<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:65912.wais]
MEDICAID PROVIDER ENROLLMENT: ASSESSING STATE EFFORTS TO PREVENT FRAUD
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JULY 18, 2000
__________
Serial No. 106-120
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
65-912CC WASHINGTON : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
FRED UPTON, Michigan, Chairman
JOE BARTON, Texas RON KLINK, Pennsylvania
CHRISTOPHER COX, California HENRY A. WAXMAN, California
RICHARD BURR, North Carolina BART STUPAK, Michigan
Vice Chairman GENE GREEN, Texas
BRIAN P. BILBRAY, California KAREN McCARTHY, Missouri
ED WHITFIELD, Kentucky TED STRICKLAND, Ohio
GREG GANSKE, Iowa DIANA DeGETTE, Colorado
ROY BLUNT, Missouri JOHN D. DINGELL, Michigan,
ED BRYANT, Tennessee (Ex Officio)
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Aronovitz, Leslie G., Associate Director, Health Financing
and Public Health, General Accounting Office............... 21
Assatourian, Ruben, President, Apical Corporation;
accompanied by Stephen H. Turner, Attorney, Carlson, Messer
& Turner L.L.P............................................. 4
Cates, J. Alan, Chief, California Medicaid Fraud Bureau...... 39
Connell, Kathleen, Controller, Office of the California State
Controller................................................. 35
King-Shaw, Ruben J., Jr., Executive Director, Florida Agency
for Health Care Administration............................. 43
Kubic, Thomas T., Deputy Assistant Director, Criminal
Investigations Division, Federal Bureau of Investigation... 31
Wagoner, Doug, Vice President, Public Sector, Choicepoint.... 47
Material submitted for the record by:
Bliley, Hon. Tom, Chairman, Committee on Commerce:
Letter dated June 22, 2000, to Gary Crayton, Director of
Medicaid, State of Florida, enclosing questions for the
record, and responses to same.......................... 70
Letter dated June 22, 2000, to Jacqueline Romer-Sensky,
Director, Ohio Department of Human Services, enclosing
questions for the record, and responses to same........ 91
(iii)
MEDICAID PROVIDER ENROLLMENT: ASSESSING STATE EFFORTS TO PREVENT FRAUD
----------
TUESDAY, JULY 18, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2322, Rayburn House Office Building, Hon. Fred Upton
(chairman) presiding.
Members present: Representatives Upton, Cox, Burr, Bilbray,
Bryant, Stupak, and DeGette.
Staff present: Chuck Clapton, majority counsel; Jason
Scism, legislative clerk; and Chris Knauer, minority
investigator.
Mr. Upton. Good morning, everybody. Thanks for coming on
time.
For my colleagues, I'll make unanimous consent that I guess
no one can object to that their opening remarks will be made
part of the record. And if they get here before I finish, which
will not be too long, obviously they will be able to deliver
that. For those of you in the audience, we do have a number of
subcommittee meetings this morning; and the House is in
session, though we're not expecting votes for a couple of
hours; but we'll see.
Let me begin by thanking all of the witnesses who are
testifying today. Many of them are currently serving on the
front lines of our national efforts to combat health care
fraud. They have unique insights into what we can do to win the
battle to eliminate fraud from important programs like Medicare
and Medicaid, and I appreciate their agreeing to appear today
to share that information with us.
Today we'll hear very disturbing testimony about how the
California Medicaid program may have lost $1 billion--``b'' as
in big--dollars due to medical equipment fraud. One of the
witnesses will tell us how he saw firsthand how easy it was to
become a California Medicaid provider and make tens and
sometimes hundreds of thousands of dollars a month by
submitting false claims. He'll also tell us how honest
equipment companies were unable to compete with these criminals
and were forced out of business or persuaded to join in the
criminal activities.
What is even more disturbing is the fact that much of this
fraud could have been prevented with simple, inexpensive
techniques to evaluate the applicants before they're able to
enroll as Medicaid providers.
It seems to me that a State has already won half of the
battle if they can keep criminals out of the Medicaid program
before they can submit any false claims. This is especially
true when you consider that the cost of these techniques can be
sometimes between $100 and $200 per provider, while denying
just one criminal access to a Medicaid program can prevent them
from submitting hundreds of thousands of dollars worth of false
claims.
Both California and Florida have shown how common-sense
techniques like criminal background checks and site visits to a
provider's place of business can be very successful methods of
preventing Medicaid fraud before it gets started. The rigorous
controls that Florida has put into place have contributed to
the dramatic decrease in fraud that has recently allowed them
to save $100 million over 2 years. California is now also
putting into place similar provider enrollment controls that
should dramatically decrease the size and scope of their fraud
problem.
I hope that the representatives from both of these States
as well as other witnesses share with us their recommendations
on how such provider enrollment controls can best be used to
prevent Medicaid fraud across the country. The most important
question that I hope can be answered today is what more should
be done to encourage all State Medicaid programs to adopt
similar provider enrollment techniques.
One lesson that I've seen from the committee's prior work
on health care fraud issues is that criminals are always going
to try to find ways to make money by ripping off government-run
health programs. They know which programs have tough safeguards
in place and which ones are vulnerable to fraud. Sometimes,
like roaches scurrying from the bright light of public
attention, these criminals will inevitably seek out the dark
cracks and crevices provided by States that lack adequate anti-
fraud safeguards.
What I hope we can learn today is how we can stop these
criminals in their tracks and to ensure that we will never
again have to hear about another State losing a billion dollars
to a similar Medicaid fraud scheme.
I welcome all of our witnesses, and I ask the vice chairman
of the subcommittee if he'd like to make an opening statement.
Mr. Burr.
Mr. Burr. I thank the chairman and apologize for my
tardiness this morning.
Let me just say, very briefly, that every time this
committee takes up medical fraud, I think it's really easy for
us to see the human face behind it. It's a billion dollars in
California that doesn't end up serving the population that it
was intended for.
Mr. Chairman, we have talked many times about the fact that
one of the most important things we can do federally is to do
no damage. In this particular case, I think that this is a
California problem. It may be a problem in other States, but I
think it's important for every Member of Congress to realize,
as we go through and set up the Federal guidelines and in some
cases expand what we cover, that it's sometimes this
institution that creates the incentive for new criminals in the
Medicaid system and for fraud to, in fact, flourish. We've got
to make sure that every dollar that's devoted to health care
goes to the beneficiaries and not to those that are in the
system only to gain from it.
I'm hopeful that California and others will use this
committee to tighten, strengthen and secure their systems. And
if there is anything that we can do--I know that I speak for
all the members on this side and many of which can't be with us
today--our hope is that the Medicaid systems truly are there to
fill the needs of those who most need it; and if there's a way
for us to set guidelines that tightens it, to help the States,
then this member and I think this side is certainly willing to
do that.
With that, I yield back.
Mr. Upton. Mr. Bryant.
Mr. Bryant. Thank you, Mr. Chairman. I apologize for
arriving late. I was downtown doing my duty and whatever that
might be----
Mr. Upton. Giving blood?
Mr. Bryant. Giving blood.
Mr. Upton. Good.
Mr. Bryant. [continuing] and I appreciate you having this
hearing. I have confidence in how you stand on this issue as
well as my colleague from North Carolina, and I would associate
myself with your remarks without even hearing either one of
them. I have great confidence in both of you, and I will yield
back my time.
Mr. Upton. Thank you.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Let me begin by thanking Chairman Upton for holding this hearing
this morning, and welcoming all of our witnesses. I believe that
hearings like this one, and oversight generally, are among the most
important functions that the Committee performs. This is especially
true of activities relating to Federal health care programs, which
prevent scarce Medicare and Medicaid dollars from being lost to fraud
and abuse. Whether it was the hearings that exposed Medicare contractor
fraud or the investigations that uncovered billing companies submitting
false claims, the Committee on Commerce has taken the lead in
protecting both the American taxpayers and the beneficiaries who depend
on Medicare and Medicaid to pay for their health care services.
Unfortunately, today's testimony clearly indicates how much more
needs to be done to eliminate fraud and abuse from these important
health care programs. The amount of money lost to the fraud schemes
that we will hear about today is staggering--California's Medicaid
program over the past few years may have lost almost ONE BILLION
dollars to fraud involving durable medical equipment. These losses are
all the more disturbing because many could have been prevented by
simple and inexpensive techniques for reviewing providers before they
are allowed to participate in Medicaid programs.
One might think that common sense would prompt all States to use
techniques like criminal background checks and site visits to a
provider's place of business before allowing an individual to begin
submitting Medicaid claims. For as little as fifty dollars per
provider, such techniques can be used to identify and screen out
individuals who otherwise are able to commit hundreds of thousands of
dollars of fraud in a single month.
Governor Jeb Bush, the State of Florida and Mr. King-Shaw's office
should all be commended for the excellent programs they have put in
place to review providers before they are allowed to enroll in
Florida's Medicaid program. These efforts have contributed to the one
hundred million dollars in savings that they have recently been able to
achieve through fraud reduction and prevention. In response to their
recent problems, California also has begun to adopt some of these very
rigorous new provider enrollment controls.
Unfortunately, the General Accounting Office will tell us that not
all States are in step with Florida and California's efforts to root
out fraud. The criminals who commit health care fraud are clever. As
Florida and California tighten up their controls, we can expect to see
these fraud schemes migrate to States with less rigorous controls.
To insure that the types of fraud described by today's witnesses
will not be repeated in other States, all States should adopt basic,
common-sense safeguards. This hearing will hopefully identify means to
encourage such activities. I also believe that Congressional oversight
should be used to hold States that are not using these techniques
accountable for their lapses.
I will also assure all of you that today's hearing will not be end
of the Committee's inquiries into these matters. This Committee will
continue to do its part to eliminate Medicare and Medicaid fraud. I
believe that America's taxpayers and Medicaid's beneficiaries should
expect no less from us.
Thank you again Chairman Upton, and I will now look forward to
hearing from our witnesses.
Mr. Upton. We have two panels today. The first panel is Mr.
Ruben Assatourian. Mr. Assastourian, if you will come to the
table. Mr. Assatourian, we have long-standing committee rules
that in this subcommittee we take testimony under oath. Do you
have any objection to that?
Mr. Assatourian. No.
Mr. Upton. And, second, under committee rules, you're
allowed to have counsel also represent you. Do you wish to do
that?
Mr. Assatourian. Yes.
Mr. Upton. And if he could state his name for the record.
Mr. Turner. Mr. Chairman, my name is Stephen Turner,
counsel for Mr. Assatourian.
Mr. Upton. If you would both raise your right hand.
[Witnesses sworn.]
Mr. Upton. You're now under oath.
Mr. Assatourian, please have a seat. Your statement, which
I was able to read in its entirety, will be made part of the
record in its entirety. If you could limit your opening
statement to about 5 minutes, that would be terrific.
We'll start--and you might need to push the mike a little
bit closer to you so that people in the back can hear.
Mr. Assatourian. I will limit the statement. I will make it
as short as possible.
Mr. Upton. Okay.
TESTIMONY OF RUBEN ASSATOURIAN, PRESIDENT, APICAL CORPORATION;
ACCOMPANIED BY STEPHEN H. TURNER, ATTORNEY, CARLSON, MESSER &
TURNER L.L.P.
Mr. Assatourian. My name is Ruben Assatourian. I would like
to thank you for giving me the opportunity to testify before
this committee.
Currently, I am the President of Apical Corporation, a
medical import and distribution company which I started several
years ago. The company does not have any Federal or State
contracts and is not involved in Medicare, Medi-Cal or any type
of government medical billing. We import high-quality medical
products from some of the most reputable European manufacturers
in Germany, Spain, France and Italy, in most cases as the
exclusive national distributor. The products range from
orthopedic bracing, sports medicine products and compression
stockings. In addition, we do purchase and distribute the
products from several reputable American manufacturers.
In 1997, while my business was growing, I was also a
territory manager for a few American medical manufacturers. At
their request, I was asked to start selling their products to
retail medical supply stores, also known as DMEs, and
providers. While, for the most part, the great majority of
providers are honest and legitimate individuals and businesses,
American-owned and also from different ethnic backgrounds,
serving their communities, I realized that the Medi-Cal program
in California, with its loopholes and defunct oversight system,
has offered criminals a business opportunity more lucrative
than the software and the dot-com industry.
The California Medi-Cal system is a broken down ATM
machine, which is spitting out cash uncontrollably without the
need for even an ATM card. Armani suits have been charged to
Medi-Cal, round-trip tickets overseas and silverware for
patients have been charged to the Medi-Cal system.
An enormous amount of fraud in the Medi-Cal system has been
committed involving adult diapers. In fact, more adult diapers
are shipped to Southern California than the entire country
combined; and, contrary to popular belief, Southern California
does not have a big bladder control problem.
From the bidding process, where manufacturers bid to put
their products on the Medi-Cal formulary, to the State
employees who were caught selling Medi-Cal provider numbers and
the criminal providers who make hundreds of thousands of
dollars a year in pure profit, the whole system has become a
magnet for criminals. The State Treasury has been looted to the
tune of hundreds of millions of dollars.
The fraud is perpetrated in four ways. The first one is
getting a provider number. Until 1997, the standard procedure
for a provider was a waiting period of 3 to 6 months to obtain
a Medi-Cal provider card. As a result of the publicity that
Medi-Cal was easy money, many immigrants from the former Soviet
republics, with the dream of making easy money, rushed to this
business. In many cases, the applicants did not have the basic
education of reading and writing English.
From early 1998, the problem got out of control when
corrupt State employees within the Health Department started
selling Medi-Cal provider numbers from anywhere between $10,000
to $20,000, thus luring people, mostly immigrants, into the
business. One client informed me he was able to obtain a
provider number within 48 hours for $15,000 before he had even
signed a lease for a store.
No. 2, billing Medi-Cal. Once the provider number is
obtained, to give the appearance of a legitimate business the
provider would make a one-time purchase of approximately $5,000
in inventory. Prior to getting the provider number, a State
employee would have to visit the store to verify the legitimacy
of the business by looking at the store operation and purchase
invoices for the merchandise the provider had purchased. In
some cases, the signature would be obtained without any
official visits to the store; and in cases where a visit would
be made it would serve no purpose, the reason being that, while
I am convinced that the State employees who were making such
visits did have the right intention to detect fraud, the
problem is that they were unqualified to detect fraud in this
area.
For example, auditors from the State Controller's Office
who had the primary responsibility of detecting fraud are
trained accountants, and I am sure they are qualified to detect
fraud in accounting matters. Unfortunately, they have been
given the responsibility of detecting fraud in medical
products, and fraud does not always happen in the accounting
figures. For example, it can happen in the combination of
products billed.
In some instances, I have been contacted by State
Controller's auditors asking me if it is normal for a small
medical supply company to bill Medi-Cal for a hundred pairs of
high-compression pantyhose a month. The answer is, no, it is
not normal unless the provider has multiple contracts with
hospitals and vein specialists.
Mr. Upton. You can finish up. We'll give you a minute or 2.
Mr. Assatourian. Passing an audit. A fraudulent provider
can pass an audit or could pass an audit by purchasing phony
invoices for the supplies the provider billed Medi-Cal from a
phony distributor. A fraudulent distributor has very low
overhead because they are not in the business of selling
products but rather invoices. Consequently, they do not have
the expenses of a legitimate business, such as inventory,
insurance, payroll, delivery vehicles and warehousing expenses.
On those occasions where products were actually sold to a
fraudulent provider, the provider would dump the products on
the market.
I am aware of situations in which my clients could purchase
products for which my company was the sole national distributor
for 20 percent of the cost my company was required to pay the
manufacturer. Obviously, a legitimate distributor cannot
compete in this environment.
The way it works is this: A provider would purchase an
invoice for a hundred thousand dollars worth of nonexistent
merchandise and pay the phony distributor the full value of the
invoice, and the distributor would keep 20 percent for himself
and reimburse the provider with $75,000 in cash. Under these
choking circumstances it has become absolutely impossible to
conduct normal business, and any provider who would get caught
with unacceptable practices would get a penalty and be allowed
to continue doing business. Had it not been for the FBI coming
into the picture with a sledgehammer and an industrial grade
vacuum cleaner, every legitimate distributor and provider would
end up bankrupt, leaving the medical business to criminal
organizations.
I will stop. The rest of the statement is already on the
record, and if you have any questions----
Mr. Upton. We do. And how we're going to proceed here is
that each of us will take about 5 minutes and ask you some
questions and see how long it goes.
[The prepared statement of Ruben Assatourian follows:]
Prepared Statement of Ruben Assatourian, Apical Corporation
Chairman Upton, distinguished members, my name is Ruben
Assatourian, and I would like to thank you for giving me the
opportunity to testify before this committee.
I am an American citizen. I was born in Iran, where my father had a
successful business during the Shah, because of our Armenian heritage,
and our being Christian, and the political instability in Iran, my
father had sent the whole family to Switzerland, where we lived, and
went to school, with my father spending 2 weeks of every month, with us
in Switzerland, and the other 2 weeks attending to his business in
Iran. After the revolution in Iran, we moved to the United States.
In 1980, we started a family business, and on the advice of my
father, I started learning about medical products and the business.
With no experience whatsoever, I went through the process of educating
myself about the medical products, and started selling medical products
to countries such as Kuwait and Qatar, where American made products are
considered to be the best. The learning process was extremely difficult
and costly. In many cases, the result was a financial disaster for me.
However, never in my entire life have I received any welfare, financial
assistance, medical aid or even unemployment from any branch of the
federal or the state government.
Currently, I am the president of Apical Corporation, a medical
import and distribution company, which I started several years ago. The
company does not have any Federal or State contracts, and is not
involved in Medicare, Medi-Cal or any other type of government medical
billing. We import high quality medical products from some of the most
reputable European manufacturers in Germany, Spain, France and Italy,
in most cases, as the exclusive national distributor. The products
range from orthopedic bracing, to sports medicine products and
compression stocking. In addition, we do purchase and distribute
products from several reputable American manufacturers.
Sales have been the primary part of my responsibility, where I
demonstrate medical products to potential customers. I was not
introduced to ``Medi-Cal'', which is the medical assistance program for
the poor in California, until 1997. Prior to that, my sales activity
was mostly in the hospital and the doctor's market, where I would go to
hospitals such as the Children's Hospital in Los Angeles, the V.A.,
Kaiser Permanente, among others, for demonstration and in-service of
orthopedic casting products.
The story I am telling you, is not a plot out of the popular TV
show the ``Sopranos'', this story is called Medi-Cal, and the hellish
environment under which businesses have to survive. It involves fraud,
corruption, criminals, scams and a splash of ethnic discrimination.
In 1997, while my business was growing, I was also territory
manager for a few American medical manufacturers, and at their request,
I was asked to start selling their products to the retail medical
supply stores, also known as ``DME's'' and ``Providers''. While for the
most part, a great majority of the providers are honest and legitimate
individuals and businesses, American owned, and also, from different
ethnic backgrounds serving their communities, I realized that the
``Medi-Cal'' program in California, with it's loopholes and defunct
oversight system, has offered criminals, a business opportunity, more
lucrative than the software and the dot.com industry. The California
``Medi-Cal'' system, is a broken down ``ATM'' machine, which is
spitting out cash uncontrollably without the need for even an ``ATM''
card. Armani suits have been charged to Medi-Cal cards, round-trip
tickets overseas, and silverware for patients have been charged to
Medi-Cal.
Currently the joke is that a car salesman asked a potential
customer, why don't you get a brand new Lexus with your Medi-Cal card,
and the man asks, what about the monthly payments? And the car salesman
says, monthly payments are no problem, we accept food stamps. Medi-cal
should have a new marketing logo: DON'T LEAVE HOME WITHOUT IT!
Unfortunately, there is no humor in this situation. This mess and
corruption has made life a living miserable hell for distributors such
as me, and providers, who are trying to conduct legitimate business and
grow. Instead, we are now paying the price and the penalty for the
actions of others.1An enormous amount of fraud in the Medi-Cal system
has been committed involving adult diapers, in fact, more Adult diapers
are shipped to Southern California, than the entire country combined.
And contrary to popular belief, Southern California does not have a big
bladder control problem! From the bidding process, where manufacturers
bid to put their products on the Medi-Cal formulary, to the state
employees who were caught selling Medi-Cal provider numbers, and the
criminal providers who make Hundreds of Thousands of Dollars a year in
pure profit. The whole system has become a magnet for criminals. The
State treasury has been looted to the tune of Hundreds of Millions of
Dollars.
A medical supply store opens up, and starts billing Medi-Cal for
medical products never purchased. The products are billed to patient's
Medi-Cal cards, which in many cases are stolen. In one extreme case
which I have heard, the provider was actually dating a nurse in a
doctor's office and promising her marriage, in exchange for patient
Medi-Cal card numbers. In cases where the patient knows his or her
number is being used illegally, the patient receives compensation,
either in the form of cash, or presents. In either case, depending on
the appetite or sophistication of the provider, they can net anywhere
from $5,000 to $100,000 per month in pure profit, for single store
operators, and several hundred thousand Dollars a month in profit, for
providers who are fronts for groups who own and control several stores.
As a result, the taxpayers, finance the lavish life style, expensive
cars, houses, and the commercial properties that these criminals
purchase.
The fraud is perpetrated in 4 ways:
1) Getting a provider number:
Until 1997, the standard procedure for a provider was a waiting
period of 3 to 6 months to obtain a Medi-Cal provider number. As a
result of the publicity that Medi-Cal was easy money, many immigrants
from the former Soviet Republics, with the dream of making easy money,
rushed to this business. In many cases, the applicants did not have the
basic education of reading and writing English. From early 1998, the
problem got out of control, when corrupt State employees within the
Health Department started selling Medi-Cal provider numbers from
anywhere between $10,000 to $20,000 thus luring people, mostly
immigrants into the business. One client informed me, he was able to
obtain a provider number within 48 hours, for $15,000 before he had
even signed a lease for a store.
2) Billing Medi-Cal
Once the provider number is obtained, to give the appearance of a
legitimate business, the provider would make a one-time purchase of
approximately $5,000 in inventory. Prior to getting the provider
number, a State employee would have to visit the store to verify the
legitimacy of the business, by looking at the store operation, and
purchase invoices for the merchandise the provider had purchased. In
some cases, the signature would be obtained without any official visits
to the store, and in cases where a visit would be made, it would serve
no purpose. The reason being that while I am convinced that the state
employees who were making such visits did have the right intention to
detect fraud, the problem is that they were unqualified to detect fraud
in this area. For example, auditors from the State Controller's office,
who had the primary responsibility of detecting fraud, are trained
accountants in accounting, and I am sure they are qualified to detect
fraud in accounting matters, unfortunately, they have been given the
responsibility of detecting fraud in medical products, and fraud does
not always happen in the accounting figures. For example, it can happen
in the combination of products billed. In some instances, I have been
contacted by State Controller's auditors, asking me if it is normal for
a small medical supply company, to bill Medi-Cal for 100 pairs of high
compression pantyhose a month. The answer is no, it is not normal,
unless the provider has multiple contracts with hospitals and vein
specialists.
3) Passing an audit
A fraudulent provider could pass an audit by purchasing phony
invoices for the supplies the provider billed Medi-Cal, from a phony
distributor. A fraudulent distributor, has very low overhead, because
they are not in the business of selling products, but rather invoices.
Consequently, they do not have the expenses of a legitimate business,
such as inventory, insurance, payroll, delivery vehicles, and
warehousing expenses. On those occasions where products were actually
sold to a fraudulent provider, the provider would dump the product on
the market. I am aware of situations, in which, my clients could
purchase products for which my company was the sole national
distributor, for 20% of the cost my company was required to pay the
manufacturer. Obviously, a legitimate distributor cannot compete in
this environment.
In 1998, in addition to it's main distribution center, and it's
office, my company had 8 storage facilities, filled with merchandise we
could not sell, because providers were interested in purchasing fake
invoices from phony distributors, at a cost of approximately 25% The
way this works is that a provider would purchase an invoice for
$100,000 worth of non-existent merchandise, and pay the distributor the
full value of the invoice, and the distributor would keep 25% for
himself and reimburse the provider with $75,000 in cash. Under these
choking circumstances, it had become absolutely impossible to conduct
normal business. And any provider who would get caught with
unacceptable practices, would get a penalty, and be allowed to continue
doing business. Had it not been for the F.B.I. coming into the picture
with a sledgehammer and an industrial grade vacuum cleaner, every
legitimate distributor and provider would end up bankrupt, leaving the
medical business to criminal organizations.
4) Products on the Medi-Cal formulary
Unlike Medicare, which reimburses providers, based on product
specifications, and not product brand names, therefore, increasing
competition, and lowering prices, Medi-Cal reimbursements are based on
product brand names, which contrary to the Medicare system, stifles
competition, and raises prices and cost to the State of California. For
example, Medicare reimburses providers approximately $200 for a double
hinged range of motion knee brace The provider may purchase this
product at the lowest possible price, and bill Medicare, as long as the
product meets the specification. In this situation the provider has a
choice of shopping around all over the country, and buying at the
lowest possible price. This practice is fair and generates healthy
competition. Unlike the Medicare system, Medi-Cal has a bidding
process, which is so rigged and flawed, that Fortune 100 companies such
as Kimberly-Clark and Proctor & Gamble, which happen to be among the
largest diaper manufacturers in the world have no chance of selling in
the Medi-Cal system, whereas Donald Duck the entertainer, who has never
manufactured a diaper in his entire career could be awarded a lucrative
5 year contract. The entire Medi-Cal incontinence system is a joke,
full of lawsuits, threats, cozy relationships and non-existent product
categories, unheard of, in the industry. And this is the way it works.
