[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]




 
                  HEALTH CARE WASTE, FRAUD, AND ABUSE

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 9, 1997

                               __________

                             Serial 105-33

                               __________

         Printed for the use of the Committee on Ways and Means


                               ----------

                    U.S. GOVERNMENT PRINTING OFFICE
46-633 cc                   WASHINGTON : 1998



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada                  GERALD D. KLECZKA, Wisconsin
JON CHRISTENSEN, Nebraska            JOHN LEWIS, Georgia
PHILIP M. CRANE, Illinois            XAVIER BECERRA, California
AMO HOUGHTON, New York
SAM JOHNSON, Texas


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

U.S. Department of Health and Human Services, Michael F. Mangano, 
  Principal Deputy Inspector General.............................    55
Health Care Financing Administration, Linda A. Ruiz, Director, 
  Program Integrity Group, Office of Financial Management........    64
Federal Bureau of Investigation, Charles L. ``Chuck'' Owens, 
  Chief, Financial Crimes Section................................    76
U.S. General Accounting Office, William J. Scanlon, Director, 
  Health Financing and Systems Issues, Health, Education, and 
  Human Services Division........................................    84

                                 ______

American Association of Retired Persons, Esther ``Tess'' Canja...    15

                       SUBMISSIONS FOR THE RECORD

Accent Insurance Recovery Solutions, Omaha, NE, Douglas R. 
  Wilwerding, statement..........................................   113
American College for Advancement in Medicine, Laguna Hills, CA, 
  Dr. L. Terry Chappell, letter..................................   114
American Hospital Association, statement.........................   115
American Preventive Medical Association, Great Falls, VA, 
  statement......................................................   118
Citizens Against Government Waste, statement.....................   121


                  HEALTH CARE WASTE, FRAUD, AND ABUSE

                              ----------                              


                       THURSDAY, OCTOBER 9, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisories announcing the hearing follow:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

April 29, 1997

No. HL-13

                      Thomas Announces Hearing on

                   Health Care Waste, Fraud, and Abuse

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on waste, fraud, and abuse in the health care 
system. The hearing will take place on Tuesday, May 6, 1997, in the 
main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
     Health care fraud accounts for a significant percentage of 
national health care costs, by as much as 10 percent, according to GAO. 
To fight fraud and abuse, the Congress included landmark reforms in the 
Health Insurance Portability and Accountability Act of 1996 (HIPAA) 
(P.L. 104-191) . HIPAA establishes and provides funding for the Health 
Care Fraud and Abuse Control Program, under the direction of the 
Attorney General and the Secretary of Health and Human Services (HHS). 
The program combats fraud and abuse committed against both public and 
private health plans by coordinating law enforcement efforts among 
Federal, State, and local officials. In addition, HIPAA creates new 
health care crimes for criminal conduct involving health care programs 
and significantly increases penalties for health care fraud and abuse.
      
     At the same time, HIPAA attempts to recognize significant changes 
in the marketplace and address some of the confusion in the application 
of current fraud statutes. This is done by: (1) providing an exception 
to the anti-kickback provisions for arrangements in which providers 
assume significant financial risk for their treatment decisions, (2) 
requiring HHS to issue binding advisory opinions regarding specific 
proposals, and (3) requiring HHS to develop additional broadly 
applicable safe harbors and modifications to existing safe harbors.
      
    The Administration has proposed in its budget to fight fraud and 
abuse through a number of proposed revisions in the Medicare program. 
This includes instituting consolidated billing for nursing homes, 
eliminating periodic interim payments for home health providers, 
requiring that non-physician practitioners provide diagnostic 
information on all claims, and increasing the number of laboratory 
tests paid on an automated basis.
      
    In March, President Clinton announced a supplemental package of 
additional waste, fraud, and abuse reforms. This proposal includes new 
requirements for individuals and companies that wish to participate in 
Medicare and Medicaid, technical modifications to HIPAA, and some 
increased sanctions.
      
    In announcing the hearing, Chairman Thomas stated: ``Nothing is 
more important to the integrity of Medicare than combating fraud. I 
look forward to working with the Administration and others who wish to 
build on the significant progress we made during the 104th Congress in 
passing the landmark anti-fraud and abuse initiatives in the Health 
Insurance Portability and Accountability Act.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the implementation of HIPAA, President 
Clinton's Medicare waste, fraud, and abuse proposals, and additional 
recommendations for combating waste, fraud, and abuse in the health 
care system.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
copies of their statement and a 3.5-inch diskette in WordPerfect or 
ASCII format, with their address and date of hearing noted, by the 
close of business, Tuesday, May 20, 1997 to A.L. Singleton, Chief of 
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515. If those 
filing written statements wish to have their statements distributed to 
the press and interested public at the hearing, they may deliver 200 
additional copies for this purpose to the Subcommittee on Health 
office, room 1136 Longworth House Office Building, at least one hour 
before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

                      NOTICE--HEARING POSTPONEMENT

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

May 2, 1997

No. HL-13-Revised

                Postponement of Subcommittee Hearing on

                   Health Care Waste, Fraud, and Abuse

                          Tuesday, May 6, 1997

     Congressman Bill Thomas, (R-CA), Chairman of the Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on the health care waste, fraud, and abuse, 
previously scheduled for Tuesday, May 6, 1997, at 10:00 a.m., in the 
main Committee hearing room, 1100 Longworth House Office Building, has 
been postponed and will be rescheduled at a later date.
      
     (See Subcommittee press release No. HL-13, dated April 29, 1997.)
      

                                

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

September 16, 1997

No. HL-16

                      Thomas Announces Hearing on

                  Health Care Waste, Fraud, and Abuse

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on the waste, fraud, and abuse in the U.S. health 
care system. The hearing will take place on Tuesday, September 30, 
1997, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10:00 a.m.
      
    In view of the limited avaiable to hear witnesses, oral testimony 
at this hearing will be from invited witnesses only. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    There has been considerable attention focused during the past 
several years on the problem of waste, fraud, and abuse in the Medicare 
program and in the U.S. health care system generally. The U.S. General 
Accounting Office has estimated that waste, fraud, and abuse account 
for up to 10 percent of Medicare costs, and the Inspector General of 
the Department of Health and Human Services (HHS) announced at a recent 
Subcommittee hearing that the Medicare program made improper payments 
totaling $23 billion in fiscal year 1996.
      
    In the past two years, Congress has passed significant legislation 
designed to address these growing concerns about waste, fraud, and 
abuse. The health Insurance Portability and Accountability Act of 1996 
(HIPAA) (P.L. 104-191) established and provided funding for the Health 
Care Fraud and Abuse Control Program, under the direction of the 
Attorney General and the Secretary of HHS. The program is designed to 
combat fraud and abuse committed against both public and private health 
plans by coordinating law enforcement efforts among Federal, State, and 
local officials. In addition, HIPAA created new health care crimes for 
criminal conduct involving health care programs and significantly 
increased penalties for health care fraud and abuse.
      
    The Balanced Budget Act of 1997 (BBA) (P.L. 105-33) significantly 
expands upon HIPPA's anti-fraud and abuse measures. Among other 
reforms, the BBA: (1) requires that providers convicted of three 
program-related offenses be excluded permanently from Medicare and 
other Federal health programs, (2) provides new civil monetary 
penalties for violations of the anti-kickback statute, (3) requires 
home health agencies, durable medical equipment suppliers, and other 
providers to post a surety bond of at least $50,000 in order to provide 
items and services to Medicare beneficiaries, (4) requires the 
Inspector General to establish a toll-free hotline for Medicare 
beneficiaries to report fraud and billing irregularities, (5) requires 
hospitals to disclose to beneficiaries requiring post-acute care any 
provider in which the hospital has a financial interest, and (6) 
provides the Secretary with new authority to reduce or increase 
Medicare reimbursement where the current payment amount is ``grossly 
excessive or grossly deficient and not inherently reasonable.'' In 
addition, the BBA modernized Medicare by establishing prospective 
payment systems designed to minimize opportunities for fraud and abuse.
      
    In announcing the hearing, Chairman Thomas states: ``Congress must 
assure Medicare beneficiaries and the taxpayers that Medicare is not 
frittering away precious program dollars on waste, fraud, and abuse. To 
meet our obligations, we passed landmark anti-fraud and abuse 
legislation in both the 104th and 105th Congress. Now, we must ensure 
that these reforms are implemented and that the Health Care Financing 
Administration makes combating fraud and abuse its top priority.''
      

FOCUS OF THE HEARING:

      
    The hearing will assess implementation of the BBA and HIPPA 
initiatives aimed at combating waste, fraud, and abuse in the health 
care system. It also will identify those areas of the Medicare program 
where waste, fraud, and abuse challenges still lie ahead.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
     Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text format only, with their 
name, address, and hearing date noted on a label, by the close of 
business, Thursday, July 31, 1997, to A.L. Singleton, Chief of Staff, 
Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515. If those 
filing written statements wish to have their statements distributed to 
the press and interested public at the hearing, they may deliver 200 
additional copies for this purpose to the Subcommittee on Health 
office, room 1136 Longworth House Office Building, at least one hour 
before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
     Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
     1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS 
Text format.
      
     2. Copies of whole documents submitted as exhibit material will 
not be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
     3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
     The above restrictions and limitations apply only to material 
being submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://www.house.gov/ways__means/''.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

      
                         NOTICE--CHANGE IN DATE

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

September 25, 1997

No. HL-16-Revised

                Change in Date for Subcommittee Hearing

                 on Health Care Waste, Fraud, and Abuse

                      Tuesday, September 30, 1997

    Congressman Bill Thomas, (R-CA), Chairman of the Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on health care waste, fraud, and abuse, previously 
scheduled for Tuesday, September 30, 1997, at 10:00 a.m., in the main 
Committee hearing room, 1100 Longworth House Office Building, will now 
be held on Thursday, October 9, 1997.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1 
format only, with their name, address and hearing date noted on a 
label, by the close of business, Thursday, October 23, 1997, to A.L. 
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of 
Representatives, 1102 Longworth House Office Building, Washington, DC 
20515. If those filing written statements wish to have their statements 
distributed to the press and interested public at the hearing, they may 
deliver 200 additional copies for this purpose to the Subcommittee on 
Health office, room 1136 Longworth House Office Building, at least one 
hour before the hearing begins.
      
    All other details for the hearing remain the same. (See 
Subcommittee press release No. HL-16, dated September 16, 1997.)
      

                                

    Chairman Thomas [presiding]. The Subcommittee will come to 
order. I want to welcome you to today's hearing on waste, 
fraud, and abuse in our Nation's health care system.
    Unfortunately, waste, fraud, and abuse is pervasive in the 
system. The General Accounting Office estimates that waste, 
fraud, and abuse account for up to 10 percent of Medicare 
costs, and the Inspector General of the Department of Health 
and Human Services announced at a recent hearing of the Health 
Subcommittee that the Medicare Program made improper payments, 
perhaps totaling $23 billion in fiscal year 1996 alone.
    It's important to point out that these problems have 
existed for a long time and they've been exacerbated by the 
escalating Medicare costs. The General Accounting Office and 
Office of Inspector General have highlighted weaknesses that 
made the Medicare system vulnerable to waste, fraud, and abuse 
as early as 1986. Nevertheless, these reports were largely 
ignored, with some exceptions, for over a decade until the 
Health Insurance Portability and Accountability Act of 1996 and 
the Balanced Budget Act of 1997, when Medicare had tripled in 
outlays from $71 billion to nearly $200 billion.
    The new Congress, in a bipartisan fashion, has responded 
forcefully by enacting legislation containing 65 concrete steps 
to stamp out waste, fraud, and abuse. In the past 2 years, the 
Congress has passed significant legislation developed by the 
Committee on Ways and Means, and other Committees of 
jurisdiction, to address these growing concerns about waste, 
fraud, and abuse in the Medicare Program and the health care 
system generally.
    In HIPAA, Congress dedicated over $5 billion for law 
enforcement through fiscal year 2003; it increased civil 
penalties fivefold for providers who commit health care fraud, 
added new criminal penalties for false statements, theft, 
embezzlement, obstruction of justice, and money laundering, and 
established new programs to coordinate antifraud efforts among 
State, local, and Federal officials, the private sector, and 
Medicare beneficiaries.
    The recently enacted Balanced Budget Act expands on the 
progress made under HIPAA. In addition to other reforms, the 
BBA requires the Secretary to kick providers out of the 
Medicare Program if they are convicted of three health care 
infractions--the so-called three strikes and you're out 
provision--and in the case of serious crimes, you only get one 
strike. We also required the Inspector General to establish a 
new toll-free hotline and put this number on every Medicare 
bill, so that Medicare beneficiaries can directly report fraud 
and billing irregularities. We'll hear from a witness today who 
thinks that's a valuable improvement.
    Together, these reforms have increased the number of 
Federal fraud investigators on the streets by 31 percent over 
the last 2 years. You can see the chart over on the left. I 
would tell my colleagues the blue is OIG, the green is FBI, but 
in just 2 years we've put almost one-third more investigators 
on the streets. We will never ever be able to have enough 
investigators without the fundamental reforms in the structure 
that we've done as well.
    Despite our efforts, there are still examples of blatant 
waste, fraud, and abuse in the system. The American people 
today still believe, by better than 90 percent, that health 
care fraud is widespread, and I couldn't disagree with them. 
Just a couple of examples of how outrageous some of these 
abuses are:
    It is tragic that we have the photo of this woman who 
suffers from extreme arthritis and who, through the effort of a 
durable medical equipment supplier, received an orthotic body 
jacket; the woman is 5 feet tall, weighs 86 pounds. This 
orthotic jacket is designed the body, back and front, very 
rigidly. This particular model was for a male, well over 6 feet 
tall and more than 180 pounds.
    She was recruited at an adult recreation center and 
supplied with this jacket. Medicare was billed more than $2,000 
for this particular item, and the durable medical supplier 
under her name billed for an additional $6,000 of equipment the 
beneficiary never received. Incidentally, the beneficiary 
didn't know how to use the body jacket, didn't think it was 
appropriate, and didn't know to whom to return it, and so she 
eventually turned it over to the Inspector General. The case 
against that particular DME supplier is currently pending.
    Let me give you another example. Take a look at this store 
in Van Nuys, California. It says ``pawnshop,'' and it looks 
fairly familiar in terms of that type of an operation. What you 
need to know is that this also happens to be the headquarters 
of a home health agency. After responding to complaints, 
Federal inspectors found that at this home health agency--which 
as you can see bears little resemblance to what one would 
expect a home health agency to look like--the previous owner's 
health care experience consisted of his ownership in management 
of this pawnshop, a cab company, and a restaurant, and that the 
home health agency was out of compliance with 11 of 12 required 
conditions of participation in the Medicare Program. I have 
asked the OIG which one they were in compliance with. I have 
not yet received the information back; it may be that there 
must be a roof on the building, but we don't know which was the 
one that they were in compliance.
    Based on this onsite review, the agency's provider number 
was revoked. Had it not been revoked, in a single year, more 
than $2 million in Medicare billing would have gone through 
this ``home health care agency.''
    Then, finally, let me give you about as graphic an example 
as I can of the kind of graft that is pervasive as part of the 
waste, fraud, and abuse. What you will see is a videotape. It's 
a videotape with an undercover informer working through the 
Office of Inspector General and the FBI. What you will see is a 
doctor, and through this, the audio is not as clear as we would 
like, apparently sufficiently clear for conviction, but what 
you get is a bantering between the informer and the doctor 
about his wife, and he inquires of her condition and the 
informer then proceeds to provide cash in a relatively obvious 
way for the cameras, and in exchange the doctor, Dr. Rafael 
Gonzalez Pantaleon, who is a citizen of the Dominican Republic, 
signs his name to a number of documents, which of course then 
allow for the Medicare billing to go forward.
    Incidentally, the good doctor was arrested in New York City 
by Federal agents on November 30, 1994, charged with 47 counts 
of Medicare fraud. There was a 7-week trial. He was convicted 
of defrauding the U.S. Government. He was sentenced to 78 
months in prison, fined $3.5 million. However, between the time 
of his conviction and his sentencing, Dr. Gonzalez fled the 
United States to the Dominican Republic and he now practices 
medicine at the Clinica San Rafael in the Dominican Republic.
    According to the Inspector General, the administration 
knows the exact address where he's practicing medicine today; 
and according to the State Department, the U.S. Embassy in the 
Dominican Republic and the Department of Justice's Office of 
Internal Affairs, no formal extradition request has ever been 
made that this fugitive return to the United States.
    My concern is that the administration's lack of commitment 
in this case is particularly striking, given the fact that in 
article II of the bilateral treaty between the United States 
and the Dominican Republic, it clearly calls for extradition in 
cases of fraud and that 2 months ago the Dominican Republic 
agreed to extradite two Dominican nationals involved in drug 
trafficking, at the request of the President of the United 
States.
    The administration has launched Operation Restore Trust in 
the area of Medicare waste, fraud, and abuse. I think perhaps 
they need to launch Operation Find and Bust when you have 
clearly convicted individuals.
    Take a look at this tape for absolute gall.
    [Videotape played.]
    Chairman Thomas. What you saw was the transfer of $1,100 
prior to the doctor signing off on a number of requests for 
which Medicare was billed and promptly paid.
    Today, I'm sending a letter to Attorney General Reno asking 
her to initiate a formal extradition process to return Rafael 
Gonzalez Pantaleon to the United States to serve his sentence 
for bilking the Medicare Program--and therefore the U.S. 
taxpayer--of over $3 million.
    Unfortunately, the events shown on this tape are not as 
unusual as we would like to think. The Inspector General says 
that over 50 other cases involving kickback payments and 
durable medical equipment suppliers are currently under 
investigation.
    We recognize that our work is not over. The Ranking Member 
in fact will highlight some alleged corporate fraud which will 
be another facet of our continued investigation of waste, 
fraud, and abuse. Additional legislative changes are going to 
need to be made and we need to stay vigilant, and that's one of 
the things that this hearing is designed to do; that is, to 
provide a report card on those areas where the 65 concrete 
steps in our antifraud plan have been most successful, where 
these reforms could be strengthened or better implemented, and 
where the most significant challenges lie in combatting waste, 
fraud, and abuse.
    Chairman Thomas. I look forward to today's testimony. I 
would recognize my colleague, the Ranking Member gentleman from 
California, Mr. Stark.
    [The opening statement follows:]

Opening Statement of Chairman Bill Thomas

    Welcome to today's hearing of the Health Subcommittee on 
waste, fraud, and abuse in the nation's health care system. 
Waste, fraud, and abuse are pervasive in our health care 
system. The General Accounting Office (GAO) estimates that 
waste, fraud, and abuse account for up to 10 percent of 
Medicare costs, and the Inspector General of the Department of 
Health and Human Services announced at a recent hearing of the 
Health Subcommittee that the Medicare program made improper 
payments totaling $23 billion in fiscal year 1996 alone.
    It is important to point out that these problems have 
existed for a long time and that they have been exacerbated by 
escalating Medicare costs. The General Accounting Office (GAO) 
and the Office of Inspector General had highlighted weaknesses 
that made the Medicare vulnerable to waste, fraud, and abuse as 
early as 1986. Nevertheless, these reports were largely ignored 
until the Health Insurance Portability and Accountability Act 
of 1996 (HIPAA) and the Balanced Budget Act of 1997 (BBA) were 
passed ten years later, after total Medicare outlays had 
tripled from $71 billion to nearly $200 billion.
    The Congress has responded forcefully by enacting 
legislation containing 65 concrete steps to stamp out waste, 
fraud and abuse. In the past two years, Congress has passed 
significant legislation developed by the Committee on Ways and 
Means, and other committees of jurisdiction, to address these 
growing concerns about waste, fraud, and abuse in the Medicare 
program and the health care system generally.
    In HIPAA, Congress dedicated $5 billion dollars for law 
enforcement through fiscal year 2003, increased civil penalties 
five-fold for providers who commit health care fraud, added new 
criminal penalties for false statements, theft, embezzlement, 
obstruction of justice, and money laundering, and established 
new programs to coordinate anti-fraud efforts among State, 
local, and federal officials, the private sector, and Medicare 
beneficiaries.
    The recently-enacted Balanced Budget Act expands on the 
progress made under HIPAA. In addition to other reforms, the 
BBA requires the Secretary to expel providers from the Medicare 
program if they are convicted of three health care infractions, 
requires home health agencies, durable medical equipment 
suppliers and other providers to post surety bonds of at least 
$50,000, replaces fraud-ridden cost-based reimbursement with 
prospective payment systems, and requires the Inspector General 
to establish a new toll-free hotline and puts this number on 
every Medicare bill so that Medicare beneficiaries can directly 
report fraud and billing irregularities.
    Together, these reforms have increased the number of 
federal fraud investigators on the streets by 31 percent over 
the last two years.
    Despite our efforts, we know there are still examples of 
blatant waste, fraud, and abuse in the health care system. As 
we will hear today, over 90 percent of the American public 
still believes that health care fraud is widespread. Here are a 
few examples:
     Medicare beneficiary receives expensive, 
unnecessary orthotic body jacket. This picture shows a woman 
who stands 5 feet tall and weighs 86 pounds wearing an orthotic 
body jacket that is designed to be custom-fitted for a male 
size ``extra large''--who stands about 6 feet tall and weighs 
at least 180 pounds.
    Orthotic body jackets are designed to be rigid, form-
fitting and customized. They are used to treat patients with 
muscular and spinal conditions by holding them immobile.
    Just three months ago, this woman--who is a Medicare 
beneficiary with arthritis--was recruited at an adult 
recreation center by a durable medical equipment supplier, 
taken to a clinic for an examination and told she would shortly 
receive an orthotic body jacket.
    This jacket was not medically indicated for her condition. 
Even if it had been, the extra-large size body jacket she 
received obviously was inappropriate for this beneficiary. 
Regardless, the supplier billed Medicare nearly $2,000 for this 
item and another $6,000 for other equipment the beneficiary 
never received.
    The beneficiary did not know how to use the body jacket, or 
where to return it. She eventually turned it over to the 
Inspector General. And the case against the DME supplier is 
currently pending.
     Home health agency/pawn shop. This is a picture 
taken last year of a pawn shop in Van Nuys, California that 
also happens to be a home health agency. After responding to 
complaints, federal inspectors found that this home health 
agency was located in a building bearing little resemblance to 
what one would expect a home health agency to look like. 
Inspectors also found that the owner's previous health care 
experience consisted of his ownership and management of the 
pawn shop, a cab company, and a restaurant, and that the home 
health agency was out of compliance with 11 of 12 required 
conditions of participation in the Medicare program.
    Based on this on-site review, the agency's provider number 
was revoked. If it would have continued billing Medicare, this 
one home health agency would have cost Medicare over $2 million 
in a single year.
     Kickback Videotape. In one of the most blatant 
examples of fraud that I have ever seen, we are about to 
witness a video taken by an undercover informer who was working 
with the Office of the Inspector General and the FBI in an 
effort to fight Medicare fraud.
    The tape shows the informer bribing a doctor in return for 
the doctor's signature on Medicare Certificates of Medical 
Necessity. The doctor is seated on the left-hand side of the 
screen. These certificates, which bore the names of people who 
did not exist, would have allowed the informant to steal 
thousands of dollars from Medicare in phony claims.
    Because the videotape is somewhat difficult to hear, the 
members of the Subcommittee and the press have been provided 
with transcripts. Let's follow along.
    The doctor in this tape, Rafael Gonzalez--a citizen of the 
Dominican Republic--was arrested in New York City by federal 
agents on November 30, 1994.
    On June 19, 1996, after a seven week trial, he was found 
guilty of a total of 45 counts of Medicare fraud conspiracy, 
making false statements, and conspiracy to defraud the United 
States government. He was sentenced to 78 months in prison and 
fined $3.5 million.
    However, between the time of his conviction and his 
sentencing, Dr. Gonzalez fled the United States for his native 
country, the Dominican Republic, where he now practices 
medicine at the Clinica San Rafael.
    I must also point out that this doctor, this fugitive of 
justice, was Ambassador to the United Nations from the 
Dominican Republic from 1989-1991 and that, despite his crimes, 
he is a free man and a prominent diplomat.
    According to the Inspector General, the Administration 
knows the exact address where he is practicing medicine today 
in Santa Domingo.
    And according to the State Department, the United States 
Embassy in the Dominican Republic, and the Department of 
Justice's Office of International Affairs, no formal 
extradition request was ever made to return this fugitive to 
justice in the United States. The Administration's lack of 
commitment in this case is particularly striking, given that 
Article II of a bilateral treaty between the United States and 
the Dominican Republic calls for extradition in cases of fraud 
and that just two months ago, the Dominican Republic agreed to 
extradite two Dominican nationals involved in drug trafficking 
at the request of the President of the United States.
    Today, I am sending a letter to Attorney General Reno 
asking her to initiate a formal extradition process to return 
Rafael Gonzalez to the United States to serve his sentence for 
bilking the Medicare program and United States taxpayers of 
over $3 million dollars.
    Let me point out that the events shown on this undercover 
tape are not unusual. The Inspector General says that over 50 
other cases involving kickback payments and durable medical 
equipment suppliers are currently under investigation.
    Finally, we recognize that additional legislative changes 
need to be made, and that we need to stay vigilant in our 
continuing battle against health care fraud. That is what this 
hearing is designed to do--to provide a report card on those 
areas where the 65 concrete steps in our anti-fraud plan have 
been most successful, where these reforms should be 
strengthened or better implemented, and where the most 
significant challenges lie ahead in combating waste, fraud, and 
abuse in the health care system.
    We must also ensure that the new fraud-fighting tools and 
funds that Congress has provided through HIPAA and the BBA are 
used by the Administration to their full potential.
    Conclusion. Congress must assure Medicare beneficiaries and 
the taxpayers that the Medicare is not squandering precious 
program dollars on waste, fraud, and abuse. Congress passed 
landmark anti-fraud and abuse legislation in both the 104th and 
105th Congress. Now, we must ensure that these reforms are 
implemented and that the Administration follows the lead of 
Congress to make anti-fraud and abuse its top priority.
    I look forward to today's testimony.
      

                                

    Mr. Stark. Thank you very much, Mr. Chairman.
    I couldn't help but think that, on this question of leaving 
the country, and speculate as to a rumor that if the former 
chief executive officer of a major hospital chain were to be 
found guilty and happened to have gone to China to study, do we 
have an extradition treaty with China, and that may be an 
interesting thing for us to speculate on.
    I'd also, with the Chair's indulgence, like to call 
attention today to the presence in the room of Scott Johnson. 
He arrived in Washington earlier this week and traveled by 
wheelchair all the way from Congressman Levin's district in 
Michigan, and he's come here to meet with us individually and 
give us some firsthand information about fraud and abuse in 
Medicare and the programs for the disabled. It's quite a 
journey for Mr. Johnson to have been here and I want to just 
recognize him and hope that he will have a chance to talk with 
all of us, but I want----
    Chairman Thomas. If the gentleman will yield, Mr. Johnson 
raise his hand, please.
    Mr. Stark. There he is in the back.
    Chairman Thomas. Thank you very much.
    Mr. Stark. Thank you. And thank you for this hearing.
    We can all be proud of the recent legislative efforts to 
fight fraud, waste, and abuse and the recent acts made 
significant strides in combating. We're heading in the right 
direction. Massive fraud schemes continue, however, and we 
heard this week about corporate systems to systematically 
defraud the Medicare system. We don't know if that's the case, 
but those will be investigated. I guess what we'd all say is 
``enough is enough.''
    In an August 1997 statement, Mr. Anderson, the director of 
corporate financial investigations for Blue Cross and Blue 
Shield in Michigan, said it best, that ``Despite increased 
enforcement in the publicity of million dollar settlements with 
large multistate health corporations, the rewards outweigh the 
risks,'' and that's what we've got to change.
    I introduced a bill which I sent to all of you, with 35 
individual provisions. Some you may like, some you may not, but 
they all aggressively increase the pressure against fraud, 
waste, and abuse in Medicare. The underlying message should be 
clear to all those who do business with Medicare and Medicaid, 
and that is, the fight against fraud is just beginning.
    For me it's pretty simple. We have zero tolerance--we 
should have zero tolerance--for repeat offenders and we 
shouldn't hide behind free market language as an excuse for 
criminal behavior. If they do wrong, they should go to jail. I 
don't think there's much that we need to add to that.
    I would like to commend my colleagues to begin to think 
about an additional or new format for auditing and reviewing, 
or whatever you choose to call it, and I just point out that in 
this investigation what the GAO did that turned up all the 
fraud, waste, and abuse, a new concept sort of appeared and 
that was comparing the medical records with the financial 
records. I think in the past you'll find that those have been 
done separately. There is a judgment call, as we're hearing, as 
we know, and I'm trying to encourage a new brand of 
examination.
    Now, this comes out of my years of experience in banking, 
where we have examiners who are both competent to assess the 
medical record as well as the financial records, and, quite 
frankly, that the people being audited pay. This is done in the 
banking industry; the Controller of the Currency, its complete 
auditing staff is covered by the bank. Now, if you do a good 
job and your records are up to date, the examiners aren't there 
very long; it doesn't cost you much. If you're a bad actor and 
don't keep your records up, and you have to have extra 
examinations, you pay more. It sounds fair, and I'm going to 
try and work with my colleagues on the Subcommittee to see if 
we can, along with HCFA and the OIG, begin to increase the 
surveillance that is done among the providers and see if that 
won't help us save some money.
    I commend the Chair and I look forward to hearing our 
witnesses this morning and working with you over the next year 
to see if we can begin to improve on this and work with the new 
administration and HCFA to see if we can't cut that fraud and 
abuse figure at least in half during our current tenancy. 
That'll be a wonderful goal for us to look forward to, and I'd 
like to work with you to do that, Mr. Chairman. Thank you very 
much.
    [The opening statement follows:]

Opening Statement of Congressman Pete Stark

    Mr. Chairman.
    Thank you for holding this hearing.
    We should be proud of recent legislative efforts to fight fraud, 
waste and abuse in the Medicare program. ``The Health Insurance 
Portability and Accountability Act'' and the ``Balanced Budget Act of 
1997'' made significant strides in combating fraud, waste and abuse in 
the Medicare and Medicaid programs. With bi-partisan cooperation, we 
enacted unprecedented tools for fighting what has become one of the 
favorite crimes of the 90's--cheating the Government of billions of 
dollars through health care fraud.
    Although we're heading in the right direction, massive fraud 
schemes to defraud the government continue. In addidavits unsealed this 
week, the FBI allege that they have ``uncovered a systematic corporate 
scheme (by Columbia HCA)...to defraud Medicare and other government 
health insurance programs.''
    Enough is enough.
    In a August 19, 1997 statement, Gregory Anderson, Director of 
Corporate and financial Investigations for Blue Cross and Blue Shield 
of Michigan said it best--despite increased enforcement and the 
publicity of million dollar settlements with large, multi-state health 
corporations, ``the rewards outweigh the risks today.''
    While recent legislation is a good first step, we need to do more.
    On Tuesday, I introduced another bill with over 35 new or improved 
provisions designed to aggressively continue the fight against fraud, 
waste and abuse. My message should be clear to those who do business 
with Medicare and Medicaid--the fight against health care fraud is just 
beginning.
    It's simple for me--individuals found to intentionally, 
systematically and repeatedly defraud Medicare and Medicaid should go 
to jail. We should have a zero tolerance for repeat offenders. We 
should not hide behind ``free market'' language as an excuse for 
criminal behavior. The fight against health care fraud should be 
aggressive and on-going. Medicare beneficiaries deserve the best we can 
offer--quality care at an affordable price with strong protections 
against unscrupulous providers.
      

                                

    Chairman Thomas. Thank the gentleman. We're always looking 
for new ways to deal with issues, but, frankly, the changes 
that were made in the Balanced Budget Act, moving away from the 
old cost-plus system, which frankly invited fraud with the 
inability to check, and moving as much as possible, as rapidly 
as possible, to a prospective payment system in which it is 
much more self-correcting will, I think, be a great advance 
once we can move forward, but any other tools that we might be 
able to come up with we'll certainly take a very careful look 
at.
    Could I ask the first witness to come to the table. It's 
Esther ``Tess'' Canja. She has a personal story to tell, but 
she's also vice president of the American Association of 
Retired Persons. Ms. Canja, if you have a written testimony, 
it'll be made a part of the record. You may address the 
Subcommittee any way you see fit.
    Normally, we have in front of us a typical stop light, 
which has a green light, a yellow caution--amber caution--and a 
red light. In California, when the yellow light comes on, 
California drivers brake. I found in this area when the yellow 
light comes on, these drivers speed up. So what we have done is 
simply eliminated the yellow, because of a malfunction. It will 
go green and then it'll go red. So, don't be concerned 
immediately, but it means that I would move toward the 
conclusion of your statement.
    With that, if you'll speak directly into the microphone, 
because these aren't very good mikes, the Subcommittee would be 
interested in your testimony.

STATEMENT OF ESTHER ``TESS'' CANJA, VICE PRESIDENT AND MEMBER, 
  BOARD OF DIRECTORS, AMERICAN ASSOCIATION OF RETIRED PERSONS

    Ms. Canja. Thank you, Mr. Chairman, and good morning. I am 
Tess Canja of the American Association of Retired Persons, and 
I'm very glad to be here this morning. It is especially 
significant to me that I'm here today because of the personal 
story I have to share.
    My mother, Linda Giovannone, suffered from Parkinson's 
disease. In 1994, she was placed in a nursing home, where she 
remained for 2\1/2\ years before she passed away. Although 
physically she was very disabled, mentally she was very, very 
alert. As her daughter, I was very involved in her care. There 
are three situations in particular that happened during her 
stay at the nursing home that I want to tell you about.
    In the first case, my mother became the patient of the 
nursing home's new medical director. After receiving notice of 
three billings to Medicare, I asked my mother how she liked her 
new doctor. Much to my surprise, she said she had never seen 
him. I then decided to check her nursing home medical records, 
where I found there was a notation of notes on file. I wrote a 
letter to the doctor suggesting he had confused my mother with 
someone else, because she had never seen him. I also asked if 
he could please reimburse Medicare and her supplemental 
insurance carrier for the amount billed since a mistake 
obviously had been made. Soon afterward I received a reply by 
registered mail. The doctor stated he had indeed seen my mother 
and that notes from these visits were on file. I did not pursue 
the matter further.
    A second situation involved care by a podiatrist. Not only 
did my mother not need podiatry care, but I regularly clipped 
my mother's nails myself. Yet, on two occasions that I 
particularly noted, a podiatrist came into the nursing home, 
clipped my mother's toenails, and then billed Medicare for 
another service that was reimbursable. The first time this 
happened, I left word with the nursing home staff that my 
mother did not need podiatry care. Yet, it happened again. 
Unfortunately, the second Medicare statement for this service 
came in after my mother died, and so I did not pursue the 
matter further.
    The last incident began when I received a Medicare 
statement for my mother's participation in a psychotherapy 
discussion group. During the time that she was supposed to be 
benefiting from this discussion group, she was unable to speak 
and, therefore, unable to participate. I discussed the 
situation with the social services director and my mother was 
removed from the group.
    Now, in all three of these situations, I believe the 
Medicare payments made were unwarranted. I can't help but 
wonder if some of these events may have been conscious acts to 
defraud the Medicare Program.
    In discussing my story with the staff at AARP, they 
informed me that there were several new provisions in the 
Balanced Budget Act of 1997 that, had they been in place during 
my mother's stay, may have helped me and saved the Medicare 
Program money.
    For instance, the budget act includes a provision that 
requires the inclusion of a toll-free number, 1-800-HHS-TIPS, 
on the explanation of Medicare benefits form to report 
suspected fraud and abuse. Another provision that should be 
helpful is one that allows the beneficiary to request from a 
provider an itemized bill for Medicare services. While the 
budget act contains a number of other provisions that will 
reduce fraud and abuse, more, however, still needs to be done.
    Enforcement authorities continue to need additional funding 
to detect, investigate, and prosecute unscrupulous providers, 
and consumers in particular could be of tremendous assistance 
if they only had more guidance. For instance, when I discovered 
irregularities in my mother's Medicare bills, I dealt directly 
with the providers. I did not notify Medicare of the suspicious 
billings for two reasons. First, I didn't know whom to call, 
and second, I did not know whether it would be worth it. The 
amount of the billings were so small compared to the millions I 
had read about in news reports, I believed at the time that my 
complaint would not matter. But I've begun to understand 
differently. With the limited financial resources enforcement 
authorities have, perhaps my phone call alone would not have 
made a difference. But my call, plus another's call, and yet 
another's call, may have shown a pattern of abuse by a 
particular provider, thus triggering an investigation.
    One of the best ways, I believe, to keep Medicare 
beneficiaries informed is through the new Medicare summary 
notice, the MSN. I understand that production of this notice is 
currently limited to only a few States as a pilot project. I am 
lucky that my State of Florida is one of them. The new Medicare 
summary notice is a major improvement over the current EOMB 
form in that it encourages beneficiaries to help stop fraud by 
providing examples of the types of fraud we should be looking 
for and the number to call if we suspect fraud. What consumers 
need to know is what they should be suspicious about, such as 
double billing, charging for services not performed, or 
performing inappropriate or unnecessary services.
    Moreover, consumers need to know how to avoid becoming 
unwitting participants in a scam. They need to understand that 
they should treat their Medicare or private insurance card like 
a VISA card--never giving out their beneficiary number over the 
phone unless they initiated the call and immediately reporting 
their card missing if it's lost or stolen.
    It's a problem for consumers that providers have up to 1 
year after providing a service to submit a claim to Medicare. 
After 1 year it can be very difficult for an individual to 
remember if the services billed were actually received or 
appropriate.
    Despite the major drive by enforcement authorities in the 
past few years, a recent survey by AARP indicates that 80 
percent of Americans are unaware of any efforts to combat 
health care fraud. Consumers do, however, believe that 
something can be done to reduce fraud and are eager to join in 
this fight themselves. The most positive findings in the survey 
pertain to the strong and nearly universal willingness of 
individuals to take personal responsibility for doing something 
themselves about health care fraud, as I tried to do in my 
mother's situations. But they still need to know what to do. 
AARP hopes to take the information learned in this survey and 
craft an education campaign to build on the positive attitudes 
that were revealed.
    I thank you all for inviting me to speak before the 
Subcommittee today. If consumers were aware of the types of 
fraud being perpetrated, what to look for when reviewing their 
claims, and whom to call when they suspect fraud, they would 
become valuable partners in the fight to reduce health care 
fraud and abuse.
    [The prepared statement and attachment follow:]

Statement of Esther ``Tess'' Canja, Vice President and Member, Board of 
Directors, American Association of Retired Persons

    Good morning. I am Tess Canja from Port Charlotte, Florida. 
As Vice President and a member of the Board of Directors of the 
American Association of Retired Persons (AARP), I appreciate 
the opportunity to testify today about fraud and abuse in the 
health care system.
    It is especially significant to me that I am here today not 
only because of my role as a representative of AARP but also 
because of the personal story I have to share.

