Testimony of John Hartwig Before the House Committee on Commerce Subcommittee on Oversight and Investigations

Testimony
Before the House Committee on Commerce
Subcommittee on Oversight and Investigations
United States House of Representatives

Medicaid Fraud and Abuse:
Assessing State and Federal Responses

Statement of
John E. Hartwig
Deputy Inspector General for Investigations

November 9, 1999

Office of Inspector General
Department of Health and Human Services

Good Morning, I am John E. Hartwig, Deputy Inspector General for Investigations in the Office of Inspector General. Thank you for the opportunity to testify on the subject of Medicaid fraud and abuse and what is being done to address it. While the vast majority of health care providers are honest, all large health care programs are vulnerable to exploitation, and Medicaid is no exception. Over the years, we have seen abuses take many forms. Fraud, waste and abuse continue today, depriving taxpayers and consumers of the value of their contributions. Our sense, however, is that the States are steadily becoming more effective in limiting abuses through continuous improvements in their systems and processes.

With my time today, I will review some of the challenges that the States face in guarding the fiscal soundness of their Medicaid programs and share with you some recent examples of fraud perpetrated against the program. I want to describe how the States are partnering with our office, the Health Care Financing Administration and other Federal and State law enforcement offices to leverage their effectiveness. Finally, I want to describe some of the areas we have observed that provide opportunities for continued improvement.

BACKGROUND

The Office of Inspector General

The Office of Inspector General (OIG) was created in 1976 and is statutorily charged with protecting the integrity of Departmental programs, as well as promoting their economy, efficiency and effectiveness. The OIG meets this statutory mandate through a comprehensive program of audits, program evaluations, and investigations designed to improve the management of the Department and to protect its programs and beneficiaries from fraud, waste and abuse. Our role is to detect and prevent fraud and abuse, and to ensure that beneficiaries receive high quality, necessary services, at appropriate payment levels.

Medicaid Program

The Health Care Financing Administration (HCFA) administers the Medicaid program. Authorized under Title XIX of the Social Security Act, Medicaid is a means-tested health care entitlement program financed by States and the Federal Government --- approximately 43 percent from the States and 57 percent from the Federal Government in FY 1998. To date, all 50 States, the District of Columbia, and the five territories have elected to establish Medicaid programs.

Within the broad national guidelines that the Federal Government provides, each of the States establishes its own eligibility criteria. While there are specific Medicaid requirements, States have considerable flexibility in structuring their Medicaid programs, including provider payment rates, certification standards and development of alternative health care delivery programs. States are required to provide a core of mandatory Medicaid services to all eligible recipients. In addition, States have restructured eligibility coverage through "program" and "research and demonstration" waivers. These waivers allow States some flexibility to reform health care by expanding coverage, to create alternatives, and to allow beneficiaries to select their own Medicaid providers.

FRAUD INVESTIGATIONS

The responsibility for detecting, investigating and prosecuting fraud and abuse in the Medicaid program is shared between the Federal and State Governments. Each State is required to have a program integrity unit dedicated to detecting and investigating suspected cases of Medicaid fraud. Most States fulfill this requirement by establishing a Medicaid Fraud Control Unit (MFCU). Each Medicaid State agency also has a Medicaid Management Information System. A subpart of this data system is the Surveillance and Utilization Review Subsystems Units (SURS). The SURS units are charged with ferreting out fraud by conducting preliminary reviews of providers and beneficiaries with aberrant claims or billing patterns that possibly indicate criminal fraud. When potential fraud cases are detected, the SURS refer the cases to the MFCUs. Regulations require the Medicaid State agencies and the MFCUs to enter into a Memorandum of Understanding in which the agencies agree to refer all cases of suspected provider fraud to the units.

Medicaid Fraud Control Units

In 1977, Congress enacted Public Law 95-142 which authorized Federal matching funds for States to voluntarily establish a Medicaid Fraud Control Unit. The Omnibus Budget Reconciliation Act of 1993 required the establishment of MFCUs unless a waiver is requested from the Secretary of the Department of Health and Human Services (HHS). These fraud units are part of the State Attorney General's office or other State agency that is separate and distinct from the Medicaid State agency. The purpose of the MFCUs is to investigate and prosecute Medicaid provider fraud, patient abuse and fraud in administration of the program.

The MFCUs are integrated law enforcement units composed of investigators, attorneys, auditors and analysts. At present, 47 States have fraud control units established and operating, while three States (Nebraska, North Dakota and Idaho) have received waivers from the Secretary. These waivers relieve these three States from the requirement to establish a Medicaid fraud control unit in the manner specified by the current Federal regulations.