Medi-Cal puts out a bid for incontinence products, which is usually
awarded to somewhere between 5 and 10 suppliers for a period of 5
years. This means that any provider who bills incontinence products to
Medi-Cal should purchase the products of one of these 10 suppliers,
either direct or through the distributors. Every step of this bid is a
comedy, the new formulary for incontinence which is supposed to go into
effect in about three months, has already been cancelled and put to a
new bid 3 times already, and this has dragged on since 1998. The
original contract award was issued in 1998, and because of legal
threats by suppliers who were not awarded major portions of the
contract, the bid was cancelled, rightly so. For example, portions of
the contract, which could mean Millions of Dollars in revenue, had gone
to a sales representative working out of his home, who somehow, had
qualified himself as an incontinence supplier to the State, under one
brand. The other portion of the contract had gone to the manufacturer
who employed the sales representative, under a different brand. Another
portion of the contract, had gone to the same manufacturer's
distributor, who had introduced the same products under a different
brand. Funny enough, another portion of the contract had gone to a
distributor which private labels products, and the leftover and crumbs
of the contract was left to the actual manufacturers. By the way, in
this entire process, the bidders had managed to convince the bidding
committee to allow them to bid on ridiculous products which did not
make any sense, with high reimbursements. This cozy and unhealthy
relationship costs the State of California, and the taxpayers Millions
of Dollars. Medi-Cal should follow Medicare's lead, and start
reimbursing based on product specifications, and not brand names. To
give you an example, a trimfit diaper, which is a terminology in the
industry for low cost diapers, costs me $20, the very same diaper from
a manufacturer which is on the Medi-Cal formulary would cost me $24, a
20% price difference. If distributors and providers are given the
opportunity to purchase from the lowest possible source, as long as the
product meets the specifications, the millions of dollars saved by the
State of California, could be put into a much better use, like fighting
crime in the State, or improving the public school system.
In conclusion, if I may, as a distributor, who gut sucked into this
mess, and has seen first hand what has happened in the Medi-Cal system,
I would like to offer the following brief points.
Everyone involved shares a part of the blame, and there is plenty
to go around. When I was offered the opportunity to testify before this
committee, before my attorney finished his sentence, I immediately
accepted the invitation, I was grateful for being given the opportunity
to testify behind a screen, to hide my identity, which I refused. I am
not, and never have been an F.B.I. informant, but rather, a witness. It
is my understanding, that as a result of my testimony, 20 or 30
convictions have been made. Obviously, the F.B.I. would have the
accurate figure. In personal terms, the last 2 years have had a
devastating effect on my personal and business life. As a married man,
and father of a 5 year old son, and a nine month old son, I have
received death threats, at one point, I was forced to hire armed
bodyguards. For the first time in my life, I have purchased a hand gun,
that I keep at one of my offices. No one can blame the law enforcement
for cleaning up this mess. However, because of a few criminals with
Armenian backgrounds, the entire Armenian community has received a
black eye. Individuals with access to the media have publicized this
fact. As an American, I am outraged at the fact that this much money
has disappeared because of fraud, and as an Armenian, I am wounded that
the Armenian names are immediately released and distributed to the
media and the industry, while, the names of the corrupt officials
within the health department who were luring and selling provider
numbers to providers, who are equally guilty, have been swept under the
rug. The very same corrupts, employees have been transferred to other
jobs with pay, pending investigation, while, any provider caught with
irregularities is immediately looked at, as a criminal. Because of the
bad publicity that the Armenians have received, my competitors now
openly tell my customers not to do business with me, and as a salesman,
I have to spend half my time with my customers defending my ethnic
background. American providers can easily purchase products on credit,
and Armenians have to purchase on a C.O.D. basis, because of their last
name. Several loose, and out of control employees within the State,
assure providers that purchasing from non Armenian distributors would
be a safer strategy. Today, in Los Angeles, if you are an Armenian, and
you are in the Medical business, life looks very grim.
Obviously, fraud cannot be eliminated completely, it is widely
suspected that criminals are migrating from the healthcare field, into
the Adult Daycare business. Additional regulation only chases the
criminals into a new field of fraud, while it paralyses honest business
people trying to make a living in the healthcare field, and in some
case forcing small mom and pop operations, out of business. New
regulations, leaves the rest of us holding the bag, while it does
nothing to stop the criminals. Basic, simple, common sense steps could
immediately reduce the level of corruption:
1) Providers should purchase from authorized distributors, therefore,
eliminating phony distributors out of the business.
2) The brand name reimbursement process should end. Any product that
meets the specification of a specific category, should be
billable. This will open up the playing field, increase healthy
competition, and save the State of California Millions of
Dollars.
3) Obtaining a driver's license in California, is not a right, it is a
privilege. The same rule should apply to anyone who wishes to
become a provider and bill Medi-Cal. Anyone wishing to become a
provider should pass a basic test, ensuring, at least the
provider has basic knowledge of the industry.
4) Providers should be bonded.
This concludes my opening statement, I wish to thank you for your
patience, and I will gladly answer any questions you may have.
Mr. Upton. Now, as I understand it, you came forward
about--what--2 years ago; is that right?
Mr. Assatourian. I was subpoenaed by the FBI to testify
before the grand jury as a witness; and it is my understanding;
as a result of my testimony, I think 20 or 30 providers have
been convicted.
Mr. Upton. Right. And when did they actually subpoena you
to--when were you aware that an investigation was ongoing,
about?
Mr. Assatourian. Two years ago.
Mr. Upton. Two years ago. As you deal with your peers, now
you're still involved in this, right? Are you still a provider?
Mr. Assatourian. I am not a provider. I'm a distributor.
Mr. Upton. I am sorry. But you're still a distributor, a
wholesaler; is that right?
Mr. Assatourian. Yes, sir.
Mr. Upton. Since you appeared before the grand jury and
your story has become fairly public, have you seen changes by
the State of California, positive changes in terms of trying to
weed this out?
Mr. Assatourian. Yes, I have. Unfortunately, I think these
changes will be temporary, because the whole system has to be
fixed because it's like killing cockroaches. You kill the
cockroaches for a couple of weeks, it's all clean. Eventually,
they came back through another crack.
Mr. Upton. The State of California and a number of other
States have been talking about performing onsite visits. Have
you seen that in a major way in the State of California?
Mr. Assatourian. Yes, yes. Except, again, if I may, even
though the people making the onsite visits have the right
intention, they do want to stop fraud. The problem is that, in
many cases, some of the people making the visits are just not
qualified to detect the fraud. Fraud could be going on right in
front of their eyes and they might not know it because the
people who are making these onsite visits should be familiar
with the business, first of all.
Mr. Upton. As I've read some of the statements that we are
going to hear from a second panel later on, in some of the
other States as they have conducted their investigations,
there's some examples such as an inspector going to a
wholesaler or provider, that the address is on the 10th floor
of a building, and the building only has nine stories. They
have got empty lots, P.O. boxes, no equipment that is there. As
they visit some of the businesses and actually look at some of
the equipment on the shelf, it's dusty. It seems to be, in at
least a number of cases, a fairly easy, routine job to figure
out whether or not they're in the real business or whether
they're not.
Mr. Assatourian. As far as fraud is concerned in the area
that you are talking about, it has stopped--like people getting
Medi-Cal checks at a Laundromat, at a P.O. Box, that has
stopped. However, pretty much what has happened, it has cleaned
out the scam artists who are more primitive. Now there are more
sophisticated people in the business. And it just--if I may,
just like the drug problem, the DEA goes in with this high-tech
equipment and the drug dealers always have the money to buy
better equipment. The basic problem has been solved, yes.
Mr. Upton. But you would urge that the States continue to
do onsite visits. What is California visiting now? Is it once a
year? Is it more than that? Do you know?
Mr. Assatourian. I think there are providers who have been
visited several times, and there are providers who haven't been
visited in--with the exception of last year, there were
providers who had never been visited in a matter of 2 or 3
years.
Mr. Upton. Tell us exactly how it is that you actually get
an enrollment number, code. What is the process for someone new
in the business trying to get an enrollment number?
Mr. Assatourian. I am not a provider. We are just
distributors. However, my understanding is there is a
moratorium right now, but until--prior to the FBI stepping in,
the process was, if somebody wanted to open up a store, it was
just a matter of 1, 2, 3, that's it, let's do it. And there
were people out of Sacramento who were selling provider numbers
from anywhere between $10,000 to $20,000 and within 24 hours a
provider could be set up to rape the system. Whereas it used to
be 3 to 6 months, but in 1997 and 1998 it was out of control
and out of date.
Mr. Upton. Mr. Burr.
Mr. Burr. Thank you, Mr. Chairman.
You, in the conclusion of your opening statement, raised
four points that you said were basic, simple, common-sense
steps that could eliminate or immediately reduce the level of
corruption. Let me go through some of those if I could.
Providers should purchase from authorized distributors,
therefore eliminating phony distributors out of the business.
Is there some type of certification that distributors and
medical equipment go through?
Mr. Assatourian. No. What I'm referring to is that the
provider should purchase from an authorized distributor--
authorized distributor meaning that the distributor purchases
directly from the manufacturer, instead of going through like
gray market distributors.
Mr. Burr. Is there any type of certification that the State
does for authorized distributors versus unauthorized
distributors?
Mr. Assatourian. Hmm.
Mr. Burr. Then whose responsibility do you see it to
determine whether the distributor is an authorized distributor?
A provider doesn't know where you might purchase your product
from or whether you purchase product at all.
Mr. Assatourian. Well, the provider should call the
manufacturer, and/or the State should verify that the
distributors are authorized distributors for a specific number
of manufacturers----
Mr. Burr. So your suggestion is somebody has to verify the
legitimacy of the distributor?
Mr. Assatourian. Yes. The provider can either call the
manufacturer and verify if, for example, Ruben Assatourian is
authorized distributor.
Mr. Burr. How many providers that you sell to would pick up
the phone and call a manufacturer to determine whether you were
an authorized distributor?
Mr. Assatourian. Maybe 1 or 2.
Mr. Burr. Not too many?
Mr. Assatourian. Not too many. Until the FBI stepped in,
these people didn't even know what an 800 number was.
Mr. Burr. Let me get into the brand name reimbursement
versus the product category reimbursement. How much of a
problem do you perceive that to be?
Mr. Assatourian. That is one of the biggest problems right
now with the whole reimbursement system. Because, as I've
said--as I've put in the opening statements, Medicare
reimbursement is based on product specification.
Mr. Burr. Medicare is also considering going to some areas
where they're getting away from product categories and going
into specifically named brand name products, and what would
your suggestion be to Medicare?
Mr. Assatourian. It would automatically start skyrocketing
the prices both for Medicare and the provider. Because for as
long as there's an enforcement or as long as there's a brand
name requirement, that drives up the cost. Because then the
manufacturers, the four or five or 10 manufacturers, know that
their product can only be billed to Medi-Cal or Medicare or
whatever. It becomes like a little cozy exclusive club, and
they can charge whatever they want.
Whereas, right now, under the Medicare guidelines, there's
very strong, healthy competition for manufacturers to sell
their products, unlike Medi-Cal where the whole reimbursement
system has become a joke because the reimbursements are made
based on specific brand names. The manufacturers who make those
brand names control the pricing and, ultimately, the
reimbursement by the State of California which, if stopped,
could save the State millions of dollars a year.
Mr. Burr. Are there currently new providers opening up in
California that are not reputable providers who are obtaining
whatever license or, I am not sure what Medi-Cal uses, a
provider number? Is that process still going on?
Mr. Assatourian. The fraud?
Mr. Burr. Yes.
Mr. Assatourian. Not to the extent that it was going on in
1997 and 1998, but, yes, it is.
Mr. Burr. There are new providers who have opened up who
have no intentions of doing anything other than the shell game
that's been happening?
Mr. Assatourian. Absolutely.
Mr. Burr. What has changed in the process in California
that you've seen as it relates to what a provider must go
through to get whatever numbers they need to from Medi-Cal?
Mr. Assatourian. The only change I've seen is that they
have to wait for a long time, which these people don't mind.
And my understanding is that the State now does a criminal
background check or a broader background check. But while
they're going through the waiting period now they have migrated
to a new, more lucrative area of fraud, which is the adult day
care center business in California. Now, that's going to be the
next jackpot for the criminals. There's a huge potential for
profit in that area, and that's where the big problem is going
to be.
Mr. Burr. The last point you hit on is that providers
should be bonded. How important do you feel about that and are
there any requirements currently?
Mr. Assatourian. I think currently--I am not sure if it's
being enforced or maybe it's being considered, but I think it
is extremely important. Because as long as the providers know
they have to deal with the legal systems, somehow it will
eliminate or minimize the fraud.
Mr. Burr. We certainly have some other witnesses that will
help to clarify some of it. I appreciate your testimony.
I yield back, Mr. Chairman.
Mr. Upton. Mr. Bryant.
Mr. Bryant. Thank you. I thank the witness for being here.
I have just a few questions.
Regarding your cooperation with the authorities, I assume
they were Federal. You mentioned the FBI. The case--the grand
jury you testified before, was it a Federal grand jury?
Mr. Assatourian. Yes.
Mr. Bryant. So this investigation that you cooperated in
primarily was done by the Federal authorities; and it is, to
your knowledge--realizing you're not a lawyer, but you have a
lawyer with you--it was handled--the people have been charged
and I assume some convicted, that's been in Federal court?
Mr. Assatourian. Yes, sir.
Mr. Bryant. Are there Federal task forces out there--again,
you might want to talk to your lawyer--in California that the
U.S. attorneys have in place that go specifically after health
care fraud and abuse?
Mr. Turner. I'll answer that question.
I am aware of such a task force, yes.
Mr. Bryant. Are there similar or counterparts in the State
system in terms of State prosecutors? Do they have such task--
medical health care task forces for fraud?
Mr. Turner. Certainly it's my understanding that witnesses
testifying later today can testify more knowledgeably. I
believe they're participants in such a task force, but I've
been told that the representatives of the State do participate
in the task force of which I am aware.
Mr. Bryant. I wanted to--Mr. Assatourian, I want to ask you
about a couple of your other points that you make, and Mr. Burr
touched on this. But you make a comment of item four about
products at a Medi-Cal formulary. You mentioned that, unlike
Medicare, Medi-Cal has a bidding process which is so rigged and
flawed that Fortune 100 companies such as Kimberly Clark and
Proctor & Gamble, which happen to be among the largest diaper
manufacturers in the world, have no chance of selling in the
Medi-Cal system. You mentioned, whereas Donald Duck, the
entertainer, who has never manufactured a diaper in his entire
career, could be awarded a contract.
Now you touched on that. How do you--why do you
characterize that system as so flawed and corrupt? What is it
about the bidding process?
Mr. Assatourian. Well, the whole process is done in a way
to shut out new manufacturers; and it pretty much ensures
companies that were on the formulary--it will offer them
continuity. And there's pretty much--there's two ways of
getting on the formulary, the right way and cheating the
system. If you do it the right way, the way some of the
manufacturers do, it's hell for them. Sometimes they put a lot
of products on the formulary, sometimes they get unlucky and 1
or 2 products--whereas the bidding process offers people who
are absolutely unqualified to get on the formulary, and the
formulary in general is a 5-year contract. So anybody who gets
on the formulary is guaranteed of making millions of dollars in
the 5 years, and as a result you have a lot of unqualified
companies who just get on the formulary just for the ride.
Mr. Bryant. Now where is the corruption--where is the--how
does that take place? How do they get on that formulary when
they're not qualified, so to speak?
Mr. Assatourian. Well, the manufacturers have too much say
in the process, and they also have too much say in the
categories of products.
Just to give you an example, in the last bid that was
canceled it had one ridiculous product on the bid which even
the manufacturers couldn't figure out, but a couple of the
bidders had convinced the State to put that on the bid. A
liner--I don't remember the exact details, but, for example, a
bladder control liner with 2000 cc capacity, which is
ridiculous. How much could an incontinent patient--I mean, 2000
cc is not needed for an incontinent patient.
Mr. Bryant. I understand that, but in terms of--where is
the corruption? Who is responsible for that type of fraud
existing in that environment? Is it the people in the
California government who draw the specifications for these
products or is it----
Mr. Assatourian. The Department of Health and Human
Services in California, which pretty much consults with the
manufacturers and the bidders. There is just too much of a cozy
relationship. It shuts out other qualified manufacturers and
distributors out of the process.
Mr. Bryant. The cases you worked for the Federal
authorities involved, I assume, people in competition with you,
other wholesalers who were corrupt, as well as people within
the government, the State government, who were selling numbers
and doing things. On both ends you have people again from
within as well as providers I guess--so you have got people in
the government, providers and others, wholesalers, that are a
part of this corrupt process?
Mr. Assatourian. Yes.
Mr. Bryant. Okay. And I think the bottom line for you and
probably the message we take out today, one is that we just
simply need better enforcement of the existing laws.
Mr. Assatourian. Better enforcement and some new laws.
Because reasonable laws--because new laws--I mean, you can't
just drive legitimate people out of the business. Because, the
bottom line, the damage is done to the recipients, people who
are supposed to receive these medical products; and they are
the ones who get damaged because they get bounced back and
forth. New laws and better enforcement, yes.
Mr. Bryant. Mr. Chairman, I would yield back my time.
Mr. Upton. Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman. I apologize for being
late. I was at another matter.
Mr. Assatourian, you make the statement in your testimony
that the California Medi-Cal system is a broken-down ATM
machine which is spitting out cash uncontrollably without the
need for even an ATM card. Armani suits have been charged to
Medi-Cal cards, round-trip tickets overseas and silverware for
patients have been charged to Medi-Cal. Do you still stand by
this statement or are you suggesting that the California
Medicaid system is still totally out of control today?
Mr. Assatourian. No. I was making reference to what the
situation was like in 1997 and 1998. It's been--I think 75 or
80 percent of the problem has been fixed.
Mr. Stupak. Okay. What steps did they take to fix those
problems? You said 75 to 80 percent of the problems have been
fixed. What steps did California take to fix the problem?
Mr. Assatourian. Pretty much the FBI came in with a
sledgehammer and put all of them out of business, case closed.
Mr. Stupak. Okay. Do you believe they're doing a good job
now in addressing fraud in California in the Medi-Cal system?
Mr. Assatourian. Yes, yes, they are. Except, usually, in
cases like this, there are always victims, innocent victims.
Even though they're doing a good job, there's also a lot of
innocent victims who are being stepped on.
Mr. Stupak. How about from a policy point of view? Do you
think that policies have been changed so that we do not go back
to this uncontrollable ATM machine spitting out cash?
Mr. Assatourian. I think policies have been changed, but,
unfortunately, I truly do believe corruption will not end, the
fraud will not end. The best they can hope for or the best this
country can hope for is to bring the level of fraud to an
acceptable level. Because, right now, it's gone back to normal;
and my guess is within another 12 months the whole circus will
start all over again except not in that level, in a more--in a
lower level.
Mr. Stupak. But if the policies have been changed, you
still believe it's going to continue in the next 12 months, it
will go back to like it was?
Mr. Assatourian. I think so. Because it's the U.S. health
care system. It's the most----
Mr. Stupak. So even if you change the policy, it's still
going to continue?
Mr. Assatourian. What I'm saying is it will continue but
not as bad as it the way it was in 1997 and 1998. Again, as I'm
saying, nobody will be ever--nobody will be able to stop fraud
100 percent. The fraud will always be there, regardless. It
just will be at an acceptable level.
Mr. Stupak. What is an acceptable level, in your mind?
Mr. Assatourian. This is just a guesstimate.
Mr. Stupak. Sure.
Mr. Assatourian. I would say--I don't know. I would say
maybe 2 or 3 or even 5 percent, even though I think that's
high.
Mr. Burr. Would the gentleman from Michigan yield for a
second?
Mr. Stupak. Sure.
Mr. Burr. I just want you to finish the sentence that you
started. You said it's the U.S. health system.
Mr. Assatourian. The most lucrative business in the world.
The U.S. health care system is more lucrative than the computer
industry, the software industry or any industry. It's pretty
much recession proof. It has nothing to do with retail sales.
It has nothing to do with--it is not directly linked to the
economy. It just--it's a recession-proof, lucrative business.
Mr. Bilbray. Guaranteed market.
Mr. Assatourian. Guaranteed market.
Mr. Stupak. Reclaiming my time, what steps do you think
should be taken then to prevent this? What steps would you do
if you were head of Medi-Cal in California?
Mr. Assatourian. As I have put in my opening statement, I
mean, there's just--this is not brain surgery. Just four or
five very simple steps would cut the fraud dramatically.
Mr. Stupak. What are those four or five different steps?
Mr. Assatourian. The first step in my mind is that the
provider should purchase from authorized distributors to
control the quality of the product and to control the cost.
And then the brand name reimbursement system which is
currently in place in California should end. I mean, California
is bleeding the money because of the way they are making these
reimbursements. It should be copied--it should use the same
format Medicare does. The reimbursement should be based--should
be made based on the product specification, not the brand name.
Every time there's a brand name requirement it drives up the
cost, it kills competition, and it costs taxpayers and the
State of California millions of dollars a year.
Mr. Stupak. Okay. You have your five points there. Is there
anything else that you believe they should be doing that they
are not doing?
Mr. Assatourian. Better people who are supposed to be
enforcing these laws should be better trained in the medical
field. Again, I respect their intentions. Their intentions are
very well--in many cases, they're not trained for that area.
Mr. Stupak. You mentioned bonding. Explain that a little
bit more. Would you elaborate on this? What amount should be
provided by the bond--by those who have to be bonded?
Mr. Assatourian. I don't know. I would say it should be
reasonable so legitimate businesses don't go bankrupt. I mean,
a bond maybe in the amount of 50,000 or 100,000, in a level
that will not destroy and drive people out of the business.
After all, people who are in the business, they are serving a
purpose.
Mr. Stupak. Thank you, Mr. Chairman.
Mr. Upton. Mr. Bilbray.
Mr. Bilbray. Thank you, Mr. Chairman.
Let me ask you--and if you don't understand it, I
understand--but I would like to know, in your professional
opinion, why would the State of California be using the brand
naming approach?
Mr. Assatourian. I don't know. I would like to find out
myself.
Mr. Bilbray. Do you think it's a concept of quality or
something?
Mr. Assatourian. No, it has nothing to do with quality. I
do not know the reason, but I do know it is costing a
tremendous amount of money.
Mr. Bilbray. In all your imagination you can't figure out
why they would do that?
Mr. Assatourian. No. I think it's an old system that's been
there, and nobody's really paid attention to it.
Mr. Bilbray. Is it possible this was part of the good old
boy system that was developed because of political influence in
the past?
Mr. Assatourian. Could be.
Mr. Bilbray. Okay. Why would the FBI need to go into a
State like California? Why couldn't the State of California
have handled this themselves? Let's face it, California is not
exactly what you call a Podunk little political subdivision----
Mr. Assatourian. No.
Mr. Bilbray. [continuing] small, little, intimate group of
32 million people. Why would the FBI need to intervene on that
and why couldn't the State of California handle that
themselves?
Mr. Assatourian. I wouldn't know. I think some of the next
witnesses would have a better answer to that.
Mr. Bilbray. Okay. I was just hoping you would use your
imagination. I'll try to get the--ask the State and see if they
can go over--I just thought you might have an opinion about
that.
Mr. Assatourian. I do have an opinion, but I don't think
it's appropriate for me to----
Mr. Bilbray. Well, let me be more blunt then. Do you think
the State of California basically didn't focus on this, looked
the other way, or they were negligent in oversight?
Mr. Assatourian. Yes.
Mr. Bilbray. Okay. I'm only asking your opinion.
Mr. Assatourian. That's part of the problem. When provider
numbers were being sold within the State--I mean, within the
Health Department, that pretty much explains the level of
indifference. I mean, when a government employee is selling a
Medi-Cal provider number for anywhere from between $10,000 to
$20,000, that pretty much speaks for itself. And the way I see
it you are right. I could be wrong, but I think the State of
California is one of the wealthiest States in the union, and
it's being robbed blindly, and the State of California has a
lot to answer for.
Mr. Bilbray. But you used a word that would indicate you do
not believe it was a conscious effort or action but it was
negligence. You used the word indifference.
Mr. Assatourian. Yes.
Mr. Bilbray. Which is a fancy word for they didn't give a
damn.
Mr. Assatourian. The way I would put it is that I don't
think they intentionally ignored it. I think they were maybe
preoccupied with something else.
Mr. Bilbray. I appreciate that; and that was a very fair
testimony, Mr. Chairman. I will yield back my time.
Mr. Upton. Thank you.
I just want to say, closing comment from me, we do
appreciate your testimony today. That's for sure. We have had a
number of hearings along this line, trying to provide not only
the States but the Federal Government better tools to go after
fraud and abuse in the Medicaid program, so your testimony is
particularly enlightening.
I don't know if other members have further questions. Mr.
Stupak, do you have further question or comment?
Mr. Stupak. Mr. Chairman, just if I could, I am still a
little unclear here. I know I got in here late and didn't get a
chance to hear all this. But the system obviously broke down in
California. So from where we sit how do you rectify that from
happening again? Where were California individuals then to let
this thing get so out of control? You said somewhere between
1997, 1998 about 75, 80 percent of the fraud was going on; and
you said there's probably always going to be some, some small
acceptable level, 2, 3, maybe 5 percent. How did a system like
this get so out of control and where were the California
officials?
Mr. Assatourian. I think the State officials got caught by
surprise. Again, I am not saying they intentionally ignored it.
I think they just--they were caught by surprise. I mean, when
you have more providers in the city, when you have more of them
than 7-Elevens and gas stations put together, it should say
something. They just got caught by surprise. When they realized
what the problem is, I don't think they knew how to deal with
it.
Mr. Stupak. I ran for Congress in 1992. I mean, fraud and
Medicare and Medicaid was a big issue, even back in 1992. It
has every year since then. It's one of the reasons I am on this
Subcommittee on Oversight and Investigations. I guess I find it
hard to believe they get caught by surprise, sleeping at the
switch or something, obviously.
All right. Thank you, Mr. Chairman.
Mr. Bryant. Mr. Chairman.
Mr. Upton. Yes.
Mr. Bryant. Could I have a follow-up question?
Mr. Upton. Yes.
Mr. Bryant. Given the reputation California has for being
on the cutting edge of everything, you've mentioned, and I
meant to ask you in my first round, a new idea or concept
that's going to be the crime wave of the future, and did you
say adult day care?
Mr. Assatourian. Centers, yes.
Mr. Bryant. Explain to us who are uninformed, outside of
California, what that involves and where that's going. Maybe we
can be alert for that.
