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S. Hrg. 103-1041
HEALTH CA RE FRAUD
Y 4. J 89/2; S, HRG. 103-1041
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ililiAKlNG
BEFORE THE
CO.ALAIITTEE OX THE JUDICURY
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
ON
EXAMINING FEDERAL, STATE, AND LOCAL EFFORTS TO COMBAT FRAUD
AND ABUSE IN THE HEALTH CARE INDUSTRY AND RELATED PROVI-
SIONS OF THE PROPOSED HEALTH SECURITY ACT
MAY 25, 1994
Serial No. J-103-57
Printed for the use of the Committee on the Judiciary
i
SEP 2 6 J9ao
;H^'f ^' iGr.
U.S. GOVERNMENT PRINTING OFFICE
91-727 CC WASHINGTON : 1995
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-047474-4
S. Hrg. 103-1041
HEALTH C/V RE FRAUD
Y 4. J 89/2: S, HRG. 103-1041
Health cm Frau*, S.Hrj. l"'-""!' ■
nuiAKlNG
BEFORE THE
COMMITTEE OX THE JUDICUKY
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
ON
EXAMINING FEDERAL, STATE, AND LOCAL EFFORTS TO COMBAT FRAUD
AND ABUSE IN THE HEALTH CARE INDUSTRY AND RELATED PROVI-
SIONS OF THE PROPOSED HEALTH SECURITY ACT
MAY 25, 1994
Serial No. J-1 03-57
Printed for the use of the Committee on the Judiciary
SEP 2 6 mo
U.S. GOVERNMENT PRINTING OFFICE
91-727 CC WASHINGTON : 1995
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-047474-4
COMMITTEE ON THE JUDICIARY
JOSEPH R BIDEN,
EDWARD M. KENNEDY, Massachusetts
HOWARD M. METZENBAUM, Ohio
DENNIS DeCONCINI, Arizona
PATRICK J. LEAHY, Vermont
HOWELL HEFLIN, Alabama
PAUL SIMON, Illinois
HERBERT KOHL, Wisconsin
DIANNE FEINSTEIN, California
CAROL MOSELEY-BRAUN, Illinois
Jr., Delaware, Chairman
ORRIN G. HATCH, Utah
STROM THURMOND, South Carolina
ALAN K. SIMPSON, Wyoming
CHARLES E. GRASSLEY, Iowa
ARLEN SPECTER, Pennsylvania
HANK BROWN, Colorado
WILLIAM S. COHEN, Maine
LARRY PRESSLER. South Dakota
Cynthia C. Hogan, Chief Counsel
Catherine M. Russell, Staff Director
Mark R. Disler, Minority Staff Director
Sharon Prost, Minority Chief Counsel
(U)
CONTENTS
STATEMENTS OF COMMITTEE MEMBERS
Page
Biden, Hon. Joseph R., Jr., U.S. Senator from the State of Delaware 1
Cohen, Hon. William S., U.S. Senator from the State of Maine 5
Grassley, Hon. Charles E., U.S. Senator from the State of Iowa 26
CHRONOLOGICAL LIST OF WITNESSES
Panel consisting of Gerald M. Stern, Special Counsel, Health Care Fraud,
and Special Cfounsel, Finincial Institution Fraud, U.S. Department of Jus-
tice; and Michael Mangano, Principal Deputy Inspector General, U.S. De-
partment of Health and Human Services 7
Panel consisting of Pamela Carter, attorney general, State of Indiana, and
vice chairperson, Health Care Task Force, National Association of Attor-
neys General; and David W. Waterbury, director, Washington State Medic-
aid Fraud Control Unit, and chairperson. Legislative Committee, National
Association of Medicaid Fraud Control Units 40
Panel consisting of Kirk B. Johnson, general counsel, American Medical Asso-
ciation; Kevin M. Mattessich, Morrison, Mahoney and Miller, former trial
attorney and health care fraud prosecutor. Criminal Division, U.S. Depart-
ment of Justice; and William J. Mahon, executive director, National Health
Care Anti-Fraud Association 81
ALPHABETICAL LIST AND MATERIAL SUBMITTED
Biden, Hon. Joseph R., Jr.:
Testimony 1
Prepared statement of:
Senator Herbert Kohl 3
The American Health Care Association 3
Carter, Pamela:
Testimony 40
Prepared statement 43
Johnson, Kirk B., JD:
Testimony 81
Prepared statement 84
Mahon, William J.:
Testimony 109
Prepared statement 114
Mangano, Michael:
Testimony 13
Prepared statement 16
Mattessich, Kevin M.:
Testimony 103
Prepared statement 106
Stern, Gerald M.:
Testimony 7
Prepared statement 9
Waterbury, David W.:
Testimony 46
Prepared statement 50
National Association of Attorneys General adopted resolution on health
care fraud 56
(III)
HEALTH CARE FRAUD
WEDNESDAY, MAY 25, 1994
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 2:21 p.m. in room SD-
226, Dirksen Senate Office Building, Hon. Joseph R. Biden, Jr.,
(chairman of the committee), presiding.
Also present: Senators Grassley and Cohen.
OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., A U.S.
SENATOR FROM THE STATE OF DELAWARE
The Chairman. The hearing will come to order.
The President and this Congress have made comprehensive re-
form in the health care system a key priority this year. The Judici-
ary Committee convenes this hearing today as part of a coordinated
effort by the Senate committees to conduct a full review of the
President's health care reform proposals.
Twenty-five years ago, health care spending totaled just 5 per-
cent of the Nation's economy. Since then, its share has almost tri-
pled, to 14 percent, over $1 trillion, in 1994. The President's health
care reform legislation seeks to bring those costs under control,
even while ensuring better care for all Americans.
A key part of the President's plan to control costs is to reduce
the amount of fraud in the system. And make no mistake about it,
there is plenty of fraud. While it is impossible to come up with a
precise dollar amount, most experts — and we have held hearings on
this before — estimate that fraud accounts for about 10 percent of
health care expenditures.
The American public pays for this fraud. Fraud against private
insurers is passed along to consumers in the form of higher prices
for health insurance. Fraud against Medicare or other government
programs is, of course, paid for by the taxpayers directly. Either
way, the American public pays the bill.
Let's put this in perspective. In 1994, there will be an estimated
$100 billion worth of fraud in the provision of health care services.
That means that a family of four will spend approximately $1,600
this year just to line the pockets of a few.
The types of fraud are virtually limitless — pharmacists who
charge for brand name drugs but supply generic brands instead;
doctors who charge for tests they never perform; medical equip-
ment suppliers who pay kickbacks to doctors who recommend their
products; home health nurses who falsify patients' records to justify
unnecessary visits; con artists who call people on the phone to get
(1)
them to come into a clinic for a battery of tests they don't need;
hospitals and heme health companies who disguise purely personal
or private expenses and then submit them to Medicare for reim-
bursement; doctors or laboratories who send bills for the same serv-
ices to two different Medicare offices or to private insurers and
Medicare; and companies that drive healthy, walking people to a
doctor's office and then bill them for the expense of an emergency
ambulance.
But the one thing all forms of fraud have in common is that they
put money in one person's pocket at the expense of the American
public. In fact, the health care industry is uniquely vulnerable to
some forms of fraud because the person who receives the services
is not the one who pays for it. Those who provide health care serv-
ices normally send the bill directly to an insurer or to the Govern-
ment, and it is likely to be paid without question.
The payer doesn't routinely check to make sure that the service
or product was provided or even needed. It doesn't usually check
to make sure the price hasn't been inflated in some way. It simply
pays. Most providers are honest and don't abuse this trust, but
some succumb to temptation and greed, largely because they know
they are unlikely to get caught.
Improving government efforts at catching those who engage in
fraud, the focus of a bill I authored that passed the Senate in 1992,
must be a part of any effective health care reform proposal, and I
am not suggesting mine is the only such bill.
The President's Health Security Act addresses this problem by
expanding Federal investigative authority and by creating a special
account into which criminal and civil recoveries from health care
fraud investigations will be deposited and then used to fund fur-
ther fraud investigations.
Putting resources into fraud enforcement pays off. Insurance
companies report returns of $5 dollars or more for every dollar
spent on fraud detection and prevention, and a recent GAO report
found that the Government saved far more than it spent by in-
creasing Medicare fraud protection efforts.
Everyone who pays health care bills— the Federal Government,
State governments, private insurers, and in every case the public —
has a big stake in this fraud problem. Both the Government and
private insurers must continue and improve active fraud detection
and prevention. The President's Health Security Act includes a
thoughtful, in my view, and comprehensive fraud program. I look
forward to discussing this program with our witnesses today and
I welcome all of them to this committee.
I will note that there are others on this committee who have
been leaders in this area, like Senator Cohen of Maine, who have
slightly different approaches. The point is I think there is a pretty
universal view shared by Democrats and Republicans that this is
a problem and it must be addressed.
We have a statement from Senator Kohl and the American
Health Care Association which we will include in the record.
[The prepared statements of Senator Kohl and the American
Health Care Association follows:]
Prepared Statement of Senator Herbert Kohl
Mr. Chairman, I'd like to first thank you for holding this important hearing and
for championing this crucial issue for so long. Before the political winds brought the
subject of health care reform into the Senate, you were sounding the alarm that un-
principled providers were pilfering our national health pocketbook.
Everyone, of course — patients, providers, policymakers — is against health care
fraud. In this sense, it is an easy issue, because we all start on the same page. In
a health care economy that borders on one trillion dollars annually, experts estimate
that fraud and abuse is costing us tens of billions of dollars every year.
These are dollars taken from private insurance carriers, state and federal govern-
ments and, ultimately, the pockets of individual Americans. These are dollars that
could be used to cover millions of Americans who now go without insurance. I think
we all agree that for a health care reform package to come out of Congress without
addressing this issue would be unacceptable.
The difficult question comes when we get down to specifics: what can we do to
better prevent and deter fraud in the delivery of health care?
Mr. Chairman, the legislation you have introduced in the past, which would
toughen criminal penalties, is an important start. But criminal fraud is only a part
of the problem.
My concern is that our health care system is being ripped-off daily by those who
see health care as a giant game: a game in which unprincipled providers are re-
warded for pushing the edge of the envelope, and exploiting what they rationalize
as loopholes. This game is pursued much like some people try to fool the IRS: it
is not necessarily criminal but, as our witnesses will tell us, it is nevertheless un-
lawful and we should prosecute it through civil enforcement.-
In short, I think our civil health care fraud laws need to pack a tougher punch
if we are to deter unlawful conduct that falls just shy of criminal behavior. I have
introduced legislation that would do just that, in addition to toughening existing
civil penalties. This legislation would more than double existing civil penalties, ex-
pand the scope of those penalties to cover additional fraudulent conduct, and allow
for the imposition of community service obligations on providers who have violated
the law.
Equally important, we need to look at expanding our existing civil sanctions to
also cover fraud against private payers, as my legislation would also do. The federal
government currently accounts for approximately 30 percent of UPS. health care
spending, and the core elements of our existing health care fraud laws only protect
against conduct that defrauds the government. But what about the other 70 percent
of our health care spending?
It is high time that we send the message that the federal government will not
tolerate fraud and abuse in any health care transaction, whether the target of the
fraud is a private payer or a public payer. No matter who appears to be the victim
of fraud and abuse, all Americans end up paying the price when costs and pre-
miums skyrocket as a result, that is why I hope the Administration will support
Chairman Biden's measure and why hope it will support mine as well.
Let me just conclude by commending the Departments of Justice and Health and
Human Services for the outstanding work they have already done in this area. In
recent years, they have rolled up their sleeves and pursued health care fraud with
skill and tenacity. Last year alone, the federal government collected more than $177
milUon in health care fraud penalties. I am confident that if we work together, and
give our fraud investigators and prosecutors the laws and resources they need, we
can produce even better results — and save considerably more money — in the years
to come.
Prepared Statement of the American Health Care Association
Senator Biden, Senator Hatch and members of the Committee, the American
Health Care Association (AHCA) appreciates the opportunity to provide you with
our Association's position on ways to combat fraud and abuse in the health care de-
livery system. AHCA is a federation of 51 affiliated associations representing 11,000
non-profit and for-profit nursing facilities, residential care, and subacute providers
nationwide.
AHCA fully supports efforts to combat fraud and abuse in health care. We have
worked with Congress and the Administration on ensuring that quality care is pro-
vided to nursing home residents and that compensation be fair and equitable to both
the government and to providers. We are continuing efforts to ensure that providers
comply with federal law by working with the Health Care Financing Administration
to advise our members on what constitutes inappropriate billing practices.
FRAUD AND ABUSE PROVISIONS
We are pleased that the Committee is examining this issue and the proposed
changes in fraud and abuse law. Provisions to modify Federal health care fraud and
abuse statutes are contained in a number of health care reform proposals, including
the President's Health Security Act (S. 1757) and in the Senate passed Omnibus
AnticrimebilKH.R. 3355).
The Health Security Act contains the following provisions.
It creates a new standard for health care fraud as a new federal crime. Such ac-
tion will be a felony with fines up to $250,000 and ten years of imprisonment, or
life imprisonment if the violation results in serious bodily injury. This would apply
to both federally and privately financed health care activities.
If a health care offense poses a serious threat to the health of any person or has
a significant detrimental impact on the health care deUvery system there can be im-
posed criminal forfeiture of property that is used, supported, or added value to the
commission of the offense. . i •
Any individual, engaged in a pattern of health care fraud. Food and Drug Admin-
istration violations, or anti-kickback violations could be civilly or criminally pros-
ecuted under the Racketeer Influenced and Corrupt Organizations (RICO) statute.
Any individual with certain controlling interest in an entity that has been sanc-
tioned through criminal prosecution, civil monev penalties or program exclusion may
be excluded from health care programs even if the individual had absolutely no re-
sponsibility for the conduct that led to the sanction.
Federal, State and local law enforcement programs will coordinate their efforts to
control fraud and abuse by developing joint enforcement programs and sharing in-
formation and resources.
Civil monetary penalties and penalties for false claims would be increased, buch
penalties will be applied to providers who incorrectly code services or provide medi-
cally unnecessary services. This would apply to claims submitted to both Federal
and private insurance plans.
Persons, other than beneficiaries who suffer harm or monetary loss as a result
of any activity of an individual or entity which would subject that individual to civil
monetary penalty, may bring an action against that provider in Federal court.
PROBLEMS AND IMPROVEMENTS TO PROVISIONS
AHCA believes that there are two problems with the aforementioned fraud and
abuse proposal. First, it relies solely on enforcement and there is no effort to en-
hance prevention and compliance. Second, it reaches far beyond those who purpose-
fully act with criminal intent.
Improving compliance
While enforcement is important, many problems such as miscoding or improper
billing of services can be remedied through education and guidance by the Federal
government. Medicare and Medicaid laws and regulations are extremely complex
and it is difficult for providers to determine if they are in compliance. The breadth
and lack of clarity of the current fraud and abuse laws has created confusion and
uncertainty for providers working to develop innovative, lawful arrangements for
the delivery of long term care services. Without clarification, this confusion and un-
certainty is hkely to increase with the dramatic expansion of the fraud and abuse
laws contemplated by numerous legislative proposals.
Currently the U.S. Department of Health and Human Services, Office of the In-
spector General is prohibited from providing advisory opinions to health care provid-
ers seeking to enter into innovative ways to deliver long term care services. Con-
gressman Hoagland (D-NE) has introduced legislation (H.R. 4028) which authonzes
the Secretary of Health and Human Services to issue such opinions. This will great-
ly aid providers in ensuring that they stay in compliance with Federal law when
delivering services in a rapidly changing health care delivery system.
Another step that Congress can take is to allow long term care providers to peti-
tion the Office of the Inspector General to issue "Fraud Alerts." In the past, the Of-
fice of the Inspector General has issued such "Alerts" when it wished to make the
industry aware that it considered certain conduct unlawful (or potentially unlawful).
Permitting health care providers to request Fraud Alerts regarding contemplated
transactions would provide increased clarity concerning the Office of Inspector Gen-
eral's interpretation of the law and would thereby promote compliance.
Ensuring honest providers are not harmed
While AHCA fully supports the intent of the provisions, we are concerned that
they would extend beyond those who willfully defraud the government to honest
providers who innocently commit an error or disagree with an insurance company's
perception of ^ patient regimen of treatment. Some specific examples are as follows.
Section 4043 would provide civil monetary penalties for miscoding of procedure or
diagnosis codes, providing items or services in excess of medical need, or providing
services not medically necessary. The practice of medicine is as much an art as a
science. A practitioner must deal with many uncertainties, and may try a variety
of approaches to diagnose a condition and treat it. In many cases medical necessity
is a judgment call and judgment can be influenced whether you are a provider deliv-
ering services or a claims reviewer seeking to keep down costs. This provision
should be limited to cases where willful intent to commit fraud is demonstrated.
Section 4044 provides for the permissive exclusion of individuals simply because
they own shares in a sanctioned entity even if the individual had absolutely no re-
sponsibility for the conduct that led to the sanction. The individuals to whom the
exclusion authority would apply include anyone with an investment interest of 5
percent or more, or anyone with management responsibilities, including members of
the Board of Directors. As a result, an individual, simply by his or her relationship
or status with a company, can be excluded from health care programs, even if the
individual had no knowledge of, or responsibility for, the events that lead to the
sanction on the company. In fact, the proposal does not even require that the indi-
vidual was affiliated with the company at the time the conduct occurred on which
the sanction is based. This provision will make it virtually impossible to obtain med-
ical professionals to sit on Boards of Directors of long term care facilities. Clearly,
responsibility must be brought back into the determination process.
CONCLUSION
AHCA supports the effort to ensure compliance with Federal Health care laws.
While the effort to ensure greater enforcement is commendable, we must ensure
that long term care providers who seek to operate within the law have the proper
guidance. In addition, we must ensure that criminal law does not extend to those
who have no criminal intent. The provisions must be tightened up to limit their
scope to those who willfully violate the law. To that end we will be happy to work
with you and your Committee.
Now, I would ask either of my colleagues, since I have delayed
them particularly, if they have any brief opening statements they
wish to make.
Senator Grassley. I do not have an opening statement.
The Chairman. Senator Cohen?
STATEMENT OF HON. WILLIAM S. COHEN, A U.S. SENATOR
FROM THE STATE OF MAINE
Senator Cohen. Mr. Chairman, I want to thank you for holding
the hearing on health care fraud. As you indicated, it is a subject
matter that I have been interested in for a long time.
You also pointed out that the GAO has estimated that we lose
approximately $100 billion a year through fraud in the health care
system. To put it all in perspective, we had a great deal of anguish
over the S&L bailout legislation that we had to pass and appropria-
tions we had to make. It totaled, according to the FBI, about $80
billion. Here, we are losing $100 biUion every single year, which
works out to about $275 million a day.
While we have passed some reforms aimed at preventing another
S&L crisis from occurring, we haven't done very much to deal with
health care fraud to date. I think it is going to be clear from the
testimony that the laws we have on the books are insufficient, that
the Justice Department has to search and look for some kind of
nexus in either mail or wire fraud statutes in order to bring action
against those who are engaging in this fraud, and that we are see-
ing a decrease in Health and Human Services investigators at the
very time that we need more and not less.
We are going to be releasing a minority staff report on the Aging
Committee soon. I want to give you just a couple of examples of the
kinds of schemes that are going on on a daily basis.
We have one example of a scheme in which cardiac pacemakers
were altered, involving inducements and endangering lives. The
owner of a distribution company altered the expiration dates on the
pacemakers, resulting in, "expired" pacemakers being implanted in
patients. According to the FBI, cardiologists and surgeons were
given inducements, such as entertainment tickets, vacations, office
medical equipment, cash, and even the services of prostitutes, in
exchange for using the heart devices.
Physician-owners of a psychiatric clinic stole more than $1.3 mil-
lion from Medicaid by billing for over 50,000 phantom psycho-
therapy sessions that were never provided. A radiologist allegedly
stole $1 million from Medicare by billing for thousands of
ultrasound tests he never reviewed. A speech therapist bilked Med-
icare for payment of services he never provided to nursing home
residents and he billed for services dated several days after the
residents had actually died.
These are just examples of the kinds of abuse that are taking
place on a daily basis, and the very size and the intricacy and the
splintering of the current health care system makes this possible.
We also have a situation where the intermediaries are trying to
make payments as quickly as possible, so the pressure is on them
to pay the bills so the hospitals and doctors can get reimbursed. So,
again, not enough effort is made in order to question suspicious bil-
lings and other types of claims.
I suspect, Mr. Chairman, that as we move toward some form or
variation of managed care in our health care reform debate that is
taking place, it is going to open the door to new possibilities for
even greater fraud that we have to be wary of.
Now, the Senate, when it passed the crime bill, thanks to you,
also accepted a criminal provision dealing with health care fraud,
and I sincerely hope that the chairman will work to continue that.
There is, I think, some pressure on to say, wait a minute, we don't
need to pass any kind of health care fraud legislation; let's wait
until we get the health care bill itself.
I would respectfully dissent from that view. I don't think we can
afford to wait to find out whether the President's bill is going to
pass. I hope it passes, or some form of his bill, or the Chafee bill
or whatever the name is going to be. But that is no guarantee, and
we may not get to it until September or October, if we get to it.
In the meantime, we are losing $275 million a day. So I don't think
anyone can make a case for delaying health care fraud legislation
from going forward now and not waiting any longer.
I have a number of proposals, Mr. Chairman. I won't take the
time now, since the witnesses are waiting, to outline what I believe
to be an appropriate and comprehensive approach to legislating in
the field of health care fraud, but I don't think we should delay by
one day any effort on our part to pass this now and not wait for
the President's program to be considered and adopted. This is
something we can do today and we ought to do today.
Thank you.
The Chairman. It does not make my party or my President
happy, but I agree with you.
Our first panel of witnesses is made of two distinguished per-
sons. The first is Gerald Stern. Mr. Stern is a special counsel for
health care fraud at the Department of Justice and is in charge of
the civil and criminal enforcement effort. Our second witness is Mr.
Michael Mangano, who is the Principal Deputy Inspector General
at the Department of Health and Human Services, which is
charged with investigating fraud in Medicare, Medicaid, and in So-
cial Security, and that is one heck of a job.
I truly appreciate both of you being here. I apologize for the late
start. Mr. Stern, why don't we begin with you?
PANEL CONSISTING OF GERALD M. STERN, SPECIAL COUN-
SEL, HEALTH CARE FRAUD, AND SPECIAL COUNSEL, FINAN-
CIAL INSTITUTION FRAUD, U.S. DEPARTMENT OF .JUSTICE;
AND MICHAEL MANGANO, PRINCIPAL DEPUTY INSPECTOR
GENERAL, U.S. DEPARTMENT OF HEALTH AND HUMAN
SERVICES
STATEMENT OF GERALD M. STERN
Mr. Stern. Thank you, Chairman Biden and Senators Grassley
and Cohen, for this opportunity to discuss the pressing problem of
health care fraud.
Ensuring that all Americans have access to quality health care
at a reasonable cost is a fundamental principle of the administra-
tion's health reform efforts. This goal, however, cannot be reached
if health care fraud goes unaddressed. Fraud can undermine both
the cost and the quality of health care. Fortunately, the Health Se-
curity Act not only decreases opportunities for fraud, it also in-
creases the likelihood that the fraud which may occur will be met
with the strong arm of law enforcement.
Before turning to the future, I would like to describe briefly the
present health care fraud enforcement program which sets the
foundation for the future. The Department of Justice is responding
to the health care fraud crisis to the fullest extent possible, given
the existing resources and remedies.
The number of cases investigated and prosecuted has risen dra-
matically over the last few years and will continue to grow. Indeed,
the FBI statistics taken at a specific point in time at the end of
March 1992 showed they were investigating 364 cases. The same
bird's eye view in March 1994 showed they were investigating
1,230 cases.
The Attorney General has made health care fraud her number 2
new initiative, and she has asked me to coordinate the Department
of Justice's health care fraud efforts. In Washington and in U.S. at-
torneys' offices across the country, we are working with the Federal
Bureau of Investigation, with the Inspector General of Health and
Human Services, with the other inspectors general who handle
health care fraud in the other agencies, and with numerous Fed-
eral investigative agencies. Our other important partners in health
care fraud enforcement also are at the State level with the State
Medicaid fraud control units and with the State attorneys general
offices.
8
Our experience to date demonstrates that health care fraud en-
forcement is most effective when we pursue a multi-prong attack.
First, the prosecutors bring criminal charges against the respon-
sible companies and persons. Second, the civil attorneys collect
damages and penalties. The third arm of enforcement is HHS and
the other agencies which impose administrative sanctions, such as
exclusion or suspensions.
To better coordinate all of this health care fraud enforcement,
last November we established an executive level health care fraud
policy group, which I chair and which has been meeting monthly
at the Department of Justice. The members include the Inspector
General of HHS, senior members of the Criminal and Civil Divi-
sions of the Department of Justice, and the FBI. This group has
been addressing emerging fraudulent schemes throughout the
country, national priorities, the sharing of data and investigative
techniques, and more efficient ways for us to work together and co-
ordinate our efforts.
Also important are various national and local health care fraud
working groups which we have both at the national level and in al-
most every one of our major cities today. They bring together the
Federal and the State prosecutors and the investigators, who often
then meet with the providers. They meet with private insurance
companies and citizens groups.
In fact. Senator Grassley, the Attorney General was in Iowa, in
Des Moines, meeting with the health care fraud working group
which we started up there, and also spoke with the folks over in
Cedar Rapids where we have a lot of the private insurance carriers
both in Des Moines and Cedar Rapids. So, that is a very good ex-
ample of our effort which has been reproduced in other States to
create these health care fraud working groups across the board.
Notwithstanding our vigilant efforts, perpetrators of health care
fraud will continue to prey upon the health care system. They sim-
ply will reshape their schemes to fit the particular reimbursement
system, whether it be fee-for-service, managed care, or managed
competition.
Fraud affecting fee-for-service plans includes billing for services
not rendered or not necessary, double billing, and illegal remunera-
tion such as kickbacks for patient referrals. Fraud in managed care
reflects the different reimbursement scheme there. There, you have
a fixed fee for an enroUe which controls the use of services through
a network of providers. In that situation, unscrupulous practices
may include impeding access to care, rather than giving too much
care, or encouraging the exclusion of costly consumers, or just fail-
ing to provide medically necessary services altogether.
Managed competition, which is the system envisioned by the
Health Security Act, will actually provide for both fee-for-service
and managed care plans. So we anticipate the same kind of health
care fraud schemes we now see, plus we anticipate new schemes,
such as improperly trying to influence the selection and terms of
plans or false or misleading submissions in the bid process. The
President's bill attempts to address these problems, as well as oth-
ers.
Senator Biden, because the red light is on, I could stop at this
point and wait and deal with the questions. I have outlined most
of what I am saying orally in the written statement I have pre-
sented.
The Chairman. OK, thank you.
[The prepared statement of Mr. Stern follows:]
Prepared Statement of Gerald M. Stern
Chairman Biden and Members of the Committee: Thank you very much for this
opportunity to discuss the pressing problem of health care fraud and its future
under health care reform.
Ensuring that all Americans have access to quality health care at a reasonable
cost for them and for the nation is a fundamental principle of the Administration's
health reform efforts. This goal however, cannot be reached if health care fraud
goes unaddressed; fraud can undermine both the cost and quality of health care.
Fortunately, the Health Security Act not only decreases opportunities for fraud, but
also increases the likelihood that whatever fraud occurs will be met with the strong
arm of law enforcement. Before turning to the nature of health care fraud in the
future, it is necessary to describe the Department of Justice's health care fraud en-
forcement program, which establishes a foundation for all future enforcement ef-
forts.
health care fraud: the crisis
While no one has an exact figure, health care fraud presently may count for as
much as 10 percent of all health care expenditures. Health care expenditures now
total approximately one trillion dollars each year, so that as much as $100 billion
may be lost in fraud annually.
Everyone pays the price for health care fraud: beneficiaries of government health
insurance such as Medicare pay more for medical services and equipment; consum-
ers of private insurance pay higher premiums; and taxpayers pay more to cover
health care expenditures.
While most health care providers are honest and care first and foremost about
their patients' welfare, fraud is perpetrated by every kind of provider: individual
physicians, as well as multistate publicly traded companies; medical equipment
dealers, ambulance companies, and laboratories as well as the hospitals and nursing
homes they service.
The horror stories are rampant. For example, recent Department of Justice
("DOJ") cases have involved the following frauds:
• Two patients died and 22 others required emergency coronary bypass surgery
when a Fortune 500 company distributed unapproved heart catheters to hos-
pitals and physicians. It preferred immediate profits to waiting for FDA clear-
ance. The company, C.R. Bard, Inc., pleaded guilty in Boston to conspiracy, mail
fraud and 363 violations of the Food, Drug and Cosmetic Act. It agreed to pay
$30.5 million in fines and criminal forfeitures and an additional $30.5 million
to resolve the government's civil claims. Individual corporate officials face trial
in the near future.
• A mobile diagnostic testing service and numerous medical and diagnostic test-
ing clinics billed more than $1 billion in fraudulent claims to private insurance
companies and more than $50 million in payments for unnecessary tests. Pros-
ecutors believe that CHAMPUS received more than $29 million in fraudulent
claims and paid out more than $1 miUion as a result of the scheme. The prin-
cipals in this scam have pleaded guilty to mail fraud, conspiracy and money
laundering.
• An attorney was convicted in Philadelphia in March 1994 of 107 counts of mail
fraud and 17 counts of money laundering in connection with his operation of
three unlicensed insurance companies, which falsely claimed that the policies
were funded by Blue Cross. His companies took in $34 million in health insur-
ance premiums and left victims with $5.8 million in unpaid claims. He faces be-
tween 97 and 121 months in prison and will be sentenced in the near future.
• Workers of small employers who sought to buy affordable health insurance from
self-funded group health plans known as multiple employer welfare arrange-
ments ("MEWA's") found themselves with unpaid medical bills because fraudu-
lent MEWAs purchased reinsurance from ofi'shore insurance companies with
few, if any, assets.
10
DEPARTMENT OF JUSTICE HEALTH CARE FRAUD ENFORCEMENT PROGRAM
The Department of Justice is responding to the health care fraud crisis to the full
extent possible given existing resources and legal remedies. In 1992, the Federal
Bureau of Investigation ("FBI") launched a health care fraud initiative which in-
cluded new training, new agents and task forces dedicated to health care fraud. The
FBI's caseload has increased dramatically. As of October 1, 1991, the FBI had 365
pending health care fraud investigations. By October 1993, this number had grown
to 1,051 pending investigations. It now exceeds 1,300.
Health care fraud matters and cases handled by United States Attorneys and
other Department of Justice attorneys similarly have risen dramatically over the
last few years. In fiscal year 1992, there were 343 criminal health care fraud mat-
ters pending; as of December 31, 1993, this number had more than doubled to 711.
Civil health care fraud matters also more than doubled in the same time period.
Recent victories have included:
• In 1992, National Health Laboratories, Inc. ("NHL") and its president and CEO
pleaded guilty in San Diego to submitting false claims to the United States. The
corporation paid a $1 million criminal fine, the President paid a $500,000 crimi-
nal fine and served three months in prison. The corporation also paid $100 mil-
lion in a settlement of civil claims involving Medicare and CHAMPUS, and
$10.4 million to 33 state Medicaid Fraud Control Units.
• In 1994, McKesson Corporation paid $765,000 to settle claims it overcharged
the Oregon Medicaid program for the cost of drugs dispensed to State Medicaid
recipients. The United States charged that McKesson had submitted several
hundred thousand claims for payment to Medicaid for prescription drugs in
which they falsely represented that the brand name drug — which was more ex-
pensive than the generic drug — was medically necessary.
• Several hospitals submitted duplicate and/or misleading bills which charged
separately for services already included as part of a bill for an entire hospital
treatment. In Alabama, the United States Attorney's Offices recently recovered
over $580,000 from several hospitals who double billed Medicare for inpatient
and outpatient services.
Although the Department of Justice is proud of its record, we recognize that these
cases are only the tip of the iceberg."
FUTURE SUCCESS REQUIRES INTERAGENCY COOPERATION
The Department of Justice has long worked with the Department of Health and
Human Services Office of Inspector General ("HHS OIG") to investigate and pros-
ecute health care fraud in Medicare and with the HHS OIG and the state-based
Medicaid Fraud Control Units ("MFCU's"). We anticipate a continued collaborative
relationship with the MFCUs, especially as we build on their experiences with fraud
in managed care settings.
Other federal investigatory agencies also committed to combating health care
fraud include, but are not limited to, the Defense Criminal Investigative Service, the
United States Postal Service, the Railroad Retirement Board, the Department of
Veterans Affairs Inspector General, and the Pension and Welfare Benefits Adminis-
tration and Inspector General of the Department of Labor.
The Department of Justice is most effective in combating health care fraud when
it pursues criminal, civil, and/or administrative proceedings, where appropriate. In-
creasingly, our cases comprise parallel proceedings where the responsible companies
and/or officials plead guilty or are convicted criminally and at the same time, civil
damages and penalties are collected. The Department of Justice has several civil
fraud initiatives, targeting frauds not prosecuted criminally. For example. United
States Attorneys' Offices in Scranton, Pennsylvania, in Alabama and elsewhere have
targeted hospitals with credit balances and with duplicate billing records; the Unit-
ed States Attorney's Office in Philadelphia is suing physicians who bill patients
more than permitted under Medicare or a Federal Employees Health Plan. Thanks
to these efforts, health care fraud that may not constitute criminal activity never-
theless is prosecuted; the government recovers its damages, civil penalties are paid
and the victims of health care fraud receive restitution. This is important whether
the victims of health care fraud are individual patients or health care insurance sys-
tems, including Medicare and Medicaid.
The Department of Justice also fully cooperates with the efforts of the HHS OIG
to implement administrative remedies, the third arm of enforcement. Exclusions,
suspensions or administrative civil penalties are often the appropriate response to
health care fraud and abuse. Prosecutors, investigators, and health system adminis-
trators must work together not only to punish perpetrators of health care fraud and
11
recover monetary losses, but also to stop perpetrators from profiting from ongoing
fraudulent schemes and to prevent those who committed fraud in the past from re-
peating the fraud in the future.
To implement this multipronged strategy with respect to the Medicare program,
the Department of Justice works closely with the HHS Inspector General and with
the Health Care Financing Administration ("HCFA"). For the first time, we have in-
stitutionalized regular meetings between DOJ, HHS OIG, HCFA and the Medicare
contractors at the national, regional and local levels to discuss trends in fraudulent
practices and devise possible solutions to stop ongoing fraud. Medicare contractors'
recently formed Fraud and Abuse Units and Health Care Fraud Coordinators also
help detect and prevent fraud, and assist law enforcement in investigating and pros-
ecuting these cases. DOJ, HHS OIG and HCFA also are working together to ensure
that, as electronic claims processing becomes universal, critical evidence of health
care fraud is not eliminated. We are exploring pilot advanced electronic fraud detec-
tion programs. As fraudulent schemes become more sophisticated so must our meth-
ods of detection.
Several vehicles now facilitate communication and coordination among health care
fraud enforcement authorities. Last November, we established an Executive Level
Health Care Fraud Policy Group, which I chair, to develop national health care
fraud enforcement policy. Members include the Assistant Attorneys General for the
Criminal Division and Civil Division, the Department of Health and Human Serv-
ices Inspector General, and a senior FBI official. The United States Attorneys are
represented by the Co-Chair of the Attorney General's Advisory Committee, Health
Care Fraud Subcommittee. This forum permits policy development and coordination
at the highest levels of the Department of Justice and the Department of Health
and Human Services. It already has tackled issues such as identification of emerg-
ing fraudulent schemes, development of national priorities, sharing of data and in-
vestigative techniques, and development of an accelerated recovery and voluntary
disclosure program.
In addition to the Executive Level Health Care Fraud Policy Group, health care
fraud working groups exist at the national, regional, and local levels, many of which
include federal and state prosecutors and investigators from FBI, HHS OIG, and
other federal agencies as well as state Medicaid Fraud Control Units. Many of these
working groups also work with private insurance companies to share information on
fraudulent schemes and investigative techniques.
FUTURE OF HEALTH CARE FRAUD
The Department of Justice's health care fraud enforcement program establishes
a strong foundation for our future enforcement efforts. Unfortunately, perpetrators
of health care fraud will attempt to prey on any health care system Congress
adopts; they simply will reshape their schemes to fit the particular form of reim-
bursement: fee-for-service, managed care, or managed competition.
Fee-for-services health plans are common under the present health care system.
Fraud affecting these plans can include billing for services not rendered; billing for
services not necessary; double billing; manipulated billing to maximize reimburse-
ments by upcoding or unbundling services; and illegal renumeration such as offering
or accepting kickbacks for patient referrals. Many Department of Justice cases pres-
ently involve these types of schemes.
Fraud under managed care plans reflects the different reimbursement scheme. A
health maintenance organization ("HMO") is paid a capitated or fixed fee for an en-
roUee and is responsible for controlling use of services through a limited network
of providers. Whereas fee-for-service plans see overutilization, managed care plans
see underutilization. Here unscrupulous practices can include impeding access to
care or encouraging disenrollment of costly consumers; failing to provide medically
necessary services; or providing financial incentives for enrolling consumers unlikely
to use lots of medical services. States with managed care plans such as Arizona,
Michigan, and California have experienced these kinds of cases. Unfortunately, so
has the federal system. One recent case litigated by the United States Attorney's
Office for the District of Columbia illustrates one type of scam:
• Group Health Association, Inc. ("GHA"), a Health Maintenance Organization,
agreed to pay $12,629,123 to resolve claims by the United States that GHA
overcharged federal agencies and employees for health care benefits from 1990
through 1993, based on misleading disclosures of rates paid to other large
groups of employees.
Managed competition, the system envisioned by the Health Security Act, would
include fee-for-service and managed care plans. Therefore, we should anticipate at-
12
tempts to continue health care fraud schemes we now see in fee-for-service and
managed care plans. In addition, we may see attempts to improperly influence offi-
cials regarding the selection and terms of plans; false submissions in the bid proc-
ess; false representations to induce enrollments; and misrepresentations of consum-
ers' health to justify higher payments under risk adjustment formulas.
These problems are far from unique to the Administration proposal; yet, only the
Health Security Act contains the comprehensive health care fraud control program
necessary to combat them. The Administration's proposal eliminates many opportu-
nities for fraud by simplifying health care reimbursement. To address the fraud that
unfortunately will still occur, the Act establishes an All-Payer Anti-Fraud Control
Program and provides the criminal, civil, and administrative tools necessary for
stronger and more meaningful health care fraud enforcement. Finally, it estabUshes
a reliable source of supplemental resources for health care fraud enforcement paid
for by the perpetrators of the fraud.
First, the present multiplicity of health care systems facilitates health care fraud
and abuse while fragmenting our efforts to combat it. Americans receive health care
from a plethora of private health insurance companies and public programs. There
are over one thousand different payers. Public programs alone include Medicare,
Medicaid, the Civihan Health and Medical Program of the Uniformed Services,
known as CHAMPUS, and Federal Employee Health Programs. Each program has
its own rules for the provision of services and for the reimbursement of costs. There
are hundreds of different claim forms, multiple identification numbers, coding sys-
tems and billing procedures. Information sharing among payers frequently is poor.
The fragmentation of the health care system is mirrored by the multiplicity of law
enforcement agencies dedicated to investigating fraud in a specific health care sys-
tem. For example, the HHS OIG primarily addresses Medicare and Medicaid fraud
(the latter through the Medicaid Fraud Control Units), the Defense Criminal Inves-
tigative Service focuses on CHAMPUS fraud, and the Department of Labor Inspec-
tor General and the Pension and Welfare Benefits Administration investigate fraud
in employee health benefit programs. In the past, many of these agencies set their
priorities focusing exclusively on their specific program concerns, available data and
rGSOurcGS.
Perpetrators of health care fraud currently exploit the multiplicity of health care
systems and their respective forms, codes and procedures. They rarely infiltrate just
one health care system. Due to the program-specific focus of law enforcement,
health care fraud investigations may risk being piecemeal and inefficient and, as a
result, our ability to detect emerging trends and the full scope of a fraud may be
compromised.
The Health Security Act eliminates many of the opportunities for fraud by estab-
Ushing standardized claims forms and coding and unique secure identification num-
bers for all providers and patients. This will go far to eliminating the opportunities
for multiple biUing. Moreover, the Health Security Act authorizes an All-Payer
Health Care Fraud And Abuse Control Program. The Act authorizes the Attorney
General and the Secretary of Health and Human Services (through the HHS Inspec-
tor General) to coordinate prevention, detection, and control of fraud in all aspects
of the reformed health care system. The HHS OIG will be able to apply its experi-
ence fighting health care fraud in Medicare and Medicaid to combating fraudulent
schemes in any health care system. The Act specifically authorizes the Attorney
General and the Inspector General to facilitate the enforcement of the new and ex-
isting statutory remedies applicable to health care fraud and abuse and arrange for
the sharing of data and resources with federal, state and local law enforcement
agencies, State Medicaid Fraud Control Units and state agencies with licensing and
certification responsibilities. By instituting an all-payer health care fraud program,
with the sharing of data and resources, the Act removes many of the program-spe-
cific limitations which have frustrated many law enforcement agencies confronting
health care fraud, and thereby fosters interagency collaboration.
Second, the Health Security Act provides strengthened criminal, civil, and admin-
istrative remedies for health care fraud, which will give prosecutors new tools to
stop health care fraud, punish its perpetrators and recover funds for the government
and other victims. These provisions create a new general health care fraud offense
prohibiting schemes to defraud any health alUances, plan or person in connection
with the delivery of or payment for health care. At present, a general federal health
care fraud offense does not exist. State health care prosecutions, while they are im-
portant and must continue, will never be an adequate response to health care fraud.
A prominent federal role is warranted in health care fraud enforcement as with all
white collar crime such as savings and loan fraud, securities fraud, and computer
fraud. The federal government has more advanced resources to detect and pursue
health care fraud such as computers and personnel experienced in detecting complex
13
financial schemes. In addition, the federal government is better able to deal with
sophisticated Schemes that often cross state lines. This new offense does not
criminalize innocent billing errors by providers or inadvertent patient mistakes; it
reaches knowing schemes to defraud. With the enactment of a federal health care
fraud offense, Congress can make a strong public statement against health care
fraud similar to the action taken with the enactment of a bank fraud offense in the
Financial Institutions Reform, Recovery and Enforcement Act of 1989.
In addition to the general health care fraud offense, the Act includes specific of-
fenses targeting the types of fraud which may emerge under any reform: false state-
ments in matters involving health alliances or plans; bribery and graft in connection
with health care; theft or embezzlement in connection with health care; and misuse
of health security cards or unique identifier numbers. Any health care reform must
include provisions targeting likely new fraudulent schemes. Only the Health Secu-
rity Act meets this test.
Of course, not every fraudulent scheme merits criminal prosecution. However,
given the present array of sanctions, the Department of Justice too often will be
forced to choose between criminal prosecution or no sanction at all. The Health Se-
curity Act fills that void. It amends the False Claims Act to cover false statements
presented to health care plans and alliances. The anticipated future configuration
of the American health system necessitates this proposed amendment. Most Ameri-
cans will receive health care from health plans which will mingle federal and pri-
vate funds. This provision ensures that false statements to such plans will receive
the appropriate attention.
The Act facilitates civil fraud cases by providing civil prosecutors of health care
fraud the same tools available to civil prosecutors of bank fraud: namely, access to
grand jury material. The Act also upgrades civil monetary penalties and other ad-
ministrative remedies to ensure that persons found guilty of health care fraud in
one health care system such as Medicare cannot repeat their fraud in other systems
such as CHAMPUS or Federal Employees Health Program.
A final issue in ensuring health care fraud enforcement involves the need for ade-
quate resources. Health care fraud cases are extremely resource intensive. They are
among the most document intensive of all white collar crime cases. Investigation of
false billing cases, for example, requires extensive storage space, computer informa-
tion management systems, and financial analysis. As computer billing frauds be-
come more common, so must sophisticated — and expensive — electronic fraud detec-
tion.
The Health Security Act will enhance fraud control by providing a source of re-
sources for anti-fraud efforts. Section 5402 establishes an Anti-Fraud Control Ac-
count to fund audits, inspections of health care programs and health care fraud in-
vestigations and prosecutions. This Control Account will be financed with the crimi-
nal fines, civil penalties and damages, administrative penalties and assessments im-
posed, and assets forfeited in federal health care fraud cases. The Control Account
will not receive restitution recoveries, which will continue to go to the direct victims
of health care fraud. In recognition that the Control Account must support the goals
and priorities of the All-Payer Health Care Fraud and Abuse Control Program, the
Control Account will be administered by the Attorney General and the Secretary of
the Department of Health and Human Services, the same parties responsible for es-
tablishing the national health care fraud program. The numerous federal as well as
state agencies involved in health care fraud control will be eligible to receive re-
sources appropriate to their health care fraud and control effort consistent with the
national program.
Unfortunately, we cannot establish a health care system which is 100 percent
fraud proof However, our chances to prevent, detect, and control fraud are improved
dramatically because the Health Security Act includes a comprehensive fraud con-
trol program not as an afterthought but as a fundamental feature of the new health
care system.
This concludes my prepared remarks. I will be pleased to answer any questions
that you may have.
The Chairman. Mr. Mangano?
STATEMENT OF MICHAEL MANGANO
Mr. Mangano. Thank you very much, Mr. Chairman. I am
pleased to be here this afternoon with my colleague from the De-
partment of Justice to discuss health care fraud and abuse.
14
Let me first begin by saying that most health care providers are
honest individuals working toward improving the health and well-
being of their patients. It is a small group of health care providers
that are responsible for the fraudulent activities. Yet, fraud and
abuse that does occur represents a serious threat. It costs our Na-
tion billions of dollars each year. These costs increase health care
premiums for everyone, and to the degree to which the health care
programs are federally funded, they increase the cost to the tax-
payers. In addition, health care fraud and abuse puts citizens at
risk by exposing them to unnecessary, sub-standard medical tests,
procedures and equipment.
Our written statement discusses the extent and types of health
care fraud that we encounter in some detail. I can safely state that
fraud permeates the system. It can be found in all areas of the
country and is committed by all types of providers.
The types of cases we investigate range from simple false claims
to complex schemes involving groups of people. Billing for services
not rendered continues to be the most common type of fraud com-
mitted against the Medicare and Medicaid programs.
Frequently, our investigations also involve providers and suppli-
ers who game the programs by unbundling and upcoding charges.
We also have become increasingly involved in allegations of viola-
tions of the antikickback
The Chairman. Explain for the record what you mean by
"upcoding." I know what you mean, but it is important.
Mr. Mangano. What that has to do with is a medical provider
charging for a service that is really more intensive than the service
that was actually provided.
The Chairman. And there is a code.
Mr. Mangano. That is correct.
The Chairman. Explain what that is.
Mr. Mangano. Medicare pays its bills according to the codes that
physicians and other health care providers charge against that
service. So a specific code identifies a specific service that is deliv-
ered.
The Chairman. A broken arm versus a heart transplant?
Mr. Mangano. That is correct.
The Chairman. They are coded differently.
Mr. Mangano. That is right.
The Chairman. You get remunerated differently.
Mr. Mangano. Yes. Some codes get remunerated much higher
than others. Typically, an easy example to think of that is the way
we pay for patients in hospitals. It is paid on a diagnostic-related
group basis. There are 279-plus different diagnoses that a person
can go into a hospital and be charged against. A heart transplant
would be one code, a broken arm would be another. The hospital
will get the payment for the broken arm if billed for that.
The Chairman. When you say upcoding, it is picking a service
that was not provided that there is a greater payback from the
Government to the provider for?
Mr. Mangano. That is correct.
We have also become increasingly involved in allegations and
violations of the antikickback statute, which prohibits the payment
or receipt of anything of value as an inducement for the referral
15
of Medicare of Medicaid business. Other scams investigated by our
office including the charging for generic drugs at brand name
prices and selling fraudulent or worthless medical products.
Since the creation of the Office of the Inspector General, we have
been actively and aggressively involved in combatting fraud and
abuse in the health care programs financed by the Department,
principally Medicare and Medicaid. The OIG's activities are de-
signed to accomplish three tasks: to reduce fraud and abuse
through successful detection, investigation and prosecution of
criminal and civil wrongdoing; to prevent fraud and abuse in De-
partment programs by identifying and recommending corrective ac-
tions and to eliminate weaknesses that increase the opportunities
for wrongful behavior; and to identify wasteful practices and more
efficient practices that can lead to program savings and protect the
financial viability of the trust funds.
With national attention now being paid to reforming our health
care system, it is particularly an opportune time to consider how
we improve our ability to combat fraud and abuse. Any health care
reform plan should have strong fraud and abuse provisions. We be-
lieve that three major problems need to be addressed.
First, the health care reimbursement system should be sim-
plified. Currently, there are so many different billing forms, medi-
cal coding conventions, provider and patient enumeration systems,
rules of coverage, payment methodologies and claim processors that
it is extremely difficult to detect and deter sophisticated fraud and
abuse.
We need to standardize on a national basis how we enumerate
the providers and patients, prepare and submit billing forms or
electronic records for payment, coordinate benefits when multiple
insurers are involved, and establish accountability for each partici-
pant in the health care system — patient, provider, processor and
payer.
Moreover, these same kinds of changes will make it easier for the
honest participants in the system by reducing the number and
complexity of rules that have to be followed by eliminating unnec-
essary administrative activities and duplicate paperwork.
Second, statutes should be strengthened to protect citizens from
those who defraud the health care delivery system. This action
would mean not only improving authorities that currently apply to
Medicare and Medicaid, but also establishing authorities that can
be used to combat fraud perpetrated against private health plans.