The MFCUs investigate and prosecute allegations of Medicaid fraud and patient abuse or neglect. Specifically, they:

Investigate and prosecute suspected cases of Medicaid fraud in connection with any aspect of the provision of medical assistance.

Review and investigate complaints of abuse and neglect of patients in health care facilities that received payment under the State plan.

Investigate suspected cases of fraud that occur within the Medicaid State agency.

Provide for the collection, or referral for collection to the single State Medicaid agency, of overpayments that are made by health care facilities.

Safeguard the privacy rights of all individuals and provide safeguards to prevent the misuse of information under the unit's control.

Submit an annual report to the Secretary of HHS detailing the accomplishments and activities of the unit.

Where State law permits, fraud control units both investigate and prosecute cases statewide. In eight of the 47 States, the units do not prosecute their own cases but instead refer them to a Federal, State or County prosecutor. Cases are generated by the units themselves and also come from a variety of sources including the Office of Inspector General, the Medicaid agency (including the Surveillance and Utilization Review Subsystem units), other Federal and State agencies (such as Survey and Certification Units) and the media. In States with fraud control units, the Medicaid agency agrees to report all suspected cases of provider fraud to the unit. To ensure that Medicaid overpayments identified by the units through their investigations are recovered, the units are required to either undertake administrative recovery actions or have procedures to refer them for collection to other appropriate State agencies.

Although originally managed within HCFA, the oversight responsibilities for the fraud control units were transferred to the Office of Inspector General in 1979 since the Units' activities were determined to be more closely related to the OIG investigative function. Federal funds for the Medicaid fraud control program are included in the Health Care Financing Administration appropriation. The program reimburses the States for the cost of operating a unit at a rate of 90 percent for the first three years and 75 percent thereafter. Currently, all 47 MFCUs are receiving the 75 percent rate.

Medicaid Fraud Control Unit Accomplishments

Since the inception of the Medicaid fraud control program, the units have recovered hundreds of millions of program dollars. The following chart represents recoveries to the Medicaid program for the past five fiscal years for which data are available:

YEAR	Federal Funding Allocated by HCFA	Actual Federal Expenditure	Federal/State Recoveries
1998	$ 87,000,000	$ 85,793,887	$ 83,625,633
1997	$ 82,000,000	$ 80,557,146	$ 147,642,299
1996	$ 79,000,000	$ 77,453,688	$ 57,347,248
1995	$ 76,000,000	$ 73,258,421	$ 88,560,361
1994	$ 65,600,000	$ 64,573,926	$ 42,780,015

It should be noted that there are areas of MFCU activity, such as patient abuse cases, that do not generate a monetary return, but are part of the overall effort to provide quality care and to hold the health care community accountable for the Federal and State dollars spent. In FY 1998, patient abuse cases accounted for over 30 percent of the 6,839 cases investigated by the 47 units.

Some types of fraudulent schemes currently under investigation by the MFCUs involve:

Billing for Services Not Provided. This is one of the most common types of fraud. Examples include a provider who bills Medicaid for a treatment or procedure that was not actually performed, such as blood tests when no samples were drawn or x-rays that were not taken.

False Cost Reports. A nursing home owner or hospital administrator may intentionally include inappropriate expenses not related to patient care on costs reports submitted to Medicaid.

Illegal Remunerations. A provider (i.e., nursing home operator) may conspire with another health care provider (i.e., physician, ambulance company) to share a certain portion of the monetary reimbursement the health care provider receives (kickbacks) for services rendered to patients. Kickbacks include not only cash, but vacation trips, automobiles or other items. The practice results in unnecessary tests and services being performed for the purpose of generating additional income to both the referring source and the provider of the service.

Medicaid Fraud Control Units Case Examples

Some recent cases investigated by the MFCUs include the following:

A radiologist collected $1.7 million from Medicaid over a 26-month period by engaging in improper billing practices. Two-thirds of the services went to pay kickbacks to the clinic operators who supplied him a staggering total of 24,000 unnecessary, duplicate or phony tests to "review." Most of these tests, provided by representatives of local clinics, were of the same people, but they had been given different names and Medicaid identification numbers. The radiologist was convicted of grand larceny and sent to prison.

In New Jersey, the owner of two medical clinics was indicted in 1997 for bilking Medicaid of more than $6 million. He claimed to have performed colonoscopies and other expensive procedures, even though he had no equipment for doing them.