Mr. Assatourian. I think in general it's a program that the
State reimburses providers. The business is called adult day
care centers.
The way it works, if I am not mistaken, is that the elderly
people, instead of their children sending them to retirement
homes, what they do is they take them to this very nice
equipped day care center where their parents or the elderly are
entertained. There's physical therapy, food, entertainment,
everything. And they check them in around--let's say in the
morning, and then they pick them up at night. And if the adult
day care center also has pick up and delivery accommodations, I
think the State pays a couple of extra dollars.
So in general, if I'm not mistaken, I think for each guest
the State pays somewhere from $60 to $70 per day, if I'm not
mistaken; and that translates--with a hundred guests, that
translates to about, if I'm not mistaken, $30,000 to $40,000
net profit per month for the day care center after taking out
the overhead. And that's where the gold rush is now. Fraud,
that's where the next wave of fraud is going to be. It has
already started, but it's getting there.
Mr. Bilbray. Would the gentleman yield?
Mr. Bryant. I'm happy to yield.
Mr. Bilbray. Let me say, as a parent and also a son of a
senior citizen, the number 60 to 70 does seem high. When is the
last time anybody in this room sent their kids to camp for--$60
or $70 a day is basically what healthy young people are charged
to be able to go to a summer camp. You get into that. I just
want to say it to be fair about this.
And the other issue that I would ask, California has been
on the cutting edge about a lot of things, and we've had some
great successes, and we've tried to warn the rest of the
country of some of our failures. I would just like to remind my
colleagues that, as I made the statement about it not being a
small State, one of the things we may run into here is that the
unit is so large, the big bureaucracies, big systems have the
potential for making big mistakes; and the administrative size
of the State may be part of the situation we want to look at,
too, as we look at implementing national programs.
And I'd yield back to the gentleman.
Mr. Burr. Mr. Chairman, let me get into the adult day care
just a little bit more if we can. Are you suggesting that
California has an open policy for all seniors or is there an
income level cutoff?
Mr. Assatourian. I am not familiar with the details. What I
just said was pretty much vague information I have heard in the
business, I guess.
Mr. Burr. What you're telling us is those criminal elements
are now eyeing this area?
Mr. Assatourian. They're already in there.
Mr. Burr. They're already in there. The $60 or $70,
regardless of what it is, that's $60 or $70 for them just being
there. That's not for service provided other than the facility
that they go to?
Mr. Assatourian. That is my understanding. Except one of
the next witnesses, Mr. Cates, he will be in a better position
to answer the question. Because really what I've heard is that
is very general information. What I know is based on what I
hear. The fraud is already there. They're at it.
Mr. Burr. But the fact that individuals might claim for $60
for somebody that's in the facility is not fraud.
Mr. Assatourian. No, that's not fraud. The problem is----
Mr. Burr. Tell us where the fraud is going to be.
Mr. Assatourian. The fraud is, after 1 or 2 visits--they're
supposed to be there every day. The fraud--after the first
visit, those people don't want to go there every day. They have
their own homes. They want to stay home and watch TV on their
couch. So after the first visit they just starting getting--the
facilities start getting reimbursement for nonvisiting guests.
That's where the fraud comes in.
Mr. Burr. I appreciate you clarifying that. Thank you.
Yield back.
Mr. Upton. Mr. Stupak.
Mr. Stupak. Just if the committee jointly could ask the
GAO--I know they have done a general survey of the States as to
what went on in the States' enforcement, but maybe they could
do a more in-depth, detailed postmortem, if you will, on
California so we can understand what happened, what lessons
learned and where were the policy breakdowns. Because, as the
witness indicated, the next area is adult day care center
fraud. And I know, like I said, they have done a general
survey, but I would like to see in detail, if GAO could put
that together for us, where it really happened in California.
Maybe we can learn a few things from it and make sure it
doesn't happen again.
Mr. Upton. No one has further questions, so, Mr.
Assatourian, thank you very much for being with us this
morning.
Our second panel includes the following: Ms. Kathleen
Connell, Controller of the Office of the California State
Controller; Mr. Alan Cates, Chief of the California Medicaid
Fraud Bureau; Mr. Thomas Kubic, Deputy Assistant Director of
the Criminal Investigations Division, Federal Bureau of
Investigation; Mr. Ruben King-Shaw, Secretary of the Florida
Agency for Health Care Administration; Mr. Doug Wagoner, Vice
President of the Public Sector, ChoicePoint; and Leslie
Aronovitz from the General Accounting Office.
Witnesses, if you would come and find the right spot--let's
see, sit down; and then we'll get the name tags in front of
you.
You heard the first panel when we swore them in. Do any of
you object to having your testimony being taken under oath? The
committee rules are in front of you.
You should also know you're able to have legal counsel with
you. Do any of you wish legal counsel?
If you would stand and raise your right hand.
[Witnesses sworn.]
Mr. Upton. You are now under oath.
Ms. Aronovitz, we'll start with you. If you would use that
mike a little closer as well. Again, thank you for your
testimony in advance. It is made part of the record in its
entirety, and if you could keep it to 5 minutes, that'd be
terrific.
TESTIMONY OF LESLIE G. ARONOVITZ, ASSOCIATE DIRECTOR, HEALTH
FINANCING AND PUBLIC HEALTH, GENERAL ACCOUNTING OFFICE; THOMAS
T. KUBIC, DEPUTY ASSISTANT DIRECTOR, CRIMINAL INVESTIGATIONS
DIVISION, FEDERAL BUREAU OF INVESTIGATIONS; KATHLEEN CONNELL,
CONTROLLER, OFFICE OF THE CALIFORNIA STATE CONTROLLER; J. ALAN
CATES, CHIEF, CALIFORNIA MEDICAID FRAUD BUREAU; RUBEN J. KING-
SHAW, SECRETARY, FLORIDA AGENCY FOR HEALTH CARE ADMINISTRATION;
AND DOUG WAGONER, VICE PRESIDENT, PUBLIC SECTOR, CHOICEPOINT
Ms. Aronovitz. We sure will. Mr. Chairman and members of
the subcommittee, we are pleased to be here as you discuss
efforts to better assure the integrity of providers who bill
the Medicaid program. With hundreds of millions of claims being
processed each year, Federal health programs need to rely on
the integrity of their health care providers, since it would be
impossible to perform detailed checks on every claim. But as
you will hear, and as you have heard from the first panel,
there is much work to be done to ensure the legitimacy of all
providers.
Since States have wide latitude in how they structure their
Medicaid provider enrollment processes, some States are much
more aggressive than others. While we found through a survey
that few States have taken comprehensive measures to prevent
problem providers from participating in their Medicaid
programs, the more aggressive States are employing variations
of several key provider enrollment activities. For example,
some States are beefing up their provider enrollment
application and more stringently reviewing the submitted
information. Some are now requiring Medicaid provider
applicants to disclose information on their criminal
background, financial status and health care program exclusions
and sanctions as well as information about their business's
owners. In Florida, applicants are required to submit
fingerprints, which are checked with both State law enforcement
authorities and the FBI.
Some States are also strengthening their provider
agreements. Several now have a clause allowing either party to
terminate the agreement without cause after giving advance
notice. Some State Medicaid officials say this allows them to
get problem providers out of the program more expeditiously
than they could otherwise. Some States, which tighten standards
for newly enrolling providers, have also required existing
Medicaid providers to reenroll in the program under the new
standards, such as the enhanced disclosure requirements.
Taking a lesson from Medicare, several States have found
that visiting the sites of provider applicants is useful in
verifying if applicants have bona fide businesses. Last year,
when one State began conducting site visits of all newly
enrolling noninstitutional providers, it found numerous
applicants with nonexistent addresses or mailbox-only
operations. Now, officials report that such a finding is a rare
occurrence. I should note that not all States believe that site
visits are cost effective, and we believe that a risk-based
approach may prove the most useful.
One last key activity is better controlling billing
numbers. As you have heard, because some individuals or groups
intent on defrauding the program use the billing numbers of
deceased or retired providers, many States are now canceling
the numbers of inactive providers to prevent those numbers from
being used fraudulently to bill the program.
Up until now, we have been discussing Medicaid, but
Medicare shares many of the same providers, and it also has
been the victim of improper billing and outright fraud. As the
result of the experiences with fraudulent providers,
strengthening Medicare provider enrollment procedures became
part of the Health Care Financing Administration's
comprehensive plan for program integrity.
Last year, HCFA began to develop a standardized and
strengthened Medicare provider enrollment process, but its plan
does not include similar actions for Medicaid. Dealing with
such issues in Medicaid is complicated by the fact that
Medicaid enrollment policies are shaped by individual State
actions. Despite its singular approach, we believe that the
current revamping of Medicare's provider enrollment process
provides an added opportunity for HCFA to help States
strengthen their Medicaid process as well. By combining their
efforts to validate enrollment application information, perform
site visits on select providers, and to share the results of
potential providers in HCFA's new provider data base, both
Medicare and Medicaid might realize efficiencies that could
benefit both programs.
Although HCFA officials agree in concept, many logistics
would still need to be worked out.
Mr. Chairman, this concludes my remarks and I'll be happy
to answer any questions you and the other subcommittee members
have.
[The prepared statement of Leslie G. Aronovitz follows:]
Prepared Statement of Leslie G. Aronovitz, Associate Director, Health
Financing and Public Health Issues, Health, Education, and Human
Services Division, GAO
Mr. Chairman and Members of the Subcommittee: We are pleased to be
here as you discuss efforts to better ensure the integrity of providers
who bill the Medicaid program. In the past, we have reported to the
Congress that scrutinizing providers more rigorously before they begin
billing the federal government's two major health care programs,
Medicare and Medicaid, is an extremely important means of protecting
program funds and beneficiaries.<SUP>1</SUP> In fiscal year 2001,
federal funding of Medicare and Medicaid is projected to reach about
$342 billion.
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\1\ Fraud and Abuse: Medicare Continues to Be Vulnerable to
Exploitation by Unscrupulous Providers (GAO/T-HEHS-96-7, Nov. 2, 1995);
Fraud and Abuse: Providers Excluded from Medicaid Continue to
Participate in Federal Health Programs (GAO/T-HEHS-96-205, Sept. 5,
1996); Medicare Home Health Agencies: Certification Process Ineffective
in Excluding Problem Agencies (GAO/HEHS-98-29, Dec.16,1997.)
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My remarks today will focus on (1) why it is important to take
steps to ensure that only honest providers bill federal health care
programs, (2) what Medicare is doing to strengthen its provider
enrollment process, (3) what states are doing to ensure provider
integrity in the Medicaid program, and (4) what additional
opportunities exist to improve these efforts. My comments are based on
our past work and work we are now conducting for the Commerce Committee
on state fraud and abuse control efforts in the Medicaid program.
In brief, with hundreds of millions of claims to process each year,
Medicare and Medicaid must rely in part on provider honesty in billing.
As a result, it is critical to protect program funds by making efforts
to ensure that only legitimate providers bill these programs. Recent
incidents of Medicaid fraud perpetrated by dishonest medical equipment
suppliers in California and other cases of Medicare and Medicaid fraud
underscore these programs' vulnerability. Although the Health Care
Financing Administration (HCFA) has made revamping its provider
enrollment process a priority for Medicare, it has not sought similar
efforts in state Medicaid programs. Medicaid state agencies report
differing practices to ensure provider integrity, with only nine states
reporting that they perform comprehensive provider enrollment
activities. Because HCFA is redesigning its Medicare provider
enrollment process, the HCFA Administrator has suggested that
developing a joint Medicare/Medicaid provider enrollment process might
be beneficial for both programs. Thus, HCFA and the states have an
additional opportunity to work together to develop new procedures for
Medicaid that could better ensure provider integrity for both programs
while minimizing the administrative burden and cost.
background
Medicare is a federal health insurance program for certain disabled
persons and those 65 years and older. It is administered by HCFA,
within the Department of Health and Human Services (HHS), through about
50 claims administration contractors. Medicaid is a jointly funded
federal-state health insurance program for eligible low-income and
medically needy people. HCFA oversees the Medicaid program at the
federal level, but at the state level, the program actually consists of
56 separate state-operated programs (including the District of
Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, and
the Northern Marianas--hereafter referred to collectively as
``states''). The federal government matches state Medicaid spending
according to a formula that is based on each state's per capita income.
Within broad federal guidelines, each state establishes its own
eligibility standards; determines the type, amount, duration, and scope
of services; sets its payment rates; and administers its program--
including the enrollment of its providers.
Although Medicare and Medicaid have different structures and
governance, and serve different populations, many providers bill both
programs and must separately enroll in each. Enrollment refers to all
of the application and verification activities that occur before a
provider is issued a provider number and approved to bill a federal
health care program.
My comments today are based on our past and on-going work for the
Commerce Committee on controlling fraud and abuse in the Medicaid
program. This statement focuses on enrollment processes for
noninstitutional providers, because there are some specific
requirements for institutions such as hospitals and nursing homes.
Noninstitutional providers include durable medical equipment suppliers,
physicians or physician groups, home health agencies, transportation
companies, and laboratories--in effect, any providers who do not
provide care in an institutional setting such as a hospital or nursing
home. To gain more information on state efforts, we surveyed the 56
state Medicaid programs.<SUP>2</SUP> Several survey questions focused
on states' provider enrollment activities. For this statement, we
supplemented the states' self-reported survey data with on-site or
telephone interviews of Medicaid officials from several states,
including Connecticut, Florida, Georgia, New Jersey, and Texas, that
reported taking actions to tighten their provider enrollment processes.
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\2\ Fifty-three of the 56 state Medicaid programs responded to the
survey.
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problems with fraudulent providers underscore the value of ensuring
provider integrity
With hundreds of millions of claims being processed each year,
federal health care programs need to rely to an extent on the integrity
of their providers. Medicare and Medicaid receive claims for services,
equipment, and supplies, and use automated computer edits as a check
before payment to help ensure the claims are legitimate and billed by
an enrolled provider. While some of the claims are also reviewed after
payment is made, with such a massive number of claims, it is impossible
to perform detailed checks on a significant share of them.
Most providers bill appropriately, reducing the risks from not
being able to scrutinize claims more comprehensively. However, both
programs have been victims of improper billing and outright fraud. For
example, we recently reported on seven criminal health care fraud
investigations, four of which involved both the Medicare and Medicaid
programs.<SUP>3</SUP> In one of these cases, providers filed more than
$120 million in fraudulent Medicare claims and $1.5 million in
fraudulent Medicaid claims before being caught.
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\3\ Health Care: Fraud Schemes Committed by Career Criminals and
Organized Criminal Groups and Impact on Consumers and Legitimate Health
Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).
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Recent fraud cases in California underscore Medicaid's
vulnerability to providers who are eager to defraud the program. As you
have heard from other witnesses today in more detail, since July 1999,
a state-federal task force targeting questionable pharmaceutical and
durable medical equipment providers has found large-scale fraud in
California's Medicaid program--Medi-Cal. More than 100 Medicaid
providers, wholesalers, and suppliers have been charged with more than
$50 million in fraud since July 1999. At least 61 of these individuals
have already been convicted and paid about $15 million in restitution.
An additional 250 providers, wholesalers, and suppliers are being
investigated for possible fraud that could exceed $250 million. In some
cases, investigators found that providers set up shop for 4 or 5 months
to bill Medi-Cal and collect payments for services not rendered and
then closed down before the fraud was detected. These so-called ``bump
and run providers'' often made off with hundreds of thousands of
dollars before they disappeared.
These cases follow a pattern that has been seen in federal health
care programs since at least the early 1990s. Investigations, some
conducted as part of Operation Restore Trust, <SUP>4</SUP> pinpointed
weaknesses in provider enrollment procedures that have allowed
questionable providers easy entry into the Medicare and Medicaid
programs. Examples follow:
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\4\ Operation Restore Trust was a 2-year demonstration to target
Medicare and Medicaid fraud in five states conducted by HHS and federal
law enforcement agencies.
<bullet> A man convicted of health care fraud in 1989 and excluded from
participating in Medicaid and Medicare was arrested in 2000 on
new charges that he secretly ran several companies that
received $40 million in Medicare reimbursements for fraudulent
ambulance transportation claims. His involvement in the
companies was hidden when these companies enrolled as Medicare
providers. Employees of the companies routinely falsified
paperwork for ambulance transports for patients who did not
need this service. For example, patients, typically people
being taken for radiation and dialysis treatment, would be
described as ``bed-confined,'' even though covert videotaping
by federal investigators showed them walking to the ambulances.
<bullet> A provider opened two ``storefront clinics'' in New Jersey and
began billing the Medicaid and Medicare programs for such
invasive procedures as colonoscopies and upper gastrointestinal
endoscopies. An investigation revealed that the clinic owner
was not licensed to practice medicine in New Jersey and, in
fact, did not have any medical license. Before the scheme was
detected, the clinic owner had billed the Medicaid program for
over $6 million and had defrauded the Medicare program of over
$166,000.
<bullet> The owner of a medical supply company in New York pleaded
guilty to billing Medicaid for more than $1.2 million for
supplies that were never provided. The company, operated out of
the owner's home, filed claims for medical items for several
patients authorized by a physician who had been dead for more
than 10 years.
Checking the credentials and qualifications of such providers more
thoroughly might have raised questions about their integrity.
Periodically requiring providers to re-enroll would allow regular
scrutiny and updating of their information. As a result, federal health
programs could keep tighter control over the current validity of
billing numbers. Failure to do so leaves federal health programs
vulnerable to questionable providers who either may not be providing
services to beneficiaries as billed or be providing poor quality
services. For example, in 1996, HCFA reported that of 36 new applicants
to provide durable medical equipment to Medicare beneficiaries in
Miami, 32 were not bona fide businesses. Some of these entities did not
have a physical address or an inventory of durable medical equipment.
To determine whether this was only a problem in Florida, the HHS Office
of Inspector General (OIG) conducted on-site inspections of 420
suppliers with Medicare billing numbers issued between January and June
1996 and 35 applicants who had applied but had not yet been
enrolled.<SUP>5</SUP> The OIG found that 31 of the 420 enrolled
suppliers and 4 of the 35 new applicants did not have the required
physical business address, or their addresses were suspect. Some had
closed suddenly, leaving no forwarding address. Some operated out of
homes, while others lacked inventory, making their suppliers' status
suspect. Other enrolled suppliers did not provide the level of service
expected, because they did not make repairs on items supplied to
beneficiaries that were still under warranty or allow beneficiaries to
return unsuitable items.<SUP>6</SUP>
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\5\ These suppliers were located in 12 large metropolitan areas in
New York, Florida, Texas, Illinois, and California.
\6\ HHS OIG, Medical Equipment Suppliers: Assuring Legitimacy, OEI-
04-96-00240 (Washington, D.C.: HHS, Dec. 1997).
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As one convicted Medicaid fraud felon whose previous experience was
owning a nightclub in Miami, Florida, remarked,
``I had no experience or training in health care services . .
. Without this experience and with no knowledge of the Medicare
program, I purchased a business and started billing Medicare.
It was very easy for me to get approval from Medicare to become
a provider . . . They gave me a provider number over the phone.
No one from the government or anywhere else ever came to me or
my place of business to check any information on the
application. No one ever checked my credentials or asked if I
was qualified to operate a medical supply business.''
By the time this man was arrested in 1994, he owned seven medical
supply companies, using the different billing numbers to hide the
number of claims he was submitting. All of his businesses were at the
same location, and he used the same staff and computers to bill under
different numbers. He estimated that he billed about $32 million to
Medicare in total, most for services not rendered.<SUP>7</SUP>
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\7\ Medicare Fraud Prevention: The Medicare Enrollment Process,
(Appendix--Statement of Convicted Medicare Fraud Felon, hearings before
the Permanent Subcommittee on Investigations, Committee on Governmental
Affairs, U.S. Senate, 105th Congress, 2nd Sess. (Jan. 29, 1998).
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Some states and the federal government have realized that their
programs do not have all the tools needed to address the problem of
providers entering their programs intent on committing fraud. One state
audit pointed out that the state's Medicaid program could not terminate
a problem provider quickly and that providers could potentially sell
their businesses, including their billing numbers, to others. In this
state, once a provider was accepted into the program, there was no
mechanism to ensure that Medicaid had up-to-date information about the
provider, thus allowing billing numbers to be potentially misused by
others. Furthermore, no efforts were made to verify information on the
enrollment form. Because the state program accepted copies of out-of-
state licenses rather than verifying them, a provider could produce a
fraudulent out-of-state license and thereby be enrolled to treat
Medicaid patients.
efforts to strengthen medicare provider enrollment under way
As a result of repeated experiences with fraudulent and abusive
providers, strengthening Medicare provider enrollment procedures became
part of HCFA's Comprehensive Plan for Program Integrity issued in
1999.<SUP>8</SUP> Medicare had delegated provider enrollment to its
claims administration contractors, which resulted in somewhat different
processes at every contractor, with no clearly enunciated national
enrollment requirements. HCFA is developing a standardized and
strengthened provider enrollment process, which would hold providers to
financial and performance standards before they could enroll in the
Medicare program. HCFA has taken, or is planning, a number of other
steps, including
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\8\ The Comprehensive Plan, published in Feb. 1999, outlined HCFA's
key program integrity initiatives for the next 6 to 18 months. It
addresses five management areas, including provider integrity.
<bullet> publishing a notice of proposed rulemaking to set standards
for provider enrollment, specifying that HCFA can deny and
revoke billing privileges and periodically require providers to
reenroll;
<bullet> implementing a new centralized data system on enrolled
providers--the Provider Enrollment, Chain and Ownership System
(PECOS), which can be used to track ownership and relationships
between providers;
<bullet> developing a new standard enrollment form that will ask for
detailed information in many categories, such as ownership; and
<bullet> requiring provider Social Security numbers on the enrollment
form, which then will be verified through the Social Security
Administration.
In addition to our ongoing Medicaid work on this issue, we are now
reviewing the Medicare provider enrollment process and will be
reporting about it later this year. In that study, we are primarily
focusing on the activities Medicare contractors perform to enroll new
providers and HCFA's plans to require providers to periodically
reenroll.
While HCFA has a number of actions planned or in process to help
strengthen Medicare provider enrollment, its plan for program integrity
does not include any actions to strengthen provider enrollment in
Medicaid. Dealing with such issues at the federal level is more complex
in Medicaid because of the differing program requirements and state
approaches to ensuring program integrity. Because the Medicaid program
is administered by the states under federal oversight, both federal
requirements and state actions form a state's Medicaid provider
enrollment program.
federal requirements are minimal, but a few states have
aggressiveprovider enrollment programs
Because states design their own Medicaid provider enrollment
processes, some are much more comprehensive than others. However,
despite the importance of activities to ensure the integrity of
Medicaid providers, HCFA does relatively little to oversee states'
efforts. Responses to our survey revealed a handful of states that have
developed aggressive actions through their enrollment processes to help
ensure provider integrity. These efforts range from requiring and
verifying comprehensive information on the enrollment form to
performing site visits at potential providers' offices. We describe
these practices later because we believe they can help other states
that want to strengthen their provider enrollment processes.
Minimal Federal Requirements Exist to Ensure Medicaid Provider
Integrity
There are few federal requirements for states to follow in
enrolling Medicaid providers. All states must have an agreement between
the state Medicaid agency and each provider or organization furnishing
services to beneficiaries under the plan. However, there is no federal
requirement that the provider certify the accuracy of information
provided. Providers must also agree to minimum treatment record-keeping
standards; give state and federal authorities access to treatment
records; and disclose or supply upon request information concerning
health care entity ownership and the identities of certain employees
with criminal histories. In addition, the Balanced Budget Act of 1997
(BBA) established additional enrollment safeguards regarding home
health agencies and durable medical equipment suppliers.
HCFA's guidance to states, incorporated in the State Medicaid
Manual, indicates that states may only enroll providers that are
qualified to provide the specified service and that have not been
excluded from federal health care programs.<SUP>9</SUP> A qualified
provider is one that is licensed to practice in the state, if licensure
is required, and that provides services within the scope of practice as
defined by state law. States can impose additional qualifications on
providers that they enroll in their Medicaid programs. Recently, the
OIG found evidence that some state Medicaid programs have paid excluded
providers for providing services to beneficiaries, and the OIG is thus
concerned that some states may not be checking on whether a provider
has been excluded.<SUP>10</SUP>
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\9\ The HHS OIG excludes individuals and entities from
participating in federal health care programs under various provisions
of the Social Security Act including sections 1128, 1128A, 1156, and
1892. When an exclusion is imposed, Medicare, Medicaid, and other
federal health care program payments are prohibited for any items or
services furnished, ordered, or prescribed by an excluded provider
other than for emergency items or services not provided in a hospital
emergency room. Reasons for the exclusion may bear on a provider's
professional competence, professional performance, or financial
integrity. Payment is also prohibited to any managed care organization
that contracts with an excluded provider.
\10\ We reviewed these processes, including the OIG's process to
exclude providers, in 1996. See Fraud and Abuse: Providers Excluded
From Medicaid Continue to Participate in Federal Health Programs (GAO/
T-HEHS-96-205, Sept. 5, 1996).
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Finally, the federal government provides states matching funds for
automated claims processing and information retrieval systems, called
Medicaid Management Information Systems (MMIS), provided that the
states' systems meet certain specifications. States that receive
federal funding for their MMIS must collect and enter into their
systems certain types of provider information to help ensure that their
providers are eligible. This information includes a unique Medicaid
provider identification number, the provider's Social Security number,
and, if applicable, the provider's Medicare number. In addition, state
information systems need to be able to support certain functions, such
as enrolling providers only after they agree to abide by the state
Medicaid program's rules and helping to screen applicants by verifying
their state license or certification, if applicable.
Limited Federal Oversight of State Enrollment Processes
Although little attention has been given to state Medicaid provider
enrollment processes, <SUP>11</SUP> HCFA is facilitating state Medicaid
fraud and abuse control activities through the HCFA Medicaid Fraud and
Abuse National Initiative. Of the 53 state Medicaid agencies that
replied to our survey on efforts to control fraud and abuse, only 16
reported that HCFA staff visited their agency to review their fraud and
abuse control activities during their most recent fiscal year. In
interviews with HCFA and state Medicaid agency officials during our
five state site visits, officials generally reported that HCFA was not
overseeing their provider enrollment activities.