             My Personal Experience with Health Care Fraud

    My mother, Linda Giovannone, suffered from Parkinson's 
Disease. In 1994, she was placed in a nursing home where she 
remained for two-and-a-half years before passing away. Although 
physically she was severely disabled, mentally she was very 
alert. As her daughter, I was very involved in her care. Not 
only did I oversee the providers who cared for her, but I also 
received her medical bills--including those from Medicare. I 
intervened on her behalf, when necessary, with both providers 
and insurance carriers.
    None of her stay in the nursing home, with the exception of 
the physical therapy she received, resulted in Medicare 
payments to the facility. However, separate Medicare Part B 
payments were made to providers who came into the nursing home. 
It is some of their charges to Medicare that I found troubling.
    There are three situations, in particular, that I want to 
tell you about.
    In the first case, my mother's personal physician no longer 
serviced the nursing home, so she became the patient of the 
nursing home's new medical director. After receiving notice of 
three billings to Medicare of approximately $40 each, I asked 
my mother how she liked her new doctor. Much to my surprise, 
she had never seen him.
    I then decided to check her nursing home medical records 
for the dates the physician apparently saw her. In the records, 
there was a notation of ``notes on file.'' I wrote a letter to 
the doctor suggesting that he had confused my mother for 
another patient since she had never seen him. I also asked if 
he could please reimburse Medicare and her supplemental 
insurance carrier for the amount billed since a mistake had 
obviously been made.
    Soon afterwards, I received a reply by registered mail. The 
doctor stated that he had indeed seen my mother and that his 
notes from these visits were on file. By now, I was sure that 
there would be notes on file and did not pursue the matter 
further. Shortly, thereafter, he resigned as medical director.
    A second situation involved care by a podiatrist. Let me 
make it clear that my mother did not need podiatry care, nor 
was it ordered by her primary physician. In addition, I 
regularly clipped my mother's fingernails and toenails. Yet, on 
two occasions that I particularly noted, a podiatrist came into 
the nursing home, clipped my mother's toenails and then billed 
Medicare for another service that was reimbursable.
    The first time this happened, I left word with the nursing 
home staff that my mother did not need podiatry care. Yet, it 
happened again. Unfortunately, the second Medicare statement 
for this service about $60--came in after my mother had died, 
so I did not pursue the matter further.
    The last incident that I would like to share with you began 
when I received a Medicare statement for my mother's 
participation in a psychotherapy discussion group. During the 
time that she was allegedly benefiting from this discussion 
group, she was unable to speak, and therefore unable to 
participate. I discussed the situation with the social services 
director and my mother was removed from the group.
    In all three of the situations I described, I believe the 
Medicare payments made were unwarranted. I can't help but 
wonder whether some of these may have been conscious acts to 
defraud the Medicare program.

                    The Balanced Budget Act of 1997

    In discussing my story with the staff at AARP, they 
informed me that there were several new provisions in the 
Balanced Budget Act of 1997 that, had they been in place during 
my mother's nursing home stay, may have helped me during this 
difficult time, and probably would have saved the Medicare 
program some money.
    For instance, the Balanced Budget Act includes a provision 
that requires the inclusion of a toll-free number on the 
Explanation of Medicare Benefits (EOMB) form to report 
suspected fraud and abuse. AARP staff tell me that the hotline 
number 1-800-HHS-TIPS has actually been in place and operating 
for several years. Yet, many beneficiaries and caregivers, like 
myself, have been unaware of its existence. Had this number 
been printed on my mother's Medicare bills at the time, I would 
have realized that there was someone I could call to report my 
suspicions.
    Another provision that should be helpful to beneficiaries 
is one that allows a beneficiary to request from a provider an 
itemized bill for Medicare services. The provider would have 30 
days from the date of the request in which to furnish the 
beneficiary with an itemized statement. If the statement showed 
services not provided or other billing irregularities, the 
beneficiary would then be able to request a review of the 
statement by the Secretary of Health and Human Services. 
Requiring providers to furnish itemized statements upon request 
will not only help the beneficiary who, in some instances, may 
be making coinsurance payments for services not received but 
will benefit the Medicare program as well if beneficiaries can 
alert the program to billing irregularities.
    The Budget Act also contains a provision that requires 
hospitals to include information on their discharge planning 
evaluations that would inform beneficiaries of the availability 
of Medicare home health services and whether or not the 
hospital has a financial interest in any such agencies. By 
informing beneficiaries of the options available to them and 
the hospital's financial interests, patients will be in a 
better position to make the best choice for their care.
    While the Balanced Budget Act includes a number of 
provisions that will help consumers participate in the fight 
against fraud, it also includes a number of provisions that 
should make it more difficult for providers to scam the system.
    For instance, requiring certain groups of providers such as 
durable medical equipment suppliers to post a $50,000 surety 
bond if they wish to do business with Medicare should help to 
weed out unscrupulous providers from the legitimate ones. 
Similarly, requiring providers and suppliers to provide HCFA 
with their Social Security numbers and employer identification 
numbers to check for past fraudulent activity should cause scam 
artists to think twice before setting up business. In addition, 
requiring providers who submit claims for services provided in 
nursing homes to list the identification number of the nursing 
home on their claim form should make it much easier to track--
and hopefully deter--unscrupulous activities.
    The budget bill gets tough with fraudulent providers by 
establishing a ``three strikes and you're out'' penalty. Any 
health care provider convicted of defrauding Medicare or any 
other federal health care program for the second time will be 
prohibited from participating in any federal health care 
program for 10 years. A provider who is convicted for a third 
time will be prohibited from participating in any federal 
health care program for life.
    In addition, the Secretary of Health and Human Services 
will now have the option to deny participation in the Medicare 
program to any provider convicted of a felony medical or 
otherwise.
    Other penalties include excluding from participation in the 
Medicare program entities controlled by a family member of a 
sanctioned individual, and imposing new civil monetary 
penalties on persons who contract with an excluded provider, as 
well as on health plans which fail to report information on 
adverse actions required under the health care fraud and abuse 
data collection program.
    AARP is pleased with these new ``get tough'' penalties. 
They send a strong message to unscrupulous providers that 
Medicare will not tolerate those who commit fraud and abuse 
against the system.
    One aspect of the budget bill, however, that may prove to 
have the greatest impact in reducing the ``incentive'' to 
commit fraud is the establishment of prospective payment 
systems (PPS) for home health care, skilled nursing facility 
care, ambulance services and rehabilitation services. In 
particular, the new PPS for skilled nursing facility care 
should eliminate the incentive to provide unnecessary therapy 
services, as occurred in my mother's case.
    Up until now, it has simply been too easy for providers of 
these types of care to abuse the system. For instance, some 
home health care providers have their home offices in high-cost 
urban centers while maintaining branch offices in low-cost 
rural areas. Since, under current law, payment is based on 
where the service is billed and not where the service is 
provided, some providers have billed Medicare from their urban 
location where the cost is much higher to provide a service 
even if the service was actually provided in a rural area. In 
addition, the ``reasonable cost basis'' of providing the 
service varied greatly from provider to provider, as well as 
location to location.
    The new payment systems should save the Medicare program 
millions by setting a fixed amount for each service regardless 
of location, with minor adjustments made for high cost areas. 
The new law also requires providers to submit claims based on 
the location of where the service is actually furnished, and 
not where the main office is located. AARP believes these new 
payment systems will be a major factor in reducing fraud and 
abuse.

                     The Need to Educate Consumers

    While the Balance Budget Act of 1997 provides significant 
legislative resources to aid both enforcement authorities and 
consumers in the fight against health care fraud, more still 
needs to be done.
    Enforcement authorities e.g., the Department of Health and 
Human Services Office of Inspector General, the Department of 
Justice, the Federal Bureau of Investigation will continue to 
need additional financial resources to detect, investigate and 
prosecute unscrupulous providers.
    Consumers, in particular, could be of tremendous assistance 
to the effort to reduce fraud and abuse if they only had more 
guidance. For instance, when I discovered irregularities in my 
mother's Medicare bills, I dealt directly with the providers. I 
did not notify Medicare of the suspicious billings for two 
reasons: 1) I didn't know who to call, and 2) I didn't know if 
it was worth going to the trouble to find out. The amount of 
the billings was so small compared to the millions I had read 
about in news reports, I believed at the time that no one would 
care. But I've begun to understand differently. With the 
limited financial resources enforcement authorities have, 
perhaps my phone call alone would not have made that big of a 
difference. However, my call plus another consumer's call and 
yet another call may have shown a pattern of abuse by a 
particular provider, thus triggering an investigation. 
Consumers need to know that their suspicions matter and that 
the government cares.
    One of the best ways, I believe, to keep Medicare 
beneficiaries informed is through the new Medicare Summary 
Notice (MSN). I understand that production of this notice is 
currently limited to only a few states as a pilot project. 
Since Florida is one of these states, I am a lucky recipient of 
the MSN.
    Let me begin by saying that the new Medicare Summary Notice 
is a major improvement over the current EOMB form. Though it is 
much easier to read and understand, the biggest difference is 
the information it contains. Not only does it encourage 
beneficiaries to help stop fraud, it provides examples of the 
types of fraud we should be looking for.
    Consumers need to know how to properly audit their claims 
and what types of billing irregularities constitute fraud. Many 
beneficiaries consider the $5 aspirin to be fraud while it is 
an extraordinary charge, it's not where consumers' attention 
should be focused. Rather, what consumers really need to know 
is what they should be suspicious about such as double billing, 
charging for services not performed, or performing 
inappropriate or unnecessary services. Moreover, many do not 
know that waiving a Medicare patient's coinsurance is illegal.
    Furthermore, consumers need to know how to avoid becoming 
unwitting participants in a scam. For example, many do not know 
that they should treat their Medicare or private insurance card 
like a VISA card. They don't know they should never give their 
beneficiary number out over the phone when they haven't 
initiated the call, or to someone who comes to their door, or 
in exchange for free medical services. They don't know to 
immediately report their card missing if it is lost or stolen.
    If consumers were more aware of the types of fraud 
perpetrated they would be in a better position to avoid and 
report them. Yet many remain uninformed of the types of fraud 
that exist or whom to call if they suspect fraud.
    The new summary notice not only helps educate consumers as 
to what types of fraud exist, but it also provides them in bold 
type with the HHS Inspector General's fraud hotline number: 1-
800-HS-TIPS. One number they can count on to report their 
suspicions. AARP believes the Medicare Summary Notice should 
formally replace the EOMB form and be made available beyond the 
pilot project to all Medicare beneficiaries.
    Another problem, from the consumer's standpoint, that I 
would like to alert you to is the current requirement that 
providers have up to one year after providing a service to 
submit a claim for payment from the Medicare program. While 
this may not be a problem for the provider, at times it can 
create a problem for the consumer. After a year, it can be 
difficult for an individual to remember if the services billed 
were actually received or appropriate. For family caregivers, 
like myself, it can be difficult to check if a loved one 
received the services actually billed if an entire year has 
passed. It is especially difficult, as in my mother's case, if 
the patient died many months before the claims were received 
particularly since the claims reflected services performed the 
previous year.
    One of the biggest problems in involving consumers in the 
fight against health care fraud is the lack of knowledge they 
have that anything is being done by the government to root out 
fraud. Despite the major drive by enforcement authorities in 
the past few years, a recent survey by AARP indicates that 80 
percent of Americans are unaware of any efforts to combat 
health care fraud. Of those who are aware, nearly one-third 
believe that such efforts have had no effect.
    Consumers do, however, believe that something can be done 
to reduce fraud and are eager to join in this fight themselves. 
In the survey, nearly 85 percent said they would be more 
inclined to report health care fraud if they only knew more 
about it. Interestingly, though, the survey showed that 
offering a reward or monetary incentive would do little to 
increase the likelihood that consumers would report suspected 
fraudulent behavior. Consumers believe reporting fraud is their 
personal responsibility.
    The public also believes that reducing fraud and abuse will 
increase the quality of their care and lower their costs, and 
that more can and should be done to reduce fraud in the health 
care system. Yet they remain cynical about the government's 
ability to fight it. The most positive findings in the survey 
pertain to the strong and nearly universal willingness of 
individuals to take personal responsibility for doing something 
themselves about health care fraud, as I tried to do in my 
mother's situation.
    AARP is taking the information learned in this survey and 
crafting an education campaign to build on the positive 
attitudes that were revealed and to dispel the myths and 
misperceptions about health care fraud.
    AARP does not see itself as acting alone in designing and 
implementing such a campaign. The Association plans to work 
with both the public and private sectors in this effort. 
Educating Americans about the extent of fraud and about efforts 
already underway to combat it is one of many steps to reducing 
fraud and abuse. This, in itself, is one aspect to lowering 
health care costs and increasing the quality of our nation's 
health care.

                               Conclusion

    Mr. Chairman, thank you for inviting me to speak before the 
Subcommittee today. Clearly, there is a need and a desire for 
greater public education on health care fraud and abuse. If 
consumers were aware of the types of fraud being perpetrated, 
what to look for when reviewing their claims, and whom to call 
when they suspect fraud, not only would they be able to avoid 
being unwitting participants in a scam, but they would also 
become valuable partners in the fight to reduce health care 
fraud and abuse.
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    Mrs. Johnson of Connecticut [presiding]. Thank you very 
much for your excellent testimony. It is very helpful to hear 
specific examples and share people's experiences. I know one of 
the most frustrating experiences for me as a Member is to have 
constituents come to you with very specific examples and then 
get the reaction from the fiscal intermediary that we just 
can't look at that; we can't get into that; we can't judge 
whether the care was actually delivered or whether it was 
necessary, as long as it was generally appropriate. I mean it 
is scandalous in a sense the way we pay bills through our 
intermediaries and the system not only rewards fraud, but 
encourages it.
    There are a couple of things that you didn't mention in 
terms of the recent legislation that will address a lot of your 
concerns. The first is that we are bundling the reimbursement 
for ancillary services to nursing homes so that there will be a 
disincentive to provide inappropriate ancillary services. We're 
also requiring that doctors, on their bill, put the number of 
the nursing home on it, so that we can see the pattern of 
physician action in nursing homes and be sure that it relates 
to patient need. So, those are two examples.
    We did, however, include 65 different concrete steps to 
fight Medicare waste, fraud, and abuse, and with the enormous 
experience of the AARP, I wondered if you would want to enlarge 
on which of those specific tools you think are most important 
or get back to us at a future date.
    Ms. Canja. Let us take a look at that and get back to you. 
We'd be very happy to do that.
    [The following was subsequently received:]

    This information can be found on pages 3-7 of our written 
testimony.
      

                                

    Mrs. Johnson of Connecticut. Thank you very much.
    Mr. Stark.
    Mr. Stark. Thank you, Madam Chair.
    I want to thank Ms. Canja for her testimony and I hope that 
her testimony will encourage others who have similar 
experiences to come forward. It's often suggested that we're 
dealing with anecdotes here, but it is these anecdotes which 
call to our attention many of the abuses that we eventually 
have to correct. I appreciate your taking the time and the 
effort to come here.
    We passed some antifraud bills recently, and as I said, I 
think we need to do more. Senator Kyl of Arizona and Chairman 
Archer of our Committee have introduced bills to let doctors 
privately contract with Medicare anytime they want and, in 
effect, force the patients to give up their Medicare benefits 
and pay privately on the side. Last week the AARP released a 
paper pointing out that this would contribute to fraud, waste, 
and abuse of the Medicare system, because there's no way that 
Medicare could keep track of these side deals and, what we 
call, unbundling of services in the private contracts that 
doctors in managed care plans could then enter into. I want to 
ask you if you agree with the AARP's position.
    And, second, in the press yesterday, Mr. Salido, a 
spokesman for Senator Kyl, indicated that we're denying senior 
citizens the right to choose any doctor in Medicare, and it's 
my understanding--and I wonder if you and AARP would agree--
that under Medicare, currently, a Medicare beneficiary can see 
any doctor they want for any Medicare-approved procedure and 
that there is currently no restriction on seeing a doctor or 
indeed choosing a hospital? Are you in accordance with the 
AARP's position in opposition to the Kyl amendment and do you 
think it would have an affect on increased fraud and abuse? 
And, second, is it your understanding that there is no need for 
it because we have the broadest possible choice now under 
Medicare?
    Ms. Canja. To answer your first question, yes, I do agree 
with AARP's concerns about the private contracting bill. There 
are opportunities in this measure, we believe, to defraud the 
system, because it opens the door to double billing. Whether 
it's the physician receiving payment from the beneficiary and 
then receiving payment from Medicare or in a managed care 
situation, where Medicare would pay the managed care plan and 
then the physician would receive a separate payment. So that 
does concern us.
    For your second question, you asked can beneficiaries now 
see doctors of their choice? Under fee-for-service they can. 
You're aware that they pay a copayment, a 20-percent copayment, 
but under any of the services that Medicare covers, they could 
go and be covered by Medicare for those services. For other 
services that Medicare doesn't cover, they can still go to the 
physician and pay.
    Mr. Stark. Thank you.
    Ms. Canja. Out of pocket.
    Mr. Stark. Thank you very much.
    Chairman Thomas [presiding]. Ms. Canja, I apologize, I had 
to deal with another issue, but I had read your testimony.
    And from personal experience, my parents were in an 
automobile accident. My mother was killed instantly, but my 
father was in intensive care and then moved into a skilled 
nursing facility. I have three sisters and we attended our 
parent, as did you, and did a number of personal grooming 
routines, just out of kindness and love, and it was a constant 
amazement to us the number of professionals who would come by, 
and notwithstanding the condition of my father, would, 
nevertheless, argue to perform a service and then, of course, 
to bill.
    One of the reasons I've worked so hard to try to create a 
prospective structure which would remove these individual 
billing capabilities was because of the firsthand experience. I 
guess you can watch things that happen and try to appreciate 
it, but until you go through it----
    Ms. Canja. Exactly.
    Chairman Thomas [continuing]. As you did, you just can't 
appreciate, under the old system, how many opportunities there 
were to make money in a fraudulent way.
    Ms. Canja. Yes, isn't it true, and I'm sorry to hear of 
your personal experience.
    Chairman Thomas. Well, that's always the best teacher.
    Ms. Canja. It is.
    Chairman Thomas. The gentleman from Louisiana.
    Mr. McCrery. Thank you, Mr. Chairman, and thank you, Ms. 
Canja, for your testimony.
    Just to follow up on my friend from California's line of 
question about the Kyl bill. While I appreciate AARP's 
position, I gather that the reason that AARP and you are 
concerned about fraud and abuse is that the fraud and abuse 
increases the costs to Medicare and the taxpayers, thereby, 
diluting the services perhaps, or with the potential to dilute 
the services to seniors in the future, if the fraud and abuse 
gets so large and takes so much of the available money that we 
have to cut back on the services. Is that a fair statement?
    Ms. Canja. I think that's a fair statement, yes.
    Mr. McCrery. So, if you're concerned about a dilution of 
services, one way the services could be diluted is by more and 
more providers refusing to take Medicare patients. Isn't that 
correct?
    Ms. Canja. Yes, if that we're to happen.
    Mr. McCrery. And it could happen, couldn't it, if, say, the 
reimbursement rates had to be ratcheted down so low that many 
providers felt like it wasn't worth their time to see Medicare 
patients for the remuneration that they were going to get from 
Medicare?
    Ms. Canja. AARP has always been concerned that we have fair 
reimbursement rates, but also, I see it, and I'm talking 
personally here, as a disincentive for physician's to take 
Medicare if there's an opportunity to get any kind of money 
that the doctor may want to charge.
    Mr. McCrery. Well, I, too, am concerned about the dilution 
of services and I'm very concerned about the long-term 
viability of the Medicare Program under its current structure. 
We've done some good things, as you helped us point out, and 
Mr. Thomas has pointed out here today, in the last couple of 
years in terms of identifying fraud and fighting fraud. Still, 
with a program this large and with so many points of contact 
between the consumer of services and the provider of services, 
there's a huge potential for fraud in this program. I hope that 
you will work with us to look at some different ways of 
providing this service to seniors in this country and not 
simply reject ideas like Mr. Kyl's and Chairman Archer's out of 
hand, because I think those ideas, potentially, are the very 
building blocks that we will need to put in place to save this 
program over the long term and to prevent wholesale rationing 
of services, because of the widespread abuse that will always 
be in this program in my view, under its current structure.
    We can spend billions and billions more on more and more 
investigators, but as long as you have a program this big and a 
pot of money this big and handled the way it's handled, your 
going to have abuse. So, I would just ask you to work with Mr. 
Kyl and Chairman Archer and me and others who want to preserve 
this program, but want to do it in a fiscally responsible way 
and in a way that will continue to provide a high level of 
services to the elderly in this country.
    Ms. Canja. You know, I think you have all received this 
fact sheet that we have that detailed our concerns, and really 
I think that you could consider that as the beginning of our 
cooperation with you, because it details the things that we are 
concerned about, asking you to please look at those things and 
see how they might be addressed.
    Mr. McCrery. And we appreciate that and I want to thank you 
for doing that. Once again, thank you for your testimony here 
today and, also, thank you for AARP helping us to advertise 
some of the changes that have been made to help consumers fight 
fraud and abuse in the system. Thank you.
    Ms. Canja. Thank you. We appreciate that.
    Chairman Thomas. Does the gentleman from Maryland wish to 
inquire?
    Mr. Cardin. Thank you, Mr. Chairman. Just very briefly, 
following on Mr. McCrery's comments.
    Let me, first, thank you and AARP for your presence here 
today and your willingness to work with this Subcommittee to 
deal with fraud and abuse within the Medicare system. I agree 
with the underlying point that, to the extent that we can 
reduce fraud and abuse--we'll never get rid of it--we will make 
more resources available to deal with the problems that Mr. 
McCrery was talking about--access to care and a proper 
reimbursement rate for the providers that work within the 
Medicare system.
    I just really want to at least put on the record a 
statement regarding the Kyl amendment. If you wish to comment, 
fine. I know neither the Kyl amendment in the Balanced Budget 
Act or the new Kyl bill are before us and I understand that. 
But, I am concerned that I don't know of any private insurance 
company in a managed care environment that would allow its 
doctors to receive payment under the managed care program and 
then go out and bill the subscriber whatever the subscriber 
could pay for services. It seems to me that's a condition of 
participating in the program.
    Medicare is the largest insurance program in the country, 
and why would we be setting a standard different for our 
beneficiaries than private health care plans? To me, that would 
make little sense. But today we are discussing fraud and abuse. 
I think the underlying point here is that if we were to permit 
a system where a doctor could participate in Medicare and get 
Medicare reimbursements and then for certain services go out 
and bill privately whatever the doctor wished to charge, 
whatever that doctor could collect from the Medicare 
beneficiary, it would seem to me that we could be opening up a 
more difficult enviornment in which to battle fraud and abuse.
    Ms. Canja. You know, we have that same concern in our 
statement.
    Mr. Cardin. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Nevada wish to inquire?
    Mr. Ensign. Thank you, Mr. Chairman. I really enjoyed your 
testimony although it's not that I enjoyed your testimony on 
what happened with your Mom's situation, but I've had a lot of 
townhall meetings around southern Nevada, and your testimony 
has been repeated so many times, and as Mrs. Johnson talked 
about before, it is incredibly frustrating for a Member of 
Congress.
    First of all, in the last couple of years, finding out 
where some of the confusion lies, like you said, you didn't 
even know whether it was fraud, whether it was just the way 
that the system was set up it was confusing, or did somebody's 
orders get taken wrong. It's such an incredibly complex 
bureaucracy now that has been set up and the system is so large 
that it seems to invite mistakes. Even if they aren't actual 
out-and-out fraud, it seems to invite a lot of abuses of the 
system simply because of clerical errors, or whatever.
    In your membership, how many letters do you get, and when 
you get those letters on fraud and abuse, what do you do with 
them, because I know you probably get some of the same things 
from your membership that we get here in Congress?
    Ms. Canja. Obviously, I can't pick out of the air right now 
the number of letters that we get, but we did do this survey 
that showed that people are enormously concerned about health 
care fraud and abuse; they believe that it is tremendously 
widespread and if we just did something about fraud and abuse, 
we could take care of Medicare. So that gives you some idea of 
the dimensions of the educational effort that really is going 
to be needed to help people understand what is fraud, what is 
abuse, what they can do about it, how they can report it.
    You know, I come to you today, as a pretty informed 
consumer, and yet, I still had those problems when I saw these 
situations: Is this fraud and what do I do about it? I did the 
best I could.
    This is what we found out in our survey and our focus 
groups: People want to do something about it; they want to be 
active participants and they will do what they think they can 
do, but, you know, you've really done a tremendous job with the 
budget bill and the provisions you've put in it, because you're 
going to give a lot more guidance to consumers. These examples 
of fraud and abuse that I talked to you about, each one of them 
is small, but I think that taken in the aggregate, they 
probably add up to a great deal of money.
    Mr. Ensign. One of the things I would like to encourage 
your organization, because your organization does touch so many 
seniors and you communicate with them all the time, and that is 
to help us educate, because most Members of Congress aren't 
even aware of what the new provisions of Medicare are to be 
able to answer those questions for their constituents. I would 
very much encourage your organization in its communication with 
its members, because you touch so many of the seniors in the 
country, and that is first of all, to educate them that there 
is a 1-800 number to call.
    Ms. Canja. Exactly.
    Mr. Ensign. And all of the other things that now maybe that 
empower seniors, but also will maybe give them a little more 
sense that Congress really is doing something up here, because 
it does seem that very seldom do we get credit for some of the 
good things that we're trying to do to cut out waste, fraud, 
and abuse in Medicare. Certainly, some of the things that we've 
done: Increasing penalties, whether it's preventing transfer of 
illicit businesses to family members or increasing civil 
penalties or the help lines that we've set up or whatever, I 
think that Congress really has taken the step in the right 
direction. We have a long way to go, but we'd certainly like 
your help in communicating some of the things that we've done.
    Ms. Canja. You know, we are continuing to do a major 
educational campaign on health care fraud and abuse. We have a 
fact sheet on it; we're now training volunteers on what are 
some of the scams and what they can do about it, and we're 
going to send them out as a gray patrol to educate others at 
senior centers and at other place where seniors congregate. So, 
we're really into that. We're working with our members; we're 
working with you--that's why I'm here today--we're working with 
the law enforcement agencies. We will do whatever we can to 
help in this effort.
    Mr. Ensign. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from California wish to inquire?
    Mr. Becerra. Thank you, Mr. Chairman. I noted in your 
written testimony you mentioned that a survey had been done in 
which it showed that even if you provided the consumer with the 
monetary incentive or some type of reward for reporting waste, 
fraud, or abuse, that doesn't really do much to get people to 
act.
    Ms. Canja. That seems to be what the survey showed. That 
incentive really wasn't that necessary.
    Mr. Becerra. And you mention in your testimony that it was 
your opinion that people consider it their personal 
responsibility to try to report that type of activity.
    Ms. Canja. Right.
    Mr. Becerra. Is there something that we could do that would 
be more personal in scope, that would help consumers become 
more engaged in trying to report these activities?
    Ms. Canja. I think they just need to have some education 
about--I mean this is a major thing; they need to know about 
fraud and abuse and what it is, because right now, you know, 
their example of fraud is the $5 aspirin. They have to have a 
better idea of exactly what to look for. So, we all need to do 
a good job of trying to get that kind of information out.
    Mr. Becerra. Do you or do you know if any of the 
individuals you know who receive Medicare have a personal 
relationship with anyone who works with the Department of 
Health and Human Services that administers the Medicare 
Program?
    Ms. Canja. I didn't hear the first part of your question, 
sir, I'm sorry.
    Mr. Becerra. I'm trying to figure out if Medicare 
recipients have a personal relationship with the administrative 
authority for Medicare. Certainly, you have a relationship----
    Ms. Canja. No, I don't believe so. It's pretty far removed 
from them probably.
    Mr. Becerra. So when it comes to trying to report abuse by 
a provider or fraud by a provider, there's no one that you can 
naturally turn to within the government or the administrative 
office that helps administer Medicare in order to try to report 
that abuse?
    Ms. Canja. Well, an 800 hotline is a very good help if they 
have it in front of them.
    Mr. Becerra. I understand the 800 hotline is there, but 
you, as a Medicare recipient, don't happen to know anyone that 
answers that hotline, for example?
    Ms. Canja. No.
    Mr. Becerra. Did you ever make use--I believe you said that 
you did not make use of the hotline when you found these 
problems occurring with your mother?
    Ms. Canja. No, and on those earlier Medicare statements 
there wasn't even a hotline, I mean, there was not a hotline; 
there was no number to call.
    Mr. Becerra. OK. Do you believe that consumers of Medicare 
services are making use of the hotline well?
    Ms. Canja. Well, I think the hotline, I don't think they 
know about it, and this is one of the things that's going to 
come out of the Balanced Budget Act--that they will know, they 
will, that hotline now. I don't think it's been that available 
to them.
    Mr. Becerra. Do you think the notice that recipients will 
be receiving now will be sufficient to give them a sense that 
there is a hotline to call if there is abuse or fraud 
occurring?
    Ms. Canja. Two things are needed: Not just the hotline, but 
what to look for so they know what to report. When I was 
looking at the form, there is something they could do. They 
could make it much more explicit in the back of the form when 
they give you some guidance on what kinds of calls to make. It 
would be tremendously helpful.
    Mr. Becerra. Does the Medicare card itself have the hotline 
number on it?
    Ms. Canja. Does Medicare?
    Mr. Becerra. The Medicare card, your beneficiary card?
    Ms. Canja. I have no idea. I never looked at it to see 
that.
    Mr. Becerra. It might be a good place to put it. It sure 
would be handy if you keep the card.
    Ms. Canja. It may be there.
    Mr. Becerra. What of the issue of individuals not realizing 
that they should treat, as you say in your testimony, they 
should treat their Medicare card and their beneficiary number 
as they would treat any credit card and credit card number, not 
to give it to anyone who happens to call them by phone, or 
someone who happens to drop by and offer them free medical 
services?
    Ms. Canja. Well, that number can be used just as a VISA 
card number can be used for fraudulent claims, but I don't 
think people understand that, so that's going to be a part of 
the educational campaign.
    Mr. Becerra. Is it your belief that people are actually 
using or giving out that card number very liberally?
    Ms. Canja. Oh, I couldn't say that; I have no idea. I would 
doubt it. I think that there a lot of ways to get a number, 
though.
    Mr. Becerra. Right. So there----
    Ms. Canja. I can't answer that.
    Mr. Becerra [continuing]. Probably needs to be a better way 
to try to protect that number as well.
    Thank you for the time, and thank you very much for coming 
and providing testimony.
    Ms. Canja. You're welcome.
    Chairman Thomas. Ms. Canja, thank you very much. It's clear 
that informed patients and informed loved ones know what was 
and was not done, and that if you were provided specific 
billing records, which we now do, and a phone line to contact 
people--oftentimes, there was a phone number on the billing 
information, but that was the particular contract agency to 
deal with----
    Ms. Canja. Exactly.
    Chairman Thomas [continuing]. The billing problems. But 
what we have assigned is a clear statement that there is fraud 
and abuse and that this is the number to call if you suspect 
it. It's a 1-800 number tied directly to the Office of 
Inspector General, and it will be a centralized collection 
structure. That is, I think, a far cry over the real, I won't 
say unwillingness, but clear failure to take what I think is a 
key frontline of defense--those people who are receiving or not 
receiving particular procedures to report their suspicions. We 
think over time this will be a useful tool, and I'm pleased 
you're willing to support it.
    Thank you very much for your testimony.
    Ms. Canja. Thank you.
    Chairman Thomas. The Subcommittee will stand in recess 
before we begin the next panel, so we don't start and then 
disrupt us, and will convene again at 11:30 a.m.
    [Recess.]
    Chairman Thomas. Eleven-thirty having arrived, the 
Subcommittee reconvenes and thank you.
    The panel in front of us will be Michael Mangano, whose 
name tag I cannot see. He's the Principal Deputy, Office of 
Inspector General, Department of Health and Human Services; 
Linda Ruiz, who is Director, Program Integrity Group, Office of 
Financial Management at HCFA; Charles Owens, who is the Chief 
of Financial Crimes Section, Federal Bureau of Investigation; 
and Dr. William Scanlon, who's been with us a number of times, 
Director, Health Financing and System Issues, U.S. General 
Accounting Office.
    Your written testimony will be made a part of the record. I 
would ask that you summarize your testimony in any way that you 
see fit within the timeframe that's available to us, and I look 
forward to the information you'll provide us on this midterm 
report card.
    Mr. Mangano.

  STATEMENT OF MICHAEL F. MANGANO, PRINCIPAL DEPUTY INSPECTOR 
     GENERAL, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Mangano. Thank you very much, Mr. Chairman. I'm very 
pleased to be here this morning to report to you on the efforts 
that we've made to combat fraud, waste, and abuse in the 
Medicare Program. The impact of the Balanced Budget Act of 1997 
and the Health Insurance Portability and Accountability Act, 
and also some areas that we think still warrant some concern.
    With the budget exceeding $200 billion this year, it's no 
wonder why Medicare is an inviting target for scam artists and 
those who want to steal from the Medicare Program and its 
beneficiaries. A recently issued report before this 
Subcommittee that the Chairman mentioned this morning indicated 
that about $23 billion last year was inappropriately spent from 
the Medicare Program. Now, while that's not all fraud, it is a 
problem that causes us great concern and ought to consume the 
attention of the Health Care Financing Administration, as well 
as our office and other law enforcement organizations. That is 
why we are so delighted with the provisions of both of these 
two acts. I want to specially thank this Subcommittee and the 
leadership that the Chairman and the Ranking Minority Member 
have had in forging these pieces of legislation.
    HIPAA provides us with a number of new enforcement tools, 
reliable funding, and a management structure in which we can 
coordinate the various fraud-fighting units across government. 
I want to assure this Subcommittee that we're working with the 
Department of Justice, the FBI, and the Health Care Financing 
Administration to address a number of these programs, as well 
as to conduct a series of investigations, audits and 
evaluations.
    The question you may ask is, How are we doing? I'm very 
pleased to report this morning that we've been successful in 
this first year and we anticipate receiving $1.2 billion in 
estimated fines, penalties, and restitutions to the program; 
this is about five times higher than last year. We've doubled 
the number of criminal and civil actions that have come out of 
the reviews that we've been doing to over 1,300 this year, and 
the number of exclusions exceeds 2,600.
    The Balanced Budget Act gives us even more weapons we can 
use in this fight, but I think what's most important are the 
program reforms that we think will make the Medicare Program a 
far more prudent purchaser of goods and services. The chart 
attached to my testimony indicates about $58 billion that these 
two pieces of legislation will save for the Medicare Program on 
the basis of program changes to be made. Scored by the 
Congressional Budget Office, we supported a number of these 
recommendations and offered them over the years.
    Very briefly, I'd just like to mention a couple of the 
issues that we still believe warrant close scrutiny. As the 
gatekeeper for home health services, we believe that the role 
of the physician needs to be strengthened. For example, 
Medicare does not require at the current time that a physician 
actually examine a patient before ordering home health 
services. We think that's a mistake. We also think that the 
certification form that the physician signs ought to be more 
explicit in terms of what the eligibility requirements are. In 
our reviews of home health agencies, we found doctors that 
didn't know what the term ``homebound'' meant. We think that 
leads to a number of problems.
    Second, we're looking at whether or not hospitals are 
prematurely releasing patients to reduce their costs and 
receive additional reimbursement from the Medicare Program for 
nursing homes and home health agencies that they refer those 
patients to. In our analysis, we found that patients released 
from hospitals to nursing homes that they owned had 2 day 
shorter hospital stays and 8 day longer nursing home stays. We 
found similar situations, although less pronounced, with home 
health.
    While the Balanced Budget Act establishes a fee schedule 
for ambulance----
    Chairman Thomas. Just for the record, Michael, what you 
meant to say was the center that cost more got longer days than 
the center that costs less. Is that what you we're saying?
    Mr. Mangano. Yes.
    Chairman Thomas. OK.
    Mr. Mangano. Yes, yes.
    Chairman Thomas. Surprise, surprise.
    Mr. Mangano. With regard to ambulance services, we think 
that this was the right approach to take to put that on a fee 
schedule, but we think that we may have locked in rates at far 
too high a level, and we think that further reductions should 
be considered.
    Finally, we think for prescription drugs that the provision 
establishing a cut of 5 percent below average wholesale price 
is a good first start, but once again, I think the 
reimbursement levels are going to be far too high. We took a 
look at the 22 most prominent drugs that Medicare pays for in 
prescriptions and Medicare paid higher than any other provider 
that bought those drugs, and in fact, for about one-third, paid 
twice as high as anybody else. The AWP, average wholesale 
price, is easily manipulated and greatly inflated.
    So let me conclude, then, by saying that we pledge our 
assistance to watch after potential scams that may be 
perpetrated against the Medicare Program in the near future.
    Thank you.
    [The prepared statement and attachment follow:]

Statement of Michael F. Mangano, Principal Deputy, Office of Inspector 
General, Department of Health and Human Services

    Good morning Mr. Chairman. My name is Michael F. Mangano. I 
am Principal Deputy Inspector General for the Department of 
Health and Human Services (HHS). It is my pleasure today to 
share with you my assessment of where we stand in our 
continuing fight against waste, fraud, and abuse in the 
Medicare program.
    In summary, we are fully engaged and making good progress. 
We have exposed and measured the problem more completely and 
accurately than ever before. It is bigger, more complex, and 
more formidable than many may have imagined. But we are more 
fully armed, have better tools, and are better organized than 
in the past. As a result, we have recently had some notable 
successes and are confident of favorable outcomes on several 
fronts. And we feel fully supported by allies in every branch 
and unit of government.
    This positive assessment, even in the face of staggering 
affronts, is the result of an unparalleled coordinated and 
cooperative response to the problem by the Administration and 
the Congress, particularly through the passage of two landmark 
pieces of legislation--the Health Insurance Portability and 
Accountability Act of 1996 and the Balanced Budget Act of 1997.
    This new legislation has so greatly strengthened our hand 
that most of our efforts now are directed to proving that 
implied trust in us is well founded. Thus, we are now focused 
on implementing the new laws. As a result, at this time we only 
have a few potential proposals to call to your attention, while 
assessing new ideas being presented from several sources.
    While treating ourselves to a brief moment of self re-
assurance, we remain on guard, watching certain facets of the 
Medicare program which we believe remain particularly 
vulnerable to waste, fraud, or abuse--especially home health, 
durable medical equipment, and ambulance services. And while we 
see advantages to the evolving integration of the health care 
industry at large, we are wary of some inappropriate incentives 
this may create in service referrals, especially to nursing 
homes and home health agencies. Managed care programs of all 
kinds present new risks in both the Medicare and Medicaid 
programs. We also remain generally concerned about upcoding of 
all kinds, and are analyzing new technologies now available 
both to automate billings and to detect inappropriate 
manipulation of the billing system.
    I will now describe in greater detail the basis for our 
simultaneous confidence and wariness.