Currently, administrative actions such as civil monetary penalties
and exclusions, as well as antikickback provisions, do not apply be-
yond Medicare and Medicaid.
Third, we support the establishment of a new funding mecha-
nism for more aggressive enforcement in the health care system.
We believe that it is appropriate to have those who defraud the
system pay for greater enforcement. Several reforms that have
been proposed would establish a special account to recycle monies
recovered from those who defraud the health care system. Deposits
into the account would include money recovered in health care
cases, such as criminal fines, civil penalties and damages in cases
brought under the False Claims Act, and administrative penalties
16
and assessments. Of course, restitution would continue to be made
to programs and plans which suffered the losses.
In addition to addressing those three problems, it is critical that
the total enforcement effort be well coordinated. There are numer-
ous Federal, State and local enforcement groups with a stake in in-
vestigating and prosecuting health care fraud under health reform.
The effort will not work unless everyone is working together to
share data, expertise and resources. We have worked diligently to
ensure that our efforts are well coordinated.
In closing, Mr. Chairman, we cannot afford to continue losing bil-
lions of dollars each year in health care fraud. Simplification, im-
proved enforcement authorities, and a new funiing mechanism are
all necessary to address the growing problem.
That completes my opening statement and I would be happy to
answer any questions you may have.
[The prepared statement of Mr. Mangano follows:]
Prepared Statement of Michael Mangano
Good morning Mr. Chairman and members of the committee. I am Michael
Mangano, Principal Deputy Inspector General for the Department of Health and
Human Services (HHS). I am pleased to be here today to discuss the important
issue of health care fraud and abuse. These are major problems that cost our na-
tion's health care system billions of dollars each year, in addition they put citizens
at risk by exposing them to unnecessary or substandard medical tests, procedures,
or equipment. It will take the concerted efforts of Federal, State, and local officials
to deal with these problems effectively.
HEALTH care REFORM
Mr. Chairman, this is a particularly opportune time to discuss health care fraud
and abuse because of the national attention being paid to reforming our health care
system. Any plan for health reform that does not address fraud and abuse is badly
flawed. Three major problems must be addressed.
THE CURRENT HEALTH CARE SYSTEM
First, the health care reimbursement system should he simplified. Currently,
there are so many different billing forms, medical coding conventions, provider and
patient enumeration systems, rules of coverage, payment methodologies, and claims
processors that it is extremely difficult to detect and deter sophisticated fraud or
abuse. This is particularly true when schemes are perpetrated across both public
and private sector insurance programs, where administrative systems and record
keeping procedures may vary significantly. To make fraud and abuse harder to per-
petrate, we need to standardize on a national basis how we enumerate providers
and patients, prepare and submit billing forms or electronic records for payment,
coordinate benefits when multiple insurers are involved, and establish accountabil-
ity for each participant in the health care system — patient, provider, processor, and
payer. Moreover, these same kinds of changes will make it easier on the honest par-
ticipants in the system by reducing the number and complexity of rules that have
to be followed and by eliminating unnecessary administrative activities and duplica-
tive paperwork.
ENFORCEMENT RESOURCES
As part of a reformed health care system, we believe that serious consideration
should be given to increasing the resources devoted to health care fraud and abuse
activities. Additional resources would allow for more aggressive pursuit of defraud-
ers and abusers. The limited resources that are available make it difficult to address
sophisticated and complex schemes that defraud and abuse health care programs.
Often these schemes are more than local anomalies, extending across State lines
and even nationally. If resources are not available to identify patterns of waste and
abuse as well as investigate and prosecute complicated cases, wrongdoers will be
more apt to commit fraud in order to gain substantial financial rewards.
17
To enhance resources for combating fraud and abuse, we support the estabHsh-
ment of an All-^ayer Health Care Fraud and Abuse Control Account. Funds for this
account should include criminal fines imposed in cases involving Federal health care
offenses, civil penalties and damages imposed in health care cases under the False
Claims Act (other than funds awarded to a relator or for restitution), administrative
penalties and assessments in health care cases (other than finds returned to original
payers, such as the Medicare Trust Fund or the States), and amounts resulting from
the forfeiture of property by reason of a Federal health care offense.
ENFORCEMENT AUTHORITIES TO PROTECT CITIZENS AND HEALTH PLANS
Several statutory improvements could be made to protect citizens and their health
care plans from unscrupulous providers. We can build on our successful initiatives
and remedies in the Medicare and Medicaid programs. First, we can make needed
changes in statutes governing those programs and then enhance them to address
fraud and abuse throughout the health care system.
Changes to Current Medicare and Medicaid Statutes — While we believe that we
have been successful in combating fraud and abuse in the Medicare and Medicaid
programs, certain statutory modifications could be made to decrease program
abuses. These modifications include:
• Civil monetary penalties should be added for activities such as kickbacks, rou-
tine waiver of copayments (with appropriate exceptions, e.g., for low income in-
dividuals), and "upcoding."
• The current Medicare ban on payments for physician self-referrals should be
broadened to include any item or service not rendered by the physician person-
ally or by a person under the physician's direct supervision. Many of the exist-
ing exceptions should he revised, such as the in-office ancillary services, prepaid
plans, and physician recruitment exception.
• The current permissive exclusion for individuals or entities convicted, in connec-
tion with delivery of health care items or services, of fraud or financial mis-
conduct should be made mandatory. A criminal conviction related to delivery of
an item or service in Medicare or a State health plan are currently the basis
of a mandatory exclusion.
Enhancing Current Remedies to Address Fraud Throughout the Health Care Sys-
tem — While the Federal Government currently has many authorities to combat
fraud and abuse in the Medicare and Medicaid programs, similar authorities to ad-
dress abuses in private health plans do not exist. The following actions are among
those that could resolve this discrepancy:
• Current civil monetary penalty authorities should be expanded to authorize the
Federal Government to assess penalties against persons who engage in specified
activities with respect to any health plan. The basis for these penalties should
include, for example, false claims and false statements in claims, or false adver-
tising to the public.
• Civil monetary penalties should also be aimed at managed care abuses that
occur in all managed care plans. These abuses are very different than those
that exist in fee-for-service medicine (where there is an incentive to order more
services) and include "skimming," which is discouraging the enrollment (or actu-
ally disenrolling) unhealthy patients or patients in high risk groups, or denying
patients expensive care even when it is medically indicated.
• Current Federal exclusion authorities should be expanded to authorize HHS to
exclude a provider from in participation in all public and private health care
programs.
• Current Medicare-Medicaid prohibitions on kickbacks and physician self-refer-
ral should be extended to all public and private payers. (Health care items and
services that are paid on an at-risk, capitated basis do not have similar over-
utilization concerns. Therefore, any reform should include appropriate excep-
tions for certain managed care plans and capitated payments to providers.)
• A health care fraud criminal statute should be enacted. Since few criminal pro-
visions directly address health care fraud, a new statute would serve as clear,
explicit notice to all that this conduct is prohibited by specifically penalizing
schemes to defraud either public or private health care programs.
• The False Claims Act should be expanded to cover claims presented to all
health plans. The civil provisions of the current False Claims Act cover claims
submitted to the Government.
• A data base of all final adverse actions against health care practitioners should
be established with appropriate safeguards for privacy and access.
18
COORDINATION
In addition to addressing these three problem areas, it is critical that the total
effort be well coordinated. There are numerous Federal, State and local law enforce-
ment groups with a stake in investigating and prosecuting health care fraud. These
include the Department of Justice and the Federal Bureau of Investigation; the In-
spectors General at HHS, the Department of Defense, the Department of Labor, and
the Department of Veterans Affairs; the United States Postal Service, State Medic-
aid Fraud Control Units and State Attorneys General; and HCFA's Medicare con-
tractor fraud units. Only by working together can we effectively use the resources
of these various entities to combat fraud and abuse. This coordination must include
the sharing of data, expertise, and resources.
The Federal and State agencies involved in combating health care fraud and
abuse are not waiting for the enactment of health reform legislation to coordinate
our enforcement efforts to the greatest extent possible. The HHS/OIG is working to
consolidate direction of all functions funded wholly or primarily with HHS funds,
including the 42 State Medicaid Fraud Control Units, and the 65 newly-established
Medicare Contractor Fraud Units at the Medicare carriers and intermediaries. We
are also working with law enforcement officials outside of our Department. Last No-
vember, we worked with the Department of Justice to establish an Executive Level
Health Care Fraud Policy Group. The group includes representatives of the Attorney
General's office, the Civil and Criminal Divisions of DOJ, the FBI and OIG. We
have been working to identify new methods of proceeding against health fraud, iden-
tifying priority areas fair increased enforcement, and breaking down red tape bar-
riers. Finally, we and the other Inspectors General have formed an IG Health Fraud
Coordination Council to better handle fraud problems that affect the programs of
our respective Departments.
We have also looked beyond the government to prevent waste and deter fraud and
abuse. Until recently, private health insurance programs had no significant inves-
tigative response to fraud. To address this issue, in 1985 we helped launch, and
were one of the founding members of, the National Health Care Anti-Fraud Associa-
tion (NHCAA). This association currently has 660 members and consists of nine
public sector entities including our office, Medicaid Fraud Control Units, and 52 pri-
vate sector entities. These members share information (with appropriate legal safe-
guards), engage in public education on health care fraud issues, train members and
non-members through regional conferences, seminars, and workshops, and serve in
an advisory capacity to industry, regulatory, and legislative bodies. In addition to
working on joint projects with this group, we help train the members in better de-
tection techniques and alert them to new types of health fraud.
Let me now describe to you in greater detail the nature and extent of the problem
of health care fraud and abuse and what we do to counteract it in the Department
of Health and Human Services.
EXTENT AND TYPES OF HEALTH CARE FRAUD AND ABUSE
Recently, the rapid rise in health care expenditures and problems associated with
access have attracted unprecedented attention and scrutiny. This attention has also
brought about discussions regarding the magnitude and pervasiveness of fraud,
waste, and abuse. . u u
In examining monetary losses to health programs, some distinction should be
made among fraud, abuse, and waste. Although frequently one problem or faihng
involves all three, we use the following rough definitions:
• Fraud is the obtaining of something of value through intentional misrepresenta-
tion or concealment of material facts.
• Abuse is any practice that is not consistent with the purposes of providing pa-
tients with services which (1) are medically necessary, (2) meet professionally
recognized standards, and (3) are fairly priced.
• Waste is the incurring of unnecessary costs as a result of deficient practices,
systems, or controls.
It is extremely difficult to estimate the total monetary loss as a result of fraud
in the health care industry. I note that our jurisdiction is over the Medicare and
Medicaid programs and we have conducted numerous analyses in specific areas of
these programs and have found substantial losses. For example, we know from our
reviews of the Medicare secondary payer program that Medicare had inappropri-
ately paid upwards of a billion dollars annually that should have been paid by pri-
vate insurers. Similarly, after we identified problems associated with hospital credit
balances, HCFA took corrective action that recovered in excess of $500 million We
can also tell you the more we look the more areas of fraud and abuse we find. Thus
19
we can state with certainty that fraud and abuse associated with health care in this
country is in the billions of dollars.
TYPES OF FRAUD AND ABUSE
Over the years, the types of health care fraud confronted by our office has
changed. In the 1970's, we found that we were largely dealing with individual pro-
viders who were involved in relatively uncomplicated schemes, such as filing false
claims which resulted in a few thousand dollars of damage to the Medicare program.
Today, it is more common to see cases involving groups of people who defraud the
Government. Some of the schemes are relatively complex, often involving the use
of sophisticated computer techniques, complicated business arrangements, and mul-
tiple locations across State lines. These crimes can cause losses in the tens of mil-
lions of dollars to Medicare and Medicaid, as well as to other public and private
health insurance programs. As our health delivery system evolves we can expect to
confront different types of fraud and abuse.
Because of the limited time we have today, we have selected a few examples of
fraudulent and abusive practices that will give you a broad overview of the types
of cases investigated by our office. The following types of fraudulent activity are
among those most prevalent that we investigate (some of the case examples involve
multiple abuses):
Billing For Services Not Rendered — Most of our workload continues to involve bil-
lings for services not rendered. These cases are more readily accepted for prosecu-
tion by the United States Attorneys and are responsible for the bulk of the convic-
tions obtained in the health care field. The following cases are examples of recent
successful prosecutions involving billing for services not rendered:
• A California man illegally received almost $1 million by using various physi-
cians' provider numbers to bill Medicare for blood circulation tests he never per-
formed. He diverted notices of payments to 38 mail drops he controlled by put-
ting false beneficiary addresses on the claims.
• The owner of a durable medical equipment company in Ohio solicited orders for
seat lift chairs through a telemarketing firm, collected $300 to $600 from Medi-
care beneficiaries — many of whom were disabled-billed Medicare, but never de-
livered the chairs.
• An Illinois psychiatrist had to repay $300,000 to Medicare and Medicaid for
submitting claims that indicated he was working more than 24 hours a day.
Misrepresentation of Services Rendered — The Medicare program loses money
when providers submit claims that do not reflect the services actually performed or
the supplies actually delivered. Some providers try to "game" the program by
unbundUng and upcoding charges. Unbundling is the billing of the subcomponesnt
parts of an item or service rather than the complete item or service in order to in-
flate charges far above the appropriate level. Upcoding is the practice of billing for
a more intensive service than the one actually delivered. The following cases are ex-
amples of recent successful prosecutions involving inaccurate claims:
• National Health Laboratories, Inc. (NHL), one of the nation's largest clinical
laboratories, purposely designed its laboratory forms and billing procedures to
induce doctors to order unnecessary laboratory tests. The company added two
tests every blood chemistry panel test ordered by a physician. Doctors were led
to believe that the extra tests cost little or nothing. However, because Medicare
and Medicaid claims are submitted directly to those programs by laboratory
companies, the programs were billed high prices for the tests, a fact unknown
to the doctors. Following the government's investigation, NHL and its president
were convicted of fraud, and the total amount paid by NHL to the government
in settlement was $110 million. In addition, the president of NHL served time
in jail for his activities. A similar case was settled with MetPath and MetWest,
for approximately $40 million.
• A Minnesota psychiatrist billed Medicare, Medicaid and the Department of Vet-
erans Affairs for more than $60,000 for extensive psychotherapy and visits with
patients in nursing and board and care homes whom he did not see or saw only
in groups at meals and snacks.
• A Florida ophthalmology group paid $2.5 million to resolve claims arising from
two Medicare billing schemes. In one scheme, they billed for services under an
erroneous code to obtain maximum reimbursement for laser surgeries. In the
other they contracted with a billing service which resubmitted to Medicare
claims for individual procedures already reimbursed under global payments.
20
Kickbacks and Physician Self-referral — A widespread problem in the fee-for-serv-
ice area is the problem of kickbacks and physician self- referral. A kickback is the
payment or receipt of anything of value as an inducement for the referral of health
care business. Physician self-referral is an overlapping and similar problem. Physi-
cian self-referral is the referral for any item or service to an entity by a physician
who has a "financial relationship" with that entity, and where the physician does
not directly provide the item or service. The overall concern within kickbacks is that
financial, rather than medical, factors may affect physician decisions about provid-
ing patients medical care. Since 1987, we have received more than 1,967 allegations
of violations of the anti-kickback statute, and have opened over 1,194 cases involv-
ing 2,099 individuals. Over 716 convictions, settlements, and exclusions have been
obtained as a result of our investigations, as well as almost $25.5 million in mone-
tary recoveries. The following are examples of recent successful prosecutions involv-
ing kickbacks:
• In 1986, a retired electrician from Chicago had a "mystery pacemaker" im-
planted in his chest. One could not determine the brand, serial number or even
the expiration date of his pacemaker or the lead attached to his heart. The pa-
tient aid not know his pacemaker was subject to failure, which would require
a pacemaker replacement operation with all the attendant risks of surgery.
Hundreds of other elderly patients in the Midwest also received mystery pace-
makers. Why did the patient's cardiologist implant such a pacemaker? The car-
diologist admitted that he received the services of a prostitute, a trip to Hawaii
and other types of kickbacks from the pacemaker dealer. That dealer and nine
others were convicted for misbranding pacemakers, changing their expiration
dates, giving kickbacks and/or overcharging.
• A chiropractor and his wife in Georgia had to repay Medicare and more than
30 insurance companies over $2.2 million for a scheme in which employees and
some 40 patients were paid a percentage of reimbursement for treatments,
many of which were never done. In one instance bills were submitted for 169
persons supposedly treated in one day.
• A total of sixteen physicians, two physician assistants, three office managers
and the owner of a durable medical equipment company were convicted in Flor-
ida for paying or receiving $50 to $300 each in exchange for prescriptions for
oxygen concentrators or nebulizers. The company owner was ordered to repay
$3.8 milhon to Medicaid.
AREAS OF FRAUD AND ABUSE
While these types of fraudulent activities can permeate all aspects of the health
care system, we have devoted significant resources to areas that appear rife with
abuse. These areas include home health agencies, psychiatric clinics, clinical labora-
tories, home infusion, and durable medical equipment. These areas are described in
more detail below.
Home Health Agencies — Home health agencies (HHA) provide care in the pa-
tient's home, with limited supervision by an attending physician. Several kinds of
fraud occur in HHA operations: cost report fraud; excessive services or services not
rendered; use of unlicensed or untrained staff; falsified plans of care and forged phy-
sicians' signatures; kickbacks; and intermediary hopping. Since 1986, we have con-
cluded 29 successful criminal prosecutions of HHAs and their employees. Since
1991, we have excluded 27 HHAs, owners or employees from participating in Medi-
care.
Psychiatric Services — There are approximately 700 psychiatric hospitals partici-
pating in the Medicare program. Program funds exceed $2.5 billion annually for in-
patient psychiatric care. Our investigations lead us to believe that the major concern
is the medical necessity of lengthy hospital stays. We are also concerned about kick-
backs and other incentive arrangements between the hospitals and practitioners or-
dering psychiatric hospitalization. In a scheme we saw recently, hospitals paid phy-
sicians up to $2,000 for each patient referral. The chnics included payment to doc-
tors in their cost reports they submit to Medicare. The payments doctors received
were ostensibly for writing manuals for the clinics to use in the care of patients,
but these manuals were never written. The OIG has several ongoing investigations
(with the FBI) of psychiatric hospitals.
Clinical Laboratories — Our investigations into clinical laboratries indicated that
the major fraud in this area is over-utilization. The laboratories bill the Medicare
program directly and beneficiaries are not liable for any cost sharing. As a result,
neither physicians nor beneficiaries have adequate information or incentive to mon-
itor utilization or costs. The marketing of tests by laboratories also encourages their
over-utilization while maximizing reimbursement from Medicare and Medicaid.
21
Many tests are performed on automated equipment capable of conducting multiple
analyses on a single specimen. While the profiles are marketed to non-Medicare
users as a single product, we are concerned that some laboratories unbundle the
tests by billing Medicare for individual tests. Program expenditures for clinical lab-
oratories was over $1.7 billion dollars in 1993. In the last 3 years, eight convictions
have been obtained as a result of our laboratory investigations.
Home Infusion— Home infusion is one of the fastest growing segments of home
health care in the U.S. (about $4 billion annually*, and is still in its infancy as com-
pared to other home care services. We believe that kickbacks in the form of case
management fees or fees for service are used as incentives for physicians to refer
Eatients to a particular company. Payment averages $150 per week per patient,
lectors have made $10,000 per month in kickbacks. Kickbacks are disguised as
service agreements, research grants partnerships, stock options, and dummy cor-
porations. We have received a number of additional allegations in this area includ-
ing unbundling, ghost patients, nutritional needs that fall short of those needed to
sustain life, and "diverted" drugs and nutrition used in infusion therapy.
Durable Medical Equipment (DME) — For many years, we have issued reports doc-
umenting fraudulent, abusive and wasteful practices in the DME area. Seat lift
mechanisms, transcutaneous electrical nerve stimulators (TENS\ oxygen equip-
ment, home dialysis systems and similar equipment are reimbursed by Medicare
and Medicaid only if prescribed by physicians as medically necessary. Unscrupulous
suppliers throughout the country circumvent this requirement through aggressive
sales practices, tricking physicians into signing authorizations and even forging
their signature. Some suppliers simply bill for items never delivered; others bill car-
riers in States which pay high Medicare reimbursement, regardless of where the
sale took place. In the last 3 years alone, over 73 convictions have been obtained
in this area. We are pleased that the Department is currently undertaking reforms
which will change point-of-sale rules and how provider numbers are issued.
HHS ANTI-FRAUD AND ABUSE ACTIVITIES
The Department of Health and Human Services (HHS) is the Federal Govern-
ment's principal agency for promoting the health and welfare of Americans and pro-
viding essential services to persons of every age group. The Department's two larg-
est health programs are the Medicare and Medicaid programs, which are adminis-
tered by the Health Care Financing Administration (HCFA). Medicare provides
health insurance coverage to approximately 36 million beneficiaries aged 65 and
older and to certain disabled individuals. The Medicaid program provides grants to
States for the medical care of approximately 35 million low-income people. Expendi-
tures for the Medicare program will total about $158 billion this year and expendi-
tures for Medicaid will reach approximately $150 billion ($87 billion Federal share).
Created in 1976, the OIG is statutorily charged to protect the integrity of depart-
mental programs, as well as promote their economy, efficiency and effectiveness. We
meet our challenge through a comprehensive program of audits, inspections, and in-
vestigations. The activities of our office consist of a multi-faceted approach to im-
proving the management of the Department's programs and protecting the bene-
ficiaries from fraud, waste, and abuse. Over the years, the Medicare program has
seen significant reforms, many of which resulted from issues brought to light by the
OIG. Such reforms include implementation of a prospective payment system (PPS)
for inpatient hospital services and a fee schedule for physician services, the Clinical
Laboratory Improvement Amendments of 1988, regional consolidation of claims
processing for durable medical equipment (DME), establishment of fraud units at
Medicare contractors, prohibition on Medicare payment for physician self-referrals,
and new payment methodologies for graduate medical education.
We are also very active in analyzing the cost-effectiveness of services delivered.
Over the years, we have documented excessive payments with respect to hospital
services, indirect medical education payments, durable medical equipment, and lab-
oratory services. Our recommendations have lead to statutory changes to reduce
payments in these areas. Through these activities, we have sought to ensure that
program dollars are spent without undue waste and that the financial viability of
the trust funds is maintained.
We are equally concerned that the beneficiaries of our programs receive high qual-
ity care. Over the years, the OIG has assessed clinical and physiological labora-
tories, medical necessity of certain services and medical equipment, and various
State licensure and discipline issues. We have also reviewed several aspects of medi-
cal necessity and quality of care under the prospective payment system, including
the risk of early discharge. Finally, we looked at the quality of care provided by itin-
erant surgeons, and surgery provided in physician's offices.
22
We also evaluate the adequacy of internal controls that are both in place and
Elanned to prevent losses to fraud, waste, and abuse. We carry out these evaluations
y: reviewing internal controls as part of our audits of the financial statements is-
sued under the Chief Financial Officer's Act of 1988; and working with HCFA in
planning, development, and implementation of new claims processing and manage-
ment information systems to help assure adequacy of program safeguards on a na-
tional basis.
Our investigative role is aimed at reducing and preventing fraud and abuse and
ensuring that beneficiaries receive high quality care at appropriate payment levels.
We utilize three enforcement authorities: (1) criminal prosecution, (2) civil prosecu-
tion, and (3) administrative sanctions (which include both program exclusions and
civil monetary penalties). All investigations can result in one or more of these rem-
edies being employed. We refer investigative findings directly to the United States
Attorneys for possible criminal or civil prosecution. Once the Department of Justice
has completed or declined a criminal or civil prosecution, HHS can impose civil mon-
etary penalties pursuant to the Civil Monetary Penalties Law, 42 U.S.C. 1320a-7a.
The OIG is also responsible for implementing the Secretary's authority to exclude
fraudulent or abusive providers from participation in Federal health care financing
programs. Our authorities are described in more detail below.
Criminal Authorities — Federal prosecutors seek to redress heath care fraud by
using traditional criminal authorities, including mail and wire fraud statutes, and
the false claims and false statements statutes. Congress also has enacted criminal
statutes directed specifically to prevent fraud and abuse within Federal health care
programs. Such authorities include criminal penalties for false claims and state-
ments specifically involving the Medicare and Medicaid programs, and the Medicare
and Medicaid anti-kickback statute. The anti-kickback statute prohibits an individ-
ual or entity from offering, paying, soliciting, or receiving remuneration with the in-
tent to induce Medicare or Medicaid program business or in return for the referral
of this business.
Civil Authorities — Federal prosecutors also rely on civil authorities to combat
health care fraud and abuse. Foremost are the civil provisions of the False Claims
Act which authorize the Federal Government to recover treble damages, costs, and
a civil penalty of between $5,000 and $10,000 for each false claim.
Administrative Sanctions — The Department enforces two types of administrative
sanctions in the Medicare and Medicaid programs: civil monetary penalties (CMPs)
and program exclusions. In 1981, Congress authorized HHS to impose CMPs, as-
sessments, and program exclusions on individuals and entities who submit false or
improper claims for Medicare or Medicaid reimbursement. Since the first CMP was
enacted in 1981, Congress has greatly expanded this authority. HHS has had the
authority to exclude from participation in Medicare and Medicaid any health care
providers and practitioners determined to have engaged in fraudulent or abusive
practices since 1972. The Medicare and Medicaid Patient and Program Protection
Act (Public Law 100-93) provides a wide range of authorities to exclude individuals
and entities from the Medicare, Medicaid, Maternal and Child Health, and Block
Grants to States for Social Services programs. Exclusions can be imposed for convic-
tion of fraud against a private health insurer, obstruction of an investigation, and
controlled substance abuse, as well as for revocation or surrender of a health care
license. Exclusion is mandatory for those convicted of program-related crimes or pa-
tient abuse.
The record shows that we have been successful. Overall, in fiscal year 1993, the
Office generated savings, fines, restitutions, penalties, and receivables of over $61
for each Federal dollar invested in our operation. The number of providers and prac-
titioners excluded from program participation increased from 224 in fiscal year 1983
to 881 in fiscal year 1993. And while six civil monetary penalty (CMP) cases were
successfully settled by the OIG in fiscal year 1983, the number rose to 75 cases in
fiscal year 1993. Successful health care prosecutions in the criminal courts have also
dramatically increased, from 30 in fiscal year 1983 to 181 in fiscal year 1993. I
would also point out that OIG administrative actions are subject to review by Ad-
ministrative Law Judges. Sanctioned individuals can appeal these decisions to the
Departmental Review Board and through the Federal court system. Of the more
than 7,600 program sanctions imposed by the OIG during the past 10 years, only
a very few have been reversed.
MEDICAID FRAUD CONTROL UNITS
The OIG and the State Medicaid fraud control units (MFCUs), have concurrent
investigative authority in the Medicaid program and conduct joint investigations.
The MFCUs, supported largely (75-90 percent) by Federal dollars, devote approxi-
23
mately 1 200 personnel to investigating Medicaid fraud. Currently, Federal outlays
for operation of the MFCUs are approximately $69 million. The units reported 628
convictions inTiscal year 1993 with total recoveries of over $41.6 million. Approxi-
mately 25 percent of their caseloads involve patient abuse allegations, for which
there is no monetary recovery.
HCFA MEDICARE CONTRACTORS
The OIG works closely with HCFA and the Medicare contractors that process
Medicare claims and perform payment safeguard functions. As a result of our rec-
ommendations over the last several years, HCFA initiated a broad effort to get the
Medicare contractors to take a more active role in detecting, developing and refer-
ring potential fraud cases to the OIG. Among the changes that HCFA implemented
was the creation of fraud units within most Medicare contractors. To date, 65 Medi-
care fraud units have been estabUshed, including units for the four regional claim
processing contractors for durable medical equipment. These units are funded at ap-
proximately $32 milUon and employ about 450 people. We believe that this will cre-
ate a significant increase in quality case referrals to our office from the contractors.
CONCLUSION
As the Congress and the Nation contemplate changes to our health care system,
the problems of fraud, waste, and abuse must be addressed. In my opening remarks
I identified the three fundamental problem areas which we believe need attention:
simplification of the current health care delivery system; enhanced enforcement re-
sources: and enactment of strengthened enforcement authorities to protect citizens
and health plans. We believe that any health reform legislation enacted by the Con-
gress should address all three concerns.
This concludes my prepared testimony. I would be happy to answer any questions
that the committee may have.
The Chairman. I thank you both. With the permission of my col-
leagues, maybe we can go in 10-minute rounds, if that is OK.
Let me begin with you, Mr. Stern. First of all, I think the Presi-
dent has made a real contribution in the legislation that has been
submitted, but I have two questions in areas that I have dealt a
lot with in the criminal justice field that have not related to the
health care fraud portion.
The first is in the prohibition of kickbacks. The reason I put that
chart up there is — I am preaching to the choir here; I know you
both know all this better than I do, but it leads to my question.
The people who actually expend the money to pay— 54 percent of
that comes from private insurance, private payers. As you can see
on the chart there, you have from Federal Medicare and Medicaid
23 percent; State Medicaid, 6 percent; and other State and Federal
expenditures, 18 percent.
Now, as I understand the antikickback provision that is in the
law now and in the President's proposal, in his bill, it, in fact,
makes kickbacks illegal in all the situations except the red. Well,
I am being corrected, rightly, by my staff. He is fired. [Laughter.]
That is a joke. I was only kidding. The reason I said that is he
is brand new, he is very competent. [Laughter.]
But he is correct in that it relates to Federal Medicare and Med-
icaid, but it does not apply to the red and it does not apply to the
yellow, and apparently does not apply to the blue. It only applies
to the shaded green areas. So there are an awful lot of expendi-
tures that are made in the system to which the antikickback provi-
sion does not apply.
I have two questions. One, why? And, two, is it because there is
not a problem in terms of kickbacks in the other nonfederally-fund-
ed portions of health care expenditures?
24
Mr. Stern. Well, first, it is a problem. In fact, we see examples
where, because it now is prohibited with Federal Medicare and
Medicaid, some of the providers may actually intentionally struc-
ture what they do to have the kickbacks occur in the private area
and not have them occur in the Federal area because they are con-
cerned about our criminal prosecution.
I think, to clarify our intention, we should have the Federal
antikickback statute in this health care fraud provision to provide
it across the board. This is an all-payer system that we are dealing
with, and to be consistent we should have an all-payer
The Chairman. I agree. Is that how the legislation is now writ-
ten, though?
Mr. Stern. It needs to be clarified.
The Chairman. Yes. Well, I hope so because I fully concur in
your assertion that because you have the green shaded area pro-
tected, in effect, there are very sophisticated ways of doing the
same thing through the private kickback area.
Now, again, I want to make it clear to the public who is listening
to this, because it is confusing, the kickback relates to a referral.
If you refer to such-and-such a doctor, program, or treatment, you
get something in return for that.
I am glad to hear you say that. This committee is anxious to
work with you. At least to speak for myself, as chairman of the
committee I am anxious to work with you to make sure that that
is clarified.
Now, there is a second area. Back in the 1970's, I wrote a bill
that became known as the forfeiture legislation. At the time, I was
trying to deal with organized crime, and I was chairing a sub-
committee here that dealt with organized crime. It has turned out
to be, as my colleagues both know because they have been deeply
involved in this, an incredibly effective tool, where the proceeds go
back to police agencies in order to reinvest in investigative, as well
as prosecutorial pursuits, of the very people whose property we
have confiscated or forfeited, and all the civil liberties are pro-
tected.
There has been some argument that in drug cases it has been
egregious, but by and large it is a tool the police have loved and
used well, as well as a tool that law enforcement generally, and
prosecutors and all involved, have viewed as a very useful tool.
Now, you have a provision in the President's legislation, as I un-
derstand it, where forfeiture, unlike in my criminal forfeiture stuff
that we started back in the 1970's, is limited only to certain cir-
cumstances where there has been an indictment and a conviction.
Right now, if we indict and convict a drug lord and we can make
the nexus between the profit he made from these sales and the fact
that he owns a multi-million-dollar mansion, yachts, et cetera, we
can confiscate the yacht, the mansion, et cetera. But here, as I un-
derstand it, first there must be an indictment; second, a conviction.
Third, a Federal judge would have to determine, on his or her own
accord, that it was a particularly serious crime, not that there was,
in fact, not just a crime, but a serious crime.
Now, why not just follow the pattern we have followed, I think,
successfully in other criminal prosecutions with regard to the for-
feiture tool?
25
Mr. Stern. The simple answer is that we have a forfeiture act
1994 that we are going to be presenting which will basically say
what you are saying about all proceeds of Title 18 crimes should
be forfeitable. I think this is an inadvertent inconsistency in this
particular proposal with our more general proposal, and I think we
would prefer to go with our more general proposal which would
specifically provide that all proceeds of the crime would be for-
feited, as they should be.
The Chairman. Good. Well, I am glad to hear that because, as
you know, I share that view strongly and it has been a very useful
tool. Nothing seems to get the attention of people like the notion
that not only are they potentially liable for time in jail, but that
you can go and get their assets.
It is a useful tool for you, sir, if you have that additional funding
available to you. Is that not correct? I mean, it can be a very impor-
tant tool.
Mr. Mangano. Absolutely.
The Chairman. Now, my last question to you, Mr. Stern, before
my time runs out. I notice that the legislation rightly allows, in my
view, the Attorney General to seek injunctions to stop ongoing
fraud. Is that correct?
Mr. Stern. That is correct.
The Chairman. Now, that power is always, at least in the past,
accompanied by an additional power to freeze assets. You get the
injunction and you freeze the assets of the outfit or individuals
against whom you have got the injunction. The reason for that is
obvious, so that there is some chance of getting some of the money
back when the case is finally thoroughly investigated and pros-
ecuted if there is a plea or a conviction.
Now, again, I may be mistaken, but the President's bill seems
not give you and the Attorney General's office that additional
power, which is to freeze the assets. A, am I right? And, B, if I am,
why not?
Mr. Stern. Actually, we believe we have that power now. U.S.
attorneys throughout the country have interpreted the statute that
is there at present to allow them to seek to freeze assets when they
go in for an injunction. So we believe that with the specific author-
ity now to seek injunctions for health care fraud directly as op-
posed to indirectly, as we now do it, we would carry along the au-
thority to freeze assets. Again, if that needed to be clarified, we
would have no objection to the clarification.
The Chairman. Good. My time is up, but I happen to be a sup-
porter of the President— Senator Cohen's proposal that is part of
the
Senator COHEN. You are joining a long line of advocates that I
step up to that. [Laughter.]
The Chairman. That is right, I am. Believe me, if there has to
be a Republican President, I would like it to be you. Senator
Cohen.
All kidding aside, we have included a very important provision
in the crime bill. One of the arguments is that it is better — and in
a rational sense, it is better to do it all in one piece of legislation,
and with that I agree. I have two concerns. One is that we get one
piece of legislation passed this Congress. If the good Lord would
26
come down and guarantee me what I wish to happen is going to
happen, then I would be more indined to wait and see.
But the proposition that we should include everything in one fell
swoop here dealing with this area seems to me argues that we
should make the clarifications explicitly on forfeiture, on freezing
assets, and on kickbacks that I think, based on your testimony, we
agree on. So although you don't need the expertise of this commit-
tee, I would be willing to work with you and come up with some
langauge that you either incorporate or that we could recommend,
but I want to do it in conjunction with the Justice Department, as
to how to accommodate the three things we spoke about today.
Mr. Stern. Thank you very much.
The Chairman. Thank you.
Senator Grassley?
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR
FROM THE STATE OF IOWA
Senator Grassley. The chairman spoke about the forfeited as-
sets that could be used to finance this, and the President has mon-
etary recoveries, the fines, et cetera, that are going to fiow to the
general Treasury, not to the investigative agencies, such as the in-
spectors general, et cetera. I have heard that in Florida, for in-
stance, there may only be three or four investigators on Medicare
fraud.
Why is it important that the recoveries be set aside to be used
by these agencies rather than going to the general Treasury to be
appropriated back?
Mr. Stern. Well, it is a supplement, to start with. It is not the
major way in which we are going to get the resources to fight
health care fraud. That will be continually the prerogative of the
Congress when they authorize our appropriations.
The idea here would be to have some fiexibility to deal quickly
with areas in which we may need to put in more resources, more
funds; a computer, for example. We heard a case just yesterday
where we were looking at a particular State where there is a prob-
lem and somebody then turns to us and says, well, we need a com-
puter to work with all this data; who is going to buy that for us?
It would be nice to have some supplemental funds here from
those who committed the wrongdoing to be used to prosecute others
who are committing the wrongdoing. But, again, it is not the major
source of the resources that will be necessary in our battle in
health care fraud.
Senator Grassley. But it certainly is a beneficial supplement to
give you more flexibility.
Mr. Stern. We certainly would like that.
Senator Grassley. And you see it as a very important tool for
accomplishing your investigatory responsibilities and prosecutions,
et cetera?
Mr. Stern. Yes, sir.
Senator Grassley. On another matter, since you have discussed
the limited public resources available to fight health care fraud, I
want to remind you that since 1986 when the False Claims Act was
amended, there has been almost $900 million recovered under the
qui tam provisions of that false claims bill.
27
While many of the early cases involved Defense contractors, it
seems like there is a trend toward using that as a tool in health
care fraud. We may see hundreds of millions of dollars recovered
from health care fraud qui tam suits in just the next few years. I
happen to believe that qui tam is a much-needed backup to the
Government's own health care fraud efforts. I think it offers us an
opportunity to combine insider information with private resources.
What are your thoughts on qui tam? Would you agree that it is
a valuable tool to combat health care fraud because it assists public
prosecutions and other enforcement efforts with private resources?
Mr. Stern. It has been a very important source of cases for us
in the health care fraud area, and I think you are absolutely cor-
rect, Senator Grassley, that it is increasingly being used now as
people see other cases which have brought great benefit not only
to the relaters, but to the Government. So we very much favor the
use of the qui tam False Claims Act procedures with respect to
health care fraud.
Senator Grassley. Are there any ways that you believe that the
public-private partnership of government resources, and also in-
cluding qui tam, to fight health care fraud can be made more effec-'
tive?
Mr. Stern. Well, I do understand that there is at the Justice De-
partment now an ongoing review of certain amendments that you
all are considering with respect to qui tam. I am not working on
that myself directly, so I am not able to answer directly on that,
Senator Grassley, but I do want to reiterate how important I do
think the qui tam legislation has been to date in the health care
fraud area.
Senator GRASSLEY. Well, I guess at this point I thought you
might have some. If you don't have any, that is perfectly legitimate.
Let me just suggest to you that I would be very happy to work with
you to develop a more cooperative effort in an3d:hing that can be
done to enhance private sector resources with government re-
sources.
Let me also comment that you are right that we are working
with your department to improve qui tam, but I think the things
that we are talking about there would be more fme-tuning, and
what I am talking about in my question to you would be ideas that
are not working their way through the bureaucracy yet that might
be helpful.
Also in the process of reforming qui tam, remember that there
are a lot of organizations out there, particularly connected with the
military industrial complex, that want to really weaken the bill. So
we are going to have to proceed cautiously on that, but I would
look forward to any suggestions you might have.
I have heard of some individuals who have received notices that
Medicare has been billed for services or products twice, or for serv-
ices that were not received. I have heard that these very same peo-
ple have attempted to notify HCFA, but that the notice of claims
and payments keep coming anyway. Even though people tell the
bureaucracy about the problems, it seems like the problems don't
stop.
How can Health and Human Services better address the reports
of health care fraud that are brought to your attention by Individ-
28
uals? I think, Mr. Mangano, you might be the best one to answer
that. You are aware of the problem, I am sure.
Mr. Mangano. Yes; we have heard accounts hke this. Typically,
what happens is a beneficiary gets a bill that isn't right. It is a du-
plicate bill or charges for services that they know they did not re-
ceive. The beneficiary will call what is called the Medicare contrac-
tor. This will be the insurance company that is paying the bills for
the Medicare program.
Just in the last couple of years, the Medicare program has start-
ed to put into place Medicare fraud control units. They are now in
existence at 65 locations across the country, with about 450 staff.
We have been working with those groups over the last 2 years to
train them in how to develop that information and make that refer-
ral over to our office. We are getting more and more good leads on
cases that we will then develop after they provide us the informa-
tion that they have been wrongfully billed.
Senator Grassley. As a follow-up not directly related to what I
asked you, but in this whole process — and this would be one exam-
ple of fraud where qui tam could be used — do you in your depart-
ment see qui tam as an important tool?
Mr. Mangano. Yes, we do, and we have investigated a number
of cases that have involved qui tam and brought them to some very
successful conclusions.
Senator Grassley. Mr. Stern, your testimony described an im-
portant increasing role of the FBI in fighting health care fraud.
Yet, I know that there has not been a single new FBI person hired
since 1992. As far as I know, we don't expect to hire any new
agents in the near future. What is your view of the wisdom of cuts
that have brought this situation about, and how do you think the
cuts will affect the FBI's ability as an effective fighter of health
care fraud?
Mr. Stern. Well, first, the FBI did make health care fraud an
important initiative back in 1992, I think, and their work-year
numbers — I might just quickly give you those. It shows in 1991
they had 71 FBI work-years doing health care fraud. As of 1994,
they are now at 228 annualized work-years. There are, in fact, 613
individual agents now assigned to health care fraud; that is, they
might have one or more cases in the health care fraud area.
I have gone around the country now with the number 5 man of
the FBI — I would list all the cities; it would be too long to list —
but everywhere in this country, from east to west and north to
south, meeting with health care fraud working groups that are
being created like the ones I mentioned to you in Des Moines and
energizing the FBI effort to work on health care fraud.
They predict that from the 228 they are now at, they will be
going up to 440 work-year agents doing health care fraud, and in-
creasing their support personnel from 97 up to 211. So there is a
large movement of FBI effort into the health care fraud area. Some
of it is coming from other areas where they felt they didn't need
the agents as much as they used to in the past. Some is coming
from an effort to reallocate some of the folks from the financial
fraud area into health care fraud.
As you indicated. Senator Cohen, health care may be for the
1990's what financial institution fraud was for the 1980's. We are
29
trying to reallocate to make certain that we have our people in the
right place. ^
Senator Grassley. So the cuts in appropriations, then, haven't
diminished your work in this area. You have been able to reorga-
nize resources, right?
Mr. Stern. We are doing that. I note that the FBI has asked for
an increase, but we are trying to deal with the resources we now
have to allocate them in the proper place, and we think health care
fraud is one of the areas where we should be doing that.
Senator Grassley. I thank both of you.
The Chairman. Senator Cohen?
Senator Cohen. Well, first, let me thank my vice president, who
has since departed from the room, for his comments. I misspoke;
I said there was a long line advocating. There is a very short line.
In fact, he is the first one in line, both parents and family dissent-
ing.
Let's assume there is no health care reform plan in the offing;
there is no Clinton plan, there is no Chafee plan, there is no Coo-
per-Breaux plan, there are no plans. Would it be your judgment
that we should not do anything to adopt a health care fraud offense
statute? I mean, assuming there is nothing in the works for reform-
ing the current health care system, isn't there a compelling case to
be made that we should adopt the basic provisions that are found
in the Clinton plan or the Chafee plan or the Cohen plan or any
of the others dealing with health care fraud?
Mr. Stern. Well, let me answer it this way. We have already
begun, I think, a very increased effort on health care fraud. That
is what I am doing since last November, so a lot of the things that
are indicated in the bill, such an effort to coordinate between HHS
and the Attorney General — I am already doing that. The effort to
allocate resources — we are doing that now.
There is a strong message in the health care fraud portion of this
bill that says health care fraud shall be a criminal offense in and
of itself without our having to use mail fraud or wire fraud or
money laundering. So if I had my druthers, I would like to have
a health care fraud criminal offense.
I think there are other provisions of the health care fraud bill,
though, that are specifically tied to the kind of plan that comes out
of this Congress, whether there are alliances, whether or not we
are talking about statements that are used to buy people into a
plan or to keep people out of a plan. I think our position has been,
and I have to support it, that we ought to tailor what we do with
the health care fraud portion to the actual bill that comes out of
here.
Senator COHEN. What I am suggesting to you is, assuming there
are no provisions for health care alliances — assuming that does
stay in the bill, what I am suggesting to you is there are things
that we can do today that we can later modify to take into account
whether or not we have health care alliances, whether or not we
have people buying into such plans, whether there are fraudulent
statements made either by those who seek to get in or those who
are providing the service; that we ought not to delay, to wait until
we see the final shape of what the health care reform bill is going
91-727 0-95-2
30
to be before we pass legislation which can take effect more imme-
diately.
It may be that we don't get a health care reform bill. Now, that
is not my position. I hope we do, and there is a lot of movement
on right now, but there is no guarantee. It could all fall apart some
time during the course of the summer. So what I am suggesting is,
given the magnitude of the problems, there are things that we
could do today or could have done last year, and we have a chance
in the crime bill itself dealing with the criminal statute, as such,
and not defer any longer because we are losing millions of dollars —
the estimates are $275 million a day. That is a lot of money.
If you asked most taxpayers, saying we could take some action
now and, like any other legislative proposal, expand on it later —
if we get a better product coming out of the President's plan, so be
it. That is what this body stands in practically constant session
about, revising and amending, and it seems to me you can tailor
provisions now that are open enough or expansive enough, or capa-
ble of being expanded, I should say, to take into account any kind
of comprehensive health care reform.
Right now, there are debates taking place within the Democratic
Party and within the Republican Party of, well, what should stay
in and what goes — mandates on employers or employees; regional
health alliances, no regional health alliances; voluntary, involun-
tary. We don't know, but in the meantime there are things that we
could right now that we can all agree on that could be in effect that
could help you in the Justice Department, the FBI, Health and
Human Services, HCFA, the inspectors general, and others to com-
bat fraud more effectively.
The only point I am making is we ought to do what we can do
now, realizing we may have a more perfect product later. We could
then amend this, not simply defer it waiting to have a comprehen-
sive package that would be ideal. We don't always get the ideal
coming out of here.
So I am not trying to in any way undercut the President's pro-
gram. Indeed, I support most of the provisions in his proposal and
our proposal; they are quite similar. But I just think that we
should take what we can now and then work on it and build upon
it later.
The reverse of this, of course, is that some people within the in-
dustry feel that you have adequate statutory authority right now,
and this is simply a slam in the face of the industry; that it is real-
ly kind of overkill. I would like your response to that.
Mr. Stern. I think that they say that some people are concerned
about why do you need an actual health care fraud crime when in-
deed we already have a fairly effective health care fraud enforce-
ment effort using wire fraud, mail fraud, money laundering.
I think the simple answer is that we ought to send a strong mes-
sage that health care fraud is a crime in and of itself, the same
thing as we did with financial institution fraud where we made a
Federal banking fraud crime. I think there should be a Federal
health care fraud crime. People argue that maybe there is a tech-
nicality; I was being charged and convicted of mail fraud and it
shouldn't have been used against me. I think it would be more use-
31
ful if we could have the direct Federal health care fraud crime it-
self.
Senator COHEN. Is there anything we can learn from the finan-
cial institutions prosecutions? As I recall, you have the reporting
of fraudulent data. There is a requirement that they must report
fraudulent information in the financial institutions. Is that some-
thing that we should also insist upon here?
Mr. Stern. Well, there are some things from the financial insti-
tution fraud area that are very useful and that we are trying to do
even without the bill, but the bill provides some additional support.
One is coordination. That was one of the major things we learned
in financial institution fraud, is we had to bring everybody to-
gether, all of the agencies, as well as the law enforcement organiza-
tions. We are already doing that in the health care fraud area. The
bills force us to do that, which is also good.
There is a specific provision in financial institution fraud that
provides the civil U.S. attorneys with access to grand jury material
so they can go civilly as well as criminally. There is a similar provi-
sion now in the health care fraud portion here which I think is a
very good provision. So we have learned from financial institution
fraud to try to do that here as well.
We are working now with the various carriers who pay these
bills and we are working with the various agencies involved in
health care fraud to find out what kind of reporting mechanism we
ought to have. There is now a criminal referral form in the finan-
cial institution fraud area. I am not sure we are at that point yet
in health care fraud. I have the FBI doing a lot of work on that
specific problem right now.
Senator Cohen. Well, another answer to those who are critical
of this effort would be that there are a number of cases, and one
which has been brought to my attention in which a phony billing
company was set up out in California to bill insurance companies
nationwide for laboratory services that were not rendered. The
owner of this particular company originally started out working for
a legitimate outfit. He then smuggled home the doctors' tax identi-
fication numbers and the patients' medical insurance information,
and then he set up a bogus billing service of his own.
At the time of his arrest, I think $1.5 million in bogus claims had
already been paid and there were many, many claim forms in the
mail waiting to be processed. It is my understanding it took a good
deal of time and resources to try to tie the money laundering stat-
ute in this one so the Federal prosecution and forfeiture could go
forward. That is one of the problems we are trying to get at with
this type of legislation.
Senator Biden mentioned his efforts in the field of organized
crime. It was interesting. This morning, we had a hearing in the
Governmental Affairs Permanent Subcommittee on Investigations
and it was a remarkable hearing, actually. We had the Director of
the FBI testifying, and beside him was a three-star general from
Russia, and also the head of the police forces, as such, charged
with international crime from Germany as well, but we had the
Russian general who was there to coordinate efforts on inter-
national crime. Apparently, Eurasian international crime is spread-
ing rather rapidly with the gangs, as such, or the organizations
32
starting up in Russia now spreading to all sorts of ties to organized
families right here in the United States.
One of them happened to be in the field of health care fraud.
Many of these Russian operations are now setting up shop here in
the United States and engaging in the kind of thing I mentioned
before about this fraudulent billing operation.