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\11\ Before the Systems Performance Review (SPR), a triennial
standards-based review to reapprove/approve a state's MMIS as well as
any reduction in federal financial participation levels, was repealed
by the BBA, HCFA performed indirect oversight of provider enrollment
via the SPR. Part of the review included an evaluation of the provider
enrollment subsystem within the state MMIS.
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However, HCFA is working with state Medicaid programs on
strengthening their fraud and abuse control activities through its
Medicaid Fraud and Abuse National Initiative. The goal of this
initiative is to facilitate, not oversee or direct, state efforts. The
initiative is led from HCFA's Atlanta regional office and has
coordinators in each of its 10 regional offices. Although the
initiative's plan does not list provider enrollment as one of its
strategic goals, its national work group has a goal to work with states
to help them avoid providers who have been excluded, suspended,
debarred, or sanctioned from other federal health care programs.
Recently, HCFA teams consisting of regional office Medicaid fraud and
abuse coordinators reviewed eight states' Medicaid program integrity
procedures. In those states, they checked two processes relevant to
provider enrollment--providers' disclosure of ownership, significant
business transactions, and employee criminal history information; and
states' processes to ensure that excluded providers do not participate
or receive payment for services. HCFA has not yet reported its findings
on this eight-state review.
Wide Variation in State Efforts to Check Provider Integrity
States have considerable latitude in how they structure their
provider enrollment processes. While some states have begun to
strengthen these processes, few have taken comprehensive measures to
prevent problem providers from entering Medicaid. In our survey, while
almost all states reported checking licensure and whether providers had
been excluded from federal programs, less than half reported checking
whether providers had criminal records or had a site to conduct
business. About two-thirds of the states reported canceling inactive
billing numbers, even though billing numbers are used to receive
payment. Canceling billing numbers that have been inactive can help
prevent unauthorized individuals from adopting and using those numbers.
States were least likely to conduct checks of whether the provider is
actually located at the address reported--21 states reported doing so.
This may overstate the amount of checking that states are doing,
because of the states that reported doing these checks, at least one
had begun doing this within the last year, and one had done so on a
trial basis in some parts of the state. Only nine states reported
conducting all four of these checks--licensure, excluded provider,
criminal record, and business location.
HCFA has found site visits to be useful in verifying whether
applicants for enrollment in Medicare have bona fide businesses. In our
survey, 19 states reported that they conducted site visits when a
provider initially applies to become enrolled. Most states that
conducted site visits reported visiting only certain providers that
they feel have a greater likelihood of abusing the program--for
example, the Kansas Medicaid program reported visiting only durable
medical equipment suppliers. Because these site visits cost money, such
targeting is seen by those states as the best approach. Only New
Hampshire, which reported enrolling about 5,000 providers in the last 3
years, said that it checked the sites of all providers before
enrollment.
Once enrolled, many states allow providers to stay indefinitely in
the program without having to update information about their status. As
a result, while some providers may be reporting changes to the Medicaid
program, such as selling a business and its associated billing number,
others may not. Twenty-six states reported allowing providers to
continue to bill indefinitely once enrolled. Others had an enrollment
time limit, which often varied by provider type. Eighteen states
reported conducting visits to help determine whether providers should
remain in the program. These states generally reported visiting only
certain providers, with 11 reporting that they visited such providers
at least once a year.
Because billing numbers allow claims to be processed, they are
valuable and need to be guarded. Existing businesses may be sold to
owners that intend to defraud Medicaid, and dead or retired providers'
numbers can be used by unscrupulous individuals. Canceling inactive
billing numbers can prevent questionable providers from deliberately
obtaining multiple numbers to keep ``in reserve'' in the event that
their practices result in suspension of claims under the primary
number. Once again, a number of states reported doing nothing to
control billing numbers. Only thirty-three states reported canceling
inactive billing numbers. Of those, 16 reported canceling providers'
numbers when they did not submit a bill for 2 years. Five states
reported that they canceled a provider number if no bill had been
submitted in more than 3 years.
States' Key Activities to Ensure the Integrity of Potential Providers
Some states, including Connecticut, Florida, Georgia, New Jersey,
and Texas, are engaged in a number of activities that make it more
difficult for questionable providers to enter and remain in their
Medicaid programs. These include more stringent review of information
on the provider enrollment application; developing provider agreements
that give the state more flexibility to terminate without delays;
reenrolling existing providers under new, stricter standards;
increasing scrutiny of applications from certain provider types and
continued scrutiny after enrollment; conducting preenrollment site
visits; and establishing better control over provider billing numbers.
Examples follow.
More Stringent Review of Provider Enrollment Applications. In late
1998, Connecticut began using information from its fraud and abuse
cases to help it determine what to require of new providers. Earlier
audits had revealed that durable medical equipment providers operating
in networks--many of which were family-based--were defrauding the
program. As a result, representatives from Connecticut's Office of the
Attorney General and Office of the Chief State's Attorney worked with
Medicaid quality assurance and provider relations staff to revise the
Medicaid enrollment process, starting with the provider enrollment
application.
Connecticut's new application requires providers to disclose
business or personal relationships with other Medicaid providers. In
addition, applicants must now state whether they have any
administrative sanctions, civil judgments, criminal convictions, or
bankruptcies, and whether they are enrolled in federal or other states'
health care programs. Further, the Connecticut Medicaid application
requires submission of the names and Social Security numbers of all
owners, officers, and directors of the provider's business. A critical
step in the state's enrollment process is verification of the
enrollment application information. Connecticut has a contractor that
uses various on-line databases to check applicants' personal, financial
and criminal backgrounds. Similar to Connecticut, beginning July 1,
2000, Georgia started using a revised provider enrollment application
that requires the applicant to disclose criminal background, exclusions
and sanctions, and ownership information on the application form.
As a result of problems with provider fraud in South Florida, in
December 1995, Florida began to implement several changes in provider
enrollment procedures. Florida now requires noninstitutional providers
to undergo fingerprinting and criminal history background screenings.
For group providers, all officers, directors, managers, and owners of 5
percent or more of the business must be screened. Applicants are
required to submit fingerprints and to pay for the background checks.
Fingerprints are checked with both state law enforcement authorities
and the Federal Bureau of Investigation.
Strengthened Provider Agreements. Several states now include
provisions in their provider agreements that allow either the provider
or the Medicaid program to terminate the agreement without cause after
giving the other party advance notice. While the details vary, such a
clause is now part of the Medicaid provider agreements required by
Connecticut, Florida, Georgia, and Texas. New Jersey's provider
agreement currently allows providers to terminate their agreement
without cause after giving the program 30 days written notice. However,
New Jersey Medicaid officials told us that a provision giving Medicaid
the same termination rights is being developed. A Texas Medicaid
official told us that the termination-without-cause provision was an
important new tool to help protect the Texas Medicaid program by
allowing officials to remove problem providers more expeditiously.
Reenrollment Under Stricter Standards. Several states that
tightened standards for newly enrolling providers also required
existing Medicaid providers to reenroll under the new standards. For
example, after strengthening the Texas Medicaid program's provider
enrollment process for new applicants, the Texas legislature directed
Medicaid officials, beginning September 1, 1997, to initiate a 2-year
period during which all current providers would be required to reenroll
in the Medicaid program. Texas Medicaid providers--both new applicants
and existing providers--must now sign a provider agreement that
includes stricter terms of participation and new anti-fraud-and-abuse
language. When Texas providers were slow to reenroll, the legislature
extended the deadline by a year to September 1, 2000, and reduced some
requirements, such as filling out a provider information form, but not
the requirement that providers sign the new agreement. Texas Medicaid
officials reported that as of May 31, 2000, 68 percent of the providers
had reenrolled. Similarly, starting in 1996, Florida required all
noninstitutional Medicaid providers to reenroll on a staggered basis
under stricter standards. When Florida began the reenrollment, there
were approximately 80,000 Medicaid providers; when it ended, there were
about 20,000 less. State program officials report that access to health
care was not affected by the reduction in Medicaid providers.
Special Scrutiny of Certain Provider Types. As several other states
have done, New Jersey's Division of Medical Assistance and Health
Services has instituted special Medicaid enrollment procedures for
certain types of providers. The New Jersey Medicaid program's fiscal
agent handles all aspects of the Medicaid provider enrollment process
for most provider types. However, enrollment applications from
pharmacies, independent laboratories, transportation companies, and
durable medical equipment providers receive extra attention. Both the
Medicaid Program Integrity staff and Medicaid Fraud Control Unit (MFCU)
<SUP>12</SUP> staff review pharmacy and independent laboratory
enrollment applications. The review includes a criminal background
check. Other New Jersey Medicaid program personnel review applications
from durable medical equipment and transportation
providers.<SUP>13</SUP> Program consultants conduct preenrollment site
visits to pharmacy and durable medical equipment applicants. In
addition, physician group practices are visited on-site after they are
enrolled. This type of approach can root out those individuals who set
up a physical location only long enough to enroll in the program. For
example, in an Illinois Medicaid fraud case involving a laboratory, an
individual paid 1 month's rent on office space and state-of-the-art
medical testing equipment to obtain the certification needed to bill
Medicaid for complex laboratory tests. But after receiving
certification, no patients were actually tested, although Medicaid was
billed for laboratory services.
---------------------------------------------------------------------------
\12\ Under the Social Security Act, Sec. 1902 (a)(61), states are
required to have a MFCU or a waiver of this requirement from the
Secretary of Health and Human Services. These units are to be separate
from a state's Medicaid agency and are responsible for investigating
and prosecuting Medicaid provider fraud, patient abuse, and program
administration fraud. Forty-eight states have MFCUs.
\13\ Since November 1998, a moratorium has been in effect on the
enrollment of ``invalid coach'' providers by New Jersey's Medicaid
program. Invalid coaches provide transportation services to
beneficiaries who require assistance.
---------------------------------------------------------------------------
Florida requires certain types of Medicaid providers, including
home health agencies, durable medical equipment suppliers, nonemergency
transportation providers, physician groups with more than 50 percent
nonphysician ownership, and independent laboratories to obtain surety
bonds. On May 25, 2000, legislation was enacted that increases the
maximum surety bond the Medicaid agency can require a prospective or
participating provider to obtain. Under the new law, Medicaid can
require the current $50,000 flat rate or, if greater, the total amount
billed by the provider during the current or most recent calendar year.
Florida officials indicated that a primary reason for the surety bond
requirement is that in underwriting a bond, surety companies check the
capacity and financial ability of the providers to operate as a valid
business. Florida officials consider such a review an effective
screening tool to help keep less qualified providers out of the
program. However, obtaining a surety bond does not reflect how well an
applicant will perform as a health care provider, just that they are a
business. In a previous report, we pointed out that these requirements
may negatively affect the ability of small providers to serve
beneficiaries. In addition, individuals with no history of criminal
action but an intent to defraud the program could still obtain
bonds.<SUP>14</SUP>
---------------------------------------------------------------------------
\14\ Medicare Home Health Agencies: Role of Surety Bonds in
Increasing Scrutiny and Reducing Overpayments (GAO/HEHS-99-23, Jan. 29,
1999.)
---------------------------------------------------------------------------
Preenrollment Site Visits. In 1999, after receiving new budget
authority from the state, the recently reestablished Georgia Medicaid
program's Provider Enrollment Unit began conducting site audits on all
new noninstitutional provider applicants. Georgia's site audit
requirements include verification of the provider's business location,
a check of the provider's compliance with the Americans With
Disabilities Act, and a check of the provider's business license. The
audit also checks compliance with any additional criteria that are
required for that category of provider as stipulated in the state's
Medicaid provider manual. Georgia Medicaid officials reported that when
they began the site audits they detected numerous applicants with
nonexistent addresses or mailbox-only operations; now such a finding is
rare.
According to Texas Medicaid officials, that state had a less
successful experiment with preenrollment site visits. In 1997, in part
because of the experience of the Florida Medicaid program, the Texas
legislature directed its Medicaid program to establish a pilot project
aimed at reducing fraud by conducting random on-site reviews of
prospective Medicaid providers in targeted counties. For the pilot,
program officials selected the three urban counties that had the
largest concentration of providers in the specialties designated by the
legislation--durable medical equipment providers, home health care
providers, therapists, and laboratories. At a minimum, Texas Medicaid
investigators were required to inspect the providers' sites; review
appropriate licenses or other authorities; interview the providers'
representatives, staff, and patients; and review medical and business
records. Only nine provider applications were received during this time
period. The nine applicants reviewed during the 5-month pilot were
found to be capable of delivering the specific services proposed in
their applications and to have fully operational businesses. Program
officials calculated that the reviews cost an average of $4,200 per
provider--too high to be cost-effective--and they recommended against
extending the pilot or implementing the preenrollment reviews
statewide.
Site visits are done before enrollment in the Florida Medicaid
program for certain types of provider applicants, including pharmacies,
durable medical equipment suppliers, physicians' group practices that
are at least 50 percent owned by nonphysicians, independent
laboratories, home health agencies, and some transportation companies.
Florida officials plan to begin conducting checks on 100 percent of the
pharmacies in two counties that historically have had a problem with
fraud. In addition, the state or its contractor may conduct site visits
on any existing providers if they are considered to be high risk, have
exhibited aberrant billing practices, or are the subject of a complaint
made to the Medicaid state agency.
Better Control of Medicaid Billing Numbers. Because control of
Medicaid billing numbers has been lax in some states, Medicaid has been
billed by individuals using information from deceased or retired
providers--either directly or as referring physicians. In an effort to
better control Medicaid billing numbers, Texas Medicaid officials
developed the Texas Provider Identification System, which they planned
to institute in conjunction with their provider enrollment changes. At
present, Texas providers can legitimately have and use several Medicaid
provider numbers simultaneously. Under the new system, each provider
would have one seven-digit base number to which locator code numbers
could be added to indicate where a service was performed. Texas has had
to delay implementing the new identification system because the start-
up of the state's new MMIS is behind schedule. The Georgia Medicaid
program uses a billing number system similar to the one envisioned by
Texas Medicaid officials. Medicaid providers in Georgia have a base
number to which letters are added that indicate the location where the
service was provided.
As previously mentioned, many states now cancel the billing numbers
of providers who have not submitted a bill to the Medicaid program
during a certain period of time. Of the states whose Medicaid officials
we interviewed, Florida, Georgia, and Texas currently cancel the
billing numbers of inactive providers, while Connecticut and New Jersey
do not.
The state Medicaid officials reported that the strengthened
provider enrollment measures they have adopted have given them
important new tools to help ensure the integrity of their Medicaid
programs. Despite the obstacles encountered in recent efforts to better
ensure the integrity of their Medicaid providers, Texas Medicaid
officials reported that they have sent a strong message to providers
about the program's intolerance for fraudulent and abusive practices.
Connecticut Medicaid officials said that while it is difficult to
quantify the deterrent effect of their provider enrollment measures,
preventing fraudulent providers from entering the Medicaid program is
inherently more cost-effective than trying to recover inappropriately
expended funds.
improving medicare provider enrollment creates additional opportunities
to strengthen medicaid
The current revamping of Medicare's provider enrollment process may
provide an opportunity for HCFA to help states strengthen the provider
enrollment process in their Medicaid programs. Because many of the same
providers bill both programs, we were interested in finding out whether
the programs' working together could more efficiently screen out
problematic providers. Sharing a standard enrollment form with Medicare
and checking providers using the new database, PECOS might help
Medicaid programs more effectively operate their provider enrollment
processes.
The HCFA Administrator has suggested that developing a joint
Medicare/Medicaid provider enrollment process might be beneficial for
both programs. A HCFA official with responsibility for program
integrity activities advised us that HCFA plans to solicit state
Medicaid officials' comments in the next month concerning the use of
HCFA's provider enrollment form for enrollment of both Medicare and
Medicaid providers.
Combining Medicare and state Medicaid efforts would not necessarily
mean that states with particularly aggressive or more comprehensive
provider enrollment programs would not continue them. HCFA and the
states would need to agree on the minimum requirements of a provider
enrollment process in Medicaid and to what extent enrollment through
the Medicare process satisfied those requirements. For example, it
might be reasonable to have states verify provider business addresses
and readiness to provide services through state-controlled site visits.
Either Medicare or Medicaid could be responsible for verifying provider
credentials and qualifications. The Medicare program could be
responsible for verifying Social Security numbers and other information
available in national databases, as well as for entering provider
information into the PECOS system. This would allow the states to put
more effort into activities that are best done at the local and state
levels.
One other recent development will affect both programs' enrollment
processes. As contemplated by the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), HHS is developing the National
Provider Identifier, a single, unique identifier for each provider to
be used in transactions with all health payers. This number could help
eliminate the multiple identification numbers for the same provider
present in today's environment that unscrupulous providers can use to
obscure their billing practices. This system would more easily track
all the activities of a provider by his or her unique identifier.
Currently, the draft of the final regulation is awaiting approval by
HCFA, HHS, and the Office of Management and Budget.
Mr. Chairman, this concludes my prepared statement. I will be happy
to answer any questions you or the Subcommittee Members may have.
gao contact and acknowledgments
For future contacts regarding this testimony, please call Sheila K.
Avruch, Assistant Director, on (202) 512-7277. Key contributors to this
testimony include Barrett W. Bader and Bonnie L. Brown.
related gao products
Medicaid: Federal and State Leadership Needed to Control Fraud and
Abuse (GAO/T-HEHS-00-30, Nov. 9, 1999).
Health Care: Fraud Schemes Committed by Career Criminals and
Organized Criminal Groups and Impact on Consumers and Legitimate Health
Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).
Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).
Medicare Home Health Agencies: Role of Surety Bonds in Increasing
Scrutiny and Reducing Overpayments (GAO/HEHS-99-23, Jan. 29, 1999).
Medicare Home Health Agencies: Certification Process Ineffective in
Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997).
Fraud and Abuse: Providers Excluded From Medicaid Continue to
Participate in Federal Health Programs (GAO/T-HEHS-96-205, Sept. 5,
1996).
Fraud and Abuse: Medicare Continues to Be Vulnerable to
Exploitation by Unscrupulous Providers (GAO/T-HEHS-96-7, Nov. 2, 1995).
Mr. Upton. Thank you. Bonus for finishing early.
Mr. Kubic.
TESTIMONY OF THOMAS T. KUBIC
Mr. Kubic. Good morning, Mr. Chairman. My name is Tom
Kubic. I'm the deputy assistant director of the FBI with
responsibilities for the White Collar Crime Program. I want to
thank the chairman and the subcommittee for allowing me to
appear today, and I have prepared a formal statement. With your
approval, I will submit it for the record.
To begin with, I'd like to mention that one of the key
reasons we have been able to make such progress in the area of
health care fraud law enforcement is the fact that the Congress
has been providing the Bureau with increased funding for both
support employees as well as new agents to come on board and
work these types of cases. In addition, the passing of the new
legislation has also helped significantly by providing us with
laws that are precise, that are direct and that are on point
with the nature of the fraud that we are seeing.
By way of background, in 1992, FBI had about 112 special
agents nationally working within the health care fraud program.
Today, there is almost 500 agents working health care fraud
matters nationally. There is also a corresponding growth in the
number of cases that we were investigating. Today, we
investigate over 3,000 allegations of health care fraud
nationally. We have also seen increases in the number of
individuals, companies and providers who have been indicted and
convicted within the area of health care fraud. For example,
the most recent information shows that in 1999, there were 615
individuals convicted nationally.
The question you might ask is why is--why is there such a
major difference in Medicaid fraud, and I would offer for the
committee's consideration--the subcommittee's consideration,
the fact that the various regulations and rules that have grown
up and the differences in State-by-State application of these
rules make this area a particularly ripe area for fraudsters.
Also, with specific reference to the State of California, the
tremendous amounts of money, over $18 billion, and the
tremendous number of people in the program make it a
particularly ripe area for unscrupulous providers.
Based, in fact, on an increasing number of referrals from
the California controller's office and a number of audit
reports that were indicative of fraud, the FBI joined with
California authorities in a task force. Earlier there was a
comment about why is it necessary for the FBI to participate or
to initiate these types of investigations? And I remind the
subcommittee that upwards of half of the money within the
Medicaid program is, in fact, Federal funds, and it is in that
fashion that we get our jurisdiction.
The task force was particularly successful because of a
very aggressive United States attorney's office in the eastern
District of California, which has the reputation of tolerating,
kind of a zero tolerance for fraud. Working with them, agents
working from audit reports were able to successfully
aggressively address this type of fraud.
I will also try to finish a little earlier and leave some
time. You clearly noticed I did not bring a sledgehammer nor an
industrial grade vacuum cleaner.
Mr. Upton. Just handcuffs.
Mr. Kubic. Just handcuffs. I will assure you that we are
continuing to investigate approximately 300 additional
providers in the State of California in a joint effort. I can
assure the committee that we will continue to conduct those
investigations and take them to their logical conclusion, which
we think will be indictments, arrests and forfeiture of assets
to be returned to the people. Thank you.
[The prepared statement of Thomas T. Kubic follows:]
Prepared Statement of Thomas T. Kubic, Deputy Assistant Director,
Criminal Investigative Division, Federal Bureau of Investigation
Good morning. I am Thomas T. Kubic of the FBI. I want to thank the
chairman and the entire sub-committee for allowing me to appear this
morning. I'd like to discuss the serious nature of health care fraud
and to brief you on innovative techniques that the FBI is currently
utilizing to address the crime problem. Specifically, I am going to
brief you on our efforts in California and the significant legislative
changes that have occurred due, in part, to the efforts of the
Sacramento task force.
As the sub-committee is well aware, in 1996, Congress enacted
comprehensive legislation to combat the health care fraud problem which
continues to rob our health insurance programs of billions of dollars
annually. The Health Insurance Portability and Accountability Act of
1996 (HIPAA), gave the FBI increased funding and new legal tools to
address this very crime problem. We at the FBI interpreted this as a
message that Congress wanted the FBI to step up our efforts. We
responded. I and other senior management officials have used this
increased funding to hire, equip, and train more agents and
professional support employees to be assigned to health care fraud
matters. In 1992 the FBI had 112 special agents investigating 591
cases. Today, thanks to the funding received through the HIPPA
legislation, we now have 493 agents investigating over 3,000
allegations of health care crimes. Criminal health care fraud
indictments have also dramatically increased by 50% from 409 to 615 in
1999. Despite the large number of criminal investigations and
convictions of the most egregious instances of health care fraud, the
FBI does not measure its successes solely on the number of convictions
obtained. Rather, the effectiveness of the entire federal government's
response to health care fraud can also be measured in the prevention of
health care fraud and abuse.
The FBI, as the principal investigative agency of the Department of
Justice, plays a significant role in health care fraud prevention
efforts. No segment of the health care system is immune from fraud,
certainly not the Medicaid program. In 1998, approximately $170 billion
was expended nationally by Medicaid programs. Because the rules and
regulations vary from state to state, and since each state administers
its own Medicaid program, I believe that the Medicaid program is just
as susceptible, if not more so, to fraud than its sister program,
Medicare. The Medi-Cal program, California's version of Medicaid, saw
expenditures over $18 billion in 1998, the second highest in the United
States. In 1998, Medi-Cal provided health care for over 4.8 million
recipients. In California, the Medi-Cal program is administered by The
California Department of Health Services. Given the magnitude of the
Medi-Cal program, the Sacramento division of the FBI, in conjunction
with the California State Comptroller's Office, identified a potential
crime problem involving health care fraud.
The California State Comptroller's Office began auditing and
referring all suspect pharmacies and other provider types throughout
California to our Sacramento division for investigation. Through these
referrals, FBI Sacramento began to identify and develop evidence of
Medicaid fraud at suspect pharmacies. Sacramento's Health Care Fraud
Task Force was formed to address this particular crime problem.
Using the newly created health care fraud task force, which
commenced in 1998 and includes members from the Sacramento division of
the FBI, the California State Comptroller's Office. The California
Attorney General's Office, the California Department of Health
Services, and the United States Attorney's Office, the Sacramento
division of the FBI initiated its ``phony pharm'' and, then later,
``unwholesum'' initiatives to investigate and prosecute individuals
suspected of orchestrating the most egregious fraud against the Medi-
Cal program.
the ``phony pharm'' initiative prosecutes pharmacies and durable
medical equipment suppliers that submit fraudulent claims to Medi-Cal.
To date, investigators have focused primarily upon pharmacies that
engage in fraudulent billing practices and illegitimate suppliers of
durable medical equipment, such as leg braces, back supports, and other
durable medical goods. Under this initiative, the Sacramento task force
targets those fraudulent providers with insufficient inventories or
purchase records to substantiate the volume of business indicated by
their Medi-Cal claims. Investigation has revealed that many
illegitimate pharmacies and suppliers often set up shell companies or
make use of a ``store front'' to set up their ``business,'' quickly
obtain provider numbers, bill Medi-Cal for high amounts in a short
period of time, and then shut down. Many times these business operators
will re-open in a few months under a new business name.
Approximately six months after the onset of the ``phony pharm''
initiative, the Sacramento task force realized that some of the
targeted pharmacies and DME suppliers have been aided by unscrupulous
wholesalers willing to create and sell phony invoices for
pharmaceuticals or DME supplies. Pharmacies and DME suppliers involved
in fraud schemes then use these phony invoices to substantiate their
Medi-Cal claims to auditors and law enforcement officers. Under the
``unwholesum'' initiative, the Sacramento task force targets wholesale
companies suspected of supplying phony invoices.
As a result of this state-federal partnership, 115 defendant Medi-
Cal providers have been charged by federal prosecutors with health care
fraud offenses. Collectively, these providers and suppliers have been
charged with defrauding the Medi-Cal program of more than $58 million.
To date, based on the strength of the investigative efforts, 69 of the
defendants have pleaded guilty. These individuals are serving a minimum
of 1 year incarceration, and have been ordered to pay, collectively,
more than $20 million in court ordered restitution.