                        New Ways to Fight Fraud

    Since 1993, the Department has been emphasizing the need to 
stem losses to the Medicare program by preventing fraud and 
prosecuting unscrupulous fraud perpetrators. Operation Restore 
Trust, initiated by the Administration in 1995, laid a stronger 
foundation by promoting the development of new techniques to 
ferret out and combat fraud and abuse and to cultivate 
effective partnerships of fraud fighting organizations within 
the Department of Health and Human Services, the Department of 
Justice, and the States. It demonstrated the effectiveness of 
these new approaches in three programmatic areas--home health, 
nursing homes, and durable medical equipment--in New York, 
Texas, Florida, Illinois, and California. On an experimental 
basis it provided steady, reliable funding for fraud fighting, 
anticipating a fair return on investment through reduced 
spending and recoveries of lost trust fund dollars. This 
planning assumption proved to be correct. The demonstration 
program identified $183 million dollars in overpayments, fines, 
and penalties.

                    Stronger Anti-Fraud Authorities

    Meanwhile, both the Congress and the Administration were 
developing far more sweeping and fundamental reforms to address 
waste, fraud, and abuse in the Medicare program. As noted 
above, these are embodied in the Health Insurance Portability 
and Accountability Act and the Balanced Budget Act. This 
Subcommittee, under both the Chairman and the Ranking Minority 
Member, played a crucial role in encouraging the bipartisan 
support and responsible public policy-making that brought both 
pieces of legislation to passage.
    In this effort, the Congress and Administration did more 
than just pass laws. The legislative process brought about an 
attitudinal change--not only within the branches of Government, 
but in the quality of consciousness with which taxpayers, the 
media, and the health care industry are viewing Medicare. 
Beginning with the momentum of HIPAA in 1996 and continuing 
through the debates on the Balanced Budget Act in the current 
Congress, much needed attention has been drawn to the purpose 
and management of the Medicare program and how to make it more 
effective, efficient, and less vulnerable to waste, fraud, and 
abuse. Much has been accomplished.
    Many specific, positive changes have been made to shore up 
the $200 billion Medicare program and its payment methods; and, 
thanks to increased resources provided through the new 
legislation, our Department, the Department of Justice, and 
related agencies at the State and Federal levels now have 
better authority and capacity to fight fraud and to reduce 
waste in all federally-funded health care programs.

Health Insurance Portability and Accountability Act of 1996

    Last year we got a major boost in our efforts through the 
Health Care Fraud and Abuse Control Program, a key part of the 
Health Insurance Portability and Accountability Act. This 
program provides much needed resources, stronger enforcement 
tools, and a management structure to coordinate the efforts of 
numerous fraud fighting units of Federal, State, and local 
governments. The Health Care Fraud and Abuse Control Program is 
a creative and far-reaching program to root out fraud and abuse 
in the nation's health care system.
    The program is under the joint direction of the Attorney 
General and the Secretary of Health and Human Services, working 
through the Inspector General. It is designed to provide the 
framework and resources to coordinate Federal, State, and local 
law enforcement efforts. It mandates a comprehensive program of 
investigations, audits, and evaluations of health care 
delivery; authorizes new criminal, civil, and administrative 
remedies; requires guidance to the health care industry about 
potentially fraudulent health care practices; and establishes a 
national data bank to receive and report final adverse actions 
imposed against health care providers. The Act also provides an 
innovative mechanism to fund these new anti-fraud efforts, 
thereby assuring that needed resources are always available for 
the effort.
    We are already reaping the benefits of the additional 
resources and authorities from this new legislation. Based on 
projected usage of 1022 FTE for fiscal year 1997, OIG on-board 
staffing increased from a little over 900 to 1143 by the end of 
the fiscal year. In addition, we are opening 6 new 
investigative offices, bringing from 26 to 31 the number of 
States in which we will have an investigative presence. We plan 
to open 6 more in fiscal year 1998. Three new audit offices are 
also being opened. We have generally intensified and expanded 
all our activities in the health care field and are now able to 
coordinate a more effective effort to curb those who exploit 
the Nation's health care systems, particularly Medicare.
    The total of fines, restitutions and settlements accruing 
from judicial and administrative processes that resulted from 
OIG civil and criminal actions totaled $1.2 billion in 1997. 
This is five times higher than the recoveries for fiscal year 
1996 and over three times higher than the previous best year 
for recoveries. Many of the larger settlements were related to 
improper marketing and billing of laboratory services. Criminal 
and civil prosecutions totaled 1,340 cases in fiscal year 1997. 
This was double the number for fiscal year 1996 and more than 
five times the total number in fiscal year 1995. Over 2,600 
individuals and entities were excluded from doing business with 
Medicare, Medicaid and other Federal and State health care 
programs because of violations of the law--an 86 percent 
increase from the 1,400 exclusions in fiscal year 1996.

Balanced Budget Act of 1997

    The Balanced Budget Act provides a number of provisions to 
help prevent Medicare fraud and abuse and to promote 
responsible program enforcement. For example, it authorizes the 
Secretary to collect social security numbers and employer 
identification numbers from entities paid under Medicare (Part 
B), Medicaid, and Child Services Block Grants. The OIG, the 
Health Care Financing Administration (HCFA), and the General 
Accounting Office (GAO) have been in general agreement in 
recent years that this authority is critical to monitor 
provider billing activities effectively and to keep excluded or 
other problematic providers from coming back into the program 
under the cloak of new business arrangements. These numbers are 
required from the entity, persons with ownership or control 
interest (5 percent or more), its managing employees, and 
subcontractors.
    The Act provides several enhanced penalty authorities; for 
example a $50,000 civil money penalty for kickback violations; 
a penalty for institutional providers who employ or contract 
with excluded providers; and a penalty to be imposed when a 
health plan or other designated entity fails to report required 
information to the Adverse Action Data Bank established under 
the Health Insurance Portability and Accountability Act.
    Included too are general improvements to the Medicare 
payment system. For example, the Act streamlines the process 
for adjusting by up to 15 percent the amount paid by Medicare 
for unreasonably priced Part B services (except physician 
services); it authorizes up to 5 projects, including one for 
oxygen, to demonstrate the efficacy of competitive bidding as a 
way to procure Medicare services and supplies. All of these are 
consistent with broad policies which the OIG has been 
advocating and strongly supporting for several years, and we 
are grateful to see legislation enacted along these lines.
    Related to the payment system is a general pros from the 
definition of ``reasonable cost'' payments for costs not 
related to patient care including entertainment, gifts, and 
donations, education expenses, personal use of automobiles, and 
costs for fines and penalties. This new provision addresses 
problems encountered repeatedly in OIG audits and 
investigations.
    The Act also addresses serious vulnerabilities in the 
process whereby Medicare enrolls health care professionals or 
agencies to provide services to Medicare beneficiaries. Quite 
fundamentally, the new law authorizes HCFA to refuse to enter 
into contracts with felons. The Secretary could stipulate, for 
example, that individuals convicted of embezzlement not be 
allowed to enroll as a Medicare provider even if the conviction 
did not occur in connection with a health care business. HCFA 
will also be able to exclude from the Medicare program entities 
owned or controlled by the family or household members of 
excluded individuals. This latter provision prevents an 
excluded individual from continuing to do business with 
Medicare through a company allegedly owned by a family or 
household member. Some excluded providers have been able to 
escape the impact of their sanctions by expediting transfers on 
paper of their ownership and control interests in health care 
entities to family or household members while retaining true, 
silent control of the businesses.
    In addition, we were pleased to see the new ``Three 
Strikes, You're Out'' provision that mandates a lifelong 
exclusion from participation in any Federal health care program 
for any provider who is found guilty of health care fraud for 
the third time. We thank you for your leadership on that.

                          Programmatic Reforms

Broad Sweep of the Balanced Budget Act

    The Balanced Budget Act went a lot further in reducing 
fraud and abuse than is reflected in the specific section of 
the Act dealing with fraud. It reformed underlying Medicare 
program areas to reduce their vulnerability to fraud, abuse, or 
waste. Included in this category are provisions to: reform 
Medicare payments systems for home health and skilled nursing 
care; eliminate payment for losses upon the sale of a hospital 
or nursing home (by ignoring accounting adjustments that 
misrepresented the profit or loss of the entities engaged in 
the sale); reduce excessive payments for oxygen, prescription 
drugs, capital expenses, laboratory tests, and outpatient 
medical services; more frequently recertify eligibility for 
hospice care (which will improve quality of care while also 
eliminating a vulnerability in the hospice eligibility 
determination system); permanently authorize systems and 
protocols to ensure that Medicare pays as secondary payer when 
other insurance provides first payer coverage for Medicare 
beneficiaries; restructure Medicare payments for bad debt, 
disproportionate share allowances, and indirect medical 
education; reform Medicare payment methods for ambulance 
services; establish better controls and improved policy making 
procedures for laboratory services.
    The attached table shows the 5 year savings as scored by 
the Congressional Budget Office for these provisions. All of 
them are items which have been highlighted through the years in 
the OIG's Cost Saver Book (also known as the Red Book), audits 
and inspection reports, and testimony, and in various 
publications of the General Accounting Office, and other 
organizations as being vulnerable to fraud or abuse or as 
embodying unnecessary, excessive, or wasteful spending. As the 
table indicates, the total savings for these provisions over 5 
years exceeds $58 billion.

Home Health and Skilled Nursing Facilities

    Of these programmatic reforms, two stand out as outstanding 
examples of coonalism of numerous organizations desiring to 
deal with complex but important policies and where reforms were 
sorely needed to prevent waste, abuse, and fraud while 
improving the quality of care of Medicare beneficiaries. These 
are the provisions relating to home health and skilled nursing 
facilities. The savings from these two areas alone amount to 
almost $26 billion. The OIG testified before this Subcommittee 
on these subjects and worked with the subcommittee's staff to 
iron out crucial sections of the prospective payment systems, 
interim cost and utilization control systems, and accounting 
provisions which were eventually passed into law. These two 
reforms are the ``successes'' which truly have many parents--
especially the Health Care Financing Administration and many 
professional organizations who had come to support the concepts 
embodied in the final law. I must say that we were particularly 
impressed by and appreciative of the work of the subcommittee 
staff in working through the many details of these reforms.
    In both cases, the fundamental approach was to establish a 
prospective payment system. In the case of home health, speed 
is of the essence. The new law recognized the difficulties 
inherent in implementing such a system, and so provides for 
interim price and utilization controls. It also begins to 
address the problem of unscrupulous individuals and companies 
who exploit or cheat the program through sham companies and 
irresponsible business practices. It requires home health 
agencies and others to post a surety bond of a minimum of 
$50,000 as a condition of participation. We have recommended 
this in the past as one method for reducing the number of 
``providers. Other general fraud provisions mentioned 
previously especially apply in this case.
    The Balanced Budget Act simplifies Medicare payments for 
services provided to nursing home residents. It phases in a 
prospective payment system for skilled nursing facility care 
covered by Medicare Part A. Covered services not only include 
all payments previously made to the facility under Part A but 
also all services for which payment may be made under Part B 
(except physician and certain other professional services) 
during the period when the beneficiary is provided covered 
Skilled Nursing Facility (SNF) care. The Act also requires 
consolidated billing of Part B items and services when a 
beneficiary is in a nursing home but is not covered under a 
skilled nursing facility stay paid for by Medicare Part A. 
These provisions related to Part B services are responsive to 
recommendations the OIG has frequently made with regard to 
things like incontinence supplies, wound care, enteral 
nutrition, durable medical equipment and supplies, and orthotic 
body jackets. Not only will these new provisions make Medicare 
less vulnerable to improper marketing, excessively high prices, 
unnecessary use, and over utilization, but they will be more 
conducive to a higher quality of care for nursing home 
residents. This is because the nursing home administrators will 
now be more responsible for monitoring, approving, and 
justifying the services that are provided for individuals under 
their care. This will also bring about a greater protection of 
privacy of the medical records of the nursing home residents. 
The records were sometimes reviewed by providers of equipment 
and supplies who wished to market their goods to these 
patients.

                            Future Concerns

    We in the Office of Inspector General are heartened by the 
support we have received from the Administration and the 
Congress in our fight against fraud, waste, and abuse in the 
Medicare program. At the same time, our new authorities and 
resources have enabled us to see more clearly just how 
pervasive and overwhelming these problems are. Our audit of the 
financial statements of the Medicare program as required by the 
Chief Financial Officers Act of 1990 as amended by the 
Government Management Reform Act of 1994 was released at a 
hearing before this Subcommittee on July 17. We reported that 
the estimated range of Medicare fee for service payments that 
were made incorrectly was $17.8 billion to $28.6 billion, or 
about 11 percent to 17 percent. This estimate is at the 95 
percent confidence level. We do not know how much of these 
payments were due to fraud or abuse or just common errors. All 
the money improperly paid is wasteful, though. And these audits 
would not detect well known forms of fraud such as kickbacks or 
deliberate forgery of bills or supporting documents. Whatever 
the audits reveal or fail to reveal, we know from our 
investigations and from complaints that we receive that fraud 
and cheating are still pervasive in the health care sector.
    Nor would the audits reveal wasteful spending due to high 
prices, which are properly billed and legally paid even if 
excessive. For example, none of the savings that Medicare will 
achieve through reduced prices for oxygen, which were mandated 
by the Balanced Budget Act, would have been classified as 
improper payments under the audit protocols we used for the 
financial statement audit.
    All of this is to say that we cannot take much time out of 
our fight against fraud, waste, and abuse. We are still 
watching all areas of Medicare through our audits, inspections, 
and investigations. And we are continuing to encourage and 
receive support from industry and beneficiary groups in our 
efforts. However, as you requested for this hearing, I would 
like to single out some areas where we continue to have special 
concerns. Some of them are follow-ups to matters addressed in 
the recent legislation--areas where we want to watch closely 
the implementation of the new provisions.

Home Health

    As you know, the President has recently announced a major 
initiative to crack down on abuse in the home health program. A 
recent audit of Medicare home health services in four large 
States found that 40 percent of them were incorrectly paid. A 
related study identified weaknesses in the system used to 
enroll providers and demonstrated how vulnerable the home 
health program is to cheating.
    The initiative places a temporary moratorium on enrollment 
of new providers while HCFA strengthens the process to keep 
untrustworthy agencies out of the program. The moratorium is an 
approach we had suggested. We have been advising HCFA about a 
number of the procedures that could be used to screen out 
unworthy providers. These include criteria related to recent 
bankruptcies, Federal program debt, and bad credit ratings. 
Many of the procedures they will use are the ones which were so 
carefully included in the Balanced Budget Act for this very 
purpose. The enactment of the new legislation combined with the 
strong administrative action is a dual effort that should go a 
long way to address the problems in this crucial area.
    One additional aspect of the home health program that 
requires attention is the role of physicians in approving the 
plans of care for homebound patients. Our studies show that 
physicians are sometimes not familiar with the patients whose 
plans of care they approve, are not aware of Medicare's home 
health eligibility requirements, or rely too much on the home 
health agencies which provide the care and get reimbursed for 
it to prepare detailed plans which they sign. We have 
recommended in the past that physicians be required to 
physically examine all patients whose home health care plans 
they certify before they do so. We still believe this is a good 
idea. Other ideas we are now considering are to modify the 
certification forms which physicians sign to spell out more 
clearly what Medicare requirements are and provide an 
attestation by the physician that they are aware of these 
requirements and of the patient's condition, and possibly to 
include on the form the amount of money that Medicare will pay 
for the patient if the plan of care which the physician 
certifies is implemented. We are beginning to solicit other 
ideas from physician groups on how to strengthen the 
physician's role. We believe that everyone will gain from 
that--patients, physicians, and taxpayers--through better 
quality of care and less waste.
    We also previously recommended that a fee be charged to new 
provider applicants to help defray some of the cost of 
conducting background checks and conducting on-site reviews of 
their operations before enrolling them into the program. We 
continue to support this proposal.

Integration of Health Care Businesses

    We have become increasingly concerned about the effect of 
financial incentives on care and billings made in connection 
with services owned by a health care entity that has authority 
and opportunity to refer patients for services to another 
entity, especially one in which it has a financial stake. One 
area in particular is the case of a hospital which owns or has 
some other financial interest in a nursing home or home health 
agency to which it can refer patients when they are discharged 
from the hospital. We have prepared a draft report on this 
subject, which was provided to members and staff of this 
Subcommittee at their request prior to the enactment of the 
Balanced Budget Act. We hope to release the final as soon as we 
complete our internal reviews.
    The study addresses several issues, including: whether or 
not hospitals prematurely release patients from the hospital to 
reduce costs and receive additional cost-based reimbursement 
under Medicare's skilled nursing facility or home health 
programs; whether hospitals restrict freedom of choice for 
patients by explicitly or subtly steering them to their own 
nursing facilities and home health agencies; and whether the 
continuity and quality of care is affected by such referrals.
    The study does indeed provide a basis for concern. The 
premature release of patients to nursing homes seems to be in 
evidence, with patients referred to a hospital's nursing home 
being released 2 days sooner than those referred to a nursing 
home not owned by the hospital. A similar phenomenon seems to 
affect home health agency referrals too, but only by one day. 
And this result for home health agencies is not conclusive 
because of the small sample size. In the case of steering, 
there is clear evidence that hospitals do steer patients to 
their home health agencies; the evidence is less clear about 
steering discharged patients to the hospital's own nursing 
homes.
    On the positive side, home health patients believe that 
their continuity of care is better when discharged to the 
hospital owned home health agency. Patient satisfaction and 
perceived quality of care seem to be unaffected.
    The Balanced Budget Act addressed the problems which our 
report raised. It requires that a hospital notify beneficiaries 
of all available home health agencies during the discharge 
planning process and identify those entities in which hospitals 
have an ownership interest. Further, the statute requires that 
hospitals report information to the Secretary on referrals to 
post-hospital facilities in which the hospital has a financial 
interest. It also allows the Secretary to specify certain 
diagnostic review groups for which discharges to nursing homes 
and home health agencies will be treated like hospital 
transfers for billing purposes.
    These new requirements and procedures should help to reduce 
abuses. But this is an evolving field, part of the larger 
phenomenon of medical care integration. We will watch it 
closely and are conducting additional studies to determine how 
serious and pervasive it is. We are wary as well of the 
possibility of shifting costs among owned entities. This was 
revealed by a problem in an investigation of at least one home 
health agency whose owner was convicted of Medicare fraud.
    These problems with home health illustrate issues that can 
arise in the evolving environment of services integration in 
the health care industry. We are also watching other spects of 
this such as hospital purchasing of physician practices. We 
have concerns about possible increases in Medicare expenditures 
that might result from the application of different accounting 
rules under these circumstances. We are now beginning to study 
this.

Ambulance Services

    We recently issued a draft report on Medicare ambulance 
services, the results of which we shared with this subcommittee 
before enactment of the Balanced Budget Act. It shows that 
Medicare payments for ambulance services appear to lack common 
sense. In 26 States, Medicare pays more for routine, non-
emergency basic life support transportation than it does for 
advance life support emergency transportation. Ambulance 
payment policies are vulnerable to fraud and abuse. Medicare 
contractors report wide-spread abusive situations involving 
unnecessary transports, oxygen, EKGs and other services. In the 
last five years, the OIG has had more than 100 convictions 
involving ambulance providers. Problems result from the 
extremely complex payment methods and inconsistent policies. We 
recommended establishment of a fee schedule for ambulance 
services to correct these problems.
    The report supported the work of the congressional staff 
who had also concluded that a fee schedule was needed. The 
Balanced Budget Act makes interim reductions in ambulance 
payments by limiting the allowed rate of increase and mandates 
the establishment of a fee schedule by January 1, 2000. The fee 
schedule is to be set so that aggregate payments are reduced by 
1 percent.
    We are concerned that even with the one percent reduction 
the new fee schedule will lock in unreasonably high payment 
rates in some cases. For example, our study shows that some 
base rates and mileage payment levels could be reduced 
significantly. We were able to reach this conclusion by 
examining only some of the illogical payment variations which 
our study uncovered. No doubt others could be reduced as well. 
We hope to provide more information on this subject.
    Previous studies by our office also showed that payments 
for routine, scheduled ambulance trips, easily identifiable for 
dialysis trips, for example, could be reimbursed much more 
cheaply than the rate for on-call trips now being charged. We 
also found that many trips for these dialysis patients were not 
medically necessary. The patients could have been transported 
by car, for example. All this leads us to believe that even 
with the new fee schedule mandated by the Balanced Budget Act 
Medicare costs for ambulance services will be excessive. We 
intend to continue our reviews of this area.
Prescription Drugs

    The Balanced Budget Act reduces Medicare payments for 
prescription drugs, which are paid based on the average 
wholesale price, by 5 percent. Our work supports taking this 
step. We issued two reports in 1996 recommending that HCFA 
reexamine its Medicare drug reimbursement methodologies, with a 
goal of reducing payments as appropriate. In a recent review, 
we found that Medicare allowances for prescription drugs 
increased 25 percent from $1.8 billion in 1995 to $2.3 billion 
in 1996. However, the number of services allowed increased only 
9 percent between the two years. While Medicare pays for only a 
narrow range of prescription drugs, it is a cost that is 
increasing rapidly and needs to be controlled.
    The newly enacted reduction is a good first step. We have 
found, however, that the published wholesale prices that are 
currently being used by Medicare-contracted carriers to 
determine reimbursement bear little or no resemblance to actual 
wholesale prices that are available to the physician and 
supplier communities that bill for these drugs. For more than 
one-third of the 22 drugs we reviewed, Medicare paid more than 
double the average price available to physicians and suppliers. 
Not only did Medicare pay more than the average price, the 
program reimbursed more than even the highest wholesale price 
for every drug. We also found there is no consistency among 
Medicare contractors in establishing and updating Medicare drug 
reimbursement amounts. We believe this variance is not 
appropriate.
    It is likely that new regulations to be issued by HCFA to 
implement the provisions of the Balanced Budget Act will 
correct the problems we have found. But some of the problems 
will not be within HCFA's control if the industry publications 
upon which the prices are based are inaccurate or misleading. 
We intend to watch this closely and will recommend additional 
legislative remedies if we find problems in this regard.

Additional Authorities

    As mentioned earlier, the Congress enacted most of the 
legislative proposals that the President requested in his anti-
fraud bill, the ``Medicare Fraud, Abuse, and Waste Prevention 
Amendments of 1997,'' and, in some cases, went further. We are 
grateful for the additional support this has provided to us. 
Some provisions were not accepted, however, and we would like 
to reiterate our support for them.
    One deals with the bankruptcy code. It is still possible 
for wrong doers to use bankruptcy protection as a way to avoid 
responsibility for repayment of overpayments, fines, or 
penalties. Many of the cases we deal with are not those where a 
legitimate business declares bankruptcy because of unfavorable 
economic or business conditions. Rather, the bankruptcy is used 
on the heals of a fine or penalty to avoid completely any 
responsibility for wrong doing. We are also concerned about 
using the bankruptcy law to prevent the Secretary from 
suspending Medicare payments to a provider under investigation 
for fraud. We hope the Congress will reconsider these proposals 
soon.
    We also continue to support our proposal to authorize the 
Secretary to exclude from Federal health care programs anyone 
who furnishes medical items or services ordered or prescribed 
by an excluded individual or entity if the person furnishing 
the services knows or should have known of the exclusion.

Planning New Work

    We are continuing to set our priorities and develop our 
work plans for the coming year. We look forward to consulting 
with the Subcommittee and its staff about our planned 
activities. We welcome your ideas and will gladly consider new 
projects of interest to you.

                               Conclusion

    Again Mr. Chairman, we would like to thank you and the 
Ranking Minority Member for the role this subcommittee played 
in working with the Administration to steer Medicare's payment 
and enforcement activities in a positive direction. The many 
provisions targeted at more realistic reimbursements and the 
increased authorities and enforcement resources found in the 
Health Insurance Portability and Accountability Act and the 
Balanced Budget Act of 1997 have put the program back on 
course. Medicare can now begin to move forward to serve the 
Nation's retired and disabled at a price we can afford. We will 
continue to remain vigilant to current abuses and any future 
fraud schemes that emerge. I welcome your questions.
[GRAPHIC] [TIFF OMITTED] T6633.001

      

                                

    Chairman Thomas. Thank you very much, Michael. We adopted a 
number of your suggestions and this exactly what we want as we 
take a look at what we've done. Kind of like the Sears list of 
items: Good, better, best. We're moving in the right direction.
    Mr. Mangano. Absolutely.
    Chairman Thomas. But we could move some more.
    Ms. Ruiz.

STATEMENT OF LINDA A. RUIZ, DIRECTOR, PROGRAM INTEGRITY GROUP, 
     OFFICE OF FINANCIAL MANAGEMENT, HEALTH CARE FINANCING 
                         ADMINISTRATION

    Ms. Ruiz. Good--I guess I was going to say, ``Good 
morning,'' but it's now good afternoon, Mr. Chairman and 
Members of the Subcommittee. My name is Linda Ruiz and I'm the 
Director of Program Integrity for the Health Care Financing 
Administration. I appreciate the opportunity to be here today 
to describe our program integrity initiatives.
    Program integrity is very important to HCFA. It is taken 
into account throughout the agency as we make policy, seek 
legislation, and implement new operational procedures in both 
fee-for-service and managed care. One of the jobs I have is to 
make sure that program integrity is considered by all parts of 
the agency. We recognize that we need to be a prudent purchaser 
of services for beneficiaries, and program integrity is one of 
the ways in which we can do that. I'd like to spend a few 
minutes on the progress we've made in combating fraud and 
abuse.
    I'd also like to extend my thanks to you, Mr. Chairman, and 
to the other Subcommittee Members for your efforts in helping 
us improve Medicare and Medicaid Program integrity. Both HIPAA 
and the BBA have given us an unprecedented amount of Medicare 
legislation that will be very helpful to us in our fight 
against fraud and abuse. The passage of these two pieces of 
legislation is a milestone for health care, and we look forward 
to working with you in the future to implement them.
    One of the most important HIPAA provisions is the fraud and 
abuse control program which provides resources and tools 
primarily to our law enforcement partners. We already see a 
major improvement in the programs ability to get cases brought 
against bad providers. The Medicare Integrity Program, which is 
also part of HIPAA, provides increased resources over a 5-year 
period and stabilizes funding for the Medicare contractor 
payment safeguard activities. We expect to have a notice of 
proposed rulemaking out on the street later this fall which 
would out the rule for competing these contracts and more 
clearly define what we consider to be a conflict of interest.
    The Balanced Budget Act of 1997 really strengthens our 
antifraud and abuse capabilities to implement the program 
integrity strategy. Our program integrity strategy uses four 
basic approaches: Prevention, early detection, coordination, 
and enforcement. These may seem like buzzwords or campaign 
phrases, but they really mean a great deal to HCFA and we have 
taken a number of concrete actions to implement them.
    We agree with you, Mr. Chairman, that postpayment 
enforcement efforts alone will not do the job. This is why a 
key part of our effort is prevention. The BBA contains several 
helpful preventive actions, including barring felons from 
getting into the program, improving our provider enrollment, 
the PPS and other payment reforms, and having definitions for 
home health.
    We have also completed some activities in HCFA that we'd 
like you to know about. We've completed a national revision of 
our provider enrollment form and procedures, and as the 
President's recent announcement on home health demonstrated, 
we're continuing to reform our provider enrollment requirements 
to maximize the likelihood that those billing Medicare are 
legitimate and are offering value to our beneficiaries.
    Starting in 1996, we implemented the correct coding 
initiative, which has resulted in approximately $200 million in 
savings in fiscal year 1996 and another $128 million for the 
first half of fiscal year 1997. We're also evaluating the GMIS 
product group from the field of commercial off-the-shelf 
software to test software applications.
    Also, for early detection, we have databases both at the 
national level and at the contractor level, and we have a 
statistical analysis contractor for durable medical equipment 
that has saved us a great deal of money and to start some 
important fraud investigations.
    I guess the last thing I'd like to mention is Operation 
Restore Trust, which is our finest example of coordination with 
the people who sit with me at the table today and with others. 
I'd like to mention that one of the things that we are doing in 
terms of cooperation is working with our beneficiaries. Part of 
Operation Restore Trust is partnering with the Administration 
on Aging and getting the word out to beneficiaries. We are now 
working on some of the projects that AARP is participating in 
with the Office of Inspector General and the Administration on 
Aging. We look forward to working with a more knowledgeable and 
aware beneficiary population who can continue to help us find 
fraud and abuse.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Linda A. Ruiz, Director, Program Integrity Group, Health 
Care Financing Administration

                              Introduction

    Good morning, Mr. Chairman and Members of the Subcommittee. 
My name is Linda Ruiz and I am the Director of Program 
Integrity in the Health Care Financing Administration (HCFA). I 
appreciate the opportunity to be here today to describe HCFA's 
program integrity initiatives. The location of the Program 
Integrity Group, which is housed in the Office of Financial 
Management, reflects our stewardship responsibility for the 
Medicare and Medicaid programs. Program integrity efforts 
permeate every corner of HCFA and are the result of a conscious 
decision to extend our mission's focus throughout the 
organization. In our newly reorganized HCFA, program integrity 
is no longer viewed as the responsibility of one department, 
one office, or one individual. It is a vital element of every 
policy decision.
    This Administration can be proud of its success in 
combating waste, fraud, and abuse. Because health care has 
become a target for unscrupulous individuals, both private 
industry and government are employing a variety of tools to 
combat fraud and abuse. Since 1992, we have made tremendous 
progress in protecting the fiscal integrity of the Medicare 
program. An example is the HCFA-initiated partnership with the 
enforcement agencies targeting fraud and abuse in the five 
States that account for nearly 40 percent of all Medicare and 
Medicaid beneficiaries. This two-year project, Operation 
Restore Trust, encompassed a wide range of projects aimed at 
eliminating fraud schemes and identifying vulnerabilities in 
the Medicare programs. The reforms enacted in the Balanced 
Budget Act of 1997 and the Health Insurance Portability and 
Accountability Act of 1996 provide significant new tools to 
further assist us, but I think we all know that equally 
tremendous challenges lie ahead. Our goal is to ensure that the 
Medicare and Medicaid programs have the necessary arsenal to 
combat fraud and abuse.
    I want to highlight the substantial progress we have made 
in combating fraud and abuse and discuss some recent events 
affecting our anti-fraud and abuse efforts, including the 
reforms enacted in the Health Insurance Portability and 
Accountability Act of 1996, the Balanced Budget Act of 1997, 
and the home health agency moratorium announced earlier this 
month by President Clinton. I would also like to extend my 
thanks to you, Mr. Chairman and the other Members of this 
Subcommittee, for your efforts in helping us improve Medicare 
and Medicaid program integrity.

                        Legislative Achievements

    Both 1996 and 1997 have been key legislative years, with 
the passage of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA) and the Balanced Budget Act 
of 1997. The impact of these two Acts is dramatic. In 
particular, the changes generated by the BBA, are the most 
significant in the history of Medicare. It is our hope that 
implementation of the provisions contained in this legislation 
will take us a step further toward eliminating fraud, waste, 
and abuse in Medicare and preserving the Medicare Trust Fund 
for future generations.

                 HIPAA--Key Fraud and Abuse Provisions

    Fraud and Abuse Control Program--The program integrity 
activities of the Medicare contractors initiate many of the 
cases subsequently developed by the Office of Inspector General 
and Federal Bureau of Investigation, and support their 
prosecution by the Department of Justice. Using monies made 
available through the Fraud and Abuse Control Fund, established 
in HIPAA, we expanded our successful two-year Operation Restore 
Trust (ORT) demonstration using the State survey agencies to be 
our ``eyes and ears'' in the field and to report back to the 
contractors whether providers are meeting Medicare billing as 
well as quality requirements. As you know, ORT was designed to 
demonstrate new partnerships and new approaches in finding and 
minimizing fraud in Medicare and Medicaid. We have used this 
model successfully with our expanded home health surveys in the 
five Operation Restore Trust (ORT) States.
    Approximately $1.8 million was allocated to HCFA for 
``Project ORT'' through HIPAA's Fraud and Abuse Control 
Program, to enhance the program integrity activities that 
involve collaboration with State certification agencies. 
Eighteen States are participating in a total of 26 HIPAA funded 
projects, allowing us to survey approximately 300 providers for 
both certification and reimbursement issues. These enhanced 
surveys will be made of providers of home health services, 
skilled nursing services, outpatient physical therapy services, 
and laboratory services, as well as psychiatric services in 
both hospitals and community mental health centers. Many of 
these surveys are modeled after the home health agency and 
skilled nursing facility surveys conducted during ORT.
    Medicare Integrity Program (MIP)--This program, enacted in 
the Health Insurance Portability and Accountability Act of 
1996, authorizes the Secretary to promote the integrity of the 
Medicare program by entering into contracts with eligible 
entities to carry out activities such as audits of cost 
reports, medical and utilization review, and payment 
determinations. MIP provides a stable source of funding for 
HCFA's program integrity activities, and gives us authority to 
contract for these activities with any qualified entity, not 
just those insurance companies who are currently our fiscal 
intermediaries or carriers.
    The Medicare Integrity Program strengthens the Secretary's 
ability to deter fraud and abuse in the Medicare program in a 
number of ways. First, it creates a separate and stable long-
term funding mechanism for program integrity activities. 
Historically, Medicare contractor budgets had been subject to 
fluctuations of funding levels from year to year. Such 
variations in funding did not have anything to do with the 
underlying requirements for program integrity activities. This 
instability made it difficult for HCFA to invest in innovative 
strategies to control fraud and abuse. Our contractors also 
found it difficult to attract, train, and retain qualified 
professional staff, including clinicians, auditors, and fraud 
investigators. A dependable funding source allows HCFA the 
flexibility to invest in new and innovative strategies to 
combat fraud and abuse. It helps HCFA shift emphasis from post-
payment recoveries on fraudulent claims to pre-payment 
strategies designed to ensure that more claims are paid 
correctly the first time.
    Second, by permitting the Secretary to use full and open 
competition rather than requiring that HCFA contract only with 
the existing intermediaries and carriers to perform MIP 
functions, the government can seek to obtain the best value for 
its contracted services. Because prior law limited the pool of 
contractors that could compete for contracts, we were not 
always able to negotiate the best deal for the taxpayers or 
take advantage of new ways to deter fraud and abuse. Using 
competitive procedures as established in the Federal 
Acquisition Regulations System (FARS), we expect to attract a 
variety of offerors who will propose innovative approaches to 
implement MIP.
    Third, MIP permits HCFA to address potential conflict of 
interest situations. We will require our contractors to report 
situations which may constitute conflicts of interest, thus 
minimizing the number of instances where there is either an 
actual, or an apparent, conflict of interest. By invoking the 
FAR in establishing multi-year contracts with an expanded pool 
of contractors, we will be able to avoid potential conflicts of 
interest and obtain the best value. Also, by permitting us to 
develop methods to identify, evaluate and resolve conflicts of 
interest, we can create a process to ensure objectivity and 
impartiality when dealing with our contractors. This is a 
concern particularly when intermediaries and carriers are also 
private health insurance companies processing Medicare claims.
    We are currently developing regulations to implement MIP 
and we are also working on a statement of work for competitive 
contracts. As we transition work from one of our contractors, 
Aetna (which is terminating its Medicare work), we are testing 
a new contracting relationship in several Western States that 
will separate out (and consolidate) payment integrity 
activities from claims processing. This will give us valuable 
experience as we prepare to implement MIP.
    Beneficiary Notification--An equally important program 
integrity priority for HCFA is beneficiary information. As a 
product of our claims payment system, HIPAA requires that HCFA 
send each beneficiary an Explanation of Medicare Benefits 
(EOMB) statement. These statements detail actions that Medicare 
has taken on claims filed on their behalf. We have learned that 
better-informed customers can actually help fight fraud and 
abuse, and we currently receive and investigate an overwhelming 
number of inquiries from beneficiaries alerting us to 
questionable services on their statements. All of our carriers 
have 1-800 numbers which appear at the bottom of the EOMB, 
encouraging beneficiaries to call with questions about their 
claims. By expanding our consumer information programs, we are 
ensuring that Medicare beneficiaries receive current, easy-to-
understand, and unambiguous information in a timely manner, so 
that they may assist us in identifying improper claims and 
erroneous bills. A well-informed beneficiary can save us 
Medicare and Medicaid funds by alerting our investigators and 
claims reviewers to potential fraud, waste, and abuse of 
taxpayers' dollars. HCFA is in the process of formulating a 
proposed rule for the program to encourage beneficiaries to 
report fraud and abuse. EOMBs were sent for select items and 
services beginning in June 1997.
    The National Provider Identifier (NPI) is another key 
initiative which will help in the prevention of fraud and 
abuse. NPI is an industry wide unique identifier for providers 
and suppliers created under the authority of the Health 
Insurance Portability and Accountability Act of 1996. This 
identifier will be used to create databases that will contain a 
record of all providers and suppliers who bill Medicare. This 
database will be available to the Medicare contractors 
processing claims so they can automatically deny or give 
greater scrutiny to claims associated with abusive billers. We 
plan to publish a proposed regulation defining the NPI as the 
national standard later this fall. We will then begin issuing 
NPIs to providers in late 1998 or early 1999 and phase in 
national implementation over the next few years.
    Sanction of Providers for Fraud and Abuse--HIPAA also 
requires the Secretary to exclude from Medicare and Medicaid 
providers with felony convictions related to health care fraud 
or controlled substances, and gives the Secretary greater 
flexibility to exclude providers convicted of misdemeanors or 
who violate Medicare quality rules. The DHHS Inspector General 
has the lead on implementation of this provision.
    Adverse Action Data Base--To ensure that our computer 
capabilities are commensurate with our program integrity goals, 
HIPAA establishes a data base, the Adverse Action Data Base, 
which coordinates with but does not duplicate the National 
Practitioner Data Bank. The data base will include providers, 
suppliers and practitioners against which final adverse actions 
have been taken.
    The Health Resources and Services Administration (HRSA) is 
taking action to coordinate this data base.
    Transfer of Assets to Obtain Medicaid Eligibility--HIPAA 
makes knowing and willful transfer of assets to gain 
eligibility for Medicaid subject to criminal penalties--
including civil monetary penalties or prison--if the transfer 
resulted in a period of ineligibility. This was amended by BBA 
to clarify that the penalties apply to the advisor, not the 
beneficiary. Implementation of this initiative rests with the 
Department of Justice.