I serve as the ranking member on the Aging Committee, and the
minority staff has been doing a lot of investigation in this field and
we found the trends seem to be a great deal of abuse in the field
of the nursing home industry and home health care. Is that some-
thing that your own investigators are finding?
Mr. Stern. Absolutely. In fact, this national group that I chair
looking at the kinds of priorities we ought to be dealing with —
home health care has been a very important one. Nursing homes
has been a very important one.
Senator COHEN. The all-payer trust fund is something that I
have in my own bill and I know it is in the President's bill. What
can we do to minimize the notion that this is going to be a sort
of a bounty system that we are setting up here?
Mr. Stern. First, of all, it is going to be jointly administered by
the Inspector General at HHS and the Attorney General. I think
the fact that two of us are doing it rather than one is a helpful
check on each other. In addition, various State and other Federal
agencies will be eligible to receive some of the funds from that ac-
count, and so they will be looking at what we do as well.
I think, also, we will be reporting yearly to the Congress under
the bill as to what we have done with respect to the expenditures,
which is another check on us. I think, finally, the most important
check is that we are dealing with the Department of Justice bring-
ing criminal prosecutions. We have our own guidelines that govern
the cases we can bring, which we believe are the most effective and
important check on what we do. I think the final result will be
when you all look and see how we have done.
Senator COHEN. Well, now that my vice president has returned,
I will try and shorten this up if I can.
The Chairman. You are the only guy I would take the job with.
Senator COHEN. In 1992, there was an article that appeared in
Private Practice, and paraphrasing, I guess, as best I can, the
charge is made that Congress looked on while Richard Kusserow,
who was the Inspector General — Richard Kusserow's junk yard
dogs used questionable tactics to meet prosecution and conviction
quotas. That is a pretty strong statement and it obviously reflects
a degree of animosity toward the Justice Department, Congress,
and all those who were involved in this.
But I noticed that there were some 7,600 cases of exclusion from
Medicare and Medicaid that were, in fact, prosecuted, as such. Out
of that 7,600, only 25 were lost. With respect to civil monetary pen-
alties, there were 900 cases, of which there were 25 lost. Again, it
would seem to me to be a pretty strong record on behalf of enforce-
ment.
If the numbers were the other way, if we had 7,600 cases and
we lost 3,000 or 4,000, or even 1,000, I would say maybe there is
something wrong here; we are being a bit over-aggressive. But that
doesn't strike me as reflecting an arbitrary or in any way unfair
33
approach to trying to root out the kind of fraud that is involved
here.
Just one final point, Mr. Chairman. In 1991, again, the staff of
the Special Committee on Aging worked with your office in the Jus-
tice Department to investigate so-called DME, durable medical
equipment, services, and again pointing out, as you did, Mr.
Mangano, that we found in those particular cases that most of the
DME suppliers were very, very legitimate. But there was a sudden
flurry of fly-by-night operations, and it is astounding what they
were able to get away with.
We had a case, for example, where — I won't forget this; I had the
tangible evidence I was presenting during the hearing. We had a
dry flotation mattress pad; it was a pad of pink foam. It was pur-
chased by one DME telemarketer who paid $28 for it. It was then
sold to Medicare for $1,100. That was the reimbursement that
Medicare provided for that $28 item because it was billed as a flo-
tation mattress, and that is all it was.
We found out that within this particular type of industry, there
are the so-called fly-by-night operators. They get involved in forum-
shopping. They basically were going around to carriers, shopping.
I can get a better deal maybe in Pennsylvania than I can get in
Delaware or Massachusetts.
So we passed some legislation to tighten up on that, but is there
anything that we need to do further? There is legislation that is,
I think, pending now by Senators Pryor, Grassley, Simpson and
others to start dealing with stricter standards for suppliers and to
prohibit Medicare from issuing the multiple billing numbers. That
is one of the real problems we had.
In fact, I applied for a number for myself up in Maine. Unfortu-
nately, they got tipped off to what I was up to, but it is pretty easy
for a carrier or a supplier to get multiple numbers. So they get
stopped on one number and they apply another. Is there something
that you would recommend in this field of durable medical equip-
ment?
Mr. Mangano. First, I would like to just thank you for all the
work that you did on the Aging Committee because it was through
that committee that we were able to bring this problem to the at-
tention of the Congress, and you helped us solve a lot of that prob-
lem.
There are a number of things that the Medicare program has
done which I think have been very good. Instead of every Medicare
carrier paying bills right now, they have moved to consolidation to
just 4 carriers.
Senator Cohen. They are down from 34 to 4.
Mr. Mangano. That is correct, and so that means that there
should be less deviation in the price from one carrier to the next.
They have addressed the problem of carrier shopping by identifying
the location of the beneficiary as to where the price should be set.
So if the beneficiary is in Pennsylvania, it will be the rate that goes
for Pennsylvania. There have been a number of other reforms in
terms of gathering more information about the ownership of the
durable medical equipment company itself So those things have
been good.
34
We continue to keep our eye on this area because even though
we have solved a lot of the problems there, there continues to be
an upcropping of new scams that are underway. Right now, we are
investigating orthotic body jackets which — these are jackets that
are very stiff that a person will wear from the waist up through
the chest to protect them after a serious operation. We have found,
and this may be heard to believe, but nursing homes which have
bought orthotic jackets for their patients in their homes to keep
them erect in chairs under the guise that they are no longer al-
lowed to have restraints. Therefore, they will use these jackets, but
these aren't the jackets that are supposed to be paid for under the
Medicare program.
These might resemble things that you can remember your kids
sitting in, in a high chair, with just a little piece of plastic with a
strap over the top of it. The cost to the Medicare care program
went up over 1,000 percent in 3 years on that until we began tak-
ing a look at it. Medicare has been taking a closer look at it and
we are starting to bring those down. There are other examples —
lymphedema pumps and oxygen services. When we looked oxygen,
we found out that Medicare was paying twice as much as a number
of other carriers.
We think that there is some additional work that could be done
to improve uniform coverage decisions, and that is for Medicare to
do a better job in terms of setting the reimbursement rate for spe-
cific pieces of durable medical equipment.
I want to do something that the IG's office is always negligent
in doing, and that is I want to compliment the NAMES group, the
National Association of Medical Equipment Suppliers. We have met
with them a number of times. They have testified before you, and
they have been out front with their organization trying to clean up
some of the abuses that have existed.
Senator Cohen. Thank you very much, Mr. Chairman.
The Chairman. Thank you. Let me conclude by following up, Mr.
Mangano, where Senator Cohen left off You have both just listed
a catalog of abuses that are illustrative of a number of the abuses
that get us to that $100 billion figure. What I am a little bit con-
cerned about is under this legislation there is an expansion of your
authority without a commensurate expansion of resources.
One of the things that I, as a general proposition, since I have
been a Senator have most attempted to avoid — and what is, I
think, reason for some of the cynicism with the public is we have
tended to over-promise what we can deliver, we who sit up here,
and administrations. Democrat and Republican.
Through the leadership of Senator Cohen and the work of you
fellows and the agencies you represent, it has been called to the at-
tention of the American people that there is a real problem. The
fact of the matter is, 5 years ago, I don't think the American people
were nearly as aware of the extent of the problem as they are now.
Because of the work you have done, and the investigative report-
ers—the "20/20's" of the world— I don't know that "20/20" actually
did it or "60 Minutes" — it is part of the parlance out there. People
know that this fraud exists.
I think they are going to expect when we pass this legislation —
"this" meaning health care and/or the separate piece in the crime
35
bill, or a combination of both — that we are really going to make
some real progress. The truth of the matter is that it is not that
you lack the ability even now to do more; it is that you lack the
resources.
Now, I am concerned about whether you have adequate resources
to enforce the laws throughout the entire industry, which is essen-
tially what we are going to do now if we pass this legislation. I un-
derstand that your responsibilities are now to detect and prevent
fraud and abuse in government programs, such as Medicare and
Medicaid, which you have been talking about.
But I understand that you also, because of lack of resources, with
government offices and their responsibility for that, have actually
had to recently close some offices. Now, why did you have to close
the offices, because there wasn't a problem? There was no work
available for them?
Mr. Mangano. Well, let me explain it in the following way. We
ended up closing 9 offices, and there should be one more that will
be closed. Over the last 3 years, we have been going through a
budget reduction, reduction in number of staff. We have lost across
the inspector general's office about 162 individuals. That would
equate to about 11 percent of our office. Our number of investiga-
tors has decreased about 18 percent, although the percentage relat-
ed to health care fraud has decreased about 11 percent, and the
reason is quite simple. The budgets haven't kept up with what the
need is.
We closed those offices because as we saw our resources shrink-
ing, we had to decide where do we deploy those resources. We took
a look at where the money was, where the problems were across
the country, and felt that it was better to have investigators
The Chairman. Please understand, I am not being critical of
your decision.
Mr. Mangano. I understand. I know you are not.
The Chairman. And you know better than I that you have a hell
of a reputation as to where you should allocate those resources, but
I am trying to make a broader point. If you had the resources, you
wouldn't have closed any of those offices.
Mr. Mangano. Well, that is correct.
The Chairman. As a matter of fact, you may even have opened
other offices. I don't know about that. I don't want to put words in
your mouth, but you wouldn't have closed the ones you closed.
Now, one of the things that Senator Cohen and I have observed
in working this beat a little bit is that when it comes to inspectors
general or agencies that provide for services to the public at large,
given the choice of cutting the inspector general or the service,
there is less squealing when you but the inspector general because
you don't have the Medicare recipient saying, whoa, wait a minute,
you cut me in some way, or you don't have the Medicaid recipient,
or you don't have the hospital or the doctor or the provider. So you
are the first to go — I shouldn't say first, but you are right at the
top of the list.
The payback on this is enormous. We are going to hear in a mo-
ment from some State folks. I don't know precisely what they are
going to say, but I would be surprised if they suggest that you don't
more than justify the expenditures that are made by the taxpayers
36
for the taxpayers, which leads me to this last point, and I would
like you to comment on all of this.
Historically, the FBI has investigated fraud in the private sector
of our economy, rather than inspectors general. Now, as I under-
stand the proposal, the inspectors general authority is being broad-
ened to encompass private health care, the rationale being that we
now are going to have a unitary system that, in fact, encompasses
all Americans — that is the President's goal — and will incorporate
private insurers in this operation as part of the program. I assume
that is the rationale as to why the inspector general's role will be
broadened. First of all, is that the premise?
Mr. Mangano. That is exactly right.
The Chairman. Now, that is going to significantly increase your
work. We have heard from the AMA and others that they don't like
this idea. They kind of like the traditional way. The FBI deals with
it and you all don't deal with it.
So can you discuss the propriety of giving plenary authority to
HHS to investigate the entire industry, and then talk to me about
resources? Then if you would conclude, Mr. Stern, if you are will-
ing, by discussing the rationale of essentially moving it out of your
department, Justice/FBI, into that authority being given to HHS
and the inspector general.
First, you, Mr. Mangano.
Mr. Mangano. Let me respond to a number of the points. You
made the point about organizations paying for themselves. This in-
spector general's office returns about $61 for every $1 invested in
it. If we were just to take the investigative side of our house, it is
about 10 to 1 back, so we feel kind of proud of that.
With regard to expansion of our authorities, I think one of the
reasons for the expansion of the inspector general's office at HHS
having greater responsibility over the health care system really re-
lates to a number of factors. One, we have been specializing in
health care fraud ever since the Inspector General Act passed in
1976, so we have got a lot of years of experience in conducting
these investigations.
Health care investigations in our department involve the same
medical providers that insurance companies in the private sector
are also dealing with. The kinds of fraud that we are dealing with
are replicated throughout the system. Our view is that there ought
to be at least one central administrative authority that could tran-
scend jurisdictions and States in looking at the health care prob-
lem.
We do have some authorities that the FBI does not have right
now, and that is the administrative sanctions. That would be the
exclusions and the civil money penalties, so we can bring that au-
thority to bear.
The Chairman. Now, explain what you mean by exclusions,
again, for the record because I refrained from asking you about the
exclusions.
Mr. Mangano. Sure.
The Chairman. You have authority now as it relates to Medicare
and Medicaid to say to a provider, whether it is a single doctor or
a company, you are excluded from participating in any reimburse-
37
ment from the Federal Government from this point on, or for a pe-
riod of time, right?
Mr. Mangano. That is correct, and those exclusions are based on
a provider being convicted of a criminal offense or abuse toward a
patient that results in a conviction.
The Chairman. Right, OK, but the FBI does not have that au-
thority?
Mr. Mangano. Does not have that right now, but I don't want
to mislead you. We work very close with the FBI and Jerry Stern
at the Department of Justice, and in many cases the investiga-
tions — all of our investigations are going to be litigated through the
Federal courts.
The Chairman. What is the total number of investigators you
have now?
Mr. Mangano. We have about — in our Office of Investigations,
there are about 375 people. Of that, 222 are what we would call
street agents. These would be investigators.
The Chairman. Now, what is the total budget you now oversee?
Mr. Mangano. The budget of our office
The Chairman. Excuse me. I misspoke.
Mr. Mangano. The department?
The Chairman. Of the programs that dispense money, what are
the total dollars that you look at protecting for the taxpayers?
Mr. Mangano. For our department as a whole, it is over $600
billion. Just if we looked at health care, Medicare right now is
about $158 billion, Medicaid is $150 billion, and then we have a va-
riety of programs in the Public Health Service that fit into that cat-
egory over there, "Other State and Federal Programs." This would
be community health centers, community mental health centers,
family planning.
The Chairman. Just Medicare and Medicaid
Mr. Mangano. That is over $300 billion.
The Chairman. Over $300 billion, "b" as in "boy? "
Mr. Mangano. Yes.
The Chairman. That is a lot of money, and you have
Senator Cohen. "B" as in "Biden."
The Chairman. I wish it were "b" as in "Biden."
You have 222 people, and now your universe in universal health
care is going to be in the trillion-dollar range.
Mr. Mangano. Right. Well, let me comment further on that.
The Chairman. Yes, please.
Mr. Mangano. I know, at least in the President's plan, there is
an expectation that we would get more resources. We would get
more investigators, we would get more auditors to look over the
system. So we would not be talking about our office, with the num-
ber of investigators we currently have, taking on the entire system.
We would get a commensurate increase in numbers of staff
The last point I want to make on this is that with regard to the
private sector, we have been working — we helped establish in 1985
the National Health Care Anti-Fraud Association. I know they are
going to be testifying a little later, but ever since we helped them
create that organization in 1985, we have been working to train
them, to have joint training sessions. We share information. We
talk about the kinds of cases that we are coming up with now and
38
help guide them into some areas that they may not be looking at
as private insurance companies and, of course, they reciprocate by
sharing that information back with us.
So I think we have got some pretty good experience across the
health care field, and I suspect that that is why the President's
plan had us play so prominent a role in the inspector general's of-
fice.
The Chairman. Well, I will end with this, but in the 1992 bill
we added 50 investigators, which would get you up to around 275,
roughly, but that was when we were talking about a much smaller
piece of that pie. I think we will be kidding the American people
if we do not significantly increase the resources commensurate with
the size of the responsibility. I think you have got to be talking
about 4 or 5 times the resources you have now to be able to deal
with this.
I want to say for the record I do have some question about the
authority vesting in your office, not because of capability, but quite
frankly, and I will be really blunt about it, the ability to garner re-
sources. I am in a much better position and the Senator from
Maine is in a much better position for us to go to the public and
our colleagues when we talk about increasing FBI agents — I am
just being very blunt with you — and being able to say we are either
raising your taxes, not lowering the deficit, because we are being
a little more honest than our State counterparts are these days.
They want us to fight crime and we are telling them we are
going to spend more money; that is how we are going to do it. We
are laying off bureaucrats. We are going to hire these folks. This
is where the money is coming from. I think there has got to be a
little truth in legislating here.
Bluntly, it is easier for me to help get passed a piece of legisla-
tion on the floor that increases the number of FBI agents by 500
than it will be to increase the number of investigators in the in-
spector general's office by 500 or 700 because — and I shouldn't be
saying all of this, but I am going to say it anyway because I need
your help on this — interest groups can't take us on, quite bluntly,
when we talk about the FBI.
Nobody has the wherewithal to come before us, whether it is the
AMA or anybody else, and say, hey, we don't want any more FBI
agents to investigate this. That one, I win walking away. On this
one, you will find people confusing the hell out of the issue and you
will be junkyard dogs, you know. I would challenge the AMA or
any organization to send out a newsletter to their folks saying the
FBI is junkyard dogs. They may be, but they aren't going to say
it because they don't want to take on that junkyard dog — not a
smart thing to do.
So I want to be blunt about it. I want a significant increase in
the resources available for investigating fraud. I have no doubt
that we are talking about paybacks for the taxpayers on the order
of 10 or 30 or 40 to 1 in terms of dollars spent, but I really think
it is going to make a difference how we do it.
I would yield to the Senator from Maine.
Senator Cohen. Can I just add one final comment before we go
to the next panel? I was inquiring as to who was covering this par-
ticular hearing because I just want to say how important it has
39
been over the years to change people's attitudes. As a result of the
hearings we^ held in the Aging Committee and now in this commit-
tee over the years, people watch and they see a change in their own
sense of responsibility. I will give you one example of what has
taken place over the last few years.
We had a man who received his bill from the hospital and he
looked down and saw that there were such-and-such service? ren-
dered to him, and he said, that never happened; I wasn't even in
the hospital that day. He ended up calling the local intermediary;
I am not sure who the intermediary was at this time. He called,
I think it was New Jersey first and they said, no, you have got to
call Pennsylvania. He called Pennsylvania and they finally referred
him out to Denver.
The response he got out in Denver was, what are you complain-
ing about, what are you making so much trouble for; this is all
being taken care of anyway; it is not costing you a penny. The
whole attitude is one of kind of the socialization of crime, that as
long as it is not coming out of your pocket, it is OK, don't raise a
ruckus about it.
Well, this was one of those salt-of-the-earth types who raised a
ruckus about it. He spent almost over $1,000 of his own money to
make sure he could come down to testify at an open hearing to say
this is wrong, because the burden suddenly is handed to the indi-
vidual consumer to then root out fraud in the system, and that is
not the way it ought to work where that person has got to be the
one bearing the sole responsibility.
As a result of that man's testimony, we saw the introduction of
the 800 number and the consolidation of the various reporting cen-
ters, and so forth. So these hearings, whatever comes out of them,
are helping to change the public attitude about what is taking
place out in the world itself.
The Chairman. It is the only place I know, Senator, where you
have all of the people involved in the industry wanting something
to be done. Do you know who I hear the most from on this when
I raise this issue? Doctors, not complaining; doctors want to see
these other doctors nailed because they are the ones who carry the
rap because all doctors get nailed. I am convinced the AMA would
like to find every damn doctor who engages in this and lock them
up, and have a big publicity day when they did it. So there are
some really positive things happening here.
I just want to make it clear. I don't want to be a party to this
unless we provide you the resources, and that is part of what I
think is going to be the most difficult thing, is deciding how we are
going to get that done.
Senator Cohen. One final point, if I can. Senator Biden is abso-
lutely correct about the need to beef up the criminal investigation,
but we ought not to diminish the significance of the civil side of
things. One of the problems we have had is the Justice Department
doesn't want to take on the burden of just prosecuting cases. They
may find that the remedy here is too severe for the case, and there-
fore don't do anything. It is one of those all-or-nothing things.
That is why we have expanded the jurisdiction to have injunc-
tions and other types of civil penalties so that we have a broad
array of remedies so we don't either shut down an operation that
40
may be a rural hospital with no other facility in the region — shut
it down over a violation where, in fact, something less onerous
would be an appropriate remedy under the circumstances.
Even though you are right politically that we need more FBI in-
vestigators, we can't have it simply on the criminal side. We need
both because this is going to be not only a criminal reform, but also
on the civil side as well.
The Chairman. I agree. As I said, I haven't made up my mind.
It is the doubt I have, it is my concern, as to how we get the re-
sources. I am talking primarily about the investigators just to go
out there and establish the case criminally or civilly.
You have been good witnesses. We appreciate the good work you
have already done. We are going to have our hands full whether
we just quote the crime bill with this in it or we pass an entire
health care bill, which I would like to see happen. I look forward
to working with you, and I suspect we will see each other in this
forum again, so thank you very much for your cooperation.
Mr. Stern. Thank you, Mr. Chairman. Thank you, Senator
Cohen.
The Chairman. Now, our next panel is made up of two distin-
guished State persons. Pamela Carter is the Attorney General for
the State of Indiana and knows a little bit about this issue. She
is also the Vice Chairperson of the National Association of Attor-
neys General Health Care Fraud Task Force. She was elected At-
torney General in 1992. Welcome, General.
David Waterbury is the Director of the Washington State Medic-
aid Fraud Control Unit and is Legislative Committee Chairperson
for the National Association of Medicaid Fraud Control Units.
I welcome you both. General, the floor is yours.
PANEL CONSISTING OF PAMELA CARTER, ATTORNEY GEN-
ERAL, STATE OF INDIANA, AND VICE CHAIRPERSON,
HEALTH CARE TASK FORCE, NATIONAL ASSOCIATION OF AT-
TORNEYS GENERAL; AND DAVID W. WATERBURY, DIRECTOR,
WASHINGTON STATE MEDICAID FRAUD CONTROL UNIT, AND
CHAIRPERSON, LEGISLATIVE COMMITTEE, NATIONAL ASSO-
CIATION OF MEDICAID FRAUD CONTROL UNITS
STATEMENT OF PAMELA CARTER
Ms. Carter. Thank you very much, and I am really pleased to
be here, Chairman Biden and Senator Cohen. I am delighted to
have the opportunity to testify today, and I think it is absolutely
essential, and I commend you and this committee for having the
States as a part of this dialogue.
As you well know, if you look back a few years when we had an-
other major health care reform with Social Security, or even later
with Medicare and Medicaid, later, and only after millions of dol-
lars were lost, patients abused and neglected, did we begin to look
at the issue of fraud, and I think it is absolutely essential to look
at the issues fraud and abuse as we are looking at reforming the
health care delivery system, on the one hand.
But I think even if we look back in the past when we had to put
together very quickly the Medicaid fraud control units, we only
looked at it in a very restricted way in an attempt to address a
41
problem that was magnified at that point because we had not
looked broadly and contemplated through discourse, discussion and
study the whole array of the potential for fraud and abuse.
So we want to come to you today to expand what we think is nec-
essary at the State level in terms of looking at the State as a nec-
essary component for law enforcement in the fraud and abuse area
with regard to health care, and not restrict it to Medicaid. If we
are beginning to look more broadly at the future for health care de-
livery reform, we would also like to make sure that the State's role
and the necessity for State and Federal partnerships are ad-
dressed.
Obviously, the States will be playing a major role in designing
and establishing a new health care delivery system, and State at-
torneys general will necessarily play a primary role in combatting
fraud and abuse in that system. State law enforcement officials will
be cops on the beat with respect to health care fraud. Happily,
State law enforcement officials have developed substantial exper-
tise during the past decade through the operation of some of our
Medicaid fraud control units, most of which are located in Attorney
Generals' offices. I believe that the most efficient and effective way
to eliminate health care fraud is to build on this considerable anti-
fraud expertise already available at the State level.
With these goals in mind, I would like to suggest five principles
that will make health care fraud enforcement as efficient and effec-
tive as it can be. First, we would suggest that we have mandatory
State health care fraud control units to deal not only with the
present issues, but also anticipating health care reform to address
the broader pie, but at the State and local level.
The Chairman. General, you mean that the Federal Government
mandate that the States have such units?
Ms. Carter. Absolutely.
If a State-based health care reform package which is similar to
the administration's proposal or others is enacted, the Federal leg-
islative framework for health care reform should require each State
system to establish a health care fraud control unit with statewide
authority to investigate and prosecute violations of Federal and
State laws pertaining to health care fraud, in partnership with the
Federal and local governments.
Let me talk really quickly about this partnership. In Indiana, we
have been very successful in forging a seamless partnership with
local. State and Federal officials with regard to health care fraud
and abuse. As a result, sharing resources at a time when all of our
resources are constricted, we have been able to get literally over $1
million last year, and we are going to be able to double that this
year, in combination with the U.S. attorney's office, the FBI, postal
inspectors, local prosecutors and local police officers in conjunction
with the investigators, auditors and prosecutors within our office in
Indiana, and it is working well.
We have also cross-deputized one another, and we are on a roll
and in a position to do more, and I would like to make sure that
you understand that we don't want to go backwards. We also agree
with you that we want to go forward so that we can hit the ground
running, irrespective of what happens in the future.
42
The second principle and goal that we would like you to consider
is the health care fraud unit should be separate from the State
health agency or whatever kinds of alliances will be overseeing this
process. As you are well aware, whenever you have the responsibil-
ity for overseeing a program, it may not be as effective in also sup-
porting vigorous efforts to uncover fraud, waste and abuse in the
program.
Additionally, the State health agency will be the entity respon-
sible for establishing and regulating the health care delivery sys-
tem in each State, including purchasers, providers and health
plans, and it may become too involved with the entities it regulates
to obtain objectivity.
It is also important that the health care fraud control unit in
each State have statewide investigatory and prosecutorial author-
ity. Presently, it exists in many States, but not all the States, and
so we still have a fragmented approach to these issues.
If responsibility for health care fraud prosecution is divided
among several geographically separate agencies, there may be, on
the one hand, unnecessary and wasteful duplication of effort and,
on the other hand, imperfect communication that allows fraud to
fall through the cracks. In some cases, the office of the Attorney
General is the only entity within the State with statewide prosecu-
torial authority, and almost all of the current Medicaid fraud con-
trol units are located in attorneys general offices.
Third, we would like the existing Medicaid fraud control
units
The Chairman. General, excuse me. You are a member of the At-
torneys General Association.
Ms. Carter. Yes.
The Chairman. Would you supply for the record today, tomor-
row, the next day, or whenever, a list of those State attorneys gen-
eral that do not have such authority?
Ms. Carter. Yes, I would be delighted to.
Our existing Medicaid fraud control units should form the basis
for the new health care fraud control units. We have the experi-
ence, we have multidisciplinary teams. We have already developed
the partnerships and we are already effectively addressing these is-
sues. The structure and expertise of the existing Medicaid fraud
control units should provide the base for an expanded health care
fraud unit which have the authority to prosecute fraud against any
government or private third-party payer.
During the past 15 years, the Medicaid fraud control units have
compiled an impressive record of convictions of Medicaid providers
and have recovered millions of program dollars. Their activity has
also had a deterrent effect on providers who might otherwise have
engaged in fraud. They trained other law enforcement officials in
health care fraud control and are well respected in the law enforce-
ment community. These units are comprised of an integrated team
of investigators, auditors and prosecutors who are able to effec-
tively prosecute the wide variety of intricate financial crimes that
comprise these types of fraud.
Even if the new health care delivery system eliminates some op-
portunities for fraud, many others will remain and those bent on
defrauding the system will develop new ways of doing so. The ex-
43
pertise and training of the Medicaid fraud control units provide an
invaluable basis for expanding these investigatory responsibilities.
Fourth, we too are going to urge for adequate funding. In order
to ensure that the new system operates effectively, adequate fund-
ing must be provided for State law enforcement activities to combat
fraud. Each dollar invested in State level antifraud activities will
yield abundant savings and fraud prevention as well. The current
Federal-State partnership in the Medicaid fraud control units
should be maintained at at least the same contribution levels — 90
percent Federal contribution for the first 3 years of the program
and 75 percent Federal contribution from then on.
Last, we would also like to have State participation in the revolv-
ing fund. If the health care reform package includes supplemental
funding of antifraud activities through a health care fraud revolv-
ing fund comprised of fines, penalties and forfeitures, the fund
should also be available for reimbursement of State costs on Fed-
eral-State cooperative actions, and in appropriate cases States
should participate in distributions from the fund on a proportionate
basis.
This type of fund can provide an incentive for both State and
Federal enforcers. However, it should be in addition to rather than
instead of appropriate funding. The more successful an antifraud
program is, the more dollars are saved by deterrence and not by
direct prosecutions. In addition, even the best antifraud program
can hit a slow period. A health care fraud revolving fund will be
an excellent incentive, but an unreliable funding source.
Full, open communication and true partnership between State
and Federal law enforcers is the best way to stop crooks and
quacks from plundering the health care system and endangering
patients' lives. Inclusion of the principles I have described in health
care reform legislation will provide a more effective weapon in the
fight against fraud.
I am delighted to answer any questions from you. Thank you
very much.
[The prepared statement of Ms. Carter follows:]
Prepared Statement of Pamela Fanning Carter
Good morning. I am Pamela Fanning Carter, Attorney General of Indiana and
vice chairman of the National Association of Attorneys General Health Care Task
Force. I am delighted to have an opportunity to speak about the importance of state
and federal efforts to combat health care fraud, especially under a new health care
delivery system.
The states are currently leading the fight against health care fraud and abuse.
Through the Medicaid Fraud Control Units, state law enforcement officials have re-
covered millions from providers who sought to defraud the system, and have en-
sured that those people are barred from taking advantage of the system and endan-
gering consumers in the future. In a new era of health care delivery and financing,
the role of the States will be even more critical, both in ensuring that the cost of
fraud and abuse is eliminated from the new system and in protecting consumers.
It has been said about several of the new health care reform proposals that they
will virtually eliminate fraud through changes to the way health care is delivered
and paid for. Although I hope that these predictions are true, I am afraid that per-
sons who seek to defraud the system are ingenious and adaptable, and that fraud
will simply continue in a different form. I therefore commend this Committee for
examining the issue of health care fraud enforcement.
Many of the comprehensive health care reform proposals contain provisions de-
signed to strengthen the hand of law enforcement in connection with health care
fraud. As important as these new tools are, I believe that the most significant im-
44
provement in health care fraud enforcement will come from increased federal/state
cooperation in investigation and prosecution of health care fraud. The states and the
federal government must be full partners in the flight against fraud.
Much of the comprehensive health care reform legislation being considered by
Congress, including the plan described by the Clinton Administration, contemplates
a state-based system for regulating and delivering health care services. For exam-
ple, the Clinton Administration has proposed a federal framework which will guar-
antee certain health care benefits and will prescribe certain quality standards.
Within this framework, each state will be given the necessary flexibility to adopt
a comprehensive system that will work best for the state. Each state will be respon-
sible for designing and establishing purchasing alliances, certifying and monitoring
providers and health plans that participate in the new system, including determina-
tion of appropriate capital standards to ensure plan solvency, and controlling health
care costs.
Just as states will likely have the primary responsibility for designing and estab-
lishing a new health care delivery system, state attorneys general will necessarily
play a primary role in combating fraud and, abuse in that system. State law en-
forcement officials will be the "cops on the beat" with respect to health care fraud.
Happily, state law enforcement officials have developed substantial expertise during
the past decade through the operation of Medicaid Fraud Control Units, most of
which are located in Attorney General offices. I believe that the most efficient and
effective way to eliminate health care fraud is to build on this considerable anti-
fraud expertise already available at the State level.
With these goals in mind, I would like to suggest some principles that will make
health care fraud enforcement as efficient and effective as it can be.
MANDATORY STATE HEALTH CARE FRAUD CONTROL UNIT
If a state-based health care reform package similar to the Administration's pro-
posal is enacted, federal legislation framework for health care reform should require
each state system to establish a health care fraud control unit with statewide au-
thority to investigate and prosecute violations of federal and state laws pertaining
to health card fraud. As you know, Mr. Chairman, health carefraud not only endan-
gers the lives of thousands of Americans, but also eat up ten cents of each dollar
we spend on health care, or $80 to $100 billion each year. Increased health care
fraud enforcement efforts will increase the cost savings necessary to help finance
the new system by identifying program vulnerability and and suggesting solutions,
as well as improving the quality of care for consumers served by the new system.
THE HEALTH CARE FRAUD UNIT SHOULD BE SEPARATE FROM THE STATE HEALTH
AGENCY
The health care fraud control unit should be separate from the state health care
agency which regulates the system and should be located in the office of the Attor-
ney General. Because the state health agency will be the entity responsible for es-
tablishing and regulating the health care delivery system in each state, including
purchasers, providers and health plans, it may become too involved with the entities
it regulates to maintain objectivity. In addition, officials with the responsibility for
overseeing a program may not support vigorous efforts to uncover fraud, waste and
abuse in their program.
It is also important that the health care fraud control unit in each state have
statewide investigatory and prosecutorial authority. If responsibility for health care
fraud prosecution is divided among several geographically separate agencies, there
may be, on the one hand, unnecessary and wasteful duplication of effort, and on the
other hand, imperfect communication that allows fraud to fall through the cracks.
In some cases, the office of the Attorney General is the only entity within the state
with statewide prosecutorial authority, and almost all of the current Medicaid Fraud
Control Units are located in Attorney General offices.
EXISTING MEDICAID FRAUD CONTROL UNITS SHOULD FORM THE BASIS FOR THE NEW
HEALTH CARE FRAUD CONTROL UNIT
The structure and expertise of the existing Medicaid Fraud Control Units should
provide the base for an expanded Health Care Fraud Unit which should have the
authority to prosecute fraud against any government or private third-partv payor.
During the past 15 year, the Medicaid Fraud Control Units have compiled an im-
pressive record of convictions of Medicaid provide and have recovered millions of
program dollars. Their activity has also had a deterrent effect on providers who
45
might otherwise have engaged in fraud. They have trained other law enforcement
officials in health care fraud control and are well respect in the law enforcement
community. These units are comprised of an integrated team of investigators, audi-
tors and prosecutors who are able to effectively prosecute the wide variety of intri-
cate financial crimes that comprise Medicaid fraud.
Even if a new health care delivery system eliminates some opportunities for
fraud, many others will remain, and those bent on defrauding the system will de-
velop new ways of doing so. The expertise and training of the Medicaid Fraud Con-
trol Units provides an invaluable base for expanded investigatory responsibilities.
ADEQUATE FUNDING
In order to ensure that the new system operates effectively, adequate funding
must be provided for state law enforcement activities to combat fraud. Each dollar
invested in state anti-fraud activities will yield abundant savings in fraud preven-
tion. The current federal/state partnership in the Medicaid Fraud Control Units
should be maintained at least the same contribution levels — 90 percent federal con-
tribution for the first three years of the program, and 75 percent federal contribu-
tion from then on.
STATE PARTICIPATION IN A REVOLVING FUND
If the health care reform package includes supplemental funding of anti-fraud ac-
tivities through a health care fraud revolving fund comprised of fines, penalties and
forfeitures, the fund should be available for reimbursement of state costs on federal/
state cooperative actions, and, in appropriate cases, states should participate in dis-
tributions from the fund on a proportionate basis. This type of fund can provide an
incentive for both state and federal enforces. However, it should be in addition to,
rather than instead of, appropriated funding. The more successful an anti-fraud pro-
gram is, the more dollars are saved by deterrence and not by direct prosecution. In
addition, even the best anti-fraud program can hit a slow period. A health care
fraud revolving fund will be an excellent incentive, but an unreliable funding source.
Full, open communication and true partnership between state and federal law en-
forcers is the best way to stop crook and quacks from plundering the health care
system and endangering patients' lives. Inclusion of the principles I have described
in health care reform legislation will provide a more effective weapon in the fight
against fraud.
I would be delighted to answer any questions from the members of the Sub-
committee. Thank you.
The Chairman. Governor Bayh would be proud of the fact that
you asked the Federal Government to fund this State function.
Your reputation precedes you, General. You do one heck of a job,
but as you know, because I have worked with you and the Attor-
neys General Association on crime legislation, I always find it fas-
cinating that the National Association of Governors comes to Wash-
ington and they have always passed two resolutions. The first is
balance the Federal budget, and the second is send us more money
for State functions.
Then the Attorneys General come down and they pass — you are
much nicer; you don't pass the balanced budget resolution. You are
saying no unfunded mandates, but pay for mandates, as well as
pay for things that are totally within the State. Now, we have got
the State court judges coming and saying, by the way, the crime
bill is going to cause more arrests because you are giving us
100,000 cops; why don't you pay for State court judges?
One of these days, the State governors and the legislators are
going to have to say, hey, we are going to raise your State taxes
at home to pay for this stuff and we are not going to tell the Fed-
eral guys to raise the taxes. On the forfeiture end, I think you are
absolutely right, but I want to talk to you a little bit later about
us funding State fraud units in attorneys general offices.
Ms. Carter. That is fine.
46
The Chairman. But I am glad to see that tradition has been
maintained.
Now, Mr. Waterbury, I am sure you have some things you want
us to pay for. We want to thank you very much for being here and
for all you have done. I shouldn't be facetious. That was a bad at-
tempt at a joke.
The floor is yours, Mr. Waterbury.
STATEMENT OF DAVID W. WATERBURY
Mr. Waterbury. Thank you. Good afternoon. My name is David
W. Waterbury. I am an Assistant Attorney General and Director of
the Medicaid fraud unit in Washington State. I am a career pros-
ecutor. I have done this job for 11 years. Health care provider fraud
is a day-in and day-out activity lately, 7 days a week, in my life,
especially for this last year.
I would just like to say something about funding for a moment
before I go on. The funding that Attorney General Carter is refer-
ring to, both now and in the future, is a State-Federal cooperative
effort. As you know, the Medicaid program is approximately 50 per-
cent Federal funding and it is administered by the States. Attorney
General Carter's budget in the State for Indiana contains a line
item for Medicaid fraud control units. It is paid for by the State
legislature.
The Chairman. But not 50 percent.
Mr. Waterbury. That is true. It is 75 percent Federal funding
and 25 percent State.
The Chairman. And you recall the request was for 90-10.
Mr. Waterbury. That is what the transition start-up fees are for
the establishment of any unit and that is for a 3-year purpose, but
I just wanted to make sure that that was clear on the record.
We hope we do a good job for you with that funding in the Medic-
aid fraud control units in the attorneys general office, and we work
very hard. We have been in existence for 15 years. There are 42
Medicaid fraud control units now. We are responsible for about
7,000 health care fraud and patient abuse prosecutions and convic-
tions in the last 15 years, and the sanctions and the medical li-
censes that were pulled accordingly as a result of those. On a day-
in and year-out basis, the Medicaid fraud control units are respon-
sible for the majority of the health care fraud convictions in the
United States of America.
What you saw before you a little bit earlier today is a new and
resurrected interest from a Federal standpoint on health care
fraud, making it a national priority. People who have done this
work in the past are trying to reorganize and do the best job they
can. We have been on point on this very specific mission for a num-
ber of years. Let me just give you as quickly as I can
The Chairman. You, the State of Washington?
Mr. Waterbury. All State Medicaid fraud control units.
The Chairman. Wrong.
Mr. Waterbury. Many of the State fraud control units.
The Chairman. Right.
Mr. Waterbury. I would be glad to talk to you about any that
you don't think are doing as good a job.
47
The Chairman. No, no. I think they are by and large doing a
good job, and some are doing a phenomenal job.
Mr. Waterbury. There are a couple of reasons, I think, why we
do a good job, and in looking at Federal legislation and things that
you can do to help us in this enforcement area in the future, I
would like you to draw on some of our successes or reasons why
I think we did a good job, or have done a good job.
First is the multi-disciplinary approach referred to by Attorney
General Carter. We are not a traditional prosecutor's office. Our of-
fices are made up of in-house prosecutors, usually; legal advice
available on a daily basis, and investigators and auditors. I person-
ally believe this is the only way to effectively and efficiently do
white collar crimes. It is patterned after the organized crime strike
forces years ago. It has worked very, very well in this particular
area.
Our mission statement is very narrow. We don't get pulled off for
auto accident cases or this or that at any given point. You have de-
fined our mission and we try to stay on that mission, and I think
to the extent that you have defined it narrowly, it has been bril-
liant because we have dedicated and been able to train ourselves
and prepare ourselves in this area, not wander around doing other
things, and our expertise and our effectiveness is probably be-
holden to that kind of definition. I ask you to consider that when
you are looking at funding these other sources and other people to
do this kind of work. I think that is important.
We are supposed to work very closely with the health care pay-
ers. We are required to have MOU's with our Medicaid programs.
The Chairman. Explain MOU's for the record.
Mr. Waterbury. Memorandums of understanding between the
people that administer and run the program and the people that
do the health care fraud investigations and prosecutions. They are
required to refer cases to us of suspected fraud based upon their
audits and findings. We are required to report our findings back to
them so they can exclude providers that are prosecuted and con-
victed.
In the best-case scenario, this results in a partnership where the
Medicaid director in my State, for example, will sit down and ask
me what do you think of these new rules; can you enforce these if
somebody attempts to violate these, or can you send me your find-
ings that your investigators make so that we can administer this
program better.
In the back of every file that we close in my office, there is a one-
page — we call it the David Waterbury bureaucratic piece of paper.
Please fill out this form. How could you keep this from happening
again? Can the rule be changed? Can the program be changed?
How did this happen? It is a two-part form. We send it to the Med-
icaid program. They tear off the bottom and send back the results,
and we track those the same way as we track every case in the
unit.
If we pay our way, we pay our way with that one piece of paper,
frankly, as much as we do with the criminals that we convict and
hopefully deter others. But we make important contributions in
running the programs better, we hope, and it pays dividends as
well.
48
The other thing that I think the units do really well is adapt to
changes within the programs. I have asked to address managed
care-related fraud issues, and I will do that as quickly as possible.
Hopefully, this is an example of adapting. There are some experi-
ences in the States with managed care-related programs that have
been experimental in nature in the Medicare program.
The primary greenhouse or hot house of managed care has been
the Arizona situation, the Access program. I am sure you know the
history of the Access program in Arizona. It was one of the last
Medicaid States to come on line. It is not called Medicaid there. It
is called Access, and it is basically a huge managed care, some por-
tions managed competition, program. My comments are based on
the Arizona experience.
Our association drafted what we call a white paper to the Presi-
dent's task force on problems in the managed care area and it is
attached to my testimony. I don't have time to go through all of it,
but if you are looking at new criminal statutes to attack problems
of fraud inside managed care, please review it.
The problem we see, of course, is underutilization in managed
care. In the old fee-for-service system, your incentive is to
overutilize. The ultimate overutilization is a phantom visit. In
other words, you are able to get somebody to pay you for something
that doesn't even happen, or if the person is there, now you charge
for an injection that never occurred. Again, it is a fee for a service
that doesn't occur; it is overutilization.
Once you start paying somebody $300 a month, or a group of en-
trepreneurs or professionals to take care of somebody for $300 a
month, the incentive is not to provide as many services during the
course of that month.
The Chairman. Does that diminish the fraud? Is that the bottom
line?
Mr. Waterbury. That is an interesting question. It changes the
fraud. What you have is overutilization in a fee-for-service setting.
Once you cap the payments, you have what I guess I would refer
to as entrepreneurial fraud. This would be illegal subcontractor re-
lationships between primary contractors who deal with big alli-
ances or whatever to get these contractors to take care of people,
people they pay as runners to go out and sign up a population be-
cause they get paid by body count.
You have incentives. For example, you pay your surgical depart-
ment at a hospital a budget of about $100,000 a month and you
get to keep the difference if you don't spend it all within the budg-
eted target. What does that do to medical judgment within that
setting and how do you make decisions? Is that the appropriate in-
centive to set up in that setting?
The Chairman. I don't want to be having an aneurism operation
in that hospital. I can tell you that.
Mr. Waterbury. I would not think so. Two days ago, I was in
my office having a team meeting with one of my investigators who
is investigating on the streets in the Puget Sound area a Medicaid
provider, and this Medicaid provider had hired what we call a run-
ner to go out to particular ethnic groups at a housing project and
pick up their identification cards for Medicaid.
49
This went on for about iy2 years. He used those identification
cards to bill for services that never occurred, and to also write out
script for drugs that were never received. The drugs were then
billed by the pharmacies, collected and resold to pharmacies. That
is the case we are investigating.
In the last 6 months, this doctor under investigation has signed
up for what is called Healthy Options in the State of Washington,
which is a managed care program inside the Medicaid program, an
experiment in the State of Washington. This doctor's incentives
have changed. My investigator told me on debriefing the informant
the following. This doesn't go on anymore. He doesn't send me out
to the projects to pick up the Medicaid cards anymore. Now, he
doesn't want to see people. I am instructed to go back and tell the
people in the projects that the doctor is not available, that he is
fully booked, and that they should go to a community center, and
the doctor will help arrange for transportation for anywhere but to
his office.
This medical practitioner has also been unavailable to see his pa-
tients for as long as the last 3 weeks while his office was under
surveillance while he is receiving capitated payments for the
month. I guess he is going to make it up in the last week. These
are serious concerns.
I guess you could ask me a question whether people that are so
inclined to commit fraud will change their stripes under a new pay-
ment system. I brought this along to share with you because appar-
ently it is part of my life this week, and this adaption will occur
fairly quickly and we are trying to learn about this so that we can
help you help us.
Just very quickly, what can you do to help us? I think Medicaid
fraud control units need broader jurisdiction. I believe that we
should monitor all Federal programs at the State level. In my case-
load, we quite often do Medicare prosecutions in State court,
whereas CHAMPUS prosecutions and private insurance cases in
conjunction with Medicaid fraud cases.
We are in a better position to stand in front of a judge and get
a defendant fully punished and fairly punished for the full breadth
of their fraudulent activity and to return monies to other Federal
programs, especially Medicare. I am poaching on the regulations
that control the funding in my office by doing that. I am candidly
admitting that to you.
We are also proud of our work in the area of patient abuse inves-
tigations, which I think you have heard about before. We are the
only agency in the country that really has that responsibility. Right
now when I send an investigator to nursing home, that investigator
drives by five board-and-care facilities where we have received com-
plaints, but can't do anything about it. They can't stop in the car
with the Federal money in the gas tank under the Federal regula-
tions that we are running to go to that nursing home. Nursing
homes are covered. Board-and-care and alternative residential fa-
cilities and home health care settings are not covered.
We are requesting that we change our underlying legislation to
allow us to look at patient abuse situations in any setting where
there are Federal funds received, and I don't think that that is a
radical departure from what the intent of our original legislation
50
was 15 years ago. Fifteen years ago when this was put together
and Congressman Pepper said, while you have your investigators
out there doing fraud in nursing homes and investigating, check on
this patient abuse situation while you are there because we don't
think anybody is looking, nursing homes were the only game on the
block, so to speak, at that time, 15 years ago. Now, there is a whole
new generation, an evolution, of alternative settings. We are asking
that we be allowed to look into those settings as well, expanding
the Federal nexus and funding.
Our association has a draft proposal which would change Medic-
aid fraud control units to the health care fraud control units that
Attorney General Carter spoke of. That is available and it is an at-
tachment to the packet.
I know I am beyond my time. One last thing. Also, an attach-
ment referred to in the testimony is just a 2-page list entitled
"Ways to Deter Fraud in Managed Care." I lifted this the other day
from Professor Bucy's article in a brand new Villanova Law Review
article that she sent me. It is definitely well thought out. I think
there are 10 things listed. They include ways that she thinks we
could make the relationships in a managed care setting tight
enough so that fraud could be adequately forced, and that is in-
cluded as an attachment with a citation of the law review article.
To the extent that we do end up with a health care reform package
that relies on managed care, this should be given some thought.
Without asking me to answer the question you asked the Federal
authorities, whether you should go forward with health care anti-
fraud legislation in the meantime, I wholeheartedly support that
you go forward with legislation in the meantime and that you in-
clude the States as part of it.
Thank you. If you have any questions, I would be glad to answer
them.
[Mr. Waterbury submitted the following materials:]
Prepared Statement of David W. Waterbury
Mr. Chairman, Members of the Committee: As Chair of the National Association
of Medicaid Fraud Control Units' Legislative Committee and Director of the Wash-
ington State Medicaid Fraud Control Unit, I am very pleased to appear before you
today to discuss the role of the states in investigating and prosecuting health care
fraud and patient abuse.
BACKGROUND
The Medicaid program, which was established to provide health care to indigent
patients, has seen its enrollment explode. Nationwide, the Health Care Financing
Administration is expected to spend more than $140 biUion in fiscal year 1993 to
sustain the Medicaid Program. State expenditures for Medicaid have doubled in the
past five years and in some urban areas, such as Baltimore and New York, it is
not uncommon for one-fourth of the population to rely on the Medicaid program for
their basic health needs. Even though Medicaid is generally funded 50 percent by
federal money, several states now spend between 15 to 20 percent of their general
budget to sustain the program. Medicaid also continues to finance almost half of the
total costs for nursing homes, spending 45 percent of the $53 billion that was spent
on institutionalized care in 1990.
And as our population ages, enrollment in the Medicare program has similarly in-
creased, costing the federal government billions of dollars each year. In Florida, a
state in which the elderly population is higher than the national average, there are
over 2.4 million people enrolled in the Medicare program. Medicare spent an aver-
age of $3,375 per enrolle in Florida last year, for a total expenditure of $8.1 billion
dollars. In Maryland, a state nearer to national averages, over $2.3 billion dollars
51
was spent last year on behalf of 553,000 Medicare enroUes, for an average cost of
$4,159 per enrojle.
By 1995, this nation is expected to spend $1 trillion on health care or 15 percent
of our gross national product. Given these figures, it is not surprising that our
health care delivery system has proven ripe for fraudulent activity.
The General Accounting Office (GAO) recently estimated that fraud and abuse ac-
counts for 10 percent of health care costs, currently exceeding $800 billion, and
while there may not be a way to establish a precise figure, we are certainly talking
about many hundreds of millions of dollars of fraud and abuse in the Medicaid pro-
gram alone. GAO stated further in testimony before the House Subcommittee on
Crime and Criminal Justice on February 4, 1993 that only a fraction of health care
fraud and abuse is identified and prosecuted. GAO acknowledged that without ade-
quate resources, effective investigation and prosecution of health care fraud is not
possible.
