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



 
                   HEALTH CARE FRAUD IN NURSING HOMES
=======================================================================





                                HEARING

                               before the

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 of the

                        COMMITTEE ON GOVERNMENT
                          REFORM AND OVERSIGHT
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION
                               __________

                             APRIL 16, 1997
                               __________

                           Serial No. 105-13
                               __________

Printed for the use of the Committee on Government Reform and Oversight










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              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois          TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland       ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
STEVEN H. SCHIFF, New Mexico         EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida         GARY A. CONDIT, California
JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
STEPHEN HORN, California             THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia                DC
DAVID M. McINTOSH, Indiana           CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana              TIM HOLDEN, Pennsylvania
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
JOHN SHADEGG, Arizona                DENNIS KUCINICH, Ohio
STEVEN C. LaTOURETTE, Ohio           ROD R. BLAGOJEVICH, Illinois
MARSHALL ``MARK'' SANFORD, South     DANNY K. DAVIS, Illinois
    Carolina                         JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire        JIM TURNER, Texas
PETE SESSIONS, Texas                 THOMAS H. ALLEN, Maine
MIKE PAPPAS, New Jersey                          ------
VINCE SNOWBARGER, Kansas             BERNARD SANDERS, Vermont 
BOB BARR, Georgia                        (Independent)
ROB PORTMAN, Ohio
                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                       Judith McCoy, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

                    Subcommittee on Human Resources

                CHRISTOPHER SHAYS, Connecticut, Chairman
VINCE SNOWBARGER, Kansas             EDOLPHUS TOWNS, New York
BENJAMIN A. GILMAN, New York         DENNIS KUCINICH, Ohio
DAVID M. McINTOSH, Indiana           THOMAS H. ALLEN, Maine
MARK E. SOUDER, Indiana              TOM LANTOS, California
MIKE PAPPAS, New Jersey              BERNARD SANDERS, Vermont (Ind.)
STEVEN SCHIFF, New Mexico            THOMAS M. BARRETT, Wisconsin

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
            Lawrence J. Halloran, Staff Director and Counsel
                   Doris F. Jacobs, Associate Counsel
                Marcia Sayer, Professional Staff Member
                       R. Jared Carpenter, Clerk
            Ron Stroman, Minority Professional Staff Member










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 16, 1997...................................     1
Statement of:
    Aronovitz, Leslie, Associate Director, Health Financing and 
      Systems Issues/HEHS, General Accounting Office; and George 
      Grob, Deputy Inspector General for Evaluations and 
      Inspections, Department of Health and Human Services.......    81
    McElroy, Carolyn J., vice president, National Association of 
      Medical Fraud Control Units, and director, Maryland 
      Medicaid Fraud Control Unit; Steven Wiggs, assistant 
      attorney general and director, Arizona Medicaid Fraud 
      Control Unit; Stephen M. Spahr, deputy attorney general and 
      director, New York Medicaid Fraud Control Unit; and Richard 
      Allen, Medicaid director, Colorado Department of Social 
      Services...................................................     4
    Willging, Paul, executive vice president, American Health 
      Care Association; and Suzanne Weiss, vice president and 
      counsel, public policy, American Association of Homes and 
      Services for the Aging.....................................   117
Letters, statements, etc., submitted for the record by:
    Allen, Richard, Medicaid director, Colorado Department of 
      Social Services, prepared statement of.....................    57
    Aronovitz, Leslie, Associate Director, Health Financing and 
      Systems Issues/HEHS, General Accounting Office, prepared 
      statement of...............................................    84
    Grob, George, Deputy Inspector General for Evaluations and 
      Inspections, Department of Health and Human Services, 
      prepared statement of......................................    98
    McElroy, Carolyn J., vice president, National Association of 
      Medical Fraud Control Units, and director, Maryland 
      Medicaid Fraud Control Unit, prepared statement of.........     8
    Spahr, Stephen M., deputy attorney general and director, New 
      York Medicaid Fraud Control Unit, prepared statement of....    39
    Weiss, Suzanne, vice president and counsel, public policy, 
      American Association of Homes and Services for the Aging, 
      prepared statement of......................................   135
    Wiggs, Steven, assistant attorney general and director, 
      Arizona Medicaid Fraud Control Unit, prepared statement of.    30
    Willging, Paul, executive vice president, American Health 
      Care Association, prepared statement of....................   122