The Balanced Budget Act of 1997

    The recently enacted Balanced Budget Act of 1997 builds on 
the anti-fraud and abuse provisions of HIPAA and gives HCFA 
more authority through its anti-fraud and pro-efficiency 
measures. Planning and implementation are already under way for 
these anti-fraud and abuse provisions. It is a very ambitious 
schedule and one we are committed to achieving. We will keep 
you informed of our progress and will alert you if we encounter 
any barriers to meeting a particular deadline.
    Surety Bond Requirements for DME and Other Suppliers--This 
provision gives HCFA the authority to require durable medical 
equipment (DME) suppliers, home health agencies and other types 
of provider facilities to post a surety bond of at least 
$50,000 before they are certified for both Medicare and 
Medicaid. We hope to publish a supplier standard regulation, 
requiring a $50,000 surety bond for DME suppliers soon in the 
Federal Register. We are contemplating a graduated sliding 
scale based on the amount of Medicare billings, either a 
$50,000 minimum or 15 percent of the amount shown on the IRS 
1099 for each supplier. We are also developing a regulation, 
which should be published in the next six months, to implement 
the surety bond requirement for home health agencies and 
provide important programmatic protections. The home health 
agency moratorium will remain in effect until we strengthen 
these requirements. HCFA is also preparing a regulation to 
require a $50,000 minimum bond for comprehensive outpatient 
rehabilitation facilities as required by the BBA. We may adopt 
a surety bond requirement for other types of providers as 
deemed necessary.
    Barring Felons and Improvement of the Provider Enrollment 
Process--The BBA provides the ability to bar convicted health 
care felons from ever receiving Medicare and Medicaid payments 
again, and to exclude the family members of sanctioned 
providers so that such providers can't simply transfer the 
business to a relative and continue operation. The Office of 
the Inspector General has the lead on implementing this 
provision through regulation. HCFA will then modify its 
provider enrollment application and contractor manual 
instructions to ensure that convicted health care felons no 
longer bill and receive payment from the Medicare program.
    The authority granted by the BBA to require providers and 
suppliers to report their Social Security and Employer 
Identification Numbers is a significant factor in identifying 
fraudulent providers. First, the Secretary must report to the 
Congress on the privacy and protection of Social Security 
numbers. HCFA will be working closely with SSA to define the 
privacy and protection guidelines, which the Secretary will 
present to the Congress. Continued cooperation with SSA and 
assistance from the IRS will also be needed for successful 
implementation.
    The BBA gives HCFA the authority to require providers and 
suppliers to report their Social Security and Employer 
Identification Numbers in order to verify the information on 
the provider enrollment form and evaluate whether or not a 
provider number should be awarded. The exact mechanism for 
verifying Social Security numbers is now being worked out with 
the Social Sen. This provision gives the Secretary authority to 
deny Medicare entry for provider applicants who have been 
convicted of a felony. If an application is denied, a 6-month 
waiting period must be completed before the provider may 
reapply.
    Home Health Prospective Payment System--This provision 
provides the ability to establish a prospective payment system 
that will pay providers a flat rate, in advance, for a 
patient's care, eliminating incentives for providing 
unnecessary care. It also will end ``periodic interim 
payments'' that are made in advance and not justified until the 
end of each year. The law establishes October 1, 1999 as the 
date by which the prospective payment system must begin, and we 
are working hard to meet that date with the necessary research 
and infrastructure development. Meanwhile, the interim system 
established in the Balanced Budget Act went into effect on 
October 1 of this year.
    Clarification of Home Health Care Definition--This 
provision provides a clear definition specifying the hours and 
days that home care must be needed or provided in order to be 
covered by Medicare. We have just issued an instruction that 
announces the new requirements for this provision. Regulations 
and additional instructions will follow.
    Clarification of the Definition of Skilled Service for the 
Purposes of Home Health Eligibility--Previously, venipuncture 
qualified as skilled nursing care and enabled a beneficiary to 
meet the eligibility criterion for intermittent skilled nursing 
services under the home health benefit. Thus, if the other 
criteria were met (homebound, etc.), then a beneficiary who 
only required venipuncture would have been entitled to all of 
the other covered home health services including home health 
aide services. Now, if venipuncture for the purpose of 
obtaining a blood sample is the only skilled service that is 
needed by the beneficiary, that individual will not qualify for 
home health. This provision is self-implementing and is 
effective for services furnished 6 months after August 5, 1997.
    Home Health Agency/Hospice Billing Based on Location of 
Services--This provision will require billing to be based on 
the location of service delivered rather than the location of 
the agency, so providers will no longer get high urban 
reimbursement rates for care delivered in low-cost areas. 
Programs are being developed to implement and administer this 
provision. We expect to pay claims under the current system and 
adjust payments when the system is completed in January to 
assure that agency reviews are not interrupted by the 
programming effort.
    Development of Payment Standards--This provision gives HCFA 
the authority to develop normative utilization standards and 
deny payment to agencies that bill for services in excess of 
these standards. We are currently considering how most 
effectively to implement this critical provision.
    Home Health Moratorium--The steadily increasing volume of 
investigations, indictments, and convictions against home 
health agencies has led to a great deal of publicity and 
concern about home health care fraud. In response to this 
concern, earlier this month President Clinton and Secretary 
Shalala announced an unprecedented moratorium on the entry of 
any new home health agencies into Medicare. The current 
moratorium on entry of new home health agencies is designed to 
reduce the likelihood of ``fly-by-night'' operators entering 
the program while HCFA strengthens its requirements, thus 
preventing fraud, waste and abuse.
    While the temporary moratorium is in effect, the Department 
of Health and Human Services will implement program safeguards 
included in the Balanced Budget Act, and work on important 
changes in requirements for home health agencies. For example, 
DHHS will implement the statutory requirement that home health 
agencies post at least a $50,000 surety bond before they are 
certified. Additionally, a related rule will require new 
agencies to have enough funds on hand to operate for the first 
three to six months. These requirements will establish the 
financial stability of home health providers.
    During this six-month moratorium, the Department will also 
develop more stringent standards against fraud. New regulations 
will include requirements for more business information from 
home health agencies; recertification every three years with 
independent audits each time; and, experience based on serving 
a minimum number of patients prior to Medicare certification. 
We are in the process of completing a final regulation to 
require home health agencies to conduct criminal background 
checks of the aides they hire, and to be more accountable for 
the care they provide. In conjunction with this regulation, new 
videos and brochures will be designed to teach beneficiaries 
how to detect and report fraud and abuse.
    These changes will not only strengthen the payment 
safeguards we already have in place, but will expand and 
enhance them. There will always be unscrupulous providers and 
questionable billing practices--but with the tools provided to 
us in the BBA and our new, stricter standards, we will have the 
ability to be one step ahead of them.

                   HCFA's Program Integrity Strategy

    The Administration is pursuing a strategy intended to deter 
fraud and abuse on every front--prevention, early detection, 
collaboration and enforcement. Prevention is the best means we 
have to guarantee the initial accuracy of both claims and 
payments, and to avoid having to ``pay and chase,'' a lengthy, 
uncertain and expensive process. Early detection is a second 
key ingredient of our approach. We can identify patterns of 
fraudulent activity early by using data to monitor the billing 
patterns and other indicators of the financial status of 
providers, promptly identifying and collecting overpayments, 
and making appropriate referrals to law enforcement.
    Close collaboration with our partners in the law 
enforcement arena is one way we can maximize our success. A 
lesson learned through Operation Restore Trust is the 
importance of working closely with the States, the Department 
of Justice, including the FBI, the Inspector General and the 
private sector to share information and tactics about fighting 
fraud and abuse.
    Finally, when we find ``bad apples'' among our many good 
providers, we must take enforcement action against them, 
including suspension of payment, exclusion from the program, 
disenrollment, collection of overpayments, and imposition of 
civil money penalties. Investing in prevention, early detection 
and enforcement has a proven record of returns to the Medicare 
Trust Fund. In FY 1995, every dollar spent by our Medicare 
contractors using these methods yielded $14 in return.
    Our prevention, early detection and enforcement strategies 
are aided by using the best technology available. In combating 
fraud and abuse in Medicare, HCFA needs to rely on the best 
technology available to detect fraudulent providers and deter 
them from abusing the Medicare Trust Funds.
    Prevention, detection, coordination, and enforcement--these 
terms are more than just buzzwords or campaign phrases. They 
are the actual cornerstones for the variety of anti-fraud 
mechanisms that HCFA currently has at its disposal. I would 
like to highlight some of these.
    PREVENTION means paying right the first time through such 
measures as:
     Conducting prepayment medical review and on-site 
reviews;
     Developing local medical review policies that 
articulate when we will pay for services;
     Evaluating our national policy for vulnerabilities 
and loopholes;
     Changing Medicare payment methodologies and 
billing procedures to make it harder for fraud to occur;
     Keeping convicted criminals out of the program;
     Requiring surety bonds; and,
     Collecting identifying information on providers.
    Currently, HCFA has a variety of concrete actions underway 
to facilitate the prevention piece of our vision. Our 
contractors currently have state-of-the-art systems that enable 
us to make proper payments and prevent fraudulent claims from 
being paid. We are constantly searching for ways to update and 
improve our claims processing technologies.
    Extensive Use of Edits--Our contractors process over 800 
million claims a year. Using our standard systems, these claims 
are subjected to a rigorous prepayment electronic screening 
process to verify beneficiary information, provider 
information, utilization history, procedure and diagnosis, and 
coordination of benefits. Each computer instruction which 
verifies information on a claim is called an edit.
    These edits are performed to determine beneficiary 
information, such as whether the patient is enrolled in 
Medicare and if all co-payments and deductibles have been met. 
Our contractors also perform a series of edits to determine if 
the provider is eligible and is in good standing with the 
Medicare program. Claims are then edited for utilization 
history. For example, our contractor's systems will only pay 
one claim in a patient's lifetime for an appendectomy. Many 
claims are also checked to verify if the procedure being billed 
is appropriate for the diagnosis. Finally, our contractors 
coordinate benefits to determine if a beneficiary has other 
coverage that is primary to Medicare. In total our contractors 
have thousands of these edits in place which perform a 
comprehensive review of each claim before Medicare payment is 
made for a service.
    Correct Coding Initiative--Implemented in 1996, the Correct 
Coding Initiative began with a contract to evaluate all 
physician coding and recommend policy for how codes should be 
billed, including which codes should be bundled prior to 
payment when separately billed. Unbundling occurs when 
physicians incorrectly use multiple procedure codes when 
describing individual components of a service instead of a 
single, comprehensive procedure code which describes the entire 
service. Our carriers have installed approximately 93,000 
computerized coding edits which check each claim for 
``unbundled'' services and prevent a payment from being made. 
The project has resulted in approximately $200 million in 
savings in the first year of implementation.
    Commercial Off-the-Shelf Software (COTS)--We are currently 
studying COTS to do some of this editing and it may become a 
part of our arsenal. In 1996, HCFA selected GPG (GMIS Products 
Group) to test a commercially available software application 
know as ``Claims Check'' which is designed to evaluate 
physician claims and reduce erroneous or abusive billing on a 
prepayment basis.
    We are currently testing this software at one of our 
contractors to evaluate the underlying policy of edits, the 
customization needs, savings, and the installation and 
integration issues. Our goal when we began this evaluation was 
to achieve maximum savings by integrating the COTS claims 
editing software into the Medicare claims processing system. 
When our final evaluation is completed later this fall, we will 
make a decision about how we can best use claims editing 
technology to ensure that claims are paid correctly and cost-
effectively.
    Los Alamos National Laboratory--Those who prey on the 
Medicare Trust Funds are ever-resourceful. As a result, HCFA 
must seek out new ways of detecting fraudulent claims and 
preventing their payment. One effort on this front is the 2-
year interagency agreement that HCFA established with the 
Department of Energy in 1995 to use the expertise of Los Alamos 
National Laboratory. The purpose of this research agreement is 
to develop a ground-breaking new claims review approach that 
differs from existing methodologies. The ultimate goal of this 
new technology is to know on a prepayment basis the likelihood 
that a claim is suspect. This kind of research is bold and 
promising, but like all basic research, one whose ``payoff'' is 
not certain. Our hope is that the product of this project will 
be a prototype system of dynamic algorithms and features, that 
has been tested and refined to detect fraud, waste, and abuse 
in prepayment environments.
    Prospective Data Sharing--This is an initiative involving 
agreements with major insurance companies to exchange 
enrollment information that permits us to identify Medicare 
Secondary Payor situations before we pay. Our preliminary 
analysis indicates that this initiative will save Medicare 
approximately $720 million in fiscal year 1997. Later in my 
testimony, I will address how HCFA is seeking to make data 
sharing mandatory by law.
    National Medicaid Fraud and Abuse Initiative--This past 
summer, HCFA's Southern Consortium of regional offices has 
assumed the leadership role for the National Medicaid Fraud and 
Abuse Initiative. This project is unique in HCFA and I believe 
that it illustrates the flexibility of our new organization and 
a willingness to do business in a more efficient and responsive 
way.
    One of the primary goals of this initiative is prevention 
of fraud and abuse. Administering this initiative at the 
Federal level and assisting the States in implementing proper 
program safeguards, will prevent fraud and abuse. Under this 
initiative we will continue to assist the Office of the 
Inspector General, the Medicaid Fraud Control Units and Program 
Integrity Units in their role of prosecuting fraudulent 
providers. We will also ensure all States are aware of 
fraudulent activities and scams occurring nationwide and 
promote consistency by developing national standards.
    Some of the primary functional areas the team will be 
focusing on are formation of a National Fraud and Abuse 
Technical Advisory Group (TAG) composed of HCFA and State 
agencies; the development of a model legislative fraud and 
abuse package that takes the best of legislation from States 
that already have it and shares it for consideration with 
States that don't; the encouragement of greater State 
involvement in Project Operation Restore Trust (ORT); and a 
general strengthening of our partnerships with the States, OIG 
and other entities. This initiative is a pilot project which 
will run for approximately one year, at which time we will 
evaluate the results and reassess our approach if indicated.
    EARLY DETECTION is the second part of our program integrity 
strategy--
    HCFA is constantly seeking means to assure that we avoid 
paying for improper claims. Early detection includes using data 
to monitor the billing patterns and other indicators of the 
financial status of providers and promptly identify and collect 
overpayments. For example, we are continuing to promote 
efficiency in overpayment collection through the review of a 
statistically valid sample of claims where overpayments are 
then projected to the universe. Also, we are supporting several 
other initiatives to assist in our detection efforts--
    Enhanced HCFA Customer Information System (HCIS)--The HCIS 
has been used in one of our most successful anti-fraud 
programs, Operation Restore Trust, which began as a 
collaborative demonstration project with the Department of 
Justice and State Medicaid Anti-Fraud Units. The HCIS enables 
HCFA and its contractors to view provider or service 
utilization data at several levels including the national, the 
state, contractor, provider type, or individual provider. For 
example, if I were trying to find out how many times a certain 
service had been billed in a state, I could obtain that 
information through the HCIS database immediately. This 
capability allows the rapid identification and analysis of 
factors contributing to aberrant data. As a result, audits or 
reviews can be focused, rapidly and inexpensively, on a 
particular level.
    HCFA first used HCIS last year to identify a number of 
skilled nursing facilities with potential problems in Miami, 
Florida. The project identified over $2 million in overpayments 
and mandated corrective action plans from the problem 
providers. To date, over $24 million in overpayments have been 
identified in these reviews. The OIG and the DOJ also both 
routinely request information from HCIS to assist them with 
their cases.
    Statistical Analysis Contractors--Since 1993, HCFA has 
supported a dedicated statistical analysis contractor, Palmetto 
Government Benefits Administrator, Inc., to support our four 
Durable Medical Equipment Regional Contractors (DMERCs). The 
contractor produces ongoing analysis of trends, utilization 
rates, billing patterns, referral patterns and related 
information at the national and regional levels. As an example, 
through their analysis the contractor has identified fraudulent 
billing practices for nebulizers and related drugs, and many 
abusive practices for incontinence supplies, surgical 
dressings, parenteral & enteral nutrition and urological 
supplies. The DMERCs have made changes in their payment 
policies that have saved the Medicare program in excess of $200 
million.
    HCFA Contractor Tools--HCFA's development of early 
detection tools at the national level has been complemented by 
continuing investment in analytic tools used by HCFA 
contractors. The Service Tracking, Analysis and Reporting 
System (STARS) and the Super Operator are two other software 
packages which are used by a number of contractors. These 
programs compile and analyze claims data and use statistical 
analysis to identify aberrant utilization profiles.
    COORDINATION is the third key part of our strategy--
    Coordination includes inter-agency collaboration and 
cooperation, case support for enforcement, development of fraud 
alerts and fraud databases, and working with beneficiaries and 
providers who make complaints. The importance of coordination 
cannot be overemphasized. The complexity of the Medicare and 
Medicaid systems requires information sharing and partnership 
among all segments of the health care environment in order for 
the fight against fraudulent providers to be successful.
    Operation Restore Trust (ORT)--This project, which I 
mentioned earlier in the testimony, is probably the best 
example of coordination where HCFA and its contractors worked 
hand in hand with the Office of Inspector General, the 
Department of Justice and State agencies to attack fraud. As 
you know, in 1997 these efforts have been expanded into 
additional states and we look forward to the results of this 
combined effort. ORT has given us a new way to accomplish our 
work, one that takes advantage of the expertise and common 
goals that we share with our partners.
    Fraud Investigation Database--Since 1996, the Fraud 
Investigation Database has provided a comprehensive nationwide 
system devoted to accumulating fraud and abuse information. It 
represents all cases Medicare contractors have referred to law 
enforcement, chronology of events for each case, and 
disposition of each case. The database also contains the Office 
of the Inspector General excluded provider list. Currently this 
database is available to HCFA, the Office of the Inspector 
General, Department of Justice, including the FBI, U.S. Postal 
Inspector, and Medicaid Fraud Control Units.
    The effectiveness of FID is illustrated by two cases that 
became national investigations, one involving a provider of 
diagnostic services and the other involving ambulance services. 
Local Medicare contractors queried the FID and noticed that 
diagnostic and ambulance services were under investigation in 
several jurisdictions across the country. The contractors were 
able to consolidate their investigative efforts and pursue 
these two national cases. The FID has also served as a valuable 
resource to investigators and attorneys as they begin new 
cases. Through the FID, they can search for past, similar 
cases, and gather information about the investigation, 
prosecution and disposition of similar cases. HCFA will use 
this database as another tool for analyzing patterns to help in 
prevention and detection activities.
    CFO Audit--Another example of how HCFA is working with its 
partners is reflected in the Chief Financial Officer's Act 
audit, which was released to Congress in July. The audit, 
conducted by the DHHS OIG, provides HCFA with an opportunity to 
identify areas needing work. The audit showed that Medicare 
contractors' claims processing systems work well. The actions 
taken, based on the information submitted on the claim, were 
accurate 99 percent of the time.
    The audit also identified some key areas where we must work 
harder to ensure program integrity. When the OIG did a ``look-
behind'' review of those claims, which were accurate on the 
surface, errors were identified. When the OIG reviewed 
supporting documentation not originally submitted with the 
claim, they found cases of no documentation or insufficient 
documentation to support the claim, instances where services 
provided were not medically necessary, billings for non-covered 
services, incorrect coding, and services billed but not 
performed. These findings led to the projected error rate of 14 
percent or an estimated $23 billion in improper payments in 
fiscal year 1996.
    Although some of these instances could be fraudulent, this 
error rate does NOT reflect a rate of fraud and/or abuse in the 
Medicare program. it did identify some key areas where we must 
work harder to ensure program integrity. We are currently 
implementing a Corrective Action Plan to reduce the claims 
payment error rate through more comprehensive review of the 
underlying documentation.
    ENFORCEMENT is the final link in HCFA's strategy--
    These enforcement activities include suspension, 
verification of program exclusions, disenrollment, collection 
of overpayment, and civil monetary penalties. Clearly, 
enforcement is an area in which HCFA will continue to work 
closely with its partners. New provisions in the Balanced 
Budget Act of 1997, as well as those provided for in HIPAA, 
will strengthen our enforcement capabilities.
    In the chain of activities that comprise fraud detection 
and prevention, enforcement is the final link. It is the 
tangible result of a series of collaborative actions taken by 
HCFA and its interagency partners, Medicare contractors, and 
ultimately, beneficiaries. This is why cooperation and 
collaboration among HCFA and its partners is so critical to 
protecting Medicare--it takes the efforts of all of our 
partners to successfully thwart potential fraud, waste, and 
abuse.

                 Remaining Tasks and Future Challenges

    Some of the anti-fraud proposals in the President's Bill 
were not included in the Balanced Budget Act of 1997, and we 
believe it is important to identify them and explain why they 
are critical to the overall success of our program integrity 
efforts. We would especially like to acknowledge Mr. Stark's 
efforts in introducing proposed legislation which would include 
some of these proposals.
    Civil Monetary Penalties--We think it is of the utmost 
importance to have the appropriate penalties for providers 
found guilty of defrauding Medicare. Without appropriate 
sanctions, anti-fraud laws will have little effect. There a 
several proposals that would create new civil monetary 
penalties for: false certification of Medicare eligibility, 
prior knowledge of claims submitted by excluded providers; and 
acceptance of requests from excluded providers (i.e. pharmacy 
services). In addition, specific dollar amounts would be 
specified for cases of repetitive overbilling and unallowed 
charges.
    Kickback Penalties--Subsequent to the 1995 Hanlester 
Network v. Shalala decision, a very high burden of proof was 
put on the government in proving the existence of kickbacks. To 
ensure that our fraud detection efforts are not in vain, 
legislation is needed to establish the same burden of proof 
under the anti-kickback laws as with other criminal statutes. 
In addition, there is a proposal to expand the criminal 
penalties by extending Federal anti-kickback criminal sanctions 
to all public and private health care programs and plans.
    Medicare Provider and Supplier Agreement Fee--This proposal 
would authorize the Secretary to collect a fee for enrollment 
or re-enrollment of Medicare providers or suppliers. The fee 
would cover administrative costs and generate considerable 
savings for the Medicare and Medicaid programs.
    Extension of Subpoena and Injunction Authority--This 
proposal would extend the testimonial subpoena power and 
injunctive authority that the Secretary has for civil money 
penalties to other administrative sanctions such as exclusions 
against Federal health care program providers. These 
investigative tools are needed in the complex investigations of 
fraud, kickbacks and other prohibited activities.
    Liability of Physicians in Speciality Hospitals--Under the 
anti-dumping statute, this proposal would clarify that 
physicians who are ``on call'' to specialty hospitals must 
respond to a call from the hospital to come in to the specialty 
unit (e.g. a burn center) in order to examine and stabilize the 
emergency medical condition of an individual who is proposed to 
be transferred to that unit. This proposal would close a 
loophole in the coverage of the anti-dumping statute.
    Prospective Payment System for Rural Health Center Services 
(RHCs)--The Secretary would develop a prospective payment 
system for RHCs no later than December 31, 2000. A prospective 
payment system would remove the incentives for providers to 
inflate their charges and would work to ensure that Medicare 
was only paying appropriate costs.
    Decreased Beneficiary Cost Sharing for Rural Health Center 
Services--Under a prospective payment system, beneficiary cost 
sharing would be based on 20 percent of the PPS amount. 
Beneficiary cost sharing (prior to the development of a PPS 
system) could not exceed 20 percent Medicare's payment limit. A 
20 percent cost-sharing limit would be consistent with current 
Administration policy to ensure that beneficiaries do not pay 
more than 20 percent of the amount that the provider receives 
from Medicare.
    Partial Hospitalization Services Not to be Furnished in 
Residential Settings--This proposal would preclude providers 
from furnishing partial hospitalization services in a 
beneficiary's home or in an inpatient or nursing home. This 
proposal would discourage development of partial 
hospitalization programs targeted to patients in their homes or 
in settings where there is a residential population, such as 
nursing facilities and assisted living facilities.
    Additional Requirements for Community Mental Health Centers 
(CMHCs)--This proposal would provide authority for the 
Secretary to establish through regulation Medicare 
participation requirements for CMHCs (health and safety 
requirements, provider eligibility standards). Additionally, it 
would provide authority for CMHCs to be surveyed by state 
agencies to determine compliance with Federal requirements or 
investigate complaints upon request. This proposal will be 
accompanied by a user fee or specific appropriation for survey 
money. It would also prohibit Medicare-only CMHCs. Currently, a 
CMHC is defined as an entity that provides certain mental 
health services that are listed in the Public Health Service 
Act and meets applicable state licensing or certification 
requirements. Since 2/3 of the states do not license or certify 
CMHCs, this definition is insufficient to ensure that 
appropriate organizations become Medicare providers. 
Prohibiting Medicare--only CMHCs would discourage establishment 
of programs targeted to Medicare beneficiaries.
    CMHC Prospective Payment System--It would also provide the 
Secretary broad authority to establish through regulation a 
prospective payment system for partial hospitalization services 
that reflects appropriate payment levels for efficient 
providers of service and payment levels for similar services in 
other delivery systems. (The current cost reimbursement system 
would stay in place until the Secretary exercises this payment 
authority.) The partial hospitalization benefit was intended to 
be a less-costly alternative to inpatient psychiatric care. The 
current reasonable cost reimbursement methodology has resulted 
in excessive payment and inappropriate payment for items and 
services that are excluded from the definition of partial 
hospitalization services.
    Bankruptcy Provisions--These proposals would protect 
Medicare and Medicaid interests in bankruptcy cases. A provider 
would still be liable to refund overpayments and pay penalties 
and fines even if he filed for bankruptcy. Quality of care 
penalties could be imposed and collected even if a provider was 
in bankruptcy. Medicare suspensions and exclusions (including 
for not re-paying scholarships) would still be in force even if 
a provider files for bankruptcy. If Medicare law and bankruptcy 
law conflict, Medicare law would prevail. Bankruptcy courts 
would not be able to re-adjudicate our coverage and/or payment 
decisions.
    Insurer Information Reporting--This proposal would build on 
HCFA's prospective data sharing initiative to clarify that 
Medicare can require information from all group health plans in 
order to ensure that Medicare is paying the appropriate amount 
for beneficiaries who may be covered by private insurance. The 
problem of Medicare's initially paying and then attempting to 
recover payment (or not having enough time to recover payment) 
from a group health plan could largely be eliminated if all 
group health plans were required to report to us information 
about the insurance coverage of Medicare beneficiaries. We 
would then know from the start what our payment obligations are 
(i.e., if Medicare is responsible for paying most of a claim or 
whether Medicare is responsible only for the co-payment and 
deductible). The appropriate payments could be made in a timely 
fashion and resources would not need to be spent to recoup 
mistaken payments.
    Conditions for Double Damages--This proposal would provide 
that when a third party payer is required to reimburse 
Medicare, double damages are payable unless the third party 
payer can demonstrate that it did not know, and could not have 
known, of its responsibility to pay first. This would reduce 
gaming of the system by third party payers.
    Clarification of Time and Filing Limitations--This proposal 
would clarify that Medicare can recover mistaken payments from 
all entities that make insurance payments, without a time limit 
upon when Medicare can file a claim. Unfortunately, because we 
must utilize information from tax returns, which is then 
matched against information from the Social Security 
Administration (in the HCFA/IRS/SSA Data Match), by the time we 
receive data it is already one and a half, and sometimes two 
years old. We must then match this information against Medicare 
files before a questionnaire can be sent to identified 
employers to determine if a Medicare beneficiary (or their 
spouse) had coverage through the group health plan of an 
employer. Thus, the current three-year limit for recovery of 
erroneous Medicare payments effectively means that no erroneous 
primary payments are collected. Consequently, private insurance 
companies (whose obligation it is to pay before Medicare when 
the beneficiary has a primary policy) receive substantial 
windfalls at the expense of the Medicare Trust Fund.
    Technical Changes Concerning Minimum Sizes of Group Health 
Plans--This proposal would make technical changes concerning 
the minimum sizes of group health plans so that the Social 
Security Act and the IRS Code would not be contradictory.
    Eliminate Exception to Anti-kickback Statute for Certain 
Managed Care Plans--The term ``substantial financial risk'' is 
undefined and somewhat broad. This proposal would eliminate the 
broad new exception (created in HIPAA) to the anti-kickback 
statute when providers are at ``substantial financial risk.'' 
The Congressional Budget Office assigned a considerable cost to 
this provision precisely because it could be easily abused by 
those wishing to profit from referrals.
    Repeal of Clarification Concerning Levels of Knowledge 
Required for Imposition of CMPs: This proposal would reinstate 
the reasonable diligence standard that the OIG used to levy 
civil money penalties on Federal health care program providers 
who violated the law. HIPAA eliminated the standard for use of 
reasonable diligence and made providers subject to civil money 
penalties only if they acted with deliberate ignorance or 
reckless disregard.
    We believe that these provisions are needed to address 
areas of vulnerability that are not covered by existing 
legislation, and that they will provide us with additional 
valuable weapons in the war against fraud and abuse. We need 
the support of Congress in order to add these important tools 
to our current efforts.

                               Conclusion

    As the nation's largest purchaser of health care services 
and as the health care insurer for one in four Americans, we 
know that it is the most vulnerable--the oldest, the frailest, 
the least able--who are the first to be victimized. Program 
integrity measures not only protect these individuals; they 
build a strong base for Medicare, as we know it today, and as 
it will evolve to meet HCFA's program needs as we face the next 
century.
    Building on the principles of our program integrity 
vision--Prevention, Early Detection, Coordination, and 
Enforcement--it is our intention to strengthen the fight 
against waste, fraud and abuse in the Medicare and Medicaid 
programs. We are gaining on the agents of fraud. Now is the 
time to increase the pressure, not reduce it. I look forward to 
working with all of you in this endeavor.
      

                                

    Chairman Thomas. Thank you, Ms. Ruiz.
    Mr. Owens.

   STATEMENT OF CHARLES L. ``CHUCK'' OWENS, CHIEF, FINANCIAL 
        CRIMES SECTION, FEDERAL BUREAU OF INVESTIGATION

    Mr. Owens. Thank you, Mr. Chairman, for inviting me to 
testify at this hearing today.
    Mr. Chairman, the FBI has conducted health care 
investigations for several years now, but it was only in 1991 
that we first designated health care fraud as a national 
priority. Since that time we've continued to increase the 
commitment of resources to these investigations and frankly, 
the HIPAA legislation and the resulting funding that came from 
that to the FBI was a real shot in the arm.
    I brought some charts with us today I'd like to show you. I 
think some points of interest which will clearly indicate what 
the FBI's doing in health care fraud investigations. The first 
chart reflects that, prior to enactment of the HIPAA 
legislation, we had designated and dedicated health care fraud 
squads in a number of our field offices around the country, but 
with the legislation and the additional agents we were able to 
allocate to our field offices, we were able to add about seven 
new dedicated squads throughout the country, including adding 
one-third squad, one-third full dedicated health care squad in 
Miami, and a second full dedicated squad in New York.
    The second chart reflects our resource utilization again--
special agents dedicated to this area. It clearly shows from 
1992 through, on the chart, the second quarter of 1997, how 
we've continuously increased our commitment there. Through the 
third quarter, which is the latest figures I have, it's up now 
to about 365 agent positions.
    The next chart reflects the pending caseload. Again, you 
see a continual increase in the number of investigations that 
we're conducting there, and frankly, I expect that that will 
now start to level off as we've continued to do more and more 
cases here. We've gotten involved in more complex cases, many 
times cases that are national in scope, and the very difficult 
cases, so we wouldn't expect to see an increase in this area. 
We do think we'll work the cases that will make more impact.
    The next chart reflects a breakdown of the cost of health 
care in the country. As you know, the FBI has jurisdiction to 
investigate both fraud against the private payor plans as well 
as the government-sponsored plans. The inset in the left corner 
indicates that in 60 percent of the investigations we conduct, 
they're in the federally sponsored programs with the remaining 
40 in the private sector. However, what we've seen in most 
instances, if the providers are defrauding the Medicare Program 
and Medicaid, their also defrauding the private payors as well.
    The last chart I have shows the convictions, and I want to 
point out, as Mike did, that many of these are joint 
investigations that we've conducted with the Inspector 
General's Office, IRS, other Federal agencies, and State and 
locals as well. Again, through the third quarter we were up to 
about 400, so I would expect this year we will exceed what we 
did last year.
    In the interest of time, I'll be brief. I just wanted to 
make a couple of points. In my statement, I indicated a number 
of successful investigations that we've conducted, but I just 
want to highlight one very briefly. That's a recent home health 
care investigation that we conducted in the Miami division. In 
that instance, we actually established a home health care 
agency ourselves and operated it and we went overt just a few 
weeks ago and arrested the first two individuals. We anticipate 
numerous additional arrests in that case. But we were able to 
make those arrests, we focused not only on the health care 
fraud that was apparent there, but also the money laundering 
activity that was associated. I think this case is particularly 
important because of the high incidence of home health care 
fraud that we're seeing and this shows our efforts to attack 
it. Also, because of the techniques used--we think by using 
these type of techniques we can really get on the inside of 
some of these operations and develop evidence of the broad 
nature of the frauds that are occurring.
    Mr. Chairman, I believe that economic losses to the 
American public are now greater from health care fraud than 
from any other form of white-collar crime and that is why we 
are placing such an important emphasis in this area. We're 
working closely with several other agencies to conduct these 
matters; there are numerous task forces and working groups 
established throughout the country with the prosecutors and 
investigators, and we think we are beginning to make some real 
impact. We're using, as I've indicated, undercover operations 
and proactive techniques to address this. We're being 
encouraged to do more and more civil investigations as well as 
criminal, and we've done that. We've applied the RICO statute 
in some instances, and we're certainly willing to do that if 
the circumstances warrant. We're also, as I indicated, 
investigating more and more cases that are national in scope.
    With that, at the appropriate time, I'd be happy to answer 
any questions.
    [The prepared statement follows:]

Statement of Charles L. ``Chuck'' Owens, Chief, Financial Crimes 
Section, Federal Bureau of Investigation