During the past decade, in particular, we have literally seen a feeding frenzy on
the Medicaid Program, a period of unprecedented white collar "wilding" in which
wave after wave of multimillion dollar frauds have swept through nursing homes
and hospitals, to clinics and pharmacies, durable medical equipment (DME), and
labs, and more recently, home health care. Although we do the best we can to put
an end to program vulnerabilities, we still have profiteers who search and succeed
in finding the next great loophole in the Medicaid system.
STATE INITIATIVES
While the investigation and prosecution of health care fraud has only recently be-
come a top national law enforcement priority, the states have been combating health
care fraud for the past 15 years.
In 1977, Congress enacted legislation, the Medicare-Medicaid Anti-Fraud and
Abuse Amendments, P.L. 95-142 which established the state Medicaid Fraud Con-
trol Unit Program. The objective of this legislation was to strengthen the capability
of the government to detect, prosecute and punish health care fraud. In addition to
investigating and prosecuting providers who defraud the Medicaid program, the
mandate to MFCUs specifically includes the authority to prosecute the abuse or ne-
glect of patients in all residential health care facilities which are Medicaid provid-
ers. The Units are staffed by professional teams of attorneys, investigators and
auditors specifically trained in the complex litigation aspects of health care fraud.
The Units are required to be separate and distinct from the state Medicaid pro-
grams and are usually located in the state Attorney General's office, although some
Units are located in other state agencies with law enforcement or auditing respon-
sibilities such as the state police or the Auditor General's office.
States which establish Units receive 90 percent of their operating costs from the
federal government for the first three years — the so-called 'start up" period. After
that, the Units are reimbursed at 75 percent. This federal grant money is trans-
ferred from the Medicaid trust fund to the HHS Office of Inspector General, which
administers the grants to the states.
Since the inception of this pioneering program, 41 federally certified state units
have successfully prosecuted over 7,000 corrupt medical providers and vendors and
elder abusers — convictions that would not have occurred without this vital piece of
legislation. These 41 Units police 92 percent of the nation's Medicaid expenditures
with combined staff of approximately 1,150 and a total federal budget of $62 million.
This amount represents a small fraction of the total Medicaid budget that the Units
are responsible for policing. Missouri's MFCU was certified in January of this year
and became the 42nd MFCU.
Last year's Omnibus Budget Reconciliation Act now requires all states to have a
Medicaid Fraud Control Unit, unless a state can demonstrate that there is a mini-
mum amount of Medicaid fraud and that beneficiaries will be protected from abuse
and/or neglect without an MFCU. When this provision of OBRA becomes effective
in January, 1995, we can look forward to all 50 states having MFCUs which will
make the fight against Medicaid provider fraud truly nationwide.
In addition to the criminal consequences of MFCU cases (repayment of restitution,
overpayments, state exclusions, incarceration, and often the loss of professional li-
censes) the criminal convictions of the Units become the basis for further federal
actions. These federal actions are reported to you by the Office of Inspector General
(OIG) of the Department of Health and Human Services (HHS) and include the un-
derlying state convictions, forfeitures, federal program exclusions, and civil mone-
tary penalties. In fact, the majority of health care fraud convictions, penalties, and
exclusions reported to you are based upon MFCU convictions. The MFCUs are the
52
most efficient and effective law enforcement agencies in the battle against health
care fraud and patient abuse.
While this remarkable success in detecting and prosecuting Medicaid provider
fraud is widely recognized, it is perhaps less well known that the Units are the only
law enforcement agencies in the country specifically charged with investigating pa-
tient abuse and neglect. Congress enacted P.L. 95-142, not only because of the wide-
spread evidence of fraud in the Medicaid Program, but also because of the horren-
dous tales of nursing home patient abuse and resident victimization — and the Units
are justly proud of their record in protecting the frail and vulnerable institutional-
ized elderly.
FRAUD INVESTIGATIONS
In the past decade, we have seen a rapid increase both in the number of fraudu-
lent schemes and the degree of sophistication with which they are committed. Al-
though the typical fraud schemes such as billing for services never rendered, double
billing, misrepresenting the nature of services provided, providing unnecessary serv-
ices, false cost reports and kickbacks still regularly occur, new and often innovative
methods of thievery are now appearing.
Medicaid fraud cases run the gamut from a solo practitioner who submits claims
for services never rendered to large institutions which exaggerate the level of care
provided to their patients and then alters patient records in order to conceal that
lack of care. MFCUs have prosecuted psychiatrists who have demanded sexual fa-
vors from their patients in exchange for prescription drugs, nursing home owners
who steal money from residents, and even funeral directors who bill the estates of
Medicaid patients for funerals they did not perform.
Medicaid fraud is a pervasive and well-documented problem throughout the Unit-
ed States. For example:
• In California, disreputable providers of incontinence supplies obtained eligibility
information from Medical beneficiaries and billed the program hundreds of mil-
lion of dollars for beneficiaries who were not incontinent or for supplies that
were never ordered or delivered.
• The Wisconsin MFCU uncovered an extensive pattern of fraud involving dozens
of firms in the medical transportation industry. Typical scams included: padded
mileage; billing for phantom second attendants; charging for trips either not
provided or not prescribed; forging physicians' prescriptions; and paying kick-
• In Massachusetts, the Medicaid Fraud Control Unit recently achieved the larg-
est civil recovery in its 14-year history when a Boston hospital and rehabilita-
tion center agreed to an unprecedented $12 million settlement.
• A Virginia pharmacist, who pleaded guilty to 6 felony counts of Medicaid fraud
and grand larceny from Blue Cross/Blue Shield, was sentenced to 90 years in
the state penitentiary. The 90-year sentence was suspended on condition that
he serve 12 months in jail, make restitution of $270,000, surrender his phar-
macy license, and agree to withdraw as a Medicaid provider for life. The phar-
macist had billed for expensive medications that were not prescribed by a physi-
cian and not received by patients. This ripoff, the defendant said, was "just too
easy" and all he had to do was "push a few keys on his computer."
• In Tennessee, a Nashville radiologist pleaded guilty to obtaining money under
false pretenses and was ordered to pay $210,000 in restitution. The physician
a native of West Africa who was in the United States illegally at the time, had
billed for CAT scans he never performed.
• Nursing home operators in Pennsylvania and North Carolina have been con-
victed of charging personal luxury items like jewelry, swimming pools, and the
family nanny to Medicaid cost reports.
• Physicians who are nothing more than drug dealers with prescription pads have
been found in Philadelphia, Baltimore, Detroit and elsewhere, providing Medic-
aid recipients with addictive and medically unnecessary tranquilizers, pain-
killers, cough suppressants, and diet control pills.
• In Jacksonville, Florida, a psychiatrist who spent an average of less than 5 min-
utes with each patient, billed Medicaid for 45-50 minute individual psycho-
therapy sessions. .
• In New York, a home health care provider and four company officials were con-
victed of cheating Medicaid out of $4.6 million and of recklessly sending out so-
called nurses who were not licensed and often had no training whatsoever into
the homes of critically ill-care dependent patients in the largest fraud in the
home health industry.
53
Perhaps even more important than any specific prosecution or recovery, however,
is the fact that the Units have demonstrably deterred the loss of many more hun-
dreds of miUions' of dollars in Medicaid overpayments. We have often witnessed a
pattern of skyrocketing Medicaid expenditures followed by a sudden, sharp dollar
decline in the wake of a Unit's investigation of a particular provider group.
PATIENT ABUSE AND NEGLECT
I would also like briefly to share with you some of our findings in the area of pa-
tient abuse. Patient abuse can be classified into several categories. For example,
providing inadequate medical or custodial care or creating other health care risks
may constitute patient neglect. Physical abuse includes acts of violence such as slap-
ping, kicking, hitting or punching a patient and sexual abuse. Financial abuse in-
cludes the misappropriation of patients' personal funds such as comminghng patient
and faciUty funds or using patient funds to pay for faciUty operations.
Scores of investigations and years of cumulative experience have made it clear
that the abuse, neglect, mistreatment, and economic exploitation of nursing home
residents is a problem of far greater magnitude than previously thought. Our na-
tional association, in collaboration with the National Association of Attorneys Gen-
eral (NAAG), has therefore promulgated a model patient abuse statute — already
adopted in several states— that would not only provide the necessary prosecutorial
tools and enhanced penal sanctions for combating this type of shocking misconduct,
but would also serve as a powerful deterrent to potential patient abusers.
Let me highlight a few examples of the Units' work in this area:
• A Baltimore doctor was sentenced to two years in jail for criminal neglect of
his nursing home patients. As the facility owner and medical director, this phy-
sician failed to provide even the most basic medical care to his patients and re-
fused to allow other doctors into the home to do so, leaving many of the resi-
dents with malnutrition, dehydration, and untreated bed sores.
• A New York physician was criminally prosecuted for willful neglect and reckless
endangerment of a nursing home patient in his care. He mistook a peritoneal
dialysis catheter in the patient's abdomen for a feeding tube, and ordered that
she be fed through the catheter. When this error was discovered two days later,
he made a conscious decision to do nothing to help the patient despite expert
advice that the patient required hospitalization for treatment. Finally, ten
hours later, the physician agreed to transfer the patient to the nearby hospital
for care.
• In Arizona, a residential care home owner was sentenced to serve 21 years—
the longest sentence for elder abuse in the state's history— for neglecting and
abusing his aged patients. To induce famiUes to place their relatives in his facil-
ity, the defendant had lied to them about his Ucensure status.
• Four nursing home officials in Philadelphia were charged with involuntary
manslaughter in the death of two nursing home residents who died from mas-
sive and infected bed sores.
• Beverly Enterprises, Inc., the largest nursing home chain in the nation, agreed
to pay Oregon $600,000 and to improve care at their 17 facilities in the state,
after an MFCU investigation of a Beverly home found evidence of inadequate
staff training and supervision, and other conditions constituting an immediate
threat to resident health and safety.
• The third largest nursing home corporation in Texas, (the ninth largest in the
nation), four corporate officers, and four employees were indicted on charges re-
lated to the death of two faciUty residents. One patient allegedly died from ne-
glect, and the other, who suffered from senile dementia, was allowed to wander
from the nursing home, became lost, and died of exposure.
And beyond these egregious cases of corporate and management neglect, the Units
have also uncovered hundreds of incidents of individual nurses, aides, and orderlies
raping, sodomizing, beating, kicking, and force-feeding the helpless, often incom-
petent patients in their charge.
JOINT INVESTIGATIONS
Medicaid cases often have a significant Medicare or private insurance component.
The Units regularly conduct join investigations with a wide range of state and fed-
eral criminal justice agencies such as the FBI, OIG, Postal Service, DEA, DOJ, and
the various United States Attorneys, as well as various state licensing and regu-
latory bodies. Of course, the Units also work cooperatively with each other and
share information on multi-state investigations.
54
An outstanding example of a federal/state partnership is the case of United States
V. National Health Laboratories, Inc. (NHL). National Health laboratories, Inc.,
headquartered in La Jolla, California, is one of the largest medical laboratories in
the country.
NHL's national marketing and billing scheme began in 1987 when the laboratory
added an HDL — cholesterol test to every blood chemistry panel test ordered by a
physician. The blood chemistry panel, also known as a "SMAC" (Sequential Multi-
Analysis Computer), is a series of up to 42 blood tests performed on a single ma-
chine, and is widely used by physicians for a variety of diagnostic and monitoring
purposes. Because the marginal cost of performing additional tests on SMAC is very
low, Medicaid, Medicare, and insurance carriers pay a flat fee for tests performed
on the SMAC requiring only that the ordering physician believe that at least one
of the tests is necessary for the care of their patient.
NHL conducted business with 33 state Medicaid programs where there are
MFCUs. These 33 MFCUs supplied the federal grand jury investigation with wit-
nesses and data demonstrating the true national character of the fraud scheme. At
the conclusion of the investigation, the 33 MFCUs were instrumental in formulating
a settlement which resulted in guilty pleas by NHL and its president and chief oper-
ating officer to Champus and Medicaid fraud. The guilty pleas and sentencing guar-
anteed a $100 miUion federal settlement and a $10.4 million settlement to the 33
state Medicaid programs and the removal and exclusion of the corporation's execu-
tive officers from future Medicaid and Medicare program billings. With the success-
ful conclusion of this case we can expect to uncover more multi-state fraud schemes
in the future.
FRAUD IN MANAGED CARE PROGRAMS
Both the Medicaid and Medicare programs have experimented with managed care.
In some states, managed care has been in existence since the early 1980's. Recently,
more states are requiring greater numbers of their Medicaid population to partici-
pate in their managed care programs.
Proponents of the managed care system believe that it is the best method for pro-
viding low cost high quality health care to more people. Managed care is not only
supposed to save money but it is also designed to cut down on the amount of paper-
work. While many observers point out that the very nature of managed care pre-
vents fraud, the experience of the fraud control units, the Arizona Unit in particu-
lar, the Medicare program and the private insurance industry, reveal that no health
care plan is immune from fraud and indeed fraud does occur in managed care plans.
Rather, fraud simply takes different forms, in response to the way the program is
structured.
While the traditional Medicaid provider fraud investigation focuses on
overutilization of services and fraudulent billing and seeks as the ultimate airn ac-
countability for claimed services in managed care investigations, the evil more likely
lies in the underutilization of services. Unlike the typical Medicaid provider fraud
case, the human cost in terms of reduced access to quality care may be tremendous.
In Maryland, for example, the Medicaid Program has initiated a limited nianaged
care approach which pays physicians a minimal monthly fee for each patient for
whom they assume primary responsibility. The Maryland MFCU recently pros-
ecuted a physician who "treated" between 90 to 100 patients a day, recording for
each patient the identical blood pressure and pulse rate, and using a rubber stamp
to diagnose the same ailment for most. Although he then billed Medicaid as if he
rendered a "comprehensive" medical examination for each patient, the sad truth was
that his patients received no medical care and, in several cases, suffered from condi-
tions that worsened due to his neglect. When questioned by MFCU staff, he was
unable to provide the name of a single patient for whom he allegedly provided care.
The physician was convicted of felony Medicaid fraud. He was ordered to repay the
Medicaid Program $93,500, given a suspended sentence, permanently barred from
the Medicaid program and his license to practice medicine has been suspended.
Many of the health care reform bills that have been recently introduced in Con-
gress, by members of both parties, rely on a managed care system to reduce costs,
curtail fraud and provide universal coverage. For those who doubt that fraud will
occur in any managed care program, I would like to recommend the Association's
report; "Health Care Provider Fraud: The State Medicaid Fraud Control Unit Expe-
rience, A Report Prepared for the President's Task Force on National Health Care
Reform." This report, which is attached, concludes that no health care plan is im-
mune from fraud, but rather that fraud will simply take different forms in response
to the way the program is structured. The state MFCUs have documented several
types of criminal activity in managed care plans including: fraudulent subcontracts;
55
fraudulent related party transactions, excessive salaries and fees to participating
entrepreneurs; bribery, tax evasion, kickbacks, rebates and other illegal economic
arrangements; and fraud in the administration of the program. Quality of care prob-
lems occur more frequently in managed care programs than in the traditional fee-
for-service payment program. These problems include underutilization of necessary
services, falsification or misrepresentation of professional credentials by providers
and the use of unlicensed providers. State Medicaid Fraud Control Units should be
consulted when the federal or state governments develop new health care programs.
In a recent Villanova law Review article, "Health Care Reform and Fraud by
Health Care Providers," Professor Pamela Bucy concludes that health care provider
fraud will exist in any health care system, including a managed care system. The
types of fraud include: submission of false cost data in order to obtain higher capita-
tion rates; enrollment of fictitious members; underprovision of necessary services
while misrepresenting that all needed services have been provided; and paying kick-
backs for referrals of healthy patients. In her article. Professor Bucy lists ten steps
that should be taken to deter and detect fraud in a managed care system. I have
attached a copy of those recommendations for the record. Unscrupulous providers
will find new and innovative ways to criminally profit at the expense of patients
and health care payers. A program for the detection and prosecution of those who
will prey on any health care delivery system should be included in the design of any
new delivery system.
Increasingly, the state MFCUs have come to be viewed as leaders in the detection
and prosecution of fraud in the health care industry. They are responsible for the
majority of health care fraud prosecutions in the United States. The Units are well
respected within the law enforcement community, are equipped with highly trained
staff, and have over 15 years of experience in investigating and prosecuting these
complex cases.
The Medicaid Fraud Control Units should be used as a model for future state-
based health care provider fraud control units. Recently, the NAAG Health Care
Task Force, chaired by Massachusetts Attorney General Scott Harshbarger, unani-
mously endorsed a legislative proposal drafted by the National Association of Medic-
aid Fraud Control Units that would expand the jurisdiction of the state Medicaid
Fraud Control Units (MFCUs) and allow them to investigate and prosecute fraud
in other federally -funded or mandated programs. A copy of this proposal is attached.
According to this proposal, the Units would continue to be the primary state compo-
nent of a national health care fraud strategy. The proposed statute would retain the
essential elements of the MFCUs. These Units, at the very least, would be respon-
sible for policing the Medicaid portion of any state program and, at most, for polic-
ing all federally-funded or mandated health care programs in the state. The Fraud
Unit would continue to be responsible for patient abuse investigations and prosecu-
tions with additional authority to pursue patient abuse in alternative residential fa-
cilities and in home health care. To accomplish program integrity, oversight should
continue with the HHS Office of Inspector General.
In any Congressional discussion which would substantially expand state enforce-
ment responsibilities, the states would expect a further funding commitment. At the
very least, the current federal and state funding partnership that contributes to the
success of this program should be maintained, at the same contribution levels, of
90 percent federal funding for the first three years of this increased responsibility
to 75 percent thereafter.
Enhanced criminal statutes should be drafted to address program vulnerabilities
in any health care delivery system that evolves from health care reform proposals.
The National Association of Medicaid Fraud Control Units is currently drafting a
model criminal statute that would assist the states with supplementing existing
statutes if the health care delivery system moves away from fee for service to man-
aged care.
NAMFCU would like to recommend that a state/federal clearinghouse be estab-
lished which would assist with the coordination of health care fraud investigations.
This would accomplish multi-agency coordination between state and federal law en-
forcement efforts. Regionally-based clearinghouses should be established in each
state with representatives from state and federal health care law enforcement agen-
cies. In order to create a meaningful federal/state partnership, all federal restric-
tions on information sharing should be reviewed and amended to effect the inter-
change of information between MFCUs and federal authorities. I would like to sug-
gest that Congress consider establishing a demonstration project that would develop
guidelines on state/federal cooperation. Best practice guidelines should be developed
to be used by state and federal task forces, or one task force could be used to serve
as the demonstration project.
56
In closing, I want to emphasize that the Medicaid Fraud Control Units are viewed
as having a national leadership role in detecting and prosecuting fraud and abuse
in government funded health care programs. The Units have been successful in
serving as a deterrent to health care fraud, in identifying program savings, remov-
ing incompetent practitioners from the health care system, and in preventing phys-
ical and financial abuse of patients in health care facilities.
Mr. Chairman, I want to thank you for this opportunity to testify today and would
welcome any questions you may have.
Recommendations to Deter Fraud in Managed Care i
1) Specify the individuals within each provider group who must personally sign
the report of costs submitted during negotiations on capitation amounts. En-
sure that these individuals sign under penalty of perjury.
2) Allow only "certified health care accountants" to prepare reports of costs. Re-
quire that to obtain this certification, accountants must receive specified
training in health care finance and fraud. Require that each cost report in-
clude certification that a compliance audit has been conducted by a qualified
health care accountant.
3) Structure enrollment procedures so that the entity regulating the providers
enrolls consumers with a provider. Do not allow providers to enroll consum-
ers. Establish data collection and retrieval systems to detect fictitious enroll-
ment of consumers. (This presupposes implementation of uniform reimburse-
ment and billing procedures.)
4) Require that all enrollment decisions be made directly by consumers or in the
case of incapacity, by power of attorney or appointed guardians. Do not per-
mit representatives of groups of consumers to make enrollment decisions.
5) To reduce the potential for collusion on reporting of costs or underprovision
of necessary services, ensure that whenever possible, multiple providers, or
multiple groups of providers, compete for patient enrollments.
6) Utilize the opportunities for self- regulation by providers. Require that to qual-
ify to compete for enrollment by consumers, each group of providers must sub-
mit and have approved an anti-fraud, waste and abuse plan. Such a plan
must address education, monitoring, detection and disciplining policies. In ad-
dition to their other duties, the entities managing the competition among pro-
viders should be charged with reviewing, approving and enforcing these plans
as well as making referrals for prosecution in egregious instances.
7) Require that everyone who is financially able make copayments. Simplify
claim forms and require a patient's signature on the claim form before the
claim is submitted by the provider for reimbursement.
8) Recognize that if the poor are relieved from making copayments, greater po-
tential for fraud exists in connection with delivery of care to the poor or the
alleged poor. Additional fraud audits should be concentrated in services ren-
dered to this population.
9) Recognize that a managed competition system presents a potential difficulty
for enforcing the exclusion sanction. Neutralize this difficulty by giving law
enforcement the tools needed to detect individual wrongdoers within an orga-
nization; by restructuring standards for finding organizations criminally lia-
ble; and, by protecting consumers in the event their provider is excluded.
10) Recognize that the managed competition system presents a potential for cor-
ruption. Ensure that law enforcement has the tools and training it needs to
deter, detect and prove this corruption. Clarify the difference between illegal
payments and legitimate contributions.
Health Care Fraud Control Units
legislative summary
Proposal: The proposal is intended to expand the jurisdiction of the Medicaid
Fraud Control units and to allow them to investigate and prosecute fraud in other
1 Pamela H. Bucy, Health Care Reform and Fraud by Health Care Providers, 38 VILL. L. Rev.
1003, 1046-48(1993).
57
federally-funded or mandated programs. The Units would continue to be the pri-
mary state components of a national health care fraud strategy. Existing statutory
language was adapted to allow greater flexibility in addressing health care fraud in
the states, wherever possible.
Need for Legislation: National discussions of health care reform include the fold-
ing of Medicaid benefits into state-based health care authorities/programs. Even
without the passage of national health care reform, many states are seeking waivers
from Medicaid requirements and are providing new and innovative state health care
programs. Program integrity issues should be addressed at the same time these new
health care delivery programs are established and approved.
Background: MFCUs are the single most successful agencies that investigate and
prosecute health care fraud. The Units are also charged with investigating and pros-
ecuting allegations of patient abuse and or neglect in facilities that receive Medicaid
funds. The Units are justly proud of their accomplishments in protecting a very vul-
nerable segment of the population. In 1977, Congress recognized that rampant fraud
existed in government funded or mandated health care programs when it passed the
Medicaid and Medicare Anti-Fraud and Abuse Amendments. Since that time, 42
states have established MFCUs and, pursuant to recent legislation, nearly all states
are expected to have Units by 1995.
Purpose of Legislation: This proposal would recognize the MFCU as a model for
future state-based health care provider Fraud Control Units. The proposed statute
would retain the essential elements of the MFCUs. These Units, at the very least,
would be responsible for policing the Medicaid portion of any state program and, at
most, for policing all federally-funded or mandated health care programs in the
state. The Fraud Units will continue to be responsible for patient abuse investiga-
tions and prosecutions.
Funding Mechanisms: Currently, MFCUs are funded on a yearly grant basis with
funds administered by the Inspector General for HHS. As MFCUs begin policing
other components of federally-funded or mandated health care programs, it may be
necessary to augment the Fraud Units' funding source to share the cost.
Oversight: To accomplish program integrity continuity, oversight should continue
with the Office of Inspector General for HHS. Each participating Fraud Unit would
detail its activities in its yearly grant applications. The grant applications would
contain information so that the Inspector General could assess the scope of the
Fraud Units' role in health care provider fraud.
Proposal
STATE HEALTH CARE FRAUD CONTROL UNITS
For the purposes of this statute, the term "State Health Care Fraud Control Unit"
herein after referred to as Fraud Units means a single identifiable entity of the
State government which the Secretary certifies (and annually recertifies) as meeting
the requirements of this section. The Fraud Unit shall conduct a statewide program
for investigating and prosecuting (or referring for prosecution) violations of any ap-
plicable state laws pertaining to fraud and patient abuse and neglect in any feder-
ally-funded or mandated health care program, the provision of medical assistance,
or the activities of providers of services under any such health care program.
1) Requirement.— Each state shall establish and maintain a State Health Care
Fraud Control Unit. Such fraud unit shall be the Medicaid Fraud Control
Unit (as described in former section 1903 (q) of the Social Security Act) if the
state has a certified Medicaid Fraud Control Unit and otherwise qualifies
under this act.
2) Organization and Location Requirements.— The Fraud Unit must:
a) be a single identifiable entity of the state government;
b) be Separate and distinct from any state agency with principal respon-
sibility for the administration of any federally-funded or mandated health
care program; and
c) meet one of the following requirements:
1) It must be a Unit of the office of the State Attorney General or of an-
other department of state government which possesses statewide authority to
prosecute individuals for criminal violations; or
58
2) If it is in a state the constitution of which does not provide for the crimi-
nal prosecution of individuals by a statewide authority and has formal proce-
dures, that (i) assure its referral of suspected criminal violations to the appro-
priate authority or authorities in the state for prosecution, and (ii) assure its
assistance of, and coordination with, such authority or authorities in such
prosecutions; or
3) It must have a formal working relationship with the office of the State
Attorney General or the appropriate authority or authorities for prosecution
and have formal procedures (including procedures for its referral of suspected
criminal violations to such office) which provide effective coordination of ac-
tivities between the Fraud Unit and such office with respect to the detection,
investigation, and prosecution of suspected criminal violations relating to any
federally-funded or mandated health care programs.
3) Scope and Purpose. — The Fraud Unit must:
a) conduct a statewide program for the investigation and prosecution of
violations of all applicable state laws regarding any and all aspects of fraud
in connection with any aspect of the administration and provision of health
care services and activities of providers of such services under any federally-
funded or mandated health care programs;
b) have procedures for reviewing complaints of the abuse or neglect of pa-
tients of facilities that receive payments under any federally-funded or man-
dated health care programs, and, where appropriate, to investigate and pros-
ecute such complaints under the criminal laws of the state or for referring
the complaints to other state agencies for action; and
c) provide for the collection, or referral for collection to the appropriate
agency, of overpayments that are made under any federally-funded or man-
dated health care program and that are discovered by the Fraud Unit in car-
rying out its activities.
The Fraud Unit may:
d) have procedures for reviewing complaints of abuse or neglect in residen-
tial facilities and in home health care programs that provide services to any
person eligible to receive federally-funded benefits, including but not limited
to, board and care and other residential facilities, and, where appropriate, for
acting upon such complaints under the criminal laws of the state or for refer-
ring them to other state agencies for action.
4) Staffing Requirements. — The Fraud Unit must:
a) employ attorneys, auditors, investigators and other necessary personnel;
b) be organized in such a manner and provide sufficient resources as is
necessary to promote the effective and efficient conduct of Unit activities.
5) Cooperative Agreements/Memoranda of Understanding. — The Fraud Unit
must have cooperative agreements with:
a) federally-funded or mandated health care programs:
b) similar Fraud Units in other states, as exemplified through membership
and participation in the National Association of Medicaid Fraud Control
Units or its successor;
c) the Office of Inspector General for HHS and the Attorney General of the
United States and his/her designee.
6) Reports. — The Fraud Unit must submit to the Inspector General for HHS an
application and an annual report containing such information as the Inspec-
tor General determines to be necessary to determine whether the Unit meets
the requirements of this section.
7) Federal Financial Participation (ffp) (MFCU transition to SHCFCU).
A State Health Care Fraud Control Unit shall continue to be funded at the rate
of 75 percent ffp, 90 percent ffp if the Unit is within its first three years as a MFCU
or as a State Health Care Fraud Control Unit. The transition period is from the
status of a certified Medicaid Fraud Control Unit to a State Health Care Fraud Con-
59
trol Unit. At the conclusion of the three-year transition period, the State Health
Care Fraud Control Unit shall receive funding at no less than 75 percent ffp.
8) Funding Approval. — In the annual report submitted to the Inspector General
for HHS, the Fraud Unit shall describe its program for investigating and
prosecuting health care provider fraud in any federally-funded or mandated
health care programs. Upon approval of the annual report, the Inspector Gen-
eral shall grant funding to the Unit. The Inspector General may require
whatever information is deemed necessary in the annual report to allocate
Unit activities among any funding sources.
9) Funding Source. — The Fraud Unit may:
a) receive its funding from a number of sources. The Inspector General
shall be responsible for administering the federal funds and for allocating the
funds to the Units from the various funding sources or programs.
b) The Fraud Unit shall participate in any trust fund estabhshed for the
specific purpose of funding health care provider fraud investigations and pros-
ecutions.
Amendments Required/Statutes affected
42 U.S.C. § 1396b(a)(6)— amend to extend funding.
42 U.S.C. §1396b(b)(3) — amend to change cap either to reflect Medicaid portion
of Unit budget or to cap Unit size.
42 U.S.C. § 1396b(q) — this proposal amends this section by adding the necessary
language to adapt the status of the Medicaid Fraud Control Units to new health
care programs; to outline program requirements, the percentage of federal funding,
and to identify the oversight agency.
42 C.F.R. Part 1007 — must be rewritten to reflect this proposed legislation and
more detailed program mission.
Health Care Provider Fraud: The State Medicaid Fraud Control Unit
Experience
executive summary
Medicaid Fraud Control Units are federally funded state law enforcement entities
which investigate and prosecute Medicaid provider fraud and violations of state
laws pertaining to fraud in the administration of the Medicaid program, in addition,
the Units are required to review complaints of patient abuse and neglect in all resi-
dential health care faciUties that receive Medicaid funds. The Units are staffed by
attorneys, investigators and auditors trained in the complex litigation aspects of
health care fraud. The Units are required to be separate and distinct from their
state Medicaid programs and are usually located in the state Attorney General's of-
fice.
There are 41 federally certified Medicaid Fraud Control Units (MFCUs). Since the
inception of the Medicaid Fraud program in 1978, the Units have successfully pros-
ecuted over 6,000 cases and have been responsible for identifying and returning
hundreds of millions of program dollars. It is important to note that every criminal
conviction excludes the provider from participation in both the Medicaid and Medi-
care program as well as other federal health care programs. The Units are also re-
sponsible for protecting the frail elderly who reside in nursing homes, some of the
most vulnerable of our population.
The National Association of Medicaid Fraud Control Units which represents the
41 state MFCUs undertook this analysis to provide its insight on fraud in managed
care. The findings in this paper are drawn from the Units' fifteen years of experi-
ence in investigating and prosecuting health care provider fraud.
Current fraud schemes include: billing for services not rendered, double billing,
misrepresenting the nature of services provided; providing unnecessary services; il-
legal remunerations and false cost reports.
Based on our common experience, the National Association of Medicaid Fraud
Control Units concludes:
• A provider who submits false claims to Medicaid often submits false claims to
other government programs and to private insurance payers. Increasingly, the
cases of many fraud units include a component of private insurance fraud as
well as other government program fraud.
60
• The Units are structured such that they provide the most efficient and effective
use of resources to successfully handle health care provider fraud at the most
logical governmental level, the states.
• The Units have accumulated a wealth of experience in these highly complicated
white collar crime cases that would be difficult to duplicate or replace.
• No health care plan is immune from fraud, but rather the fraud simply takes
different forms in response to the way the program is structured.
• Fraud occurs in managed care plans.
State MFCUs have documented several types of criminal activity in man-
aged care plans including: fraudulent subcontracts; fraudulent related party
transactions; excessive salaries and fees to participating entrepreneurs;
bribery, tax evasion, kickbacks, rebates and other illegal economic arrange-
ments; and fraud in the administration of the program.
• Quality of care problems occur more frequently in managed care programs than
in the traditional fee-for-service payment programs.
These problems include underutilization of necessary services, falsifica-
tion or misrepresentation of professional credentials by providers and the
use of unlicensed providers.
Patient and resident abuse will continue to occur.
• Unscrupulous providers will find new and innovative ways to criminally profit
at the expense of patients and health care payers.
• A program for the detection and prosecution of those who will prey on any
health care delivery system should be included in the new system.
The ancient law looked upon fraud as a greater crime than theft, and,
therefore, seldom failed to punish it with death, for with care and vigilance
and a very common understanding might a man preserve his goods from
thieves, but honesty has no defense against superior wit and cunning.
Anonymous ( 1726)
Health Care Provider Fraud: The Medicaid Fraud Control Unit Experience
State Medicaid Fraud Control Units (MFCUs)
Medicaid Fraud Control Units are federally funded state law enforcement entities
which investigate and prosecute Medicaid provider fraud and violations of state
laws pertaining to fraud in the administration of the Medicaid program, in addition,
the Units are required to review complaints of patient abuse and neglect in all resi-
dential health care facilities that receive Medicaid funds. The Units are staffed by
attorneys, investigators and auditors trained in the complex litigation aspects of
health care fraud. The Units are required to be separate and distinct from their
state Medicaid programs and are usually located in the state Attorney General's of-
fice.
There are 41 federally certified Medicaid Fraud Control Units. Since the inception
of the Medicaid Fraud program in 1978, the Units have successfully prosecuted over
6,000 cases and have been responsible for identifying and returning hundreds of
millions of program dollars. It is important to note that every criminal conviction
excludes the provider from participation in both the Medicaid and Medicare pro-
gram as well as other federal health care programs. The Units are also responsible
for protecting the frail elderly who reside in nursing homes, some of the most vul-
nerable of our population.
The National Association of Medicaid Fraud Control Units represents the 41 fed-
erally certified units and is staffed by a Medicaid Fraud Counsel who conducts its
daily work at the office of the of the National Association of Attorneys General, in
Washington, D.C.
The Association was founded in 1978 to provide a forum for a nationwide sharing
of information concerning the problems of Medicaid fraud: to foster interstate co-
operation on legal and law enforcement issues affecting the Units; to improve the
quality of Medicaid fraud investigations and prosecutions by conducting training
programs and providing technical assistance to Association members; and to provide
the public with information about the Medicaid Fraud Control Unit Program.
The Association conducts several training conferences yearly and publishes a
newsletter, the Medicaid Fraud Report, 10 times a year.
61
HISTORY OF THE PROGRAM
As a preface, it is worth noting the historical context of the MFCU program. Med-
icaid was created by Congress in 1965 as a national attempt to provide uniform
health care benefits for the financially indigent, initially, no fraud and abuse provi-
sions were contemplated nor enacted. Congress, in the mid-1970's, became aware of
widespread fraud and abuse by health care providers in the Medicaid Program when
it conducted hearings which documented evidence of provider fraud. These hearings
revealed that fraud and abuse were taking a toll on the beneficiaries as well as on
the ability of the states to deliver these federally mandated health care services.
The Medicare-Medicaid Anti-Fraud and Abuse Amendments of 1977 (P.L. 95-
142), signed by President Jimmy Carter on October 25, 1977, were designed to
strengthen the capability of the government to detect, prosecute and punish health
care fraud. The key to the success of the MFCUs are the following statutory require-
ments: the Units must be separate and distinct from the Medicaid agency; are gen-
erally located in the state Attorney General's office; must be solely dedicated to in-
vestigating and prosecuting provider fraud and patient abuse; must be staffed by
trained specialists, i.e. attorneys, investigators, and auditors who are trained in the
prosecution of complex white-collar crime cases; and must have statewide prosecu-
torial authority or the ability to establish formal procedures with the appropriate
state prosecuting authority.
Many believe that the gap between the establishment of the Medicaid Program
in 1965 and the estabUshment of the MFCUs in 1977 forced law enforcement into
a nearly impossible catch-up mode. New health care fraud schemes and new twists
to old schemes are documented every day. Health care providers are no exception
to those who would cheat a system where a large amount of money is administered.
Criminal health care fraud not only diverts scarce resources but also deprives those
who are in need of health care. In addition, fraudulent health care providers are
sometimes found to be incompetent.
As Professor Pamela Bucy so accurately points out in her exhaustive law review
article on health care fraud, i the growing commercialization of health care encour-
ages fraudulent behavior. Furthermore, Professor Bucy states, as the number of pro-
viders increase, and the efforts to control health expenditures increase, there will
be fewer dollars to be divided among she provider community. "As providers seek
to maintain what they perceive as appropriate target incomes, the unscrupulous
provider is more likely to succumb to fraud." 2 Some health care professionals and
non-professionals literally scheme and plot ways to get around any new rules, regu-
lations, or controls and continue to divert large amounts of program dollars for their
own benefit. While the vast majority of health care providers are honest, health care
is a big business and big business without regulatory and legal controls sets the
stage for fraud. Health care provider fraud undeniably exists and affects both gov-
ernment and private insurance payers. We urge you to not repeat what should be
a lesson of history. When a new health care delivery system is chosen, program for
the detection and prosecution of those who will defraud it, should also be created.
CURRENT FRAUD SCHEMES
1. Billing for services not provided
This is one of the most common types of abuse. Examples include, a provider who
bills Medicaid for a treatment or procedure which was not actually performed, such
as blood tests when no samples were drawn, x-rays which were not taken, or, in
the case of a dentist, billing for a full denture plate when only a partial was sup-
pHed. It is improper for a Medicaid provider to bill Medicaid for any service not per-
formed.
2. Double billing
A provider will bill both the Medicaid Program and a private insurance company
'or the recipient) for the treatment. Another example is two providers requesting
payment for services rendered to one recipient for the same procedure on the same
date.
3. Misrepresenting the nature of services provided
A pharmacy may bill the program for the cost of a prescription drug charging the
name brand prescription drug price, when, in fact, a generic substitute was supplied
1 Pamela H. Bucy, Fraud By Fright White Collar Crime by Health Care Providers, 67 N.C.
L.Rev 855, 856 11989).
2 Id. at 936.
91-727 0-95-3
62
to the recipient at a substantially lower cost to the pharmacy. Less expensive goods
are often supplied to a patient but a higher priced item is billed for.
4. Providing unnecessary services
A provider may misrepresent the diagnosis and symptoms on recipient records
and billing invoices to obtain payment for unnecessary tests and procedures.
5. Illegal remunerations
A provider, for example, a nursing home operator con spires with another health
care provider, i.e. physical therapist, pharmacy, laboratory, ambulance company or
physician, to pay a certain portion of the monetary reimbursement the health care
provider receives for services rendered to patients in the nursing home. Payments
include, vacation trips, leased vehicles or other remuneration. This practice usually
results in unnecessary tests and services being performed for the purpose of gener-
ating additional income.
6. False cost reports
A nursing home owner or hospital administrator may include inappropriate ex-
penses in claims to Medicaid. These expenses often include the costs of items for
personal consumption and use.
FRAUD IN OTHER GOVERNMENT PROGRAMS/PRIVATE PAYERS
The fraud units have found that a provider who submits false claims to Medicaid
very often submits false claims to other government programs and to private insur-
ance payers. Increasingly, the cases of many fraud units include a component of pri-
vate insurance fraud as well as other government program fraud (i.e. Medicare and
CHAMPUS prosecuted in conjunction with Medicaid fraud cases).
In order to successfully investigate and prosecute providers of any health care
program, one must understand the program's rules and regulations. As a result of
this increasing experience with a variety of health care reimbursement systems, the
Units have gained a wealth of experience that would be difficult to duplicate or re-
place.
FRAUD IN MANAGED CARE PROGRAMS
Both the Medicaid and Medicare programs have experimented with managed care.
In some states, managed care has been in existence since the early 1980's. Recently,
more states are requiring greater numbers of their Medicaid population to partici-
pate in their managed care programs.
Proponents of the managed care system believe that it is the best method for pro-
viding low cost high quality health care to more people. Managed care is not only
supposed to save money but it is also designed to cut down on the amount of paper-
work. While many observers point out that the very nature of managed care pre-
vents fraud, the experience of the fraud units, the Arizona Unit in particular, the
Medicare program and the private insurance industry, reveal that no health care
glan is immune from fraud and indeed fraud does occur in managed care plans,
.ather, fraud simply takes different forms, in response to the way the program is
structured.
While the traditional Medicaid provider fraud investigation focuses on
overutilization of services and fraudulent billing and seeks as the ultimate aim ac-
countability for claimed services, in managed care investigations, the evil more like-
ly lies in the underutilization of services. 3 Unlike the typical Medicaid provider
fraud case, the human cost in terms of reduced access to quality care may be tre-
mendous.4
THE ARIZONA EXPERIENCE
The Arizona Health Care Cost Containment System (AHCCCS), a statewide pre-
paid capitated program, that is designed to provide the same quality health care to
the poor that is provided to private pay patients, began on October 1, 1982. Each
recipient is enrolled in a health maintenance organization (HMO or AHCCCS Plan),
which in turn contracts with the state to provide all benefits for a fixed fee per en-
rollee. Plans bid competitively by county. The AHCCCS Fraud Unit was estabUshed
on November 5, 1984, and has 8V2 years of experience in investigating and prosecut-
ing fraud in the AHCCCS Program.
3 Cathy Pilkington, Health Maintenance Organizations: Investigating Industry-Wide Practices,
Medicaid Fraud Rep., Feb. 1988, at 1.
*Id.
63
AHCCCS is operated by private plans, which may be for-profit, rather than ad-
ministered directly by the state. Federal and state monies are the payment source
for these for-profit plans that actually provide care to the beneficiaries. Each of
these private plans represent opportunities for entrepreneurial fraud.
/. False claims
Because AHCCCS has a limited fee-for-service component of its system, the
AHCCCS Fraud Unit has found numerous examples of a traditional type of fraud,
that is, the submission of false claims. The AHCCCS program is a two-tier system,
the state agency pays certain types of claims directly, and the subcontracted plans
pay other types of claims. The AHCCCS Fraud Unit has found that false claims
have been submitted at both levels.
At the state level, the submission of false claims involves mainly upcoding and
double-billing. While there are many types of upcoding the primary type that the
AHCCCS Fraud Unit has discovered is billing for a higher level of service than actu-
ally provided. For example, physicians have billed for a Level II ultrasound when
they have really performed a Level I, have submitted claims for a comprehensive
consultation when they have only performed an examination or merely admitted a
patient, and have submitted claims for a more complex surgical procedure than ac-
tually performed. ,,.,,, , 1 •,, /• .u
The AHCCCS system enables providers to double-bill that is. they can bill lor the
same service at the state level as well as at various subcontracted levels because
the system which has different payers or beneficiaries, is so complex.
At the plans' subcontractor level, the AHCCCS Fraud Unit has found that false
claims have been submitted by virtually every provider type; physicians, osteopaths,
medical transportation companies hospitals, pharmacies, physical therapists, reg-
istered nurses, etc. These false claims involve the following schemes:
Upcoding; billing for services or supplies not provided; several types of
unbundUng (spUt billing, breaking services down into steps and stages, bill-
ing for services included in the single fee, etc.); billing for unnecessary serv-
ices, duplicate billing; hospital bill padding; pharmacy fraud (generic substi-
tution, short filling; false refilling; forged prescriptions); billing for services
provided by others; and false time claims by health care workers.
No one health care entity can effectively cover all services that will be need-
ed by a plan's beneficiaries. Therefore, some fee-for service component will
continue to exist as part of any managed health care plan and, the types
of fraud that are inherent to the traditional delivery system will continue
to exist.
//. White — collar crime
"Fraud by health care providers is one of the most deleterious of all white-collar
criniGS." ^
The AHCCCS Fraud Unit has learned that any managed care system that allows
profit-minded entrepreneurs to be involved will be subject to traditional white-collar
crimes. In fact, the government is often victimized twice, first by failing to receive
performance on its prepaid capitation contracts, and then again by having to pay
for services to the beneficiaries when the vendors fail to provide them. In some
cases, the subcontracting provider may actually be the victim, by providing the care
and then not getting paid for that care by the contracted plan.
Specifically, Arizona has documented the following types of criminal cases:
Embezzlement of funds paid by the state to plans for client services; theft
of funds, equipment and services; fraudulent subcontracts (for example, no
services provided, or phony management contracts); fraudulent related
party transactions; excessive salaries and fees to the entrepreneurs iri-
volved; extortion; conspiracy; mail and wire fraud; bribery; tax evasion; and,
pure and simple bustouts (money goes in, no money goes out to the vendors,
then the entrepreneur claims bankruptcy).
In general, the white-collar crime aspect of the AHCCCS program has been exac-
erbated by inadequate investigation and supervision of the subcontractors, poor
monitoring of plan activities and providers by the subcontracted plan, and inad-
equate operation and financial reviews.
///. Kickbacks / rebates and other illegal economic arrangements
Arizona is becoming increasingly aware of a growing number of situations involv-
ing kickbacks. Examples of kickback cases include: money from one provider to an-
5 Bucy, supra at 855.
64
other provider (for example, for referral of patients); from a subcontracting plan to
a provider (or employee of a provider); from one subcontractor to another sub-
contractor, and from an unlicensed provider to a licensed provider for the use of his
license. Also, Arizona has found providers sharing capitation payments with each
other subsequent to an "arranged" assignment of patients. Due to the complex struc-
ture of the AHCCCS managed care program, and the many types and levels of pro-
viders, there are opportunities for kickbacks among providers. Thus far, Arizona has
found physicians, osteopaths, home health care facilities, durable medical equipment
companies, and physical therapists involved in kickbacks. In general, kickbacks are
a very difficult type of fraud to detect and prosecute.
IV. Fraud in Government administration I lack of internal controls
Arizona has recently begun to take more of an interest in the actual administra-
tion of the AHCCCS managed care program and is discovering reason for concern
at the state administrative level. Along the kinds of fraud that have been, or are
being, reviewed are bid rigging by state personnel (collusion with the bidders); self-
dealing by state and county employees; and numerous types of conflicts-of-interest
by state employees in their dealings with the plans.
This type of problem is inherent in any business organization or governmental
program and should be addressed by a strong regulatory effort to vigorously educate
and monitor staff with respect to conflicts-of-interest, and to regulate and enforce
laws dedicated to exposing and discouraging these relationships. The agencies that
regulate the health care plans must be required to cooperate with the investigative
agency or law enforcement entity that is charged with ferreting out fraud. Under
current Medicaid regulations, the state Medicaid agency is required to refer sus-
pected cases of fraud and abuse to the MFCU.
V. Miscellaneous frauds I collateral criminal activity
There are other kinds of fraudulent activity that Arizona has discovered which
may not fit into any convenient category and include:
1) Providing Medicare and Medicaid services when the provider has been pre-
viously excluded from the programs. This could occur as a result of providers
who have been excluded based on a criminal conviction or license proceedings.
2) Forging professional credentials to gain employment in an AHCCCS con-
tracted facility.
3) Exploiting the Medicaid funds of incapacitated adults. Arizona has numerous
examples of the embezzlement of patients' trust funds or assets by nursing
staff or family members, by false powers of attorney and forgeries, by imper-
sonating licensed health care professionals in order to exploit an AHCfCCS cU-
ent, and by diverting the Social Security checks of AHCCCS clients for unau-
thorized uses.
4) Providing false information on applications to qualify for AHCCCS. This in-
cludes financial and other information used to make contractual decisions.
THE EXPERIENCE OF OTHER STATES
As previously described, more states are requiring Medicaid beneficiaries to par-
ticipate in managed care programs. For example, while managed care in Michigan
has existed in various forms since 1982, the state Medicaid agency has been aggres-
sively pursuing the managed care option during the past two years and anticipates
that by December, 1994, 60 percent of the Medicaid population in Michigan will be-
come part of the managed care system.
The Michigan program consists of three types of managed care; physician spon-
sored plans, clinic plans and HMOs. The MFCU has had experience in dealing with
fraud in both the physician sponsored plans as well as the clinic plans. The physi-
cian sponsored plans run the gamut of fraudulent activity from kickbacks to billing
for services not rendered. This plan is very similar to the traditional fee for services
payment system with Medicaid providers.
Although a limited number of clinics operate under the managed care system in
Michigan, the MFCU is currently investigating a clinic in Detroit that it anticipates
charging with Medicaid fraud ad other crimes in the near future. This is an enrolled
Medicaid cUnic that utilizes unlicensed doctors and physicians' assistants. Although
the Michigan MFCU has less experience with HMOs, it does note that they are sub-
ject to kickbacks. Typically, the HMOs have no internal mechanism to monitor
fraud.
Illinois has also had prepaid, preventive health care for Medicaid recipients since
1982. The Illinois MFCU began an investigation into prepaid health plans in 1987
65
and found fraudulent marketing techniques, reduced access to quality of care and
improper disenroUment practices. The Unit learned that misleading or downright
fraudulent marketing practices are a common complaint in the Medicaid HMO pop-
ulation. At the time the investigation began, the Unit learned that many HMO
salesmen worked on a "quota system." Under the quota system salesmen were re-
quired to enroll a certain number of recipients per week. The Unit learned of in-
stances in which salesmen not meeting quotas lost their jobs or were threatened
with termination. The incentive to enroll recipients at any cost, coupled with recipi-
ent misunderstanding of the consequences of HMO enrollment seems to have caused
tremendous problems in Medicaid HMO enrollments.
A further category of complaints pertained to HMO disenroUment practices. Re-
cipients complained that upon becoming dissatisfied with HMO health care,
disenroUment was made very difficult. Recipients who desired to disenroU were ad-
vised to take a bus trip to downtown Chicago. Some recipients described hours long
waits in HMO reception rooms before obtaining appropriate forms. Even after trav-
elling downtown and fiUing out forms, changing health care providers aUegedly took
several months.
In California, the state has enrolled 1.1 million Medi-Cal beneficiaries in 1993 and
expects to enroU 2.5 million beneficiaries by the end of 1994. Fifty percent of the
Medi-Cal population (Medi-Cal is the Medicaid program in California) wiU be en-
roUed by the end of 1994. The program expects to spend $15 billion in the upcoming
year. Existing HMOs wiU participate by accepting Medi-Cal beneficiaries.