Two Atlanta businessmen pled guilty to felony charges for submitting fraudulent nursing home cost reports to the Georgia Medicaid program. The businessmen operated a "shell corporation" established primarily for creating inflated contracts with nursing homes. The nursing homes received an artificially inflated Medicaid per diem reimbursement rate. Between 1991 and 1996, the businessmen obtained nearly $10 million in excess Medicaid reimbursements. A State auditor uncovered the scheme in 1996 when he performed a routine audit and became suspicious of the high payments. The businessmen were indicted and were found guilty on eight counts of false documents. They were sentenced to 50 months in prison, required to pay restitution of approximately $6 million to the Medicaid program and to forfeit an additional $2.1 million in assets.

A Maryland woman was convicted of felony theft for defrauding more than $19,000 from mentally disabled adults during a 6-month period in 1996. The woman stole social security checks from them and drained the savings accounts of disabled adults who were in her care. In one case, money was withdrawn from an existing account but never deposited into the patient's other account. Similarly, this woman stole from at least three other Medicaid recipients, depleting their accounts to the extent that they were unable to pay their rental expenses and were deprived of clothes and other essentials. She was sentenced to home detention and ordered to repay the victims.

OIG Oversight of MFCUs

The OIG has responsibility for oversight of the funding and operating standards of the 47 MFCUs, including coordinating part of their investigative training. During FY 1998, we provided oversight and administered approximately $85.8 million in funds granted by HCFA to the MFCUs to facilitate their mission. In FY 1999, HCFA's funding allocation amounted to $92.2 million. For FY 2000, $97.7 million has been allocated.

The OIG's oversight duties include the initial certification and yearly recertification of the MFCUs. Regulations require the MFCUs to submit an application to the OIG with an annual report and a budget request. The MFCU application, annual report, budget and quarterly statistical reports are reviewed by the OIG to determine if the MFCUs are in conformance with standards issued by the OIG. The OIG also reviews questionnaire responses from the Medicaid Agency and OIG Field Offices. On-site inspections and reviews of the MFCUs are conducted by the OIG on an as needed basis. The OIG maintains ongoing communication with individual State units and the National Association of Medicaid Fraud Control Units related to the interpretation of program regulations and other policy issues.

FEDERAL AND STATE PARTNERSHIPS

The OIG has aggressively sought new and innovative ways to stretch our resources and thus maximize the effectiveness of our anti-fraud efforts. Over the years, we have forged new and stronger links with other Federal agencies, State governments and the private sector. A major component of the Health Insurance Portability and Accountability Act of 1996 was the establishment of a program to coordinate health care anti-fraud efforts. The OIG, MFCUs, and other law enforcement agencies work together to coordinate anti-fraud efforts. These partnerships have greatly enhanced our ability to carry out our mission.

Ten years ago, the OIG helped establish the National Health Care Anti-Fraud Association, representing both governmental and private third party payers and law enforcement agencies, to coordinate governmental and private health care fraud enforcement activities. Over the years, this governmental/private partnership group has been extremely successful in fostering our collaborative efforts. More recently, the OIG has established with the Department of Justice and other enforcement agencies an Executive Level Working Group to focus on health care fraud. In addition, the OIG and MFCUs have joined with other State and Federal law enforcement agencies to organize health care fraud task forces throughout the country.

We have taken steps to develop partnerships and build a team to combat health care fraud and abuse. Listed below are examples of cases involving both the OIG and MFCUs:

In Florida, a hospital health care corporation agreed to pay the Government $469,000 to resolve its liability under the False Claims Act and entered into a corporate integrity agreement with OIG. This agreement settles allegations concerning Medicaid claims submitted by one of its component facilities between 1995 and 1997. The claims at issue were submitted to the Florida Medicaid program, by one of the corporation's hospitals, for services rendered to patients in the adolescent psychiatric unit. Allegedly, the hospital billed for services not rendered or not provided in accordance with Medicaid requirements; and, the defendants failed to adequately document the length and nature of the services provided.

A psychologist in Georgia is serving a 2-year prison sentence for defrauding the Medicaid program of approximately $209,000. The psychologist submitted false billings to Medicaid for services that were not medically necessary and services in excess of the number actually provided. In addition to imprisonment, the doctor was ordered to pay restitution in the amount of $209,000 and was excluded from the program for 15 years.

An alcoholism clinic in New York was excluded for a period of 10 years for felony larceny. The two owner/operators of the clinic were involved in a scheme to defraud Medicaid, which lasted over five years. They submitted false claims that resulted in overpayments totaling approximately $113,000. Both owners were ordered to pay restitution in the aforementioned amount and were each excluded for 10 years.