    Good Morning Mr. Chairman and Members of the Subcommittee 
on Health.
    The FBI places a high priority on investigating Health Care 
Fraud and is committed to working with this Committee and all 
of Congress to ensure that law enforcement has the necessary 
tools to combat the health care crime crisis. I testified 
several months ago on this issue to the Senate Permanent 
Subcommittee on Investigations. I would be delighted to furnish 
this Committee with similar statistics relating to the FBI's 
enforcement efforts as well as to update you on some very 
recent developments. Another FBI representative recently 
participated in a hearing held by the Senate Special Committee 
on Aging. At this hearing the FBI representative played a video 
obtained by use of a closed circuit television, installed under 
court order, located in the billing area of a doctor's office. 
The doctor was captured in the act of altering billing records 
to facilitate his fraud scheme. Inasmuch as it was previously 
shown and was the subject of widespread publicity, I chose not 
to play this tape today but I can certainly make it available 
to the Committee.
    As the Committee is aware, in addition to providing new 
statutory tools to combat health care fraud, the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA), 
which was passed by the last session of Congress, specified 
mandatory funding to the FBI for Health Care Fraud Enforcement. 
The last chart accompanying my written statement depicts the 
incremental increases in FBI appropriations. The law provided 
the FBI with $47 million in fiscal year 1997 for its health 
care fraud efforts, up from $38 million in fiscal year 1996. 
The FBI used this enhancement, in large part, to fund an 
additional 46 agent and 31 support positions for health care 
fraud and to create several new dedicated Health Care Fraud 
Squads. (see chart 1 attached). This increase in personnel 
resources brought the number of FBI agents addressing health 
care fraud in the 2nd quarter of FYER fiscal year 1997) as 
compared to 112 in 1992. (see chart 2 attached). Funding is 
slated to increase incrementally until the year 2003, when it 
will reach $114 million and remain at that level each year 
thereafter. With this additional funding, the FBI will be in a 
position to continue to increase the number of agents committed 
to Health Care Fraud investigations.
    As the FBI has increased the number of agents assigned to 
health care fraud investigations, the caseload has increased 
dramatically from 591 cases in 1992, to over 2,300 cases in the 
first half of 1997 (2,428 3rd quarter fiscal year 1997). (see 
chart 3 attached). The FBI caseload is divided between those 
health plans receiving government funds and those that are 
privately funded (see chart 4 attached). Criminal health care 
fraud convictions resulting from FBI investigations have risen 
from 116 in 1992, to 475 in 1996. (see chart 5 attached). As 
the complexity and long-term nature of our health care fraud 
investigations increase we anticipate that the number of 
investigations and convictions will begin to level off.
    A considerable portion of this funding increase was 
utilized to support major health care fraud investigations such 
as the federal probe of Columbia Healthcare Corporation, 
reportedly the nation's largest for-profit health care 
provider. This investigation has been widely reported in the 
media and I am sure the Committee is aware of the allegations. 
The coordinated execution of multiple search warrants at 
Columbia related facilities required the services of hundreds 
of FBI agents and representatives of other cooperating 
agencies. The expenses associated with the searches, as well as 
post search document storage and review expenses, were funded 
in large part through the appropriations made possible through 
HIPAA. The committee can be assured that HIPAA funding is being 
used to enhance the staffing level of FBI field offices 
involved in ongoing investigations of national importance.
    The funding made available through HIPAA also made possible 
four regional training conferences for FBI agents assigned to 
Health Care Fraud Investigations. These one week training 
sessions sponsored by the Health Care Financing Administration 
provided in-depth training on the Medicare Program to almost 
300 agents. Other training sessions, to include a session for 
the Bureau's Financial Analysts and an FBI, Defense Criminal 
Investigative Service (DCIS), and Office of Inspector General-
Health and Human Services (OIG-HHS) Managers' Conference, were 
also made possible by HIPAA.
    As the Committee is aware, Health Care Fraud Investigations 
are document intensive. Each of the Bureau's Health Care Fraud 
Squads are being provided with newly purchased computer 
hardware and software and other technical equipment to aid in 
their investigations. These purchases were made possible 
through HIPAA funding.
    Our investigations to date have shown that no segment of 
the Health Care System is immune from fraud. This morning i 
would like to discuss briefly three areas of the Health Care 
Delivery System which FBI investigations have shown to be 
particularly susceptible to fraud: Laboratory billings; Home 
Health Care; and Durable Medical Equipment, Prosthetics, 
Orthotics, and Supplies (DMEPOS).
    Eight months ago, Damon Clinical Laboratories Inc. agreed 
to pay the Federal government $119 million in civil and 
criminal penalties for submitting false claims to various 
Federal Health Care Programs, including the Medicare Program 
and a number of Medicaid Programs. In November of last year, 
the Laboratory Corporation of America agreed to pay the Federal 
government $182 million in civil penalties associated with 
submitting false claims for medically unnecessary tests. As 
part of this agreement, Allied Clinical Laboratories, a labcorp 
subsidiary, pled guilty to a criminal charge and will pay a $5 
million criminal fine. In February of this year, Smithkline 
Beecham Clinical Laboratories Inc. agreed to pay $325 million 
to settle fraud charges.
    These multi-agency investigations and settlements were the 
result of the cooperative efforts of a number of agencies and 
resulted in significant restorations to the hospital insurance 
trust fund--which funds the Medicare and Medicaid Programs--as 
well as other Federal Health Care Programs. The fraud schemes 
include bundling certain lab tests with blood panels, causing 
physicians to order tests that were not medically necessary; 
billing for hemogram indices each time a complete blood count 
was ordered; ``Code Jamming'' on screening tests to ensure 
Medicare payment; and providing inducements to physicians to 
obtain their Medicare business. Investigations into other 
allegations involving the laboratory industry are continuing.
    The home health industry has grown tremendously during the 
last few years. In 1993, Home Health Agencies were reimbursed 
by Medicare in the amount of $9.7 billion for services provided 
to 2.8 million Medicare beneficiaries. By 1996, Medicare paid 
$17.2 billion to providers of Home Health Care for services 
rendered to 3.8 million beneficiaries. The number of Home 
Health Agencies billing Medicare has grown from just over 7,000 
in 1993, to an estimated 9,500 in 1996.
    Investigations conducted by the FBI and OIG-HHS have 
uncovered fraud schemes in the Home Health Area involving cost 
reporting fraud; billing for services not rendered; up-coding 
visits to a higher reimbursement code, such as a skilled 
nursing visit; and billing for services rendered to persons not 
``Home Bound'' as required by medicare. A number of factors may 
contribute to the high rate of fraud detected in the Home 
Health Industry. Less than 4 percent of the agencies receive 
on-site audits by Medicare contractors and the beneficiaries 
are not required to make a co-payment, making it less likely 
that a beneficiary will complain about the extent of service or 
what's being billed to Medicare. As the committee is aware, the 
President recently announced that the Government will be 
doubling its audits of Home Health Agencies. It can be expected 
that more audits will result in the predication of more 
criminal investigations and the FBI applauds this effort.
    Just last month a Federal grand jury in Miami returned a 
102 count indictment of twelve defendants, including two 
administrators and five physicians, from one of the Nation's 
largest Home Health Care Agencies. allegedly, this is a $15 
million fraud and one of the Nation's largest Home Health Care 
Fraud indictments ever. Two of the defendants are charged with 
creating a large network of bogus nursing groups and then using 
these groups to fraudulently bill the Medicare System for Home 
Health Care Services that were not provided or for persons they 
knew were not qualified to receive the service. They also 
allegedly instructed employees to fabricate the records 
necessary to support these billings and then ``Laundered'' the 
proceeds through accounts set up through the secret owners of 
the bogus nursing groups, who were either family members or 
friends of the defendants. The money laundering charges carry a 
maximum of twenty years in prison and a fine of twice the 
amount laundered. The conspiracy, false claims and wire fraud 
counts are punishable by up to five years imprisonment each and 
a $250,000 fine, per count. This indictment was a culmination 
of a four and one half year investigation by the FBI, IRS, and 
United States Attorney's Office.
    Another area of Health Care that has been shown to be 
particularly vulnerable to fraud is durable medical equipment. 
Recently, five midwest residents pled guilty to racketeering 
charges in connection with more than $25 million in fraudulent 
billings to Medicare through the marketing of durable medical 
equipment to Medicare reimbursement for products they did not 
provide, receiving payment for non-reimbursable supplies, 
providing unnecessary items to patients, misrepresenting the 
quantities of supplies actually provided, and engaging in 
billing activities to avoid detection by the Medicare 
contractor. Part of the scheme included adding unnecessary 
items in urinary incontinence kits and marketing those items to 
nursing homes for reimbursement from Medicare. The two 
principle subjects were each sentenced to 57 months in prison 
and agreed to the forfeiture of $12 million.
    In a highly unusual case, just last week two individuals 
were arrested and charged in connection with a two-year fbi 
sting operation addressing Medicare fraud and money laundering. 
The FBI set up its own Home Health Care Agency and participated 
with the subjects in laundering $1.2 million in what the 
subjects thought was drug money through the subjects Home 
Health Agency. The investigation is still ongoing and efforts 
are underway to freeze the subjects assets and prevent further 
Medicare billings. The subjects Home Health Agency received 
over $8 million in Medicare payments over the last two years.
    The HIPAA of 1996 (The Act) established the Health Care 
Fraud and Abuse Control Account which provided funding to HHS 
as well as the Department of Justice. This funding increase for 
the Department of Justice provides great support for the 
Department's decision, from approximately five years ago, to 
make Health Care fraud Prosecution one of its top priorities. 
Through the funding provisions of this Act, the Department was 
able to hire an additional 90 Assistant United States Attorneys 
(AUSAS), 60 criminal and 30 civil, to support Health Care Fraud 
Prosecutions. The assignment of these AUSAS To various 
districts was closely coordinated with the Bureau's staffing 
increases in an effort to ensure adequate prosecutive support 
for the anticipated increase in criminal matters under 
investigation.
    The Act also created a Federal health care fraud offense, 
which covers any Health Care Plan, whether Government or 
privately funded, and empowers the Attorney General or her 
designee to issue investigative demands to obtain records 
pertaining to Federal criminal health care offenses. Records 
obtained pursuant to this method are not subject to the same 
constraints applicable to records obtained through the use of a 
Grand Jury subpoena. A number of investigative demands have 
already been issued in connection with ongoing criminal 
investigations.
    As the committee is well aware, the Balanced Budget Act of 
1997 goes even further than HIPAA'S efforts to combat Health 
Care additional anti-fraud measures continues to exist. The 
Bureau strongly supports provisions requiring the permanent 
exclusion of individuals with multiple convictions of program 
related offenses and the posting of surety bonds. The Bureau 
also supports efforts to require providers to furnish social 
security and employer identification numbers of all owners and 
managing employees prior to certification.
    Despite the great strides made by the last session of 
Congress, additional legal tools are still needed if law 
enforcement is to make even more of an impact on this estimated 
$100 billion a year crime problem.
    The FBI concurs with the Department of Justice that there 
should be a liberalization of F.R.CR.P. 6(E) to facilitate the 
sharing of information among criminal and civil attorneys in 
health care cases. Often, investigations which are initiated on 
complaints of criminal allegations fall short of the burden of 
proof required to sustain criminal convictions and the 
appropriate remedy becomes civil enforcement. Information 
currently obtained through the Grand Jury cannot be routinely 
used by civil attorneys, absent a court order.
    Secondly, while Section 204 of the Act extends Title 42 
criminal provisions relating to kickbacks in all health plans 
receiving Federal funds, except the Federal Employees Health 
Benefit Plan (FEHBP), it does not apply illegal remuneration 
prohibitions to the private health care industry. Congress has 
also not included violation of the anti-kickback statute in the 
definition of Federal Health Care Offense. Thus, in an 
investigation based solely on illegal kickbacks, the new health 
care violations and new procedural tools, such as investigative 
demand authority and injunctive relief, will not be applicable.
    Statistical analysis of billing data typically reflects 
high usage peaks during certain time periods for various 
procedure codes. Reimbursement for these procedures or tests 
require certification from a medical provider stating the 
procedure or test was medically necessary. Typically, after law 
enforcement activity is initiated based partly on the 
statistically aberrant usage of a particular code, usage 
decreases and another procedure exhibits higher than normal 
usage. One cannot help but assume that these aberrant billing 
patterns are due in part to monetary incentives paid to 
providers to certify that the tests or procedures were 
medically necessary. When the medical judgement of providers 
becomes obscured by the motive for profit, all americans 
seeking medical care become potential victims. The FBI and 
other Department of Justice components would support an 
amendment to the Federal criminal code to create a new 
generalized offense against kickbacks paid in connection with a 
``Health Care Benefit Program'' as defined in 18 U.S.C. Sec. 24 
(B). This provision would fill the gap in the law by extending 
Federal anti-kickback criminal sanctions to all Health Care 
Benefit Programs, public and private.
    An ongoing FBI undercover investigation has determined that 
the payment of illegal kickbacks for referral of Medicare 
business is a widespread and accepted practice in the segment 
of health care under investigation. At this time I am unable to 
share with the Subcommittee audio and visual confirmation of 
this assertion but I would be happy to share these tapes with 
the Subcommittee when this investigation is concluded. These 
recorded Acts will serve as a compelling argument for further 
expansion of the anti-kickback statute.
    This ongoing undercover investigation now involves 
investigators from, in addition to the FBI, agents from the 
OIG-HHS, IRS, and DCIS and is but one example of the 
cooperative Federal effort to combat health care fraud.
    That concludes my prepared remarks and at this time I would 
be pleased to answers any questions that you may have. 
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    Chairman Thomas. Thank you, Mr. Owens. My assumption is you 
didn't operate your home health care agency through a pawnshop 
front arrangement. Did it look more like a home health care?
    Mr. Owens. Actually, it wasn't too different than the one 
you showed. It just shows the----
    Chairman Thomas. Careful.
    Mr. Owens [continuing]. Egregious nature of this activity, 
I think.
    Chairman Thomas. And still they came.
    Mr. Mangano, to begin the discussion. What we did was, 
again, to give people an idea of how--I'm sorry, Dr. Scanlon.
    Mr. Scanlon. That's OK.
    Chairman Thomas. You're here so often.
    Mr. Scanlon. Beg your pardon?
    Chairman Thomas. You're here so often.
    Mr. Scanlon. Right. [Laughter.]
    Chairman Thomas. But I do want to hear from you.

STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH FINANCING AND 
SYSTEMS ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, 
                 U.S. GENERAL ACCOUNTING OFFICE

    Mr. Scanlon. Thank you very much. It's a pleasure to be 
back again. In particular, I'm pleased to be here as you 
discuss the recent legislative efforts to address fraud and 
abuse in the Medicare Program.
    As you indicated at the start, as well as what you've heard 
from my fellow panelists, the Congress has squarely faced the 
mounting concerns that exist about Medicare fraud and abuse and 
has responded very decisively in HIPAA and the Balanced Budget 
Act. Indeed, the broad scope of this response is demonstrated 
by the fact that these acts address the bulk of the waste, 
fraud, and abuse recommendations that have been made by the 
Inspector General and ourselves over the years. At your 
request, we have issued correspondence to the Subcommittee 
today elaborating on how well you have addressed those 
recommendations.
    Today, I would like to focus in my statement on the work 
that lies ahead to realize the potential benefits of these 
pieces of legislation. As you know, the success of any reform 
legislation is contingent upon its implementation. This new 
Medicare legislation is no exception. Take, for example, the 
mandates under BBA to replace cost-based reimbursement with 
prospective payment systems to eliminate the financial 
incentives for providers to deliver more services than 
necessary. HCFA will have to bring to a speedy conclusion years 
of data-intensive research to develop prospective payment 
methods and settle on methods that, first of all, avoid 
building excessive payments of the past into future rates.
    Second, they will have to compensate providers fairly for 
their sicker or healthier-than-average patients, and finally, 
they will have to avoid creating incentives for underservice 
that could put beneficiaries at risk. Then, under the standard 
regulatory process, HCFA will need to develop implementing 
regulations, seek public comments, and ultimately issue final 
regulations.
    For the expectations of BBA to be realized, this process is 
going to have to be accelerated significantly. Under the 
Balanced Budget Act, HCFA will have to develop concurrently 
separate prospective payment methods for inpatient 
rehabilitation facilities, home health agencies, skilled 
nursing facilities, and hospital outpatient departments.
    Medicare's new Choice plans also present implementation 
challenges. For example, in setting standards for planned 
participation, HCFA will need to strike a judicious balance 
between encouraging plan growth and adequately protecting 
beneficiaries quality of and access to care. In addition, HCFA 
may face extraordinary challenges in overseeing compliance with 
participation standards. The newly authorized higher HMO rates 
for rural areas, plus the options for preferred provider 
organizations, provider-sponsored organizations, and private 
fee-for-service plans may well increase substantially the total 
number of participating plans. If that anticipated growth 
occurs, HCFA may not be equipped to make the site visits at the 
current rate of once every other year or to give adequate 
scrutiny to the marketing material that plans are submitting 
for HHS approval.
    Another implementation concern is related to HCFA's 
information management systems. As you know, HCFA's major 
project to modernize its information system, the Medicare 
Transaction System, was terminated about 2 months ago. This is 
a significant setback for HCFA's efforts to intercept fraud and 
abuse. MTS was expected to provide an online database that 
could integrate data on part A and part B services and 
payments. This information is currently stored separately, 
limiting contractors' efforts to detect double billing for the 
same service or supply or other patterns of suspicious billing. 
HCFA's other antifraud and abuse software development projects 
are also years away from implementation nationwide.
    I'd like to conclude by reiterating that these acts, the 
Balanced Budget Act and HIPAA, offer HCFA great potential to 
combat Medicare fraud and abuse. Some provisions, however, will 
require extensive time and resources to implement effectively. 
Additional congressional oversight, encouragement, and possibly 
action will be needed to achieve timely and effective 
implementation and to realize the potential of this 
legislation. At the same time, HCFA's management information 
difficulties undermine the agency's abilities to perform the 
high-tech investigative work needed to scrutinize Medicare 
bills effectively. Medicare's program managers and their 
Federal law enforcement partners will certainly have to work 
diligently to keep pace with the persistent attempts to defraud 
the program.
    Thank you, Mr. Chairman. I'd be happy to answer any 
questions you or other Members of the Subcommittee have.
    [The prepared statement follows:]

Statement of William J. Scanlon, Director, Health Financing and Systems 
Issues, Health, Education, and Human Services Division, U.S. General 
Accounting Office

    Mr. Chairman and Members of the Subcommittee:
    We are pleased to be here as you discuss recent legislative 
efforts to address fraud and abuse in the Medicare program. In 
response to heightened concern about the exploitation of 
Medicare, the Congress enacted as part of the Balanced Budget 
Act of 1997 (BBA) (P.L. 105-33) a number of provisions designed 
to control fraud and abuse. At your request, we have sent 
correspondence to the Subcommittee today that discusses the 
provisions of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA) (P.L. 104-191) and BBA that 
address anti-fraud-and-abuse recommendations that we and the 
Inspector General of the Department of Health and Human 
Services (HHS) have made.\1\ We also included in the 
correspondence our remaining open recommendations and those 
from the Inspector General.
---------------------------------------------------------------------------
    \1\ Medicare Fraud and Abuse: Summary and Analysis of Reforms in 
the Health Insurance Portability and Accountability Act of 1996 and the 
Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997).
---------------------------------------------------------------------------
    In noting the comprehensive legislation that the Congress 
enacted, in part, to grapple with program fraud and abuse, my 
statement today focuses on the work it will likely take to 
realize the potential benefits of HIPAA and BBA in three 
areas--in traditional fee-for-service Medicare, the new 
Medicare+Choice plans, and information management systems. My 
remarks are based on the work we have done to prepare today's 
correspondence and relevant GAO studies. (See the list of 
related products at the end of this statement.)
    In summary, both HIPAA and BBA directly address Medicare 
fraud and abuse and provide opportunities to improve program 
management. Both acts offer civil and criminal penalties. They 
also introduce opportunities to deploy new program safeguards. 
For example, on the fee-for-service side of the program, BBA 
introduces prospective payment methods for skilled nursing 
facility and home health services, in part to halt opportunists 
from overbilling Medicare. These are among Medicare's fastest-
growing components: From 1989 to 1996, spending for home health 
care and skilled nursing facility care averaged, respectively, 
a 33-percent and 22-percent annual rise. HIPAA also ensures a 
stable source of funding for anti-fraud-and-abuse activities, 
authorizes HCFA to contract for improved claims reviews, 
enhances law enforcement coordination, and calls for data 
collection improvements. On the managed care side, BBA's 
Medicare+Choice program, which broadens beyond health 
maintenance organizations (HMO) the private health plans 
available to Medicare beneficiaries, includes several 
provisions addressing the marketing, enrollment, and quality of 
care issues raised in our reports and those of the Inspector 
General.
    As always, however, the success of any reform legislation 
is contingent on its implementation. The Congress has provided 
HHS and the Health Care Financing Administration (HCFA), the 
Department's administrator of the Medicare program, with many 
new statutory requirements governing traditional fee-for-
service Medicare; some require little effort to carry out, 
whereas others, such as prospective payment system development, 
will require extensive time and resources to implement 
effectively. In addition, the Medicare+Choice program will add 
considerably to HCFA's private plan monitoring workload. 
Finally, the project to modernize Medicare's claims processing 
systems, which are at the core of many fraud and abuse 
detection efforts, has recently been halted. This brings into 
question the ability of HCFA and its contractors to perform 
expeditiously the data-intensive analyses needed to spot and 
counteract abusive billing schemes. HCFA agrees that the tasks 
associated with implementing HIPAA and BBA mandates are 
considerable and plans to report routinely to HHS officials and 
to the Congress on HCFA's progress implementing the 
legislation.
    As we stated in our 1997 High-Risk Series report on 
Medicare, fraudulent and abusive schemes are inherently 
dynamic, as unprincipled entrepreneurs continually seek ways to 
dodge program safeguards.\2\ As a result, fortifying Medicare 
against fraud and abuse will require a concerted and ongoing 
effort by Medicare program managers and federal law enforcement 
agencies to keep pace with new attempts to exploit the program. 
It will also likely require additional congressional oversight 
to encourage timely and effective program management.
---------------------------------------------------------------------------
    \2\ High-Risk Series: Medicare (GAO/HR-97-10, Feb. 1997).
---------------------------------------------------------------------------

                               Background

    Established under the Social Security Amendments of 1965, 
Medicare is a two-part program: (1) ``hospital insurance,'' or 
part A, which covers inpatient hospital services and skilled 
nursing facility, hospice, and home health care services, and 
(2) ``supplementary medical insurance,'' or part B, which 
covers physician and outpatient hospital services, diagnostic 
tests, and ambulance and other medical services and supplies. 
In fiscal year 1997, part A will have covered an estimated 38.1 
million aged and disabled beneficiaries, including those with 
chronic kidney disease. Total outlays for parts A and B are 
estimated at $212 billion for fiscal year 1997.
    In Medicare's fee-for-service program, which is used by 
almost 90 percent of the program's beneficiaries, physicians, 
hospitals, and other providers submit claims for services 
rendered to Medicare beneficiaries. HCFA administers the fee-
for-service program largely through claims processing 
contractors. Insurance companies--like Blue Cross and Blue 
Shield plans, Mutual of Omaha, and CIGNA--process and pay 
Medicare claims, which totaled an estimated 900 million in 
fiscal year 1997. As Medicare contractors, these companies use 
federal funds to pay health care providers and beneficiaries 
and are reimbursed for the administrative expenses incurred in 
performing the Medicare work. Over the years, HCFA has 
consolidated some of Medicare's operations, and the number of 
contractors has fallen from a peak of about 130 to about 65 in 
1997.
    Generally, intermediaries are the contractors that handle 
claims submitted by ``institutional providers'' (hospitals, 
skilled nursing facilities, hospices, and home health 
agencies); carriers generally handle claims submitted by 
physicians, laboratories, equipment suppliers, and other 
practitioners. HCFA has guarded against inappropriate payments 
largely through contractor-managed operations, leaving the 
intermediaries and carriers broad discretion over how to 
protect Medicare program dollars. As a result, contractors' 
implementation of Medicare payment safeguard policies varies 
significantly.
    Medicare's managed care program covers a growing number of 
beneficiaries--more than 5 million as of September 1997--who 
have chosen to enroll in a prepaid health plan rather than 
purchase medical services from individual providers. The 
managed care program, which is funded from both the part A and 
part B trust funds, consists mostly of risk contract HMOs that 
enrolled nearly 5 million Medicare beneficiaries as of 
September 1997.\3\ Medicare pays these HMOs a monthly amount, 
fixed in advance, for each beneficiary enrolled. In this sense, 
the HMO has a ``risk'' contract because regardless of what it 
spends for each enrollee's care, the HMO assumes the financial 
risk of providing health care in return for the payments 
received. An HMO profits if its cost of providing services is 
lower than the predetermined payment but lose if its cost is 
higher than the payment.
---------------------------------------------------------------------------
    \3\ The Medicare managed care program also includes cost contract 
HMOs and health care prepayment plans. Cost contract HMOs allow 
beneficiaries to choose health services from their HMO network or 
outside providers. Health care prepayment plans may cover only part B 
services. Together, both types of plans enroll fewer than 2 percent of 
the Medicare population.
---------------------------------------------------------------------------

 Implementing New Laws Affecting Fee-for-Service Medicare Will Require 
                  Sustained Effort to Realize Benefits

    The Congress provided important new resources and tools to 
fight health care fraud and abuse when it enacted HIPAA and 
BBA. To address problems in traditional fee-for-service 
Medicare, various provisions require HCFA to change outmoded 
payment methods, largely by establishing new prospective 
payment systems and by imposing fee caps, reductions, and 
updates to contain unnecessary expenditures. Certain provisions 
offer the potential to improve claims reviews--mandating 
specific increases in reviews and providing HCFA new 
contracting authority to acquire technical expertise.
    Enactment of the legislation represents an important first 
step toward the realization of program integrity goals. As we 
have noted in previous testimony, the legislation process sets 
forth the broad concepts while the administering agencies 
implement the legislation through planning, design, and 
execution.\4\ In the case of HIPAA, now more than a year old, 
HCFA and the HHS Inspector General have been developing plans 
on many fronts, but actual implementation is just beginning. In 
the case of BBA, less than 3 months old, the ``to-do'' list is 
long. Three examples relating to both acts illustrate the 
situation.
---------------------------------------------------------------------------
    \4\ ``Administration's Proposed Budget Cuts Affecting the Medicare 
Program,'' hearing before the House Subcommittee on Health, Committee 
on Ways and Means, March 2 and June 15, 1982, serial 97-53, pp. 331-38.
---------------------------------------------------------------------------
    First, HIPAA, enacted over a year ago, grants HCFA the 
authority to use contractors other than the insurers serving as 
Medicare intermediaries and carriers to conduct medical and 
utilization review, audit cost reports, and carry out other 
program safeguard activities. The purpose is to enhance HCFA's 
oversight of claims payment operations by increasing contractor 
accountability, enhancing data analysis capabilities, and 
avoiding potential contractor conflicts of interest.
    HCFA's target date for awarding the first program safeguard 
contract is in fiscal year 1999, more than a year from now. 
HCFA officials are preparing for public comment a notice of 
proposed rulemaking that would ultimately govern the selection 
of contractors to perform safeguard functions, but they are not 
able to specify when the contract award rules will be final.
    Second, to allow greater information-sharing among federal 
and state government agencies and health plans, HIPAA mandates 
the creation of a national data collection program under which 
information on final adverse actions against health care 
providers will be maintained. Officials from the Office of the 
Inspector General are working with the Health Resources and 
Services Administration to develop the database. On the basis 
of past experiences with database development, it could be 
several years before the system can be fully operational.
    Distinct from its predecessor system, the National Provider 
Data Bank, this data collection program is expected to maintain 
information on civil judgments, criminal convictions, licensing 
and certification actions on suppliers and providers, 
exclusions, and other adjudicated adverse actions--involving 
the collection of data from state and local governments. The 
program must also be self-supporting, requiring market research 
to assess the needs and preferences of potential users. 
Finally, because existing federal and state statutes and 
regulations may impede the collection and dissemination of the 
information required, new federal regulations may be necessary, 
requiring the publication of proposed rules, a 60-day period 
for receipt of public comments, and an indeterminate period for 
making the regulations final.
    Third, BBA requires the implementation of several 
prospective payment systems to replace cost-based reimbursement 
methods. Depending on their design, prospective payment systems 
can remove the incentive to provide services unnecessarily. For 
example, prospective payment for skilled nursing facilities 
(SNF) should make it more difficult to increase payments by 
manipulating Medicare's billing rules for ancillary services 
provided to beneficiaries in these facilities, an issue often 
raised in our reports and testimonies. However, a considerable 
amount of work will be involved. Establishing rates that will 
enable efficient providers to furnish adequate services without 
overcompensating them will require (1) accounting for the 
varying needs of patients for routine and ancillary services 
and (2) collecting reliable cost and utilization data to 
compute the rates and the needed health status adjustment 
factors. Earlier this year in testimony before this Committee 
on prospective payment proposals, we suggested that HCFA use 
the results of audits of a projectable sample of SNF cost 
reports when setting base rates to avoid incorporating the 
inflated costs found in the HHS Inspector General's reviews of 
SNF cost reports. We also discussed the need for systems to 
adequately monitor prospective payments to help ensure that 
providers do not skimp on services to increase profits at the 
expense of quality care.\5\
---------------------------------------------------------------------------
    \5\ Medicare Post-Acute Care: Cost Growth and Proposals to Manage 
It Through Prospective Payment and Other Controls (GAO/T-HEHS-97-106, 
Apr. 9, 1997).
---------------------------------------------------------------------------
    In general, reforming payment methods entails developing 
payment methodology components that require data-intensive 
studies, developing the implementing regulations, publishing 
the proposed regulations for public comment, and issuing final 
regulations. For example, it took HCFA 4 years--from the time a 
task force was established in 1993--to issue proposed salary 
guideline regulations for rehabilitation therapy services. To 
meet the requirements of BBA, HCFA will have to develop, 
concurrently, separate prospective payment systems for services 
delivered through inpatient rehabilitation facilities, home 
health agencies, skilled nursing facilities, and hospital 
outpatient departments.
    Developing prospective payment systems, moreover, 
represents only a fraction of the design and implementation 
work that HIPAA and BBA require. Conducting demonstration 
projects and reporting to the Congress constitute another 
portion of work mandated by the legislation.

  Medicare's New Choice Plans Present Unknown Challenges for Program 
                                Managers

    Among the more challenging of BBA's provisions to implement 
are those establishing the Medicare+Choice program, which 
expands beneficiaries' private plan options to include 
preferred provider organizations (PPO), provider sponsored 
organizations (PSO), and private fee-for-service plans. It also 
makes medical savings accounts (MSA) available to a limited 
number of beneficiaries under a demonstration program. The 
reforms the Congress embodied in these provisions are major, 
helping Medicare adapt to and capitalize on changes in the 
health care market.
    However, each of these options will have to be carefully 
monitored to identify and correct vulnerabilities. Our 
observations of HCFA's oversight of Medicare's risk contract 
HMOs, which have been the chief alternative to traditional fee-
for-service Medicare, raise concerns. In our 1997 High-Risk 
Series report, we noted that HCFA's monitoring of HMOs has been 
historically weak. HCFA has allowed some plans with a history 
of abusive sales practices, delays in processing beneficiaries' 
appeals of HMO decisions to deny coverage, and patterns of 
poor-quality care to receive little more than a slap on the 
wrist. We also noted that HCFA had done little to inform 
beneficiaries of HMO performance and did not publish available 
data on such satisfaction indicators as rapid disenrollment 
rates compared across Medicare HMOs within a given market.\6\
---------------------------------------------------------------------------
    \6\ Our in-depth study on this subject is entitled Medicare: HCFA 
Should Release Data to Aid Consumers, Prompt Better HMO Performance 
(GAO/HEHS-97-23, Oct. 22, 1996).
---------------------------------------------------------------------------
    BBA addresses many of these problems. For example, the 
legislation calls for all Medicare+Choice plans to, among other 
things, obtain external review from an independent quality 
assurance organization, such as a peer review organization, 
that would assess such factors as the quality of the plan's 
inpatient and outpatient services and the adequacy of the 
plan's response to written complaints about poor-quality care. 
These and other mandates should help improve oversight. The act 
also requires HHS to disseminate to all beneficiaries within a 
market area consumer information on the area's Medicare+Choice 
plans, including, for example, disenrollment rates, health 
outcomes, and compliance with program requirements. 
Collectively, these consumer information requirements enlist 
market forces to help improve HMO performance.
    We remain concerned that HCFA will have to be attentive to 
new issues raised by expanded choice for beneficiaries. The 
implementation challenge for HCFA will be to strike a judicious 
balance between encouraging plan growth and development and 
adequately protecting beneficiaries' quality of care. For 
example, under BBA, requirements for minimum enrollment 
levels--aimed at achieving an adequate spreading of risk to 
ensure a plan's financial solvency--can be waived for new 
Choice plans in their first 3 years of operation. In addition, 
the recent authorization of higher HMO rates in rural areas may 
well increase the total number of risk contract HMOs. If the 
number of Medicare managed care organization grows, HCFA may 
not be equipped to make site visits at the current rate of 
every other year. Finally, all the Medicare+Choice plans, 
including PPOs, PSOs, and private fee-for-service plans, will 
have to submit new marketing materials for HHS approval; with 
an escalating workload, however, these materials could be 
approved without adequate scrutiny. Under the law, marketing 
materials are approved automatically if HHS does not disapprove 
them within 45 days of their submission to the Department.

Delays in Modernizing Medicare's Claims Processing Systems Could Hamper 
                       Program Integrity Efforts

    Another implementation concern is related to HCFA's 
information management systems. As you know, HCFA's major 
project to modernize its information systems--the Medicare 
Transaction System (MTS)--all but collapsed as of August 15, 
1997.\7\ This is a significant setback for HCFA's efforts to 
prevent and detect fraud and abuse. For example, HCFA intended 
MTS to replace nine separate automated information systems with 
a single, unified system. It was expected to provide an on-line 
database that could integrate data on part A and part B 
services and payments that are currently stored separately. 
Ideally, such a system would enable the comparison of claims 
against other claims already submitted on behalf of the 
beneficiary, other claims submitted by the provider, and other 
claims for the same procedure or item. Work is still underway 
to develop a new system for collecting payment and other 
information related to risk contract HMOs, but the MTS contract 
has been terminated.
---------------------------------------------------------------------------
    \7\ On that day, an internal HCFA memo was issued stating, ``Today, 
HCFA formally notified GTE of our decision to close down the contract 
by January 1998. This contract action results from the stop work order 
that we issued to GTE on April 4, 1997.''
---------------------------------------------------------------------------
    HCFA is in the process of consolidating its nine separate 
systems into one part A claims system and one part B claims 
system. While having a single system for each part should allow 
better claims editing, it would not provide all the benefits 
that had been expected from MTS, including the ability to 
ensure routinely, before payments are made, that an item or 
service billed to part A has not also been billed to part B and 
vice versa. Other anti-fraud-and-abuse software development 
discussed in our High-Risk report--namely, algorithms under 
development by the Los Alamos National Laboratory for 
generating prepayment claims screens and commercial off-the-
shelf software controls being tested at one contractor--are 
years away from implementation nationwide.\8\
---------------------------------------------------------------------------
    \8\ For a more detailed discussion of this work, see Medicare 
Automated Systems: Weaknesses in Managing Information Technology Hinder 
Fight Against Fraud and Abuse (GAO/T-AIMD-97-176, Sept. 29, 1997).
---------------------------------------------------------------------------

             HCFA Dedicates Staff to Implement BBA Mandates

    Aware of the need for agencywide coordination and planning 
to implement BBA's multiple provisions, HCFA has established an 
infrastructure to track and monitor the tasks associated with 
BBA mandates. Staff organized into functional teams will be led 
by a project management team tasked with reporting to agency 
executives, including the HCFA Administrator. According to a 
HCFA official, the agency has plans to keep Department 
officials and the Congress routinely informed of the agency's 
progress.

                              Conclusions

    With the enactment of HIPAA and BBA, the Congress has 
provided significant opportunities to strengthen several of 
Medicare's areas of vulnerability. How HHS and HCFA will use 
the authority of HIPAA and BBA to improve its vigilance over 
Medicare benefit dollars remains to be seen. The outcome 
largely depends on how promptly and effectively HCFA implements 
the various provisions. HCFA's past efforts to implement 
regulations, oversee Medicare managed care plans, and acquire a 
major information system have often been slow or ineffective. 
Now that many more requirements have been placed on HCFA, we 
are concerned that the promise of the new legislation to combat 
health care fraud and abuse could at best be delayed or not be 
realized at all without sustained efforts at implementation.
    Mr. Chairman, this concludes my statement. I will be happy 
to answer your questions.

                          Related GAO Products

    Medicare Automated Systems: Weaknesses in Managing Information 
Technology Hinder Fight Against Fraud and Abuse (GAO/T-AIMD-97-176, 
Sept. 29, 1997).
    Medicare Home Health Agencies: Certification Process Is Ineffective 
in Excluding Problem Agencies (GAO/T-HEHS-97-180, July 28, 1997).
    Medicare: Control Over Fraud and Abuse Remains Elusive (GAO/T-HEHS-
97-165, June 26, 1997).
    Medicare: Need to Hold Home Health Agencies More Accountable for 
Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997).
    Medicare Transaction System: Success Depends Upon Correcting 
Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 
1997).
    Nursing Homes: Too Early to Assess New Efforts to Control Fraud and 
Abuse (GAO/T-HEHS-97-114, Apr. 16, 1997).
    Medicare Post-Acute Care: Cost Growth and Proposals to Manage It 
Through Prospective Payment and Other Controls (GAO/T-HEHS-97-106, Apr. 
9, 1997).
    Medicaid Fraud and Abuse: Stronger Action Needed to Remove Excluded 
Providers From Federal Health Programs (GAO/HEHS-97-63, Mar. 31, 1997).
    High-Risk Series: Medicare (GAO/HR-97-10, Feb. 1997).
    Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better 
HMO Performance (GAO/HEHS-97-23, Oct. 22, 1996).
    Medicare: Home Health Utilization Expands While Program Controls 
Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996).
    Medicare Transaction System: Strengthened Management and Sound 
Development Approach Critical to Success (GAO/T-AIMD-96-12, Nov. 16, 
1995).
    Medicare: Commercial Technology Could Save Billions Lost to Billing 
Abuse (GAO/AIMD-95-135, May 5, 1995).
      