In California's managed care system, the single state agency (Medicaid agency)
contracts for some or all of its Medicaid covered services and supplies. The services
are provided by employees of the contractors or by subcontractors. The victim of
fraud may be the program, the contractor, the subcontractor or the individual pro-
vider. The perpetrator of fraud may be an individual within the single state agency,
an individual employed by the contractor or subcontractor, or individual provider,
agent, employee or an entity that controls the service provider.
Huge dollar amounts are at stake in California's managed care program unlike
the average individual provider. While Medicaid and/or Medicare providers who
have been convicted of health care fraud are subject to civil fines, sanctions and ex-
clusion from the programs, managed care plans would suffer a far greater financial
loss if sanctioned or excluded from participation in the health care delivery system.
The system would suffer the loss of a major provider and therefore the ability to
deliver health care to large numbers of beneficiaries.
Some potential areas of fraud that the California Unit has found include the fol-
lowing:
a contractor arbitrarily excludes identifiable groups of beneficiaries (people
with mental/emotional problems children, infants, elderly) from service
even though these people were assigned to one plan: a contractor denies
treatment requests regularly or by policy without regard to legitiniate medi-
cal evaluation; a contractor has poUcies that require an appeal prior to pro-
viding the treatment; a contractor relies strictly on the language of the con-
tract and only measures performance by breach of contract concepts; a con-
tractor fails to notify assigned beneficiaries of their right to services yet
keeps a capitated sum; a contractor fails to obtain health practitioners thus
no service is supplied; a contractor retains an exorbitant "administrative
fee" releasing too little to the subcontractor or individual provider to cover
their costs; a contractor keeps an administrative fee but fails to monitor
shortcomings of the subcontractor; and a contractor attempts to assign too
many beneficiaries to providers of service thus making adequate service im-
possible.
Maryland recently initiated a managed care approach for a large percentage of its
Medicaid enroUees. It has already become apparent that a problem will occur with
respect to the quality of patient care being afforded by some of the more unscrupu-
lous providers participating in the program. This "quality of care" issue is directly
attributable to the desire of providers to increase their reimbursement from the
Medicaid program and other insurers.
Specifically, the Maryland MFCU is now investigating an internist who, although
a solo practitioner, is attempting to treat up to ninety Medicaid patients during his
five-hour work day. Needless to say, the actual medical care rendered is minimal
(at best) and the cost to the state Medicaid Program is exorbitant— up to $42.50 per
patient. The Unit has learned that his "private pay" patients receive a more com-
plete routine examination while the typical Medicaid recipient on managed care re-
ceives what one would generously call an abbreviated service, regardless of the
symptoms with which they present.
66
The Unit recently learned of another managed care provider who went on vaca-
tion and left a message on his answering machine telling his patients that if they
had a medical problem, they should seek assistance at a hospital emergency room.
In addition, the Unit has received an allegation concerning a Baltimore HMO
which paid cash incentives to its sales staff, the amounts of which were determined
by the number of new enroUees they were able to attract. This practice is alleged
to have led to falsification of new enrollee registrations, leading to increased and
false charges to third-party insurers, including Medicaid.
MEDICARE/HMO FRAUD
In the early 1980's, concerned with the skyrocketing costs of health care, Congress
evaluated the efficiencies of HMOs as a way to save dollars for Medicare while pro-
viding high quality, coordinated benefits. Given appropriate safeguards on access
and quality, it was assumed that Medicare could save billions of dollars by giving
older Americans the option to participate in a system of health care delivery that
had already attracted increasing numbers of younger individuals.
Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Congress
authorized the Medicare program to contract with HMOs for covering beneficiaries
on a "risk" basis. Under a risk contract, the HMO would provide the full range of
Medicare benefits for a fixed cost for each enrollee. If the actual costs of services
were higher than the payment, the HMO would absorb the loss. Thus, the concept
of risk.
The first risk contracts were signed in April 1985. As of March 1, 1987, about 3
percent of the Medicare population — 867,087 individuals — were enrolled in 151
HMOs under risk contracts.
In addition to traditional HMOs Congress authorized "competitive market plans"
(CMPs) which were groups of providers who came together for the purpose of con-
tracting with Medicare to supply fiat fee paid health care services to defined Medi-
care populations. In 1987, the late Senator John Heinz, then ranking member of the
U.S. Senate Special Committee on Aging, conducted an investigation of the Medi-
care HMO and CMPs alternative program. The following results were documented
in the Committee's report, Medicare and HMOs: A First Look with Disturbing Find-
ings, and may be relevant to determine where fraud and abuse may occur in these
non-traditional delivery programs.
Providers were found to manipulate the beneficiary pool in an attempt to remove
higher risk (more expensive) participants. Reducing health care costs of any partici-
pant increases profits. Marketing practices of the plans were found to be misleading
in some cases and even false. Quality of care was found to be inadequate because
medical judgments became the basis for profits. In at least one instance the pro-
vider. International Medical Centers (IMC), a Florida HMO, falsified it's financial
background, denied access to beneficiaries, and went bankrupt after diverting pre-
paid sums causing Medicare to have to intercede and pay twice for the care of the
IMC's beneficiaries.
The illegal schemes used by these plans included: pre-enrollment health screening
of potential enrollees; selective marketing practices; denying access to high cost
beneficiaries in an attempt to have them withdraw from the plan; and geographi-
cally terminating the plans coverage to remove high cost beneficiaries.
Subsequent legislation banned the use of physician incentives by hospital and
Medicare HMOs. The incentives were designed to put undue and clinically inappro-
priate pressures on physicians to limit care.
The lesson of international medical centers
In 1981, the Miami-based International Medical Centers received federal govern-
ment approval to provide comprehensive medical care to Medicare patients. For a
flat payment of 95 percent of Medicare's normal per-patient costs, all the health
care needs of the enrollees would be taken care of ^ Even free prescriptions, eye-
glasses and hospital care without Medicare's deductibles were promised. The Regan
administration believed that IMC would be the national model for low cost, high
quality health care for the elderly. IMC ultimately became the country's largest
Medicare HMO, enrolling more than 130,000 elderly Florida residents and costing
the government approximately $360 million annually.
IMC enrolled such a large number of beneficiaries because of a large television
advertising campaign as well as aggressive and high-pressure door-to-door sales
techniques.
6This discussion of IMC is excerpted from an article by Michael Abramowitz, Collapse of a
Health Plan: How Did Such a Good Idea Turn Out So Bad?, Wash. Post, June 23, 1987 at Al.
67
However, as a result of the rapid and unexpected enrollment of so many bene-
ficiaries, IMC becarfie overburdened and unable to pay its bills or provide adequate
care. There were allegations that IMC officials paid themselves unusually large sal-
aries for an HMO.
IMC finally collapsed only five years after it began because of alleged mismanage-
ment and failure to maintain adequate capital. Furthermore, both the Inspector
General of HHS and the FBI investigated allegations of fraud. The founder of IMC.
Miguel Recarey, Jr., was indicted by a federal grand jury in Miami for conspiring
to bribe union ofiicials to send patients to the health plan and charges of fraud,
racketeering, wiretapping and bail-jumping.
As of July 1992, the FBI was still pursuing Recarey who had fled the country in
1988 supposedly to Venezuela.'
FRAUD IN PRIVATE INSURANCE/MANAGED CARE
In addition to the government's attempts to reduce costs by encouraging the es-
tablishment of managed care systems, the private insurance industry has also
steered more of its beneficiaries into managed care plans. And private insurers have
also found fraud in these plans. Some industry observers believe that preferred pro-
vider arrangements (PPAs) are more susceptible to fraud because there are fewer
controls, therefore there's more incentive to increase or fabricate charges.
QUALITY OF CARE
Quality of care problems occur more frequently in managed care systems than in
the traditional fee-for-service. While the success of the MFCUs in discovering and
prosecuting Medicaid provider fraud is widely recognized, it is less well known that
they have jurisdiction over complaints of patient mistreatment in residential health
facilities that receive Medicaid funds. When Congress held numerous hearings on
Medicaid fraud in the 1970's, egregious cases of patient abuse and neglect in nurs-
ing homes were described and Congress soon realized that in the institutional set-
ting poor quality of care was often the result of fraud by nursing home owners and
operators. For example in its investigation of the state's nursing home industry, in
the mid 1970s, the New York Office of the Special Prosecutor for Medicaid Fraud
Control found that patients suffered dramatically because the Medicaid money that
was to be used for the care of patients was diverted into the hands of greedy nurs-
ing home operators. The result of this greed was patients who were horribly ne-
glected, many of whom developed decubitus ulcers and were literally left to rot in
their own waste. Because of these scandals. Congress authorized the MFCUs not
only to investigate and prosecute Medicaid provider fraud but also to investigate al-
legations of patient abuse and neglect in nursing homes. After more than a decade
of investigating patient and resident abuse, neglect, mistreatment and economic ex-
ploitation, the state MFCUs have estabhshed that patient abuse crimes pose a sig-
nificant threat to the safety and well-being of the elderly and sick residing in health
care institutions.
In managed care plans, the types of quality of care fraud issues that occur include
the denial of medically necessary care and the delivery of substandard and generally
inappropriate health care. The Illinois MFCU, for example, found that a significant
number of the complaints made to the Unit alleged that recipients seeking medical
treatment had been turned away or told to make appointments several weeks in the
future. In some instances, recipient ignorance or misinformation regarding HMO
health care precipitated the problems. Recipients were unaware that upon HMO en-
rollment, they would be essentially restricted to one location. Certain recipients al-
leged that upon enroUing in an HMO, they were assigned to clinic locations miles
away from their homes. No longer could they merely walk to the neighborhood clinic
to seek medical treatment. Admission to a hospital or even an emergency room visit
now required the consent of the HMO. As the investigation progressed. Unit person-
nel learned that physician incentive payments were a common practice in HMOs.
Essentially, this means that physicians on contract to the HMO receive monies left-
over for hospital days not used or for surgery not performed, etc. A fair amount of
physicians called to complain that their medical judgments were, at times, being re-
placed by what they felt were improper cost containment considerations. Therefore,
•'Michael Isikoff, As Race Heats Up, So Does Scrutiny of Bush's Family, Relatives' Business
Affairs Become Target, Wash. Post, July 4, 1992, at Al.
68
in some instances, it appeared that underutilization of services and the potential for
interference with medical judgments was a problem. s
The underutilization of services, the falsification or misrepresentation of profes-
sional credentials by providers and the use of unlicensed professionals all of which
have been seen in managed care plans, will surely affect the quality of care and
could indeed lead to patient abuse. Furthermore, although the health care delivery
system may change, a large portion of health care services will continue to be deliv-
ered in hospitals and nursing homes and just as fraud will continue to exist, so will
patient and resident abuse.
UNDERUTILIZATION
Crimes involving "overutilization" result in providers ordering tests, medical
equipment, and other services which are not medically necessary but do result in
a greater profit to the provider. In a program which attempts to cap costs or estab-
Usn contractual flat fee payments to supply a beneficiaries' health care, a motive
is created to accept payment and supply as few services as possible thus maximizing
profits. The same provider who currently lies about the necessity of a test for profit,
will also lie about the need for a necessary test in order to reduce costs and retain
a higher level of profits. "Underutilization" takes a number of forms to include fal-
sifying medical records which would support the need for treatment or altering med-
ical decisions (for example, a patient needs a complex and expensive battery of tests)
to avoid the expense, if the duty that is contractually established is to supply a cer-
tain level of health care benefits, a knowing and willful refusal to supply agreed and
necessary services should be a crime.
U.S. V. NATIONAL HEALTH LABORATORIES
A case study in the manipulation of medical judgment for profit
National Health Laboratories (NHL), a publicly traded corporation, is one of the
largest medical laboratory chains in the country. In 1987, NHL instituted a market-
ing and billing scheme which ultimately cost the Medicaid and Medicare programs
millions of dollars. One of the most disturbing aspects of NHL's scheme involved a
small, greedy group of business executives who devised a method to circumvent the
medical judgment of thousands of medical doctors for the corporation's gain. NHL's
scheme involved adding an expensive blood test to a standard panel test. Through
aggressive and deceptive marketing techniques, the corporation managed to double
and then triple its profits using the scheme over a three year period. In the end,
NHL used the thousands of tests ordered by physicians to imply that the doctors
medical judgment extended to the tests added by the company. An important lesson
of the U.S. V. NHL case is that the government should be careful in trusting a for-
profit business entity in making medical judgments.
This case also illustrates the scope of health care fraud and its national implica-
tions. In December of 1992, NHL and its president/chief executive officer entered
guilty pleas in United State District Court for the Southern District of California
in San Diego. The defendants agreed to repay $110.5 million dollars to Medicare
and 33 state Medicaid programs. This case is the largest health care prosecution
ever and represents a high point in the cooperation of 33 state Medicaid Fraud Con-
trol Units aid with federal prosecutors. It is of note that this prosecution involved:
ancillary services cot physician care: tests actually performed and not fictitious bill-
ing; the manipulation of the concept of medical judgment and necessity for a profit;
a large national corporation and not a primary provider or clinic; and a group of
profit minded unscrupulous businessmen in search of a way to maximize their com-
pany's profits at the expense of government and health care beneficiaries. NHL also
exemplifies the ability of the states to coordinate and cooperate both with each other
and with the federal government on health care fraud cases. If the new health care
delivery system establishes entities that cross state lines, the state MFCUs can be
looked to as a model of state law enforcement agencier that are capable of handling
multi-jurisdictional health care fraud cases.
CONCLUSION
Health care fraud occurs and will continue to occur in the future no matter what
type of delivery system is created. Our experience has shown that unscrupulous pro-
viders have always found new and innovative ways to criminally profit at the ex-
pense of patients and health care payers. If there is a larger amount of health care
sPilkington, supra at 3.
69
fraud than in the past, it may be attributable to the growing size of the industry
and the diversity of the services that are considered to be a part of "health care."
All payment programs have relied, heavily on the integrity of those with whom they
have contracted and too often the expectation that the provider is honest and be-
lieves that the patient's health is of paramount concern has not been realized.
Unfortunately, as James Pinkerton predicted in his article in New York Newsday,
March 18, 1993 "About 10 minutes after the President signs a bill, Americans will
figure out how to 'game' the new system. The cleverest doctors and lawyers in the
country will match wits with bureaucrats. Guess who will win."
A program for the detection and prosecution of those who will prey on any health
care delivery system that is designed should be a part of the Administration's report
on health care reform.
Recommendations on Health Care Fraud Enforcement by the National
Association of Medicaid Fraud Control Units
I. The state Medicaid Fraud Control Units (MFCUs) should be incorporated imme-
diately into any new health care delivery system. If the Medicaid Program is elimi-
nated and becomes part of the new health care delivery system, the newly named
state health care fraud units should have the same authority as the current state
MFCUs, that is, the statewide authority to prosecute providers for criminal viola-
tions and to investigate allegations of patient abuse and neglect in facilities that re-
ceive government monies and to investigate and prosecute violations of all state
laws pertaining to fraud in the administration of the program. Such Units should
be mandatory for all states.
II. In addition to leaving the same authority as the current MFCUs, the new state
health care fraud units should be staffed by trained specialists, i.e. attorneys, inves-
tigators and auditors who are trained in the prosecution of complex white-collar
crime cases.
III. The Units should be solely dedicated to the investigation and prosecution of
provider/administrator/contractor fraud and patient abuse.
IV. A Unit should be located in the office of the state Attorney General or another
department of state government which has statewide authority to prosecute individ-
uals for violations of criminal laws with respect to fraud in the provision or the ad-
ministration of the program. If there is no state agency with statewide authority
and capability for criminal fraud prosecutions, the Unit should establish formal pro-
cedures that assure that the Unit refers suspected cases of criminal fraud to the
appropriate state prosecuting authority or authorities.
V. A Unit must be separate and distinct from the state health care agency. No
official of the state health care agency will have the authority to review the activi-
ties of the Unit and the Unit should not receive funds either from or through the
health care agency.
VI. The state health care agency must cooperate and ensure access to records
maintained by the agency or its contractors to the fraud control unit. The Unit will
enter into an agreement with the state health care agency under which the state
health care agency will agree to refer all suspected cases of provider fraud to the
Unit.
VII. The new state health care entities should have methods and criteria for iden-
tifying suspected fraud cases and procedures, developed in cooperation with state
legal authorities, for referring suspected fraud cases to the Units. The new state
health care entities should also have internal methods for detecting suspected fraud.
VIII. The fraud control units should have the authority to investigate and pros-
ecute fraud that is committed by a health care provider, administrator or contractor
against any government third party payer (including Medicare) or private payer.
IX. No specific recommendation can be made regarding the funding of these Units
without further information about the new delivery system. Funding should be a
partnership between state, federal, and possibly private payers with incentive fund-
ing to encourage state enforcement and funding levels proportionate to the expendi-
tures of the system.
National Assocl\tion of Attorneys General
adopted resolution on health care fraud
WHEREAS, the cost of health care continues to rise dramatically every year and
millions of Americans are uninsured and underinsured; and
70
WHEREAS, estimates of health care fraud in government and private insurance
programs range from $580 to $100 billion each year; and
WHEREAS, health care fraud is of increasing national concern and a focus of both
law enforcement and the private insurance industry; and
WHEREAS, Congress is considering numerous proposals to reform the health care
delivery system in order to contain costs and to assure access to quality health care
for all, and several of these proposals would restructure or eliminate Medicaid; and
WHEREAS, health care fraud has been the subject of numerous Congressional
hearings and proposed legislation; and
WHEREAS, Medicaid finances the majority of long term care costs and with the
aging of the population it is vital to continue to protect the quality of care of those
sick and elderly who reside in health care facilities; and
WHEREAS, the states have demonstrated their success for more than a decade
in investigating and prosecuting health care providers and in protecting sick and
elderly residents of health care facilities from patient abuse and neglect; and
WHEREAS, the Medicaid Fraud Control units of the states and the District of Co-
lumbia have demonstrated their ability to coordinate their resources with other
state and federal agencies, which is necessary to successfully prosecute these crimes;
and
WHEREAS, if Congress adopts a new health care financing system that elimi-
nates Medicaid, the government will still be significantly involved with financing
health care, there will be enormous sums of money involved, and there will continue
to be unscrupulous providers who steal public funds; and
WHEREAS, Congress should establish integrated law enforcement units that
have statewide authority to prosecute providers for criminal violations and should
include these state investigative and prosecutorial entities immediately in any pro-
posed health care reform legislation;
NOW THEREFORE, BE IT RESOLVED THAT THE NATIONAL ASSOCIATION
OF ATTORNEYS GENERAL:
1) urges Congress to continue to maintain state investigative and prosecutorial
entities in any new health care reform legislation; and
2) urges Congress when adopting fraud and abuse legislation to use the Medic-
aid Fraud Control Units of the states and the District of Columbia as a suc-
cessful example of state/federal and private sector cooperation in investigating
and prosecuting health care fraud; and
3) urges Congress to include in any health care reform legislation the authority
to prosecute patient abuse and neglect of the elderly in health care facilities
and in home health care programs at the state level; and
4) authorizes the Executive Director and General Counsel to transmit this reso-
lution to the Administration, appropriate committees of Congress, and other
interested individuals and associations.
5) directs NAAG to establish a subcommittee of the Health Care Task Force
which would include representatives of the National Association of Medicaid
Fraud Control Units to make recommendations for further action.
The Chairman. Thank you very much. I do have a few questions
before I yield to Senator Cohen.
Tell me — and I am being very serious about this now, and I will
start with you, Mr. Waterbury — what does the State legislature in
Washington State do to support your efforts.
Mr. Waterbury. I was going to be hard-pressed if you stopped
right after "what do they do? "
The Chairman. Well, whatever they did before, they are likely
not to do now for you being such a smart alec, I suspect.
Mr. Waterbury. The State legislature in the State of Washing-
ton has actually been very supportive of the efforts of the attorney
general's office in the area of health care fraud enforcement. That
is not a classic answer, probably, that could be given to you nation-
ally because there are some people that do the kind of work that
I do that I have heard that their legislatures aren't as supportive.
But in direct answer to your question, they have always funded
the Medicaid fraud control unit proposals at the 25-percent rate. If
71
we are going to talk about whether they would fund it at a higher
rate or be more willing to, up to this point that has been the rate
that they have had to do it.
The Chairman. Since there is an expenditure of State dollars,
what is the rationale of why States don't do more? They have the
authority to do more, if they wish, through the attorney general's
office, whether it is Delaware, Indiana, Washington State.
I am truly trying to figure this out. I mean, we are constantly
in the position, with limited resources, of trying to shift burdens
from the county level to the State level, the State level to the city
level, the city level to the Federal level. That just seems to me a
statement of fact, a recognition of reality.
In my experience — and I may be mistaken; it may be too lim-
ited — the health care fraud units in the States, of the many States
where they exist, have indicated to me they usually have difficulty
convincing their State legislators and governors to invest more re-
sources. There is not a limitation on what they can invest.
First of all, is that correct in incorrect?
Mr. Waterbury. You are correct.
Ms. Carter. I think it is much more complex than that. When
the Medicaid fraud control units were originally instituted, they
were focus on Medicaid issues and fraud. As the health care issue
has become much more important and the public discourse much
more extensive, people began at the State, I think, and I know at
the Federal level, to look at how we can look at health care more
broadly.
We find the funding, for example, is so convoluted and that State
and Federal statutes are so specific that it makes it very difficult
to have an effective and uniform and unified approach to health
care investigations in combatting fraud and abuse at the local
level.
For example, when I became Attorney General, once of the things
that I wanted to do immediately, and did, was to meet with the va-
riety of State agencies that oversee a host of State health care
agencies and programs, and began to find out how we could work
together in forming a kind of health care task force. We found that
you could not use, for example, our Medicaid investigators or pros-
ecutors or any of that, except solely for Medicaid fraud and control,
even though we could have potentially used our partners or those
individuals to do a variety of other activities.
The Chairman. Well, you know the reason for that, though. You
know the reason for that?
Ms. Carter. Yes, I do know the reason for it, and I think it is
positive, but it also forms an impediment, a real impediment, to
maximizing without unnecessarily duplicating activities.
The Chairman. You are right on point. Again, I don't have any
brief on this. I am truly trying to figure this out. The same thing
occurred in States that I am familiar with when they found out
there was an inability to use federally-funded personnel to deal
with matters that did not relate to federally-funded programs,
which are many in my State, and I suspect in yours.
Instead of the governor. Democrat or Republican, saying, you
know, we have got a real problem here in the State of Delaware
or the State of Indiana or the State of Maine with State-funded
72
programs, why don't we go to the State legislature and ask the
State legislature to fund for the Attorney General 2, 5, 7 more in-
vestigators to deal with this totally State-related issue — now,
maybe I am mistaken, but I don't know many States that have
done that in areas that are totally, completely, fully a local and
State responsibility. That is my frustration.
Ms. Carter. I think there have been an enormous number of
States that have, in fact, not only discussions, but have been at-
tempting to look at ways in which we can address that. But one
of the other impediments is that we also know that there is a na-
tional health care reform debate and that whatever happens at the
State level will be subsumed and superseded by whatever occurs
here at the national level. So there is a sort of hurry up and wait
kind of reality, so there is are lot of discussions.
I think there would be sufficient support, certainly, in Indiana by
the governor and our legislators and others to move forward, but
we find that we are also stymied not in a negative way, but in
terms of trying to find out what is going to be imposed.
The Chairman. The only thing I want the record to reflect here,
because it is a frustration for somebody like me who has worked
22 years of my life dealing with the criminal justice system at the
Federal level — to use an expression of one of my colleagues, I am
tired of wearing the jacket, as they say, by implication, that some-
how we impede the ability of States to have better law enforcement
capabilities, which is malarkey, flat malarkey.
There is nothing that stops a State, a governor or a legislature
to deal with locally controlled senior citizen centers, locally con-
trolled nursing homes, locally controlled, managed and licensed fa-
cilities, from going out and hiring 20, 10, 50, 500 more investiga-
tors. Instead, what we get, and the public believes it, is this notion
that somehow the Federal Government, by implication at least,
prevents this from happening. So, as you can tell, that is what you
are sensing my resentment about, that maybe we should do more
where there is a Federal nexus.
Ms. Carter. I think that you are correct in the sense that if you
have local problems and State problems, at some point local and
State governmental entities must take care of those problems. But
we can't ignore the fact that we have always had a partnership and
we are interdependent, and so the same kind of argument
The Chairman. Yes, but a partnership out of the largess of the
Federal Government.
Ms. Carter. Well, it is also a partnership because both the State
and Federal Governments do things together and both benefit, and
there can also be, in the best of all worlds, major benefits and con-
tributions. At worst, it can be an impediment, and to the extent
that it is duplicative, inefficient, poor communications, ill-funded
all across the board, the bottom line is that the public suffers.
To the extent that we work together and understand that there
is that interdependence and the necessity for that interdependence
and partnership, which would include, in my mind, broad funding
across the board, I think that we will do much better.
The Chairman. There is no question about broad funding. If we
funded it all, it would be wonderful.
73
Ms. Carter. Not just you. When I say broad, I mean Federal,
State and local.^
The Chairman. Good, OK.
Ms. Carter. But I don't want the Federal Government to ignore
the States either. I mean, I think there is a partnership.
The Chairman. We are about to pass a $30 billion bill for law
enforcement, all going to the States, all that money going to the
States.
Ms. Carter. Well, crime is local.
The Chairman. That is right, but the States aren't doing the job.
You have a total population of 860,000 prisoners. You have a need
for twice that amount. You, the States, are keeping people in jail
45 percent of the time for which you sentence them. We are about
to fund $10 billion to give to governors so they can build prisons
to house State prisoners because they won't go to their State legis-
lators and say the State if not doing the job. These are local of-
fenses.
The Federal Government keeps their people in jail 85 percent of
the time sentenced. The Federal Government tries people within 60
days of arrest. The Federal Government does that. As you can tell,
I am tired of State governments coming to us and telling us this
is a Federal responsibility. Ninety-six percent of the crime is local.
Ninety-six percent of the fraud may be local. Now, I believe we
should do a lot more, but I do believe it is important that States
recognize and acknowledge the part the Federal Government does.
Ms. Carter. With all due respect, I think that States do.
The Chairman. I have never heard a witness come and say, by
the way. Senator, thank you for the Federal Government doing as
much or more than my State has done for local problems in law
enforcement.
Mr. Waterbury. You know, I am, I guess, a law enforcement of-
ficial in the State of Washington, and not just because of what you
just said, but I do think the Federal Government has a leadership
role in this area because, frankly, if you asked me whether we
could have done this without you, the answer is no. It would have
never been done. Health care fraud would not be a priority in law
enforcement in my State if we had not developed the expertise, es-
pecially, frankly, in the patient abuse area, which is an area that
really the public seems to grab on to and be very, very concerned
about right now, but it is also in the area of fraudulent providers,
et cetera.
Through the Federal leadership that has been shown 15 years
ago that set up the Medicaid fraud control units and allowed the
State of Washington to have one, I think that we have developed
a law enforcement presence in our State and I think that the peo-
ple in my State, including my boss, the Attorney General, would be
the first ones to indicate that that is in large part due to Congress
and the funding that we have had.
The Chairman. Let me tell you what is going to happen here,
and you are both politically sophisticated in the best sense of that
phrase. Do you know what is happening in the crime bill? Because
federally-elected officials have to go home and stand for election for
being the big spenders, the irresponsible people, which is a title we
have earned, but reinforced by every State official that we run
91-727 0-95-4
74
across — because of that, you are probably not going to get your
prison money. Do you know why? Because the RepubUcans are very
angry.
Senator Gramm and others have a provision saying that you will
not get one penny of Federal funding, general, until you keep your
people in jail 85 percent of the time that they have been sentenced
for. In your State, that means you will have to double your prison
space or put up a sign in Indiana saying "no more crime in the
year 1995."
Unless you are way off the average, and you may be, the average
is 43 percent of the time served. So assuming you are in the aver-
age, it means for the governor of your State to be able to apply for
one single penny to build a new prison — Federal monies that I
want to give them because we have a problem — in order to do that,
you will go to the governor and say, governor, good news, there is
a $10 billion fund out there and we can compete for it. The bad
news is that in order to compete to get one penny of that fund, you
have got to go to the State legislature and double the number of
prisons you have.
If you are keeping people in, on the average, 43 percent of the
time and you have got to keep them in 85, you have got to literally
double the number of cells. You have got to keep people who are
sentenced to 10 years now serving 8V4 you have got to keep them
in 8V2 years. This is what I get so angry with the States about be-
cause they are making people down here angry.
Literally, you are going to end up with no money because the
governor of Indiana or Delaware — Delaware is small enough that
they have truth in sentencing legislation already, so they would be
an exception not because we are exceptional, but just literally we
have a smaller problem. Literally, what is going to happen is no
governor is going to ask for that money because they are going to
have to go the legislature and say, by the way, we are going to
have to spend 20 times as many dollars as we get.
So I had an idea. The idea was why don't we let the States just
say they are going to make a good-faith effort. My Republican
friends, represented by these able staff people here, and they are
able, are going to say, along with a couple of my Democratic
friends, no dice, Biden, truth in sentencing; unless they do it like
we do it, they don't get anything, which means you are not going
to get any money.
The Federal Government does a lot of things wrong, a lot of
things, but one of the things we do relatively well is the law en-
forcement piece because we have a much smaller problem, only 4
percent of the problem. It all drops on your doorstep, not ours, so
it is easier for us.
I am one who wants to increase your funding. Federal funding,
to do the State things, but I really am concerned that because of
this sort of animosity that has been built up that you are seeing
reflected in the legislation now, we are going to lay it all back on
you in a way that that partnership to deal with local problems —
this has nothing to do with unfunded mandates. That is also an-
other problem. We do that to you all the time, and we shouldn't.
We should pay for what we mandate you to do.
75
But the end result of it all is that it really disturbs me that we
are going to end up diminishing what needs to be done because we
are blurring so totally the line of federalism here.
Ms. Carter. I think the good news, however, is that in the
health care fraud arena, because we have always had the partner-
ship where the States have always carried their end of the bargain
in terms of funding, personnel, investigations and prosecutions in
conjunction and partnership and interdependent with the Federal
Government, some of the issues that you have raised that are af-
fecting the crime bill may not be as effective here in this
The Chairman. Mark my words, general; mark my words. If 50
percent of the fraud is at a State level, you are going to have some-
one come and say let's fund 50 percent, not 90, not 80.
Ms. Carter. Well, let me say two things. We want to make sure
that we are at the table to have the dialogue, and that is why we
commend you for having this dialogue on fraud. But we also know
that States are able, willing, and already are paying their share
and if we have to dicker over the percentages, at least we are still
in the ball park and at least it is a formal recognition that the Fed-
eral Government understands that the State government is in-
volved in this process and should remain involved in fighting fraud
and abuse.
The Chairman. Well, after all of that, believe it or not, I am an
ally, but I think you had better, with all due respect, get a slightly
different hymnal from which you sing because you have got a lot
of people up here who are feeling put upon. While we have capped
spending for 5 years, this President has actually done something
no one has done in 20 years, actually reduced the deficit 2 years
running, and will reduce it a third year — real numbers, not phony
baloney, makeshift numbers.
I think just as a piece of responsibility, I have never offered a
program that I can think of where I haven't at the time I have of-
fered it told the people of my State and the country how we pay
for it. Sometimes I have said, like I did in the last crime bill, that
we should increase the deficit; it is more important than the deficit.
Last time, for health care, we should pay for these programs
through a sin tax; I actually offered that when I offered the legisla-
tion.
This time, there is a trust fund for the crime bill, and there will
be for some version of this, where we say here is how we are going
to pay for it. I think that the public deserves that we tell them
straight up how we are going to pay for these things. It is clearly
in the public interest that every State do the job as well as — by the
way, I am not being solicitous when I say this. Your reputations
really do precede you. The reason why we invited you two here is
because you two do the job, for real. You do the job, and the pay-
back far exceeds any expenditure you make on behalf of the public.
You are not the exception, but you are also not the rule.
I am anxious to work with you. As you know, general, from work-
ing with me on the crime bill, and your organization working with
me on the crime bill, there is not a single thing I put in that crime
bill that the Attorneys General didn't have a chance to comment
on first.
Ms. Carter. That is correct.
76
The Chairman. I think that is the first time that has ever hap-
pened, ever, and I feel the same way about this. Your experience,
Mr. Waterbury, is real. You are a first-class professional; you are
serious player. You know of what you speak, and that is why we
asked you here.
One of the things, in addition to the funding piece, I want to ask
you about — and the only reason I keep going is I think Senator
Cohen had to go to another hearing — is to ask you about one piece
of your recommendation, and that is that there be concurrent juris-
diction over Federal laws. I have been arguing against the Federal
Government seeking jurisdiction over State laws; for example, the
federalizing of all gun offenses.
The Attorneys General Association, and the DA's in particular,
have been allies with me in that argument against that. You do the
job very well, thank you, and we don't need to have an FBI agent
and a Federal prosecutor doing the job. President Reagan once
said, if it ain't broke, don't fix it. It is one of the few things I agree
with him on. The Federal system ain't broke here. We have enough
people servicing this and the fact of the matter is that if we load
up what is now State jurisdiction on the Federal courts, we are not
going to help you and we are going to break the Federal system.
But this is an unusual twist here and one that I am not opposed
to, but I want you both to talk to me about it in this practical ap-
plication. As I understand it, the National Association of Attorneys
General, 29 of you, general, sent us a letter that proposed expand-
ing Medicaid fraud control units so they can have concurrent en-
forcement authority over Federal laws, which is not something,
again, I am opposed to, but something I understand — do you have
a plane to catch?
Mr. Waterbury. No. I am fine.
The Chairman. I thought you had to go because I know you
Mr. Waterbury. No. I was moving closer to her.
The Chairman. You guys can confer on this. Go ahead and do
that because I am looking for — you know, either one of you can an-
swer this, but this is a more unusual way of approaching it; that
is that we don't often up here have State authorities, State pros-
ecutors, saying to us, we want to be able to prosecute under Fed-
eral law in State courts. I am not opposed to that. I just want to
make sure I fully understand it. Could you talk with me about that
a little bit?
Mr. Waterbury. Yes. First of all,
I would like to clarify something. What is called the sign-on let-
ter that you referred to from the 29 AG's
The Chairman. Yes.
Mr. Waterbury. This is a general recommendation in the area
of health care reform and authority. It is not a Medicaid fraud con-
trol unit proposal.
The Chairman. OK.
Mr. Waterbury. It is more of a civil proposal in the sense of con-
current authority to do injunctive relief, since it has been discussed
earlier by Mr. Stern, I believe, and to freeze assets.
The Chairman. I see.
Mr. Waterbury. I would say as far as the criminal fraud en-
forcement, I am cross-designated in any number of States and dis-
77
tricts, and many of the personnel in the Medicaid fraud control
units are. I believe Attorney General Carter indicated to me that
she even offers the Federal prosecutors to become assistant attor-
neys general in her office and work in the Medicaid fraud control
unit.
The Chairman. For the record, David, is it in State court they
proceed or Federal court?
Mr. Waterbury. No. This proposal, and I will let Attorney Gen-
eral Carter pick it up at this point, as I understand it, is for civil
injunctive authority under Federal criminal statutes which would
basically allow an assistant attorney general to come into Federal
court and appear.
The Chairman. OK. Is that right, general?
Ms. Carter. Yes.
The Chairman. OK. Now, tell me why you need that authority,
or why that is preferable.
Ms. Carter. It is a helpful practice for us, and the best examples
we have are in the consumer protection area. With the Fair Credit
Reporting Act, if they have a uniform law that is already on the
books, we don't have to scurry to get State laws that are similar
on the books. We can begin to continue to prosecute more quickly,
so part of it is just practical realities that would preclude us from
having to go for State legislative action.
The other area is that we have found in health care areas that
there are so many times practically that if we already have the
case and we have already developed the theory of prosecution, we
usually just pull in a host of other people, and normally these same
actors have committed a range of crimes. Then it is easier for us
to just have them all in that package, and if we can have some con-
current authority it helps us to be able to prosecute more people.
The Chairman. Excuse me for the delay here. I have got to
check, too, because I may have misunderstood something.
[Pause.]
The Chairman. The reason why I was delaying here was I was
trying to find a copy of the letter sent to us.
Ms. Carter. We have it. Do you want a copy?
The Chairman. I thought it said concurrent authority across the
board, civil and criminal, to enforce civil and criminal sanctions. If
that is not the case, then I
Mr. Waterbury. It is not, although it certainly is confusing be-
cause the one above it is Medicaid fraud criminal actions and the
one below it is criminal actions. But this one is concurrent enforce-
ment authority and it says, "The new civil penalties for health care
fraud contained in several comprehensive health care fraud bills" —
this would be the President's bill — "will enable prosecutors to pur-
sue health care fraud that might not otherwise have been reach-
able." It is not clear, but they are talking in a civil context.
The Chairman. That is a useful clarification for us. Again, I don't
have any brief for it one way or another. I just want to make sure
I understand it. So, general, it would be useful if maybe you and
I could — we don't have to do it now — get together on the telephone
or get together later, after you talk to your colleagues, to make
sure I understand — I think it is probably my misreading of the let-
78
ter, but that I understand precisely what it is that is being sug-
gested or asked for.
Ms. Carter. We would be happy to.
The Chairman. Again, I don't necessarily oppose it. I just don't
fully understand it. I don't know what response we have gotten
from the Justice Department about such a proposal, and so I want
to make sure when I sit with them and have them at the table as
well that I understand what we are trying to work out here so we
don't end up with a more confused, rather than a clarifying and
broadening of authority that allows there to be nonduplication.
You are probably sitting here thinking, well, with Biden as an
ally, I am sure glad our enemies didn't show up at the hearing. I
am just really concerned. Again, I keep coming back to this theme,
and this doesn't relate to either one of you personally, and I mean
that sincerely. I am really concerned that we don't tell the Amer-
ican people, those of us who hold public office — the average person
makes no distinction between when I speak and when the governor
speaks or when a Federal prosecutor or a State prosecutor speaks.
They don't know from Adam. They shouldn't; I mean, they are busy
just making their way. So there are very confused messages.
If you look at the polling data that is out there about law en-
forcement, people say they want more, but they get frustrated be-
cause they hear one message coming saying this outfit is not doing
it and this outfit is, and they just simply don't know. I think that
we who hold public office and stand for elective office have an obli-
gation to go to people and say, look, everybody has got to do more.
By the way, the reason why I want to help the States — and I am
going to be very presumptuous, but both of you are first-rate law-
yers, beyond holding positions of holding positions of public respon-
sibility. I am going to send you a copy of a speech I just made to
the third circuit on a principled approach to federalism. I may not
be right. I mean, I have spent a lot of time thinking about it and
I would appreciate, not for the record, your feedback on it.
What I am worried about is, as the lines of federalism blur, not
only do we find ourselves in a position where we may be moving
perilously close to a position that is at odds with the constitution,
but I think we blur the lines of responsibility.
My father has an expression. He says he wants to know who is
responsible so he knows who to nail when it goes wrong. So when-
ever we would leave with four brothers and sisters, my father
would turn and say, you are in charge, or you are in charge, or it
is your job to feed the dog and yours to cut the grass, not, by the
way, kids, I will be back in 6 hours; feed the dog, cut the grass,
and while you are at it, would one of you run to the store for your
mother and get some milk?
Then he would come back and he would say — I know this sounds
corny and it is a little bit of a homily here, but he would come back
and say, well, the dog is not — Val did it, or Joe did it, or whatever.
It is very simple. I think that is what is happening in the criminal
justice system, and I think that is why, although the people view
it as the single most important thing they want us to do in govern-
ment, they also increasingly doubt our ability to do it, even though
we are doing a better job, "we" meaning you, me, the whole govern-
79
mental system. I think it goes to this issue about who is on first
and who is on second in a time of Hmited resources.
Yes, general?
Ms. Carter. I would like to invite you, Senator, to Indiana be-
cause I think you would in many ways be pleased with some of the
discussions that are going on. With regard to just prisons, for ex-
ample, we have built more prisons with State funds and we have
expanded our facilities and we are in the process of reforming our
juvenile justice system.
I don't know that you hear quite the hysteria and the fmger-
pointing on Capitol Hill that you might hear in a constant stream
before you through these hearings. From my perspective in the hin-
terlands of Indiana, I think there is a pretty balanced discussion
that is going on with regard to funding and responsibility and ac-
countability, and I think that there is a sense of people that they
are not happy with government. There is an enormous amount of
cynicism and skepticism, but I don't think that it is disproportion-
ately pointing the fmger here or there, and I think that we do ap-
preciate what you all do here.
The Chairman. I think there is a reason for that, General
Carter, and that is because you — and you have one of the best gov-
ernors in the Nation.
Ms. Carter. Yes, we do.
The Chairman. You have a guy who is the governor — truly, one
of the best in the whole country— who ran in a State that doesn't
elect people of his party, generally, like you, and straight out told
folks, here is the deal. He stood right up, as I recall it, and said,
this is the deal, these are the costs, these are the expenditures,
these are the problems; if you want me to do this, it is going to
cost this, this is how it is. That is not the general rule among Sen-
ators, among Congresspersons, among governors, and I dare say
maybe even among Attorneys General.
In the State of Delaware, we get a relatively high proportion,
based on per capita distribution, of criminal justice monies; purely
coincidental, I am sure, and I make no apologies for that. But do
you know what I found out was happening in my little old State?
We, the Federal Government, were sending money into the State
to increase law enforcement capabilities. We have a little commit-
tee that meets to distribute these funds appointed by the governor
and by the local folks.
The legislature figured out that, you know, this money we are
getting in here for drug control and this money we are getting in
here for more police, et cetera — here is what we do: we don't net-
increase the number of anybody we have; what we do is we reduce
the State funding for the public defender's office, the State funding
for the attorney general's office and the State funding for the judi-
cial system, and we supplant it with these Federal dollars that are
coming in. So the end result is there is no net increase, or little
increase, in the money that was supposed to go directly for more
cops.
This time when I wrote the Biden crime bill, guess what? If you
reduce by one single officer the number of police you have, you
don't get a single penny out of that $9 billion, not one penny, be-
cause the deal here is there are 547,000 police officers in America.
80
When my bill passes, and I hope it does, and is signed by the Presi-
dent, I want 647,000 police officers in America, not 550,000 with
100,000 fiinded by the Federal Government. That is the frustration
folks like me feel.
There are notable exceptions. Governor Cuomo and Governor
Richards are asking for — and I am sure there are a number of Re-
publican governors, as well, going in and asking their State legisla-
tors for money for prisons, but that is more the exception than the
rule. I just think we have to have a little truth in legislating and
tell people what we are willing to pay for, who is paying for it, and
how.
Again, the reason you two were invited here is because you two
have reputations for doing that, and so I am anxious to work with
your organization, as well as yours, Mr. Waterbury, and the other
groups that exist in the other States. We need that practical input
because the flip side is you know a lot better at a local level than
we know at a Federal level how to deal with your problems at a
local level.
Where there is a Federal nexus, and there is in this area of
health care, and there will be a larger one, we should do our share,
like we should on the drug stuff as well, which is what I am going
to want to be talking to you in another month or so about, General
Carter. We are going to spend about $13.1 billion next year, which
is 5 times the amount of money we are going to spend in the crime
bill in the first year, on drug enforcement activities and drug treat-
ment activities because that is a Federal problem. Drugs are po-
rous; the drugs consumed in Indiana don't all originate in Indiana.
They originate in the port of New York, they originate in Colombia,
they originate in Seattle, where a lot of stuff is coming in, and also
in Vancouver, in Canada.
So you could do the best job in the world and you can't do the
job on drugs. So it makes a lot of sense for the Federal Government
to play a larger role there, but it doesn't make any sense for the
Federal Government to be paying for the enforcement of scoff laws
in Seattle or Indianapolis. That is the kind of thing we have got
to figure out.
Again, I am sorry to go off so much on this, but I am worried
that this funding which is now there, and there is a desire for it
federally, is going to be jeopardized if we don't figure out a way for
everybody to step up to the ball.
Thank you very, very much.
Ms. Carter. Thank you very much.
The Chairman. I look forward to continuing to work with you,
and you both do a heck of a job. Thanks.
Mr. Waterbury. Thank you.
The Chairman. Our last panel of witnesses is probably wonder-
ing why we had that discussion on federalism, or that lecture, as
it turns out, by me. We have three distinguished persons. Our first
witness is Kirk Johnson. Mr. Johnson is General Counsel for the
AMA. The second witness is Kevin Mattessich. Mr. Mattessich is
currently in private practice and was formerly a trial attorney in
the Department of Justice Health Care Fraud Unit. Our final wit-
ness is Mr. William Mahon. Mr. Mahon is Executive Director of the
81
National Health Care Anti-Fraud Association, which includes many
insurance companies as members.
Thank you for your patience and thank you for being here. I am
not being solicitous when I say we are anxious to hear your views
on this issue. Why don't we begin in the order in which you have
been called? Mr. Johnson, welcome.
PANEL CONSISTING OF KIRK B. JOHNSON, GENERAL COUN-
SEL, AMERICAN MEDICAL ASSOCIATION; KEVIN M.
MATTESSICH, MORRISON, MAHONEY AND MILLER, FORMER
TRIAL ATTORNEY AND HEALTH CARE FRAUD PROSECUTOR,
CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE; AND
WILLIAM J. MAHON, EXECUTIVE DIRECTOR, NATIONAL
HEALTH CARE ANTI-FRAUD ASSOCIATION
STATEMENT OF KIRK B. JOHNSON
Mr. Johnson. Thank you, Chairman Biden. It is a privilege to
be here. Thank you for asking for our testimony.
You were right. The AMA does officially support junkyard dogs,
but as long as they are FBI agents.
Now, let me start by emphasizing the areas where we are in
agreement with the comprehensive legislation of Senators Mitchell,
Chafee, and the amendment by Senator Cohen. We do agree that
fraud and abuse is a major problem in this country, and it is a dis-
grace to the entire profession when, as sometimes happens, physi-
cians are involved. We have no interest in defending these doctors
or making it any easier for them to get away with it. We want
them caught.
More can and should be done. The Federal Government should
have an expanded role. There should be more resources. So should
physicians and their professional societies — more and better report-
ing by doctors and others who see the fraud as it develops, we
think, and the FBI agrees with us, is really an important step in
trying to do better.
We want the AMA and the profession to play a greater role in
detecting and reporting fraud. Here is what we can do. We can get
doctors to tell us about it. If they feel something will be done, if
they feel the focus is on true fraud and not mistakes, if they feel
they will be protected if there is litigation, they will report.
As you may know, we established an 800 hotline number with
the FBI to report fraud. We have had over 100 calls in the last
year. Many investigations have resulted from those reports. We are
proud of that activity, and doctors just are disgusted by this stuff.
Now, let me be a little more specific about our position. As I said,
we strongly support the central thrust of the Mitchell and Chafee
bills. Given where we are in health care spending, given the abuses
we have seen, it is obvious we need more resources to go into find-
ing and preventing fraud, particularly if it involves doctors.
Physicians are made like the rest of us. They have human flaws,
but their positions require them to act and behave differently.
Overall, they have to be better citizens. They have to have higher
standards, be less susceptible to self-interest, and certainly less to
dishonesty. That have to be trusted. That is really the bedrock of
our system. If you don't have the faith that when you see your doc-
82
tor he or she will put your interests first, we think the system of
health care in this country collapses. So we are very interested in
trying to do everything we can to find doctors who don't hold up
that trust.
We are not asking for a medal, but the FBI will tell you that,
in fact, of all the players in the health care system, doctors are the
least likely to be involved in fraud. They are involved to some ex-
tent, but they are the least likely of all the players.
The Chairman. I agree with that, by the way.
Mr. Johnson. And that is from the FBI.
So how do we get the fraudulent, dishonest characters out? The
AMA has thrown out about 100 doctors in the last 2 years. Our ju-
dicial council does it. Whenever there is a finding by a Medicaid
fraud unit or by a medical society that someone is engaged in dis-
honest conduct, we kick those doctors out, and we have had about
100 go in the last 2 years.
We like the approach of the bills that give the Department of
Justice, particularly through an expanded FBI corps — to do the
health care fraud and to coordinate it. We think they need more
authority. We believe the focus needs to be on fraud, not on mis-
takes, and we strongly endorse the inclusion of an intent standard
in both bills.
We believe it should be a Federal crime to defraud either the
Federal Government in a Federal program under Medicaid or Med-
icare or other programs, or a health care plan even if it operates
exclusively in the private sector. We support that expansion of Fed-
eral regulation to that extent.
Now, here is where we express caution. First, we believe the FBI,
not the IG of HHS, should lead that initiative. The HHS inspectors
are dedicated and hard-working. We did meet with June Gibbs
Brown just 2 weeks ago to talk about the IG. We have confidence
in her, but the private sector is not Medicare and Medicaid. There
will be more and more for HHS to do under Medicare and Medic-
aid. They are not staffed to do it today.
The FBI has the experience in private sector criminal actions.
We think they have the resources. They have devoted over 200
more FBI agents within the last few years, you have heard today.
They do need more resources, but we would put our faith in Justice
and the FBI, and that manpower, that training and that experi-
ence. We have worked with them closely. They should guide, create
and lead that effort.
Second, we would not at this time extend the new Federal fraud
initiatives to purely civil actions and civil sanctions, at least to the
extent that the IG involved. Civil actions in the private sector will
involve disputes short of fraud, short of clear and deliberate efforts
to cheat a program — not the kinds of things that Senator Cohen
discussed today and you. Chairman Biden, have talked about.
These will be disputes about billing, about coverage, about proce-
dures, about quality, about coding, about a whole list of things.