The OIG excluded a dentist because he was required to surrender his license to practice dentistry in California while a formal disciplinary hearing regarding his professional competency was taking place. After surrendering his license and being excluded from the Medicaid program by the OIG, the dentist moved to Oregon. While in Oregon, he applied for a license to practice dentistry with the appropriate licensing board and then for a provider number to bill Oregon's Medicaid program. In researching the dentist's current practices, the OIG determined that he had not been truthful about his exclusion status and that the Medicaid agency had an investigation in progress regarding his current billing practices. The dentist was subsequently convicted of Medicaid fraud and falsifying business records. He has been excluded again for an additional 10 years.

Federal and State Audit Partnerships

Other cooperative efforts include State Medicaid Audit Partnerships. Five years ago, we began an initiative to work more closely with State auditors in reviewing the Medicaid program. The Partnership Plan was created as an effort to provide broader coverage of the Medicaid program by partnering with State auditors, 11 State Medicaid agencies and two State internal audit groups. Sixteen State auditor reports have been issued with a financial impact of $163 million.

As health care fraud has become increasingly complex, we have found a greater need to coordinate with other law enforcement entities, as well as others, with a vested interest in fighting fraud and abuse. For example, our auditors partner with State auditors, other State groups including departmental internal auditors, departmental inspectors general, Medicaid agencies, and the Health Care Financing Administration's financial managers, to conduct joint reviews. The level of involvement of each partner is flexible and can vary depending upon specific situations and available resources.

The goal of our Federal and State partnership is not just to identify and recommend recovery of unallowable costs from State agencies. Rather, it is designed to focus on issues that will result in program improvements and reduce the cost of providing necessary services to Medicaid recipients. The Plan provides broader coverage of the Medicaid program and provides a more effective and efficient use of scarce audit resources by both the Federal and State audit sectors.

Since its inception in 1994, active partnerships have been developed in 22 States on such diverse issues as:

Program issues related to Medicaid outpatient prescription drugs.
Unbundling of clinical laboratory services.
Outpatient non-physician services already included as an inpatient charge.
Excessive costs related to hospital transfers.
Excessive payments for durable medical equipment.
Acquisition costs for Medicaid drugs.
Program issues related to managed care.

Joint projects have also identified areas where improvements in program operations could be achieved, unallowable program expenditures could be recovered and future cost savings could be recognized.

Clinical Laboratory Services. One Partnership Project was undertaken to review Medicaid payments for clinical laboratory services. The objective of this review was to determine the adequacy of State agency procedures and controls over the payment of Medicaid claims for clinical laboratory services. Audits in 22 States examined pricing of lab tests and system edits and controls to detect and prevent duplicate payments and identified $33.9 million in Federal and State overpayments. The review also found that State Medicaid agencies did not have adequate controls to ensure that the Medicaid program did not pay more than Medicare would have paid for the same clinical laboratory tests.

Dual Eligibles. A unique example of OIG auditors, State Auditors, and Medicaid Fraud Control Units working together is an ongoing managed care initiative involving dual eligible Medicare/Medicaid beneficiaries. The objective of this review is to determine the extent of inappropriate Medicaid fee-for-service payments made on behalf of dually eligible beneficiaries while enrolled in a Medicare risk HMO. The review began with State Auditor work conducted in two States, Texas and Florida. The Texas State Auditors found that the State Medicaid claims on behalf of beneficiaries for prescription drug services should have been covered by the Medicare HMO. The Florida State Auditor's Office found that the Medicaid fee-for-service program improperly paid for medical services and drugs that should have been provided by the Medicare HMOs. The questioned payments amounted to over $15.8 million in Calendar Year 1996. As a result of the findings for 1996, the review was referred to the Florida Medicaid Fraud Control Unit which is continuing the review for 1994, 1995, 1997 and 1998.

OPPORTUNITIES FOR CONTINUED IMPROVEMENT

I want to describe some recent and continuing activities that relate to improving anti-fraud and abuse efforts in the Medicaid program.

Training

The OIG sponsored a program to provide five-day training sessions for MFCU investigators at the Federal Law Enforcement Training Center (FLETC) in Glynco, Geogia. The training is administered by the Inspector General Academy in cooperation with the National Association of Medicaid Fraud Control Units and is intended to improve the effectiveness of the MFCUs in investigating and prosecuting Medicaid provider fraud and patient abuse and neglect.