                                

    Chairman Thomas. Thank you, Dr. Scanlon. Normally, we refer 
to economics as the dismal science, but your outline of the job 
of trying to get HCFA to do its job sounds fairly dismal as 
well, and I hope you're painting a darker picture than is 
necessary. When the agent from the FBI makes a statement that 
he believes that Medicare waste, fraud, and abuse is the number 
one white-collar crime in the United States, I would have to 
think that $23 billion-and-growing is more than a sufficient 
incentive to make sure that people are as creative as possible 
in doing the job. If they can't do it, one of the things I can 
assure you is that we will provide you with more tools and we 
will investigate who's doing it and we'll find somebody who 
will do it, and we've appreciated your work.
    Before I go to other questions, I'd like to ask Mr. Mangano 
to come up front and talk about some of the devices that we 
have here because perhaps some people are not as fully 
appreciative of the creativeness that went on in the system, 
and, unfortunately, may be still more pervasive that we would 
like.
    In dealing with the very thing you talked about, Dr. 
Scanlon, prior to the prospective payment--and we're quite sure 
that there will be some creative folk under prospective payment 
who will continue to try to figure out how to scam the system--
Mr. Owens' comment that apparently these crooks are not scam-
specific; once they understand that it is high reward and 
little risk, they move clear across the taxpayer-supported 
health care and prey on individuals with their own money as 
well.
    So would you please come up, Mr. Mangano?
    Mr. Mangano. Mr. Chairman, if it's OK, I could have my 
assistant hold some of these items while I talk about it.
    Chairman Thomas. Sure. Just explain to us what it is and 
how Medicare got billed, and if possible, why maybe there's 
less the chance of it occurring now than there was prior to the 
passage of HIPAA or the BBA.
    Mr. Mangano. Great. I'd be happy to do that. I'd like to 
just give a little bit of the background and just say that most 
of the time some of these scams come to our attention, they 
come to us largely in two formats. One, allegations of fraud 
that come either directly to our office or through the Health 
Care Financing Administration carriers, or through other 
sources. The other is through reviews that we do to analyze 
some of the reimbursements that are coming into Medicare for 
billing. The first thing I want to talk about----
    Chairman Thomas. Do you think the new hotline and the more 
specific billing given to the patients themselves will provide 
you with another resource that was always there but not tapped 
as adequately as it should be?
    Mr. Mangano. We think that will help. We're working with 
the AARP to go out and do public education across the country. 
The Administration on Aging is sending their ombudspersons out 
to nursing homes as well as the senior centers to get the 
message out and we're going to be using other forms to get the 
message out. So, I think the hotline will be a help.
    Chairman Thomas. Well, just let me underscore that as a 
public agency responsible for getting the information out, I 
would certainly think the AARP would be a useful group, but 
they are not exclusive, and I would be concerned that, if there 
was too close a working relationship there, there might be some 
assumptions made that weren't warranted.
    Mr. Mangano. Yes, we're also going to other groups in the 
industry to talk with them about assisting us as well.
    Chairman Thomas. Thank you.
    Mr. Mangano. But the first item I would mention is the 
orthotic body jacket. You had the poster up this morning and 
actually the device that the woman was wearing actually was a 
legitimate device and that was a device that would run about 
$1,300 in Medicare reimbursement. When we began to look at 
this, we found that there was a meteoric rise in Medicare 
reimbursements over 3 years. It went up 8,200 percent. The 
first year Medicare reimbursements were $217,000; it went up to 
$18 million in 3 years. That's what caused us to take a look at 
it. What we found is that 95 percent of the cases that we 
reviewed were fraudulent. They were billing for things that 
we're not covered. That $1,300----
    Chairman Thomas. Would you repeat that?
    Mr. Mangano. Sure. We found that in our sample, 95 percent 
of the claims were for fraudulent items. They were 
nonreimbursable items.
    Chairman Thomas. So, if you denied 100 percent of the 
claims, you'd only have a 5-percent error rate?
    Mr. Mangano. That's correct. Yes.
    Chairman Thomas. Do you ever think about approaching it 
that way?
    Mr. Mangano. Yes, that's true, that's true. Well, for this 
device it was. Instead of that $1,300 device which was billed, 
the providers were supplying any one of these three items on 
display or other devices like it. Two of them look like 
wheelchair pads and another one looks like a bib, to be honest 
with you. None of those items at the time we first started this 
would have cost more than $50. The good news is that the 
Medicare Program got onto this very quickly and actually right 
now the reimbursements have dropped from $18 million to about 
$5 million. We still have more work to do, and we're working on 
it.
    The second issue is a glucose monitor which most people 
know a diabetic would use to monitor their blood sugar. When we 
first took a look at this, the Medicare fee schedule was 
allowing $114 to $211 for these. We sent our investigators into 
pharmacies across the country and found out we could buy them 
for about $50. A number of them even had rebates that would 
drive the price down further. The Medicare Program jumped on 
this, and the only method they had at that time was to change 
the rules for the fee schedule, and they did change it. It took 
about 2 years and reduced the Medicare reimbursement rate to 
$58.
    Chairman Thomas. Mr. Mangano, on that point, because you do 
have some products that are being identified by name, this in 
no way is to imply that any of these products are not capable 
of performing the service that their indicated, except perhaps 
for the bib and it may have some use, but it was the misbilling 
that is the problem, and the overbilling. So, I don't want 
anyone to assume that these products are not capable of doing 
what they claim to do. It is the billing process and the amount 
that's being paid for them that is of primary concern.
    Mr. Mangano. Absolutely correct. Any one of these devices 
could be useful. The rulemaking occurred and it was----
    Chairman Thomas. For something.
    Mr. Mangano. Yes. The rulemaking changed it to a $58 
reimbursement, and we think that will help a great deal. The 
Balanced Budget Act does give the Secretary authority now to 
reduce things that are inherently unreasonable. So, that 
authority could be used in the future to reduce some of these 
costs.
    The third item was incontinence supplies. This is another 
one of these meteoric rises in reimbursements for Medicare. It 
almost tripled in 4 years, up to $230 million. So, that 
captured our interest, and we wanted to go out and find out 
what was going on. These are devices for persons who have 
bladder or bowel control problems. This was the scam of all 
scams. Durable medical equipment suppliers would go largely to 
nursing homes and tell the nursing homeowners, we can take care 
of your patients' incontinence problems, and by the way, it 
isn't going to cost you anything, because we're going to bill 
Medicare directly. So, one of the schemes that they were doing 
was to bill for covered items not provided. They were supplying 
the adult diapers at about 35 cents a diaper and billing 
Medicare for what was called a female urinary collection pouch 
which costs about $7.38; so you can see the profit margin here 
was enormous.
    A diaper is never reimbursable in the Medicare Program. 
Medicare got their durable medical equipment regional carriers, 
working on this, and in 1 year, reduced the incontinence 
reimbursement by $100 million. It's absolutely fascinating.
    Let me mention one other thing, a lymphedema pump. This is 
for persons who have lymph nodes removed, and their arms and 
legs are swelling. In some cases, a lymphedema pump will help a 
great deal. I will give you some examples:
    In 1990, Medicare was reimbursing $6.3 million for these; 
by 1995 it was up to $118 million. What we found were two 
schemes. One, these pumps were being supplied when people 
really didn't need them, but even more important than that, 
lower-level $500 to $600 pumps were being supplied to the 
persons, but they were billing Medicare for $4,600--a 
tremendous scam. Since then, Medicare has taken care of that. 
The reimbursements in 1996 were under $20 million.
    I think the Balanced Budget Act helps a great deal with 
nursing homes, because now we have this consolidated billing. 
The durable medical equipment companies can't come in and 
individually work with patients and bill Medicare directly.
    Chairman Thomas. Any other comments?
    Mr. Mangano. There are other items up there--a TENS unit, 
that is, a transcutaneous nerve stimulator. This is a 
nonnarcotic, pain-relieving device. Once again, it has good 
reliability for certain people. Medicare required 
beneficiaries, though, to try it out for a trial period to see 
if it works, and then if it does, they would then purchase the 
item. Medicare was getting billed $450 for this. With our 
investigators going to Radio Shack, we were able to put 
together another one that resembled that for about $50. One-
third of the people that we looked at in our sample did not 
have that trial period, so we thought there was a gross number 
of TENS units being sold inappropriately.
    There are some other items there--wound care kits that were 
being provided to patients in their homes. There we found about 
two-thirds of the reimbursements were inappropriate. For 
example, Medicare was billed $5,800 for 1 inch tape over 6 
months for one patient. This tape, if you put it end to end, 
would have stretched 12.5 miles. Clearly, it was a fraudulent 
example of the way they wanted to do business.
    Chairman Thomas. Might have been an appropriate bill for an 
NFL football team.
    Mr. Mangano. Maybe, for the whole team.
    Chairman Thomas. Certainly, not a single individual at 
home. Well, and, of course, the problem is that the old system 
simply invited this, but the one statistic that I find just 
absolutely incredible is 95 percent false billing--just 
amazing.
    Mr. Owens indicated that the number of cases that they're 
going to initiate probably is going to drop because they're 
getting into more complex cases. My assumption is that the more 
complex cases perhaps would bring larger dollar amounts if 
they're more sophisticated, but it just seems to me that 
there's a whole lot of stuff that can be done that's normally 
under the heading of common sense and ordinary followup that 
could save enormous amounts of money as well. With $23 billion 
at stake, there are a whole lot of ways to get at it.
    What we did do is provide you, as you indicated, with a 
more stable funding source, which means if you're going to have 
a piece of that $5-plus billion between now and 2003, it might 
lend itself to more long-range planning. Could you just give us 
a flavor over where you think you might be looking in going 
over the next 2 to 5 years?
    Mr. Mangano. Well, you're absolutely right. This reliable 
funding source helps us a great deal. The health care industry 
itself is one that is going to occupy our time for a 
considerable number of years. We've been working together with 
the Health Care Financing Administration and the FBI to plan a 
number of investigations, audits and evaluations. We're doing 
more work this year in the hospital arena; we think there are a 
number of areas that need to be paid attention to there.
    Prior to about a year ago, the work that we were doing in 
hospitals had pretty much languished for a number of years and 
we're getting back into that area and quite heavily. We're 
going to be doing much more work in the managed care area as 
well, and physician services. So those will be the three areas 
I'd say were most involved.
    Chairman Thomas. Thank you very much.
    Ms. Ruiz, you mentioned Operation Restore Trust. I'd 
indicated earlier before we recessed on the votes that I'm 
hopeful we can initiate ``Operation Find and Bust'' of 
criminals who have been convicted but we aren't willing to go 
get them. I was looking at the flowchart and I do note that you 
are director of the program integrity group, but according to 
the HCFA chart, the program integrity group is under the Chief 
Finance Office, Office of Financial Management. Wouldn't you, 
if you were doing your job, and you discovered a number of 
these items as an integrity program, partially reflect on the 
performance of your chief financial officer and the department 
of financial management? I found oftentimes when people are out 
looking for problems, if they have a degree of independence to 
report to the actual head of the operation, for example, the 
administrator, that you sometimes get better results. This is a 
difficult question and so I don't want to put it on any kind of 
a personal basis, but do you think that now we've given you 
some new tools, that perhaps a degree of independence in some 
agencies might produce better results than the current 
structure?
    Ms. Ruiz. I think we actually have provided for that under 
the reorganization. What doesn't show up on that flowchart is a 
dotted line between my position and the Administrator of HCFA. 
I have the ability, and regularly exercise it, to talk directly 
with the Administrator and make known the problems that are 
identified and the issues that are going on. For a person in my 
position, it presents a challenge because there are a lot of 
people to keep in the loop in terms of communication. However, 
at the moment, it seems to be working.
    Chairman Thomas. I prefer solid lines to dotted lines. In 
the legislation that we passed, Congress asked for, by October 
1, an estimate from the Secretary of expected Medicare outlays 
for fiscal years 1998 through 2002 in terms of the home health 
services and of course the administration has suspended the 
creation of new home health care agencies. When are we going to 
get the work product?
    Ms. Ruiz. Yes, sir. I was just made aware this morning that 
this report has not yet arrived on your desk. It's my 
understanding that it has been prepared and we're in the stages 
of finalizing it. We expect to get it to you very shortly.
    Chairman Thomas. Dr. Scanlon outlined his concerns about 
HCFA's ability to perform. Given all the responsibility that 
you've been given, I'm disappointed to find out that some of 
the earlier hurdles that were placed in front of you for 
information that will allow us to make some at least 
monitoring, if not decisions, haven't been met. So, I hope we 
can take a look at what we asked for and that you set up some 
timeliness that allow us to get what we asked for----
    Ms. Ruiz. Yes, sir.
    Chairman Thomas [continuing]. In the timeframe that we 
asked for it.
    Let me stop there and turn to the gentleman from Louisiana 
if he has any--
    Mr. McCrery. Thank you, Mr. Chairman.
    Let me begin by saying how much I appreciate Mr. Mangano 
bringing to us today the hammers and toilet seats of HCFA. I 
hope the media will spend as much time highlighting the abuses 
of Medicare spending as they did Defense spending, and I hope 
the public is as outraged as I am, and you are, at the abuses 
that have taken place in this program.
    Mr. Owens, in your testimony, you state that the following 
health care industries are particularly susceptible to fraud 
and we've seen examples of some of this today: Laboratory 
billings, home health care, and durable medical equipment, 
prosthetics, orthotics, and supplies. How will the reforms 
addressing waste, fraud, and abuse included in both the HIPAA 
and the Balanced Budget Act, enhance the FBI's ability to 
combat the most egregious health care fraud in these particular 
industries?
    Mr. Owens. I think in two ways, Congressman. One, certainly 
the additional funding that was provided has enabled us to add 
a lot more agents on the street investigating these types of 
crimes, and as I indicated, we're attempting to go into the 
higher levels now and address the more egregious type of 
frauds. The other certainly is the new statutes that were 
provided to us to give us a particular health care statute 
which we can begin to employ, and I think that's going to be 
helpful to us. So, we should be able to benefit tremendously 
from that.
    Mr. McCrery. Good. I understand that the FBI and the OIG 
worked well together on the Gonzalez case and that this kind of 
collaboration is not uncommon. Can you elaborate, Mr. Owens, on 
the extent to which the FBI coordinates their investigations 
with other agencies, such as the OIG and HCFA, to ensure 
consistent interpretation of the law?
    Mr. Owens. Yes, at the headquarters level, we actually have 
an exchange program where we have a supervisory special agent 
from the FBI detailed to the Inspector General's Office, and 
conversely, they have one of their Deputy Assistant Inspector 
Generals detailed to the FBI, so that we can coordinate 
virtually any issue that arises. Throughout our field offices, 
there's a tremendously good working relationship. I'm not sure 
of the numbers, but I want to say, something like 41 of our 56 
field offices, we have either task forces or working groups 
established that include Inspector General representation, as 
well as U.S. Attorney's Office representatives, and in many 
instances, local investigators, people from Medicaid fraud 
control units, and so forth. This is a highly complex area and 
again, as we particularly get into the complex activities that 
are occurring, so we are committed to this type of a 
cooperative effort and we think it's essential.
    Mr. McCrery. Do you have any thoughts or suggestions on how 
coordination could be improved among the various agencies? 
Anything that we can do to help you with that?
    Mr. Owens. I think it's very good we're doing joint 
training now. For instance, we do rely on the expertise, the 
technical expertise, even of the HCFA representatives as well 
as people from HHS. We constantly look at that sort of thing 
and certainly we have the type of relationship, if new things 
develop, that we think can improve our efforts we attempt to 
work on it, and I think it's very good.
    Mr. McCrery. Dr. Scanlon, your agency's been making 
recommendations to the Congress for quite some time on fraud 
and abuse in the Medicare system; is that right?
    Mr. Scanlon. That's correct.
    Mr. McCrery. Were a lot of the recommendations that you've 
been making over the years finally included in the HIPAA 
legislation and in the Balanced Budget Act?
    Mr. Scanlon. They definitely were. The vast bulk of the 
recommendations that we've made are reflected in one part or 
another of either act. In addition, the Congress went somewhat 
further in terms of recommendations that we had made over the 
years to HCFA and to the department in terms of including them 
in the act, as well as certain of the act's unique provisions 
indicating both the priority and importance that you attach to 
using those tools and those mechanisms to attack fraud and 
abuse.
    Mr. McCrery. Were there any major areas of your 
recommendations that were not addressed in the legislation that 
we could look at?
    Mr. Scanlon. The recommendations that were either in the 
IG's Red Book of open recommendations or our open 
recommendation report that were not addressed directly involved 
Medicare as a secondary payor program, both reports on the 
effectiveness of those programs as well as the use of the State 
Medicaid Programs actions to try to recover funds from other 
third-party payors, and then another recommendation related to 
home health care. But relative to the recommendations we've 
been making, these are very small compared to sort of what 
you've accomplished. But we think, though, that what you've 
done is laid out a clear path that you would like for HCFA and 
the Medicare Program to follow to eliminate waste, fraud, and 
abuse, but the agency may need your assistance in the future as 
we discover sort of how well we can navigate that path to try 
to accomplish that task.
    Mr. McCrery [presiding]. Thank you, Dr. Scanlon.
    Mr. Ensign.
    Mr. Ensign. Thank you. I would like--I only have a couple 
minutes before we adjourn--one quick question and that is for 
Mr. Owens and Dr. Scanlon. That is, Medicaid and Medicare, two 
separate programs, but yet Federal dollars going to both of 
them. The example is on ambulances and there are abuses that 
happen and fraud that happens in Medicare with ambulances and 
the one thing that happens on Medicaid, from what I understand, 
is with ambulance transports a lot of Medicaid patients, a 
tremendous percentage at least what have been told to me 
anecdotal in my State, a lot of ambulance rides are taken to 
the hospital by Medicaid patients to get these prescriptions 
filled; that it's cheaper than a cab ride and Medicaid patients 
get, I think, three hospital rides a year, or whatever, and 
many of them take advantage of these hospital rides. You can 
talk to people just generally in the emergency rooms, the 
people who work there, and everyone that I've ever talked to 
confirms that the same thing happens. I've talked to ambulance 
drivers; I've talked to emergency room people, and they've 
confirmed this.
    FBI, GAO, do you get into the combination of Medicare/
Medicaid abuses together, because it's not just happening in 
one of the systems?
    Mr. Owens. I think from my perspective in the past that we 
worked several of the ambulance cases, and I can't give you 
specific details on that, but throughout the programs what 
we've seen is providers, or service providers or medical 
providers, when they're defrauding one program, they're 
defrauding others, even private insurance companies. So my 
suspicion is that those ambulance service are doing that sort 
of thing, but I could certainly check and get back to you if 
you'd like.
    Mr. Ensign. OK, please.
    [The following was subsequently received:]

Reply from Mr. Owens.

    It is the rule rather than the exception that those engaged 
in committing health care fraud do not discriminate against any 
particular health care plan. Most FBI investigations have 
multiple health care plans, such as Medicare and Medicaid, as 
victims of the fraud scheme.
    In the area of medical transportation fraud the schemes 
include billing for a higher reimbursement code, such as 
advanced life support vs. basic life support, inflated mileage, 
billing round-trip vs. one way, paying kickbacks for patient 
referrals, billing for supplies not used and billing for trips 
not made or for trips which were not medically necessary. 
Medicare will only cover medically necessary ambulance 
transportation from the residence to a hospital or skilled 
nursing facility when the use of other methods of 
transportation would endanger the patient's health. Medicaid 
will reimburse for a variety of reasons for transportation by 
taxi or other means of conveyance.
    ABC World News Tonight aired a segment on 3/6/95 regarding 
ambulance fraud in the San Diego, CA area. (Tape available upon 
request) The targeted ambulance company was defrauding all 
insurance carriers, including Medicare, Medicaid and the 
private insurance companies.
    The Medicare reimbursement system is very complex which 
only encourages fraud and abuse. The Medicaid reimbursement 
systems very with each state. In most instances, when an 
ambulance company is defrauding one, they are defrauding both. 
In those instances the FBI has been known to work jointly with 
the State Medicaid Fraud Control Units. With the new Health 
Insurance Portability and Accountability Act (HIPAA) 
regulations regarding coordination of Federal, State and local 
law enforcement programs to combat fraud and abuse, working 
together is becoming even more common.
      

                                

Reply from Mr. Scanlon.

    We have not done any recent work regarding that.
      

                                

    Mr. Scanlon. We're also very concerned about the fraud and 
abuse that occurs within the Medicaid Program as well as 
Medicare and are looking into especially the issues of dual 
eligibles. We haven't looked specifically at the question of 
ambulance services, but to the extent that Medicaid is 
operating fee-for-service programs within each State, similar 
to Medicare, it faces some of the same difficulties. We're 
talking about large populations of beneficiaries and large 
numbers of providers who can bill directly, and as a result, 
have many opportunities to take advantage of it.
    Mr. Ensign. This today may have been more focused on the 
providers, but we also have to look at the beneficiaries 
sometimes. Sometimes somebody is taking advantage of something 
that they can do under the system that's given to them, and 
that should not be allowed. So, I think we have to look for 
every way that we can cut out, and that's why I always like to 
call it waste, fraud, and abuse of the system because they all 
go together, and sometimes it's fraud, sometimes it's just 
abuse, or sometimes it's just waste from a bureaucracy.
    I just want to thank all of you, and give that some thought 
when you're looking into these type programs.
    Mr. McCrery. Thank you all very much for your testimony.
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    Mr. McCrery. The hearing's adjourned.
    [Whereupon, at 12:41 p.m., the hearing adjourned subject to 
the call of the Chair.]
    [Submissions for the record follow:]

Statement of Douglas R. Wilwerding, Chief Operating Officer, Accent 
Insurance Recovery Solutions, Omaha, Nebraska

    Mr. Chairman, I want to thank you and the Members of the 
Committee for the opportunity to testify today.
    My name is Doug Wilwerding. I am Chief Operating Officer of 
Accent Insurance Recovery Solutions headquartered in Omaha, 
Nebraska. Accent was founded in 1986 as a cost containment 
recovery firm. Accent recovers overpaid insurance claims on 
behalf of healthcare payors and administrators of healthcare 
insurance.
    First, I would like to praise this Committee for addressing 
the issues of waste, fraud and abuse in the Medicare program. 
Today, I will specifically address overpayments and the lethal 
condition in which it is placing the healthcare program for our 
senior citizens. Medicare overpayments represent a diversion of 
resources that are badly needed by aging beneficiaries who 
require quality care; they also lead to higher taxes and 
increased insurance premiums.
    ``$23 Billion Overpaid By Medicare'' read the headline of 
virtually every newspaper in the country earlier this summer as 
the Inspector General of HHS announced that the ``records of 
the Medicare agency and its contractors were in such disarray 
that they could not be thoroughly audited.'' The $23 billion is 
only for Fiscal Year 1996 and does not account for the 
additional billions unrecovered going back to the boundary of 
the federal statute of limitations. Nor will the figure stay at 
the same level going forward as demographics inexorably 
increase the load on Medicare.
    HCFA officials acknowledged that a substantial number of 
erroneous payments had been made. Contractors have mixed up 
Medicare's two trust funds; other contractors have confused 
amounts owed to the federal government with amounts owed by the 
federal government, and serious coding errors accounted for 
billions of dollars in overpaid claims. What is more, nearly 
everyone involved agrees that Medicare documentation 
requirements are confusing and convoluted.
    As ``fraud and abuse'' become everyday words to those of us 
in the healthcare indat is estimated as being responsible for a 
third of the $23 billion overpaid--the waste of unrecovered 
claims that have been overpaid through error.
    Overpayment recovery is no secret to healthcare--nor is it 
a newfound concept. It is an entire industry. Commercial 
healthcare payors have been either utilizing internal recovery 
units or contractors like my company, Accent, to recover their 
overpaid claims for years.
    The overpayment recovery industry is capable of returning 
between 50 and 85 cents on the dollar. Imagine what that would 
do for increased care for our seniors, as well as tax and 
premium relief based on an annual overpayment loss of at least 
$7 billion per year.
    What is the difference between private group health claims 
and Medicare claims? Virtually nothing. In fact, the 
similarities are startling. The same administrators that are 
paying Medicare claims are paying the rest of the country's 
claims. Those same companies are contracting with overpayment 
recovery vendors like Accent, to recover hundreds of millions 
of dollars in overpayments to return to the private sector 
employers. Leaders responsible for health benefits for private 
groups would never ignore the savings found in overpayment 
recovery. Neither should Medicare.
    HCFA currently provides no incentive for Medicare 
contractors to recover overpaid claims. Further, the current 
Medicare system lacks the expert systems, trained personnel and 
years of nationwide experience to systematically address this 
problem. Now, safeguards, criminal investigations and audits 
are being created to attempt to put a dent in fraud. Meanwhile, 
obvious cost savings are being ignored--those claims being paid 
in error. They are not fraudulent, just recoverable.
    HCFA and Medicare policymakers need to acknowledge and 
adopt the cost containment techniques used by the private 
sector. These techniques should not only be investigated, but 
also administered to assuage the continuing drainage of federal 
funds because of simple, yet recoverable, errors. We in the 
health insurance recovery industry stand ready and eager to 
assist this Committee in accomplishing this task.
    Thank you.
      

                                

                                   American College for    
                                    Advancement in Medicine
                                                   October 10, 1997

    For consideration by the Committee and for inclusion in the printed 
record of the hearing.
    As President of a rapidly growing medical society that is dedicated 
to research and teaching about innovative therapies, I am greatly 
concerned about the huge burden threatened by current legislation on 
those physicians who want to provide non-covered services to their 
patients.
    Either to require them not to treat any patients under Medicare or 
to impose wasteful, useless reporting requirement for services not 
covered is unacceptable.
    We as a country need to encourage innovative approaches to find 
dramatically improved, cost-effective treatments for chronic 
degenerative diseases. Otherwise, we will never escape from the medical 
quagmire that is sucking our health care system into bankruptcy.
    Further, the rights to choose the type of medical care one desires 
and to make contracts should be freedoms that are diligently preserved 
in our country. Loosing these would be a severe blow to American 
Society.
    Requiring that physicians who provide noncovered services to be 
excluded from Medicare will stifle innovation and substantially impede 
medical progress. Such restrictions would be a serious blow to medical 
freedom and the right to make contracts.

            Sincerely,
                                    L. Terry Chappell, M.D.
                                                          President

LTC/jla
      

                                

Statement by the American Hospital Association

    On behalf of the American Hospital Association (AHA) and 
its 5,000 member hospitals, health care systems, networks and 
other providers of care, and the patients we serve, we are 
pleased to submit this statement regarding health care waste, 
fraud, and abuse. In recent years, and particularly these past 
several months, the federal government has dramatically stepped 
up its efforts to crack down on what it calls health care fraud 
and abuse.
    Ridding the health care system of fraudulent operators 
should be applauded and a high priority for all. But we should 
not paint as fraud every billing error or misinterpretation of 
what are often vague and complicated regulations--regulations 
so ambiguous that they are often misunderstood by Medicare's 
own bureaucracy. The vast majority of health care services are 
provided ethically and appropriately. Those who intend to 
defraud the system are a small segment of the health care 
community. Our goal is to develop a system which prevents fraud 
in the first place, separates real fraud from mismanagement or 
error, and finally imposes penalties to deter those who might 
consider cheating the system from doing so.
    Hospitals and health systems are rooted in a tradition of 
ethics and caring. We are strongly opposed to fraud and abuse 
and we support efforts to prosecute those who knowingly and 
willfully take illegal actions. We deeply regret that the 
health care industry is tainted by a minority of bad apples. As 
a result, the people who Americans rely on to provide emergency 
and often life-saving health care are also being compelled to 
keep voluminous records that explain, defend and validate their 
actions. Both hospitals and health care professionals are being 
forced to divert valuable resources from patient care.
    As our institutions face unprecedented scrutiny from all 
segments of society--government, media, business community, and 
the public in general--it is vital that we continue to act in 
ways that strengthen both public confidence and the bonds we 
have forged with our patients and communities. This is 
particularly important as hospitals and health systems face 
challenges of complying with the many conflicting and ambiguous 
rules governing Medicare, Medicaid, and other federal programs. 
The challenge is made even more difficult for us when the 
government characterizes unintentional errors in billing as 
intentional fraud.

Prevention:

    The AHA board recently endorsed voluntary adoption of 
regulatory compliance programs by hospitals and health systems 
as a way to minimize errors in conforming to highly technical 
and complicated rules. The AHA urges all hospitals and health 
systems to develop and implement a strong, formal compliance 
program to ensure that regulations are accurately followed.
    The Department of Health and Human Services (HHS) Office of 
Inspector General (OIG) is in the process of developing model 
compliance plans for the health care field. The AHA submitted a 
draft hospital model compliance plan for the OIG's 
consideration last April. The OIG circulated its first draft in 
July. Hospitals expected to see the OIG issue a final 
compliance plan this fall. Unfortunately, it appears that they 
will not release a revised draft until 1998. Hospitals wanting 
to establish a compliance plan are anxiously awaiting its 
release.
    Nevertheless, responding to our members' strong desire to 
adopt compliance plans, the AHA is developing a Health Care 
Compliance Service. It will be available in early November. 
This service will help health care organizations develop a 
system that achieves the best possible compliance with 
government payment policies. We anticipate that compliance 
programs will move toward universalizing best practices and 
help enforcement agencies distinguish between error and true 
fraud. The law should recognize and provide incentives for 
institutions to adopt effective compliance plans. Hospitals who 
take the measures to implement compliance programs should be 
deemed protected from qui tam (whistle blower) challenges and 
have damages limited.
    However, even the most comprehensive compliance plan will 
not enable providers to fully comply with the letter of the 
law, if providers cannot obtain more timely and clear 
regulations from the Health Care Financing Administration 
(HCFA) and instructions from government contractors. Further 
payment system refot against fraud and abuse. The Balanced 
Budget Act of 1997 mandated the implementation of four new 
prospective payment systems by 2002. These reforms modify 
incentives making the system more efficient.

Enforcement:

    Congress vastly increased the number of tools enforcers may 
use to attack health care fraud and funding for investigations 
and other enforcement activities. In the largest-ever 
investigation of Medicare and Medicaid billing practices, the 
HHS has allocated more than $1 billion through 2002 to target 
every type of provider. The Federal Bureau of Investigation 
(FBI) has tripled the number of investigators dedicated to 
health care fraud enforcement since 1992, and the OIG has 
increased its staff by about 250 in one year's time. Indeed, 
the OIG and FBI indicated that they have yet to meet their 
staffing capacity as already funded by Congress. Additionally, 
these agencies can tap into approximately 55 new enforcement 
tools and 53 new payment safeguards under the Balanced Budget 
Act of 1997 and Health Insurance Protection and Affordability 
Act of 1996 to detect fraud. Before new remedies are considered 
by Congress, the current arsenal of laws should be tested.
    We do agree with some of the witnesses that the laws used 
to enforce health care fraud and abuse need to be reformed to 
reflect the current health care market. For example, we believe 
that the HHS should be required to use a materiality standard--
based on American Institute of Certified Public Accountants 
guidelines--when referring Medicare overpayment cases to the 
Department of Justice (DOJ) for prosecution.
    Many of the settlements arise from claim disputes involving 
less than one percent of an institution's total claims. In 
determining whether a pattern of incorrect claims submission 
exists, or if the hospital intended to defraud the government, 
the HHS secretary should be required to consider whether the 
total amount of the incorrect submissions by a health care 
provider is material to the total claims submitted by that 
provider. If the number of disputed claims is less than a 
certain percentage, then the issue should be resolved through 
direct repayment--with interest--to HHS. If the disputed claims 
exceed an acceptable number, the secretary would be free to 
refer the case to the DOJ for further investigation.
    The AHA is also looking at ways in which to address the use 
of the False Claims Act. The False Claims Act was first passed 
in the 1860s to outlaw certain practices in the trade of horses 
and manufacture of weapons for the government during the Civil 
War. Although it was revised in 1986, it remains a very broad 
law which allows the federal government to file suit against 
anyone submitting a false claim to the government for payment 
of goods and services. The statute does not require proof that 
the defendant actually intended to defraud the government or 
that the government actually suffered any loss.
    The DOJ, using the False Claims Act, is targeting 4,700 
hospitals nationwide for fraud and abuse. That means that 
virtually every hospital paid under the Medicare prospective 
payment system will be the target of a federal investigation. 
It simply defies logic to assume that every one of these 
institutions should be a Medicare fraud suspect. But, until the 
law differentiates between fraud and error, every institution 
will be liable for honest mistakes and misunderstandings.

Fraud vs. Error:

    It is commonly understood that there is waste in the health 
care system. But, waste--albeit unacceptable--is not, by 
definition, the intent to defraud. The OIG estimates that about 
$17.8 billion to $28.6 billion is inappropriately paid by 
Medicare each year. But, the OIG admits that, ``We do not know 
how much of these payments were due to fraud and abuse or just 
common errors.'' Billing errors are unacceptable, but they do 
not constitute intentional fraud.
    Medicare itself is a massive federal program that grows 
larger every year. The number of claims increases by about 3 
million each year. In 1995, hospitals and health systems 
submitted on average nearly 200,000 claims a day and provided 
care to a total 38.2 million individuals in the inpatient 
setting and 483.2 million outpatient visits. Hospitals have to 
comply with 3,000 pages of statutes and regulations with 14,277 
instructions to interpret the regulations. At the same time, 
hospitals, health systems, and other care givers are expected 
to comply with rules from 43 different Medicare Part A fiscal 
intermediaries, and 28 Medicare Part B carriers. Given the 
number of claims generated under so many different systems, it 
is not surprising that honest errors will be made.
    All components of the reimbursement stream--providers, 
patients, and intermediaries--should be responsible for 
controlling fraud and abuse in the system. Fiscal 
intermediaries (private organizations, usually an insurance 
company, that serves as an agent for HCFA) are on the front 
line of the Medicare reimbursement stream. Intermediaries make 
initial coverage determinations and handle the early stages of 
beneficiary appeals. The federal government pays fiscal 
intermediaries approximately $1.5 billion each year to process 
Medicare claims.
    In the FY 1996 Chief Financial Office Audit, the OIG 
estimated that $11.6 billion in claims payments, or about half 
of all ``fraud and abuse'' is actually billing error or 
incomplete claims. If all of these claims have been billed 
incorrectly by providers, they have been paid incorrectly by 
fiscal intermediaries. We believe more attention should be 
directed to HCFA and the performance of its contracted fiscal 
intermediaries who fail to instruct hospitals in a clear 
manner.
    Hospitals receive incomplete, inadequate, and often, 
conflicting information from their fiscal intermediaries. We 
found in the hospital lab unbundling case that fiscal 
intermediaries instructed hospitals to bill laboratory tests 
separately, because their computer system had the ability to 
group (or bundle) the payments together as required by HCFA. 
However, the Justice Department is now holding hospitals liable 
for not bundling tests and threatening penalties equal to 
triple the cost of each test plus $10,000 per claim in 
accordance with the False Claims Act. Here is a clear example 
of inconsistent standards and lack of accountability on the 
part of the intermediaries. Hospitals in several states are the 
subject of similar Catch-22 situations.
    The AHA, together with the Ohio Hospital Association, 
brought suit against the secretary for improperly and 
retroactively enforcing new coding and billing standards in 
connection with Medicare reimbursement for certain medical 
laboratory tests. In the opinion issued by U.S. District Court 
Judge Kathleen M. O'Malley in Ohio Hospital Association v. 
Shalala, she expressed the ``understandable concern over the 
secretary's and attorney general's investigative tactics [of 
hospitals].'' She stated that ``despite the very real 
possibility that the secretary's position regarding the 
hospitals'' billing practices is wrong, the practical barriers 
of challenging the secretary leave the hospitals with little 
choice and no bargaining room.'' She further criticized the 
government for its `heavy-handed tactics.' The case was 
dismissed on jurisdictional grounds and will be appealed.
    An example of retroactive application of reimbursement 
rules, inadequate notice by the government and their fiscal 
intermediaries and lack of instruction by the HHS is the 
physicians at teaching hospital (PATH) audits. In 1996, HCFA 
revised and clarified its guidelines on billing for teaching 
physician services. Teaching hospitals are now being audited as 
far back as 10 years and are held responsible for claims made 
while the reimbursement rules covered by the PATH audits were 
in many instances highly ambiguous. The HHS General Counsel 
acknowledged that such ambiguity existed and halted audits in 
several states after receiving letters of inquiry from members 
of Congress. However, the Department of Justice continues to 
issue subpoenas to teaching hospitals demanding years of 
records, raising questions of fundamental fairness.
    We must all share responsibility for reducing waste and 
billing errors in the system. The rules must be clear, and all 
parties involved in rulemaking, implementation, interpretation, 
and claims processing must be held accountable--not just 
providers, but regulators and fiscal intermediaries too.

Summary:

    Government resources should be used to attack true fraud. 
However, a continuous stream of investigations and recoveries 
using the False Claims Act ignores the underlying complexity 
and confusion of the Medicare payment system, defers important 
time and dollars away from patient care and erodes public 
confidence in their public institutions. We will do our part to 
improve provider compliance, but that's not enough. We must all 
share the responsibility of preventing errors from occurring in 
the first place through clear regulations and guidelines and 
their consistent application. We also need to make sure the 
laws enforcing these provisions do not label hospital billing 
error as fraud.
    Thank you for considering these comments and we are eager 
to work with the Committee toward eliminating fraud and abuse 
in the American health care system.
      

                                

Statement of American Preventive Medical Association

    Thank you for this opportunity to present our sentiments 
regarding the Health Insurance Portability and Accountability 
Act of 1996 (``HIPAA'') and, what we believe to be the 
precarious and potentially detrimental effects it may have on 
those medical practitioners who engage in alternative or 
complementary medical techniques. As the law stands now, there 
is the possibility that HIPAA could be employed by those who 
are ignorant of alternative medicine; and further, certain 
elements of HIPAA may actually encourage so-called ``quack 
busters'' to instigate a ``witch hunt'' of alternative 
medicine, one of the growing branches of medicine. This 
testimonial attempts to address the most threatening effects 
which HIPAA has prompted.
    The most important and controversial aspect of this new law 
is that concerning the federalization of health care crimes. 
This area is important because of the number of persons 
affected by it and the radical changes which it makes; it is 
controversial because the intentions behind its inception are 
dubious, and the effects of its imposition have the potential 
to seriously impact the practices and lives of every 
alternative medicine practitioner in the country. It is not 
reactionary or inciting to say that alternative medicine 
practitioners have much to fear from HIPAA. HIPAA portends 
serious legal implications for those physicians practicing 
alternative medicine; namely, federal criminalization for what 
is loosely defined as ``health care fraud.''
    The relevant portion of the newly enacted HIPAA is Title 
II, entitled ``Preventing Health Care Fraud and Abuse; 
Administrative Simplification.'' Title II of HIPAA is therein 
broken down into numerous sections; some of which have 
legitimate purposes, many of which are suspect.
    The first important area is section 201: ``Fraud and Abuse 
Control Program.'' This section provides for the establishment 
of a program to coordinate Federal, State and local law 
enforcement programs to control ``fraud and abuse with respect 
to health plans,'' and thereby any and all measures needed to 
reach that end, including ``investigations, audits, 
evaluations, and inspections relating to the delivery of and 
payment for health care in the United States.'' \1\ The 
important point to take from this section is that hereafter all 
types of supposed ``fraud'' or ``abuse'' are now under the 
microscope of federal investigators. This impliedly suggests 
that both staff and physicians themselves are at risk of FBI 
agents appearing at their homes to ``investigate'' federal 
crimes; this investigation may include rummaging through 
personal property to look for diagnoses and then comparing them 
with CPT codes, as well as other billing and insurance 
information. Whereas before the state would most likely make 
inquiries and arrange for hearings, the federal government now 
has authority to coordinate with state governments in the 
investigation; and since federal matters inevitably preempt 
state or local matters, the federal government will ultimately 
be the driving force behind these ``investigations,'' and their 
modus operandi may take an ominous manner.
---------------------------------------------------------------------------
    \1\ Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191 (H.R. 3103), Title II, Subtitle A, sections 
201(1)(A),(B).
---------------------------------------------------------------------------
    Another way in which HIPAA may be used in the alternative 
medicine hunt is through the expansion of the health care fraud 
and abuse data collection program. This program will expand the 
``data bank'' to include the reporting of final adverse actions 
against health care providers, suppliers, or practitioners.\2\ 
For the purposes of this section, a final adverse judgment 
includes criminal convictions, civil judgments, licensing and 
certification decisions, or ``any other negative action or 
finding by [a] Federal or State agency,'' including ``[a]ny 
other adjudicated actions or decisions the Secretary may 
establish by regulation.'' \3\ This leaves quite a bit of 
uncertainty in the determination of what type of information is 
entered into the data bank; for instance--an adverse Medicare 
audit might be includable. Furthermore, though HIPAA uses the 
term ``final,'' actions which may still be on appeal are also 
includable. This means that even though a physician may still 
be awaiting appeal of an action against him, the action is 
nonetheless entered into the data bank. It is unjust to 
penalize those who are still awaiting a further determination 
on an issue of this type. Also, the reporting of ``negative 
findings'' leaves far too much discretion to the government; 
only those negative findings that are part of a final, 
unappealable action should be reportable. To do otherwise 
allows for abuse and prejudice to run rampant; those who may 
harbor ill-will toward a physician can permanently scar their 
record by the reporting of ``negative findings'' which may or 
may not be legitimate.
---------------------------------------------------------------------------
    \2\ Title II, Subtitle C, section 221(a).
    \3\ Title II, Subtitle C, sections 221(g)(1)(A)(i)-(v).
---------------------------------------------------------------------------
    The question then becomes, who is it that is responsible to 
give this information to the data bank? Certainly, government 
agencies should be responsible for this type of reporting. In 
fact, in the past, government plans such as Medicare and 
Medicaid were under affirmative duties to do so. However, it is 
now also the duty of all ``health plans,'' meaning private 
companies, to also report such information.\4\ That is, 
whenever any health plan learns of any ``adverse action'' 
against a health care provider, it is its duty to report that 
to the government. This implies that anybody associated with a 
health plan can report a physician's actions to the government; 
and, in fact, has a duty to do so. While an alternative 
medicine physician may be doing nothing wrong, this provision 
allows for a much greater amount of discretion on the part of 
the reporting entity. For example, suppose a traditional 
medicine HMO decides to report that an alternative medicine 
practitioner is practicing an allegedly non-approved 
treatment-- though that physician may have done nothing 
illegal, that information will put up red flags as to that 
physician's practice, and the subject physician may be exposed 
to investigations or audits by federal agents, as well as have 
a State inquiry into that physician's legitimate practice.
---------------------------------------------------------------------------
    \4\ Title II, Subtitle C, section 221(b)(1). (``Health plans'' is 
defined by Title II, Subtitle A, sections 201(c)(1)-(3) as ``a plan or 
program that provides health benefits, whether directly, through 
insurance, or otherwise, and includes--(1) a policy of health 
insurance; (2) a contract of a service benefit organization; and (3) a 
membership agreement with a health maintenance organization or other 
prepaid health plan.'').
---------------------------------------------------------------------------
    In addition to being at risk of reporting from health plan 
entities, HIPAA actually gives monetary incentives for 
individuals to report to the government ``information on 
individuals and entities who are engaging in or who have 
engaged in acts or omissions which constitute grounds for the 
imposition of sanctions. . .or who have otherwise engaged in 
fraud or abuse against the Medicare program.'' \5\ This 
provision now allows any member of the general public to 
receive compensation for whistleblowing. Again, while 
alternative medicine practitioners are not doing anything 
illegal, this provision permits further exposure to an 
investigation; and the government now has a statutory duty to 
``look into'' the reports of individuals who, for all we know, 
may be traditional medicine doctors, or so-called ``quack-
busters.'' This additional attention will further complicate 
the lives of alternative medicine physicians, who will now have 
to use precious time and money defending and explaining their 
actions against a governmental investigation brought on because 
of individual reports, elicited for dually recognizable gains--
money and vengeance. Inevitably, a new market will emerge, 
filled with complainants who have nothing to lose; if, in fact, 
their complaint is successful, they are awarded a pecuniary 
gain, yet they have expended no expense in making the complaint 
since the one who files the complaint does not have to 
investigate or prosecute. Why not make as many complaints as 
possible, with the hope that even if a few are successful they 
may present some monetary gain, without having to put out any 
expense in return? This type of reward system needs some 
measure of regulation to curb the potential for abuse.
---------------------------------------------------------------------------
    \5\ Title II, Subtitle A, section 203(b)(1).
---------------------------------------------------------------------------
    Additionally, those who will be investigating and auditing 
these complaints are funded, in part, by a new Health Care 
Fraud and Abuse Account program. Its goal is to collect as much 
money from alleged violators of HIPAA. In fact, it is through 
the collection of fines and forfeitures which provide 
sustenance to the program. The organizational expenditures and 
salaries are dictated by the amount of collections. This plan 
creates a precarious conflict of interest. The program 
administration's objectivity will be greatly obscured through 
the lure of easy money. The cycle is vicious: the more 
prosecution, the more money made--the more money made, the more 
prosecution. All of this with no procedural safeguards against 
potential abuse.
    Furthermore, HIPAA has now ``federalized'' all health care 
program violations.\6\ This means that if in fact a violation 
took place against a state health program, it is now a federal 
violation, and the federal government can now become involved 
in the investigation.
---------------------------------------------------------------------------
    \6\ Title II, Subtitle A, section 204(a).
---------------------------------------------------------------------------
    The issues examined above only detail what the possible 
effects are of the underlying mechanism for identifying 
violators--that is, how problems will be created for 
alternative medicine from only the procedures which have been 
implemented to catch ``fraud and abuse'' perpetrators. However, 
the actual substantive laws which are newly created under HIPAA 
have as many potential problems as the infrastructure 
implemented to effectuate them. These new violations, and the 
corresponding penalties, drive a chill through all alternative 
medicine practitioners.
    The most prominent of the new federal health care offenses 
is that of health care fraud, defined as ``knowingly and 
wilfully'' executing or attempting to execute a plan or scheme:
    (1) to defraud any health care benefit program; or
    (2) to obtain, by means of false or fraudulent pretenses, 
representations, or promises, any of the money or property 
owned by, or under the custody or control of, any health care 
benefit program, in connection with the delivery of or payment 
for health care benefits, items, or services.\7\
---------------------------------------------------------------------------
    \7\ Title II, Subtitle E, sections 242(a)(1).
---------------------------------------------------------------------------
    These crimes are punishable by fines and up to ten (10) 
years in prison.
    The reason alternative medicine practitioners worry is 
derived from an examination of another statute which defines 
what courts may attempt to use to determine what a new type of 
fraud is.
    Under HIPAA, civil penalties may be assessed against any 
person who:
    [E]ngages in a pattern or practice of presenting or causing 
to be presented a claim for an item or service that is based on 
a [CPT] code that the person knows or should know will result 
in greater payment to the person than the code the person knows 
or should know is applicable to the item or service actually 
provided[.] \8\
---------------------------------------------------------------------------
    \8\ Title II, Subtitle D, section 231(e)(1).
---------------------------------------------------------------------------
    Furthermore, penalties may be assessed against any person 
who submits a claim which is for ``a pattern of medical or 
other items or services that a person knows or should know are 
not medically necessary'' (emphasis added).
    This one line addition which HIPAA mandates may unleash a 
flood of litigation. Alternative medicine practitioners may 
have immediate fines and penalties assessed against them 
because, under HIPAA, many will state that their treatments are 
not ``medically necessary''--a term which is not defined in 
HIPAA, and which even the Social Security Act has never 
specifically outlined. Until the government puts into place 
some scheme of approved and medically necessary treatments 
verses those that are non-medically necessary, there is no 
standard with which to apply equally. This in turn hurts both 
physicians and patients. Physicians will have to guess at what 
treatments they may use, in the hope that they do not violate 
HIPAA. Meanwhile, those patients who may wish novel or 
experimental treatments are at a loss because physicians will 
be unlikely to treat them for fear of inducing liability. 
Furthermore, the price that physicians will have to pay, both 
in time and expense, hurts their patients. The cost of 
defending potential numerous actions will be passed on to their 
patients; either through higher costs or fewer treating 
physicians.
    Further, if this standard is accepted by courts as a 
``fraudulent'' activity, it would immediately subject 
practitioners to criminal penalties for health care fraud. That 
is, if courts were to conclude that this type of activity, that 
is--submitting claims for non-``medically necessary'' 
treatments, is fraudulent, then the practitioner could be 
fined, have his personal property forfeited \9\, and could go 
to jail for ten (10) years.
---------------------------------------------------------------------------
    \9\ Title II, Subtitle E, section 249(a).
---------------------------------------------------------------------------
    The idea that courts could adopt the civil penalty standard 
to the criminal definition of ``fraud'' is not just a paranoid 
delusion; especially if there are hundreds of traditional 
medicine ``quack busters'' jamming the government's phone lines 
with reports of the fraudulent activity of alternative medicine 
practitioners who are submitting claims for non-``medically 
necessary'' treatments.
    There are numerous problems which HIPAA creates for those 
medical practitioners that specialize in alternative medicine. 
It is necessary for action to be taken in order to clarify and 
delineate specific language which may be employed in the 
activation of HIPAA, so that this new law is not abused by 
those with anti-alternative agendas, who may attempt to gain 
personal reward from the destruction of legitimate alternative 
medical practitioners.
    Apart from inducing fear in the alternative medicine 
community, HIPAA recreates George Orwell's ``1984.'' Everyone 
is against fraud but you cannot find it under every rock. This 
bill creates a negative atmosphere for all physicians.
      