                   HEALTH CARE FRAUD IN NURSING HOMES

                              ----------                              


                       WEDNESDAY, APRIL 16, 1997

                  House of Representatives,
                   Subcommittee on Human Resources,
              Committee on Government Reform and Oversight,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 2247, Rayburn House Office Building, Hon. Christopher 
Shays (chairman of the subcommittee) presiding.
    Present: Representatives Shays, Snowbarger, Towns, and 
Barrett.
    Staff present: Lawrence J. Halloran, staff director and 
counsel; Marcia Sayer, professional staff member; R. Jared 
Carpenter, clerk; and Ronald Stroman, minority professional 
staff member.
    Mr. Shays. I would like to welcome our witnesses; I would 
like to welcome our guests. Mr. Towns and I are delighted to 
begin this hearing.
    Vulnerable patients. Vulnerable programs. In the nursing 
home setting, both can be victimized by pernicious forms of 
health care fraud and abuse that undermine the quality and 
inflate the costs of care.
    When separate vendors provide medical supplies, therapy, 
and other services to the same nursing home patient, no one is 
ultimately responsible for the coordination of care. When both 
Medicare and Medicaid are billed by the same service, health 
care dollars are wasted. When vendors manipulate Medicare Part 
A, Medicare Part B, and Medicaid reimbursement rules, decisions 
about the quality and quantity of nursing home services are 
driven by the size and source of the payments, not the best 
interests of the patient.
    Today we begin an examination of long-term care 
expenditures by asking: What makes health care services 
provided in nursing homes uniquely susceptible to abuse? One 
answer: the absurd complexity of multiple program eligibility 
and reimbursement rules. If not the direct cause, program 
proliferation creates a conducive environment for overbilling, 
overutilization, and poorly managed care in nursing homes.
    Fraudulent and abusive schemes take root and prosper in the 
definitional cracks and jurisdictional crevices of labyrinthine 
regulatory constructs in which toenail clipping becomes minor 
foot surgery and a coffee klatch can be billed as group 
therapy.
    As the single largest purchaser of long-term care services 
in the Nation, Medicaid covers almost two-thirds of all nursing 
home residents. Many nursing home patients are also covered by 
Medicare Part A for a time. Most elderly are eligible for 
Medicare Part B reimbursement for physician visits, other 
outpatient services, and supplies. In 1995, the three programs 
paid more than $45 billion for services to nursing home 
patients.
    State Medicaid Fraud Control Units are the first line of 
defense against nursing home fraud and patient abuse. For that 
reason, we invited them to testify first today, to describe the 
scope of the problem and their efforts to protect nursing home 
residents from perverse financial incentives and unhealthy 
medical choices.
    Both Health and Human Services, HHS, Inspector General, IG, 
and the General Accounting Office, GAO, have also investigated 
services to nursing home patients. Their testimony will discuss 
the vulnerabilities they found affecting the cost and quality 
of long-term care.
    Finally, we invited representatives from the nursing home 
industry to describe how they meet both their medical and 
fiduciary duties to those in their care.
    As further evidence of the complexity of the problem, we 
can't even fit all the key players into one hearing. The Health 
Care Finance Administration, HCFA, equipment and service 
providers, private insurers, and consumers will be invited to 
testify later, as we formulate more detailed findings and 
recommendations for regulatory and legislative solutions to 
address the problem of nursing home fraud.
    In the last Congress, this subcommittee spoke with a strong 
bi-partisan voice, advocating many of the anti-fraud provisions 
ultimately included in the Health Insurance Portability and 
Accountability Act. For the first time, fraud against all 
health care providers, public and private, is a Federal 