Currently, investigations by the Sacramento task force have
targeted more than 300 medical providers, including wholesalers and
suppliers. The targeted providers are suspected of defrauding more than
$250 million in Medi-Cal funds.
A major component in the success of the Sacramento task force is
the prosecuitve support that investigators receive. The eastern
district of California has a long standing reputation for pursuing
health care fraud vigorously and effectively. The investigative members
of the task force combined with the prosecuitve support which they
receive has equated to a very effective and efficient approach to this
identified crime problem.
One of the most flagrant examples of the type of fraud perpetrated
against the Medi-Cal program is the Heravi case. The Heravis, suppliers
of leg braces, back supports, and other DME, were charged with
defrauding Medi-Cal out of more than $9 million. The Heravis submitted
thousands of fraudulent claims for DME supplies that were never
delivered to patients. In October 1999, the Heravis entered guilty
pleas in the federal health care fraud case brought against them by the
United States attorney's office in Sacramento. Additionally, the
Heravis agreed to a civil forfeiture recovery totaling $4.74 million,
the largest in the history of the eastern district of California.
In addition to the Heravi case, other significant accomplishments
attributed to the Sacramento task force include: in June, 1999, Zaruti
Ovesepyan and business associates were charged with health care fraud
violations in a scheme totaling $5.94 million, and in July, 1999,
Razmik Ovasapian was charged with health care fraud violations
involving in excess of $1.18 million. These high dollar amounts of
fraud were due, in part, to the ease with which suppliers could obtain
provider numbers and certification to allow them to bill Medi-Cal.
A recent bill enacted in California recognized the need to attack
fraud more effectively. On July 29, 1999, Governor Gray Davis signed
legislation which provided $3.5 million for the creation of a new fraud
prevention bureau, aimed at providers of durable medical equipment,
transportation, laboratory, and pharmacy companies. This fraud
prevention bureau is the first of its kind in the nation. It is the
result of a joint effort between the Sacramento health care fraud task
force and the state Medi-Cal program. The fraud prevention bureau is a
new program of the California Department of Health services. It
includes a more comprehensive process for provider applications and
certification process, provider agreements, and an enrollment term of
only four years for the specified category of providers.
The department now conducts regular field audits to determine
whether the volume of Medi-Cal claims submitted to the state are
consistent with the amount of business that providers have. The
department is also conducting on-site visits to almost all Medi-Cal
providers and has a moratorium on the issuance of new Medi-Cal provider
numbers. These efforts have prevented fraudulent providers from
shutting down and opening again in several weeks or months using a new
provider number.
I would specifically like to emphasize the provider application and
certification process. We have seen in California, as well as other
jurisdictions, unscrupulous individuals enter the health care industry
with one goal in mind, to steal from health insurers. The best defense
we have against these individuals is to strengthen the provider
enrollment and certification process and to keep these individuals out
of our health care programs in the first place. The recognition of this
HCF crime problem by the task force has, in part, led to these
legislative changes.
Based on our experience in California, it certainly would
facilitate law enforcement's efforts if other states would tighten
their respective provider enrollment process and certification process.
We have included presentations on the Sacramento operation at all of
our recent health care fraud training programs, as well as past and
future manager's conferences, and we look forward to the franchising of
this investigative approach in other states.
That concludes my prepared remarks and at this time I would be
pleased to answer any questions that you may have.
Mr. Upton. Thank you.
Ms. Connell.
TESTIMONY OF KATHLEEN CONNELL
Ms. Connell. Yes. I'm Kathleen Connell. I am California
State Controller. It is an elected position. I was elected by
the voters of California in November 1994. I am serving in my
second term. I am delighted that the Congressional Committee is
holding this hearing today. Medi-Cal fraud and the effort to
reform Medi-Cal programs in California has been a high priority
in my administration.
When I came into office in 1995, I initiated an audit of
the Department of Health Services, which is the Department that
runs the Medi-Cal programs in California, because I felt it was
a very important part of our budget. In California, to give you
some sense of the scope of this program, $22.5 billion is spent
in this budget year in Medi-Cal activities; $13.2 billion of
that is Federal; $9 billion of that is general-funded.
The role of the State Controller is to audit State
programs, and in that capacity, I determined it was necessary
to do the first-ever audit of the Department of Health
Services. We completed that audit in roughly a year. We
submitted that audit information to the legislature and to the
Governor. At that point, it was Governor Pete Wilson who was
responsible for the operation of the Department of Health
Services. That audit report, which indicated $467 million of
audit problems in the Department of Health Services, did not
receive a response. We issued an update report to the Governor
and to the legislature 6 months later, and then subsequently a
year later.
Over a course of a period of roughly of 3 years, we began
to see some administrative changes in the Department of Health
Services, but it was very slow and taxing work.
Independently of the effort to audit the Department of
Health Services, we went forward and audited Medi-Cal providers
in four categories: Medical labs, Department of durable medical
equipment providers, pharmacists and physicians. To date, we
have issued 339 reports. We have referred 70 percent of those
reports for criminal investigation and prosecution by the U.S.
Attorney General's office, by the State Attorney General's
office and by the FBI, and we have identified savings to date
of $547 million. All of that information is included in the
charts which I provided in my testimony.
I'd like to direct my comments now to what has evolved over
the course of the last few years and how the FBI got engaged in
this effort. When we began referring cases to the State
Attorney General's office there was no interest in prosecuting
those cases. At that point, cases were referred to the FBI. A
task force was made up of the FBI, the State Controller's
office, and the U.S. Attorney General's office. In the election
cycle of 1998, Governor Gray Davis was elected. He had been a
prior controller and was committed to the efforts that were
underway on Medi-Cal reform. He has significantly expanded the
Medi-Cal efforts in the Department of Health Services, and Mr.
Cates is here today to discuss their activities.
We've also expanded the task force now to include the
Attorney General's office and the Department of Health
Services. That task force is now being led by the Governor's
office, and they are making a concerted effort to assist us in
wrestling Medi-Cal fraud and dealing with the after efforts of
it.
Unfortunately, in the midst of this effort to crack down on
Medi-Cal fraud because we had been so aggressive, some of the
people that we had investigated and had brought for criminal
prosecution have filed a lawsuit against the State Controller's
office. Those lawsuits were heard in Federal court, and two
Federal actions have significantly handicapped the ability of
the State controller to play an active role in investigating
Medi-Cal fraud. The Federal courts have recently ruled that
under a Federal definition of single State agency, that only
one agency can be empowered to be engaged in the effort to
operate a Medi-Cal program.
In California, that designated agency was the Department of
Health Services. They had contracted with the State
Controller's office for a period of years well before I got
elected to office in 1994 to conduct the audits, because we are
the constitutional officer responsible for conducting State
audits.
Under the Federal court appeals ruling, the State
Controller's office can no longer conduct the audits in the way
that we had. When we had conducted audits prior to the ruling
in 1999, we conducted audits--when we found that there was
indication of fraud, we would basically pull the trigger. We
would freeze the funding for that Medi-Cal provider until we
could indeed investigate the level of fraud, which had occurred
in their program activity.
Under the current law the State controller can only do the
audit, send the audit report, not a finding to the Department
of Health Services. The Department of Health Services then
needs to review the audit review report, make its own finding
that Medi-Cal fraud has indeed occurred, and at that point can
seek to stop the funding.
This lag factor has significantly slowed down the ability
to carry forth on the audits. It has substantially reduced the
effectiveness of our efforts as a task force to move forward
with the enlightened effort of the Governor's office and the
continued support of the FBI.
So I have asked, in my testimony today, if Congress could
get clarification of the single State agency. If it requires
legislation, we would certainly hope you would do that. I have
been in conversation with State controllers around the country.
They are, indeed, concerned that similar kinds of judgments
will be made by their courts. This is obviously an easy way to
take your audit capacity out of the game of controlling Medi-
Cal fraud. We've proven we have been effective, and as a result
of that, I think there's continuing concern on the part of
providers that they rule us handicapped in this process.
I would like to spend a moment responding to Mr.
Assatourian's questions about how he feels we should improve
the system and his four common sense steps, and I think the
committee should be aware that those steps have actually been
addressed. He indicated that getting a provider number is
extraordinarily simple. I carry the bill called the Romero
bill, which was AB 874. It passed, was signed by the Governor
last year, which has now tightened up the ability in California
to get a provider number.
We carried another bill, which has put in place a bond
program for anyone who does Medi-Cal provider work in
California. That bond is now set at $25,000 a year. That bill
was also signed by Governor Davis. We have been carrying these
bills for a number of years, but we're finally delighted they
made it through the system.
The third concern that he had is that obtaining a Medi-Cal
card should be more difficult. We agreed. That language has
been in the bill, it was passed and it's in effect.
And finally, his concern was that we should purchase from
authorized distributors. We agree with that, but that is not
our role as a State controller; that's really Department of
Health Services. We are doing, however, in the State
Controller's office, what we call third party validation. It is
a normal part of the audit process. We do not accept the fact
that people have invoices. We go beyond the invoices because
many of these invoices are phony, and we go back to the
provider's supplier, and that is part of a normal audit
process. The FBI can verify that as well.
In relationship to products on the Medi-Cal formulary, I am
carrying a bill this year which will deal with that and will
modify the Medi-Cal formulary role. That has reached it's
policy committees in the Senate now. It has gotten a lot of
opposition from providers in California, and it may not pass
this year because of the opposition it has received.
And finally, in relationship to his concern about the
training of auditors, I can't comment on the Department of
Health Services. All of our auditors are trained specifically
in Medi-Cal audits. They are very informed in this field, and
that, indeed, is how we've gotten to the savings of $547
million.
[The prepared statement of Kathleen Connell follows:]
Prepared Statement of Kathleen Connell, Controller for the State of
California,
Good Morning Mr. Chairman and Members. My name is Kathleen Connell.
I am the State Controller of California, a State Constitutional Office
elected by the voters. I serve as the chief financial officer for
California.
In my testimony this morning, I will outline efforts that my office
has initiated in combating Medicaid fraud in California and identify
the challenges which are continuing. I have produced a report
specifically for this Committee setting forth my full remarks which I
would submit for the record. The report provides a complete history of
the efforts of my office as well as detailed statistics on our efforts.
At the beginning of my administration in 1995, I set the
elimination of waste and fraud in state programs as my highest
priority. The Medi-Cal program, California's version of the Medicaid
program, was then, and continues to be, one of the most significant
parts of California's annual budget. In the current fiscal year, over
$22.5 billion is appropriated for Medi-Cal, of which $13.2 billion is
federal funds. General fund expenditures of over $9 billion for Medi-
Cal will account for nearly 12% of all General Funds in the state
budget.
Early in my administration, I directed auditors to expand the
review of billing practices of Medi-Cal providers. In June 1996, I
issued a report on 11 pharmacy providers in Long Beach, California,
which identified over $2 million in unallowable costs. Significantly,
two of the eleven closed their businesses immediately after the
auditors arrived. This raised my concern that there were additional
areas of apparent fraud that had not been previously identified.
The Controller's office then expanded its efforts into other
provider categories and found similar results in audits of durable
medical equipment providers, physicians, and laboratories. To date, the
Controller's office has issued 367 reports, demanded repayment of $141
million, saved the taxpayers an additional $385 million in cost
avoidance, and withheld $23.5 million in payments to providers
identified by law enforcement as engaging in fraudulent activities. The
total savings from the efforts of our office are over $547 million,
more than one-half of which is federal funding. In addition, the
Controller's office referred 238 cases to the Medi-Cal Fraud Control
Unit located in the California Department of Justice for criminal
investigation and prosecution.
In 1998, seeking to pursue criminal prosecution of our Medi-Cal
findings, the Controller's office initiated a partnership with the
Federal Bureau of Investigation, the U.S. Attorney General's Office,
and the California Department of Justice to pursue criminal
investigations and subsequent prosecution.
To assist the California Department of Health Services in carrying
out its administrative responsibilities, the Controller's office
sponsored legislation which gave that Department more authority to
tighten up the provider enrollment process, increase penalties for
fraud, and expand the use of bond requirements. This legislation was
signed into law last year, and represents significant change to the way
we operate Medi-Cal in California. Please refer to chart 4 in my
report, which outlines the specifics of these legislative changes.
The Controller's office has also participated in the newly created
California Governor's Task Force on Medi-Cal Fraud, which is intended
to coordinate the efforts of all state and federal agencies involved in
anti-fraud efforts in Medi-Cal.
The increased anti-fraud activities from all of these agencies,
which resulted from our initiatives, are having a significant effect.
The California Legislative Analyst noted that 31% of the providers of
durable medical products--one of the first provider types to be
targeted by my auditors--had been removed from the provider roles and
that claims for this group have declined by nearly 10%. In addition the
Legislative Analyst anticipates similar results in the future in other
provider types that our office's audits have targeted.
While this is good news, it is also clear that fraudulent providers
have noticed these efforts and are taking steps to circumvent the
current prevention and detection efforts. New schemes involve:
<bullet> Using false identification to masquerade as licensed providers
who are retired, no longer practicing in California, or dead;
<bullet> Using marketers to pay beneficiaries to use their Medi-Cal
card to bill for services that are unnecessary or not provided;
<bullet> Stealing beneficiary Medi-Cal information from hospital
records and using it to bill for services not provided;
<bullet> Buying an established health care business and billing under
that name; and
<bullet> Developing some documentation to avoid detection by performing
unnecessary invasive procedures (for example, drawing blood)
and then billing for tests never performed. In addition to the
health risks to the person having this type of procedure, this
practice can increase the possibility of the spread of disease
in the general population.
It is clear that the fight against fraud in the Medi-Cal program is
still far from over. There are two concerns regarding the future of
Medi-Cal anti-fraud efforts that I would like to discuss:
First, recent federal court rulings have minimized the Controller's
office's role in combating Medi-Cal fraud and abuse. Without our
efforts to identify the problem and take action, Medi-Cal provider
fraud could have gone unnoticed and/or untreated for long periods of
time. While much has been accomplished, it is clear that this is a
problem that will require long-term dedication by state and federal
officials.
Second, recent federal court rulings have undermined the
Controller's office's ability to carry out a critical oversight role,
limiting our ability to conduct audits. In addition, the Controller's
office is currently prohibited from initiating withholds on payments to
suspected fraudulent providers or referring them to the Department of
Justice for criminal investigation and prosecution. Cracking down on
fraud cannot occur without the ability to stop the flow of funds. Under
the current court rulings, even when fraud is detected, the
Controller's office cannot withhold payment nor even inform the
Department of Health Services that fraud is suspected. Only a report
can be submitted with the intention that the Department of Health
Services would recognize the fraudulent activity. As a result, our
payments may be continued for some time. Even when prosecution is
successful, those additional payments are often not recovered.
Essentially, the federal courts have interpreted federal law and
regulations to require that the Controller's office not engage in any
activities in which it might exercise any discretion.
Even though the Controller's office has an independent duty under
California law to determine the legality and propriety of payments made
from the State Treasury, the federal courts have determined that the
State of California modified this duty when it accepted federal money
and agreed to be bound by federal Medicaid law.
Let me briefly explain what has occurred. The Medicaid law and
rules require the designation of a single state agency to administer
this program and prohibit any other agency from exercising
administrative discretion in any area, including the prevention and
detection of fraud. In California, the single state agency is the
Department of Health Services. The Federal Court's ruling essentially
requires an unnecessary duplication of functions in state government.
For example, under the court's ruling, state governments are prohibited
from using the long established, and often state constitutional,
functions of other offices. In California, the court ruling requires
the Department of Health Services to establish an audit function
similar to that of my office as well as an investigative function
duplicative of the California Department of Justice.
Certainly, it was never contemplated that the single state agency
would not be allowed to utilize the existing resources in state
government and would relegate the state constitutional functions of
other state offices to a nullity.
Other state Controllers and state Auditors have expressed concern
that the federal court determinations could be used to undermine their
authority as well, and detract from their efforts to fight fraud and
abuse in their Medicaid programs.In order to solve this problem, and
allow states to adequately combat fraud, I request that Congress take
action to review and amend the Single State Agency law to allow
recognition of the State's constitutional role of its elected officials
and allow me to once again carry out my independent duties and
responsibilities as the state's fiscal watchdog. The amendment should
allow me to exercise discretion in analyzing the Medi-Cal program to
identify fraudulent trends, initiate audits to identify overpayments,
take actions to withhold payments, make referrals for criminal
prosecution, and develop recommendations to increase fraud prevention
and detection activities.
Such an action on the part of Congress would send a clear message
to criminals considering committing Medicaid fraud and undermining the
program goals that both federal and state government are serious about
prevention, detection, and prosecution, and that such criminal activity
would have its consequences.
Thank you for your inviting me to address you today. I am happy to
answer any questions you may have.
Mr. Upton. Thank you.
Mr. Cates.
TESTIMONY OF J. ALAN CATES
Mr. Cates. Thank you, Mr. Chairman, and honorable members
of the committee. My name is Alan Cates. I am the chief of the
new Medi-Cal Fraud Prevention Bureau in the State of
California's Department of Health Services. It is my pleasure
to be here today and give you an update on our efforts to
combat fraud in Medi-Cal, specifically to update you on our new
provider enrollment processes and our innovative approach to
eradicating fraud in our provider network.
I would want to point out that until last year, fraud was
indeed bilking a billion dollars from the State of California's
health care service system. Concealed by an inherent trust of
medical professionals along with a long recession that limited
oversight resources, fraud had flourished in California.
Providers that were caught were typically apologizing and
promising to do better next time. Many times they did. We had
one that was identified as taking $200,000. They were ordered
to repay it. They were closed down, but they instead opened two
new stores and took over $12 million in just over a year.
Fortunately, they're now in prison.
Working with eight special agents of the Sacramento office
of the FBI and one assistant United States attorney, we were
able to identify and stop $200 million in durable medical
equipment fraud in 1998, 1999. That was approximately a $20
million-per-person return rate. However, we did not even get to
half of the fraud, and more resources were desperately needed.
That's when, in 1999, Governor Davis put up $1.2 million
for a new Medi-Cal Fraud Prevention Bureau, and implemented the
Medi-Cal Fraud Task Force. The Medi-Cal Fraud Prevention Bureau
is essentially a civil authority within the Department of
Health Services that uses existing administrative authority
within the Medi-Cal program to specifically detect and document
fraud. The Governor's Medi-Cal Fraud Task Force is primarily
interested in combining the resources of the various law
enforcement and civil authorities within the State of
California, including HCFA, Office of Inspector General, FBI,
U.S. attorney, State Controller's office, and State Department
of Health Services to focus entirely on fraud within the health
care program in the State of California.
The Medi-Cal Fraud Prevention Bureau launched a new three-
step focus on fraud approach to put fear back into fraud. Step
one was a survey, a risk assessment survey approach where you
went onsite to each of the providers. In the State of
California, I might mention we have over 100,000 providers of
Medi-Cal services. However, we have approximately 5,000-and-
some targeted groups, which include durable medical equipment
that present a little bit more of a problem for us than some of
the other provider groups. So we're focusing on approximately
5,000 of those providers, and then approximately 15- to 20,000
doctor clinic operations that, due to their claim patterns, we
are also focusing on. That's for the onsite risk assessment
survey.
Step two we call ``trust--but verify.'' We do a follow up
review of those high risk providers to identify actual evidence
of fraud. The first step just indicates indicators, ``fraud
flashers'' we call them in the business. Step two, we're
actually documenting evidence of fraud by looking at their
books and records.
Step three is immediate payment withhold to stop the
payments and to refer them for criminal prosecution.
That three-step process has proved effective. Ten Medi-Cal
fraud prevention specialists in the field have already
completed over 14,000 onsite surveys, documenting 2,000 high
risk providers, stopping $50 million in payments, and referring
over 100 providers to law enforcement for prosecution.
As you heard earlier, currently the Sacramento office of
the FBI and the U.S. attorney alone are investigating 350 fraud
cases, having charged 115 with $60 million in health care
fraud, convicting 70 of those 115 and recovering $21 million
through asset forfeiture and criminal restitution. All that in
just a little over a year.
Special Agent Ed O'Donnell, the lead agent on that case,
was recently awarded outstanding criminal investigation of the
year for his role in the phony form operation. The Medi-Cal
Fraud Prevention Bureau's role has now been expanded to
provider enrollment. In addition to new ChoicePoint
examinations, before they can be turned on and $50,000 fidelity
bonds, new and reenrolled providers must first pass an onsite
fraud prevention review. In place of the old pay and chase,
California now uses a lock-and-load system where we go in and
lock in what the provider's business practices are, how they
intend to operate that business, what their capabilities are
based on their current business structure; we lock that in and
then we load it into a computerized system that will trigger us
within 90 days, or, if they exceed their parameters that we
reasonably set for them when we did the initial review. Within
that 90 days, or if they hit the trigger, we go right back in
and perform a fraud prevention follow-up review where, again,
we look at actual business records, primarily bank records. We
use source documents to determine what is really happening at
the business.
The lock-and-load procedures are designed to assist the new
honest providers, while at the same time, demonstrate to
fraudulent providers that fraud detection will be swift and
certain.
We have other antifraud efforts going on at the Department,
including pre-check write processes that identify questionable
claims before they are paid and are field reviewed before
payment is released. We are aggressive with fraud, but not the
vast majority of honest providers that help us deliver the
health care system to the people that need it the most.
Thank you, your Honor.
[The prepared statement of J. Alan Cates follows:]
Prepared Statement of J. Alan Cates, Chief, California Medical Fraud
Bureau
Mr. Chairman and honorable members of the Committee, my name is J.
Alan Cates. I am the Chief of the Medi-Cal Fraud Prevention Bureau for
the California Department of Health Services (Department). Thank you
for the opportunity to testify, and pursuant to your request, I have
prepared written testimony for inclusion in the record, as if read. It
is my pleasure to be here today to give you an update on the efforts of
the State of California to combat fraud and abuse in the Medi-Cal
program. Specifically I would like to update the committee on our new
provider enrollment process and our new innovative approaches to curb
fraud and abuse.
Background
Following a decade of a limited number of oversight resources and
concerted efforts to encourage provider participation with easy
application processes, fraudulent providers were slipping in and were
stealing millions of dollars. Stealing doctor identities and
professional license numbers, and using illegally obtained Medi-Cal
beneficiary data, fraudulent providers were bilking millions from
California's Health Care Program. Employing complex, but essentially
cookie-cutter fraud schemes, they concealed the fraud with perfected
paper trails and cleverly cooked books. Since only a few were ever
caught, the pervasive scope of the problem went undetected. That is,
until recently.
Governor Davis Declares War on Fraud
Remembering his days as State Controller and his active role in
fighting fraud with Medi-Cal supply providers, Governor Davis declared
all-out war on those who would steal from programs serving the most
vulnerable. Within months of his inauguration in 1999, Governor Gray
Davis took decisive steps in the State Budget to reduce fraud in the
Medi-Cal program by tightening the provider enrollment process,
establishing the Medi-Cal Fraud Prevention Bureau, and convening a
Governor's Medi-Cal Fraud Task Force with both State and Federal
representation. Since taking office, Governor Davis has added more than
230 new positions and more than $17.5 million to California's Medi-Cal
fraud prevention efforts.
Provider Enrollment
Durable medical equipment (DME) was found to have a high incidence
of fraud and the number of new providers of these services was growing
at an alarming rate. A moratorium on the enrollment of new DME
providers was established in early 1999. In July 1999, a legislative
initiative proposed by the Governor was enacted which for the first
time gave the Medi-Cal program the statutory authority to verify a
provider applicant's identity and background prior to enrollment and to
deny enrollment, or sanction existing providers, who did not meet the
enrollment criteria. This legislation extended the authority to impose
enrollment moratoriums to all provider types, and precluded the
enrollment of providers convicted of fraud for a period of 5 years. The
statute also authorized the Program to make unannounced inspections of
the provider's place of business prior to and after enrollment.
With the new statutory authority and enabling regulations, the
Medi-Cal provider enrollment process underwent significant changes.
New, more extensive enrollment applications, provider agreements and
ownership disclosure statements were developed. Current providers in
five particularly problematic provider categories (durable medical
equipment, independent pharmacy, non-emergency medical transportation,
prosthetic, and orthotics providers) were subject to a review of their
qualifications for continued enrollment. Each continued enrollment
review included at least one on-site inspection by the Medi-Cal Fraud
Prevention Bureau. The Department also contracted with ChoicePoint, a
nationally recognized on-line tracking company, to access background
information on providers seeking enrollment or for those providers
subject to continued enrollment review.
The provider enrollment staff was augmented and tighter internal
controls were instituted to assure that no one individual would have
the ability to review and approve a provider's application and to
assure adequate supervisory oversight. Physical security was tightened
to prevent provider access to enrollment staff and document tracking
mechanisms were improved. As investigators uncovered new fraud schemes,
provider enrollment practices have been altered to look for specific
risk factors associated with those schemes. For example, stolen
identities often involve very new physicians, so enrollment staff now
gives special scrutiny to recent medical school graduates. The
California Department of Health Services is working with ChoicePoint,
to develop on-line access to the State motor vehicle records and other
public records to enhance the Department's background check
capabilities. California is also working to implement surety bond
requirements for non-licensed provider categories.
As keeping fraudulent providers out of the Program is the most
effective way to eliminate fraud, California, under the Davis
Administration, is committed to a careful, thorough review of a
provider's qualifications for Medi-Cal participation while being
responsive to the legitimate provider's expectation for timely
enrollment processing.
Medi-Cal Fraud Prevention Bureau
Using a new innovative approach to combating fraud and abuse the
Medi-Cal Fraud Prevention Bureau was created by Governor Davis and
initially staffed with 16 civil service positions, including ten Fraud
Prevention Specialists trained in the Focus on Fraud method of fraud
prevention. In operation only nine months, they have completed 14,000
on-site surveys; detected over 2,000 providers with unacceptable risk
for fraud; initiated 200 follow-up reviews that documented evidence of
fraud in almost 100 cases to date; and, implemented administration
sanctions to withhold $50 million in Medi-Cal payments with a dual
referral to the State Department of Justice, Medi-Cal Fraud and Elder
Abuse Division and to the FBI Phony Pharm operation.