The Office of Investigations also sponsors and coordinates training conferences regarding the Federal grant regulations for MFCU employees and other State administrative and financial staff . Additional training for MFCU investigators is available through the Health Care Fraud Investigations Training Program provided at the FLETC. The OIG, in cooperation with the Financial Fraud Institute at the FLETC, developed this two week training program. Course topics include health care fraud schemes, interviewing techniques, evidence gathering, case preparation and financial investigative techniques.

Increased Auditing Partnerships

Additional Federal and State partnerships will be developed with the States to strengthen the capability to detect, prosecute and punish fraudulent or abusive reimbursement activities. Potential audits and developing issue areas include:

Medicaid denials of inpatient acute hospital stays.
Physician clinical billing practices.
Medical equipment, supplies, and related items.
Medicaid prescription drugs - average wholesale price.
Medicaid prescription drugs - dispensing fees.
Hospice care - eligibility.
Home health care - eligibility.
Managed Care - payment of enhanced rates.
Multi-state audit of long-term care to include licensing, inspections, violations, and reimbursement systems.
Mental health services.

Surveillance and Utilization Review Subsystem (SURS)

In 1972, Congress enacted Public Law 92-603 that provided funding to States to foster development and implementation of the Medicaid Management Information System (MMIS). One of the subcomponents of the MMIS is the Surveillance and Utilization Review Subsystem (SURS). These units were designed to serve as major contacts and analysis points for detection and referral of potential fraud and provider abuse cases to assigned components within the States that pursue investigation of alleged criminal fraud within the Medicaid Program, usually the Medicaid Fraud Control Units.

As part of the Medicaid Management Information System, the SURS applies automated post-payment screens to Medicaid claims adjudication to identify aberrant billing patterns that may indicate fraud or provider abuse. The SURS staff reviews systems output and conducts preliminary reviews of providers to determine whether they can substantiate a pattern of fraud. In such cases, they must refer the matter to the States' fraud control unit for investigation.

Based on a review we conducted in November 1996, we determined that the number and percentage of suspected fraud referrals from SURS had declined in the previous 10 years. Officials at the State fraud control units were divided in their opinions as to the extent and quality of SURS development of fraud allegations and edits. Based, in part, on our recommendation, HCFA established a Program Integrity Group to address fraud and abuse issues within the Medicaid and Medicare programs. This group was charged with monitoring many projects that would increase the effectiveness of fraud unit activities.

Managed Care Fraud

Last summer, we released a report describing the manner in which Medicaid Section 1115 Waiver States detect, review, and refer for investigation fraud and abuse cases in managed care programs. This emerging area is of great importance as an increasing number of Medicaid beneficiaries receive health care services under managed care. In our review of 10 States we found variation in the intensity and nature of States' oversight activities for managed care fraud and that there is no general agreement about specific roles and responsibilities for fraud detection and referral in managed care. We recommended a series of actions for HCFA to undertake and work with us collaboratively, including establishing guidelines for States and managed care organizations to follow in developing and carrying out fraud and abuse detection and referral activities. Also, we recommended that HCFA ensure that States monitor managed care organizations' fraud and abuse programs for compliance with its guidelines. Finally, we encouraged HCFA to continue in developing and sponsoring training in managed care fraud and abuse referral and detection techniques for the States and Medicaid managed care organizations.

Medicaid Payment Safeguard Activities

We are in the process of conducting a study that will assess Medicaid program safeguards used in a sample of States and will provide information on the state of developing safeguards in the areas of provider enrollment, prepayment and claims processing and post payment review. We are finding several States are employing new safeguards in provider enrollment that show promising results in reducing the number of abusive providers within the program. States are now beginning to employ claims processing edits and other systems improvements similar to those used by Medicare that should reduce program vulnerabilities. Finally, we are seeing States begin to target their post payment activities to more accurately target fraud and abuse activities. All of these developments and new strategies suggest promising approaches that may be adopted by all of the State agencies and further strengthen the Medicaid program.

CONCLUSION

We appreciate the opportunity to come before you today and share with you the continuing improvements that we are witnessing in the ongoing fight against fraud and abuse in the Medicaid program. We will continue to work for further improvements that will strengthen the program through our investigations, financial audits and evaluations of program effectiveness. Perhaps most importantly, we look forward to continuing our active partnerships with other Federal and State agencies and to providing oversight and guidance in investigating fraud and abuse in health care. My thanks to you and the committee for highlighting this important issue and allowing us to share our continuing efforts. This concludes my testimony. I welcome your questions.

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