                                

Statement of Citizens Against Government Waste

               Medicare Fraud: The Symptoms and the Cure

                           Executive Summary

    Citizens Against Government Waste's (CAGW) 1995 Medicare 
Fraud: Tales From the Gypped exposed and detailed many avenues 
of Medicare fraud. Since then, numerous hearings have been 
held, and legislation, the Health Insurance Portability and 
Accountability Act (HIPAA), was passed in 1996 to further 
expose and punish those responsible for gaming the system by 
giving the Department of Health and Human Services (HHS) 
Inspector General's (IG) office additional resources to 
aggressively combat Medicare fraud. CAGW's new report, Medicare 
Fraud: The Symptoms and the Cure, not only documents new and 
unsavory examples of fraud and abuse, but offers long-term 
solutions to improve the Medicare system itself.
    The report addresses major questions surrounding Medicare, 
including: Who's at fault for the waste, fraud, and abuse--the 
system itself, those who use it, or both? Who are the real 
victims--the taxpayers, the seniors who rely on Medicare, or 
those who are expecting to draw down benefits in the future? 
What is the best way to cure Medicare's afflictions in the long 
run? Should the current course of treatment be continued; i.e., 
attacking fraud, reducing payments to hospitals and doctors, 
and marginally increasing choices for seniors in Medicare 
services? Or, is the country ready to embrace more innovative 
approaches that will allow seniors to regain control of their 
healthcare choices, rather than deferring to third parties and 
the federal government?
    This report identifies dozens of examples of waste, fraud, 
and abuse, which can be characterized as: civil penalties, 
criminal penalties, kickbacks, home healthcare, nursing home 
fraud, laboratory fraud, durable medical equipment fraud, 
hospital fraud, and program exclusions. These examples are 
further graphic proof that, as long as funds flow generously 
and indiscriminately from this impersonal and nebulous source 
called the government, Medicare will continue to be plagued by 
scam artists and crooks, as well as garden variety bureaucratic 
snafus and misunderstandings.
    In 1995, HHS IG June Gibbs Brown estimated that up to $17 
billion, or 10 percent of Medicare funds, were lost each year 
because of waste, fraud, abuse and mismanagement.\1\ In 1996, 
following the first comprehensive audit of Medicare since its 
inception 32 years ago, the IG was forced to revise that 
staggering figure upward, estimating that the true losses due 
to fraud, waste, and abuse were closer to $23.2 billion a year. 
That is $63 million per day, or about 14 percent of total 
program costs, in net overpayments by Medicare in fiscal year 
1996.\2\ Almost half (46 percent) of the $23 billion was the 
result of insufficient or absent documentation. The IG admitted 
that her staff was unable to determine exactly how many of the 
improper payments occurred as a result of outright fraud and 
how many were simply honest human errors.\3\
---------------------------------------------------------------------------
    \1\ Congressional Quarterly, Congressional Monitor, August 1, 1995, 
p. 7.
    \2\ Department of Health and Human Services (HHS), Office of the 
Inspector General (OIG), Report on the Financial Audit of Health Care 
Financing Administration for fiscal year 1996 (HCFA Financial Audit), 
July 1997, p. 5.
    \3\ June Gibbs Brown, Inspector General, Department of HHS, Audit 
of HCFA Financial Statements--Testimony before House Committee on Ways 
and Means, Subcommittee on Health, June 17, 1997.
---------------------------------------------------------------------------
    Recent high-profile Medicare investigations indicate that 
the system may be as much, if not more, to blame as healthcare 
providers. While there are certainly plenty of unscrupulous 
individuals bilking Medicare--and the examples offered in this 
report will rightly outrage the public--there are genuine 
disagreements between the Health Care Financing Administration 
(HCFA) and providers, and a significant number of these 
discrepancies grow directly out of misinterpretation of vague 
and sometimes conflicting HCFA guidelines.
    HCFA has admitted that ``the best hospitals can do is to be 
paid for their costs of furnishing services; they can also be 
paid less than costs, but they cannot make a profit even if 
they are extremely efficient.'' \4\ This no-win situation 
naturally drives Medicare providers to seek the highest 
possible reimbursements and encourages even the most law-
abiding among them to stretch the rules as far as possible. 
Some providers conjure up ever more creative techniques to 
fraudulently squeeze out additional dollars. Further, 
Medicare's price control system is ineffective and may reduce 
the quality of healthcare services available to beneficiaries. 
In fact, the Balanced Budget Act of 1997, with its short-term 
``fix'' of further lowering reimbursement rates for providers, 
will only exacerbate this problem.
---------------------------------------------------------------------------
    \4\ Susan Horn and Robert Goldberg, ``A Sickly Approach to 
Medicare,'' The Washington Post, July 1994.
---------------------------------------------------------------------------
    This helps explain why attacking fraud alone, although a 
laudable goal and the government's only bulwark against the 
appalling abuses of the system, will never solve Medicare's 
problems entirely. Medicare needs much more than a vigilant IG 
to ensure its long-term viability.
    Seniors are not the only players in the Medicare debate. 
Legislators, law enforcement officials, lawyers, healthcare 
providers, healthcare consultants, accountants, and bureaucrats 
all have a stake in the outcome. Ironically, two groups--
members of Congress and HCFA employees--wield a 
disproportionate percentage of power over which healthcare 
procedures will be covered by Medicare and at what cost, 
despite the fact that few of them are healthcare professionals.
    Their decisions are heavily influenced by the well-
organized and well-financed lobbying efforts of hundreds of 
special interest groups. Members of Congress are under a 
constant barrage from groups demanding changes to the Medicare 
laws that address their special causes, diseases, or 
constituencies. Expensive legal advisors must, in turn, be 
retained by hospitals, healthcare professional associations, 
trade groups and other organizations to interpret the impact of 
these new laws on their ability to deliver quality healthcare 
to their patients. And finally, accountants, consultants and 
healthcare insurers must also pore over the 45,000 pages of 
convoluted Medicare regulations to determine which medical 
procedures they can bill for and for how much.
    Medicare not only encourages providers to stretch the 
limits of reimbursement to recapture as many of their costs as 
possible, it also offers patients little incentive to question 
excessive costs or report overpayments. Because there are no 
rewards for delivering high quality healthcare or improving 
efficiency, there are no ``up front'' incentives for providers 
to control costs. Instead, there are ``back-end'' 
investigations and billing disputes, well after the money has 
disappeared, and lack of attention to the root causes of the 
problems. In this insidious cycle, more dollars are 
reprogrammed and committed to investigations, and regulations 
are constantly made more complex and vulnerable to 
misinterpretation, abuse, and litigation. This, in turn, leads 
to still more insistent calls for crackdowns and 
investigations.
    These problems will multiply as technology and advances in 
medicine continue to outpace the government's ability to write 
and enforce new rules and regulations. Many of the newest and 
most innovative medical techniques are not even recognized or 
covered by Medicare, which means that seniors do not have 
access to all of the same high quality treatments under 
Medicare as patients under the age of 65. Medicare trails the 
private sector in using both managed care and healthcare 
outcomes to control unnecessary medical spending. The only way 
to control expenditures in this type of entitlement program is 
to specify in advance exactly what price the government will 
pay for each and every service rendered. A lumbering, 
monopolistic bureaucracy like Medicare is simply not nimble 
enough to keep up with a rapidly evolving industry that offers 
many different types of services, products, and treatments.
    Real change in Medicare will only come about when the power 
to make healthcare decisions is taken away from politicians, 
bureaucrats, lawyers, consultants, and accountants, and placed 
into the hands of those who depend upon the program. The 
Balanced Budget Act of 1997 was a good start in providing 
seniors with more choices and more control. But it does not 
address the core problem: Medicare will begin to slide into 
bankruptcy in 10 years, as the baby boomers begin flooding the 
program. The commission created by the Balanced Budget Act must 
confront this immediate crisis head-on by taking bold steps. 
CAGW concurs with U.S. Rep. Pete Stark (D-Calif.), who recently 
wrote ``Medicare beneficiaries deserve the best we can offer--
quality care at an affordable price with strong protections 
against unscrupulous providers.'' \5\
---------------------------------------------------------------------------
    \5\ Congressman Pete Stark, ``Letter to the Editor,'' The Wall 
Street Journal, September 11, 1997.
---------------------------------------------------------------------------

              Waste, Fraud and Abuse--The Continuing Saga

    Medicare was created in 1965 to provide healthcare 
insurance benefits to the aged and other eligible populations 
who might not otherwise be able to afford decent health 
insurance coverage in the event of injury or illness.
    Medicare Part A provides hospital and other institutional 
coverage for eligible disabled persons and persons 65 or older. 
This coverage is premium-free and is financed through mandatory 
payroll taxes. Part A is commonly referred to as the hospital 
insurance program.
    Medicare Part B, Supplementary Medical Insurance (SMI), is 
an optional program that covers most of the costs of medically 
necessary physician and other services. All persons 65 years or 
older can choose to enroll in the SMI program by paying a 
monthly premium. Even though this is a voluntary program, non-
participating taxpayers finance approximately 75 percent of the 
spending.
    HCFA administers Medicare through more than 70 private 
claims processing contractors (who are really in control of the 
system). Healthcare providers and beneficiaries are paid by 
these companies, which also receive tax dollars to cover 
administrative expenses (approximately $1.2 billion in 1996). 
According to the General Accounting Office (GAO), HCFA 
processed more than 800 million claims in 1996.\6\ The sheer 
volume of the claims processed allows incidents like the 
following to occur:
---------------------------------------------------------------------------
    \6\ GAO, High Risk Series: Medicare (GAO/HR-97-10), February, 1997, 
p. 15.
---------------------------------------------------------------------------
     After unsuccessfully pleading insanity (claiming 
psychotic delusions caused him to overbill), a Boston, 
Massachusetts, psychiatrist was sentenced to 46 months 
imprisonment and fined $1 million for Medicare and private 
insurer fraud, obstructing justice, and intimidating a witness. 
The psychiatrist attempted to get patients to lie for him and 
even threatened to make public the medical records of a family 
member of one of the patients if she didn't lie to the 
government. The witness refused to be intimidated and testified 
against him.\7\
---------------------------------------------------------------------------
    \7\ Department of Health and Human Services (HHS), Office of 
Inspector General (OIG), Semiannual Report, April 1, 1996-September 30, 
1996, p. 15.
---------------------------------------------------------------------------
    In 1995, the GAO warned that, ``Medicare pays more claims 
with less scrutiny than at any other time over the past five 
years.''\8\ Two years later the situation is not much better:
---------------------------------------------------------------------------
    \8\ GAO, High Risk Series: Medicare Claims, February, 1995, p. 7.
---------------------------------------------------------------------------
    [P]roblems in funding program safeguards and HCFA's limited 
oversight of contractors continue to contribute to fee-for-
service program losses. While HCFA expects a major system 
acquisition project to reduce certain weaknesses, the project 
itself has several risks that may keep HCFA from attaining its 
goals. In addition, the managed care program suffers from 
excessive payment rates to HMOs and weak HCFA oversight of the 
HMOs it contracts with.\9\
---------------------------------------------------------------------------
    \9\ GAO, High Risk Series: Medicare, February, 1997, p. 8.
---------------------------------------------------------------------------
    The 1996 HHS audit identified HCFA's four internal control 
weaknesses that hinder Medicare from tracking its money: there 
is no process to estimate a national error rate for improper 
payments; no acceptable method for estimating Medicare accounts 
payable; no integrated financial reporting system to properly 
account for Medicare accounts receivable or other financial 
management and reporting issues; and deficient electronic data 
processing and controls relating to security access, system 
application development, and service continuity.\10\
---------------------------------------------------------------------------
    \10\ Department of HHS, OIG, HCFA Financial Audit 1996, July 1997, 
p. 2.
---------------------------------------------------------------------------
    The anti-fraud provisions passed by Congress in fiscal year 
1996 made significant changes in the oversight of Medicare 
fraud. HIPAA (also referred to as Kassebaum-Kennedy, after its 
Senate co-sponsors) contained increased funding for IG 
activities, along with provisions that will enable the 
government to recoup more of its losses. The Balanced Budget 
Act also contained measures to stave off Medicare's financial 
failure until 2007. Congress chose to carve out the bulk of the 
savings over the next five years, $115 billion, by once again 
reducing payments to doctors, hospitals, and other healthcare 
providers.

                      Combating Health Care Fraud

    Since 1995, the HHS IG's office has stepped up its attacks 
on Medicare fraud. That year, the department established 
Operation Restore Trust in California, Florida, Illinois, New 
York, and Texas, to target areas of waste, fraud, and abuse. 
HHS joined forces with multiple federal and state agencies to 
examine the activities of home healthcare agencies, nursing 
homes, and durable medical equipment suppliers. According to 
Michael Mangano, HHS's principal deputy inspector general, the 
IG eventually expects to recover about $1.1 billion through 
criminal cases and civil settlements.\11\ This is an enormous 
increase over last year's collections, which totaled $205 
million (the IG collected $69.8 million five years ago). That 
figure does not include any collections that may accrue as a 
result of the IG's ongoing investigation of Columbia/HCA, the 
largest tax-paying hospital chain in the country.\12\
---------------------------------------------------------------------------
    \11\ David S. Hilzenrath, ``Bold Scams Bilk Medicare of Billions,'' 
The Washington Post, August 8, 1997.
    \12\ Greg Jaffe and Eva Rodriguez, ``In Hospital Probes, a New 
Focus on Bottom Line,'' The Wall Street Journal, September 12, 1997.
---------------------------------------------------------------------------
    In May 1997, the IG's office reported that for every dollar 
spent on Operation Restore Trust, $23 was recovered. It 
identified more than $187.5 million in fines, recoveries, 
settlements, audit disallowances, and civil monetary penalties. 
There are still hundreds of pending cases. Because of the 
program's success, HIPAA will double the IG's appropriation 
over the next seven years and the operation will be expanded to 
include specific targets in all 50 states. Eventually, it will 
be applied in all 50 states and throughout all Medicare program 
areas.
    Tracking and punishing fraud, of course, are vital parts of 
administering any government program. And, as a result of some 
of new laws governing Medicare, they have also become more 
lucrative. But there are risks. Recent congressional hearings 
on the Internal Revenue Service (IRS) should serve as a 
cautionary tale about what can happen when federal law 
enforcement officials exceed their authority in response to 
financial or other incentives.
    According to The Wall Street Journal, almost all 187 
hospitals in Ohio recently received letters from federal 
officials accusing them of overbilling Medicare for blood and 
urinalysis tests. The letters then offered settlements in lieu 
of prosecution.\13\ Investigations and audits must not become 
institutionalized government shakedowns.
---------------------------------------------------------------------------
    \13\ Idem.
---------------------------------------------------------------------------

                    Civil Penalties for False Claims

    Congress enacted the Civil Monetary Penalties Act to 
empower the IG to impose penalties and assessments against 
healthcare providers who submit false or improper claims to 
Medicare and state healthcare programs. The law allows the 
government to try to recover money lost through illegitimate 
claims and to impose additional penalties, if necessary. The IG 
may now also direct companies found to have engaged in improper 
billing or other transgressions to enter a corporate integrity 
program and submit to increased scrutiny in order to remain in 
Medicare.
    The IG is currently monitoring 70 such corporate integrity 
programs, from small physician offices to large laboratory 
corporations. Most supervision lasts for 5 years and compels 
active participation by the provider to certify that it is 
operating within HCFA regulations and the parameters 
established by the plan. Failure to comply may result in 
lengthy, or permanent, exclusion from participation in 
Medicare.
    The following are recent examples of civil cases and their 
settlements:
     A Massachusetts laboratory agreed to pay $6.67 
million to settle charges that it overbilled Medicare. 
According to the IG, the laboratory routinely billed Medicare 
for a serum iron test whenever a physician requested a standard 
panel of tests, even though the iron test was not specifically 
requested. The laboratory improperly collected more than $3.35 
million from Medicare for the unnecessary tests.\14\
---------------------------------------------------------------------------
    \14\ HHS, OIG, Semiannual Report, April 1, 1996-September 30, 1996, 
p. 12.
---------------------------------------------------------------------------
     A New Jersey corporation performing X-ray and 
electrocardiographic services used subsidiaries in 
Massachusetts and Pennsylvania to illegally bill in regions 
where reimbursement rates were higher. The corporation agreed 
to pay $2.1 million to settle the case, and the president and 
vice president of one subsidiary pled guilty for their 
involvement in the scheme.\15\
---------------------------------------------------------------------------
    \15\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 14.
---------------------------------------------------------------------------
     After submitting false claims to the Medicare and 
Medicaid programs for experimental cardiac devices that were 
not FDA-approved, a California hospital paid nearly $1.3 
million to resolve its civil liability.\16\
---------------------------------------------------------------------------
    \16\ Idem.
---------------------------------------------------------------------------
     In early 1997, four Georgia healthcare providers 
agreed to pay $2 million to settle allegations of Medicare 
fraud. According to the Justice Department, California-based 
Apria Healthcare Group Inc. used sham consulting contracts to 
give kickbacks to physicians in exchange for referrals of 
Medicare patients. Apria, one of the nation's largest suppliers 
of medical equipment and oxygen, agreed to pay $1.65 million. 
The other companies involved were Georgia Lung Associates, 
which agreed to pay $346,000; Pasa del Norte Health Foundation 
of El Paso, Texas, which agreed to pay $20,000; and Physicians 
Pharmacy Inc. of Georgia, which agreed to pay $4,000.\17\
---------------------------------------------------------------------------
    \17\ Bill Rankin, ``Medicare Fraud Case Settled for $2 million,'' 
Atlanta Journal-Constitution, February 6, 1997.
---------------------------------------------------------------------------
     Between 1991 and 1993, a Philadelphia psychiatrist 
and his wife filed numerous false Medicare and Medicaid claims 
by billing for therapy that was not provided, for unsupervised 
treatments, and for more therapy units than were provided. The 
psychiatrist attempted to destroy records when federal 
investigators searched his office. The couple agreed to pay a 
$500,000 settlement and entered a corporate integrity 
program.\18\
---------------------------------------------------------------------------
    \18\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 15.
---------------------------------------------------------------------------
     A New Jersey medical supply company paid $330,000 
to settle charges that it billed Medicare for expensive, 
custom-fitted ``spinal body jackets'' that were actually little 
more than seat cushions provided to nursing home residents.\19\
---------------------------------------------------------------------------
    \19\ Alice Ann Love, ``Medicare Crackdown to Target 12 New 
States,'' The Orange County Register, May 21, 1997.
---------------------------------------------------------------------------
     Pennsylvania-based Mediq Inc. and its subsidiary, 
ATS Inc., agreed to a settlement in which ATS and its president 
pled guilty to concealing a felony and ATS agreed to pay $2.1 
million in fines. The settlement was the result of a 
whistleblower lawsuit, which exposed illegal cross-billing of 
portable EKGs and portable X-rays. ATS billed services 
performed in one carrier's jurisdiction to a carrier in another 
jurisdiction where reimbursement rates were higher.\20\
---------------------------------------------------------------------------
    \20\ U.S. Department of Justice, Department of Justice Health Care 
Fraud Report: Fiscal Years 1995-1996, p. 25.
---------------------------------------------------------------------------

                           Criminal Penalties

    Medicare fraud is often tried as a criminal offense, and a 
conviction can lead to jail time for the perpetrators. Recent 
criminal convictions for Medicare fraud include the following 
cases:
     A former Colorado heart surgeon was convicted of 
Medicare and Medicaid fraud for billing for heart bypasses he 
never performed. The surgeon was sentenced to 30 days' 
incarceration, 3 years' probation, and 200 hours of community 
service. Total restitution, fines, and damages recovered 
totaled $30,000.\21\
---------------------------------------------------------------------------
    \21\ HHS, OIG, Semiannual Report, April 1, 1996-September 30, 1996, 
p. 16.
---------------------------------------------------------------------------
     An Oregon opthamologist pled guilty and was 
sentenced to 2 years' probation and fined $10,370 for 
submitting false claims for medically unnecessary cataract 
surgeries. Though his patients had near-perfect vision prior to 
surgery, the opthamologist gave the hospital false information 
about the patients' true visual abilities. He subsequently 
surrendered his medical license and declared bankruptcy.\22\
---------------------------------------------------------------------------
    \22\ Idem.
---------------------------------------------------------------------------
    The owner and chief executive officer of Georgia's largest 
home healthcare agency pled guilty to charging Medicare and 
Medicaid for campaign contributions, phantom employees, and 
personal vacations. She was sentenced to 33 months in prison, 
followed by 3 years' supervised work release, including 200 
hours of community service. She was fined $25 million and 
ordered to pay $11.5 million in restitution. The company's 
former vice president was fined $75,000, had to repay $710,000, 
and was sentenced to 151 months incarceration followed by 3 
years' probation. The agency's former risk manager was ordered 
to repay $710,000 and received 97 months' incarceration and 3 
subsequent years of probation.\23\
---------------------------------------------------------------------------
    \23\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 19.
---------------------------------------------------------------------------
     A joint audit and investigation revealed that a 
California nursing home owner had billed Medicare for 
nonexistent medical supplies and filed false cost reports. The 
former owner was sentenced to more than 11 years in prison and 
was ordered to pay more than $3.5 million in fines, 
restitution, and special assessments. Two former Medicare 
carriers and two former employees also pled guilty and were 
sentenced after they testified against the owner.\24\
---------------------------------------------------------------------------
    \24\ Ibid., pp. 19-20.
---------------------------------------------------------------------------
     A laboratory clerk and her husband (the president 
of the laboratory) used a fraudulent passport to set up a 
laboratory. The clerk and her husband submitted more than 700 
claims for 416 beneficiaries (many of whom were already dead) 
and collected $330,000 over a 60-day period. One of the 
``referring physicians'' had been dead for 2 years. The wife 
was sentenced in Florida to 9 months in prison, 2 years' 
supervised release, and ordered to pay a $50 special 
assessment. The husband was arrested after trying to withdraw 
$200,000 from the corporate account and was sentenced to 10 
months in prison, 3 years probation, and ordered to make 
restitution of $115,800.\25\
---------------------------------------------------------------------------
    \25\ Ibid., p. 21.
---------------------------------------------------------------------------
     After pleading guilty to submitting false claims 
for complex procedures that he did not perform, a California 
urologist was sentenced to 24 months in prison. Before the 
sentencing, he agreed to pay $440,000 in damages and penalties. 
The urologist will be barred from participation in Medicare for 
10 years due to the egregious nature of his crimes. For 
example, he performed invasive procedures that he admitted were 
not medically necessary. He has also surrendered his medical 
license.\26\
---------------------------------------------------------------------------
    \26\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
pp. 21-22.
---------------------------------------------------------------------------
     While employed by a doctor as an office manager, a 
Texas woman submitted false claims for a personal friend, even 
though no services were performed. The two split the proceeds 
when the checks came in. The office manager was sentenced to a 
year and a day in prison and ordered to make restitution of 
$41,500. The friend was sentenced to one year probation and 
fined $2,550.\27\
---------------------------------------------------------------------------
    \27\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
p. 23.
---------------------------------------------------------------------------
     A former IRS mail clerk was sentenced to five 
months in prison and five months' home confinement with 
electronic monitoring, followed by one year supervised release, 
for impersonating a federal officer, intimidating a witness, 
and obstructing a Medicare fraud investigation. Before becoming 
an IRS employee, he had worked for an ambulance company that 
was being investigated for fraudulent Medicare billing. During 
that investigation, several company employees revealed that the 
man had claimed to be an IRS agent and had threatened at least 
one of them with a tax audit if he cooperated with 
authorities.\28\
---------------------------------------------------------------------------
    \28\ Idem.
---------------------------------------------------------------------------
     A psychologist in Pennsylvania was sentenced to 6 
months' home detention, 12 months' probation, and 300 hours of 
community service for mail fraud. Over a 4-year period, she 
billed Medicare for more than 700 services that were never 
provided. The Medicare loss was estimated at $113,000.\29\
---------------------------------------------------------------------------
    \29\ Idem.
---------------------------------------------------------------------------
     Blake Alan Wimpee was sentenced to 18 months in 
prison for submitting false claims to Medicare. Between 1994 
and 1996, Mr. Wimpee billed Medicare for 28 power wheelchairs 
when he actually provided electric scooters instead. As a 
result, Medicare overpaid the San Angelo, Texas businessman by 
more than $82,000.\30\
---------------------------------------------------------------------------
    \30\ Associated Press, ``Medicare Supplier Gets Prison Time for 
Fraud,'' San Antonio Express-News, June 8, 1997.
---------------------------------------------------------------------------
     In 1996, Ronald W. Nemeroff pled guilty in U.S. 
District Court in Newark, New Jersey, to paying kickbacks of 
$36,000 to get $145,000 worth of Medicare-funded orders for 
equipment.\31\
---------------------------------------------------------------------------
    \31\ Jerry DeMarco, ``Guilty Plea in Kickback Scheme,'' The Record, 
September 25, 1996.
---------------------------------------------------------------------------

                               Kickbacks

    Many businesses use referrals as an integral part of their 
day-to-day operations to meet customer needs and provide 
specialized medical services that are not part of their 
expertise. The healthcare system is especially dependent on 
referrals because there are so many medical specialty areas. A 
referral becomes a kickback when patients are referred in 
exchange for anything of value. Both parties, the giver and the 
receiver, share culpability under the law. Medicare requires 
that referrals be made in the best interest of the patient and 
without financial gain by either party.
    Medicare's anti-kickback statute ``penalizes anyone who 
knowingly and willfully solicits, receives, offers or pays 
remuneration in cash or in kind to induce or in return for:
     referring an individual to a person or entity for 
the furnishing, or arranging for the furnishing, of any item or 
service payable under the Medicare or Medicaid programs; or
     purchasing, leasing or ordering, or arranging for 
or recommending the purchasing, leasing, or ordering of any 
good, facility, service or item payable under the Medicare or 
Medicaid programs.'' \32\
---------------------------------------------------------------------------
    \32\ HHS, OIG, Semiannual Report, April 1, 1996-September 30, 1996, 
p. 17.
---------------------------------------------------------------------------
    The following are recent examples of Medicare kickback 
schemes:
     In the first case initiated under the anti-
kickback law, a group of cardiologists in a Massachusetts 
hospital, who are not permitted to bill Medicare for 
interpreting coronary angiograms and ventriculograms, gained 
the illicit cooperation of a group of radiologists, who agreed 
to pass the bills through to Medicare. The hospital paid agreed 
to pay $177,000 in restitution.\33\
---------------------------------------------------------------------------
    \33\ Idem.
---------------------------------------------------------------------------
     Tony Abad, a 43-year-old Florida X-ray and 
ultrasound technician who owned and operated Physicians Choice 
Diagnostic Service Inc., was charged with 24 counts of paying 
illegal kickbacks for Medicare business.\34\
---------------------------------------------------------------------------
    \34\ Mark Albright, ``Medicare Fraud Inquiry Spreads,'' St. 
Petersburg Times, August 1, 1997.
---------------------------------------------------------------------------
     Two brothers were found guilty by a New York jury 
for conspiracy related to fraudulent Medicare claims. The 
brothers visited senior citizen highrises and conducted health 
fairs where they coaxed Medicare beneficiaries into revealing 
their Medicare identification numbers. The brothers then used 
the numbers to forge certificates of medical necessity to two 
durable medical equipment (DME) companies. The companies then 
billed for equipment, much of which was never supplied, costing 
Medicare $750,000. The brothers received ``commissions'' based 
upon the cost of each piece of equipment.\35\
---------------------------------------------------------------------------
    \35\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 22.
---------------------------------------------------------------------------
     Five owners of licensed branches of the Florida 
Impotence Clinic Inc. were indicted for receiving kickbacks for 
referring Medicare patients to medical equipment manufacturers 
and service providers.\36\
---------------------------------------------------------------------------
    \36\ Mark Albright, ``Medicare Fraud Inquiry Spreads,'' St. 
Petersburg Times, August 1, 1997.
---------------------------------------------------------------------------
     A former salesman for a New York DME company was 
sentenced to four months in prison, followed by 2 years' 
probation, and $13,500 in restitution fines for Medicare fraud 
conspiracy. The salesman recruited patients for his father, a 
semi-retired podiatrist, in return for the patients' Medicare 
identification numbers and signed certificates of medical 
necessity. The salesman then turned around and sold the 
certificates to his employer. The father was sentenced to three 
years probation and four months home confinement for billing 
Medicare and private health insurance for treatments not done 
and visits not made.\37\
---------------------------------------------------------------------------
    \37\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 23.
---------------------------------------------------------------------------
     Physicians First Choice and Somed Company, both 
owned by Frank J. Lopez of Clearwater, Florida, are accused of 
paying clinics for Medicare patient referrals and then 
including the payments in their charges to Medicare. The 
government is seeking triple damages on 17,000 false claims 
that Lopez's companies submitted, for a total of $170 million 
in punitive damages.\38\
---------------------------------------------------------------------------
    \38\ Mark Albright, ``Medicare Fraud Inquiry Spreads,'' St. 
Petersburg Times, August 1, 1997.
---------------------------------------------------------------------------

                            Home Healthcare

    Home healthcare is a rapidly growing industry that allows 
seniors to receive care in their own homes for less than the 
cost of hospitalization or nursing home care. Unfortunately, it 
has become rife with fraud and abuse. A recent government audit 
found that 40 percent of home healthcare visits reimbursed by 
Medicare in California, Illinois, New York, and Texas do not 
qualify for reimbursement. Another IG report uncovered the fact 
that 25 percent of home healthcare agencies certified to 
participate in Medicare have defrauded or exploited the program 
at one time or another. Medicare spends $17 billion per year on 
home healthcare services.\39\
---------------------------------------------------------------------------
    \39\ Testimony of George F. Grob, Deputy Inspector General for 
Evaluation and Inspections HHS Office of Inspector General, Hearing 
before the Senate Special Committee on Aging, July 28, 1997, p. 1.
---------------------------------------------------------------------------
    Ironically, it was Medicare's policies that helped spawn 
the huge explosion into home healthcare spending. Much of the 
technology that has been developed in recent years allows many 
medical procedures to be performed at home, often by patients 
themselves. Medicare deliberately offered generous payments for 
home healthcare, based upon the fact that caring for someone at 
home is less expensive and more desirable for seniors than 
admitting them to a hospital. But in the process, Medicare 
allowed for unlimited payments for a wide variety of home 
healthcare services instead of capping prices as it has for in-
hospital care.
    The Balanced Budget Act passed this year by Congress will 
require home healthcare agencies and other post-acute 
healthcare providers to move from Medicare's current cost-based 
reimbursement system to the prospective payment system (PPS) by 
1999. It is believed that under PPS, hospitals will no longer 
have the incentive to shift acute-care costs to home healthcare 
operations.\40\
---------------------------------------------------------------------------
    \40\ Charlotte Snow, ``Home Health Heats Up,'' Modern Healthcare, 
August 18, 1997, p. 30.
---------------------------------------------------------------------------
    After years of promoting the expansion of home health care 
agencies and then failing to exercise oversight, the Clinton 
Administration has finally taken steps to address the problem 
by announcing a moratorium on the acceptance of new home 
healthcare agencies and by a doubling of the number of 
investigators assigned to examine agencies' activities. This is 
the first time since Medicare was implemented that a whole 
section of the healthcare industry has been barred from 
admission to the program. The moratorium will put the brakes on 
what has been one of the fastest growing segments of the 
healthcare industry--Medicare was accepting an average of 100 
new home healthcare companies each month. Furthermore, 
currently certified home healthcare companies will be required 
to reapply for admittance to remain eligible to receive 
Medicare reimbursements.\41\
---------------------------------------------------------------------------
    \41\ Amy Goldstein, ``President Acts to Curb Home Health Care 
Fraud,'' The Washington Post, September 16, 1997.
---------------------------------------------------------------------------
    In Florida alone, the IG found that:
     In Miami Lakes, 24 percent of claims did not meet 
guidelines: 11 percent were for 145 services that were not 
reasonable or necessary, 9 percent were for 177 services that 
physicians either denied authorizing or authorized improperly, 
and 4 percent were for 24 services that were not provided.\42\
---------------------------------------------------------------------------
    \42\ HHS, OIG, Semiannual Report, April 1, 1996-September 30, 1996, 
p. 18.
---------------------------------------------------------------------------
     In Miami, 40 percent of claims did not meet 
Medicare guidelines: 25 percent of the claims were for 466 
services made to individuals who were not homebound; 8 percent 
of the claims were for 200 services that were not reasonable or 
necessary; 5 percent of the claims were for 127 services that 
were not provided; and 2 percent of the claims were for 53 
services that physicians denied authorizing.\43\
---------------------------------------------------------------------------
    \43\ Idem.
---------------------------------------------------------------------------
     In Dade County, 32 percent of claims did not meet 
Medicare guidelines: 16 percent were for 208 services that were 
not reasonable or necessary; 9 percent of the claims for 129 
services were provided to beneficiaries who were not homebound; 
4 percent were for 18 services that were not provided; and 3 
percent were for 48 services that physicians either denied 
authorizing or authorized improperly.\44\
---------------------------------------------------------------------------
    \44\ Idem.
---------------------------------------------------------------------------
     In one Florida home healthcare agency (HHA), 32 
percent of claims did not meet Medicare guidelines: 23 percent 
were for 262 services that were not reasonable or necessary; 5 
percent were for 69 services provided to beneficiaries who were 
not homebound; 3 percent were for 17 services that physicians 
did not authorize; and 1 percent were for 5 services that were 
not provided. During this fiscal year period, the HHA claimed 
$12 million in 8,700 claims representing 151,015 services.\45\
---------------------------------------------------------------------------
    \45\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
pp. 24-25.
---------------------------------------------------------------------------
    Other examples of home healthcare fraud include:
     Some people in the home healthcare business are 
very generous to their relatives. One HHA hired the owner's 
nephew to maintain its computer system. The nephew was a full-
time college student and was paid $250,000 for the work.\46\
---------------------------------------------------------------------------
    \46\ HHS, OIG, Home Health: Problems and Their Impact on Medicare, 
July 1997, p.9.
---------------------------------------------------------------------------
     The former owner of a Michigan HHA was sentenced 
to 5 months house arrest and ordered to pay $18,000 for his 
participation in Medicare fraud. He sold his agency in December 
1994 to a Georgia agency but backdated the sale to November 12, 
1994. This sleight-of-hand allowed the corporation to bill 
Medicare for all the services provided by the former owner's 
HHA, thereby covering nearly all of the corporation's 
acquisition costs. Although the former owner provided no 
services, he received a $5,000 a month salary from December 
1994 to June 1995.\47\
---------------------------------------------------------------------------
    \47\ HHS, OIG, Semiannual Report, April 1, 1996-September 30, 1996, 
p. 19.
---------------------------------------------------------------------------
     The former owner of a Texas HHA was handed a 
sentence of 27 months after he pled guilty to filing false 
Medicare claims totaling more than $49,000 in only 6 months. 
The harsh sentence was partly due to a previous state 
conviction for embezzlement.\48\
---------------------------------------------------------------------------
    \48\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
pp. 26-27.
---------------------------------------------------------------------------
     Two brothers in Texas conspired to include phony 
expenses for medical supplies, office supplies, and automobile 
leases on Medicare claims forms. One brother was the president 
of a medical supply company, which sold equipment to the other 
brother's agency at a 100 percent markup. The two then altered 
invoices for supplies not purchased and fabricated automobile 
lease contracts from vendors who never leased vehicles. They 
agreed to pay $30,000 to resolve their civil liabilities.\49\
---------------------------------------------------------------------------
    \49\ Ibid., p. 27.
---------------------------------------------------------------------------
     In 1996, John Watts, Jr. pled guilty to defrauding 
Medicare of at least $1.5 million. He started his company, 
United Care Home Health Services Inc., just 13 months after 
finishing a prison term for dealing cocaine. Watts paid 
kickbacks to local doctors to get his first patients, but later 
decided it was easier just to bill for services never provided, 
in some cases using the names of dead people. Watts sent his 
claims via computer. When investigators asked for documentation 
of the services, Watts and his partner forged the documents, 
hoodwinking investigators for several months. Watts made so 
much money with the scam that he was able to put a $1.2 million 
cash down payment on a $2.5 million house.\50\
---------------------------------------------------------------------------
    \50\ Peter Eisler, ``Fraud On the Rise,'' USA Today, November 12, 
1996.
---------------------------------------------------------------------------
     In less than one year, Urgent Home Health Care of 
Washington, D.C., billed for 1,450 visits its nurses never 
made, often leaving patients waiting for needed care. The 
owners of the company, Pauline Bapack and Pierre Yopa, 
collected about $100,000 for those fraudulent billings. Bapack 
was sentenced to three years in jail. Yopa is wanted for 
failing to show up for sentencing.\51\
---------------------------------------------------------------------------
    \51\ Brooke A. Masters, ``Investigators Try to Keep up with Growing 
Problem of Health Care Fraud,'' The Washington Post, April 6, 1997.
---------------------------------------------------------------------------