Focus on Fraud Approach
Determined to put fear back into fraud, a team of ten State
auditors and Certified Fraud Examiners initiated a special Focus on
Fraud pilot designed solely to detect and document fraudulent service
providers.
In one year, Focus on Fraud was able to expand coverage to review
over 450 providers, in place of the normal 40 resource-consuming
compliance audits. These 450 reviews resulted in the documentation of
evidence of fraud in over 100 cases, involving $34 million in Medi-Cal
payments. While these cases were prosecuted, the real benefit was that
the pervasive scope of the fraud problem was finally demonstrated.
Also demonstrated was the efficiency and effectiveness of the Focus
on Fraud approach. While not intended to replace compliance audits,
this three-step system proved it could quickly separate honest from
dishonest providers, then professionally pierce complex fraud schemes
to document the evidence of fraud necessary for prompt prosecution.
Step One (Fraud Flashers) was an on-site risk assessment survey to
detect and document systemic fraud indicators. Requiring only minutes
to complete, surveys proved effective in detecting providers at high
risk for fraud. For example, a provider that does not accept bankcards
may be uninterested in real customers and/or fear bank background
checks.
Step Two (Trust--But Verify) was a prompt follow-up review of
actual business records of providers with high fraud risk. Requiring
only hours to complete, follow-up reviews proved effective in
documenting actual evidence of fraud. For example, bank records of
Medi-Cal deposits withdrawn in cash can evidence money laundering and
health care fraud.
Step Three (Eradication) was immediate application of
administrative sanctions. For example, withholding of Medi-Cal payments
and referral to law enforcement.
Medi-Cal Anti-Fraud Operation in Los Angeles
The Department of Health Services has uncovered an increasing
number of cases in which physicians are knowingly or unknowingly having
their medical license numbers and/or Medi-Cal ID numbers used to bill
the Medi-Cal program fraudulently. Two key types of provider fraud
schemes include: (1) ``Physician Identity Theft''--Physicians
unknowingly having their medical license numbers and/or Medi-Cal
Provider Numbers stolen and used to bill the Medi-Cal program; (2)
``Rent a Doctor''--Physicians knowingly selling their medical license
number or Medi-Cal Provider Number. In addition, recent anti-fraud
efforts in Los Angeles identified beneficiaries being paid for the use
of their Medi-Cal cards for fraudulent Medi-Cal claiming. The
fraudulent providers continually look for creative ways to develop
Medi-Cal beneficiary patient bases to support the fraudulent claims
that are being submitted for reimbursement to the Medi-Cal program.
Under Governor Davis' leadership, the California Department of
Health Services recently developed an innovative approach to address
suspected fraudulent or abusive activities to reduce unnecessary
expenditures of Medi-Cal funds and to more importantly protect
California's Medi-Cal population. A rapid response team consisting of a
medical professional and an investigator conduct on-site visits at
suspicious Medi-Cal provider locations with follow-up reviews of the
claim information and verification of medical necessity. A recent
focused operation in the Los Angeles area has resulted in sanctions of
over 200 Medi-Cal providers who used ``cappers'' to recruit patients
and improperly bill the Medi-Cal program over $75 million. Medi-Cal
fraud has gone beyond false billing to treating Medi-Cal beneficiaries.
It is common knowledge that children and disadvantaged adults are
becoming anemic because of the frequency of unnecessary blood draws.
Recently, a major fraud scheme in Los Angeles was uncovered that used
unlicensed technicians to perform unnecessary dental procedures on
hundreds of patients, including the unnecessary drilling and filling of
children's permanent teeth.
The Governor's Medi-Cal Fraud Task Force
The Governor's Medi-Cal Fraud Task Force, chaired by Dr. Diana
Bonta, State Director of the Department of Health Services, focuses its
attention on the combined resources of the FBI, US Attorney Civil and
Criminal Divisions, the Health Care Financing Administration, Health
and Human Services Office of Inspector General, State Attorney General,
and State Controller in a coordinated effort to eliminate health care
fraud in California. This group meets on a quarterly basis and has
established sub-committees to develop a clearing house for information
regarding investigations of fraud and abuse, preparing a directory of
contacts and representatives for state and federal anti-fraud and abuse
programs and discussing collaborative efforts to deal with new areas of
fraud not yet explored.
Provider Anti-Fraud Strategic Plan
With strong support of Governor Gray Davis, including the addition
of over 200 new positions, the State Department of Health Services
(DHS) has also implemented a Provider Anti-Fraud Strategic Plan. This
maximizes the DHS effort to eliminate fraud within all DHS programs and
services. Some of the new anti-fraud initiatives include:
<bullet> Doubling of the Medi-Cal Fraud Prevention Bureau
<bullet> New proposed legislation to expand criminal penalties, require
enrollment for third party billers, and tighten requirements
for laboratory providers.
<bullet> Pre-check write on-site reviews to verify claim propriety
prior to payment
<bullet> Automated payment system edits to quickly identify unusual
claim patterns
<bullet> Formal focus on mosquito labs that draw blood for fraud
purposes only
<bullet> Verifying a doctor's identity before approving a request for
new locations
<bullet> Expanded provider enrollment oversight
<bullet> Monitoring of Medi-Cal Managed Care under-utilization
Eradication of health-care fraud is a high priority for California
Governor Gray Davis.
Thank you for the opportunity to address this committee and share
with you information regarding the successes of the Medi-Cal Fraud
Prevention Bureau under Governor Davis. I would be pleased to answer
any questions you may have regarding California's efforts to combat
Medi-Cal fraud.
Mr. Upton. Thank you.
Mr. King-Shaw, welcome.
TESTIMONY OF RUBEN J. KING-SHAW, JR.
Mr. King-Shaw. Thank you.
Mr. Upton. Just put the mike a little bit closer.
Mr. King-Shaw. Thank you and good morning, Mr. Chairman,
distinguished Members, ladies and gentlemen. My name is Ruben
Jose King-Shaw, Jr., and I am the Secretary of the Florida
agency of the Health Care Administration. And just to give you
a word about the agency, we are the chief health care finance,
planning and regulatory agency of the State of Florida. The
health care industry to Florida is like the automobile industry
to the State of Michigan, Congressman Stupak, I think you can
understand that, and in the sense of its size and scope and
complexity and growth.
Included beyond the Medicaid operation that we regulate
hospitals, nursing homes and about 20,000 facilities, we
investigate quality-of-care complaints against practitioners
and facilities, regulate managed care organizations for quality
of service and medical care and operations. So we have a great
deal of leverage. And as we talk about some of things we've
done to curb Medicare fraud in our enrollment, particularly
keeping in mind the leverage that we have over the health care
delivery system as a whole, it makes a very powerful
opportunity for us.
The State of Florida is a very diverse State. We have a
great deal of our State still rural, but of course, the
majority of Medicaid recipients are concentrated in the urban
areas, which for us is primarily southeast Florida, Dade
County, Miami Dade County with the city of Miami, Broward
County with the city of Ft. Lauderdale, and going into Palm
Beach County, city of West Palm Beach. It's about an $8 billion
operation, the Medicaid program is, and serves about 1.5
million Floridians, and we don't want any of that money going
to fraudulent providers.
There was a concept of acceptable level of fraud tossed
around earlier this morning. We believe there is no acceptable
level of fraud, and our objective is to root it out all
together.
We have some very aggressive folks in the State who spend
all their waking hours thinking of ways to steal our money. Our
position is we need to stay up an hour later than they do
figuring out ways to keep them from doing so. So we have an 82-
person-staffed integrity unit, and we also work throughout the
agency with other parts of State government to protect the
public's funds and the best interests of the patient.
I'd like to share with you some of things that we've done,
particularly in our provider enrollment, that we think have
been quite effective in deterring fraud, and as I run through
them, I may go back during your question-and-answer period to
answer some questions about them, but, for example, we require
that all officers, directors, physicians, and principals who
own at least 5 percent of the operation applying for a Medicaid
number, to be disclosed in the application, and every single
one of them have to sign it. There can be no hidden providers.
There can be no providers covered under the contract that are
not explicitly established in the contract. We do not allow any
retroactive enrollment of providers into the Medicaid program.
Our contracts all have expiration dates, which means that
at a certain point they must be re-examined, reprofiled,
recredentialed, and readmitted. We have a surety bond ability.
We can require a surety bond, or letters of credit, to
providers as a condition of applying for the Medicaid program
for high risk providers, which are primarily the durable
medical equipment, nondoctor-owned medical practices,
independent labs and transportation companies. The value of the
surety bond is that it requires--no bond agency is going to go
and offer that kind of coverage to a facility or provider
unless they have gone in and looked at them themselves first.
So it's a no-cost operation of the State, but it does bring
another set of eyes to go look, on a prospective basis, at a
potential Medicaid participant.
It requires notice of change of ownership of a Medicaid
provider once in the program. We do regular criminal background
checks. It is not a property right, the Medicaid provider
number. It doesn't transfer, cannot be sold or traded, doesn't
travel with a change of ownership necessarily. We have located
the venue for all legal actions to a single county in the
State, which is important because we get to know, you know, the
bench, if you will, in that county.
We have established a prepayment schedule for any
overpayments. Regular license verification, and perhaps the
most powerful tool we have of all of these is the fact that we
have a provision in all of our Medicaid contracts that allow us
to cancel that contract with 30-day notice without cause.
Now, we regularly go through periods of reenrollment, and
we can talk about that if you like. Our last reenrollment
period was between January 1996 and July 1997, where every
noninstitutional provider was asked to reapply, reenroll in the
Medicaid program, which gave us a chance to look at them again
for quality and performance. We have adopted site visits, and
we do that for, again, those high risk providers, durable
medical equipment, nonphysician-owned practices, transportation
companies, independent labs, and now pharmacies. And as you
would expect, we have uncovered a great number of vacant lots
and storefronts and PO boxes, just by the practice of going out
and performing those site visits.
We also have been able to save quite a bit of money, $100
million overall, through a combination of all these things,
including about 10,000 lines of edits in our computer system.
We do a series of statistical analysis and trend analysis to
identify aberrant billing patterns that may lead to fraud. We
can then zero in on those targets to do some more analysis, to
determine what is going on there. We have saved $19 million in
DME alone, $7 million in independent lab and X-ray expenses,
and every 2 months we do a sweep of our data base to see if any
of the providers, physician providers and other providers in
the Medicaid program, turn up on our list of folks who have
been indicted or prosecuted for violation of laws.
My time is out--in fact, I'm a minute over--so I'll curtail
my comments with the very last comment. One of the things that
we have the ability to do is to competitively bid our network,
and we have the ability to accept or deny practitioners or
applicants into the Medicaid program, based on our
identification of need, be that geographic or quality or a
certain skillset. That gives us an enormous opportunity to, on
the front end, admit only quality providers in the Medicaid
program with the specialty and the geographic distribution that
we need.
Hopefully we'll get a chance to do some more conversation
through the Q-and-A period. I will defer the rest of my time to
my colleague. Thank you very much.
[The prepared statement of Reuben J. King-Shaw, Jr.
follows:]
Prepared Statement of Ruben J. King-Shaw, Jr., Secretary, Florida
Agency for Health Care Administration
Chairman Upton, distinguished members, ladies and gentlemen, I am
Ruben J. King-Shaw, Jr., Secretary of the Florida Agency for Health
Care Administration. Thank you for this opportunity to talk about how
Florida fights fraud and abuse among providers seeking to enroll in our
Medicaid program.
Florida is a very diverse state. Much of it is rural. Dade and
Broward Counties are the most heavily populated areas. They encompass
Miami and Ft. Lauderdale where a quarter of our Medicaid recipients
live. Not surprisingly, this densely populated area is also where a
majority of provider fraud and abuse occurs.
Combined state and federal Medicaid spending in Florida exceeds
eight billion dollars. Every month a million and a half Floridians are
eligible to receive Medicaid benefits. We do not want a single dollar
that could be going to legitimate health care diverted by unscrupulous
people trying to steal from Medicaid by posing as health care
providers.
The fight requires aggressive measures. Unscrupulous individuals
are good at finding holes in the system. Our job is to find those holes
before they do. Today I want to talk about what we have done over the
past several years to fight this kind of crime.
Our focus has been on prevention. If you prevent dishonest people
from enrolling as providers, you have won half the battle.
Our first line of attack is the Medicaid provider application. In
1995 we began requiring more information from provider applicants. We
also rewrote our provider agreement to beef up standards and make
providers more accountable. Here are some of the things we require:
<bullet> Disclosure of all officers, directors, physicians and
principals who own five percent or more of the business. All of
them have to sign the provider agreement;
<bullet> No ``hidden'' providers. The application must identify every
practitioner who will be participating in Medicaid;
<bullet> No retroactive enrollment;
<bullet> Contracts that expire;
<bullet> Surety bonds or letters of credit for certain high-risk
provider types;
<bullet> Notice of change of ownership;
<bullet> Criminal background checks;
<bullet> No ``property right'' in a Medicaid provider number;
<bullet> Venue for all legal actions in a single county;
<bullet> Repayment schedule for overpayments;
<bullet> Regular license verification.
Between January 1996 and July 1997 every non-institutional provider
had to re-enroll under the new agreement. When we started, we had more
than 82,000 enrolled providers. When it was over, there were 55,000
left. By giving every agreement an expiration date, we guarantee that
providers are periodically re-examined to ensure their continuing
fitness to be in the program. Our next re-enrollment is beginning now
and will continue through the first quarter of calendar year 2003.
Since 1996 we have been doing site visits of durable medical
equipment suppliers, non-physician owned physician groups,
transportation companies, and independent laboratories. We are adding
pharmacies this year. You would be amazed at how many vacant lots,
empty storefronts, and shell businesses this turns up. A site visit
costs about fifty dollars, but that one simple step can save a million
dollars.
Between 1996 and 1998 our fraud and abuse initiatives reduced
annual Medicaid spending by more than $100 million. We terminated more
than 120 South Florida clinics and physicians suspected of fraud. A
combination of on-site reviews, a $50,000 surety bond, and new computer
edits reduced Medicaid durable medical equipment spending by more than
$19 million. We saved another $7 million using anti-fraud controls to
target independent laboratories and x-ray service providers.
A word about surety bonds. No bonding company is going to issue a
bond without doing its own investigation of the provider. The state
spends nothing and at the same time potentially avoids losing millions
to fraud.
We make it a point of following up on those criminal background
checks. Every two months, a contractor notifies us about any providers
convicted of a crime since the last check. The state's Department of
Health, which regulates the health professions, does quarterly license
checks so we will know if a provider has lost a license or if
proceedings are under way to revoke a provider's license.
Obviously, enrollment initiatives alone won't do the job. We do
believe in the ``use it or lose it'' philosophy. Any provider that
doesn't bill Medicaid for twelve consecutive months is dropped from the
program. Reinstatement requires going through the full enrollment
process again.
In addition we use our Medicaid Management Information System to
identify inappropriate billings through edits. We have more than 10,000
automated, hard edits. It is a good thing that Medicaid and the
computer age grew up simultaneously. Can you imagine how many people it
would take to examine paper claims to make sure someone isn't trying to
bill Medicaid for a non-covered service, twice for the same service,
conflicting procedures or perhaps a hysterectomy for a man?
We do aggressive pharmacy audits and have been able to remove some
bad providers. We expect to remove more. This year the Florida
Legislature added to our arsenal by giving us the additional authority
we need to deny provider applications based on the best interests of
the Agency. We have been able to beef up our pharmacy credentialing
requirements and are now able to impose a moratorium on pharmacy
enrollment and enroll providers only where we identify a need.
We built a map of pharmacy locations in south Florida and stuck in
a pin for each pharmacy. In some areas we couldn't find room for all
the pins. With this new legal authority, we're ready to tackle that
problem. As a companion effort we will be watching pharmacy use by
Medicaid recipients. Those who abuse their drug benefit will be locked
into a single pharmacy.
Right now we are seeking proposals from private contractors to help
us profile providers who demonstrate potential for fraud and abuse. We
already have begun comprehensive profiling of recipient drug therapies
by beneficiary and prescriber.
Because responsibility for dealing with the bad guys is shared by a
lot of agencies, it is sometimes easy to miss the big picture. In
Florida we have worked hard to form strong interagency partnerships
that focus on anti-fraud strategies. My agency works closely with the
Attorney General and his Medicaid Fraud Control Unit, with the
Department of Law Enforcement, with the Statewide Prosecutor, with the
Federal Operation Restore Trust, our practitioner regulatory agencies,
the provider professional associations, local law enforcement agencies,
and others.
We can never assume we don't have a problem. We can't even assume
we know what form fraud and abuse might take. We do know that our
efforts are paying off. We will keep working hard, and we take
satisfaction that we are improving service for Medicaid recipients and
making life very hard for the people trying to take money they don't
earn.
Again, thank you for allowing me to appear today. I would be happy
to answer questions.
Mr. Upton. Thank you.
Mr. Wagoner.
TESTIMONY OF DOUG WAGONER
Mr. Wagoner. Thank you, Mr. Chairman, and members of the
subcommittee. Good morning, my name is Doug Wagoner. I am here
today representing ChoicePoint. ChoicePoint is the Nation's
leading provider of on-line and on-demand information services
to business and government. Headquartered outside of Atlanta,
ChoicePoint has over 3,500 associates working in over 40
locations nationwide.
I have been the vice president of ChoicePoint's public
sector division for almost 3 years. Through the public sector
division, ChoicePoint provides low risk, low investment
information-based solutions to prevent and thus reduce the cost
of fraud and abuse in publicly funded health care systems.
Additionally, we support law enforcement, child support
enforcement and other entitlement programs to reduce fraud. On
behalf of ChoicePoint, thank you for your generous invitation
to appear here today.
I am proud to say that all the participants here on this
panel, the GAO, the FBI, the States of California and Florida,
are clients of ChoicePoint. ChoicePoint's philosophy has been
that stringent reviews of provider applications coupled with
onsite and unannounced inspections, will go far in preventing
fraudulent claims from entering the system, and thus preventing
fraudulent payments that have to be investigated on the back
end with little chance of recovery. Again, your mother was
right, an ounce of prevention is better than a pound of cure.
Working together with our government clients, we are
progressing in joint efforts to prevent those who would engage
in health care fraud from entering the public systems. Allow me
briefly to reference these projects. As part of HCFA's
Operation Restore Trust, ChoicePoint combined onsite inspection
services with our extensive data resources to verify the
existence and legitimacy of community mental health centers, or
CMHCs, in Florida. The initial phase of inspections found that
over 60 percent of the CMHCs were not in compliance with
Federal regulations. Several months and 300 inspections later,
this rate got down to 20 percent as word had gotten out on the
street about these inspections. During this project,
ChoicePoint found fraudulent providers in adult video stores,
people's homes and even an airport runway that was given as an
address for one provider.
ChoicePoint has also been working with HCFA on the durable
medical equipment, or DME, inspection program. As a part of
this effort, ChoicePoint has inspected about 45,000 of the
110,000 Medicare DME's. As a result of this program, the number
of suspected fraudulent providers is going down substantially
each year. In addition, the knowledge that an inspection will
occur at some point serves as a deterrent for those applying to
be a fraudulent DME in the first place. One such fraudulent
provider, as the chairman mentioned earlier, was located on the
10th floor of a nine-story building. The cost of the
ChoicePoint's inspection service averages about $130, and takes
less than 30 minutes of the provider's time. We estimate that
the annual savings of ChoicePoint's services through HCFA's
program has created about a $1 billion savings a year. The
inspection program results in significant return on investment
for the Federal Government considering the low, relatively low
cost of ChoicePoint.
ChoicePoint has been supporting HCFA's Medicare provider
enrollment process since 1998. HCFA's fiscal intermediaries and
carriers are required to use an independent third party
information provider to verify the information from providers
applying to the Medicare program. The vast majority of FIs and
carriers have chosen to use ChoicePoint's data on a daily basis
to verify the legitimacy of providers entering the Medicare
system. ChoicePoint's Internet-based solutions allow the FI or
carrier to confirm professional license data, education,
sanctions, disciplinary actions and business ownership to name
a very few of the data bases.
Efforts like these have led, and will continue to lead, to
significant cost savings for programs that HCFA administers.
Based upon our experience from across the country, we would
like to make three recommendations for the committee to
consider.
First, we recommend that HCFA conduct a competition of data
providers and contract with one company to provide all of its
provider enrollment for compliance needs. This would provide a
consistent nationwide approach to verifying applicant data
while pooling the purchasing power of HCFA to get the best
price.
In addition to this, we also believe that HCFA should
mandate a criminal background check program as part of the
provider enrollment process for both Medicare and State
Medicaid programs.
Second, a nationwide inspection program for State Medicaid
DME, similar to what HCFA has done for the Medicare system,
would help prevent provider fraud at a State level, similar to
what we've experienced for Medicare on a nationwide basis.
Finally, as with State inspection services, ChoicePoint
believes that additional front end prevention can be achieved
through using on-line data services on a consistent nationwide
basis. Thus, we recommend that HCFA require each State Medicaid
program to use these types of on-line data services to prevent
fraud. California and Florida are examples and models for this
program.
We thank the subcommittee for this opportunity to appear
here today and to tell you about ChoicePoint and what our
company has been doing to protect our health care systems. We
are proud of our record and look forward to working with the
subcommittee in the future. I would, of course, be pleased to
answer any questions you may have. Thank you very much.
[The prepared statement of Doug Wagoner follows:]
Prepared Statement of Doug Wagoner, Vice President, Public Sector,
ChoicePoint, Inc.
Mr. Chairman and Members of the Subcommittee, good morning, I am
Doug Wagoner. I am here today representing ChoicePoint, Inc.
ChoicePoint is the nation's leading provider of decision-making
intelligence to businesses and government. Through the identification,
retrieval, storage, analysis and delivery of data, ChoicePoint serves
the informational needs of the property and casualty market, life and
health market, and businesses, including Fortune 1000 corporations,
asset-based lenders and professional service providers, and federal,
state and local government agencies. Headquartered outside of Atlanta,
ChoicePoint is a publicly-traded company with over 3,500 employees in
more than 40 locations nationwide.
I have been the Vice President of ChoicePoint's Public Sector
Division for almost three years. Through the Public Sector Division,
ChoicePoint provides low-risk, low-investment, information-based
solutions to prevent and thus reduce the cost of fraud and abuse in
publicly funded medical programs and services. On behalf of
ChoicePoint, thank you for your generous invitation to appear here
today.
I am proud to say that most of the other participants on this
panel--the General Accounting Office, the Federal Bureau of
Investigation, the State of California, and the State of Florida--are
ChoicePoint clients. A more complete list of ChoicePoint's government
clients is contained in the Appendix to this testimony. Today, we are
working together to share ideas and solutions to solve a problem that
impacts us all. Our common goal is to reduce healthcare fraud in
publicly funded programs. In previous hearings, this Committee has done
an excellent job of defining the scope and breadth of this pressing
problem. I want to commend the Committee for again directing its
attention to the issue of provider fraud in the Medicaid system because
there is still much work to be done to eliminate fraud in our federal
and state health programs. We also appreciate the Committee's
willingness to hear from both the private and public sector, including
state and federal agencies.
On prior occasions, this Committee has investigated the possibility
of using public sector data sources not only to reduce the cost of
fraud in the health care system, but also to reduce the risk to
citizens of poor performing health care providers. ChoicePoint
supplements these data sources with our over 10 billion public records
and our site investigators. Our goal is to enhance government's ability
to reduce health care fraud. ChoicePoint's solutions are relatively low
cost, require no up-front investment by the government, have minimal
impact on the provider, and can be implemented by a state Medicaid
program in days, not years. ChoicePoint's solutions are also targeted
at the front-end of the problem. Our philosophy has been that stringent
reviews of provider applications--coupled with on-site, unannounced
inspections--will go far in preventing fraudulent claims from entering
the system, and thus preventing fraudulent payments that have to be
investigated on the back-end with little chance of recovery.
choicepoint provides valuable inspection services to the federal
government
ChoicePoint has been working to reduce public health care fraud
since the company's inception in 1997. I would like to detail the
various provider enrollment verification services that we have been
supporting as a part of this effort. While our customers have primarily
been involved in the Medicare program, ChoicePoint also serves several
state Medicaid programs.
Operation Restore Trust
In 1997, we began supporting the Health Care Financing
Administration's (``HCFA'') Operation Restore Trust (``ORT'') program.
This program was one of the first large-scale task forces assembled to
identify and reduce Medicare/Medicaid fraud. ORT was a concentrated,
joint state-federal program that focused on Community Mental Health
Centers (``CMHCs'') in key southeastern states. To begin using
ChoicePoint's site inspection services, the ORT team provided
ChoicePoint with a list of approximately 300 CMHCs primarily located in
Florida. ChoicePoint's site inspectors then used our extensive data
resources to verify the existence and legitimacy of these businesses.
Although ChoicePoint inspected all of the businesses targeted by ORT,
those businesses that did not match our data-verifying tests were given
priority for inspection. Starting in south Florida and working north,
ChoicePoint conducted the CMHC inspections. The purpose of the
inspections was to collect and confirm such information as the name of
the business, its hours of operation, photographs of the establishment,
what inventory was on hand, and other related business information.
These inspections were conducted during regular business hours and are
completed in less than thirty minutes, but they are done without prior
notice to the ownership in order to prevent the masking of violations.
The findings from our experience in ORT are staggering. During the
initial phase of the inspections in south Florida, we found that over
60% of the CMHCs were not in compliance with federal regulations. The
second round of inspections--carried out several months later
throughout the state--found that the problem rate had decreased to 40%.
Finally, after the third round, the non-compliance rate had decreased
to 20%. During its inspections, ChoicePoint located CMHCs that were
actually adult video stores, private homes, mail forwarding services,
or locations with no physical presence at all. We believe the decline
in the problem rate can be attributed in some degree to the very fact
of our inspections. Word of mouth from one operator to another gave
fraudulent operators an opportunity to close their doors prior to our
inspector's arrival after they learned that one of their cohorts
received a visit from our inspectors. We also discovered that owners
that were shut down after failing an earlier inspection would relocate
to another Florida city and open another fraudulent CMHC, only to be
inspected again under ORT.