There are over 1,200 insurance plans or other kinds of plans in
this country. Each has a different set of rules for all of these var-
ious facets of medical care delivery. It would be a huge and
daunting and complex task for HHS or anyone to take on that bur-
den, given where it fits in total health care spending.
83
It is the real fraud, it is the dangerously bad care that we should
put our limiteid resources at, and we should increase those re-
sources. It is not only a complex area for HHS to get into, but it
is one that is being addressed by payers with increasing vigor and
effectiveness. The socialization of crime that Senator Cohen talked
about is ending. The attitudes are changing.
Most medical procedures in the private sector today are reim-
bursed by insurance companies or a self-insured employer or a
group of employers. The patient generally doesn't pay the bulk of
the bill. The way these payers approach costs today, particularly
unnecessary costs or abuses, has changed dramatically as the
health care system itself has changed. Cutting costs is their pri-
mary goal. It is a highly competitive business based on price.
The physicians that are in these plans are generally subject to
profiling, in which their procedures, their referrals and the kind of
care they provide is monitored, recorded and measured. Any sus-
picion of overutiUzation, not to mention abuse, gets you thrown out
of the plan. Since the plan has your patients' lives at stake, the
consequences are very serious.
We don't think that Cigna, Aetna, AT&T, those people who are
paying for health care today and have changed their approach to
how they look at costs and how they look at abuses — they won't ac-
cept it any longer. We don't think they need the help of HHS and
the private sector. Those kinds of disputes are disputes that good
businessmen and women are going to take care of. So we can't sup-
port at this time the extension, at least with regard to HHS au-
thority, into the private sector. We can't, in good conscience, sup-
port it because physicians are telling their children today, don't go
into medicine, there are too many hassles.
Another group of Federal bureaucrats in these kinds of nonfraud
areas hassling, second-guessing and watching over doctors is not
good for the profession, and they are going to bump into the others
who are doing it in a more and more sophisticated way each day
with their computer software programs.
Another massive change in health care, and we talked about it
today, is, of course, managed care. That is capitation. When physi-
cians are at financial risk for the care they provide, the kinds of
incentives to overutilize, of course, disappear. Now, there are other
problems that we have heard about today from David Waterbury
with regard to managed care and capitation, and those problems do
need to be looked at. They are not necessarily fraud problems.
It is very hard to make judgments with regard to whether a phy-
sician, because he is incentivized, is providing too little care. It is
very easy when there has been a double billing, where there has
been a scheme to create paperwork that gets paid for somewhere
down the road. These kinds of things need to be dealt with in other
ways. The AMA has a patient protection act which would help. We
also think antitrust relief. Chairman Biden, would be of great bene-
fit so that some of the competing plans out there, at least some of
them, are physician-directed plans with physician values and phy-
sician utilization review. Today, we are impeded in doing that.
The final point I want to make about physicians and the crime
bill, to the extent it extends HHS into nonfraud areas, into civil
areas in this huge, vast private sector — physicians are the most
84
regulated sector of the economy today. Whether it is CLIA or
OSHA or RBRBS or all the rules in the private sector, the list is
endless. There are 80 new regulations a year that come out from
HCFA, over 500 pages full of Federal Register.
I am here today talking to you. We always send a physician
trustee. Physician trustees of the AMA don't feel comfortable be-
cause they don't understand fraud and abuse. It is too damned
complicated. I don't feel comfortable with all the rules and regula-
tions we have to deal with today, and every now and then a very
good doctor gets caught. Usually, they are in the inner city doing
Medicaid or they are in rural areas where they don't have the ex-
pertise to understand which rule they have to comply with, and
sometimes they actually go to jail. So we have to keep that doctor
in mind as well.
The bottom line here, Chairman, is that we support an increased
Federal effort. We support making fraud in health care a Federal
crime. We support giving the FBI a coordinating role. We support
additional resources, and we ask to be able to work with the FBI,
or whomever, so that physicians can detect fraud and report it and
eliminate that part of the waste from our system.
Thank you very much.
[Mr. Johnson submitted the following materials:]
Prepared Statement of ICirk B. Johnson, JD on Behalf of the American
Medical Association
Mr. Chairman and Members of the Committee: My name is Kirk B. Johnson, JD.
I am the General Counsel of the American Medical Association (AMA). Accompany-
ing me is Hilary Lewis, JD, of the Association's Division of Federal Legislation. On
behalf of the AMA, I want to express our appreciation for the opportunity to provide
our views on the subject of health care fraud and abuse, particiilarly within tne con-
text of health system reform.
As the nation awaits the emerging changes in health care delivery under any re-
form model that is ultimately adopted, you are confronted with the challenge of
eliminating a very serious problem that consumes vast economic resources, and,
more importantly, threatens the health and safety of our patients. The fraudulent
and abusive schemes that, unfortunately, have entered our health care system often
lead to the rendering of medically unethical or potentially harmful testing, as well
as inaccurate, misleading, and false diagnoses. As a consequence, such practices un-
dermine health care delivery, and also bear future patient and societal ramifications
by generating unnecessary fear, jeopardizing the ability to obtain universal health
care coverage in the future, and increasing the already high cost of health care.
While the scope of illegal activity under analysis today is clearly substantial, its
precise dimensions remain difficult to quantify. One point, however, must be empha-
sized: Whatever resources are expended for fraudulent and wasteful practices divert
the use of funds and efforts from meeting legitimate health care needs. The AMA
urges the creation of programs to identify and eliminate abusive, wasteful and
fraudulent practices.
Mr. Chairman, the AMA was pleased to work with you in the 102nd Congress in
formulating rational solutions to this complex problem. Once again, we commend
you for recognizing that the elimination of fraud and abuse is integral to our na-
tion's ability to reduce the rate of growth in health care spending.
COST OF HEALTH CARE FRAUD
In order to effectively address the issue of health care fraud, its proportions and
magnitude must be accurately identified. The AMA believes that more rigorous scru-
tiny must be brought to bear regarding the existing nature and amount of health
care fraud. Only careful examination of its scope will yield the most effective solu-
tions to this difficult problem. Reports presented to date are speculative and are not
based on credible data or evidence. Further information is needed.
In an effort to identify areas of fraudulent practice, the AMA would be pleased
to work with the federal government in studying the extent to which health care
85
fraud permeates the current environment. Our own survey data, for example, have
eUcited valuable information on the incidence of hospitals that require physicians
to make payments for hospital services. In our study, physicians were asked: (1)
Whether any hospital had ever requested the physician (or the physician's practice)
to make payments to the hospital for the privilege of serving its patients; and (2)
whether the physician had ever been asked to make unreasonable payments to a
hospital for the privilege of utilizing space, supplies, equipment, utilities, hospital
employees, or billing information. (See Attachment A.) In our view, the proper com-
pilation of similar data on other possible abuses pervading our health care system
will aid in the development of the most effective solutions to identified problems.
We strongly concur with the recommendation issued by the General Accounting
Office (GAO) in a May 1992 study that calls for the establishment of a national com-
mission to develop comprehensive solutions to fraud and abuse in the provision of
health care. We also support the recommendation in the December 1992 GAO study
advocating a nationally coordinated effort to combat such fraud and abuse.
HEALTH CARE FRAUD AND PARENT CARE
The high economic costs associated vnth. fraudulent conduct obviously siphon off
valuable dollars that could be more effectively utilized in providing universal health
care coverage to our citizens. Perhaps the most injurious and alarming aspect of this
illegal activity involves the victimization of patients — a truly lamentable con-
sequence of the devious tactics perpetrated by these mercenary entrepreneurs.
For example, in the California Rolling Labs case, patients were sohcited to under-
go medical examinations and laboratory testing, lured by the attendant promise
that insurance reimbursement would be accepted as payment in full, and co-pay-
ment would be waived. Out-of-pocket payments, however, were often required prior
to the exam as a show of "good faith. In many instances, patients were subjected
to medically unnecessary, unethical, or potentially harmful testing. Reports of car-
diac stress tests administered without the presence of a defibrillator were a common
occurrence. False diagnoses given in the course of such exams, moreover, threatened
improper treatment, prompted unnecessary fear, and resulted in the compilation of
erroneous medical records that could follow patients attempting to apply for health
insurance in the futu»-e.
Superfluous expenses also are generated by these fraudulent schemes as patients
may undergo repeated testing by their regular physicians in order to obtain a sec-
ond opinion. Ultimately, the cost of these fraudulent claims, moreover, is borne by
all consumers. The investigation of the California Rolling Labs revealed that more
than $1 billion worth of fraudulent claims were filed. While the owners were both
sued and prosecuted successfully, virtually no monies have yet been recovered.
Other cases in which ignominious activities in various sectors of the industry have
imperiled patient care involve reports of individuals detained in mental health fa-
cilities far beyond the time necessary for appropriate care and treatment. A familiar
scenario involves a facility that becomes cognizant of a patient's extensive health
insurance coverage. When so apprised, the institution then prescribes a lengthy in-
patient stay as a matter of course. The ensuing bounty of third-party reimburse-
ment generated from additional inpatient days accrues to the benefit of hospital rev-
enue. Sadly, patients in need of mental health services may be particularly vulner-
able to such intolerable practices, inasmuch as communications between the patient
and the outside world are easily curtailed under these circumstances. Patients have
been forced to remain institutionalized, subjugated to the sinister profit motive of
these facilities and unable to secure timely release through family or friends.
LEGISLATIVE APPROACHES
The AMA deplores the very real problem of fraud and abuse perpetrated by crimi-
nal elements and believes that all reasonable efforts must be used to combat such
crimes. We applaud the Committee for examining the critical issue of health care
fraud and abuse today. In fact, every major health system reform proposal intro-
duced in the 103rd Congress would act aggressively to reduce or eliminate this se-
vere problem.
1. S. 1757— THE "HEALTH SECURITY ACT"
S. 1757, the "Health Security Act," introduced by Senator George Mitchell (R-
ME), would establish an all-payer health care fraud and abuse control program,
with joint authority over the program granted to the Department of Health and
Human Services (HHS) through the Inspector General (IG), and the Department of
Justice (DOJ) through the Attorney General. These departments would be statu-
86
torily mandated to coordinate efforts to prevent, detect, and control health care
fraud and abuse. The program would conduct investigations, audits, evaluations,
and inspections relating to the delivery of and payment for health care, and facili-
tate the enforcement of statutes applicable to these offenses.
An "All-Payer Health Care Fraud and Abuse Control Account," to be created in
the U.S. Treasury, would be comprised of gifts and bequests made to the account.
The account would also be financed through funds collected from all criminal fines
imposed in cases involving a federal health car offense, other civil penalties, and
amounts resulting from property forfeiture by reason of such an offense. Data shar-
ing would be required between representatives of federal, state, and local law en-
forcement agencies, state Medicaid fraud control units, state licensure bodies, and
representatives of health alliances and health plans.
Mandatory exclusion from participation in any applicable health plan for those in-
dividuals or entities convicted of health care-related crimes or patient abuse for a
minimum period of five years would be imposed. Permissive exclusion from plans
for a minimum period of three years would apply to convictions under federal or
state law in connection with the delivery of a health care item or service, or acts
or omissions involving government-operated programs. Actions subject to penalty
with respect to an applicable health plan may be fined $50,000 for each violation.
The "Health Security Act" defines "health care fraud" to include acts by one who
knowingly executes or attempts to execute a scheme or artifice to defraud any
health alliance, plan or individual in connection with the delivery of or payment for
health care benefits, items, or services, or to obtain by means of false or fraudulent
pretenses or representations any of the money or property owned by or under the
custody or control of a health alliance in connection with the delivery of or payment
for health care benefits, items, or services. A fine will be levied and/or a ten-year
term of imprisonment will follow such a conviction. If the violation results in serious
bodily injury, imprisonment for life or a term of years would ensue.
Finally, all self-referral by physicians to an entity in which they hold an invest-
ment interest would be prohibited. However, exceptions would be established for
items or services paid for on an at-risk basis to a specific provider, such as capitated
payments, physician recruitment to a rural area, discounts or other reductions in
price between a physician and an entity, coinsurance under limited circumstances,
and home infusion therapy. Civil monetary penalties would apply to the offering of
inducements to individuals under health plans, to submission of a claim for an
"upcoded" item or service, and to restrictions on the utilization of services under a
service contract or health plan. A three-year minimum period of exclusion from
Medicare and Medicaid would result. This penalty would also apply to individuals
who default on health education loan or scholarship obligations, or who possess an
ownership or control interest of 5 percent or more in a sanctioned entity. Culpable
parties would be excluded from participation in all health plans.
2. S. 1770 — THE "HEALTH EQUITY AND ACCESS REFORM TODAY ACT OF 1993"
S. 1770, the "Health Equity and Access Reform Today Act of 1993," sponsored by
Senator John Chafee (R-RI), contains a number of provisions similar to those out-
lined above in the "Health Security Act." This proposal also would establish an all-
payer fraud and abuse control program within the Department of Health and
Human Services to conduct investigations, audits, evaluations, and inspections re-
lating to the delivery of and payment for health care. The HHS IG would be respon-
sible for coordination of federal, state, and local law enforcement programs to con-
trol fraud and abuse. Similar to S. 1757, the program would be financed by an
"Anti-Fraud and Abuse Trust Fund" consisting of monies from penalties, fines, and
damages. It, too, would extend civil monetary penalties to the private sector.
Further, the "Health Equity and Access Reform Today Act of 1993" would amend
the Medicare law to mandate exclusion of providers convicted of felonies relating to
fraud or controlled substances from participation in Medicare and state health care
programs. Permissive exclusion would be imposed upon individuals with ownership
or control interest in sanctioned entities. Civil monetary penalties of $10,000, and
treble damages for each offense, would be levied against those who offer induce-
ments to persons enrolled under or employed by federal or state health care pro-
grams or plans, and also against excluded individuals retaining an ownership or
control interest in a participating entity.
In addition, the Secretary of HHS would be directed to establish a health care
fraud and abuse data collection program to report, on a monthly basis, final adverse
actions against health care providers. Confidentiality mechanisms to protect the
identity of patients receiving health care services would be incorporated in the data
collection program. Access to the health care fraud and abuse database would be
87
made available to the public, federal and state governmental agencies, and health
care plans. The Secretary will publish all final adverse actions in the Federal Reg-
ister on a quarterly basis.
A definition of health care fraud" similar to that contained in the "Health Secu-
rity Act" is also included in S. 1770. The bill calls for a fine, and/or a maximum
10-year prison sentence, against those convicted of health care fraud. Where health
care fraud leads to serious bodily injury, the offender would be sentenced to life im-
prisonment. Finally, individuals convicted of federal health care offenses that pose
a serious threat to the health of another, or that have a significant detrimental im-
pact on the health care system, would be ordered to forfeit property used in the com-
mission of the offense, or derived from proceeds traceable thereto, and that are of
a value proportionate to the seriousness of the offense.
3. THE "NATIONAL HEALTH CARE ANTI-FRAUD AND ABUSE ACT OF 1993"
Title XXXVIII of the crime bill, the "National Health Care Anti-Fraud and Abuse
Act of 1993," introduced by Senator William Cohen (R-ME), would create enhanced
penalties for anti-fraud enforcement efforts. Its definition of "health care fraud" is
identical to those in S. 1757 and S. 1770. It also provides a real and personalprop-
erty forfeiture penalty for any individual convicted of a federal health care offense.
4. FRAUD AND ABUSE PROVISIONS: THE AMA VIEW
The AMA commends the Administration and the Congress for providing a number
of constructive approaches to the problem of fraud and abuse. In our view, any legis-
lative solution that is formulated to address this issue must contain a number of
critical elements.
a. Information and jurisdictional authority
At the outset, a comprehensive program designed to root out fraud and abuse
must begin with the establishment of an intergovernmental commission to inves-
tigate the nature, magnitude and costs of this pervasive problem. The AMA rec-
ommends modification of current legislative proposals to include the creation of a
clearinghouse, incorporating standards for the protection of confidential information,
that could be utilized to detect fraudulent activity. All health insurance plans
should then be required to provide information essential to fraud investigations,
knowing that the confidential nature of this data will be ensured.
In establishing an all-payer health care fraud and abuse program, both S. 1757
and S. 1770 would undertake a comprehensive effort to grapple with the problem.
We applaud these initiatives to combat fraud and abuse on a systemwide basis in
both the public and private sector. However, the operational structure envisioned for
such a program raises a number of concerns. Under the "Health Security Act," au-
thority for its implementation and enforcement of this program resides with both
the Department of Health and Human Services and the Department of Justice,
through the exercise of broad authority to conduct investigations, audits, evalua-
tions, and inspections relating to the delivery of and payment for health care. In
the "Health Equity and Access Reform Today Act of 1993," no specific role has even
been assigned to the DOJ.
The AMA strongly urges that coordination of federal anti-fraud activities be dele-
gated to the Attorney General, rather than the HHS Inspector General. The Depart-
ment of Justice, especially the Federal Bureau of Investigation (FBI), possesses
unique and demonstrated experience in orchestrating the law enforcement efforts of
various federal, state, and local agencies. For example, the Chicago office of the FBI
stands as a model of coordinated activity in which the HHS Inspector General, the
state Medicaid fraud control units, private insurers, law enforcement agencies and
other groups work together in a constructive and participatory effort. The Health
and Human Services IG, on the other hand, has operated only in the coordination
of fraud relating to federal programs. It has no historical jurisdiction over private
plans. It is our firm conviction that success of the all-payer fraud and abuse control
program contemplated in S. 1757 is contingent upon empowering the governmental
agency with the greatest breadth of experience in law enforcement to take the lead-
ing role in the investigation and detection of fraud in the private and public sector.
In addition, the offices of the Inspector General in the Department of Labor, the
Veterans Administration, and the Department of Defense have been cited as poten-
tial contributors to a coordinated law enforcement program. While the expertise of
these agencies may be deployed to serve a highly useful role in this area, the AMA
recommends that the predominant responsibility for coordination should be reposed
in the Attorney General. Creation of a diffuse governing structure, employing a myr-
iad of investigative and procedural techniques, would be fraught with inefficiencies
88
and ultimately ineffective. Clearly, the agency with the widest experience should be
charged with management of this complicated activity in order to achieve coherent
and unified objectives, and to ensure that all cases are pursued according to consist-
ent standards, with fairness to the individuals or entities that are subjects or tar-
gets of an investigation.
Finally, S. 1757 and S. 1770 would permit investigations by mandating that the
fraud and abuse control program could, without limitation, direct inspections relat-
ing to the delivery of and^ payment for health care. The AMA urges that the author-
ity to conduct criminal investigations or audit functions be narrowly circumscribed,
such that jurisdiction is restricted exclusively to the scrutiny and pursuit of anti-
fraud matters.
b. Financing
The financing mechanism for the All-Payer Fraud and Abuse Control Programs
established in the bills sponsored by Senators Mitchell and Chafee would come from
a trust fund account consisting primarily of fines, penalties, and damages collected
pursuant to convictions for federal health care offenses. The AMA strongly opposes
the funding of a governmental program through penalties levied in connection with
violations that the activity is designed to eliminate. We believe that such a bounty
system provides inappropriate disincentives for the objective implementation of the
program. We, therefore, recommend that financing of this effort be secured through
general revenue or another appropriate financing source.
c. Definition of "Health Care Fraud"
The AMA commends the measures being reviewed at this hearing in articulating
specific definitions of a "federal health care offense" and "health care fraud." Health
care fraud and abuse is currently prosecuted under sections 1341 and 1343, Title
18, United States Code, the mail and wire fraud statute, as well as under Title 42,
Medicare. These two provisions must be reconciled in any legislative proposal in
order to: (1) attain consistency; (2) preclude harsh sanctions for inadvertent or legiti-
mate mistakes, such as billing errors; and (3) impose penalties commensurate with
the offense committed. We are pleased that S, 1757, S. 1770, and the Title XXXVIII
provisions in the crime bill articulate clear definitions of what is proscribed.
The AMA believes that a phvsician is, of course, responsible for actions performed
in his or her name. Yet the physician should be found to be acting with the intent
to commit a fraudulent act where a court imposes a severe sanction. The previously
cited definitions set forth in the proposals under consideration properly incorporate
a standard of knowledge on the part of the defendant that requires the demonstra-
tion of an intent to commit fraud. This standard would also reduce the possibility
that honest mistakes lacking in criminal intent, such as inadvertent biUing errors,
are not pursued according to the dictates of criminal law and procedure.
d. Penalties
The "Health Security Act" and the "Health Equity and Access Reform Today Act
of 1993" call for criminal penalties for all payers, for acts involving Medicare or
state health care programs, such as willful submission of false information or
claims, and acceptance of kickbacks, bribes, or rebates in return for referral for serv-
ices. The AMA supports all appropriate sanctions for acts of this nature.
Other penalty provisions in these bills range from a mandatory exclusion from
participation in any applicable health plan for those individuals or entities convicted
of health care-related crimes or patient abuse, for a minimum period of five years,
as well as mandatory exclusion of providers convicted of felonies relating to fraud
or controlled substances. Permissive exclusions would apply to an individual or en-
tity convicted under federal or state law in connection with the delivery of a health
care item or service, or any act or omission in a government-operated program.
We recommend the application of exclusion procedures to all payers only for crirni-
nal convictions, with exceptions recognized for rural or urban underserved areas, in-
asmuch as exclusion from provider participation in these communities would impact
deleteriously on access to health care.
In addition, the Secretary of Health and Human Services should not be authorized
to exclude health care professionals or providers from private plans unless a crimi-
nal conviction has been obtained, or an immediate and grave risk of patient harm
would result from a provider's continued ability to deliver medical or health care
services under the plan. Adoption of these standards would preclude the possibility
of eliminating one's livelihood for an unintentional failure to comply with Medicare
and Medicaid regulations, such as may occur when billing errors arise. Opportuni-
ties for administrative review of exclusion determinations must also be guaranteed.
The "Health Security Act," the "Health Equity and Access Reform Today Act of
1993." and the "National Health Care Anti-Fraud and Abuse Act of 1993" also call
89
for forfeiture of proceeds obtained through the commission of a federal health care
offense posing a serious threat to the health of any person or having a significant
detrimental impact on the health care system. WTiile forfeiture of direct proceeds
represents a reasonable penalty, the AMA opposes a RICO-type confiscation proce-
dure employed in the health care arena.
The AMA notes the severity of the criminal penalties contained in these meas-
ures. Although the bill seeks to reduce the number of criminal actions that occur,
such sanctions must be meted out in a fair and equitable manner so that improper
conduct is penalized commensuratelv with the crime. In this regard, the case of
Carol Sims Robertson, MD stands as a vivid example. Dr. Robertson is serving 12
years in prison for inappropriately signing Tylenol 3 prescriptions in an inner city
clinic in Detroit. (See Attachment B.)
With respect to civil monetary penalties, S. 1757 and S. 1770 would expand the
authority of the HHS Inspector General to impose sanctions in this area as well.
The levying of civil monetary fines is based upon a lower standard of proof than
criminal sanctions. Therefore, we believe that the purview of the Inspector General's
authority should not be extended to private health benefit plans whose activities
would be subject to control by the federal government. The AMA strongly opposes
expansion of IG jurisdiction in this regard.
e. Physician ownership and self-referral
As health system reform and integrated entities evolve over the next several
years, the practice of self-referral will greatly diminish, or will be subsumed by inte-
grated or other delivery systems for genuine efficiency purposes in order to compete
on cost and quality. With the modification of fee-for-service arrangements, self-refer-
ral concerns will become peripheral. In this new health care environment, physi-
cians will be unable to control where their patients acquire ancillary health care
services. That decision will be made by the managed care entity.
Although we support the Administration's effort to prohibit self-referral, addi-
tional modifications are necessary. The AMA agrees in principle that physicians
should not refer patients to a health care entity outside of their office practice at
which they do not directly provide or supervise care or services when they have an
investment interest in the facility or service. However, the current "self-referral"
limitations, even as applied to Medicare and Medicaid, are far too restrictive.
The AMA is opposed to current legislative proposals that would further restrict
the ability of physicians and group practices to provide necessary medical care to
their patients. These restrictions would constitute an unwarranted federal intrusion
into the practice of medicine. As outlined below, our ethical policy recognizes that
an exception to this prohibition must be created where there is a demonstrated need
in the community for the facility, and alternative financing is not available. Fur-
thermore, in those instances where there may be an ownership interest and referral
permitted (such as in rural and inner city areas), the legislation must be modified
to safeguard the patient. In these cases, physicians and others minimally should
comply with well-established ethical requirements regarding the marketing efforts
of the facility or service, return on investment, noncompetition clauses, patient dis-
closure, and utilization review.
An exception to address community needs would be clearly justified, especially
when physician ownership may create a facility that would not otherwise exist to
serve local residents. Patient benefit and patient access to health care facilities al-
ways must remain the paramount concern.
Other matters that must be addressed include:
• The "shared" facility issue. The AMA supports such an exception for situations
in which physicians share facilities (such as laboratories) outside of a formal
group practice arrangement.
• An exception for community need as explained in the AMA's ethical opinion out-
lined below.
• A clear exception that would allow nephrologists to provide dialysis services to
their own patients, as well as to hospitals and to hospitalized patients, on an
in- and outpatient basis. The exception contained in the 1993 Omnibus Budget
Reconciliation Act (OBRA '93) does not specifically allow a continuation of this
practice in the manner that assures continuity of care for dialysis patients.
f Kickbacks and safe harbors / hospital acquisition of physician practices
Another area of concern involves illegal kickbacks. Clearly, acceptance of kick-
backs, bribes, or rebates in return for referral for services should constitute a crimi-
nal violation and be punished accordingly. Illegal kickbacks also occur in cases
where hospital contracts with physicians call for payments on terms other than fair
90
market value. As physicians wish to comply with all legal requirements in business
transactions, it is, therefore, imperative that the legitimate parameters of these ar-
rangements be specifically defined. Distinctions must be made between agreements
that induce physicians to inappropriately refer patients, or order unnecessary items
or services, and those that do reflect reasonable business practices.
The AMA believes that an improper inducement would exist where: (1) Incentives
are paid on a per-referral basis; (2) incentives are offered only to so-called preferred
"heavy admitters"; (3) incentives are paid above fair market value, or when little
or no substantive services are provided; (4) free or discounted leasing space or serv-
ices are offered; (5) discounted continuing medical education is offered only for the
purpose of enhancing private practice earnings; and (6) unreasonable upfront pay-
ments in the sale of a medical practice are offered for such factors as good will and
patient lists.
However, safe harbors must be delineated to protect legitimate practices that may
involve remuneration between parties, yet may still be construed as an arm's length
business transaction. Some recruitment and retention plans in fact provide benefits
to both patients and providers. For example, incentives granted to physicians to
practice in underserved areas, secretarial support and computer access to facilitate
the performance of medical staff duties, discounted continuing medical education
improving the institutional ability to monitor quality of care, and purchase of the
sole medical practice in the community should all be legally permissible. In order
to condemn a business arrangement as an illegal kickback, moreover, intent to pro-
vide referral in return for other perquisites must be established. The AMA rec-
ommends action to ensure that all assets of a physician's practice, both tangible and
intangible, can and should be used to determine the market value of the practice.
g. Reporting
S. 1770 would establish a health care fraud and abuse data collection program
to report final adverse actions against health care providers, suppliers, or practition-
ers. The information reported to the HHS Secretary would include: (1) the name of
the provider, supplier or practitioner; (2) the name of any health care entity with
which a provider, supplier, or practitioner is affiliated; (3) the nature of the final
adverse action; and (4) a description of the acts or omissions and injuries upon
which the final action is based. Access to the database would be made available to
the public and to governmental agencies.
The AMA opposes the creation of a national database containing fraud and abuse
information. If any such database is constructed, appropriate safeguards for the con-
fidentiality and use of the information contained therein must be included. S. 1770
addresses the issue of confidential patient information, but fails to consider critical
matters regarding confidentiality and privacy of the reported subject. We also urge
that the term, "final adverse action," be more carefully circumscribed so that cases
pending on appeal are not identified as final. The bill's current definition only would
preclude the reporting of settlements where no finding of liability has been deter-
mined without delineating any parameters for control of database information.
ETHICAL ISSUES
1. REPORTING
When a physician provides care in a fraudulent manner, numerous ethical
breaches occur. The AMA has addressed these matters through various ethical pro-
nouncements. For example, ethical physicians must accept the responsibility to re-
port colleagues who are engaged in fraud or deception. The AMA Principles of Medi-
cal Ethics state as follows:
A physician shall deal honestly with patients and colleagues, and strive to
expose those physicians deficient in character or competence, or who engage
in fraud or deception.
Opinion 9.031 of the AMA's Council on Ethical and Judicial Affairs (CEJA) out-
lines the physician's obligation to report impaired, incompetent, and unethical col-
leagues in accordance with the legal requirements in each state pursuant to the
guidelines outlined in the opinion. With respect to the reporting of unethical con-
duct, the opinion specifically states:
Unethical conduct that threatens patient care or welfare should be reported
to the appropriate authority for a particular clinical service. Unethical be-
havior that violates state licensing provisions should be reported to the
state licensing board. Unethical conduct that violates criminal statutes
91
must be reported to the appropriate law enforcement authorities. All other
unethical conduct should be reported to the local or state medical society.
Where the inappropriate behavior of a physician continues despite the ini-
tial report(sh the reporting physician should report to a higher or additional
authority. The person or body receiving the initial report should notify the
reporting physician when appropriate action has been taken. Physicians
who receive reports of inappropriate behavior have an ethical duty to criti-
cally and objectively evaluate the reported information and to assure that
identified deficiencies are either remedied or further reported to a higher
or additional authority. Anonymous reports should receive appropriate re-
view and confidential investigation.
2. PHYSICIAN OWNERSHIP OF MEDICAL FACILITIES AND SELF-REFERRAL
The AMA Council on Ethical and Judicial Affairs undertook an intensive exam-
ination of the issue of physician ownership of medical facilities and the ethical is-
sues presented by "seli-referral" of the physicians' patients to these facilities. In
brief, the AMA believes that when adequate alternative facilities exist, self-referral
is presumptively inconsistent with physicians' fiduciary duty to their patients. How-
ever, where there is demonstrated community need for a facility and alternative fi-
nancing is unavailable, self-referral is appropriate and even necessary. Moreover,
physicians must be free to invest in ancillary facilities, such as ambulatory surgical
centers, in which they personally provide care to their patients. For physicians, the
highest priority must always be the needs of our patients.
The AMA strongly recommends that physicians should not refer patients to a
health care facility outside their office practice (or their group) at whicn they do not
directly provide or supervise care or services when they have an investment interest
in the facility. If there is a demonstrated need in the community for the facility and
alternative financing is not available, however, referral should be permitted. If this
exception is met, the physician must comply with further ethical requirements relat-
ing to the marketing efforts of the facility, referral requirements, return on invest-
ment, noncompetition clauses, disclosure to patients and utilization review.
Through CEJA Report C (Attachment C), the AMA established strict formal
guidelines for those physicians who, in order to serve their patients, invest in out-
side facilities and refer to those facilities. The physician also must comply with the
following further ethical requirements:
a) Individuals who are not in a position to refer patients to the facility must be
given a bona fide opportunity to invest in the facility, and they must be able
to invest on the same terms that are offered to referring physicians. The
terms on which investment is offered to physicians must not be related to the
past or expected volume of referrals or other business from the physicians.
b) There is no requirement that any physician investor make referrals to the en-
tity or otherwise generate business as a condition for remaining an investor.
c) The entity must not market or furnish its items or services to referring physi-
cian investors differently than to other investors.
d) The entity must not loan funds or guarantee a loan for physicians in a posi-
tion to refer to the entity.
e) The return on the physician's investment must be tied to the physician's eq-
uity in the facility rather than to the volume of referrals.
f) Investment contracts should not include "noncompetition clauses" that prevent
physicians from investing in other facilities.
g) Physicians must disclose their investment interest to their patients when
making a referral. Patients must be given a list of effective alternative facili-
ties if any such facilities become reasonably available, informed that they
have the option to use one of the alternative facilities, and assured that they
will not be treated differently by the physicians if they do not choose the phy-
sician-owned facility. These disclosure requirements also apply to physician
investors who directly provide care or services for their patients in facilities
outside their ofilce practice.
h) The physician's ownership interest should be disclosed, when requested, to
third-party payers.
i) An internal utilization review program must be established to ensure that in-
vesting physicians do not exploit their patients in any way, as by inappropri-
ate or unnecessary utilization.
92
j) When a physician's financial interest conflicts so greatly with the patient's in-
terest as to be incompatible, the physician must make alternative arrange-
ments for the care of the patient.
Report C is based on a number of observations. It recognizes that there are cir-
cumstances under which patients may be deprived of the best health care if a physi-
cian cannot refer patients to a facility in which the physician has an investment in-
terest. Physicians have often been exclusively motivated by the important needs of
their patients in becoming involved in such arrangements. Clearly, blanket bans on
self-referral are inappropriate. Also, investing and referring, when it is a direct ex-
tension of a physician's commitment to serve patients' needs, is both ethical and de-
sirable. This recognizes, however, that those needs must not be marginal or ration-
alized needs, or secondary to a profit motive. Non-physician or non-referring physi-
cian investment for developing ancillary health care facilities and services should
be explored and exhausted.
AMA INITIATIVES AND RECOMMENDATIONS
The AMA recognizes that additional efforts must be undertaken to confront health
care fraud and abuse, especially inasmuch as it transcends the medical profession,
reaching into many segments of our society. Unfortunately, people and entities from
all walks of life have been found culpable in contributing to the magnitude of the
problem.
The medical profession remains committed to rendering high quality medical care
to its patients on an ongoing basis, and the AMA is proud of the work of our profes-
sional community. While some physicians have been implicated in health care fraud
activities, we note that their numbers have been minimal. Even this slight level of
physician participation is unacceptable, and the AMA does not condone fraudulent
activity on the part of even one individual. In a profession that relies on public and
individual patient trust as a vital element in providing successful medical care, any
number of bad apples" is too many.
The AMA stands ready to assume an active role in identifying those who would
profit by improper use of their authority to practice medicine. We pledge to continue
working with the Congress and appropriate law enforcement agencies in a coopera-
tive endeavor to attain the goal of eliminating health care fraud in all of its forms.
To this end, the AMA is pursuing a number of activities.
1. COOPERATION WITH FEDERAL BUREAU OF INVESTIGATION (FBI)
Since 1992, the AMA has worked with the Federal Bureau of Investigation to
confront issues relative to fraud and abuse. FBI representatives have expressed to
us that physicians are not responsible for the vast majority of health care fraud and
abuse. The AMA, however, does not take comfort from the fact that only a small
number of physicians seek to gain through fraudulent practices.
We have been pleased to provide assistance to the Bureau in a cooperative en-
deavor as it attempts to identify and prosecute health care fraud. AMA officials
have participated in sessions in which the FBI trained agents to ferret out fraud.
We have also offered our network of state and specialty societies, boards and other
entities to combat criminally fraudulent activities. The self regulatory mechanisms
of these organizations can provide valuable assistance in detecting illegal activity.
One year ago, the AMA testified on these same issues before the House Judiciary
Crime and Criminal Justice Subcommittee. On that occasion, we welcomed the com-
mendation of Assistant FBI Director Larry Potts who highlighted the Bureau's
"close cooperative effort with industry groups such as the American Medical Associa-
tion," in identifying criminal action.
2. AMA FRAUD AND ABUSE HOTLINE
The AMA has established a system whereby medical societies or individual physi-
cians can report fraud through the AMA by dialing our toll-free hotline. Response
to the hotline has been cyclical, increasing as stories relating to health care fraud
are reported in American Medical News. The Association has been active in seeking
out stories relating to fraud in an effort to boost reporting. In the last year and a
half, there have been approximately 100 telephone reports to the hotline. The 800
number is periodically published on our electronic network to which state medical
associations and national medical specialty societies subscribe. Physicians, medical
societies, and other health care personnel report cases of which they are aware. The
AMA then prepares a memorandum on all calls it receives. The FBI Chicago Office
receives this information and assumes investigatory responsibility by sending the
93
information to the local agent in the area from which the complaint was reported.
The FBI makes a determination as to whether an investigation will be initiated. The
AMA is proud of the hotline as an excellent model of partnership between the pri-
vate sector and federal law enforcement authorities on this critical issue.
3. HEALTH CARE COMMISSION ON FRAUD AND ABUSE
While more criminal investigations by the FBI, the Inspector General, and the
states will succeed in eliminating some of the immediate problem, law enforcement
alone will not create an environment in which fraudulent and wasteful activity will
become only a marginal concern. As stated earlier, the most effective initial step will
include accurate identification of the dimensions of health care fraud and abuse so
that investigatory resources may then be focused in a manner that will address the
causal agents and not merely the isolated criminals.
The establishment of a national commission on fraud and abuse would be bene-
ficial, as it could explore mechanisms to facilitate fraud detection, such as allowing
health benefit plans to exchange information for coordinating prosecution efforts
and to ensure the availability of appropriate and effectively applied resources to law
enforcement authorities to combat fraud and abuse. However, any measures taken
must proceed cautiously. Even seemingly innocuous actions, such as information ex-
change systems and other investigatory activities, must be carefully weighed against
potential sacrifices of patient confidentialitv protection. Through careful consider-
ation of such concerns, the commission could provide a valuable means to target and
focus activity to address this critical issue.
4. PROFESSIONAL SELF-REGULATION
The medical community had been subjected to unreasonable constraints in recent
years from efforts to discipline itself by state and federal antitrust laws that inhib-
ited the ability of organized medicine to assume an expanded professional self-regu-
latory and enforcement role. Most state and county medical societies have by-laws
providing for standing committees designed to mediate and resolve patient griev-
ances and to discipline members who engage in unethical conduct. While some of
these societies continued to hear patient complaints about fees notwithstanding the
threat of antitrust exposure, these committees became inactive or underused in
many, if not most, geographic areas.
In 1992, the AMA and the Chicago Medical Society (CMS) filed a petition with
the Federal Trade Commission (FTC) requesting an advisory opinion that would
permit the AMA and its constituent and component medical societies to engage in
professional peer review of physician fees pursuant to procedures developed by the
AMA. In order to expand the restrictive nature of the FTC guidelines in effect, the
AMA proposal recommended: (1) mandatory participation in fee peer review and me-
diation by medical society members; (2) disciplinary action for members who engage
in egregious conduct, including fee gouging; and (3) public disclosure of disciplinary
actions for egregious conduct.
On February 14, 1994, the Federal Trade Commission issued its advisory opinion
in response to the AMA/CMS petition on the permissibility of professional society
peer review of physicians' fees under the antitrust laws. The FTC stated that the
proposed program would not be violative of the law as long as the disciplinary proc-
ess is Umited to certain abusive practices. Mandatory physician participation in ad-
visory fee review was determined to be "reasonably related" to making information
about fees available to consumers, without infringing upon competition. Patient
grievance committees acting in an advisory fashion and rendering nonbinding deci-
sions in hearing complaints of fee gouging, would be permissible. The opinion fur-
ther stated that the antitrust laws do not preclude professional groups from protect-
ing consumers by disciplining group members who have engaged in abusive conduct
such as fraud, intentional provision of unnecessary services, or exercise of undue in-
fluence over a vulnerable patient. The Commission refused, however, to permit dis-
cipline based solely on fee levels without the presence of other abusive conduct. It
recommended that the AMA could require physicians to disclose relevant informa-
tion to patients in advance when possible.
The FTC opinion represents an important first step in resurrecting the construc-
tive activities of professional societies and patient grievance committees on this sen-
sitive issue. The American Medical Association has encouraged physicians to volun-
teer fee information to patients and to discuss fees in advance of services where fea-
sible.
We further believe that carefully designed legislative immunity from the federal
antitrust laws for medical self-regulatory entities engaged in enforcement activities
designed to promote the quality of care must be recognized. By lending statutory
94
reinforcement to the February 1994 advisory opinion of the FTC, progress would be
advanced to an even greater degree in this area. It would also enable the medical
profession to play a more active role in the elimination of health care fraud and
abuse. In addition, statutory immunity should be afforded to those who provide in-
formation in good faith leading to prosecution and conviction of health care offenses.
Any proposed legislative solution should incorporate this approach, and it must
be carefully crafted to clearly illuminate the parameters of a fraudulent practice. A
number of major health system reform proposals, including S. 1743, the "Consumer
Choice Health Security Act of 1993," and S. 1770, the "Health Equity and Access
Reform Today Act of 1993," contain this type of provision. In addition, the AMA
strongly supports S. 1658, the "Health Care Antitrust Improvements Act of 1993,"
introduced by Senator Orrin Hatch (R-UT). This measure would permit medical
self-regulatory entities to engage in standard setting and enforcement activities de-
signed to promote the quality of health care provided to patients, without the threat
of antitrust sanction. We urge that any health system reform proposal that is con-
sidered by this Committee and the Senate incorporate this approach as well.
5. MEDICAL SOCIETY GRANTS
Another mechanism for health care fraud and abuse detection should include the
award of grants to medical societies for the establishment of programs specifically
targeted toward this issue.
Medical societies presently lack the resources to launch comprehensive initiatives
to investigate and study these issues. The majority of their disciplinary activities
are directed at problems relative to fee disputes impaired physicians or sexual mis-
conduct. An award grant program would better enable medical societies to explore
mechanisms to facilitate fraud detection at the local level, work with state medical
disciplinary agencies to identify those who commit health care fraud, and ensure
that appropriate sanctions are imposed. The AMA applauded the provisions in S.
2652, the "Health Care Fraud Prosecution Act of 1992," introduced by Chairman
Biden in the 102nd Congress, that included a medical society grant award program.
6. STATE LICENSING BOARDS
The state medical and licensing boards, through their authority to license and dis-
cipline health care professionals, also have an important role to play in any orga-
nized effort to address health care fraud and abuse. The AMA urges the Committee
to pursue discussions with the Federation of State Medical Boards regarding pos-
sible strategies to achieve the goal of strengthening the ability of state agencies in
this regard.
7. SILENT PROS
The AMA has uncovered information that strongly suggests that insurance com-
panies across the nation are using misrepresentations to secure inappropriate PPO
discounts from physicians and hospitals. Providers enter into PPO contracts to se-
cure increased referrals by virtue of financial incentives for beneficiaries to use "pre-
ferred" providers. In exchange, the providers offer discounted fees to the PPO. Hos-
pitals and physicians are susceptible to abuse of their legitimate PPO contracts
when insurers use misrepresentations to claim discounts to which they are not enti-
tled. These insurers, often using brokers, will gain access to the provider roster of
legitimate PPOs and, whenever a beneficiary in an indemnity (non-discounted fee-
for-service) plan visits a provider under contract to the PPO, misrepresent their in-
demnity beneficiaries as PPO members. Because health care claims processing is
largely based on trust, physicians and hospitals may not take the steps to verify
whether the beneficiary is in fact a member of the PPO. As PPO discounts can be
large, often 20 to 30 percent, this scheme illegally deprives providers of huge
sources of legitimate income. The AMA has reported this information to appropriate
enforcement agencies.
CONCLUSION
In conclusion, the AMA underscores its commitment to eliminate health care
fraud and abuse wherever it exists. We welcome the opportunity to work with Con-
gress and others on this issue so that our health care resources may be maximized
to focus on our mutual goal— the provision of quality health care to all of our citi-
zens.
The AMA appreciates the opportunity to appear before this Committee. At this
time, we will be pleased to respond to questions.
95
Att:achment A
American Medical Association
Phvsicunsdedicaied lo ihe Iwalih of Americi
Physician Marketplace
Figvu e I
Percentage of Phyiicians with Hospital Leases, by
Sfxciaky, 1991*
HI-..IIIJI..ILIJ?ff?»S2
0331
I '"'"■■
...f >.>•>•.• I«^l (»•<
Perceniagc of Physicians with Hospital Leases, by
Census Oivision. 199t
*« P'-tVCJ-I \
.M ^ V»(>M-i««s.>.w Mo...>0'»>^ VxX'i. I?4: t
Volume 3 Number 4, July 1992
PhysLcian-to-Hospital Payments
Anecdotal evidence hns suggested a rising incideiu c of
hospiinls requiring physicians to make pavmenis for li^)*
piial serv ices Applving ihe reasoning of the Ninili Cii-
cuii Court of Appeals in I'nitcd States f Lijiku 770 F 'id
1447 ( 1085), an October 1991 report from the OfOrc ol
Inspector General concluded that an tllrgnl kirkhnrli oc-
curs when .\ contract bcuveen a hos[)iial and a hospiial-
based phvsician calls for the rental of space or
equipnieiii or provision of professional services on iciiu-
other tiian fair market value Data from the Socioeco-
nomic Moiiiiormg Svsiem (SMS) 1991 core survcv per-
mit an analvsis of the potential magnitude of this
problem The data have been analvzed bv David W
Emmons. Ph D . of the American Medical Association s
Center for Health Policv Research, and his findings are
presented in the remainder of this report
.\n upper l)Oun<l on the number of phvsicians vMih po-
lentiallv questionable contracts is provided bv the pro
poriion of phvsicians with a lease arrangement, wherebv
tliev, or their practice, compensates a hospital for use ol
services \uch as space, equipment and personnel (hercaf
ter. referred to simpK as a lease) Figure 1 shovvs that
9 2^c of all phvsicians have such a contract Significani
variation occurs bv speciakv; the proportion of phvsi-
cians with .1 lease ranges from a low of b S'rc among gen-
eral/fainilv pracunoners to a high of 14 0% and 14 2'~<
among pathologists and radiologists, respeciivelv
Regional variations in lease-coniracting reflect both the
geographic distribution of specialties and regional dilfer-
cnccs in contracting practices .\s shown in Figure 2.
phvsicians in ihe East North Central states most fre-
qucnilv reported having a lease. 14 2'^c. in conirasi lo
phvsicians in the Mountain stales, onlv 5 '2'~t tifwhoin
reported having one
Alternative measures of the extent of the problem idciiii-
fied bv the Inspector General arc provided bv responses
to two additional questions on the S.MS survev
Cop^iijht 199? b» \m«iic.in Medical \\»o<iiiioii
96
."able 1
»«rcenuge of Physiciant Asked for Pjymenls. 1991
Patient
Privileges
Services
Eiinet
Only
3 4'/.
Only
All Physicians
6 9%
4 6"'.
Soecmiy
Geneiai/family Ptjclice
31
1 9
1 3
Internal Medicine
64
32
39
Sutge'y
S9
29
4 J
Pedijifics
93
61
42
Obsteltics/Gynecology
4 1
1 5
27
Radiology
It 4
46
108
Psychiatry
70
36
4 1
Anesthesiology
9B
5 1
7 7
Pathology
122
36
11 1
Other Specially
107
51
73
Ofjir-i
New England
79
3 7
50
Middle Atlantic
105
48
85
tasi Nonn Central
78
35
54
West North Central
38
07
35
South Atlantic
47
26
28
East South Central
33
10
23
West South Central
54
22
39
Mountain
79
38
46
PjCiliC
7 1
51
35
»cv.<r ^M\ SfX.iM-COnOiiiK ^
^•••toi.ilf ><>tc>»
I*S1 to.( ....^r
> «l
• vilrrtcra. p«iirni t»'C prt'i.ci
nt r^cluding fn
dr..u
( 1 ) Wlicilict .Tti% hospital had ever requested the
phvsici.Tii lor the phisiciati's practice) lo make
pavinciiib to the liospiial lor the priv ilegc of ser\ mij
patients ihcic
(2) Whether the phvsician had e\er been asked lo
make paviiienis to a hospital for the privilege of
utilizing space, supplies, equipment, utilities, hospital
employees, oi billing information
Table 1 suiiinianzes the responses to these i^vo (jiit^-
iioiis The fit SI column of Tal)le 1 shows the pro[)oriuiii
of plusiciaus uho responded m the affirmative to eiihir
of the two questions. The proportions of affirinatue re-
sponses to each question iiidividuallv are reported in ml
umiis 2 and 3 Overall. 6 9% of phvsicians had been
asked hv a hospital for pavments This percentage ap-
pears to be at odds with the proportion of phvsicians
who reported thev had a lease with a hospital (9 2'~c ) Be-
cause questions 1 and 2 encompass a wide range of hos-
pital/phvsician fmancial arrangements and mereK being
asked to make a pavmem does not mean that tlie phvsi-
cian complied, it would be expected that this proportion
would be higher than the proportion of phvsicians indi-
cating that thev had a lease One plausible explanation
for the apparent discrepancv is that the lead-in phrase
"Has am hospital ever requested " led phvsicians to re
port onlv msiaiices where a hospital had inUudrH stich a
discussion
Table 1 also provides breakouts by specialtv and census
region The patterns largeh parallel those observed on
the earlier qtiesiion Bv specialtv, pathologists and radi
ologists were most likelv to indicate having been asked
bv a hospiial to make pavments Bv region. phvsician< in
the Middle Atlantic states vvere most likelv to have been
asked
In order to assess the magnitude of the amounts in-
volved, phvsicians who had been asked for pavments
were asked if thev were currentiv making such pav mciiis
and how much, per phvsician. those pavments were
Shghtlv more than one-half indicated that thev curreniK
made sucii pavments The latter group reported average
pavments per phvsician. of S2525
The data reported here should be interpreted with cau
tion The Inspector General concluded that an illegal
kickback occurs when a hospital contract calls for pav
menis o" ti'nn olhcr Ouin fmr iniirhel vritiif These data du
not reflect the presence or absence of the latter propertv
in the pavmenis that phvsicians are making lo hospitals
Voneiiieles", the data do delineate some boundaries as
to the picv.ilcnce of kickbacks being scughi bv hospii.il-
97
Attacr.Tient S
98
Attachment C
report of the council on ethical and judicial affairs
Report: C
Subject: Conflicts of Interest: Physician Ownership of Medical Facilities (Resolu-
tions 137 and 188, A-90)
Presented by: Oscar W. Clarke, MD, Chairperson
Referred to: Reference Committee on Amendments to Constitution and Bylaws,
(Jerome K. Freedman, MD, Chairperson)
INTRODUCTION
At the 1990 Annual Meeting, the House of Delegates referred two resolutions to
the Board of Trustees regarding physician ownership of medical facilities. Resolu-
tion 137, introduced bv the American Society for Therapeutic Radiology and Oncol-
ogy, called for reconsideration of the Association's guidelines on passive investments
in radiation therapy facilities by physicians who refer patients to those facilities.