criminal offense.
    The new law also mandates and funds enhanced enforcement 
efforts coordinated at Federal, State, and local levels. 
Nowhere is the need for coordinated enforcement more urgent 
than in the fight against fraud in nursing homes. Each of our 
witnesses today plays an essential role in that coordinated 
strategy, and we welcome their testimony.
    At this time, I would like to invite my partner in this 
effort, Mr. Towns, to make a statement.
    Mr. Towns. Thank you very much, Mr. Chairman. Let me thank 
you again for holding this hearing.
    One of the concerns that I have repeatedly discussed is the 
issue of patient records. In preparing for this hearing, I was 
outraged to learn that, in some instances, nursing home 
operators make patient records available to equipment suppliers 
and to outside providers who are not responsible for the direct 
care of the patient.
    These operators and providers target nursing home residents 
to sell them unnecessary medical supplies and to perform 
unnecessary medical services, in many instances. This practice 
is wrong, and it should be illegal. It permits the exploitation 
of vulnerable nursing home residents and leads directly to 
fraud within the Medicare and Medicaid programs.
    Anyone caught improperly making patient records available 
should be excluded from the Medicare and Medicaid programs, and 
should be fined.
    Another area of concern is the complicated matter in which 
Medicare bills are paid. Currently, bills for outpatient and 
equipment are paid by six different claim processing systems--
six, Mr. Chairman. We need a single, consolidated billing 
system. That is why I was pleased that last week the Health 
Care Financing Administration awarded a contract for 
development of a standard system for paying Medicare physicians 
and other outpatient bills. I am hopeful that this system will 
permit a more rational Medicare billing process.
    Mr. Chairman, we need to develop an accurate Medicare data 
system as soon as possible. Federal, State, and local agencies 
must find better ways to share information on nursing home 
fraud. We need more coordinated Federal and State fraud 
investigations to make more efficient use of limited 
enforcement resources.
    Finally, we must insist that people convicted of nursing 
home fraud be punished to the fullest extent of the law, 
including exclusion from participation in the Medicare and the 
Medicaid programs. Also, licenses should be revoked and, where 
appropriate, prison and fines. Without a comprehensive attack 
on these criminal enterprises, nursing homes will continue to 
serve as a breeding ground for fraud.
    So, Mr. Chairman, again I thank you for holding this 
hearing, and I look forward to working with you to try to clean 
up the mess that is out there.
    I yield back.
    Mr. Shays. I thank the gentleman.
    Let me get some housekeeping out of the way first. I would 
ask unanimous consent that all members of the subcommittee be 
permitted to place any opening statements in the record and the 
record remain open for 3 days for that purpose. Without 
objection, so ordered.
    I would also ask unanimous consent that all witnesses be 
permitted to include their written statements in the record. 
Without objection, so ordered.
    At this time, I would like to introduce our first panel. We 
have four witnesses, from Maryland, Arizona, New York, and 
Colorado. We know that you come with some effort to be here, 
and we really thank you for that.
    Carolyn McElroy, vice president, National Association of 
Medicaid Fraud Control Units, and director, Maryland Medicaid 
Fraud Control Unit; Steven Wiggs, assistant attorney general 
and director, Arizona Medicaid Fraud Control Unit; Stephen 
Spahr, deputy attorney general and director, New York Medicaid 
Fraud Control Unit; and Richard Allen, Medicaid director, 
Colorado.
    We have four excellent witnesses. As I think you were told, 
we swear in all our witnesses, including Members of Congress.
    [Witnesses sworn.]
    Mr. Shays. For the record, we will note that all witnesses 
have responded in the affirmative.
    We will go just right down the line, and we will start with 
you, Ms. McElroy.