Durable Medical Equipment Inspection Program
Shortly after ORT was underway, ChoicePoint began working on HCFA's
nationwide Durable Medical Equipment (``DME'') inspection program. We
have been part of this program for three years. ChoicePoint has
inspected about 45,000 of the estimated 110,000 Medicare DMEs in the
United States. The goal is for every new DME applicant in the country
to pass an initial inspection prior to receiving a billing number and
be subject to re-inspection every three years. Similar to ORT, these
inspections are unannounced, take less than thirty minutes of a
provider's time, and collect various data depending on the type of
facility. Our inspectors arrive with a letter from HCFA explaining the
inspection program and asking for the provider's cooperation with the
inspector. The inspector provides identification to demonstrate the
legitimacy of the request, and then begins a consistent, process-driven
inspection as directed by HCFA. It is important to note that it is not
ChoicePoint's role to distinguish a ``bad'' DME from a ``good'' DME at
the time of inspection. Our job is to objectively collect the data
required by HCFA and deliver it to HCFA for evaluation and action.
Often, providers attempt to cover up problems or ask an inspector
for feedback, but ChoicePoint's professional inspectors are trained to
keep their composure and collect the data as needed without comment. If
the inspector has any doubts in the course of the inspection process,
it is ChoicePoint's policy to take a photograph to document the
evidence. This was made particularly difficult when one inspector
visited a DME whose address was listed as the 10th floor of a 9-story
building.
Despite these types of incidents, we are finding that the number of
suspected fraudulent providers is going down each year the program
continues. Not only do these inspections identify and shut down
fraudulent or potentially dangerous DMEs, the knowledge that an
inspection will occur at some point serves as a deterrent to applying
as a fraudulent DME in the first place. Additionally, HCFA wisely
requires our inspectors to inspect the inventory of the DME, so those
individuals who attempt to set up a fraudulent company must make a
substantial initial investment in inventory in order to pass the
inspection.
Cost Savings
The cost of these inspection services average around $130 per
inspection. Although it is impossible to accurately determine the value
of the fraud prevented by this program, we can extrapolate some numbers
from the findings of ORT. Prior to the commencement of the ORT program,
we were told that an inspection would be triggered for those DMEs that
billed federal health care programs between $250,000 and $300,000 per
year. Thus, DME owners could fraudulently invoice just under that
amount, close the business, and then start another fraudulent front
company. Since ChoicePoint does not make any determinations as to the
validity of DMEs, we do not maintain the official numbers associated
with fraudulent suppliers, such as the number of denied applications
and the number suspended from federal programs. Based on information
that we were provided in the past, we estimate that the annual savings
ChoicePoint's services create for this program is over $1 billion a
year. This dollar figure is based upon a conservative estimate that 10%
of the supplier population is (or would be) fraudulent, and that each
of these fraudulent DMEs would have invoiced up to the $250,000
threshold prior to starting another DME and re-applying to the program.
If these numbers are accurate--and we believe that they are
conservative--this inspection program results in significant financial
savings for the federal government, even after considering the annual
cost for the ChoicePoint inspections.
Given these estimated savings, ChoicePoint believes that the DME
inspection program implemented by HCFA gives United States taxpayers a
dramatic return on their investment. However, this program's
capabilities have not been fully utilized because it has only been
implemented with respect to Medicare's DMEs. Based upon the numbers
from ORT and our estimates of DME fraud, it seems safe to assume that a
similar consistent, process-driven, nationwide program focused on the
inspection of state Medicaid providers would yield similar or even
greater results. This Committee has learned not to underestimate the
criminals in this industry. It is our educated assumption, given years
of experience inspecting fraudulent behavior, that the criminals will
soon figure out that while HCFA has closed the door to DME fraud in the
Medicare program, the door is still wide open in many state Medicaid
programs.
Inspections of Independent Diagnostic and Test Facilities
In addition to DME inspections, ChoicePoint has recently begun
working with one of HCFA's Fiscal Intermediaries (``FIs'') to inspect
Independent Diagnostic and Test Facilities (``IDTFs''). Although
ChoicePoint does not make official determinations regarding the
validity of a facility, our inspectors found absolutely no existence of
an IDTF in 10 of the first 14 inspections performed. This may have been
coincidence, or it may be strong evidence that fraudulent DME providers
of the past have moved into a new field--IDTFs. While fourteen cases is
not a large enough sample upon which to base a definite conclusion, we
believe it would be wise to expand this first round of inspections in
order to determine the true level of fraud in Medicare's IDTFs.
choicepoint supports the medicare provider enrollment process
In addition to our on-site inspection services, ChoicePoint has
been supporting the Medicare provider enrollment process since 1998.
HCFA requires providers applying to join the Medicare program to fill
out a ``Form 855'' to collect information about the applicant provider.
Additionally, HCFA requires their Fiscal Intermediaries (``FIs'') and
Carriers to verify the information on the Form 855 via an independent
third-party information provider. Although HCFA does not mandate the
use of a particular on-line information service, we are proud to say
that the vast majority of FI's and Carriers have selected ChoicePoint
as providing the most cost-effective solution for complying with HCFA's
requirements. These contractors use our data on a daily basis to verify
the legitimacy of providers entering the Medicare system.
For applicants to Medicare Part A, ChoicePoint supplies the data
necessary to verify address, business ownership, directors and
executives, secretary of state information, bankruptcy, and sanctions
by the General Services Administration (``GSA'') or the Department of
Health and Human Services (``HHS''). Additionally, our Internet-based
searches reveal hidden owners who may have been omitted from the Form
855 application. Our Address Inspector algorithms compare the address
of the Part A applicant with our database of over 2 million high-risk
and fraudulent business addresses. This data is available from all 50
states.
The Medicare Part B Form 855 verification process allows the
provider enrollment specialist at a Carrier to compare the applicant
provider's information with our independently derived data from various
government sources, including all 67 physician licensing boards and 50
state chiropractor licensing boards. We plan to add additional health
care professional license data from all fifty states by the end of the
year. In addition to physician license data, we are able to confirm
American Medical Association status, colleges and universities
attended, board certifications, HHS sanctions, DEA licenses, and most
important, disciplinary and sanction data. In the near future,
ChoicePoint will add GSA disbarment information to both the Part A and
B searches.
There is no record of exactly how many fraudulent providers have
been stopped from entering the Medicare system, because the
verification processes are so decentralized among HCFA's FI's and
Carriers. However, we receive constant feedback from customers that
suggests that scam artists are still trying to enter the system each
day. I will submit for the Subcommittee's record a computer printout of
a ChoicePoint Part A search where our data and search capabilities
uncovered an owner that was not listed on the application to enter the
Medicare program. This owner had been disbarred for previous fraudulent
behavior in Medicare, which is why his colleagues conveniently omitted
him from the next application. This case demonstrates that the
perpetrators of fraud do not stop, but try every door into the system
until they find one that is unlocked.
Our data is delivered via the web, and the searches take about 45
to 180 seconds to be delivered, depending upon the amount of data on
the provider. This almost-instant delivery of critical data allows the
fraudulent or dangerous provider to be detected prior to obtaining that
all-important billing number and entrance into the system. The cost for
instant access to data that can uncover a fraudulent provider is
between $10 and $30, depending on the type of search. This is not
software or a special system that has to be purchased at a high cost.
This is a web page (www.providerscreen.com) that any FI/Carrier can
access from a standard, simple Internet connection. The web page is
identification and password protected in order to verify the user and
assess billing. There is no up-front investment to begin using the
service, and a user can be productive in preventing fraud after a 2-3
hour training class that ChoicePoint provides at no cost.
recommendations
HCFA should be commended for their provider enrollment standards,
their auditing of compliance with those standards, and their
requirement of independent data verification of provider supplied
information. Nevertheless, we believe that the program can be enhanced.
And we would be proud to work with them on this.
However, since HCFA has placed the responsibility for provider
enrollment and compliance with their standards on the FIs and Carriers,
companies such as ChoicePoint must contract directly with each of the
many and ever-changing FIs and Carriers. Maintaining many varied
contracts raises our cost of providing the data service. Therefore, we
recommend that HCFA conduct a competition for data providers and
contract with ONE company to supply this data nationwide. This would
provide a consistent approach to verifying the applicant data and would
pool the buying power of HCFA in order to lower the cost of providing
this data across the Medicare program. With the advent of HCFA's PECOS
system in the provider enrollment process, ChoicePoint also believes
that this data can then be verified electronically to increase accuracy
while lowering the enrollment time and cost.
In addition, we recommend that FIs and Carriers be required to
investigate providers' criminal histories prior to their enrollment in
the Medicare program. We believe that if HCFA were to mandate criminal
background checks as part of the provider enrollment process, many
fraudulent providers could be identified before they are allowed to
enter the federal system and continue their criminal activities.
Currently there is legislation pending in the Senate to require
background checks as part of the enrollment process.
While HCFA has taken proactive steps to increase the front-end
detection of fraudulent providers on a nationwide basis, there is no
such program for most state Medicaid programs. Some states, such as
Florida, California and Connecticut, use ChoicePoint or similar
services to review a provider's background. Many others, however, only
rely on information from within their state. With a transient
population, these intrastate-only searches could fail to uncover
fraudulent, illegal or dangerous behavior that occurred in a
neighboring state. As with the site inspection services, ChoicePoint
believes that additional front-end fraud prevention can be achieved by
utilizing on-line data services on a consistent nationwide basis for
state Medicaid programs. This comprehensive yet targeted approach will
help lock all possible doors to the public health care system to those
who wish to defraud it and divert scarce resources from those in need.
We thank the Subcommittee for this opportunity to appear here today
and to tell you about ChoicePoint and what our company has been doing
to protect our health care systems. We are proud of our record and look
forward to working with this Subcommittee in the future. I would, of
course, be pleased to answer any questions that you may have. Thank you
very much.
Appendix
choicepoint federal government clients as of june, 2000
Bureau of Alcohol, Tobacco & Firearms; Bureau of Public Debt;
Commodity Futures Trading Corporation; Department of Commerce;
Department of Defense; Department of Energy; Department of Housing &
Urban Development; Department of Health & Human Services--Office of
Child Support; Department of Interior; Department of Justice; Drug
Enforcement Agency; Environmental Protection Agency; Executive Office
of United States Attorneys; Federal Bureau of Investigation; Federal
Deposit Insurance Corporation; Federal Election Commission; Federal
Emergency Management Agency; Federal Public Defenders; Federal Reserve;
FinCen; FreddieMac; General Accounting Office; General Services
Administration; Health Care Financing Administration Fiscal
Intermediaries and Carriers; Immigration & Naturalization Service;
Internal Revenue Service; INTERPOL; National Aeronautics & Space
Administration; National Credit Union Agency; Office of National Drug
Control Policy--High Intensity Drug Trafficking Areas; Office of
Personnel Management; Pension Benefit Guarantee Corporation; Secret
Service; Small Business Administration; United States Customs; United
States Marshals; United States Postal Service; and the World Bank.
Mr. Upton. Well, thank you all, and as you saw in the first
round with our first panel, we'll rotate here and try to limit
our questions and answers to 5 minutes, and we'll do--my guess
is probably a couple rounds.
I have a lot of questions, and again, I appreciated your
testimony, and I guess I should start with Ms. Aronovitz. Would
you say that as we listened to California and Florida tell
about their programs, that they're about average in terms of
the other States, or better or worse in terms of going after
fraud and abuse?
Ms. Aronovitz. I would say that based on the activities
that they describe that they're pretty much in the forefront.
Mr. Upton. At the top?
Ms. Aronovitz. Yes. In our survey of the 56 State Medicaid
programs, and of course that includes the territories and the
District of Columbia, we found that only nine States do what we
would consider comprehensive checks, or checks in four areas
and we found that a lot of States----
Mr. Upton. These are among the nine?
Ms. Aronovitz. Yes. We found--and this is self-reported
information from our survey that many States do very little in
the way of provider enrollment activities. We were actually
surprised by this.
Mr. Upton. That information sort of jumped off the page in
terms of the draft statement that I read last night. You
indicated that only 16 States or 16 jurisdictions, when you
count D.C., et cetera, only 16 reported that HCFA staff visited
their agency to review their fraud and abuse control activities
during their most recent fiscal year. That's on page 11 of your
draft that you provided.
Ms. Aronovitz. HCFA's very involved in the Medicare program
in activities like provider enrollment and other program
integrity activities. HCFA's position in terms of Medicaid and
overseeing States is more of a facilitator and a partner and a
helper. We do give them a lot of credit for working with States
in their national initiative on Medicaid fraud and abuse
control efforts. These fraud and abuse control efforts really
are designed more to encourage States and to help States learn
about what they can do, but ultimately, HCFA does not mandate
very much in terms of Federal requirements, and in fact, these
are voluntary activities on the part of States.
Mr. Upton. Now, you indicated--one of the things we've
heard from both--well, certainly from Florida, and I think
California does this as well--is that they do the criminal
background check of their enrollees, California does as well.
What percent of the enrollees that you have looked at actually
have a criminal background in their past, do you know?
Ms. Aronovitz. We do know that in our survey, 23 of the 56
programs indicated that they do some type of criminal
background check.
Mr. Upton. But of those that they check out, how many of
them actually have a criminal background red flag that will pop
up?
Ms. Aronovitz. In many of these cases, it will be on
selected providers. My understanding is that Florida does
criminal background checks on all producers, but many of these
other States use a risk approach, which we think is a prudent
approach when you have limited funds and you have a good risk
assessment.
Mr. Upton. Right.
Mr. King-Shaw, do you know what--how many actually get
flagged?
Mr. King-Shaw. Approximately 1 to 2 percent every time we
run the query, which is every 2 months.
Mr. Upton. Ms. Aronovitz, you indicated in your statement
that you said that not all States view, in essence, the site
visits as cost effective. I mean, as I listen to California and
Florida talk about range of between $50 and $130 per visit,
only about what, a half hour, an hour in terms of visit, what
States, I mean, if there's something that sort of jumps off the
page, it's that statement that many States don't utilize some
type of site visit.
Ms. Aronovitz. Well, we know that in response to an audit
report, Colorado felt that site visits were not cost effective
for them. We don't know why. But in Texas, which did a pilot of
site visits, we do have some indication that they found that
their site visit, first of all, was much more intense than the
site visit that lasted 30 minutes. They checked medical records
in detail and did a lot of reviews. They also had to pay to
travel to distant places in the State.
But the other reason that Texas found this to be not cost
effective, in our opinion, had to do with the circumstances of
their pilot. It was at a time when HCFA was putting a
moratorium on new home health agencies entering the Medicare
program. Home health agencies, which were among the groups
targeted for the pilot, were not applying to be providers at
the time.
In addition, there was a lot of publicity about this pilot
site visit program in Texas, and it was supposed to go on for
several months. So we think there's a possibility that some of
the providers decided to hold off until this pilot site visit
check was finished before they applied to the program. As a
result, only nine providers during this pilot actually applied,
and all of them were reviewed and found to be absolutely
qualified to provide services in the opinion of the Texas
inspectors .
So, in those cases, based on that pilot test, the Texas
program decided that it was not cost effective.
Mr. Upton. Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman. How would you, Ms.
Aronovitz, how would you assess California's and Florida's
antifraud efforts now?
Ms. Aronovitz. We haven't been there to be onsite, but we
certainly believe that a lot of the activities that they
describe are ones that we would say are key activities in any
type of provider enrollment program. So in fact, we think that
these States are very aggressive.
Mr. Stupak. Is there any other suggestions you would have
for them? If they're one of the top two, are there any other
suggestions that would help them along?
Ms. Aronovitz. Not in the provider enrollment program per
se, I think, especially in Florida. They have a pretty
comprehensive program.
Mr. Stupak. Ms. Connell, you indicated in your testimony
and I missed it, and I asked Chris here and he missed it. You
said there's a bill right now that you are hopeful to get
through the Senate and legislature, but you did not believe it
would.
Ms. Connell. It's the Corbitt bill which is an attempt to
deal with the formulary, and it has run into opposition,
largely from those who provide the drugs, the pharmacists. What
we were attempting to do is put a restriction on the prices of
selling drugs in California under the Medi-Cal program, and
this is, of course, hit with tremendous opposition by those who
sell the drugs, and I am not certain the bill is going to make
it out of the legislature. We were fortunate to have three
bills that we authored on Medi-Cal reform pass last year, and
one, which is a cleanup bill, which appears to be going through
this year. This other bill just seems to be stalled in
committee because of the kind of opposition that it has
received.
Mr. Stupak. It would really be from the pharmaceutical
companies, not necessarily the pharmacists?
Ms. Connell. That's correct.
Mr. Stupak. Mr. Wagoner, you indicated California and
Florida, they're part of your clients, right?
Mr. Wagoner. Yes, sir.
Mr. Stupak. In any other States that contract with you?
Mr. Wagoner. Yes. Right now for the on-line data services,
to verify the data that's involved in an application,
Connecticut uses our data as well, and we are right now talking
to several other states, but right now those are the only three
States that are using that.
Mr. Stupak. Other States that have not contracted to
provide your service, do they have someone else doing it? What
are the reasons for not doing what you are----
Mr. Wagoner. Many of the States depend upon intrastate
data, so they may look at their own Secretary of State data,
they may look at their own criminal data, not realizing that a
lot of these providers do move quite often, they do move State
to State, and they just don't take a nationwide approach. Other
States have indicated that there's legislation that prevents
them. The only thing they can do is look at and verify data
within their State. So if a provider had done something illegal
or sanctioned in one State, other States would not be able to
prevent them from entering that State's Medicaid program is
what we have been told.
Mr. Stupak. I see. Mr. King-Shaw you mentioned in your
testimony in the State of Florida requires either surety bonds
or letters of credit for certain high risk providers. So two
questions, how do you define a high risk provider, and what is
the amount of bond that is required?
Mr. King-Shaw. Well, we define high risk provider based on
our historical experience of fraud and have narrowed that down
to durable medical equipment companies, transportation
companies, nonphysician-owned medical group practices,
independent labs, and now we've added pharmacies to that list,
and again, that's been based on experience, just where the
fraudulent behavior seems to rear its ugly head the most. The
level can be between $50,000 or a year's worth of historical
billings or estimated billings to the Medicaid program, and so
we can adjust it anywhere within that range.
Mr. Stupak. What's been the reaction of the providers to
the bond or letters of credit?
Mr. King-Shaw. They haven't loved it but I think the bottom
line is, it's hard to argue that they don't want to provide all
the documentation to demonstrate that they are a credible
provider. I mean, what would their basis be for refusing--that
they're going to go commit fraud? They don't have much of an
argument or much of a fight to put up, but I can't say if it
were up to them, that they would have voluntarily posted a
surety bond. I don't think they would have.
Mr. Stupak. Mr. Cates, you indicated in your lock and load
that you looked at bank records.
Mr. Cates. Correct.
Mr. Stupak. When you get to look at those bank records, are
those only under providers that are being investigated or do
you have something in your contract that allows you, upon your
own suspicions, to get into these bank records?
Mr. Cates. Our focus on fraud approach, within that 3- to
5-minute survey that we conducted, every one of our providers
we look at and we request a copy of their business bank
account, and the reason we do this is that we are trying to
level the playing field so that the honest providers do not
have to compete with the dishonest providers. We have found
that the compliance rate for providing that business bank
record is right at 100 percent.
Mr. Stupak. But how do you get to the bank records? Don't
they object that these are our personal records, you can't look
at them? How do you get to them?
Mr. Cates. It's interesting. If you lay it out ahead of
time in a letter, like we did, letting them know exactly what
we've been doing in the fraud prevention review, the honest
providers do not mind cooperating, the dishonest providers are
afraid to draw attention to themselves. All I can tell you is
while we believe that we have the authority in existing law to
review all business records as it relates to the program, we
have only had 1 or 2 provider attorneys call us up and say
what's that about. I tell them and they go, okay, my client
wants to provide it.
Mr. Stupak. Thank you, Mr. Chairman.
Mr. Upton. Mr. Burr.
Mr. Burr. Mr. Kubic, is it safe to say for the FBI,
targeting and prosecuting fraud in the Medi-Cal system has sort
of been like shooting fish in barrel?
Mr. Kubic. I think that's safe to say, yes.
Mr. Burr. Has it been fairly easy to identify where there's
legitimate fraud and abuse?
Mr. Kubic. Yes. One of the key things here and what I think
worked really well stemmed from the fact that the audit reports
provided by the State of California were kind of like the road
map. I mean, if you look at a provider who's billed and that
same provider does not have the inventory to ship those
materials, it's a pretty straightforward case, and a large
number of these cases did not go to trial. I mean they were
pretty much a prima facie case, when a provider comes in with
his attorney and you make a case presentation and a review.
Mr. Burr. And in most cases, were moneys reimbursed to the
State?
Mr. Kubic. Yes, it was. Reimbursements total about 20
million just on the ones that have been adjudicated.
Mr. Burr. Ms. Connell, let me go to that piece of
legislation Mr. Stupak asked you about that you suggested
probably would not get out of the legislature. You said that
has to do with drug pricing. We have a Federal statute under
HCFA for Medicare best pricing on drugs. Was that bill on
something other than pricing or was it----
Ms. Connell. It will require the Department of Health
Services, which runs Medi-Cal in California, to modify the
Medi-Cal formulary to take advantage of the lower cost of
generic products of prices.
Mr. Burr. This is legislation to affect the formulary?
Ms. Connell. Right.
Mr. Burr. And not to alter in any way pricing?
Ms. Connell. No, no. We're trying to get the advantage of
discounted prices.
Mr. Burr. I don't disagree with you that there ought to be
control of formularies, but it's really important to draw the
distinction that we already have a Federal statute that says
that Medicaid, regardless of the State, buys at the best
negotiated price that exists in the marketplace. So it isn't in
fact--I think somebody led it to believe that it was the
pharmaceutical companies on a pricing issue. It may be the
pharmaceutical companies on an inclusion issue, but----
Ms. Connell. Whether they be brand or generic?
Mr. Burr. Correct. Let me ask you, it seems at least in
North Carolina it would be unusual for the auditor or the
controller to be an active participant in the legislative
process, but I conclude from what you have said by using the
word ``we,'' that the controller's office has been initiating
legislation through the general assembly. Is that, in fact,
correct?
Ms. Connell. Congressman, what occurs when we complete an
audit, if there are improvements that we can make in any
program, whether it's charter schools or public schools or
Medi-Cal, we then introduce the concept to a legislator, and a
legislator will carry the State controller audit legislation
for us. So the legislation that passed, I referred to it as the
Romero bill, was carried by Assemblywoman Romero. The Corbitt
bill is being carried by Assemblywoman Corbitt.
Mr. Burr. Let me ask you and Mr. Cates, if you will, just
to comment, where is the Department of Health Services in all
of this?
Ms. Connell. Well, let me just do it historically and Alan
can do it currently. The Department of Health Services is, in
my view, the reason we've had this high level of Medi-Cal
fraud, which has gone undetected and initially unobserved in
California. When we began auditing them in 1995 and 1996, they
had no control system in place to really deal with many of
these issues that are being discussed by your committee today.
We recommended those changes. Those changes did not occur in
1996 and 1997, and 1998. We began to see some changes in the
latter part of 1997 and 1998, but they were really not at the
level that we had anticipated and hoped. With the change of
administration in 1999, we have had a restructuring of the
Department of Health Services, and Mr. Cates represents the new
Medi-Cal fraud unit in the Department of Health Services, which
is a subset of the Department of Health Services. The
Department of Health Services is the single State agency in
California that runs Medi-Cal. So they are a huge agency.
They were focused in fairness to them on different
priorities than we thought they needed to be focused on. They
were focused on the Medi-Cal fraud on the beneficiary level. We
were focused on Medi-Cal fraud on the provider level. We don't
even audit Medi-Cal fraud on the beneficiary level obviously.
And that's where they were using their resources. So they were
heading in a different direction. At the time we felt there was
an explosion in Medi-Cal fraud on the part of pharmacists and
doctors and durable medical providers, their interest was in
another venue.
Mr. Burr. Mr. Cates, just because it was mentioned by our
last witness, I have to ask you. How many adult day care
facilities have you investigated already?
Mr. Cates. The adult day care centers that we have formally
investigated would only No. 2. The adult day care centers that
we have reviewed surreptitiously is more like about 40.
Mr. Burr. Are adult day care centers licensed by the
Department of Health Services?
Mr. Cates. They are licensed by the State Department of
Aging under a contract with the Department of Health Services.
I can tell you that the approach of the Fraud Prevention Bureau
is focused on preventing fraud. We will detect and eradicate
existing fraud, but our primary function is to prevent it.
In order to do that, we first need to have a full
understanding of exactly what it is that is going on. In the
case of adult day health care, I would just advise the
committee that at this point in time, it's an interesting
program and that we clearly see benefits of the program. People
that might otherwise be in nursing homes, the quality of life
is infinitely better in these adult day care centers. However,
there's enough laxness in the program right now as it's being
carried out in California that we need to tighten it because
the fraud really isn't always fraud, meaning, we are paying $63
a day in the State of California for a program that lasts
approximately 4 hours. So to correct the earlier witness, it's
not an all-day program, it's a 4-hour program.
Mr. Burr. My time has run out, but I want to ask for a
clarification from California. In Mr. King-Shaw's testimony,
one of the things he pointed to in Florida was the reenrollment
period that providers had to go through. Has California done a
reenrollment for its providers?
Mr. Cates. On our targeted provider groups in order, yes,
we have. We have already reenrolled, out of 1,300 or 1,400
durable medical equipment providers, only about 800 elected to
reenroll, and we are currently doing nonemergency medical
transportation, and pharmacies are scheduled next year.
Mr. Burr. Let me commend Florida, specifically Mr. King-
Shaw, for their whole process, because it seems to be a model,
and my hope is that you will share that model with more, and
Ms. Aronovitz, if for some reason we have not conveyed to HCFA
some of the horror stories that exist in California where we,
on a Federal level, can be more aware of the potential of
Medicaid fraud and abuse that exists, but also the potential
areas that we might ought to look at that are future fraud and
abuses and adopt the Florida principle of prevention versus
prosecution, I would think that we would make Mr. Kubic's day
by adopting that across this country. With that I'd yield back,
Mr. Chairman.