Resolution 188 requested the Council on Ethical and Judicial Affairs to declare it
unethical for physicians to refer patients to a medical facility if the physicians or
their families hold a financial interest in the facility and the facility is outside of
the sphere of the physicians' medical expertise.
The Council presented an Interim report in response to these resolutions at the
Annual Meeting in 1991 which called for aggressive enforcement by state and coun-
ty medical societies of the Council's existing guidelines on conflicts of interest. This
report responds to the substantive issues raised by the resolutions. The Council is
recommending a change in the Association's approach to the question of self refer-
ral.
BACKGROUND
The Council issued a major report on conflicts of interest in the practice of medi-
cine in 1986. The Council's view then was that conflicts are inherent in the practice
of medicine and that the problem of referral of patients to outside facilities in which
physicians have an investment ( "self referral' ) was not significantly different in
principle from other conflicts presented by fee-for-service medicine. In a report in
1988 the Council also identified the patient conflicts presented by certain managed
care arrangements, particularly HMOs which reward physicians for providing less
care.
With all of these arrangements, the Council's primary guidance was to remind
physicians that the profession of medicine is unique and that physicians are ex-
pected to put their patients' interests first. Thus, where a physician's financial inter-
est may conflict with the best interests of a patient, it is assumed that the physician
will not take advantage of the patient.
The Council did recognize that some arrangements may present too great a con-
flict to be appropriate, but with regard to self-referral the Council issued a list of
safeguards to help ensure that the patient's interests would not be jeopardized. That
list was most recently updated in 1988.
Since these reports and opinions were issued, several studies have been perfornied
analyzing self-referral and drawing conclusions with regard to increased utilization
and cost of the practice.
At the request of the Council, the AMA's Center for Health Policy research re-
viewed this evidence. The review focused on the three studies that provide original
data and analyses on the effects of self-referral on utilization and costs: (1) Finan-
cial Arrangements Between Physicians and Health Care Facilities, a 1989 report by
the Office of the Inspector General of the Department of Health and Human Serv-
ices; (2) Joint Ventures Among Health Care Providers in Florida, a recently com-
pleted study issued by the Florida Health Care Cost Containment Board; and (3)
Frequency and Costs of Diagnostic Imaging in Office Practice — A Comparison of
Self Referring an Radiologist-Referring Physicians," an article by Bruce J. Hillman
and others that appeared in the New England Journal of Medicine (December 6,
1990).
Although the Center found that all of these studies have flaws, several important
points could be made with regard to their findings:
• In the neighborhood of 10 percent of physicians nationwide have ownership in-
terests in health care entities that have been associated with potential self-re-
ferral issues. However, not all of the physicians with such ownership interests
engage in self-referral, so other motivations exist for physicians to make such
99
investments. Moreover, there is significant geographic variation in the extent of
physician ownership of health entities that is not readily reconciled with dif-
ferential opportunities to self refer.
• For several important classes of services for which physicians make referrals,
patients of physicians who self-refer have higher utilization rates than other pa-
tients. None of the studies, however, examined the appropriateness of the utih-
zation levels of physicians who self-refer and those who refer to other sources, i
• There is no evidence in these sources on the extent to which physicians may
profit from self-referrals, so the degree of the conflict is not known, except
anecdotally.
The advisory panel
The Council also appointed an expert advisory panel to assist it. The panel mem-
bers consisted of Russel Patterson, MD, Chief of Neurosurgery at Cornell Univer-
sity, New York and a former Chairman of the Council, Newton M. Minow, senior
partner in the law firm of Sidley & Austin, former FCC Chairman, Trustee Emeri-
tus of the Mayo Clinic, Director of the Rand Corporation and Director of the
Annenberg Washington Program of Northwestern University, and Robert Veatch,
PhD, Director of the Kennedy Institute of Ethics. The panel studied the data and
other evidence with regard to physician self-referral and reviewed the Council's
prior reports and opinions.
The panel members met with the Council and provided an important perspective
on the issue. The panel made no formal recommendations to tne Council but as-
sisted the Council in establishing a framework for analysis of the issue. The panel
identified several considerations of particular significance:
• The medical profession's ability to preserve autonomy and the nature of the
physician-patient relationship during periods of transformation have succeeded
in large part due to the profession's lack of tolerance for "commercialism" in
medicine.
• Government policies toward the profession have been contradictory and have
contributed significantly to the rise of commerciaHsm in medicine. The Federal
Trade Commission has made unfettered competition a priority in medical prac-
tice and has seen physicians primarily as businesspeople. TheCommission has
acted against certain professional regulatory efforts, in particular, self-imposed
restraints on advertising and fees. In contrast. Congress and the Health Care
Financing Administration have established an extensive system of oversight
and controls that place restrictions on physician practices which are often at
odds with the Commission's free market approach. The only consistent theme
of government policies is their treatment of physicians as entrepreneurs rather
than professionals, with little value being given to physicians' fiduciary obliga-
tions.
• The treatment of the self-referral question has important symbolic significance
for the public and policymakers with regard to which of two alternative
conceptualizations of the physician's role — that of professional or that of entre-
preneur — the medical profession will move toward in the era of health care re-
form. Although physicians will unquestionably continue to be forced into busi-
ness oriented behavior, and market forces will have an important function in
controlling health care costs, the Association should make clear what balance
will be maintained with the profession's unique ethical traditions.
A new approach recommended by the council
The Council believes that it is necessary to strengthen its opinion on self-referral.
It believes that physicians in general can be trusted to deal appropriately with the
conflicts presented by self-referral. Indeed, the Council believes that physician in-
vestment and self-referral have on balance been positive for patients and the na-
tion's health care system. But anecdotes of excessive profit and utilization have been
widespread, and the formal studies which have been done strongly suggest, al-
though they do not actually prove, inherent problems with the practice.
In addition, the Council takes notice of the change in our nation's health care pri-
orities, and in particular, of our patients' expectations about physicians. In the
1990s and beyond, the growth in the costs of health care is likely to be the dominant
iThe HHS study found that self-referring physicians referred patients for clinical lab testing
at a 45 percent higher rate than non-investing physicians; the Florida study concluded that phy-
sicians' utilization of clinical labs, diagnostic imaging centers, and PT/Rehabilitation Centers
was "significantly higher" where physicians are owners; the Hillman study concluded that physi-
cians with a financial interest in diagnostic imaging facilities referred patients at a rate of 4-
4.5 times that of non-investing physicians.
100
concern of our patients. The nation has today, and is Ukely to continue to have, un-
paralleled availability of health care facilities and technology of all varieties.
In this environment, the Council believes that the issue of self-referral is a part
of the larger issue of physicians commitment to professionalism. As professionals,
physicians are expected to devote their energy, attention and loyalty fully to the
service of their patients. This does not mean they cannot have outside investments
and activities or that they should not invest in health care facilities. It does mean
that, to the extent possible, physicians should not be in the business of profiting
purely from their ability to refer patients to outside facilities. Such a practice is fun-
damentally different from deriving financial reward from treating patients in their
offices or in outside health care facilities they have invested in at which they care
for or provide services to their patients.
At the heart of the Councifs view of this issue is its conviction that, however oth-
ers may see the profession, physicians are not simply businesspeople with high
standards. Physicians are engaged in the special calling of healing, and, in that call-
ing, they are the fiduciaries of their patients. They have different and higher duties
than even the most ethical businessperson. This is the teaching of the Hippocratic
oath and of the great modern teachers of ethical behavior. There are some activities
involving their patients which physicians should avoid whether there is evidence of
abuse or not.
Patient need and new guidelines
The Council recognizes that there are circumstances under which patients may
be deprived of the best health care if physicians cannot invest and self-refer. Physi-
cians have often been exclusively motivated by the important needs of their patients
in becoming involved in such arrangements. Blanket bans on self-referral are inap-
propriate. Investing and referring when it is a direct extension of a physician's com-
mitment to serve patients' needs is both ethical and desirable. But those needs must
not be marginal or rationalized needs, or secondary to a profit motive, and where
non-physician or non-referring physician investment is available those sources
should be explored and exhausted first.
By recognizing this patient service aspect of physician investment as a basis for
ethical self-referral, the Council appreciates that the effectiveness of its general pro-
scription against self referral for profit may be weakened. Guidelines which do not
effect a change in behavior or which are unenforceable because of their vagueness
or breadth of exceptions do little to enhance professionalism. Indeed, they reduce
the public's confidence in the profession's ability to regulate itself
The Council does not believe that will occur here. In addition to announcing a
shift in its vie about self referral — one that finds the practice presumptively incon-
sistent with the physician's fiduciary duty when adequate alternative facilities
exist — the Council is also establishing new and stricter formal guidelines for those
physicians who, in order to serve their patients, invest in outside facilities and refer.
Only where physicians can demonstrate both the absence of adequate alternative fa-
cilities—a plain medical need— and the absence of alternative financing should self
referral take place.
Compliance with these new guidelines, as well as other Council standards, will
be enhanced by an increased focus on education and enforcement by the American
Medical Association and the constituent state and local societies. The commitment
to greater education and enforcement is discussed in a report of the Board of Trust-
ees at this meeting.
Recommendations
Accordingly, the Council on Ethical and Judicial Affairs recommends:
1) Physician investment in health care facilities can provide important benefits
for patient care. However, when physicians refer patients to facilities in which
they have an ownership interest, a potential conflict of interest exists. In gen-
eral, physicians should not refer patients to a health care facility outside their
office practice atwhich they do not directly provide care or services when they
have an investment interest in the facility.
2) Physicians may invest in and refer to an outside faciUty, whether or not they
provide direct care or services at the facility, if there is a demonstrated need
in the community for the facility and alternative financing is not available.
There may be situations in which a needed facility would not be built if refer-
ring physicians were prohibited from investing in the facility. Need might
exist when there is no facility of reasonable quality in the community or when
use of existing facilities is onerous for patients. In such cases, the following
requirements should also be met:
101
a) Individuals who are not in a position to refer patients to the facility must
be given a bona fide opportunity to invest in the facility, and they must be
able to invest on the same terms that are offered to referring physicians. The
terms on which investment interests are offered to physicians must not be re-
lated to the past or expected volume of a referrals or other business from the
physicians.
b) There is no requirement that any physician investor make referrals to
the entity or otherwise generate business as a condition for remaining an in-
vestor.
c) The entity must not market or furnish its items or services to referring
physician investors differently than to other investors.
d) The entity must not loan funds or guarantee a loan for physicians in a
position to refer to the entity.
e) The return on the physician's investment must be tied to the physician's
equity in the facility rather to the volume of referrals.
f) Investment contracts should not include "noncompetition clauses" that
prevent physicians from investing in other facilities.
g) Physicians must disclose their investment interest to their patients when
making a referral. Patients must be given a list of effective alternative facili-
ties any such facilities become reasonably available, informed that they have
the option to use one of the alternative facilities, and assured that they will
not be treated differently by the physician if they do not choose the physician-
owned facility. These disclosure requirements also apply to physician inves-
tors who directly provide care or services for their patients in facilities outside
their office practice.
h) The physician's ownership interest should be disclosed, when requested,
to third party payers.
i) An internal utilization review program must be established to ensure that
investing physicians do not exploit their patients in any way, as by inappro-
priate or unnecessary utilization.
j) When a physician's financial interest conflicts so greatly with the pa-
tient's interest as to be incompatible, the physician must make alternative ar-
rangements for the care of the patient.
3) With regard to physicians who invested in facilities under the Council's prior
opinion, it is recommended that they reevaluate their activity in accordance
withthis report and comply with the guidelines in this report to the fullest
extent possible. If compliance with the need and alternative investor criteria
is not practical, it is essential that the identification of reasonably available
alternative facilities be provided.
4) That the remainder of this report be filed.
SELF-REFERRAL CLARIFICATIONS
Clarification of recommendation 1
Facilities in which the physician directly provides care or services. Under
the guidelines, physicians may refer their patients to facilities in which
they have an ownership interest if the physician directly provides care or
services. The Council drew a distinction between the physician who benefits
financially from services that the physician actually provides and the physi-
cian who benefits purely from the ability to refer patients for services.
Thus, for example, a surgeon may operate on a patient at an ambulatory
surgical facility in which the surgeon has an investment interest. [While
self-referral is permissible, there is still an obligation to comply with rec-
ommendations 2.b. through 2.j.]
The requirement that the physician directly provide the care or services
should oe interpreted as commonly understood. The physician needs to
have personal involvement with the provision of care on-site.
Clarifications of recommendation 2
Demonstrated need. Demonstrated need might exist (a) when there is no facility
of reasonable quality in the community or (b) when use of existing facilities is oner-
ous for patients.
102
No facility of reasonable quality. Self -rekrral cannot be justified simply if
the facility would offer some marginal improvement over the quality of
services in the community. The potential benefits of the facility should be
substantial to justify assuming the risks of self-referral. The question is
whether the community has facilities that can provide medically appro-
priate services.
The community. The community should be defined liberally since con-
cerns about patient convenience are included in the next criterion. Thus,
the community would be the metropolitan area for a city, or the community
for a rural area.
Use of existing facilities is onerous. This guideline permits newer facilities
when use of existing facilities creates a hardship for patients. This might
occur, for example, if existing facilities are so heavily used that patients
face undue delays in receiving services. A delay would become undue if put-
ting off the service could compromise the patient's care, i.e., it would affect
the curability or reversibility of the patient's condition. There would also be
a hardship if patients had long travel times that made it difficult for them
to receive services. The appropriateness of the travel time would depend in
part on the frequency of the service. Longer travel times would be accept-
able if patients tended to use the facility rarely, while longer travel times
would be unacceptable if patients tended to use the facility more regularly.
Alternative financing. The requirement that alternative financing not be available
carries a burden of proof If the facihty serves a real need and is financially viable,
then capital should generally be available to support it. The burden on the builder
of the facility is to show that adequate capital could not be raised without turning
to self-referring physicians. As to the kind of efforts that must be made to secure
alternative financing, the builder would have to undertake the usual steps that en-
trepreneurs undertake, including efforts to secure funding from banks, other finan-
cial institutions, and venture capitalists.
Clarification of recommendation 3:
Previous investment. Physicians who invested in facilities under the
Council's prior opinion and who complied with the opinion should not be
damaged by retroactive application of the Council's new opinion. To the ex-
tent feasible they should, however, begin to comply with the new opinion,
if the investor were able to recover his/her initial investment, plus a reason-
able rate of return, there would appear to be no loss or hardship. The Coun-
cil expects that physicians could achieve full compliance within three years
of the issuance of the guidelines, January, 1995.
When immediate compliance with the need and alternative investor criteria
is not practical and therefore full compliance is delayed, there is still an ob-
ligation to comply with recommendations 2.b. through 2.j.
The Chairman. Thank you very much.
Mr. Mattessich?
STATEMENT OF KEVIN M. MATTESSICH
Mr. Mattessich. Thank you, Senator. Good afternoon. My name
is Kevin Mattessich and I, of course, will rely on my formal com-
ments and would just like to highlight some of the points as sort
of a guide through them.
I am also very heartened by the fact that my comments, in light
of what the others have said today, have become somewhat redun-
dant because these are issues that, as I saw them in private prac-
tice and during a recent stint as a Federal prosecutor combatting
health care fraud, really stuck in my craw, so to speak, and for
which they were not adequate remedies at the time. If, in fact, the
earlier comments from the Justice Department and the later com-
ments that were made as to particular amendments to the bill
come true, I think that would be a very good thing.
There are two issues I want to address in the bill. I think it has
a lot of meritorious provisions and there are two things that I think
103
could be added to it that would address issues that are critical to
the containment' of health care fraud.
The first is the need to extent to all payer situations the
antikickback provisions that are now found in the Medicare-Medic-
aid regulations that prohibit kickbacks when the services are paid
with those dollars. The second is the wisdom of implementing uni-
form forfeiture provisions in the plan.
In instances of health care fraud, parties stand accused of de-
frauding debilitated individuals and depriving them of care, of in-
juring the public fisc by defrauding Medicare and Medicaid or other
Federal programs, and also defrauding private third-party payers.
I would like to describe to you some of the underlying practices
that lead to such accusations and, for the reason I am about to ex-
plore briefly, why I think that certain amendments to the plan can
help prevent those abuses.
Now, a few years ago in private practice, I had the fortune of
meeting a fellow who was quite a character, a Texan whose nick-
name was Available. He allegedly was the role model for the char-
acter in the Lil' Abner cartoon strip named Available, and he was
allegedly the original 5-percenter. What that means is that for 5
percent he would go out and get you anything — vintage car parts,
oil rig parts. You name it, he would fmd it and he would get it to
you.
In my more recent stint as a Federal prosecutor, I had the mis-
fortune of meeting a different breed of 5-percenter. This is some-
body who would go out and get you a
The Chairman. How did you meet him in private practice the
first time around?
Mr. Mattessich. a different 5-percenter. In the first case, it was
actually
The Chairman. Never mind; you don't have to tell me.
Mr. Mattessich. I don't think he would appreciate the tie-in.
At any rate, the latter 5-percenter that I have now met is en-
gaged in the dishonorable practice of referring patients to facilities
for referral fees, or what I prefer to call kickbacks. Now, the profit
motive in these schemes is clear. The 5-percenter gets his or her
cut and the health care provider is fueled by the fact that they are
going to have a steady stream of income-producing patients sent in
the door.
Under the current state of the law, again, the antikickback provi-
sions of title 42 apply and 5-percenters are prohibited from trading
Medicare and Medicaid patients like so much merchandise. On the
other hand, where the patient is not a Medicare or Medicaid pa-
tient, the services are not paid by those programs and they can be
treated in that manner.
A few examples of some of the kickbacks and the forms that they
come in. First of all, doctors may receive illicit benefits under the
guise of serving as directors of hospitals or other institutions. Al-
though appearing to represent reimbursement of legitimate, needed
services, these fees are all too frequently a means by which the in-
stitution pays for the referral of patients to the facility.
For example, a gynecologist may agree to perform all of his or
her hysterectomies at a particular hospital in exchange for being
designated as a director of the maternity ward, with few or no cor-
104
responding duties, and then paid hundreds of thousands of dollars
in director fees based upon the number of hysterectomies per-
formed and the stream of income-producing patients that is gen-
erated.
Second, institutions may also enter referral fees with other indi-
viduals or agencies occupying positions of trust with potential pa-
tients. Fees, incredibly, may be paid to school counselors, police or
court officials who are in a position to recommend, or even to order,
medical or mental health care for victims of crime or others.
Think of it. A school counselor who is responsible for counseling
teenagers with drug or alcohol problems is paid for the number of
his or her students who enter the treatment program at the paying
facility. Sometimes, these arrangements are covered up to make it
look like the counselor is providing some consulting or marketing
advice, but in reality the payments are based on a body count, and
that is the number of adolescents that are actually referred to the
facility.
A final example. Medical supply and pharmaceutical companies
may make paybacks to doctors or to others who can recommend
their equipment or prescribe their medicines, and often these pro-
grams operate like the frequent flyer programs. If a doctor writes
enough prescriptions, he can get a trip to Hawaii.
Now, the potential for abuse in these situations, I believe, is
enormous and obvious. Financial incentives skew the judgments of
those relied upon by the public, and the potential for abuse is ex-
actly what has motivated the legislature to enact antikickback stat-
utes in other contexts.
So, as I mentioned, the antifraud provisions of title 42 apply
where there are Medicare and Medicaid dollars involved, but for
millions of other citizens, however, there is not prohibition and the
behavior of the referring physicians and/or advisers being moti-
vated by undisclosed profit rather than purely the health concerns
of the patient are therefore unchecked. I urge the consideration of
extending the law to cover those situations.
Now, briefly, as to forfeiture, the President's bill, I believe, right-
fully provides for forfeiture both of properties used in the commis-
sion of a health care offense, as defined, and the proceeds of that
offense. But unlike typical criminal forfeiture laws, the proposed
language provides that after a guilty verdict, there should be a
case-by-case judicial determination as to whether forfeiture should
occur. This requirement, respectfully, is burdensome and should be
stricken.
As an attorney, I favor legislation that, in fact, requires rather
than bypasses judicial review, and that is not because I want to
generate additional fees for attorneys, but it is out a healthy regard
for the 3-tier system of checks and balances in our jurisprudence.
Where judicial review may be a shield to ill-gotten gain, the latter
legislation is not only appropriate, but it is compelled by the cir-
cumstances.
I believe criminal forfeiture is a strong and just prosecutorial tool
because it returns exactly what the felon has taken, and while
there is no doubt that an accused is entitled to a full and fair trial,
the language of the bill goes much further. It requires the court,
after the person is convicted of the crime, to determine whether or
105
not it was of a type that poses a serious threat to the health of any
person or has a significant detrimental impact on the health care
system.
I believe what does is sow a bountiful harvest for the litigious 5-
percenter, and I believe it will be treated to the spectacle of the de-
fendants bringing in their witnesses, et cetera, and dragging out
the judicial system. For those reasons, I think that the law should
be amended with respect to forfeiture.
Thank you.
[The prepared statement of Mr. Mattessich follows:]
Prepared Statement of Kevin M. Mattessich, Esq.
Good afternoon, Senators. My name is Kevin Mattessich. The Health Security Act
incorporates several important measures for combating health care fraud. Without
detracting from the Act's many meritorious provisions, I wish to comment on two
possible amendments addressing issues critical to the containment of health care
fraud: (1) The need to extend— to all payor situations— the existing federal law pro-
hibiting kickbacks in connection with Medicare or Medicaid services, and (2) the
wisdom of implementing uniform forfeiture provisions in the President's proposed
Plan.
My comments are based on experiences both as a private practitioner and as a
federal prosecutor. (My remarks, of course, are my own and do not necessarily re-
flect the views of my former employer, the Department of Justice, or my present
law firm.) My practice specialty is the investigation and litigation of commercial and
white collar fraud matters. In private practice, I have directed cases on behalf of
insurance carriers in the United States, Europe and Asia, involving allegations of
fraud and white collar crime such as insider trading, embezzlement, loan fraud, tele-
communications fraud, computer fraud and insurance fraud. More recently, as a
Trial Attorney in the Fraud Section of the Department of Justice's Criminal Divi-
sion, I was involved in health care investigations whose targets were individuals
and multinational corporations accused of bilking federal programs and private par-
ties out of hundreds of millions of dollars, i
In instances of health care fraud, parties may be accused of (a) defrauding debili-
tated individuals and depriving them of care; (b) injuring the public fisc, by defraud-
ing Medicare, Medicaid and military dependents' health care programs; and/or (c)
defrauding private third party payors. These are serious charges affecting the
health and finances of each and every American. I would like to describe to you
some underlying practices that may lead to such charges. And for the reasons I am
about to explore briefly, I believe that certain amendments to the proposed health
care legislation can help prevent such abuses.
I. EXTENSION OF ANTI-KICKBACK LAWS
A few years ago in private practice, I had the fortune to meet a Texan whose nick-
name was Available" and about whom a cartoon character in the comic strip "Lil'
Abner" is said to be based. This character was a so-called "five-percenter" : for five
percent of the purchase price, he would find anything, for anyone, anywhere — oil rig
parts, vintage car parts, routine plumbing or building supplies. His was a time hon-
ored profession; he would match a potential buyer with a potential seller and collect
a 5 percent commission if a sale were consummated.
In my more recent experience as a federal prosecutor, I had the mJ,sfortune of en-
countering a different breed of five-percenter, characters who were engaged in the
dishonorable — and all too often, marginally legal— practice of referring patients to
health care providers or prescribing treatments to patients in exchange for a refer-
ral fee or other "incentive", or what in many instances more accurately should be
called a kick-back. The profit motive in this general scheme is, sadly, two-fold. Not
only does the five-percenter receive his or her cut, but the institution — the health
care provider which pays that cut and receives a patient — is fueled by its desire to
generate profit-producing patient stays or treatments, and not necessarily by the de-
sire to serve the public's health care needs.
iThe President's bill includes many provisions that will facilitate investigations of this nature,
e.g., procedures for the sharing of grand jury information between the Civil and Criminal Divi-
sions, and clear cut standards for excluding convicted felons from federal programs.
91-727 0-95-5
106
Under the current state of the law, these schemes are prohibited, but only if Med-
icaid or Medicare services are involved. The "anti-kickback provisions" of Title 42
of the United States Code prohibit "five-percenters" from treating Medicare and
Medicaid patients like so many spare merchandise parts. These schemes have flour-
ished, however, when patients' bills are paid by either the patient or a private third
party payor.
Examples of kickbacks may include the following:
"Directorships" : Doctors may receive illicit benefits under the guise of serving as
"directors" of hospitals and other institutions. At first blush, these fees and honors
appear to represent reimbursement of legitimate and needed services. In fact, these
all too frequently are a means by which the institution is paying for the referral
of patients to the facility. Detailed records are kept for the number of in-patient re-
ferrals by each doctor, perhaps by intricate computer tracking systems, and director-
ship fees are negotiated annually based on the number of patients referred. For ex-
ample, a gynecologist who agrees to perform all of his or her hysterectomies at a
particular hospital may be designated as a "Director" of the maternity ward, with
few or no corresponding duties, then paid hundreds of thousands of dollars (based
upon the number of hysterectomies performed) in addition to fees derived as a bone
fide doctor. The hospital, in turn, is assured of a steady stream of income-producing
patients for its operating room and beds.
Referral Contracts With Other Persons in Positions of Trust: Institutions may also
enter referral agreements with individuals or agencies occupying positions of trust
with potential patients. Fees, incredibly, may be paid to school counselors, police,
or court officials who are in a position to recommend — or even order — the provision
of medical or mental health care for victims of crime or to others who may be wards
of the state. Further, union benefit administrators or therapists provided by compa-
nies may also collect such fees. Think of it: a school counselor who has responsibility
for counseling teenagers with drug or alcohol problems is paid for the number of
his or her students who enter the in-patient treatment program at a facility which
pays for such referrals. Sometimes, these arrangements are covered up by making
it appear that the counselor has been paid to perform some marketing or consulting
service, but in reality the payments are based on a "body count" : the number of ado-
lescents referred to the facility.
"Frequent Prescriber Programs": Medical supply and pharmaceutical companies
may make paybacks to doctors or other health care providers who recommend or
prescribe their equipment or products (regardless of the actual need of the patient).
Often, these programs operate like the airlines' frequent flyer programs: a doctor
who writes enough prescriptions may qualify for a trip to Hawaii. Often, too, at-
tempts are made to disguise these arrangements by requiring the doctor to submit
patient profiles so it might appear that the doctor is simply being rewarded for pro-
viding marketing demographics to the company (itself a questionable practice where
it is based purely on profit motive).
Relevance of Kickback Statute Rationale: The potential for abuse in these situa-
tions is obvious and enormous: Financial incentives skew the judgments of those re-
lied upon by the public for advice. This potential for abuse of the discretion and oth-
erwise humanitarian judgments of those occupying positions of trust relative to
those in positions of need is exactly what has motivated the legislature to enact
anti-kickback statutes in other contexts.
Of course, where Medicare/Medicaid dollars are involved, the anti-fraud provisions
of Title 42 already apply. And indeed, the manner in which many health care pro-
viders evade Title 42's prohibitions is to exclude Medicare/Medicaid patients from
consideration under their referral or "frequent prescriber" agreements. For millions
of other citizens, however, there is no such ironic check on the behavior of their re-
ferring physicians and advisers. The egregious, recurring cases — patients following
advice which is motivated by undisclosed profit rather than solely by health care
concerns — are escaping prosecution.
II. THE FORFEITURE PROVISION IN THE PRESIDENT'S BILL
The President's Bill rightly provides for forfeiture both of properties used in the
commission of a health care offense and of the proceeds of that offense. But unlike
the typical criminal forfeiture laws, the proposed language requires that after each
verdict of guilty is rendered, there be a case-by-case judicial determination as to
whether forfeiture is appropriate. I believe the requirement for an additional judi-
cial determination is unduly burdensome and should be stricken from the proposed
legislation.
As an attorney, I favor legislative provisions requiring rather than bypassing judi-
cial review — not because I wish to generate additional fees for lawyers, but out of
107
a healthy regard for the three-tier system of checks and balances ingrained in our
jurisprudence. But^ where judicial review may be used to shield ill-gotten gain, the
latter legislation is' not only appropriate, but compelled.
Criminal forfeiture of the proceeds of crime is a strong and just prosecutorial tool:
it returns what the felon has stolen. Many on the lecture circuit now deride forfeit-
ure; but the essence of health care fraud — the abuse of positions of trust — dem-
onstrates its justification.
There is no doubt that one accused of such a crime is entitled to a full and fair
trial to determine whether he or she, in fact, committed the crime. Yet the language
of Section 4532 of the Health Security Act goes much further, providing that after
a person is convicted of a Federal health care offense, a court may order forfeiture
only if it then also determines that the offense "is of a type that poses a serious
threat to the health of any person or has a significant detrimental impact on the
heath care system."
This language sows a bountiful harvest for the litigious five-percenter. After being
convicted of health care fraud, he or she will get a second bite at the judicial apple,
by making sentencing arguments that the specific crime committed did not pose a
"serious threat to the health of any person or a significant detrimental impact on
the health care system."
Respectfullv, it does not take a judge to determine that implementing a kickback
or other incidents of health care fraud cause harm to the system. This body can and
should make that determination, sending a clear beacon of advice to the industry.
The present language only gives an arguably ingenuous person, with dollars to bum,
the opportunity to tax the judicial process. (Again, the accused will have their day
in court; we are concerned here only with the penalties that will apply after a full
and fair trial and conviction.)
Even more troubling is the prospect of a convicted doctor arguing that his or her
activity did not pose a serious threat to the health of any person". My position, of
course, is that the original fraud, by its very nature, constitutes a serious threat
to the health of the defrauded person. The drafters obviously differed, but consider
the burden involved in determining whether this standard is met. Defense and pros-
ecution alike presumably would have to call expert witnesses. The expense and ef-
fort involved in such activity — at sentencing stage — would be staggering. These eco-
nomics should not be -"dsited upon the judiciary.
And most importantly: the underlying message — that conviction of the underlying
offense is not sufficiently egregious to justify forfeiture of the ill-gotten gains —
should not be visited upon the American public.
Thank you for providing me with the opportunity to express these views.
Respectfully submitted,
Kevin M. Mattessich, Esq.,
Morris, Mahoney & Miller.
The Chairman. Thank you very much. Before we go on, does the
AMA have a position on broadening the antikickback provisions
and on forfeiture expansion?
Mr. Johnson. Yes, we do. Senator. We just think you have to be
cautious about it. We think if it is genuine fraud, we ought to get
it, and you can broaden it. But some of the things are ambiguous.
Some of the things are new ways of doing business, and you need
to sit down, really, with the lawyers who make these arrangements
on both sides and find out where the real abuse is or where you
have a new way of delivering managed care or a new way of
incentivizing whomever to do one thing and the other.
It is so damn complicated today that I don't even begin to try to
understand all those rules. You have to have a lawyer who devotes
all his time to figuring out what you can pay for, what you can be
reimbursed for. Straight, dishonest kickbacks are out. If you are
paid for a referral or you are paid for providing a service, that is
it, that is fraud. We ought to extend that.
But if you are talking about marginal things in gray areas that
you need two lawyers to tell you whether that is honest or dishon-
est in the eyes of the Government, that is a mistake and that is
a waste of resources.
108
The Chairman. But that is the way it is now with regard to Fed-
eral programs, right?
Mr. Johnson. That is the way it is now, and if we can focus in
on what the real crimes are — and you can find the lawyers who do
this. The National Health Association has got a bunch of them who
can sit down and separate out what is really abuse and really
fraud and what are business arrangements that you really
shouldn't be wasting your energy, time and effort on like it was an
IRS investigation where 3 people will give you a different view.
That is our only concern.
The Chairman. How about forfeiture?
Mr. Johnson. If it is fraud, it is fine. If it is marginal stuff or
there hasn't been a clear showing that this is a bad actor, we are
not in favor of that.
The Chairman. I think you are going to lose on both.
Mr. Johnson. Well, restitution is absolutely fine.
The Chairman. No, no, no. I am talking about the requirement
that a judge sit down after the conviction, after a jury has con-
victed someone, and decide whether or not this is a serious offense,
as opposed to whether or not, like in every other proceeding
Mr. Johnson. We just waste so much time. I see it all the time
in my ofTice. We have teams of people analyze these things and the
amount of time that is spent on the marginal stuff, as opposed to
the really clear things, is just disproportionate today. There is
enough fraud out there — God knows there is enough fraud out
there that if we could focus on that and incentivize our people to
go after that
The Chairman. But what confuses me about the position on for-
feiture is this is after there has been a conviction. This is after
there has been a conviction and after there has been a determina-
tion that it is fraud.
Mr. Johnson. We have no problem with that.
The Chairman. The way the law is written now, though, after
that, unlike in any other conviction where forfeiture applies, the
judge then gets to sit down and say, well, you know, this is fraud,
it did happen, but it is a little thing, so I am not going to make
you forfeit, whereas if you do that as a businessman, the sanie
exact thing, the judge says, hey, it is fraud, the jury said it is
fraud, you have been convicted, the appeals are exhausted; it is
fraud, there is a conviction, you forfeit. So you don't have objection
to that, do you?
Mr. Johnson. No.
The Chairman. OK, all right.
Mr. Mahon?
STATEMENT OF WILLIAM J. MAHON
Mr. Mahon. Thank you, Mr. Chairman. As this is the last official
word, so to speak, I will try to keep it concise and not take too long.
The Chairman. You have all waited and I am not going to curtail
your time, and I am happy to sit here as long as you have some-
thing to say.
Mr. Mahon. Well, we appreciate the invitation to testify, and I
must say we are well aware and very appreciative of your and your
fellow committee members' longstanding concern with this problem
109
and we are delighted to see this committee resuming its activity in
this area.
The National Health Care Anti-Fraud Association, as Mr.
Mangano alluded to earlier, has, since 1985, represented a partner-
ship of private insurer antifraud operations and the public sector
law enforcement agencies who have jurisdiction to investigate and
prosecute fraud against either private or public payment prograrns.
We are not a lobbying organization. We conduct two sets of prin-
cipal activities. One is cooperative education and training, so that
within our membership we cross-pollinate the best knowledge there
is with respect to detecting, investigating, prosecuting
The Chairman. Who are your members?
Mr. Mahon. On the private sector side, we have 60 commercial
insurers and private payers. They are commercial carriers, Blue
Cross/Blue Shield plans, one third-party administrator. On the
public sector side, we work with the Department of Defense, 0PM,
the inspector general's office at HHS, the antifraud people at the
Health Care Financing Administration, the Postal Inspection Serv-
ice. We work closely with the FBI and with the U.S. attorneys' of-
fices and some of the main Justice personnel here in Washington.
The Chairman. Thank you.
Mr. Mahon. As I mentioned, our principal activities are nuts-
and-bolts education in the detection, investigation and prosecution,
both civil and criminal, of health care fraud.
Second, which we have conducted since our inception, is the le-
gally-controlled and conducted sharing of investigative information
not only between insurers and law enforcement, but most impor-
tantly among insurers or private payers themselves, the point
being that one payer needs a legitimate and safe legal channel
through which it may learn that another payer is investigating a
given provider and for what types of suspected activity.
The company cannot deny claims based on that knowledge. It
can't black-list that provider, but in a practical world it can then
decide whether it will investigate its dealings with that same pro-
vider to see if it finds evidence of the same suspected activity.
The Chairman. But this is suspected activity. This isn't proof
of
Mr. Mahon. That is correct, yes, and it goes to what I will de-
scribe in a moment as the basic nature of the problem.
The chart obviously tells the story of why the private sector's role
in addressing health care fraud is essential, in that private dollars
pay most of the Nation's health care bill. There is a lot in our pre-
pared testimony that talks about the nature and the scope and the
impact of health care fraud. Most of it echoes what most of the wit-
nesses today have had to say on those subjects, and I would second
virtually all of it, especially the idea that there is no mistaking
whose money is being stolen in the end. It may be the Govern-
ment's and the insurer's immediate loss, but it is all coming out of
the same citizen's pocket in the end.
In deference to Mr. Johnson, I would also note by no means do
we consider this to be a physician problem strictly. As has been
said, wherever in the system there is an opportunity to bill a payer,
there is the opportunity to commit fraud. It goes across the board
and it is not limited to or unique to physicians.
110
Mr. Chairman, were Senator Cohen still here, I would be doing
a "this is your life" type of thing to him. The best illustration and
the most timely one I have seen of various facets of the problem
came in today's Philadelphia Inquirer. The lead sentence of the ar-
ticle titled "Philadelphia Doctor Charged with Insurance Fraud"
says:
When a U.S. Senate committee went looking for an expert on health insurance
fraud in 1981, it called on Richard Joseph Conus. He had, after all, been convicted
of cheating health care insurers in 3 States for as much as $500,000. 'The system
is extremely easy to evade,' Conus told the committee. 'The forms I sent in were
absolutely outrageous.'
That 1981 statement came in testimony before the Senate Spe-
cial Committee on Aging, and ironically, 13 years later. Dr. Conus
still apparently could not resist. The FBI arrested him yesterday
in Philadelphia and charged him again with defrauding several pri-
vate insurers to the tune of hundreds of thousands of dollars. He
has a total of seven arrests and five convictions in three States for
defrauding Medicare and private payers since 1974.
In other aspects that have been cited today, he is said to have
deposited $2 million in foreign banks in the last several years.
The Chairman. This is a doctor?
Mr. Mahon. This is a doctor.
The Chairman. And he still has a license to practice?
Mr. Mahon. Well, he lost it and then the State of Pennsylvania
reinstated the license, for reasons unbeknownst to me at the mo-
ment. But it illustrates, as I say, the very many facets
Mr. Johnson. He is not an AMA member.
The Chairman. He is not?
Mr. Johnson. As of right now. [Laughter.]
If you lose your license ever, you don't get back in without a spe-
cial proceeding at the AMA. So I am pretty confident he is not a
member.
Mr. Mahon. As I say, having once testified to the Senate on how
easy it was and how successful his fraudulent billing career had
been, he still persisted in it over a decade later. I think it goes to
what Senator Cohen asked about whether stiffer measures are
needed and whether anything that is being discussed today rep-
resents overkill. I think it certainly does not.
At the other end of the spectrum, you have schemes like the roll-
ing labs scheme in California, the perpetrators of which will be
sentenced this June 27th in Los Angeles. That was a purely entre-
preneurial enterprise set up to defraud the Government and pri-
vate insurers that accounted for just under $1 billion in false
claims submitted during the 1980's. It resulted in the payment of
tens of millions of dollars before the payers caught on to the
scheme.
That, as I say, goes to the basic nature of the problem that you
alluded to. The system assumes honesty on the part of the parties
who are billing it. Its primary objective is to pay claims more and
more rapidly than ever before, not to detect fraud, which is a nec-
essarily secondary purpose.
Also, the typical fraud is aimed at a number of payers simulta-
neously. If you are going to steal $100,000, you realize that you are
smarter to take it in bites of $10,000 from 10 payers than you are
Ill
by being greedy and being conspicuous with any one of them. Also,
we almost never find anyone defrauding either the private or the
public sector exclusively. It tends to victimize both quarters simul-
taneously, for the reason I just mentioned.
Increasingly, the schemes that we see are multi-State in nature.
Some of the enterprises and some of the national companies that
have been implicated or convicted in schemes in the last several
years do business across State lines throughout the country.
Earlier, it was noted that the system is moving to a more man-
aged care orientation and what that implies for the change in fraud
itself and what we all have to be aware of. As was noted, today the
incentive, if you are going to commit fraud, is to ostensibly perform
more procedures for which you can bill, or perform unnecessary
tests to generate billings.
The inverse incentive, I think, is a clear opportunity for fraud.
If you are accepting an up-front payment for treating Ms. Jones for
a year, it is to your advantage to see her twice rather than 20
times in exchange for that up-front payment, if that is your inclina-
tion to do less for the money.
We also see in managed care a higher incidence or a higher po-
tential for kickbacks for referrals to specialists beyond the gate-
keeper physician in a typical managed care plan either to special-
ists outside the network or within the network. We see, too, a high-
er potential for schemes involving the establishment of phony man-
aged car companies themselves whose objective will be to rake in
the up-front capitated payments and then disappear from sight
with the money.
There are some advantages, theoretically, to managed care. In-
surers, by virtue of selecting certain providers to comprise their
networks, should be able to apply clean-record type criteria when
it comes to fraud. It remains to be seen whether they will be able
to exercise the kind of leeway they would like to see there to select
up front or to inject from their networks providers whom they find
are engaged in fraud.
There are, Mr. Chairman, a number of obstacles that the private
sector has historically faced in addressing this problem, and we are
delighted to see that the Clinton bill and some of the other ap-
proaches that have been proposed tend to address most of these
concerns.
One is the fact that the private sector cannot sanction providers
from doing business with private payers. They have to live with
anything that they have not proven is fraud. Second, as you noted,
it is not illegal to pay kickbacks for referrals for private sector busi-
ness unless State law somehow outlaws it. It is not illegal to waive
a patient's copayment or deductible payment when used as a mar-
keting device. What we see is the waiver of copayment used as a
hook to lure patients into what turn out to be free physical exam
schemes or other fraudulent billing schemes.
The private payers in investigating fraud run the risk of civil li-
ability to the people whom they are investigating. It is not uncom-
mon to find, upon an insurer investigating a provider or referring
a case for prosecution, for that provider to at least threaten, if not
actually file, a civil tort suit for defamation, malicious prosecution,
invasion of privacy, and so forth.
112
Some State laws give private payers a reasonable degree of im-
munity from that civil liability so long as they are acting in good
faith in investigating and reporting suspected frauds. In other
States, there is no immunity protection and, as I mentioned, many
of the investigations cross State lines, which tends to render the
immunity laws somewhat impractical.
Finally, the Federal Government enjoys the power of the False
Claims Act, for which the private sector has no analogous legal
tool. We have suggested, and we still suggest, that either in place
of or in addition to the type of False Claims expansion and qui tam
provisions that are in the administration's bill, the private sector
could very well use a carefully tailored civil cause of action at the
Federal level.
Right now, I am aware of private payers who are suing provider
companies in a number of States simultaneously for fraudulent ac-
tivity. Unless one files a racketeering suit against a multi-State
scheme, one must go State by State with civil actions in order to
pursue civil recoveries. We think it would be much more effective
and cost-efficient for all concerned, and would have some deterrent
value, to give private payers the right to sue civilly in Federal
court.
Mr. Chairman, I have attached to our testimony an assessment
by our general counsel that represents his personal point of view
of the antifraud implications of the Health Security Act's fraud and
abuse title. I would note the biggest question surrounding how we
approach fraud and abuse is whether it will be done as part of re-
form or by virtue of putting health care fraud on a faster legislative
track. In either case, I think it is evident, and we certainly believe
that we need more effective measures. We need comprehensive
measures, and we could all use them sooner rather than later, vis-
a-vis health care reform.
I would also note that 20 States last year enacted new laws per-
taining specifically either to health insurance or workers com-
pensation insurance fraud. They range in scope from creating de-
fined penalties to establishing State insurance fraud bureaus with
varying degrees of investigative and prosecuting responsibility, but
the States are acting quickly. Those measures are all to the good,
but again I think the argument must be made that it is increas-
ingly a Federal crime in nature and that to effectively deter it na-
tionwide we need the Federal focus on it.
One final point, if I may, Mr. Chairman. When we look at health
care reform itself, we all must keep our eyes open, I think, about
what happens historically when we establish new health care bene-
fits or broaden existing benefits. We have seen it in home infusion,
in mental health in the last decade, and in other areas.
When benefits are created or expanded, for a time they tend to
generate money, which in turn attracts fraud schemes. We often
create cottage industries in fraud for a time until the private and
public payers catch up to the fact that people are abusing these
new benefits.
If we look at the areas where expansion is planned under health
care reform— mental health, prescription drugs for Medicare, and
home care — those three areas all have relatively high-profile fraud
problems at present. No one is saying don't expand the benefits,
113
but as a general rule we need to keep our eyes open to the poten-
tial for increased fraud when we provide new benefits.
Mr. Chairman, thank you for your indulgence and your time. I
will conclude and be happy to answer any questions.
[Mr. Mahon submitted the following materials:]
Prepared Statement of William J. Mahon
Mr. Chairman, Members of the Committee. The National Health Care Anti-Fraud
Association appreciates your invitation to testify today, and we commend your con-
tinuing attention to a critical problem with which members of this Committee have
been concerned for some time — and one on which virtually all interested parties
agree that strong action is needed.
Estabhshed in 1985, NHCAA is a unique membership organization that combines
the anti-fraud efforts of private-sector health care payers with those of the public-
sector agencies responsible for investigating and prosecuting health care fraud.
NHCAA is not a trade association, nor is it a lobbying organization. Rather, it is
an issue-based Cooperative association whose member organizations account for
most of the private and public health insurance benefits paid in the US, and ^yhose
objective is to improve the private and public sectors' ability to detect, investigate,
prosecute (both civilly and criminally) and, ultimately, prevent health care fraud.
From the private sector, NHCAA numbers 59 commercial and not-for-profit insur-
ers. The public-sector members of the Association's governing board are:
• The Deputy Inspector General for Investigations and the Assistant Inspector
General for Civil Monetary Penalties of the Office of Inspector General of the
Department of Health and Human Services;
• The Assistant Inspector General for Investigations of the Department of De-
fense;
• The Deputy Chief Inspector for Criminal Investigations of the US Postal Inspec-
tion Service;
• The Senior Auditor in Charge of the US Office of Personnel Management;
• The Deputy Director of the Office of Medicare Benefits Administration in the
Bureau of Program Operations of the Health Care Financing Administration;
• The Director of the Florida Medicaid Fraud Control Unit; and
• The Medicaid Fraud Counsel of the National Association of Medicaid Fraud
Control Units.
In addition to those officials and agencies, NHCAA works closely with the Head-
quarters and Field health care fraud units of the Federal Bureau of Investigation
and with various United States Attorneys' offices and Department of Justice Head-
quarters personnel.
We also number nearly 700 individual members, from the ranks of health care
insurers, third-party administrators, self-insured corporations and from a wide vari-
ety of other state and federal law enforcement organizations. [See Appendix I,
NHCAA Fact Sheet.]
NHCAA's principal activities comprise: (1) cooperative education and training in
the specifics of health care fraud detection, investigation, prevention and prosecu-
tion; (2) the sharing of investigative information among insurers and also between
insurers and law enforcement agencies; and (3) communication with a wide variety
of interested parties with regard to the nature, scope and impact of health care
fraud and the development of more effective measures to combat the problem.
Although individual patients can, and do, commit health care fraud, our principal
focus as an organization is on claims fraud committed by health care providers, sim-
ply because it is they who, if they are inclined to defraud third-party payers, are
best equipped to do so on a broad scale and an ongoing basis.
We have been asked today to offer the private sector's perspective on health care
fraud and on proposed legislative approaches to the problem. The private payers
perspective is essential to the discussion for three reasons:
First, according to 1992 figures from the Health Care Financing Administration,
most of the nation's total health care bill— 56 percent— is paid with private-sector
dollars (37 percent by insurers and 19 percent by consumer out-of-pocket payments).
Second, experience clearly shows us that the health care provider who is defraud-
ing Medicare, Medicaid, CHAMPUS or other government programs in all likeUhood
is also defrauding private payers — and vice versa.
Third, although insurers and the government may be the immediate targets of
health care fraud, we and all our fellow citizens are its ultimate victims — as con-
sumers and patients who pay health insurance premiums, co-payments and
114
deductibles; as employers who purchase health coverage for their employees; and as
taxpayers, where we are doubly victimized when public payment programs are de-
frauded.
Health care frauds run the gamut — from individual providers who routinely fab-
ricate or very consciously misrepresent claim information in order to receive third-
party payments (or greater payments) to which they are not entitled; to medical
equipment and home health businesses that prey on the Medicare program and pri-
vate payers; to entities such as "rolling lab" schemes established solely as vehicles
for committing fraud within the health care arena; to institutional frauds by hos-
pitals, laboratories and clinics, all or part of whose basic business operation revolves
around the systematic commission of fraud.
What these various schemes have in common is the criminal and quite deliberate
intention to defraud [See Appendix II, NHCAA Guidelines to Health Care Fraud].
As such, we must emphasize our belief that they represent the actions of a small
proportion of health care providers and others in the field. Unfortunately, though,
given the enormous amount of money at play in our health care system, the actions
of even a tiny dishonest minority can inflict massive financial damage on both pri-
vate and public payers.
One Florida physician and his spouse, for example, were sentenced to prison after
pleading guilty to having filed more than $800,000 in false claims with private pay-
ers and Medicare. In a widely reported 1992 case, a clinical laboratory firm pled
guilty to filing fraudulent claims and is paying the federal government and several
state Medicaid programs a total of more than $110 million. Meanwhile, the largest
ongoing scheme identified to date — the so-called California rolling lab case, to which
the perpetrators pled guilty and will be sentenced this June 27 — accounted for near-
ly $1 biUion in false claims against private and public programs during the 1980s.
How much do we lose in all?