  STATEMENTS OF CAROLYN J. McELROY, VICE PRESIDENT, NATIONAL 
   ASSOCIATION OF MEDICAL FRAUD CONTROL UNITS, AND DIRECTOR, 
 MARYLAND MEDICAID FRAUD CONTROL UNIT; STEVEN WIGGS, ASSISTANT 
 ATTORNEY GENERAL AND DIRECTOR, ARIZONA MEDICAID FRAUD CONTROL 
 UNIT; STEPHEN M. SPAHR, DEPUTY ATTORNEY GENERAL AND DIRECTOR, 
   NEW YORK MEDICAID FRAUD CONTROL UNIT; AND RICHARD ALLEN, 
   MEDICAID DIRECTOR, COLORADO DEPARTMENT OF SOCIAL SERVICES

    Ms. McElroy. Thank you. Mr. Chairman, members of the 
committee, thank you very much for inviting me to be here 
today.
    My name is Carolyn McElroy, and I am the director of the 
Maryland Medicaid Fraud Control Unit. I am here today 
representing the National Association of Medicaid Fraud Control 
Units, of which I am currently serving as the vice president. I 
have come here today to discuss the role of the States in 
investigating and prosecuting health care fraud and, 
specifically, fraud in the delivery of long-term care to 
Medicare and Medicaid beneficiaries.
    When the Medicaid program was established in 1965, its cost 
to the Federal Government was $1.5 billion. Today, the cost of 
the program is more than 100 times as great, $160 billion, and 
that is only the cost to the Federal Government. States are 
responsible for up to 50 percent of the cost of the Medicaid 
programs, with some of the States devoting to 15 to 20 percent 
of their total budget to sustain the Medicaid program.
    Medicaid Fraud Control Units are presently established in 
47 States. We currently have jurisdiction over provider fraud, 
physical and financial abuse of patients in Medicaid-funded 
facilities, and fraud in the administration of the program.
    There are some holes in the jurisdictional fabric, and the 
National Association has recently proposed that these loopholes 
be closed. Specifically, as the States seek lower-cost 
alternatives to long-term care facilities, we find that they 
are placing vulnerable adults into domiciliary care or 
alternative residential settings that were probably 
unanticipated at the time the Medicaid Fraud Control Units were 
established.
    Although these settings are even more prone to physical and 
financial abuse than are the more closely watched and regulated 
nursing homes, the Medicaid Fraud Control Units currently lack 
the authority to prosecute abuse in these settings. We also 
find that Medicare fraud which is uncovered during our Medicaid 
investigations is often not pursued in cases where the Federal 
authorities deem the amounts uncovered to be too small.
    The National Association believes that the proposal to 
amend the Medicaid Fraud Control Units' jurisdiction to fill in 
these loopholes, which was originally included in the Kennedy-
Kassebaum legislation, would have provided the flexibility we 
need to more fully prosecute fraud, and we urge you to consider 
this in future legislative efforts.
    The units were established by Congress in the late 1970's, 
following the discovery that there was rampant fraud and abuse 
in the Medicaid program. To date, the units have amassed more 
than 8,000 convictions and recovered millions of dollars which 
would otherwise have been lost to the programs.
    Ironically, the case which spurred the congressional 
funding of the units was a New York City nursing home case 
where it was discovered that patient needs were being grossly 
neglected while the owners diverted millions of dollars 
intended for patient care to their own personal needs.
    We find ourselves here, 20 years later, to talk again about 
fraud in the nursing home industry. In 1977, when the New York 
nursing home case was uncovered, Medicaid fraud was relatively 
unsophisticated and easy to detect. Fraud was rampant mostly 
because there was no oversight whatsoever. Today, I share the 
view with my sister States that fraud and abuse are just as 
prevalent, but that providers are far more sophisticated and 
able to detect new weaknesses in the system as fast as we shore 
up our defenses to stop areas of past abuse.
    Traditionally, nursing home prosecutions involved the 
filing of false cost reports, which were proven false because 
they claimed reimbursement for expenses which were not properly 
attributed to patient care. In most successful prosecutions, it 
was shown that the expenses were personal to the owners.
    Using only Maryland's cases as an example, we have 
criminally prosecuted owners and administrators for including 
in their nursing home cost reports the costs of renovating 
their personal residences; maintaining the swimming pool; 
buying shrimp and tenderloin for holiday entertaining, or, in 
the case of one of our rural facilities, butchering the owner's 
hogs; including personal maid service and opera tickets on a 
cost report; paying a salary to a son who was in prison in 
Texas at the time he was drawing the salary; buying, heating, 
and fixing up rental properties for the benefit of the owners; 
and putting together a custom-built monster truck which was 
owned by the administrator's son.