Mr. Upton. Ms. DeGette.
Ms. DeGette. Thank you, Mr. Chairman. Ms. Aronovitz, I
thought something you said was one of the most salient points
in this hearing, and that is that we have to remember as
Congress that Congress has--while HCFA has more oversight
perhaps of Medicare, we have really given Medicaid to the
States, and therefore, HCFA's historical effort at least has
been to try to work in an advisory capacity more than an
oversight capacity.
And you know, in Congress we like to say, or many of us who
came from State legislatures like to say, we are sort of States
rights types, but the bad thing that happens is then you get
some States like California and Florida that do a better job
than other States, and HCFA then has to figure out what is its
appropriate role for, say, States like my own State of Colorado
and Texas that don't do site visits?
I am wondering if you can comment very briefly if you
think--if GAO thinks that there are ways that HCFA can take a
more proactive role, particularly in States that do not have a
good record on fraud prevention.
Ms. Aronovitz. I'd like to first clarify two things that
have been said. With regard to Texas particularly, I did not
want to give the impression that the State does not believe
that site visits could be useful in a selected, targeted way. I
think the program that was contemplated for that State was
going to be to do site visits on all providers. I think the
State felt that was not cost effective.
But--and the other thing I wanted to say is that you're
very correct in that HCFA has seen the payoff in focusing on
prepayment activities. It's much more expensive to try to get
involved in pay and chase or trying to collect overpayments
later. In the Medicare program, there's a lot of evidence where
HCFA has done much to try to encourage contractors to involve
themselves in prepayment activities. Where HCFA has a balancing
act is in the Medicaid program. It's very important to HCFA's
ability to help States to not create so much of a regulatory
burden on them that it becomes impossible for all States to be
able to meet whatever Federal standards are imposed upon them.
HCFA walks a very clear line.
Ms. DeGette. Let me interrupt because I only do have 5
minutes. My question is, is there something HCFA could be
doing?
Ms. Aronovitz. Yes.
Ms. DeGette. If you could answer that question.
Ms. Aronovitz. Absolutely. We feel that at a minimum, HCFA
needs to know a lot more about what all States are doing, and
even if it's by encouragement rather than a regulatory
environment, they really need to work harder to encourage
States that they know are not doing the minimal amount of
activities.
Ms. DeGette. So you still think that a carrot-versus-the-
stick approach may work if they take an active role?
Ms. Aronovitz. I think they need to take a much more active
role in understanding what all States are doing and they need
to continue to be aggressive in trying to help States learn.
Ms. DeGette. Mr. King-Shaw, I was struck by your testimony
on these site visits because as you said, you don't visit every
site, you take the higher risk areas and then you do it. What
percentage of your providers would you say you do these site
visits on, and do you do them preenrollment or is that what you
do?
Mr. King-Shaw. Yes. We have two types of site visits. One
is the preenrollment as a part of the application process where
we confirm that they are a physical location, that the
providers that they say are a part of the work group are there
and that the inventory they say is there, that they have all
their licensure and that kind of thing. We have follow-up site
visits that are more like audits, and there we do confirm that
if we have billing records on a beneficiary that would suggest
certain utilization at a pharmacy or a DME, we then try to
match that up to the records located at the facility to see
that they do, in fact, fit together. If they do not, there's
suspicion of fraud somewhere and we can then go deeper into an
analysis of the beneficiary or of the provider itself. What
percentage? Approximately 100 percent of those five categories
that I spoke of before up front.
The audits that we have on an ongoing basis, that depends,
and that could be physicians and medical groups as well. It
really is a matter of what do we detect through our very
rigorous statistical analysis when we find that the historical
billing patterns which show one curve, and all of a sudden
there's a spike.
Ms. DeGette. How many of these site visits does your
Department do annually?
Mr. King-Shaw. All right. Just a minute. Approximately
5,000 a year.
Ms. DeGette. Okay. And one more question, Mr. Chairman.
Texas, and I don't know what is Colorado's excuse, but I guess
I can probably find out, but one of the things they had thought
was that it was not cost effective in the pilot program that
they did to do these site visits. I guess I would like to hear
yours and Mr. Wagoner's quick responses to that.
Mr. King-Shaw. We find them extremely cost effective. For
$50 or what it costs to do a site visit, you can save
potentially hundreds of millions of dollars in many, many years
of fraudulent activity. The deterrent factor when, you know,
when every provider in the State knows that the site visit is a
part of the application process, there's a screening out right
there, but when you can identify a fraudulent practice early on
and exclude them from the program, then you're talking about a
compounding effect of all the things and cost avoidance that is
a benefit to the Medicaid program with that $50 investment.
Mr. Wagoner. Our experience with doing inspections of
Medicare facilities, DME facilities mirrors what Mr. King-Shaw
said as far as return on investment, as far as reducing fraud,
but also knowing that that is coming, that that inspection is
going to come, deterring fraud. One of the things that Medicare
does is to require all new DME providers to have that
inspection before they're allowed that billing number, and that
every 3 years they're going to get another unannounced site
inspection.
One of the things, and I'm not familiar with Florida's
program, but one of the things that may have happened is they
were in a mode where they had to hire State employees, or they
had to augment State employees to do this. One thing about
using a contractor is they should have staff in place that you
can leverage across many different clients, and that's what
should bring the cost down on a per-search basis.
Ms. DeGette. Thank you.
Mr. Upton. Mr. Bilbray.
Mr. Bilbray. Yes, Mr. Chairman. Ms. Connell, you mentioned
your little difficulty with the court system. Would you think
it's appropriate for Congress to address that issue and
initiate legislation to try to give you jurisdiction to try to
identify the fraud issue?
Ms. Connell. I would certainly hope that would be one of
the considerations of this committee. We did receive support
from Donna Shalala's office prior to our second appeal hearing
at the court, and she clearly stated that she felt our
interpretation of a single State in California should allow the
Department of Health Services to contract with the State
controller to do the audit and the investigation, and the court
said we're not interested in what Ms. Shalala's interpretation
is of single State agency law, and short of legislation, we're
going to continue this interpretation that we have.
Mr. Bilbray. Would you like to use today as a chance to be
able to request that this Congress address the issue?
Ms. Connell. I did request it in my written remarks, and I
would certainly like to again request it on record that
Congress take action to review and amend the single State
agency law to allow recognition of the State's constitutional
role of its elected officials and allow me to once again carry
out my independent duties.
Mr. Bilbray. Would your office be willing to work with this
majority and minority to draft and to move legislation that
would affect that?
Ms. Connell. Absolutely. And in my conversation with State
controllers around the country, they would welcome the
opportunity as well.
Mr. Bilbray. Thank you.
Mr. King-Shaw, let me, I appreciate all the dialog you have
had with my office. Let me just sort of open this up to whoever
wants to get into it, because one of the things we have to do
here is--first, wait a minute. Let me go over to Mr. Cates and
Ms. Connell and say, do you have any reason why California
plays the brand name game?
Ms. Connell. I will let him answer so I don't have to get
into the political issue, but I'll be happy to answer it for
you as well.
Mr. Cates. From a fraud prevention perspective, brand name
versus specifications, the fact of the matter is if you go with
brand name products, generally you would not have as much
fraud, simply because you're dealing with a product that even
the company that markets----
Mr. Bilbray. Either is or isn't.
Mr. Cates. Right. It either is that product or it's not,
and you get a private company out there protecting its own
label. When you get into a private spec, the problem with that
is that, you know, somebody develops a product based on
specifications, and the State gets into the business of trying
to always determine is this new product that's just hitting the
market, is it truly meeting the specifications, or is it not,
and you end up with a lot of people manufacturing that product
and getting the price that's been established per a
specification listing.
This is an old argument. It's not an easily solved one. My
personal preference as a fraud prevention specialist is I like
to go with the brand name but keep the bidding open so that you
have multiple companies bidding and you get a fair and good
price as opposed to opening it up to anybody that wants to say,
I manufacture that product, I may do it in a country you've
never heard of, but it's that product, yes, really it is, that
type of thing.
Mr. Bilbray. I'll not bring in imported drug issues. That's
a separate whole issue.
Mr. King-Shaw, one of the responsibilities we have in the
legislature is not only to do oversight on the implementation,
but also to make sure that the law itself, implementation
package is designed to be able to minimize the potential for
fraud and maximize the ability to detect it. Talking about this
adult day care issue, one of the things that's been used
successfully by the private sector and in California, to some
degree, is this issue of a very small stipend of a copay of the
participant, so that when somebody claims grandmother was there
every day for the last 3 months, they get at least a bill so
they can blow the whistle and say no way. Do you think the
implementation of a small stipend of a copay may help to be
able to get--raise one more way to be able to raise the red
flag, or do you think the administrative problems with that are
too great?
Mr. King-Shaw. Well, I think that the administrative
problems are too great. I don't think that's the most effective
way to control fraud or overbilling for adult day care
specifically. We have a moderate adult day care program in
Florida. We have something called the ``Cares'' system. These
are teams of case managers that assess regularly the medical,
social, developmental needs of the elderly and go through a
process of placement and recommending a treatment plan based on
the needs of that patient.
So we don't open the flood gates to allow just anyone to
utilize adult day care. There needs to be some needs, if you
will, that are assessed and then recommended or prescribed. I
think where we are in Florida is we like to make sure that the
patient receives the right amount of medical care, social
services, whatever it is, each according to their need, and
that that be a clinical base and social base model as opposed
to a financial incentive model. The financial incentives can
work, but often--and you can just look at the cost of
prescription drugs, but what often happens is people make
economic decisions that override their health care needs, and
down the line that does not produce, I think, a good outcome
and a good result.
Mr. Bilbray. I understand my time is up. I'd ask unanimous
consent for 30 seconds just to do a follow-up on that.
Mr. Upton. Okay.
Mr. Bilbray. I'm just saying I have seen, the copay is used
in the private sector so extensively, even among the poor, and
in California we've integrated a lot of that into our Medicare
and Medicaid in a successful manner, and Mr. Cates, what better
program we have than to have the families or the recipients of
the benefits actually participate in part of the oversight, and
do we have any vehicles in California to be able to do that?
Mr. Cates. To my knowledge, I am not aware of a copay
requirement in California which is a model that you describe. I
do agree that given the fact that we have 5 million
beneficiaries in California, if you get into a copay scenario,
while I certainly appreciate the detection ability that that
gives because you get somebody saying I didn't get that
service, I don't want to pay that copay, they tell me
administratively it's a nightmare. Now, is it? Is it not? I
think that's a type of pilot project that should be attempted,
and I would think that California is a good proving ground for
any type of pilot like that.
I will certainly be pursuing something like that on a pilot
basis. It has been brought up in our fraud committee meetings,
which is another thing we have now in California. We have
monthly fraud steering committee where that's all we do is
focus on those types of things. I will certainly keep you
posted if we do establish such a pilot and give you the
feedback.
Mr. Bilbray. Thank you very much. I appreciate it, Mr.
Chairman, and I think we got a good insight of maybe a vehicle
to at least investigate down the line. I yield back whatever's
left.
Mr. Upton. No time is remaining.
Mr. Cox.
Mr. Cox. Thank you very much. I'd like to welcome each of
our witnesses and thank you for your testimony this morning, in
particular, our witnesses from California, where I and Mr.
Bilbray are especially concerned.
In both of your testimonies this morning, Ms. Connell and
Mr. Cates, you describe the efforts that California is making,
and in particular, Ms. Connell, you referred to the problems
that recent Federal court decisions are providing to your
office. You mentioned four areas in which these judicial
decisions are constraining. The first is that they are
inhibiting your ability to conduct audits of fraud; second,
they are inhibiting your ability to withhold payment when fraud
is suspected; third, they are constraining you from referring
fraud cases to the Department of Justice; and fourth they are
preventing you from reporting any conclusions of fraud or
suspected fraud to the Department of Health Services.
Have you provided the committee or Congress at all, or has
the State of California or has the Department of Health
Services provided us with proposed legislative language to
remedy those court decisions?
Ms. Connell. My general counsel has prepared some
legislation that he thought, or legislative language he thought
would help resolve this. We thought it was presumptuous to give
it to the committee today. We wanted to someone perhaps request
it, and I would be happy to provide it. I didn't know if that
was appropriate on my part. We can provide that for you.
Mr. Cox. If you are that far along can you tell us what it
is that you suggest that we amend the United States code, which
portions of the law?
Ms. Connell. It is the single State agency law, and
specifically it is the law that says there can be only be a
single vehicle in each State. As that law has now been
interpreted by the Federal courts in California, we are not
allowed to be part of the process of Medi-Cal fraud evaluation.
Our counsel believes, as does the Attorney General who defended
us in court, that if we could get legislation that would amend
the single State agency law and say it is the decision of the
agency--of the State and its single agency, if it wishes to
contract out for these services to other agencies, to other
private sector participants or to constitutional offices a part
of that role, that that would be sufficient.
Mr. Cox. Inasmuch as these are executive branch actions
within the State of California and every other State, Florida
and elsewhere, would it not make sense to empower the Governor
to allocate among State agencies responsibilities that comport
best with relative----
Ms. Connell. That would be perfectly fine with us. We would
have no problem with that. In fact, the legislature has
continued with the Governor to increase the amount of funding
we have for Medi-Cal audit activities. The difficulty is that
we're not able to be as aggressive in those activities.
Mr. Cox. Ms. Aronovitz, in your view, would it inhibit, in
any way, the goals of the Federal program to permit Governors
to make those allocations and responsibilities in fighting
fraud?
Ms. Aronovitz. I am not a lawyer, and I am actually not
that familiar with the single-State agency statute. So I'd
rather defer to others to get you an answer to that.
Mr. Cox. Let me ask Mr. King-Shaw, do you have a view about
this in Florida?
In California, apparently our problem is that we have
competing agencies and Mr. Cates' agency is building up
competency to deal with these things. The Controller's office
has complementary resources, and the Controller is telling us
that she'd like to continue the participate in fighting fraud
in the State of California. Do you have similar issues in
Florida?
Mr. King-Shaw. No. Our fraud and auditing capabilities
within the agency, within Medicaid, are superior to what would
be outside of the agency. Our single-State agency program in
Florida works very well. The Medicaid Fraud and Control Unit,
which prosecutes cases of identified fraud, is in the Attorney
General's Office. But I'll tell you candidly that we have built
up expertise and resources and data mining capabilities and
auditing capabilities, both financial and clinical, within the
agency that I think would be, you know, inappropriately
diffused if there were some other agency involved in that
effort.
Mr. Cox. If Congress were to empower the Governor of the
State of Florida to allocate within a single agency of the
State of Florida or, in your case, to share that responsibility
with the Attorney General or some other office for the purpose
of fighting fraud as best he saw fit, would that help or hurt
Florida?
Mr. King-Shaw. I think that the empowerment is good. I
think that, just as there are variants of issues within a
State, there are variations of issues among States. So the
power for every State to organize its effort for Medicare fraud
to its own need and ability I think would be fine. I don't
think we would have any changes within Florida, but I think
Florida, like any other State, would appreciate the freedom to
organize that effort in a way most appropriate for any State.
Ms. Connell. Mr. Cox, I have just been reminded by my
counsel that, indeed, if the Federal court ruling in California
was applied to Florida, the Attorney General's Office would
have that difficulty carrying forth any audits. That is the
problem. If this ruling is applied in any other State, they're
going to find the same kind of restrictions that are now
occurring in California.
Mr. Cox. Mr. Cates, I won't ask you to speak for Governor
Davis, but, speaking for your agency, would you support
legislation that would empower the Governor to allocate
responsibilities within the State of California?
Mr. Cates. I believe this Governor would support all
efforts to eradicate and prevent fraud within the health care
program within California. I believe that the Controller's
points are well taken, especially as it related to a couple of
years ago when it was virtually only the Controller's office
taking an aggressive stand against health care fraud in the
State.
But I also want to point out with that statement that fraud
is an act of concealment. The Department of Health Services was
primarily interested in the health program and in the health of
its citizens. They just were not geared to address concealed
fraud. They are today.
Mr. Cox. I thank you. Thank you, Mr. Chairman.
Mr. Upton. Thank you.
I have just a couple of more questions, and then I presume
that my colleagues may have some as well.
Surety bond issue. Ms. Connell, you talked--I think
$25,000----
Ms. Connell. Yes that's correct.
Mr. Upton. [continuing] is the level that was established.
And in Florida, I think it's what, $50,000?
Mr. King-Shaw. Fifty or a year's expected billings.
Mr. Upton. How many other States have a surety bond like
Florida and California?
Ms. Aronovitz. I am not sure. I am not sure we asked that
specifically on our questionnaire.
Mr. Upton. But do you all feel that it was a pretty good
tool?
Ms. Aronovitz. Yes. We think surety bonds definitely serve
a purpose but they will not be the end-all because they don't
in any way assure quality care. Nor, if you're an honest
provider and you enter the program and you later decide to
commit some type of fraud, a surety bond wouldn't stop you from
doing that. But, clearly, they are screening tools; and used in
conjunction with other tools, they certainly could be useful.
Mr. Upton. I just remember when I first saw the story on
Medi-Cal on 60 Minutes, I guess it was, I wonder why California
might not have taken a little higher level when you look at
other States.
Ms. Connell. Maybe I can respond to that. When we suggested
the 25,000, we even hit resistance at that level, and the
feeling was that we would put the 25,000 into effect and see if
it was having the necessary impact. Many people in the
legislature felt that, for small businesses, a $25,000 bond was
a difficult deterrent and that it would encourage responsible
behavior, and the legislature I don't think was willing to go
any higher. We tested a higher amount, and it fell back down to
$25,000 level in hearings.
Mr. Upton. I know that Mr. Cox explored the single-State
agency quite a bit in his last questions. I want to say, too,
that my office has been working on legislation that we are
hoping to introduce in the near future, and this is obviously
one plank that I'd like to welcome as part of our package, and
I appreciated that as part of your testimony this morning.
I guess the last question--Mr. Kubic, I visited with my
local FBI agents in Michigan a number of times looking at their
efforts. Their offices are literally across the street, across
the parking lot from where my office is. And I was glad to see
that you all have increased, I think you indicated, from 115 to
500 agents looking into this. How many do you need?
Mr. Kubic. That's a great question. Basically, most field
offices, everywhere they have looked in terms of health care
fraud have been able to find similar schemes that we've been
discussing this morning, and I think the bottom line needs
assessment is that we were looking for, through the fiscal year
2002 cycle, an additional 200 agents nationally. You know,
going through the process internally, through the Department of
Justice and through other cuts, that tends to be reduced.
Mr. Upton. Now, when I look again at my own little
operation, my county that I live in has one field office. It
is--about 175,000 people live in the county. They have three or
four agents that are there. Do they then work--and they have
worked with the U.S. Attorney's Office in the Western side of
the State. We have two in our State. Do they work very closely
then with the State Medicaid offices? I mean, how do they go
about coming up with their target list?
Mr. Kubic. Sure. I can tell you, as the former agent in
charge of the Salt Lake City Division, which covered Idaho,
Montana and Utah, it was absolutely essential to work with your
State counterparts in the Medicaid Fraud Control Units to
develop an active exchange of information dialog to do joint
investigations. With the wide coverage that the Bureau has
nationally, it does evolve to some fairly small operations,
some two-man resident agencies where there's 1 agent or 2 who
are covering the full range of criminal violations. So you're
right. You absolutely have to work together.
Mr. Upton. Well, thank you.
Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman.
Ms. Aronovitz, we've heard about California and Florida.
What top two steps should all States be taking to fight State
Medicaid fraud?
Ms. Aronovitz. In our survey, we found that there were
actually several States that answered in a way that made us
feel like they're doing a pretty good job. One was Texas,
despite its concern about site visits. They were doing a lot of
other very positive things. Connecticut, New Jersey and Georgia
are also taking steps. Some of the things they're doing which
we feel are very important are things like changing the
provider agreement to assure that the provider has to sign the
agreement and understands what the requirements are, and
including a termination clause so that both parties could
terminate the contract for no cause without too much due
process. We think it's very important that site visits be
considered even if it's on a risk approach, and also we feel
that reenrolling providers on an ongoing basis is important.
Mr. Stupak. Well, on some of these steps they just seem
like common, good things to do. Why aren't other States doing
them? Is it they don't have the resources, lack of will?
Exactly what is going on in those other States?
Ms. Aronovitz. I think every single State has its own
story, and I think it's fascinating to hear about California
and, actually, Florida before 1995, but I think that the budget
has some role in this. I think management commitment plays a
part but I think there's also another answer. There's a real
tension between making sure in Medicaid that providers want to
participate in the program, to assure good access to high-
quality care so there's a concern that States don't hassle good
providers in a way that they might not want to participate. So
I think there's also that balance that State Medicaid programs
have to consider.
Mr. Stupak. Mr. Cates, it looks like you want to jump in on
that one.
Mr. Cates. I sure do. One of the things--I've been in the
Medi-Cal fraud program many, many years. And I can remember
when I was first hitting the diaper scam in California in the
1990's, the State Department of Health Services at that time
candidly was letting me know, you know, Alan, for every time
you go out there and identify a hundred thousand dollars that
might be fraudulent, we are required under HCFA guidelines to
report that hundred thousand immediately to them within 60
days. At that point, they take back their 50 percent share,
regardless of whether or not the State of California ever
actually collects a dime.
While, right now, we are so aggressive with fraud in
California we're identifying literally hundreds of millions.
HCFA is getting half. The U.S. prosecutor, because we are so
successful, is getting the money back. HCFA is getting half of
that. Guess what? HCFA's coming out way ahead. If we don't
change that, all I can tell you is States have a built-in
disinterest to identifying fraud and problems in their
programs, and that is----
Mr. Upton. If the gentleman will yield for a second, we
picked that up in our earlier hearing we had on this. In
legislation that I'm looking at doing, which will be
bipartisan, we're going to fix that.
Mr. Cates. Excellent. Thank you.
Mr. Stupak. Let me, if I may, I asked earlier if GAO would
do a report on what happened and lessons learned in California
and policy breakdown. Because it looks like California, since
1994, apparently has been well aware of it and has been doing a
good job, so you could probably teach us something. But I'm
really looking for GAO to do a detailed report as to what
happened there. They have done this survey, but really----
Ms. Connell. We'd be happy to provide that information.
It's been detailed in many reports to the legislature. All of
our audit reports are public, and we'd be happy to make that
available to the GAO.
Mr. Stupak. That would be helpful for GAO to just take a
look at it. We'd just like--it sounds like you've had a bad
problem, you made it into a good problem--not a good problem
but certainly you have cleaned it up a lot, and we'd like to
learn a more about it, especially if--do you agree that the
adult day care center may be the next big area of fraud?
Ms. Connell. Well, I think there are many areas of fraud,
and we could list them all here today. I almost don't like to
do that publicly. I try to restrain myself for fear that I'm
just directing entrepreneurial talent into these new fields.
Certainly that is an area of concern.
Mr. Stupak. Thank you.
Mr. Upton. Ms. DeGette.
Ms. DeGette. Thank you, Mr. Chairman. I'd like to follow up
a little bit on questions the chairman was asking about surety
bonds.
Mr. King-Shaw, you testified and also in your written
testimony you talked about the surety bonds and letters of
credit that Florida uses. How do you determine who you will
impose that requirement on? Who's a high-risk provider in
Florida?
Mr. King-Shaw. We do it by provider type. So it's, again,
those five groups that I talked about--durable medical
equipment, transportation, pharmacies outlets themselves has
been added this year, independent labs and nonphysician-owned
group practices. Because, historically, that's where the fraud
have been detected and the recoveries have come.
Ms. DeGette. And what amount of bond does Florida use?
Mr. King-Shaw. $50,000 is the base. We can expand it beyond
that to be an estimated year's worth of billings.
Ms. DeGette. Do you have problems--I know I've talked to
providers in my State, for example, particularly small
providers. They say a $50,000 surety bond or, in their view,
even a $25,000 bond would be prohibitive for them to obtain it.
And what they say is that it is freezing some of these, you
know, honest but small providers out of the market.
Mr. King-Shaw. That is a real issue. You know, when you
have barriers to entry that are too high for a small operator
they may not be able to get into the field. We have a great
relationship with our legislature on these issues. I think
that's one of the critical parts of our success. And they have
really supported the agency in our efforts, we've understood
that, but I think it's important that if we're going to talk
about a quality health care delivery system that has a strong
financial base that we look at the resources of the providers
who are going to provide the care, and it does take a certain
amount of financial stability and maturity and commitment in
order to earn the trust of the State to take care of the
Medicaid population. I would argue it would be the same for
Medicare.
So, yes, it will screen out some of the marginal startup
players, but, on the flip side of that, we know that we are
entrusting our funds and our patients with a health care
provider base that is worthy and substantial and able,
financially and otherwise, to care for that patient.
Ms. DeGette. I mean, I think about what Ms. Connell was
talking about and others about the adult--the coming adult day
care, you know, if you said that's a high-risk group, you know
you don't need a lot of capitalization to start an adult day
care center.
Mr. King-Shaw. That's very true. And we have similar issues
in our ALF, our adult living facilities, because that's another
one that doesn't require a lot of startup capital. It's another
service need of the elderly. Regulating them is just as
challenging, and it's just as prone to fraud, but we need to be
able to anticipate that issue and respond to it aggressively,
and so we do.
Ms. DeGette. Thank you. Thank you, Mr. Chairman.
Mr. Upton. Well, thank you very much.
Again, this has been one of those continuing hearings that
we've conducted over the last number of months, and I think
it's very helpful, as we look now at pursuing legislation to
provide better tools to the States in building, strengthening
the partnership between the Federal Government and the States,
to weed out fraud and abuse.
I would ask unanimous consent to include a number of
letters for the record from Chairman Bliley that he sent to
several States about their provider enrollment efforts and the
States' responses.
We may have members on this panel that may have additional
questions they may submit to you in writing. So watch the mail.
We appreciate your testimony very much and look forward to
working with you in the future.
Thank you. Hearing is adjourned.
[Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
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