information is a database operated by the property/casualty industry. The Insurance Services Office (ISO) is a comprehensive information system for improving claims processing and fighting fraud. Carriers report the opening of all property/casualty claims, such as automobile accident-related injuries, to this central database to prevent duplicate filings. If agents of HHSC’s Office of Investigation and Enforcement were granted law enforcement status, they could access the ISO and use the data to increase third-party recoveries.[11]

Texas Medicaid also has pursued recoveries by joining certain class-action lawsuits. HHSC, for instance, is pursuing lawsuits against drug manufacturers for strokes related to use of certain over-the-counter cough syrup medicines. Class-action lawsuits, such as those under way against paint manufacturers to recover damages from the lead poisoning of children, also might be related to increased Medicaid recoveries.[12]


A. The Texas Health and Human Services Commission (HHSC) should contract directly for third-party recovery services rather than folding the services into the fiscal intermediary contract.

This would give HHSC better control over third-party recoveries. HHSC could take this step as soon as the contract can be renegotiated; this recommendation does not require a change in state law.

B. HHSC should require its third-party recovery contractor to seek recoveries from all Medicare health maintenance plans and claims processors.

This would ensure that all health care plans with Medicaid dual-eligible clients are tapped to recover medical costs. The third-party contractor should establish adequate information-sharing procedures with Medicare.

C. HHSC should ensure that its contract for third-party recovery services includes aggressive recovery operations for home health and skilled nursing facility/nursing home claims for dual-eligible clients.

This would require HHSC and the Texas Department of Human Services (DHS) to develop new procedures to ensure that Medicaid pays last on both home health care and nursing home claims. Some enhancements of automated system edits in the claims payment systems operated by contractors, HHSC and DHS would be necessary.

D. DHS should clarify its rules to establish that Medicaid is to be the payer of last resort and that nursing facility, home health and similar service providers should seek payment from Medicare whenever possible.

E. Texas should reprice Medicare dual-eligible outpatient and other provider payment claims so that Medicaid pays only what it would have if the client were eligible for Medicaid only.

Automation changes necessary for Recommendation C could incorporate these changes as well.

F. State law should be amended to consolidate DHS’ Medicaid third-party reimbursement unit with HHSC’s third-party reimbursement activities to make it more effective.

This would allow all third-party activities to benefit from access to the same databases and the more sophisticated techniques used at HHSC.

G. The Texas Medicaid program should modify its eligibility cards to list other health insurance coverage and instruct providers to bill those sources first.

H. The Texas Medicaid program should modify its claims payment systems to provide more searches for other insurance and to ensure that Medicaid pays last.

I. State law should be amended to give agents of HHSC’s Office of Investigation and Enforcement law enforcement status to give them access to a private insurance industry database for third-party recovery operations.

This would allow HHSC to identify more health care claims and recoveries related to automobile accidents. Law enforcement status also would enhance HHSC’s work in fraud and overpayments by allowing it to gain easy access to information gathered by other law enforcement investigators.

J. HHSC should develop a systematic approach for reviewing class-action lawsuits to determine if they contain a Medicaid third-party recovery interest.

HHSC could partner with the Attorney General’s Office, university health science centers and other groups to determine the state’s Medicaid recovery potential in health-related class-action lawsuits.

Fiscal Impact

The fiscal estimate for these recommendations involves increased collections from third-party health care plans that would save general revenue as well as federal funds by reducing Medicaid payments.

Recommendations A, D, F, G, H and J would produce no direct savings or costs, but would increase revenue from third-party recoveries and allow for greater control of the process.

Recommendation B would recover about $1,381,000 annually from home health and Medicare health maintenance claims ($550,000 in state funds and $831,000 in federal funds), less a 10 percent contingency fee of $138,000 ($55,000 in state funds and $83,000 in federal funds). Total net savings from Recommendation B would be about $1,243,000 ($495,000 in state funds and $748,000 in federal funds).