    We have also prosecuted owners who overstated Medicaid's 
obligations on patient census reports, stole money from patient 
accounts, failed to report income from a related party contract 
with a vendor, wrongly authorized Medicaid reimbursed 
transportation, overstated and upcoded the level of care needed 
by the patients, and failed to refund amounts which should have 
been credited for medications that were not actually dispensed 
to the patients.
    That has always seemed to me to be a pretty impressive list 
of wrongs for a State that has fewer than 250 nursing homes.
    Today, we seldom see cases involving this kind of fraud. 
The State of Maryland audits nearly every nursing home in the 
State nearly every year. Nursing home owners now know that this 
kind of fraud will be detected and will be prosecuted. Instead, 
they concentrate on maximizing profits by analyzing the 
reimbursement process for weaknesses in the regulations and the 
oversight of the programs.
    Lately, the homes have focused on the gap between the 
oversight of the Medicare and Medicaid programs. I would like 
to talk about two specific examples. The first is a gray area 
where a nursing facility finds it profitable to be a provider 
or to be related to a provider of ancillary services. This 
allows them to essentially double-bill for certain items 
provided in the nursing home care.
    The services in Maryland which have proven particularly 
susceptible to this scheme are therapy of any sort--that 
includes occupational, physical and speech therapy--and durable 
medical equipment. In a nutshell, the problem is that the homes 
are permitted to include the costs associated with providing 
the therapy or equipment in their Medicaid cost report, and 
thereby increase their per diem rate.
    The facility is also permitted to bill the services to 
Medicare Part B. The income which is received from the Medicare 
reimbursement is not required to be reported as an offset to 
the Medicaid expenses. Hence, the facility gets paid for the 
services by Medicaid through a higher per diem rate, and also 
gets paid directly by Medicare for the same service. It is hard 
to recover the funds, let alone prosecute a criminal case for 
this double-dipping, when the regulations of the various 
programs are not cohesive and do not expressly prohibit this 
behavior.
    The second example is an example of outright fraud. It is 
exemplified by a case which was indicted by the Washington 
State Medicaid Fraud Control Unit just 2 weeks ago. As you 
know, Medicare will cover all or a portion of a patient's care 
following hospitalization for an acute condition. Since 
Medicare generally pays more than Medicaid, facilities are 
encouraged to hospitalize their patient for acute conditions 
based on eligibility cycles.
    Even more egregious, however, is the Washington State case 
where a nursing home had billed Medicare for the days following 
a hospitalization, but has also billed the very same care to 
Medicaid. Hence, the home was literally paid twice for the same 
days of care, and both times by federally subsidized programs. 
I would note also that this same fraud has been identified in 
Texas facilities.
    In order to detect and prosecute this kind of fraud, 
greater cooperation of both State and Federal agencies is 
needed. Medicaid Fraud Control Units traditionally experience 
difficulty in getting Medicare payment information regarding 
nursing homes. This is because nursing homes are permitted to 
submit their bills to virtually any Medicare fiscal 
intermediary. So, in the State of Maryland, if I were to go 
request information on Maryland Medicare beneficiaries in 
nursing homes, I would have to contact as many as 61 different 
fiscal intermediaries.
    In addition, the information which is reported to us by the 
fiscal intermediaries is reported in incompatible formats, 
either with the State's Medicaid data and, frequently, with 
that of the other fiscal intermediaries. In Texas, for example, 
information was provided on microfiche and was sorted by 
beneficiary instead of by facility. If it is not provided in 
electronic form, it's almost impossible for us to re-sort it.
    While this has been a past problem, I am pleased to tell 
you that we are presently working with the Health Care 
Financing Administration and other Federal agencies to find 
solutions. HCFA is working with the Maryland Unit currently to 
provide electronic data for all nursing homes in the State of 
Maryland, regardless of what the fiscal intermediary was, and I 
anticipate that this project will be successful. Washington 
State, also, as you know, is taking a lead in prosecuting this 
complex dual eligibility case, and I anticipate that they will 
also be successful.
    All of the Medicaid Fraud Control Units are working toward 
stronger partnerships with the Federal agencies who are 
responsible for prosecuting Medicare fraud. We are viewed as 
having a national leadership role in prosecuting health care 
fraud and abuse, and we intend to continue to serve in that 
capacity.