                           Nursing Home Fraud

    Most nursing home staffs are trustworthy providers of care 
and comfort for seniors who are unable to care for themselves. 
When nursing home doctors, nurses, suppliers, or staffs defraud 
the Medicare system for personal gain, they break that trust. 
The GAO identified two reasons why nursing homes are so 
vulnerable to fraud:
    First, because a nursing facility locates individual 
Medicare beneficiaries under one roof, unscrupulous billers of 
services can operate their schemes in volume. Second, in some 
instances, nursing facilities make patient records available to 
outside providers who are not responsible for direct care of 
the patient, contrary to federal regulations that prohibit such 
inappropriate access.\52\
---------------------------------------------------------------------------
    \52\ GAO, Fraud and Abuse: Providers Target Medicare Patients in 
Nursing Homes (GAO/HEHS-96-18), January, 1996, p. 2.
---------------------------------------------------------------------------
    As the baby-boom generation matures and more seniors enter 
the nursing home system, the potential for fraud will explode. 
The following cases are recent examples of fraudulent schemes 
involving nursing home facilities:
     An Ohio hospital agreed to pay the federal 
government $1.45 million to settle charges of defrauding the 
Medicare and Medicaid programs. False claims for geriatric 
psychiatric services that were non-therapeutic or unnecessary 
were submitted while the hospital was operating an outpatient 
clinic for nursing home patients. Many of the patients suffered 
organic brain disorders that did not call for psychiatric 
treatments, resulting in an overpayment to the hospital of more 
than $600,000. The hospital agreed to enter a corporate 
integrity program.\53\
---------------------------------------------------------------------------
    \53\ HHS, OIG, Semiannual Report, April 1, 1996-September 30, 1996, 
pp. 22-23.
---------------------------------------------------------------------------
     A company in New Jersey that employed 
psychologists to provide services to nursing home residents 
agreed to pay $700,000 to settle allegations it submitted false 
Medicare claims. The company billed for 45 to 50 minutes of 
psychotherapy to nursing home residents when only 20 to 30 
minute sessions were held. Some of the company's psychologists 
billed for more than 14 hours of therapy a day, and one billed 
for the equivalent of more than 24 hours in one day. The 
company has entered a corporate integrity program.\54\
---------------------------------------------------------------------------
    \54\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
pp. 29-30.
---------------------------------------------------------------------------
     An Illinois ambulance company owner and one of his 
employees pled guilty to Medicare and Medicaid fraud for filing 
false and inflated claims for same-day, round-trip transfers of 
nursing home patients, many of whom were in fact bed-confined. 
The company owner was sentenced to 5 months' incarceration, 
ordered to sell his business, and fined $10,000. He had 
previously agreed to a $367,000 civil settlement. The employee 
was given two years probation and fined $500.\55\
---------------------------------------------------------------------------
    \55\ Ibid., pp. 30-31.
---------------------------------------------------------------------------
     A podiatrist received $143,580 for performing 
unneeded surgical procedures on at least 4,400 nursing home 
patients during a six-month period. A doctor would have to 
operate on at least 34 patients per day, five days a week in 
order to perform surgery at that volume.\56\
---------------------------------------------------------------------------
    \56\ GAO, Fraud and Abuse in Nursing Homes, p. 4.
---------------------------------------------------------------------------
     A Florida therapy company provided free services 
to nursing homes, then billed group activities such as sing-
alongs and arts-and-crafts classes as individual therapy for 
each patient. The sing-alongs were billed as speech therapy. 
The arts-and-crafts classes were billed as occupational 
therapy. The company offered the services to the nursing homes 
in exchange for information from the patients' charts, which 
they then used to bill Medicare.\57\
---------------------------------------------------------------------------
    \57\ Lindsay Peterson, ``Medicare Swindlers Exposed,'' The Tampa 
Tribune, June 23, 1996.
---------------------------------------------------------------------------

                            Laboratory Fraud

    HHS determined in 1993 that many independent clinical 
laboratories were billing Medicare for millions of tests that 
were medically unnecessary. Many individual lab tests are 
included in a routine screen, or panel, of tests. Some 
laboratories, however, were leading physicians to believe that 
the tests were free of charge and then billed Medicare for them 
anyway. The government ordered a national investigation 
involving the HHS IG auditors, HCFA staff, U.S. attorneys, and 
federal law enforcement agencies to examine clinical 
laboratories.\58\ What follows are some examples of fraud 
uncovered during those investigations:
---------------------------------------------------------------------------
    \58\ U.S. Department of Justice, Health Care Fraud Report, Fiscal 
Years 1995-1996, p. 7.
---------------------------------------------------------------------------
     In one of the biggest financial settlements 
involving healthcare fraud in the history of the False Claims 
Act, one laboratory agreed to a $325 million settlement and 
entered a corporate integrity agreement to ensure stringent 
compliance in its future billing practices.\59\
---------------------------------------------------------------------------
    \59\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
p. 32.
---------------------------------------------------------------------------
     A laboratory owned by SmithKline Beecham allegedly 
programmed computers to fabricate information for Medicare 
claims when missing or incomplete data would have delayed 
payment and, in some cases, substituted a false diagnosis that 
would assure payment instead of submitting one that would be 
rejected. The company has also been accused of unbundling 
tests, charging for tests that doctors never ordered, and 
offering physicians kickbacks for patient referrals.\60\
---------------------------------------------------------------------------
    \60\ David S. Hilzenrath, ``Medicare Scams Easy, Officials Say,'' 
The Florida Times Union, August 10, 1997.
---------------------------------------------------------------------------
     Another major clinical laboratory agreed to pay 
$187 million to resolve its civil liabilities and to enter a 
corporate integrity program with comprehensive training and 
monitoring. One of its constituent laboratories also pled 
guilty to fraud, paid a $5 million criminal fine, and was 
excluded from participation in federal and state healthcare 
programs.\61\
---------------------------------------------------------------------------
    \61\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
p. 32.
---------------------------------------------------------------------------
     A fourth major independent laboratory fell victim 
to ``successor liability'' for the conduct of laboratory 
companies that it had purchased during its growth in the early 
1990s. Two settlements were reached amounting to $130 million, 
bringing the total amount recouped in this case thus far to 
$185 million.\62\
---------------------------------------------------------------------------
    \62\ Idem.
---------------------------------------------------------------------------
     In early 1997, Medicalab Inc. and its owners 
agreed to pay $1.3 million to settle allegations that it 
defrauded Medicare by overbilling for mileage traveled by 
workers and charging for duplicate radiology services.\63\
---------------------------------------------------------------------------
    \63\ Associated Press, ``Lab Settles Medicare Fraud Allegations 
with Feds for $1.3 Million,'' The Boston Globe, July 1, 1997.
---------------------------------------------------------------------------

                       Durable Medical Equipment

    DME is one of the more prevalent and long-standing areas of 
fraud. Medicare is often billed for higher-cost equipment than 
that which is actually delivered, equipment that never arrives 
at all, medically unnecessary equipment and supplies, or 
equipment delivered in one state but billed in a state where 
the reimbursement rates are more generous. The HHS IG's office 
has made investigating DME scams one of its highest priorities. 
There are a number of ingenious scams used by unscrupulous 
companies and individuals in order to squeeze more money out of 
Medicare, including the following cases:
     A New York physician, who was sentenced to 12 
months' imprisonment and ordered to pay $87,000 in restitution, 
was one of 19 people participating in a scam involving a 
medical supply company which ended up costing Medicare more 
than $13 million over an 18-month period. Without ever seeing 
patients, the physician signed medical necessity forms, then 
falsified medical charts to indicate treatment.\64\
---------------------------------------------------------------------------
    \64\ HHS, OIG, Semiannual Report, April 1, 1996-September 30, 1996, 
pp. 24-25.
---------------------------------------------------------------------------
     Ben Carroll, owner of Bulldog Medical of Kissimmee 
Inc. and MLC-Geriatric Health Services, was sentenced to 10 
years in prison for overbilling Medicare by $71 million. Mr. 
Carroll billed Medicare for urinary-collection pouches costing 
$8.45 each, when what he actually supplied were adult diapers 
costing only 35 cents each. He also pled guilty to defrauding 
Medicare of $2.3 million in Kansas City, Kansas.\65\
---------------------------------------------------------------------------
    \65\ Maya Bell, ``Medicare Easy Target for Thieves,'' Orlando 
Sentinel, June 15, 1997; and Associated Press, ``$71 Million Medicare 
Overbilling Alleged Against Medical Supplier,'' The Washington Post, 
October 13, 1996.
---------------------------------------------------------------------------
     Alfredo Lazaro Borges of Miami set up two phony 
DME supply companies and, using the Medicare identification 
numbers of patients and the names and identification numbers of 
several licensed physicians, filed falsified Medicare claims 
between August 1993 and June 1994. He stole $2.6 million in the 
course of one year. He never saw a patient, nor did he ever 
provide anyone with any medical equipment.\66\
---------------------------------------------------------------------------
    \66\ ``Man Sentenced for Fraud,'' Fort Lauderdale Sun-Sentinel, 
March 22, 1997.
---------------------------------------------------------------------------
    The FBI is investigating complaints that several companies 
in the Tampa Bay area offered free motorized wheelchairs to 
residents of a seniors' housing complex, but delivered motor 
scooters instead. The scooters sell for around $1,700 each; 
Medicare was billed and paid nearly $5,000 each for what it 
thought were wheelchairs.\67\
---------------------------------------------------------------------------
    \67\ Lindsey Peterson, ``Scooter Bills Spur Probe,'' Tampa Tribune, 
July 27, 1997.
---------------------------------------------------------------------------
     In Charlotte, North Carolina, federal prosecutors 
have charged five men and one woman with filing more than 
11,000 fraudulent Medicare claims for medical supplies and 
equipment.\68\
---------------------------------------------------------------------------
    \68\ Harvey Burgess, ``Fraud Suspect Strikes Deal,'' The Herald 
Rock Hill, April 25, 1997.
---------------------------------------------------------------------------
     On December 13, 1996, Arthur Schinitsky, a 
supplier of medical equipment based in Bradenton, Florida, pled 
guilty to charges that he defrauded Medicare by submitting 
claims for services he never delivered. On some of the claim 
forms, he used the Social Security numbers of dead people. His 
network of transactions involved at least 15 real or fictitious 
businesses in three states, and relied heavily on mail 
services, which helped delay his capture. Two of his employees 
have also been charged with complicity in the scams. In all, 
Mr. Schinitsky is accused of stealing $9 million from the 
government.\69\
---------------------------------------------------------------------------
    \69\ Sara Langenberg, ``Medicare Fraud Charges Spread,'' Sarasota 
Herald-Tribune, April 16, 1997.
---------------------------------------------------------------------------
     As part of a plea bargain agreement, a Texas DME 
company paid restitution of $450,000 and was sentenced to one 
year probation for supplying wheel chair pads to nursing home 
patients and then fraudulently billing Medicare for a more 
expensive lumbar sacral support system.\70\
---------------------------------------------------------------------------
    \70\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 26.
---------------------------------------------------------------------------
     A physician fled to the Dominican Republic and his 
cohort in crime fled to Sierra Leone for preparing and signing 
fraudulent certificates of medical necessity for DME. A New 
York judge sentenced the Dominican refugee in absentia to 78 
months in prison and ordered him to pay $3.5 million. His 
partner waived extradition to return to the United States.\71\
---------------------------------------------------------------------------
    \71\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
p. 34.
---------------------------------------------------------------------------
     A New York DME company used a sham subsidiary to 
submit claims in Pennsylvania for equipment sold in Western New 
York. In addition to a criminal fine of $300,000, the 
subsidiary also pled guilty and agreed to make full restitution 
of $1.1 million and to pay a civil penalty of $2.5 million.\72\
---------------------------------------------------------------------------
    \72\ Ibid., p. 35.
---------------------------------------------------------------------------
     A Pennsylvania DME company agreed to pay $110,000 
to settle criminal and civil liabilities for submitting false 
claims to Medicare for marketing and distributing lower-quality 
body jackets to long-term care facilities than those actually 
delivered. The company and its president were barred for life 
from participation in any HHS programs.\73\
---------------------------------------------------------------------------
    \73\ Ibid., p. 36.
---------------------------------------------------------------------------

                    Lymphedema Pumps--A Special Look

    A significant area of abuse in DME has been the purchase of 
lymphedema pumps. Lymphedema is the swelling of an arm, leg, or 
other part of the body, a condition that can occur when lymph 
nodes and vessels in the armpit or the groin have been removed 
or damaged by surgery, radiotherapy, or blocked by a tumor. 
This condition is most common in cancer patients whose lymph 
nodes have been removed. Although there is no cure for 
lymphedema, several treatments are available to control 
swelling, including pumps. These pumps vary in complexity and 
range in price from $600 to $6,000 each. HCFA recognizes the 
pumps as a treatment of last resort.\74\
---------------------------------------------------------------------------
    \74\ Idem.
---------------------------------------------------------------------------
    Several medical supply companies have settled charges that 
they defrauded Medicare for marketing and selling lymphedema 
pumps for $500 while billing Medicare $5,000 each. The 
allegations of fraud were first made by Ron Wells, the owner of 
a medical supply company. In 1991, Wells was approached by 
Huntleigh Technology Inc., an American subsidiary of Huntleigh 
Technology of Great Britain, and asked to participate in a 
network of retailers offering the pumps for the marked-up 
price. Wells realized that the pumps were identical to a 
version that cost only $600 and reported the company's 
improprieties to authorities. The government's investigation 
led to a settlement with Huntleigh in which the company agreed 
to repay $4.9 million.\75\
---------------------------------------------------------------------------
    \75\ Robert Rudolph, ``U.S. To Reward Whistleblower for Diagnosing 
Medi-Fraud,'' The Star-Ledger, May 24, 1997, p. 1.
---------------------------------------------------------------------------
    Many of the medical supply companies that purchased the 
pumps from Huntleigh have also reached settlements with the 
government. The latest settlement came in May 1997, when 
Mediserv Inc. of Texas agreed to pay $1.35 million and Medico 
International Inc. of New Jersey agreed to pay $150,000. In 
all, the federal government has garnered $15 million from 
settlements of such charges. None of the companies were 
required to admit wrongdoing, however. Between 1990 and 1992, 
Medicare claims for the pumps jumped from $4.8 million to $49.1 
million.\76\ A few specific examples:
---------------------------------------------------------------------------
    \76\ Idem.
---------------------------------------------------------------------------
     The former owner of New Jersey's largest Medicare 
supplier of lymphedema pumps was sentenced to 35 months in 
prison followed by 3 years supervised release, fined $7,500, 
and ordered to pay a total of $220,100 in restitution for a 
scheme involving beneficiaries in Florida and New Jersey. The 
owner billed Medicare for pumps reimbursable at $4,000 per pump 
when cheaper quality pumps were actually delivered. In 
addition, many of the pumps were medically unnecessary, and 
overpayments totaled more than $200,000.\77\
---------------------------------------------------------------------------
    \77\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
p. 37.
---------------------------------------------------------------------------
     A Maryland DME company agreed to pay $1.5 million 
and enter a corporate integrity program to prevent future 
incorrect billing after submitting claims for lymphedema pumps 
under an improper code. The company was overpaid approximately 
$690,000.\78\
---------------------------------------------------------------------------
    \78\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 25.
---------------------------------------------------------------------------
     Bernice Tambascia, owner of MedFast Inc., forged 
physicians' signatures for prescriptions of lymphedema pumps 
and billed Medicare in New Jersey and Florida for the 
equipment. She was sentenced to 2 years and 11 months in jail, 
and ordered to make immediate restitution of nearly $200,000 to 
Medicare carriers and to a private insurance company.\79\
---------------------------------------------------------------------------
    \79\ Joseph D. McCaffrey, ``Cherry Hill Woman Gets Prison in Med-
Fraud,'' The Star-Ledger, September 20, 1996.
---------------------------------------------------------------------------
     In October 1995, National Medical Systems agreed 
to a $1.5 million settlement for billing the government for 200 
top-of-the-line lymphedema pumps when it provided much cheaper 
equipment. Public Integrity Inc., a watchdog group for the 
medical equipment industry, received $225,000 for bringing the 
qui tam suit that led to the settlement.\80\
---------------------------------------------------------------------------
    \80\ John Rivera, ``Health Care Fraud Cases on the Rise,'' The 
Baltimore Sun, August 19, 1996.
---------------------------------------------------------------------------
     The former owner/operator of a DME company in the 
state of Washington was sentenced to a year and a day in 
prison, 3 years' supervised release, and ordered to pay 
$294,860 in restitution, fines, and penalties. He billed 
Medicare and private insurance companies for lymphedema pumps 
at $4,500 each, but delivered pumps that were only worth $600 
and pocketed the difference.\81\
---------------------------------------------------------------------------
    \81\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
p. 37.
---------------------------------------------------------------------------

                             Hospital Fraud

    Recent headlines demonstrate that Medicare fraud is also 
occurring in some of the nation's most prestigious hospitals. 
The chief executive officer of the largest investor-owned 
hospital chain in the U.S., Columbia/HCA, was forced to resign 
after three employees at a Columbia hospital in Florida were 
indicted for Medicare fraud. Now, the government has expanded 
its investigations and says the entire company has become a 
target of the probe. Investigators want to know whether 
Columbia illegally passed on to Medicare the costs it incurred 
during the acquisition of hospitals and other healthcare 
facilities. The government is also investigating Columbia's 
home healthcare division to determine if the company engaged in 
cost-shifting of non-reimbursable items such as gift shop 
merchandise and cafeteria expenses. The investigation could 
ultimately cost Columbia a record $1 billion.\82\
---------------------------------------------------------------------------
    \82\ Greg Jaffe and Eva Rodriguez, ``In Hospital Probes, a New 
Focus on Bottom Line,'' The Wall Street Journal, September 12, 1997.
---------------------------------------------------------------------------
    HHS officials are also examining the billing practices of 
many of the nation's 125 teaching hospitals. These audits, 
commonly referred to as PATH audits (Physicians at Teaching 
Hospitals), aim to find out if some hospitals billed Medicare 
for the treatment of patients by senior doctors when medical 
records show the work was actually performed by residents. Not 
surprisingly, politics are seeping into the act. Several 
members of Congress, under heavy pressure from teaching 
hospital lobbyists, are trying to persuade HHS to suspend the 
audits pending the release of a congressional study that will 
try to determine whether the complexity and vagueness of HCFA's 
regulations contribute to the problem.
    While many of Medicare's billing foul-ups certainly occur 
as a direct result of confusion, it is also clear that some 
teaching hospitals have erroneously billed for a senior 
physician's services even when the physician was not physically 
in the hospital at the time. HHS IG June Gibbs Brown recently 
explained in a letter to CAGW that:
    In order to claim reimbursement from Medicare Part B for a 
service rendered to a patient, the teaching physician must have 
personally provided the service or have been present when the 
intern or resident furnished the care. Physicians claiming 
reimbursement for services only provided by the intern or the 
resident are making a duplicate claim--since that service has 
already been paid for under Part A through the Graduate Medical 
Education Program.
    The following recent incidents are only the tip of the 
iceberg. More are sure to be uncovered as HHS auditors go 
forward.
     A former controller and vice president of finance 
at a New Jersey medical center was ordered to make restitution 
of more than $1 million to the hospital and $24,870 to Medicare 
after he was sentenced to 25 months in prison for tax evasion, 
embezzlement, and fraud. The official agreed to aid in the 
investigation of other hospital officials accused of kickbacks 
and false billing schemes that cost the hospital nearly $3.8 
million. The executive vice president was also sentenced to 55 
months in prison and ordered to repay $21,000. Three others 
executives who pled guilty await sentencing.\83\
---------------------------------------------------------------------------
    \83\ HHS, OIG, Semiannual Report, October 1, 1996-March 31, 1997, 
pp. 7-8.
---------------------------------------------------------------------------
     Part of a Pennsylvania university healthcare 
system agreed to pay $30 million to settle charges of 
defrauding Medicare. An audit and investigation revealed that 
false Medicare bills (totaling approximately $10 million) were 
submitted for physician services, and that many of the claims 
improperly reported the level of care provided or falsely 
reported the involvement of attending physicians.\84\
---------------------------------------------------------------------------
    \84\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 13.
---------------------------------------------------------------------------
     The FBI and the Justice Department are currently 
investigating whether 4,600 hospitals have been routinely 
billing twice for blood tests, X-rays, and other outpatient 
services performed during pre-admission workups. Those services 
are supposed to be included in the fee Medicare pays for a 
related inpatient stay.\85\
---------------------------------------------------------------------------
    \85\ David S. Hilzenrath, ``Medicare Scams Easy, Officials Say,'' 
The Florida Times Union, August 10, 1997.
---------------------------------------------------------------------------

                           Program Exclusions

    One method of deterring fraud is to bar perpetrators from 
participation in the Medicare program, temporarily or 
permanently.
    According to the IG, such program exclusions can be imposed 
for ``conviction of fraud against a private health insurer, 
obstruction of an investigation, distribution of a controlled 
substance, revocation or surrender of a healthcare license, or 
failure to repay health education assistance loans.'' The 
following are only a few of the thousands of program exclusions 
issued by HHS over the past several years:
     The owner and operator of eight Florida DME 
companies was excluded from Medicare for 30 years after being 
convicted of conspiracy to defraud, filing false and fraudulent 
claims, and paying kickbacks for the referral of Medicare 
patients. One employee was also convicted of conspiracy and 
excluded from Medicare for 10 years.\86\
---------------------------------------------------------------------------
    \86\ HHS, OIG, Semiannual Report, October 1, 1995-March 31, 1996, 
p. 12-13.
---------------------------------------------------------------------------
     Two officers in two different Florida DME 
companies were excluded from Medicare for 20 years each after 
selling liquid nutritional supplements to beneficiaries who 
didn't need them. The companies paid fees to several doctors to 
sign certificates of medical necessity authorizing the 
supplements, even though the doctors never examined the 
patients. Once the companies had the certificates, they billed 
Medicare about $400 each month for the supplements and an 
additional $250 each month for tubal feedings.\87\
---------------------------------------------------------------------------
    \87\ HHS, OIG, Semiannual Report, April 1, 1996-September 30, 1996, 
p. 10.
---------------------------------------------------------------------------
     After convictions for defrauding Medicare of more 
than $108,000, a Florida DME company owner and its sales 
manager were both barred from the program for 10 years. The two 
had submitted false claims for X-ray tests that had not been 
ordered or were determined to be medically unnecessary, and for 
equipment that had never been provided.\88\
---------------------------------------------------------------------------
    \88\ HHS, OIG, Semiannual Report, October 1, 1997-March 31, 1997, 
p. 16.
---------------------------------------------------------------------------

                          Time for Real Change

    The current crusade against Medicare fraud is long overdue. 
Unscrupulous providers who game the system must be punished. 
However, it is striking to note that the $23 billion in losses 
identified by the IG are referred to as ``improper payments'' 
rather than ``fraud,'' and that more than half of that estimate 
is based on insufficient or total lack of documentation. 
Criminalizing and exacting restitution for paperwork snafus and 
honest misunderstandings will certainly replenish government 
coffers. The real question is: Will it improve the quality of 
healthcare for Medicare beneficiaries?
    Under the current system, greedy providers motivated to 
prey on Medicare's inherent vulnerabilities have shown almost 
limitless creativity in ripping off the system, sometimes 
repeatedly and for long periods of time. At the same time, law-
abiding healthcare providers must engage in expensive anti-
fraud education and retain professionals to help them 
constantly retool their billing systems, as well as to figure 
out how to recoup some of their costs. As Congress reflexively 
returns again and again to providers, squeezing them as a 
short-term fix for Medicare's financial problems, it is almost 
inevitable that they will, at times, skirt the bounds of 
``proper'' reimbursements.
    The Clinton Administration recently suspended a contract 
for the design of an advanced computer system that would have 
accelerated payments, improved service, and reduced fraud. The 
idea was to create a single national database, which would pay 
all doctors and healthcare facilities that serve Medicare 
beneficiaries. Government officials finally concluded that 
Medicare's payment system was far more anachronistic and 
impenetrable than they had anticipated. They were unable to 
even reconcile the current system. Estimates on how much this 
fiasco cost taxpayers vary between $30 to $43 million.\89\
---------------------------------------------------------------------------
    \89\ Robert Pear, ``Modernization for Medicare Grinds to a Halt,'' 
The New York Times, September 16, 1997.
---------------------------------------------------------------------------
    Medicare teems with perverse incentives that drive both 
providers and beneficiaries to spend money that contributes 
nothing to individual health. Many of the features designed to 
control costs actually compromise well-being, force seniors to 
spend billions out-of-pocket, and encourage wasteful spending. 
The new wave of price controls included in the Balanced Budget 
Act passed by Congress is yet another politically facile, stop-
gap measure that will simply compound Medicare's problems.

                       Medicare's Price Controls

    Medicare was initially an open-ended entitlement program 
that promised to pay for every medical service and procedure 
for every eligible beneficiary on a reasonable cost basis. By 
1982, the explosive costs of this approach became politically 
and financially unsustainable. So Congress and President Reagan 
agreed to squeeze the ``fat'' out of Medicare by instituting 
strict price controls, known today as the prospective payment 
system (PPS).
    The PPS established fixed prices for hospitals for 
treatment of different types of illnesses. In 1989, Congress 
went a step further and created the Resource-Based Relative 
Value Scale (RBRVS) for doctors serving Medicare patients. 
Supporters at the time, including CAGW, argued that price 
controls would force hospitals and doctors to be more 
efficient. But, instead, price controls in Medicare actually 
increased costs and barriers to healthcare.
    In the 1980s, healthcare costs in the private sector rates 
exceeded Medicare's rates. For example, in 1996 Medicare costs 
grew at a rate of 8.5 percent per year, while private sector 
costs increased at an annual rate of only 3.2 percent. 
According to the January 1997 Congressional Budget Office (CBO) 
baseline budget estimates, Medicare is projected to continue to 
grow at 8.5 percent per year over the next 5 years, while 
federal budget outlays will grow at an average annual rate of 
5.2 percent and the gross domestic product at an average of 4.8 
percent.\90\
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    \90\ Gail Wilensky, Ph.D., Testimony before Senate Finance 
Subcommittee on Health Care, February 12, 1997, p. 3.
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    Indeed, rather than promoting efficiency, price controls 
have only led to rationing of healthcare services as a way of 
reducing costs. As health analyst J.D. Kleinke points out, 
``Medicare's prospective payment system effectively rewards the 
rapid discharge of patients, many of whom are not well enough, 
relapse, are re-admitted-- and the meter starts running all 
over again.'' \91\ In other words, Medicare gets people out of 
hospitals quicker, but sicker.
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    \91\ Susan Horn and Robert Goldberg, ``A Sickly Approach to 
Medicare,'' The Washington Post, September 17, 1995.
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           How Price Controls Promote Waste, Fraud, and Abuse

    The causes of fraud and waste in Medicare are deeply rooted 
in the program's structure itself. The absence of any 
incentives to deliver high-quality, low-cost healthcare greatly 
contributes to the problem. First, price controls have 
encouraged doctors and hospitals to ``cost shift,'' or recoup 
their losses by increasing their prices to unregulated, or 
privately insured, patients. Second, providers have resorted to 
``unbundling'' medical procedures, separating a course of 
treatment into individual, more expensive elements. Third, they 
will often ``upcode'' a diagnosis to maximize reimbursement. 
Fourth, even though Medicare caps the price it will pay for a 
medical procedure, it will also pay for any procedure for which 
a claim is filed. It is common to hear seniors complain about 
their Medicare bills being loaded up with lots of unnecessary 
procedures. Fifth, a whole new industry has sprung up to 
educate physicians and other healthcare providers on how to 
understand, and work around, Medicare's labyrinthine payment 
systems.\92\ Of the $23 billion in improper payments uncovered 
by the HHS IG, 36 percent were for services deemed medically 
unnecessary after the fact. This steady increase in losses 
attributable to improper billing is not surprising when the 
system is set up to reward quantity of care, rather than 
quality of care.
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    \92\ Edmund Haislmaier, ``Why Global Budgets and Price Controls 
Will Not Curb Health Costs,'' Heritage Foundation Backgrounder, No. 
929, March 8, 1993, pp. 18-19.
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         Enforcement Alone Will Never Eliminate Fraud and Waste

    Will more aggressive oversight make a difference? Yes, but 
it will come at a tremendous cost, both in dollars and in 
further corrosion of the doctor-patient relationship. Every 
action taken by a doctor or hospital will increasingly be 
subject to second-guessing and third-party monitoring. Medical 
judgments made and services rendered will become, in 
retrospect, grounds for civil and criminal action. Even today, 
doctors and hospitals practice the art of medicine with the 
knowledge that even an honest billing error could set off chain 
of events that could threaten their livelihoods and even land 
them in prison. It remains to be seen, for example, how much of 
this is true and the government's unprecedented investigation 
of Columbia/HCA. These unfavorable trends will only continue 
and grow under the current system.
    This post hoc criminalization of medicine is a direct 
outgrowth of Medicare's archaic system. Because it is an 
entitlement, the Medicare bureaucracy in Washington, D.C., has 
only the most tenuous control over the program as a whole. 
Hence, no amount of enforcement will have an impact on the real 
reason providers inflate medical bills. Medicare cannot capture 
quality-based savings, because it cannot measure quality, and 
it will pay for any healthcare, regardless of whether it is 
good, bad, or indifferent.
    Even now, despite a push to improve the quality of the 
healthcare purchased through Medicare, the program lacks 
accurate information on how the treatments it pays for relate 
to the patient's true medical needs or the patient's ultimate 
well-being. Until recently, even private insurers did not 
demand, and did not receive, up-to-date medical information. 
However, under the lash of market competition, private 
healthcare providers have begun to recognize the value of 
fresh, accurate data and are spending more money to capture, 
store, and analyze the information needed to generate quality 
healthcare. Medicare has no such market forces to reward 
quality.
    In fact, Medicare lags so far behind the private sector in 
the inevitable rush toward the information age that a recent 
GAO report stated:
    HCFA's efforts in distributing comparative performance data 
lag behind those of state agencies and many employers in the 
private sector. Furthermore, GAO's analysis of HCFA's previous 
implementation efforts raises concerns about how well HCFA will 
implement comprehensive programs to deal effectively with 
poorly performing providers and improve all providers' 
performance.\93\
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    \93\ GAO, Medicare: Federal Efforts to Enhance Patient Quality of 
Care, April 10, 1996.
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    Even if Medicare tried to improve quality, spending money 
on anything other than Medicare's benefits package must first 
be approved by HCFA, a process that takes years. As a result, 
Medicare is also unable to compete with the private sector in 
using both managed care and healthcare outcomes to measure and 
control unnecessary medical spending.
    Similarly, Medicare has been notoriously slow to recognize 
and adopt new medical treatments and innovative technologies 
that provide better healthcare. For example, cochlear implants, 
which are widely accepted as a superior treatment for hearing 
loss, are not reimbursed under Medicare. Consequently, patients 
must pay between $3,000 and $5,000 out-of-pocket for this 
state-of-the-art technology, and physicians may be reluctant to 
recommend the treatment to low-income patients. Overall, the 
Medicare bureaucracy conducted only 10 assessments of new 
technologies and innovations for coverage under Medicare in 
1991, and only eight in 1992. Some ongoing assessments have 
been under consideration for over three years.\94\
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    \94\ Peter Ferrara, ``A Proposal for Reform: Resolving the Medicare 
Crisis,'' United Seniors Association, Fairfax, Virginia, 1996.
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                       The Impact on the Elderly

    Medicare's antiquated approach to medicine does more than 
compromise patient care. Seniors tend to spend more on 
healthcare than the general population and they also spend more 
on co-payments and deductibles. But studies show that seniors 
who purchase Medigap insurance (in addition to Parts A and B) 
to cover these costs spend 70 percent more on healthcare than 
those who do not, with little measurable increase in their 
well-being.\95\
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    \95\ Michael Morrisey, ``Retiree Health Benefits,'' Annual Review 
of Public Health, 1993, Volume 14, pp. 271-292.
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                   The Impact on Future Beneficiaries

    In spite of the reforms made to Medicare in the 1997 
Balanced Budget Act, Medicare will only remain solvent for 10 
years. The program will begin to accrue losses just as the baby 
boomers begin to retire.
    For the last 15 years, Medicare has grown faster than any 
other federal program. The Medicare tax has increased from 0.7 
percent of the first $6,000 in wages to 2.9 percent of every 
dollar in wages. In 1965, there were 5.5 workers for every 
beneficiary. Today, there are 3.9 workers for the current 
number of beneficiaries. The number of retirees will increase 
by 800 percent in the next 15 years, leaving only 2.2 workers 
to support every beneficiary.\96\ The system foments 
intergenerational competition for resources and will, if left 
unchecked, rob future workers--along with their children and 
grandchildren--of their livelihoods.
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    \96\ Senator Phil Gramm, ``How to Avoid Medicare's Implosion,'' The 
Wall Street Journal, February 4, 1997.
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                  Reducing Fraud by Reforming Medicare

    To paraphrase Friedrich Hayek, the Nobel Prize-winning 
economist, there are only two ways of holding men accountable: 
prices and prisons. Enforcing price controls requires throwing 
people in jail. Unfortunately, some of the people who get 
thrown in jail may have honestly misunderstood the regulation 
they needed to follow. But, when prices are set by free-market 
forces, overcharging for a product is simply punished by the 
loss of market share.
    Eliminating fraud in Medicare calls for reducing the 
incentives and opportunities to profiteer. Medicare is 
currently rife with such enticements. Only the discipline of 
the free market and the creation of a patient-centered 
healthcare market will allow Medicare patients to choose care 
based on cost and quality. Providers will then have to compete 
for patients based upon their ability to provide a variety of 
quality medical outcomes.
    The following changes would go a long way toward 
establishing such a system:
    1. Medicare would be changed from a government-run, fee-
for-service health insurance plan to a system in which Medicare 
beneficiaries would choose among publicly available private 
health insurance plans. The government would subsidize 
insurance purchases through individual premium allowances, at 
an amount set by the average price of competing plans, keyed to 
a benchmark benefit package.
    2. Healthcare plans, physician groups, and health insurers 
would have to provide consumers with information on the quality 
of their care. Recent studies show that beneficiaries value 
such information because they want to be informed, cost-
conscious consumers of healthcare services, rather than passive 
recipients.
    3. Direct competition between provider systems would be 
based on quality and cost. Providers would no longer go to 
Medicare for their payments. How much money to spend and what 
to spend it on would be the responsibility of Medicare program 
participants. The Medicare bureaucracy would simply serve to 
collect and disseminate up-to-date, patient-friendly healthcare 
information and stimulate the universal adoption of the best 
available medical practices. Rooting out and eradicating fraud 
would be the responsibility of the private sector.
    Leaders in healthcare policy from all sides of the 
political spectrum are now providing sound ideas and solutions 
for transforming Medicare into a program that responds to the 
needs of the elderly by providing the best possible healthcare 
at a reasonable price. Many of these ideas have originated in 
think tanks and public policy organizations.\97\ The Medicare 
commission, which will be established pursuant to the Balanced 
Budget Act, should give careful consideration to these 
proposals, and be bold in its final recommendations. The future 
health of Medicare, our economy, and our people depends upon 
true reform.
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    \97\ Senator Phil Gramm, ``How to Avoid Medicare's Implosion,'' The 
Wall Street Journal, February 4, 1997; Dowd, Feldman, and Christianson, 
``Competitive Pricing for Medicare,'' American Enterprise Institute, 
July 1996; Butler and Moffit, ``Congress's Own Health Plan as a Model 
for Medicare Reform,'' Heritage Foundation Backgrounder, June 1997; 
Dave Kendall, ``The Phony Medicare Debate,'' The Progressive Policy 
Institute, April 1996.
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