Recommendation C would allow the third-party recovery contractor 10 percent in recovery fees. It would save a total of $1,047,000 ($417,000 in state funds and $630,000 in federal funds) in the first year and $2,094,000 ($834,000 in state funds and $1,260,000 in federal funds) in subsequent years by increasing Medicaid dual-eligible nursing home and home health claims billed to Medicare. Contingency fees would be $104,000 in the first year ($52,000 state and $52,000 federal) and $210,000 in subsequent years ($105,000 state and $105,000 federal). Recommendation C, then, would produce a net gain of $942,000 in fiscal 2004 and $1,884,000 in subsequent years.

Recommendation E also would require a six-month startup period and a one-time cost for programming of $350,000 each to the state and federal governments in fiscal 2004. Gross savings after full implementation from paying claims for dual eligibles at Medicaid rates rather than Medicare rates would total $23.7 million annually.

Finally, Recommendation I should generate savings of $6.0 million per year ($2,390,000 in state funds and $3,610,000 in federal funds) less $600,000 in annual fees for use of the property/casualty insurance database ($300,000 in state and $300,000 federal). Claims review is estimated to require six months, so $3 million of the gains would be realized in fiscal 2004 ($1,195,000 state and $1,805,000 federal), less $300,000 in fees ($150,000 state and $150,000 federal) and a one-time startup cost of $300,000 for the effort involved in aligning data systems. Thus the net impact of Recommendation I would be $2.4 million in fiscal 2004 and $5.4 million annually thereafter.

To achieve these savings, DHS general revenue appropriations should be reduced by $365,000 for fiscal 2004 and $729,000 for 2005. HHSC’s general revenue appropriation for the Medicaid program should be reduced by $5.8 million in 2004 and $12 million in 2005. A transfer of $55,000 in general revenue funds from DHS to HHSC would be needed to move third-party recovery functions.

Fiscal Year Savings to General Revenue Savings to Federal Funds (Cost) to General Revenue (Cost) to Federal Funds Net Savings to General Revenue Net Savings to Federal Funds
2004 $ 6,898,000 $10,370,000 ($757,000) ($785,000) $ 6,141,000 $ 9,585,000
2005 $13,246,000 $19,909,000 ($460,000) ($488,000) $12,786,000 $19,421,000
2006 $13,246,000 $19,909,000 ($460,000) ($488,000) $12,786,000 $19,421,000
2007 $13,246,000 $19,909,000 ($460,000) ($488,000) $12,786,000 $19,421,000
2008 $13,246,000 $19,909,000 ($460,000) ($488,000) $12,786,000 $19,421,000


[1 ]Texas Health and Human Services Commission, Office of Investigations and Enforcement, Fiscal Year 2001 Activities (Austin, Texas), p. 3.

[2 ]E-mail communication from Terry Cottrell, Health and Human Services Commission, July 18, 2002.

[3 ]The Henry J. Kaiser Family Foundation, Medicare Chart Book, by Michael E. Gluck and Kristina W. Hanson (Menlo Park, California, 2001), p. 42.

[4] Interview with Terry Cottrell, Office of Investigation and Enforcement, Health and Human Services Commission, July 8, 2002.

[5 ]E-mail communication from Bruce Bower, Texas Legal Services Center, Austin, Texas, April 25, 2002.

[6]Telephone interviews with Donna Price, Keith Reinold, Kevin Lee and Mike Hostetler of Health Management Systems; Bruce Bower and Gary Chapman, Texas Legal Services Center; Terry Cottrell, Health and Human Service Commission; and Tim Broadhurst, National Heritage Insurance Company, July 17, 2002.

[7]Interview with Terry Cottrell.

[8]Texas Department of Human Services, “Summary of Medicaid Payment of Co-insurance for Medicare Skilled Care,” July 24, 2002. (Spreadsheet.)

[9]Texas Department of Human Services, “Texas Department of Human Services, FY 2001 Third-Party Liability System,” June 26, 2002.

[10]E-mail communication from Terry Cottrell, Office of Investigation and Enforcement, Health and Human Services Commission, June 17, 2002.

[11]E-mail communication from Terry Cottrell, Office of Investigation and Enforcement, Health and Human Services Commission, June 20, 2002.

[12]Thomas Grillo, “Lead-paint Suit Advances,” The Boston Globe (February 2, 2002), (Last visited October 19, 2002.)