By its nature, the amount lost to any ongoing fraud can never be quantified to
the exact dollar and thus must be estimated in an educated context. In that context,
NHCAA estimates the loss to outright fraud at between 3 percent and perhaps as
much as 10 percent of what we spend as a nation on health care each year.
In 1994, then, when the Department of Commerce estimates that our health care
expenditure will total $1,006 trillion, that translates to a minimum loss to outright
fraud of at least $30 billion— and in all likelihood substantially more, perhaps as
much as $100 billion.
The bottom line: Even by conservative estimates, health care fraud is costing us
tens of billions of dollars at a time when Congress, the Administration, the states
and the public are struggling with the complex questions of funding various health
care reform proposals.
How are such losses possible?
First, and as a general observation, they stem from the efforts of a small propor-
tion of providers to defraud a system that rests on an assumption of honesty and
thus is designed to pay health care claims efficiently and — often by statute — more
rapidly than ever before. In that context, claims payers are being called on both to
pay claims faster and faster, AND to put a stop to fraud in the system — two de-
mands that are not easily reconciled.
Putting a stop to a given fraud means first detecting it through one or more of
the various means employed for that purpose; investigating it with regard for due
process; in the private sector, involving law enforcement and prosecutorial authori-
ties at the appropriate stage; and in the case of prosecutions, proving the case.
Detecting most fraud is itself no easy matter, in that on face value, any one fraud-
ulent claim may appear perfectly legitimate. Generally, it is only when fraudulent
claims surface as part of a given pattern, or when the payer's attention is otherwise
called to them, that they become suspect.
In addition, rarely do fraudulent providers victimize only one payer at a time. On
the contrary, they generally — and quite deliberately — spread their activity among
any number of payers simultaneously, the better to remain inconspicuous and thus
prolong the detection process with each one while reaping the proceeds.
The investigation and prosecution processes also present the private-sector with
a number of obstacles, both real and perceived.
First, actions that are illegal under a federal program are not always illegal when
private payers are the target: for example, the payment of "kickbacks" for referral
business which has a snowball efi'ect on the volume of claims; or the waiver of the
patient's insurance co-payment when used systematically as a "free-service" market-
ing hook with which to lure patients into fraudulent-billing schemes.
Second, the government enjoys two very effective enforcement tools for which the
private sector has no legal counterparts: the ability to sanction fraudulent providers
from participation in a given health plan, and the legal weight of the federal civil
115
False Claims Act, which imposes heavy civil penalties on any individual or entity
fiUng a false claim.against a government payment program.
Third, insurers referring cases for criminal investigation and prosecution often
confront the very real hierarchy of law enforcement resources and priorities, where
health care fraud cases must be weighed according to their nature and financial di-
mensions.
Fourth— although the sharing of case information and aggressive investigation are
essential to the early detection and effective prosecution of health care fraud — insur-
ers conducting investigations, exchanging case information and prosecuting cases in
good faith, expose themselves to widely varying degrees of potential civil tort liabil-
ity to the subjects of those investigations or prosecutions (e.g., for defamation, inva-
sion of privacy, malicious prosecution).
Some state laws grant insurers relatively strong immunity from such civil liability
in that good-faith investigative information-sharing and reporting activity; in other
states, however, they receive no such protection at all. Similarly, the value of state
immunity laws is at best limited with respect to the increasingly common cir-
cumstance of multi-state or nationwide fraud investigations. In that context, they
must continually consider the risk of significant lawsuits— at best costly, even if
without merit — in their aggressive pursuit of fraud cases.
Finally, private payers also face the uncertainty that a successful prosecution will
result in a recovery or restitution of funds lost to the fraud. The absence of such
reasonable assurance represents yet another factor that insurers must weigh in pur-
suing a given case.
In the last two years, several members of Congress — including the Chairman and
two other members of this Committee — have introduced health care fraud bills rep-
resenting a variety of philosophic and practical approaches to the problem. Today
several of the health care reform plans before Congress incorporate similarly varied
anti-fraud proposals. (In 1993, meanwhile, 20 states enacted new laws pertaining
specifically to health insurance fraud, and more are doing so this year.)
Obviously, the adoption of a given health care reform plan will hinge on many
issues far beyond its particular anti-fraud measures, and it is not NHCAA's role to
comment on those overall reform issues. From our anti-fraud perspective, however,
we ofier the following observations:
First, we must adopt more efi'ective measures against health care fraud — whether
as part of any health care reform plan or via independent legislation.
Here we must consider the tradeoff involved in tying new health care fraud meas-
ures to the health care reform effort— a step that would delay their effectiveness
pending agreement on, then enactment and implementation of any reform plan—
versus the merits of addressing fraud sooner through independent legislation writ-
ten so as to accommodate reform-related structural changes in the health care sys-
tem.
Second, we must acknowledge that while the nature of health care fraud will cer-
tainly evolve as does the health care system itself, fraud will not be restructured
or reformed out of existence. At first glance, for example, "managed-care" models of
health care delivery and payment pose a variety of new challenges from an anti-
fraud standpoint:
• An inverse incentive, under capitated payment plans, to underserve patients'
medical needs: i.e., to provide less treatment than the patient requires in ex-
change for the fixed payment;
• A potentially higher incidence of kickbacks for referrals from "gatekeeper" phy-
sicians to specialists either inside or outside a given network of providers; and
• A higher potential for schemes involving the creation of phony managed-care
entities for the purpose of stealing up-front treatment fees.
Of course, the managed-care environment also features certain theoretical advan-
tages when it comes to fighting fraud — for example, the contractual ability to select
"better" providers at the outset and to eject from one's network any found to be en-
gaged in fraud.
We can be sure, however, that wherever more than $1 trillion changes hands an-
nually, some will always try to steal from the system. Our responsibility is to under-
stand how fraud itself will continue to evolve and to better protect the system ac-
cordingly.
Finally, any truly effective new steps against fraud not only will recognize its irn-
pact on private payers, but will also take advantage of the private sector's experi-
ence and resources as a partner in fighting the problem.
Thus NHCAA suggests that any effort to maximize the private sector's effective-
ness in fighting health care fraud encompass the following points:
116
• The creation of the specific federal crime of health care fraud and related pen-
alties;
• The acknowledgment of the need to assemble and share information, not only
on "adverse final actions" against fraudulent health care providers, but also on
active fraud schemes that are under investigation; and consequently
• The standardization at the federal level of immunity from civil liability for pri-
vate payers' good-faith sharing of investigative information and reporting to law
enforcement on suspected frauds, based on the knowledge that such activity is
essential to the early detection, effective investigation and successful prosecu-
tion of typical fraud schemes;
• The provision of a federal civil cause of action, analogous to the government's
civil False Claims Act, for private-sector victims of health care fraud, to enable
private payers to pursue recoveries more effectively through civil suits at the
federal level;
• The preservation (if not the enhancement) of private payers' standing with re-
spect to court-ordered restitution of fraud proceeds in criminal convictions or to
the government's distribution ot assets seized in health care fraud cases;
• The extension to private-sector health care dealings of the illegality of kickbacks
for referrals or arrangements for the provision of health care services (with ap-
propriate exception of any financial incentives seen as legitimately furthering
the public-good purpose of managed-care health care delivery arrangements) ;
and
• Provisions for the incorporation in electronic-claims dealings of appropriate
technical safeguards against fraud — an area that, like managed care, represents
both significant new problems and potentially improved opportunities with re-
spect to the detection of fraud.
As outlined in the accompanying memorandum by NHCAA's General Counsel, the
Fraud and Abuse title of the Clinton Administration's Health Security Act rep-
resents a comprehensive approach to fraud that, commendably, addresses many of
the aforementioned points. [See Appendix III, The Anti-Fraud Implications of the
Clinton Health Care Proposal.]
It does not, however, provide a federal civil cause of action for private payers; nor
does it explicitly address the need to encourage private payers to share investigative
information on active frauds by providing a reasonable degree of immunity from
civil liability for the good-faith exchange of such information.
By its nature, the Health Security Act's Fraud and Abuse title also reflects the
content and is tied to the legislative fortunes and timetable of the overall reform
Act (calling, for example, for the Attorney General and Secretary of Health and
Human Services to act "not later than January 1, 1996." ) In that context — and
given the magnitude of our estimated annual loss — one must at least examine the
option of placing improved anti-fraud measures on a faster legislative track.
Alternatively, should the final product of Congressional debate on health care re-
form differ fundamentally from the Administration's overall plan, we must ensure
that any integral approach to fraud is tailored appropriately.
Again, we commend the Committee for its thorough examination of this problem
and the realization that its solution not only must involve the private sector, but
must build on private payers' experience and their direct interest in fighting health
care fraud more effectively.
Thank you very much for this opportunity to comment. NHCAA will be pleased
to assist the Committee further in any way it deems helpful.
117
NHCAA
NATIONAL HEALTH CARE ANTI-FRAUD ASSOCIATION
FACT SHEET
Founded in 1985 by several private hcallh insurers and federal/stale law enforcement officials, the National Health Care Anti-Fraud
Association (NHCAA) is a unique, issue-based organization compnsing private- and public-sector individuals and organizations
responsible for the detection, investigation, and prosecution of health care fraud.
MISSION STATEMENT ,
Purpose: To improve the detection, investigation, civil and criminal prosecution, and prevention of health care fiaud.
Goals: • [establish and maintain a pro-active stance in the fight against health care fraud
• Conduct national seminars to educate the public and pnvate sectors in effective methods of combatting health
care fraud.
• Expand the investigative capabilities of health care reimbursement organizauot'S through education in the detection,
investigation, prosecution, and prevention of health care fraud.
• Provide an information-sharing network, with appropriate safeguards, to aid in the investigation of health care fiaud.
• Assist law enforcement agencies in their investigation and prosecution of health care fraud,
ANNUAL TRAINING CONFERENCE
Each year. NHCAA conducts a 3-day educational conference featuring training workshops on a wide variety of anti-fraud topics and
addresses by prominent leaders in' the field. Future Annual Conferences are scheduled as follows:
1994: November 13-16 Hyatt Regency Hotel - New Orleans, Louisiana
1995: November 12 - 15 Marriott Hotel - Marco Island, Rorida
MEMBERSHIP
Corporate Membership is open to private for-profit or not-for-profit health care reimbursement organizations approved for membership
by the NHCAA Board of Governors Individual Membership is open to persons occupying managerial, supervisory or professional
positions in such reimbursement organizations; in local, state or federal law enforcement, prosecutorial or regulatory agencies; in
professional associations or professional disciplinary organizations approved for membership by the Board of Governors or by the NHCAA
Membership Committee.
PRIVATE SECTOR
Founding Corporate Members
Aetna Life Insurance Company
CIGNA
LiiiploycrN Hcallh Insurance
The Guardian
MElLlITi
Tlic Mulu;il of Omaha Companies
Pennsylvania Blue Shield
The Travelers Companies
NHCAA 1255 Twenty-Third Street. N W • Washington. DC 20037-1174 • (202) 659-5955 • FAX (202) 833-3636
118
Corporate Mnmt>ers
Allmcnci FiMiicidI
Aineritap Kepiibhc Insurance
Vi1;ansas RIup Cross/Blue Shield
blue CrosvUluc Shield AssocialiOii
Blue Cross/Blue Shield of Conncclicul
Blue Cro.ss/B!ue Shield of Florida
Blue Ciosi-'Biue Shield ol Georgia
IllueCrosJBlue Shield of Illinois
Blue Cio; s.Hluc Shield of Maryland
Ul'jc Cross/Blue Shield of Michigan
Bije Crosi/Blue Shield of the National
Capilai Area
HIucCrosi'Blue Shield of New Hampshire
BIlc Cros<i1Hue Shield of Nev/ Jersey
Biue Cruss/Blut Shield of ihc Rochester
(NY) ^rcs
Blue Cross/Blue Shield of Texas
Blue Cross/Blue Shield of Virginia
Blue Cross of Washington & Alaska
Blue Cross of Western Pennsylvania
Blue Shield of California
CalFarm Life Insurance Co.
Chubb LifeAmenca
Community Mutual Blue Cross/
Blue Shield
Delta Dental Plan of California
DelU Dental Plan of Michigan
Bmpirc Blue Cross/Blue Shield
Federated Mutual Insurance Co.
Foundation Health Federal Services
Gertcral American Life
Golden Rule Insurance Co
The Guardian
Hawaii Medical Service Association
Independence Blue Cross
John Deere Health Care
King County Medical Blue Shield
Massachusetts Mutual Life
National Travelers Life Co.
New York Lite Insurance Co.
North American Benefits Network, Inc.
Northwestern National Life
Insurance Co.
Phoenix Home Life Insurance Co.
PioiKyr I i^e Insurance Co.
Piiysicians Health Services
Principal Financial Group
Prudential Insurance Co. of America
Time Insurance Co.
Trustmark Insurance Co.
The United States Life InsuraiKe Co.
United Teacher Associates Insurance Co.
Washington National Insurance Co.
WEA Insurance Corp
WellPoint Health Networks Inc.
Wisconsin Physicians Service
PUBLIC SECTOR
Agencies represented on NHCAA Board ol Governors
Ronda Medicaid Fraud Control Unit
National Assn. of Medicaid Fraud
Control Units
US Department of Defense.
Office of Inspector General
US Dept. of Health & Human Services
• Health Care Financing
Administration
• Office of Inspector General
US Office of Pereonnel Management,
Office of Inspectoi GeneraJ
US Postal Inspection Service
INDIVIDUAL MEMBERS
NHCAA has over 650 individual meinbers from private insurance carriers, not-for-profit health insurance plans, health care reimburi-
emenl organizations, and slate and federal law enforcemenl and regulatory agencies.
HEALTH BENEFITS PAID
In 199.t NHCAA Corporate Members accounted for an estimated $110 rjlLLION in private-sector group and individual heal.n
benefits paid, not including benefits paid on behalf of self-insured or government progiams.
1994 OFFICERS, EXECUTIVE COMMITTEE & STAFF
Chairperson
Steward E Uhler
Director of Special Invcsligalions
Pennsylvania Blue Shield
Camp Hill. PA
Chairperson-Elect
Jnyce L Hansen
Assistant Vice President
Northwestern National Life
Minneapolis, MN
Vice Chairperson
Michael R Abriola
Assistant Vice Presidcnl
New Yod Ufc
New Yori,. NV
Secretary
T^.nmai J O'Connor
Assistant Vice President
Miss Mutual Life
Spnngtield. MA
Treasurer
Joltn G Morm. Jr
Dircclor
rionda Medicaid Fraud Conlrol Unit
Tallah.xsS4:c. FL
Members
James L Garcia
Director of Employee Benefits
Health Insurance Tracking Unit
Aetna Life & Casualty
Hartford. CT
Palricia A. Ingeno
CIGNA
Bloomficld. CT
John Mattoy
Director of Cost Containment
Employee Health Insurance
Green Bay. Wl
James E Penneila
Second Vice President
Mutual of Omaha Comp.inies
Omaha. NF.
l^rry D Morey
Deputy Inspector General
For Investigations
US Depl of Health & Human Svcs
Office of Inspector General
Washington. DC
Jimmy W. Riggs
Direcior/lntcmal Audit
Blue Cross/Blue Shield of the
National Opital Area
Washington. DC
Edward P. Hanselmann
Manager/Naiional Anti-Fraud Division
The Pnidenlial
Iselin. NJ
Staff
Executive Director
William J Mahon
Director of Education/Member
Services
Barbara M uiRock
Director ol Administration
Elizahelli A Ij^udy
Administrative Assistant
Kmihi-riyA Polh
General Counsel
Thomas W fi.-u-.ier
Kirk J Nahrr
Wiley. Rem <^^ l-ic'ding
^Vashing'')!'. IX'
I'M I sit): 1 S ll'l-
119
NHCAA
NATIONAL HEALTH CARE ANTI-FRAUD ASSOCIATION
ADOPTED BY THE
NHCAA BOARD OF GOVERNORS
NOVEMBER 19, 1991
Health care fraud-is an intentional deception or misrepresentation that the individual or
entity makes knowing that the misrepresentation could result in some unauthorized
benefit to the individual, or the entity or to some other party.
The most common kind of fraud involves a false statement, misrepresentation or
deliberate omission that is critical to the determination of benefits payable. Fraudulent
activities are almost invariably criminal, although the specific nature or degree of the
criminal acts may vary from state to state.
The variety of fraudulent reimbursement and billing practices in the health care area is
potentially infinite. The most common fraudulent acts include, but are not limited to:
T278
Billing for services, procedures and/or supplies that were not provided.
The intentional misrepresentation of any of the following for purposes of
manipulating the benefits payable:
a. The nature of services, procedures and/or supplies provided;
b. The dates on which the services and/or treatments were
rendered;
c. The medical record of service and/or treatment provided;
d. The condition treated or diagnosis made;
e. The charges or reimbursement for services, procedures, and/or
supplies provided;
f. The identity of the provider or the recipient of services,
procedures and/or supplies.
The deliberate performance of unwarranted/non-medically necessary services for
the purpose of financial gain.
NHCAA 1255 Twenty-Third Street. N W • Washington. D.C 20037-1174 • (202) 659-5955 • FAX (202) 833-3636
120
The Anti-Fraud Implications of the Clinton Health Care Proposal, i
Submitted by Thomas W. Brunner and Kirk J. Nahra2
The Clinton Administration health care reform proposal contains an elaborate sec-
tion entitled "Fraud and Abuse." While the fraud and abuse provisions have not
been a focal point of debate within the Clinton Administration, the plan includes
a number of creative and aggressive proposals to fight fraud. With some attention
by knowledgeable parties, this legislation can represent a significant opportunity to
improve the investigation, detection and prosecution of health care fraud.
The CUnton anti-fraud program has three primary goals: (1) to provide a more
coherent framework for civil and criminal investigative and enforcement efforts in
the health care fraud area; (2) to integrate "private" third-party payers into the fed-
eral civil and criminal enforcement scheme; and (3) to broaden the civil and criminal
sanctions available to fight health care fraud. Obviously, the operation and effective-
ness of these proposals will depend in large part on the fate of the overall health
care reform package; while the proposals typically make sense if the overall Clinton
plan is adopted, some of the provisions would be substantially less applicable under
other reform proposals. Because it is likely that the Clinton plan will undergo sub-
stantial legislative revision, the logic of these proposals will need to be reexamined
as the legislation evolves. Moreover, to date, it is clear that the anti-fraud proposals
have been almost an afterthought in the overall debate. This is likely to continue.
It will be important to monitor these provisions carefully as they evolve, to ensure
that the overall anti-fraud program that eventually emerges fulfills the promise of
the current Clinton anti-fraud proposals.
A. establishment of all-payer health care fraud and abuse control program
The centerpiece of the Clinton anti-fraud plan is the creation of an "all-payer"
health care fraud and abuse control program (Part 1, Sec. 5401),3 to be established
jointly by the Department of Health and Human Services (acting through the In-
spector General's Office) and the Department of Justice. This program is intended
to be an organized, coordinated law enforcement effort to fight health care fraud. ^
A significant problem with this anti-fraud program arises immediately. The HHS
Secretary and the Attorney General (the program directors) are to establish this
program "[n]ot later than January 1, 1996." Sec. 5401(a). Accordingly, the plan will
have no significant effect on ongoing anti-fraud efforts until that time.s Given sub-
stantial losses to fraud each year, this delay is not acceptable to those interested
in fighting fraud. Moreover, because there is more nearly a consensus as to the need
for changes in the anti-fraud enforcement program than in the specific parameters
of the overall health care reform plan, independent anti-fraud legislation may move
more quickly than the rest of the health care reform package.
The goal of the all-payer program is threefold:
• To coordinate law enforcement functions with respect to the prevention, detec-
tion and control of health care fraud and abuse;
• To conduct audits and investigations in relation to the deUvery of and payment
for health care services; and
• To facilitate the enforcement of various statutes applicable to health care fraud
and abuse.
In creating this program, the HHS Secretary and the Attorney General are in-
structed to consult with and share data and resources with federal, state and local
law enforcement agencies, state Medicaid fraud control units and the state agencies
responsible for Ucensing of health care providers. Sec. 5401(b). The officials also are
1 This memorandum has been prepared by the authors at the request of the National Health
Care Anti-Fraud Association All opinions expressed herein represent the view of Wiley, Rein &
Fielding and do not necessarily reflect the view of NHCAA or any of its member individuals
or organizations.
2The authors are attorneys with the law firm of Wiley, Rein & Fielding in Washington, D.L.
They represent the National Health Care Anti-Fraud Association, the National Insurance Crime
Bureau and various insurers and other third-party payers in a wide range of matters related
to insurance fraud.
3 All references to the Clinton plan are to sections of the legislation as introduce. Other ref-
erences in this Memorandum are to H.R. 3080, introduced by Congressman Michel (R-Ill.), S.
491, introduced by Senator Wellstone (D-Minn.), the Cohen Amendment, introduced by Senator
Cohen (R-Me.), H.R. 3222, introduced by Congressman Cooper (D-Tenn.) and S. 1770, introduced
by Senator Chafee (R-RI). The Cooper bill does not contain a fraud and abuse section.
"The Michel proposal creates a similar coordinated program.
5 The Chafee plan establishes a similar program no later than January 1, 1995.
121
instructed to consult with and share data with "representatives of health alliances
and health plans." Sec. 5401(c). This provision reflects an understanding of the di-
versity of victims and investigators of health care fraud, as well as a recognition
of the private payer expertise in this area.
In structuring and implementing this program, the HHS Inspector General and
the Attorney General are authorized to carry out a number of functions. In particu-
lar, they are authorized to conduct, supervise and coordinate audits, civil and crimi-
nal investigations and other reviews of the overall anti-fraud program. Sec.
5401(d)(1). They also are authorized to obtain access to all records of health alli-
ances and health plans relating to ongoing investigations or the imposition of sanc-
tions involving health care services. Sec. 5401(d)(2).
This first function is simply a reiteration of the role of the directors in this
scheme. The second is a substantial change, implicating a number of private sector
concerns. By statute, the government would be allowed to have access to
all. investigative records and sanction information from all payers, public and pri-
vate alike. This would substantially increase the flow of investigative information
to the government The goal of this provision is to allow government law enforce-
ment officials to have direct access to private sector investigative information.
Again, the provision demonstrates the benefits that law enforcement receives from
private sector information. Because of the lack of reciprocity, either required or dis-
cretionary, however, this information exchange is likely to continue as a one-way
street, with little information flowing to private sector investigators.
To facilitate insurers' provision of this information to the government, the plan
also provides a qualified immunity for certain information disclosures. Sec. 54(3 1(e).
Incorporating the immunity provisions of the Social Security Act, persons providing
information to the program directors "in conjunction with their performance of du-
ties" under the program will receive this qualified immunity. Sec. 5401(e); see also
42 U.S.C. 1320c-6(a).6
This federal-level immunity is an important step forward. Under the Social Secu-
rity Act, no persons providing information shall be held "to have violated any crimi-
nal law, or to be civilly Hable under any law" unless they have provided information
unrelated to their performance of duties or unless the information was false and the
person providing information "knew, or had reason to believe, that such information
was false." 42 U.S.C. § 1320C-6.
By incorporating the Social Security Act provision, this immunity statute fills
some of the vacuum left by the patchwork quilt of current state immunity statutes.
These state statutes provide varying levels of protection in certain states and may
provide no significant protection in multi-state investigations. The recognition of the
need for uniform federal protection is important, and may create the opportunity for
broadening the available protection once this Federal line is crossed. ^^
Nonetheless, there are a few important issues to resolve. First, it will be useful
to clarify the meaning of the phrase "performance of duties." Because the Clinton
plan contemplates a blending of the public and private payer systems, this phrase
should be interpreted broadly so that all activities involved in both anti-fraud and
ongoing participation in the health care payment system will be covered. It will be
important to ensure that all anti-fraud activity falls within the immunity.
Second, the immunity also should extend to provision of information to all law en-
forcement officers, not just those connected to the administration of the health care
system, to encourage cooperation with these law enforcement officials. In addition,
it would be useful for this immunity to apply to exchanges of information between
private sector fraud investigators, as the private sector investigators often are the
first wave of defense against fraud. The statute needs to apply not only to potential
violations of federal and state statutes, but also to state common law claims (e.g.,
defamation, malicious prosecution, invasion of privacy). 8
Next, the threshold level for providing information needs to be clarified. Because
of potential liability concerns, private sector entities need to understand exactly
when in an investigation this information must be provided; the earlier in the proc-
ess, the less likely the information is to be complete or reliable (and the greater the
burden on those who must provide information).
6 The Chafee bill provides similar immunity protection.
■7 The Chafee proposal creates a national database for health care fraud information. It pro-
vides immunity as to all submissions made to this database.
8 The proposal as it now stands provides immunity from federal statutory claims, such as
§ 1983 claims, that could be made based on cooperation by insurers with the government or
other activities as a potential "state actor." Given the increased public/private cooperation envi-
sioned by the overall health care reform plan, the likelihood of this type of suit otherwise would
increase.
122
Last, the exception for provision of false information must not prove to be a sig-
nificant loophole. Many of the current state immunity statutes revoke immunity
protection where a person acts with malice or bad faith. In these instances, the
mere allegation in a complaint of these motives may be sufficient to remove the im-
munity. This immunity standard should be strengthened, by requiring that any alle-
gation of knowledge of false information be required to be pled "with particularity,"
a term of art under the Federal Rules of Civil Procedure, Rule 9(b), so that there
must be allegations of specific behavior beyond that normally required in a com-
plaint. This immunity protection needs to extend not only to claims by providers
that are the targets of investigations but to claims by patients whose confidential
information might be released. 9 Because the statute requires provision of this infor-
mation, private sector entities should he protected from all liability for claims aris-
ing from this statutory mandate.
The Clinton plan also addresses how the new program will be paid for, albeit in
vague terms. The proposal states that "in addition to" other amounts appropriated
for health care anti- fraud and abuse activities, the program is entitled to additional
amounts that will be necessary to enable the program directors "to conduct inves-
tigations, audits, evaluations, and inspections of allegations of health care fraud and
abuse," and otherwise carry out this program. Sec. 5401(f).
The plan is not clear concerning what these additional appropriations would cover
or where they would come from; nor are the "additional amounts" necessary to con-
duct the activities of this program specified. This provision apparently aims to pro-
vide legislative authority for additional investigative personnel, without being too
specific. 10
Section 5402 of the plan creates an additional funding mechanism, the "All-Payer
Health Care Fraud and Abuse Control Account" This account is basically a trust
fund that will provide resources for the fight against health care fraud and abuse.
The account will be made up of (1) all criminal fines in cases involving federal
health care offenses (defined below); (2) penalties and damages imposed under the
Federal False Claims Act relating to the provision of health care items and serv-
ices; n (3) administrative penalties and assessments under the civil monetary pen-
alties provisions; (4) amounts obtained through the forfeiture of property by reason
of a federal health care offense; and (5) any money gifts or bequests made to the
account Sec. 5402(a). 12
These funds may be used by the directors (without involvement of the appropria-
tions process) to carry out the anti-fraud program, including the costs of prosecuting
health care fraud matters, the costs of investigations and the costs of other audits
or inspections. Sec. 5402(b). This account is supposed to supplement the agencies'
anti-fraud operating budget, not supplant it It represents an effort by the govern-
ment to make health care fraud investigations a somewhat self-supporting mecha-
nism.
This section contains the first explanation of what constitutes a "federal health
care offense" under the Clinton plan. Sec. 5402(d). While not a separate crime itself,
a "health care offense" is the catchword for a number of broad references under the
Clinton plan. This offense includes (Da series of new health care-specific criminal
acts defined by the plan itself (discussed below); (2) any violation of § 1128B of the
Social Security Act, which includes illegal remunerations, certain false statements
concerning health care institutions and illegal patient admittance and retention
practices; (3) violations of a variety of existing criminal provisions, if these violations
relate to health care fraud; i3 (4) violations of criminal provisions of ERISA (includ-
ing coercive interference with ERISA rights, 28 U.S.C. § 1141, and general criminal
ERISA violations, 29 U.S.C. § 1131), if the violation relates to health care fraud; and
9 Some patient-specific information is excluded from disclosure by a separate privacy proposal.
See Sec. 5401(d)(2). The balance between this disclosure requirement and the patient privacy
restrictions is uneasy. As it now stands, insurers are likely to continue to receive requests for
patient records or other patient-specific Information for which disclosure may create insurer li-
ability. In fact, the privacy proposals expand the range of patient-specific information that is
given federal protection. There is no discussion of how current regulatory requirements in the
substance abuse area will be integrated into this system.
10 Some of the other proposals contain specific levels of finding for additional investigators
and/or prosecutors.
11 This excludes funds awarded to a qui tarn relator or to a victim for restitution.
12 The Chafee plan creates a similar fund, and provides an extensive discussion of the invest-
ment guideUnes for this fund.
isThese include mail fraud (18 U.S.C. §1341), wire fraud (18 U.S.C. §1343), false statements
in relation to ERISA (18 U.S.C. §1027), false statements to the government (18 U.S.C. §1001),
theft or embezzlement from an employee benefit plan '18 U.S.C. §664), conspiracy to defraud
the United States '18 U.S.C. §371), and false claims to the government ( 18 U.S.C. §287).
123
(5) various violations of the Federal Food Drug and Cosmetic Act, if the violation
relates to health care fraud. Id.
The proposal also discusses other types of funds that various health care inves-
tigative offices may receive. The HHS Inspector General's office may receive and use
reimbursement for the costs of its investigations, if ordered by a court as part of
restitution or where voluntarily agreed to by a provider. Sec. 5403(a). A separate
fund is established for all money that has been transferred to the Inspector Gen-
eral's Office from tTie Department of Justice Asset Forfeiture Fund. Sec. 5403(b).
Given the extensive losses due to fraud and the perhaps heightened competition be-
tween the various government entities and other victims for limited funds recover-
able from health care fraud defendants, it is important to ensure that victims'
rights, including those of health insurers and other third-party payers, are given an
important priority in the distribution of money obtained from convicted providers. i4
B. APPLICATION OF FRAUD AND ABUSE AUTHORITIES UNDER THE SOCIAL SECURITY ACT
TO ALL PAYERS
In an attempt to diminish distinctions between public and private payers and cre-
ate a more unified enforcement scheme, the plan creates a series of fraud and abuse
enforcement programs that are applicable to all health care providers and all pay-
ers. The critical language (applied throughout the proposal) is that various enforce-
ment provisions relate to "any applicable health plan." See, e.g.. Sec. 5411(a). i^
For example. Section 5411 of the proposal allows the HHS Secretary to exclude
an individual or entity from participation in any applicable health plan for certain
Social Security Act violations. For criminal convictions relating to. fraud, theft, em-
bezzlement, breach of fiduciary responsibility or other financial misconduct in con-
nection with the delivery of a health care item or service or relating to the neglect
or abuse of patients, the exclusion is mandatory for at least five years. Sec. 5411(a).
For a variety of other program-related offenses, there is a permissive exclusion from
participation in health care programs, is
The plan provides an explanation of the procedural safeguards for those that may
be excluded, the time periods for such exclusions and the provision of notice to rel-
evant health care payers. Sec. 5411(c). The HHS Secretary is obligated to exercise
this authority so that a violation results in a person's exclusion "from all applicable
health plans for the delivery of or payment for health care items or services." Sec.
5411(d)(1). The Secretary is required to notify each sponsor of an applicable health
plan of these exclusions and also to notify the state licensing authorities. Sec.
5411(d), (e). Aside from initiatives of the HHS Secretary, sponsors of applicable
health plans, including the states for regional alliance health plans and the Sec-
retary of Labor for corporate alliance health plans, may request the exclusion of par-
ticular providers. Sec. 5411(i).
The plan also expands the categories of practices for which the HHS Secretary
may enforce civil monetary penalties. Sec. 5412. As with the exclusion authority,
these provisions affect actions taken with respect to an applicable health plan. Most
generally, this includes civil penalties relating to a number of violations of the So-
cial Security Act. It also creates some new actions that may result in civil monetary
penalties, including (1) terminating an individual's enrollment in violation of the
plan; (2) discriminating against applicants on the basis of medical condition; (3) in-
ducing enrollment in a health care plan through false pretenses; and (4) providing
14 The Asset Forfeiture Office of the Department of Justice has been drafting regulations con-
cerning the distribution of forfeited assets. The current regulations are well-suited to situations
in which homes or cars are seized, but make little sense in the context of money that has been
defrauded. Similarly, the current regulations are not effective in large scale fraud schemes with
multiple victims. One of the purposes of these new regulations would be to prioritize the compet-
ing interests where there are multiple claims on particular assets, including money. These draft
regulations largely were completed at the close of the Bush Administration, but have been
pulled back by the Clinton Administration and currently are under review. There is no specific
timetable for their release.
15 The Michel and Chafee plans similarly extend these sanctions to all health benefit plans.
The Wellstone proposal, the single payer plan, expands sanctions to the state plans that would
be created. It also creates a national health care fraud database and mandates requirements
for state anti-fraud units.
16 These permissive exclusions involve (1) fraud convictions in relation to non-health related
government programs; (2i revocation, suspension or loss of a health care license related to pro-
fessional competence, performance or financial integrity; (3) exclusion from certain government
health care programs; (4) performance of medical services that fall to meet professionally recog-
nized standards in a gross and flagrant manner or In a substantial number of cases and other
items including failure to repay student loans and failure to provide access to information. See
Section 5411(b).
124
financial incentives to enroll in an applicable health plan. Sec. 5412(a). A person
may be excluded from the program in addition to receiving a civil monetary penalty.
Sec. 5412(b)(2-3). If the federal government does not enforce these penalties against
a provider or other person, the state in which the alliance is located may initiate
proceedings to impose civil monetary penalties. Sec. 5412(c)(3).
Any money recovered under the civil monetary penalties provision will-be paid to
the HHS Secretary. Sec. 5412(d). Any amounts determined to have been improperly
paid from a health plan will be reimbursed to the plan. Sec. 5412(d)(1). All remain-
ing amounts are to be deposited in the Health Care Trust Fund. Sec. 5412(d)(2).
Where civil monetary penalties are enforced, the HHS Secretary will notify the ap-
propriate licensing authorities. Sec. 5412(e).
The program also authorizes civil monetary penalties based on violations of the
physician self-referral rules, and extends these provisions to all applicable health
plans. Sec. 5413. As set forth below, the proposed changes to the self-referral limita-
tions and anti-kickback rules are quite substantial and would result in significant
increased opportunities for enforcement activities.
C. AMENDMENTS TO ANTI-FRAUD AND ABUSE PROVISIONS OF THE SOCIAL SECURITY ACT
Part 3 of the Fraud and Abuse plan references an earlier section of the Clinton
health care bill relating to amendments to the existing anti-fraud provisions of the
Social Security Act. Sec. 5421. The primary goal of this section is to expand the
anti-kickback provisions to a wider range of activities, to extend the ban on self-
referrals and to clarify certain of the safe harbor provisions to immunize various
managed care business practices that the overall reform package seeks to encour-
age.
These statutory provisions are perhaps the most complicated of the anti-fraud pro-
posals. The bulk of this material is taken up with defining the exceptions to the pro-
visions, in an effort to outlaw inefficient or improper financial inducements while
still encouraging appropriate managed care techniques. These provisions are quite
controversial and already have generated extensive commentary and debate. Be-
cause of their complexity and the lack of impact of many of these exceptions on
mainstream private sector anti-fraud issues, we provide below only a general de-
scription of the anti-fraud approaches in this area.
In relation to the anti-kickback provisions, the proposal authorizes the HHS Sec-
retary to impose civil monetary penalties for kickback violations (a power she does
not now have), up to $50,000 and not more than three times the amount of remu-
neration offered, solicited or paid. Sec. 4041(a). The plan also increases the accom-
panying criminal penalties. Sec. 4041(a)(3).i'^
Because of other sections of the bill that incorporate these changes to the Social
Security Act, the anti-kickback provisions also will apply to all health claims, not
just government claims. This will provide a significantly increased ability for private
carriers to attack kickbacks related to privately insured services. Exceptions to the
kickback provision include payments for items or services furnished to patients paid
for on an at risk basis to that provider furnishing the items or service. See Sec.
4041(b). Also included are payments made on an at risk" basis to a health plan,
including capitation, global fees, and perhaps other bundled payment arrangements.
Id.
There are other amendments to the self-referral limitat'ons. Sec. 4042. Subject to
certain exceptions, the plan prohibits payment for any item or service to an entity
with which the physician ordering services has a financial relationship and in which
the physician does not render that item or service. The exception to the anti-kick-
back prohibitions for "at risk" payments to plans and networks also applies to self-
referral prohibitions. Sec. 4042(c). The current safe harbor exceptions are retained
except that (1) the exception for group practices is narrowed to prevent the creation
of sham groups; and (2) the exceptions for investments in large entities require that
the company hold $100 miUion in shareholder equity.
These provisions represent one of the most controversial aspects of the anti-fraud
plan. Many of these issues, however, are of only peripheral interest to the anti-fraud
area (although they obviously are extremely important to ongoing business develop-
ments in the managed care area). There will continue to be extensive debate on the
appropriateness and breadth of the exceptions, given the policy goal of encouraging
creative efforts to reduce health care costs. Many of these issues are business issues
that should not distract from the primary anti-fraud agenda: To expand the anti-
17 The Chafee plan creates authority for civil monetary penalties for violation of the anti-kick-
back, law, but does not extend this to private health care plans.
125
kickback and self-referral. bans to all claims, and to broaden the reach of these pro-
visions while still encouraging legitimate managed care techniques.
D. AMENDMENTS TO CRIMINAL LAW
As an additional enforcement tool, the Clinton proposal creates a new series of
health care — fraud-related criminal offenses.
Crime of health care fraud
The centerpiece of this section is the creation of a new crime of health care fraud.
Sec. 5431(a). This crime involves any person who knowingly executes or attempts
to execute a scheme or artifice to defraud "any health alliance, health plan, or other
person" in connection with the delivery of or payment for health care benefits, or
to obtain, by means of false or fraudulent representations, any money or property
of a health alliance, health plan or other person in connection with the delivery of
or payment for health care benefits or services. Id. A conviction under this section
involves a fine or a prison term of not more than ten years, or both. A crime involv-
ing "serious bodily injury" can result in life imprisonment.
This crime is based on existing statutory provisions relating to mail and wire
fraud. The penalties under the health care fraud section are somewhat more exten-
sive. The crime also is targeted to the health care business. It does not require use
of the U.S. mails or interstate wire system, and instead involves efforts to defraud
health alliances, plans or other persons through whatever means the perpetrator
uses. This statute would fill in some existing gaps in the statutory scheme and
would be a useful enforcement tool, is
Forfeiture of assets
In addition to this new criminal statute, the Clinton plan includes a variety of
additional criminal provisions. If a federal health care offense (defined earlier) is
one that "poses a serious threat to the health of any person or has a significant det-
rimental impact on the health care system," the court also should order the person
to forfeit property used in committing the offense, that constitutes or is derived from
proceeds traceable to the offense or that is of a value proportionate to the serious-
ness of the offense. Sec. 5432. Currently, proceeds of health care fraud can be for-
feited primarily where RICO violations are involved. It is not clear whether this pro-
vision extends to purely financial frauds, rather than those that affect patient
health interests, as the meaning of "significant detrimental impact on the health
care system" is not spelled out. Significant monetary losses should be covered, as,
otherwise, this loophole would eviscerate the effectiveness of the forfeiture provision.
The amounts forfeited under this section are not to be deposited under the general
Department of Justice Asset Forfeiture Fund, but instead go to the health care trust
fund discussed above. This forfeiture authority would represent a significant step
forward in efforts to recover the proceeds of health care fraud. Although the Su-
preme Court recently imposed some procedural requirements on the government's
ability to obtain forfeitures, this threat would be an important new tool.i9
False statements
The plan also creates a separate crime of false statements relating to health care
matters. Sec. 5433. This crime involves both false or fraudulent statements and con-
cealing of material facts, and requires a fine and/or imprisonment of up to five
years. This applies to any matter involving a health alliance or health plan, and cov-
ers knowingly falsifying documents or concealing material facts by any trick. Id.
Bribery and graft
The section creates a new crime for bribery and graft in connection with health
care. Sec. 5434. This makes illegal any direct or indirect gift, offer or promise of
"anything of value" to a health care official or to someone else with the intent to
influence the health care official's actions relating to a health alliance or health
plan. It also makes it illegal for a health care official to demand, seek, receive or
accept anything of value personally or for any other person. The definition of a
"health care official" is quite broad; it means (1) any employee, counsel or other
agent of any health care alliance or health plan, (2) any employee or agent of an
18 The Cohen amendment passed by the Senate and the Chafee proposal include similar provi-
sions. The Michel proposal creates a crime of heahh care fraud that is less defined and applies
only to "health care providers." The Michel plan also expands the existing mall fraud statute
to include private delivery Services, a loophole currently used to evade the U.S. mall require-
ment of the mail fraud statute.
19 The Cohen amendment and the Chafee proposal include similar forfeiture provisions.
126
organization that provides services under contract to any health aUiance or health
plan, (3) any official or employee of a state agency that has regulatory authority
over any health alliance or health plan or (4) an employee or agent of a health care
sponsor. A sponsor includes anyone who serves as the sponsor of a health alliance
or health plan under the Health Security Act and includes any joint board of em-
ployers that administer the alliances or plans.
Injunctive relief
The plan also creates the opportunity for injunctive relief for health care offenses
under 18 U.S.C. § 1345. Sec. 5435. This provision now applies to false statements
made to the government and to bank fraud, but would be expanded to include any-
one who is committing or about to commit a federal health care offense. This section
allows the Attorney General to bring suit to enjoin these ongoing violations. This
would be an important tool for stopping ongoing fraud schemes and recovering or
freezing assets before they disappear.20 Authority under this section is limited to
the government; accordingly, private parties are not authorized to seek injunctive
relief (although the government can make these allegations in relation to private
claims).
Additional criminal provisions
There are a few less important (but equally far-reaching) provisions. In relation
to grand jury investigations of health care violations, if an attorney for the govern-
ment or other government investigator receives information concerning a health
care violation, that person may disclose information to an attorney for the govern-
ment for use in civil proceedings related to federal health care offenses or in connec-
tion with civil health care forfeiture. Sec. 5436. Typically, information obtained from
grand juries cannot be disclosed even to the civil side of the U.S. government. Cur-
rently, this ability to disclose is limited to bank fraud violations only, not other
criminal violations, where this kind of disclosure of grand jury information is illegal.
This provision, like the injunctive relief section, represents part of the effort to focus
prosecutorial attention on the health care area, much as bank fraud was a primary
target of law enforcement resources in the 1980s. 21
These provisions, taken together, demonstrate an intent to criminalize an exten-
sive range of inappropriate business techniques and an effort to target law enforce-
ment tools to the specifics of the health care business. These new provisions would
go a long way toward closing loopholes and facilitating the overall health care anti-
fraud effort.
E. AMENDMENTS TO CIVIL FALSE CLAIMS ACT
The amendments to the Civil False Claims Act also would significantly expand
the reach of the federal anti-fraud enforcement scheme. Where now the False
Claims Act requires submission of a claim to the government, the act would be ex-
panded to cover claims submitted to any health plan. The specific statutory provi-
sion expands the definition of "claim" to include "any request or demand, whether
under contract or otherwise, for money or property which is made or presented to
a health plan." Sec. 5441 (amending 31 U.S.C. §3729).22 With this minor language
change, the full range of severe sanctions under this act becomes available for all
false claims submitted to a health plan, whether public or private money is in-
volved. This statute allows for a civil penalty of at least $5,000 per claim, plus treble
damages suffered by the government or the health plan. This would be a substantial
enforcement tool.
Although the Clinton plan says nothing on this point, perhaps the most signifi-
cant effect of this change is on the qui tarn provisions of the False Claims Act. The
qui tam statute, as it currently exists (31 U.S.C. §3730), provides the authority for
a private person to bring a civil action for a violation of the False Claims Act on
behalf of the government Once a suit is brought, the government can intervene and
take over management of the litigation, if it desires, or the private individual can
take the case forward. The private individual (known as the qui tam relator) takes
20 The Cohen amendment and Chafee proposal contain similar injunctive relief provisions.
21 There are additional crimes of theft or embezzlement from the assets of a health alliance
or health plan. Sec. 5437, and misuse of the health security card or other individual identifier.
Sec. 5438.
22 The Cohen amendment expands the False Claims Act to all federally funded programs (an
extension that may not be necessary under the existing statute), but does not extend it to cover
private health care claims. The Chafee proposal similarly extends the act to all health plans,
but hmits the definition of this term to "federally funded programs."
127
a portion of the recovery for his efforts. In one recent case, the relator was paid tens
of millions of dollars for his role in the action.
There are several crucial elements to these qui tarn provisions. First, the qui tarn
provision is the closest thing to a private right of action-for health care fraud viola-
tions. The absence of a carefully -tailored private civil cause of action is the most criti-
cal omission in the Clinton proposals, as, with continued resource problems in the
law enforcement arena and the potential competition for limited assets, private car-
riers need the ability to protect their own interests and those of their policyholders,
without relying completely on the government. 23
Moreover, under the proposed qui tarn provisions, a private payer can bring an
action if it knows of fraudulent claims involving a health plan. In this instance, the
plaintiff would have less control over the action than in a typical civil case, and
would receive only a portion of the recovery (the remainder would go the plan). This
party also could bring an action on behalf of the government and, presumably, all
other health plans as well. To provide a fictional example, if the XYZ Corporation
is defrauding one company, and, it believes, the government and other private par-
ties as well, the company could bring a suit on behalf of all of the victims of that
provider, both public and private, and could recover a portion of the losses suffered
by all of those entities. In fact, any person who is the 'original source" of this kind
of information could bring such a suit, even, as in one recent case, a former em-
ployee of the defendant.
The substantive standard for violation of the False Claims Act also is quite broad.
It requires "knowing" submission of a false claim. However, no specific intent to de-
fraud is required. Instead, this "knowledge" can come from (1) actual knowledge; (2)
acts in delioerate ignorance of the truth or falsity of the information; and (3) acts
in reckless disregard of the truth or falsity of the information. Coupled with the qui
tam provisions, these amendments would represent a substantial weapon in the en-
forcement arsenal. While these amendments would substantially strengthen the
anti-fraud arsenal, private sector victims should be given a straightforward private
cause of action to redress health law violations.
Privacy issues
Aside from the specific anti-fraud proposals, the plan also includes some amend-
ments to existing privacy laws and regulations. We do not propose to review these
topics in detail, as they are quite controversial and relate primarily to issues outside
of the fraud arena Nonetheless, there are some important connections with the anti-
fraud program.
The privacy section envisions the creation of a National Health Board that will
develop and implement a "health information system" to collect and disseminate
specific health care data. This information will be used for a wide variety of pur-
poses, including assessing and improving the quality of care, improving the ability
of all parties to the health care field to make choices about health care and manag-
ing and containing costs of health care. As part of the information that will be col-
lected, the Board will collect "any other fact that may be necessary to determine
whether a health plan or a health care provider has complied with a federal statute
pertaining to fraud or misrepresentation in the provision or purchasing of health
care or in the submission of a claim for benefits or payments under a health plan."
Sec. 5101(e)(ll). A wide range of organizations are to be involved in developing this
system, including representatives of alliances and health plans. These entities also-
will be involved in creating an electronic data network and health information sys-
tem privacy standards.
The operating principle of this system is that disclosure of individually identifi-
able health information is not allowed unless a specific exception to this rule is ap-
pUcable. One of the exceptions relates to "the disclosure * * * to federal, state, or
local law enforcement agencies for the purpose of enforcing [the Health Security
Act]." While this exception would he applicable to most disclosures of fraud informa-
tion, it would be useful to include an immunity provision that would protect private
payers when individual information is disclosed to law enforcement. It will be im-
portant to ensure that the privacy interests are properly balanced with legitimate
anti-fraud efforts. Otherwise, as is often the case now, fraud investigations may be
hindered by privacy provisions designed for other purposes.
The Clinton plan includes an aggressive array of anti-fraud proposals. Many of
these proposals, including the expansion of civil monetary penalties and exclusion
authority to all private claims, would vastly benefit insurer efforts to fight fraud.
23 The Chafee plan creates a private cause of action for competitors injured by kickback viola-
tions. The private party must provide notice to the HHS Secretary before filing suit HHS would
then have an opportunity to initiate an investigation.
128
Other provisions, including mandatory disclosure of private investigative informa-
tion, would create significant additional burdens for insurers and create the possibil-
ity of increased liability exposure. There are some significant omissions to the plan
(primarily the absence of a private cause of action) and other areas where there is
likely to be expanded competition between private payers and law enforcement over
limited financial recoveries. Because of the complexity of these proposals and the
interrelationships with the overall health care reform package, it will be important
for private payers to monitor the progress of the fraud plan to ensure that the admi-
rable goals of this plan can be met and that the fraud and abuse portions of the
plan effectively serve both the private sector and the public interest.
The Chairman. Thank you. I find myself disagreeing in part with
ail of you, which means that maybe I am on the right track. I think
the AMA has a point. Doctors are in a position where it is so darn
easy to be victimized — they may victimized themselves some, but
they can become victims very easily.
When you are a professional woman or man, you trade a little
beyond your reputation, and it seems to me that the seeking of im-
munity from the transfer of investigatory information is something
that— just so you know, I admit the side of the ledger I come at
this from — it is something that I don't want to see you have.
It is one thing if you convict a doctor; it is one thing if a doctor
is convicted. The President's bill does not have any sharing of that
information, but as I understand it, your organization has a pro-
posal to create a data base which would include information about
providers who have been sued and/or convicted of fraud. That kind
of data base, it is argued, would help, since there is really no way
of checking on a provider now. So you think that is a good idea.
Am I getting this correctly?
Mr. Mahon. If I may cl 