    Mr. Chairman, thank you for giving me the opportunity to be 
heard, and I welcome any questions you have.
    [The prepared statement of Ms. McElroy follows:]
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    Mr. Shays. Thank you, Ms. McElroy. Thank you very much.
    Mr. Wiggs.
    Mr. Wiggs. Mr. Chairman, members of the committee, I am 
Steven Wiggs, director of the Arizona Medicaid Fraud Control 
Unit, and I consider it an honor to be here to testify today.
    I have been asked to identify some emerging trends of fraud 
and abuse in the long-term care industry, within the context of 
dual eligibility and managed care. Let me begin by briefly 
contrasting the evolution of fraud control within the Medicaid 
program and the transition toward managed care and its effect 
on the fraud control efforts, a transition that so 
fundamentally changes the nature of how and where fraud occurs 
that it presents distinct and urgent challenges to those of us 
concerned with program integrity.
    In 1977, Congress established the Medicaid Fraud Control 
Unit program in response to the targeting of Medicaid's soft 
underbelly of fee-for-service reimbursement by greedy 
providers. By regulation, the responsibility for fraud control 
was logically placed where the risk of loss was the greatest 
and where the location of fraud was most likely to occur. 
Hence, centralized claim reimbursement or claim-based provider 
profiling by the Medicaid agencies became the primary method of 
fraud detection.
    The success of the Medicaid Fraud Control Unit program 
these past two decades is widely recognized, and their 
evolution as effective Fraud Control Units can be attributed to 
the fact that that responsibility for detection and referral of 
fraud logically reflected the system within which they 
operated.
    Such is not the case with managed care. In 1982, Arizona 
was the last State to join the Medicaid system and, at the same 
time, the first to deliver indigent health care by way of a 
managed care model. It has, for the most part, succeeded. 
However, no thought was initially given to fraud control or 
program integrity.
    As a result, allegations of fraud and mismanagement have 
shadowed a system once touted as the Nation's managed care 
model, but have also focused a critical light on what those of 
us in the fraud control profession have known for a long time: 
fee-for-service program integrity methods cannot simply be 
transferred onto a managed care model with any sense of 
efficacy.
    Because of the structural differences and shifting of 
incentives created by managed care, the nature of fraud changes 
and its location shifts from the Medicaid agency to the 
contracting health plans or managed care organizations. The 
responsibility for fraud control, however, does not likewise 
shift, and the basis for program integrity, therefore, becomes 
market-based rather than justice oriented. The net result is 
that program integrity becomes illusory.
    Arizona found itself in this precise predicament and has 
hit the problem head on by taking several steps in implementing 
a comprehensive managed care fraud control strategy. Chief 
among these have been the inclusion of the Medicaid Fraud 
Control Unit in fraud control development and the clear 
delineation of responsibility and accountability for program 
integrity.
    I have identified other steps that Arizona has taken in 
this regard in my written statement prepared for the committee. 
Suffice it to say, however, current program integrity methods 
and regulations, having evolved from the fee-for-service 
experience, are impotent in the managed care model.
    This problem is further exacerbated in the long-term care 
arena where you have both Medicare and Medicaid populations. 
The amalgamation of dual program eligibility and managed care 
contracting creates new opportunities for fraud and abuse and 
leads to further blurring of program integrity 
responsibilities.
    Consider these examples: Dual eligible residents whose 
Medicare co-payments are included in the Medicaid capitation 
which is paid to a network provider are routinely placed out of 
network and seen by non-network vendors, who then discount 
their services to the nursing home and accept Medicare Part B 
payment as payment in full.
    Not only does Medicare lose out on the reduced fees, but 
Medicaid does not receive the service it contracted and paid 
for, and the discount is an illegal kickback between the 
provider and the nursing facility. Moreover, the patient may be 
defrauded regarding informed consent by electing to go out of 
network, and since the nursing facility or non-network provider 
is required to bill to collect the co-payment, the possibility 
of sham or duplicate billings increases.
    Consider also the managed care organization that awards a 
competitively bid contract for x-ray services, including 
coverage for dual eligibles, to a provider-vendor that offers a 
20 percent reduction in fee-for-service billings, including 
those billed to Medicare Part B. The very entity that has 
program integrity responsibility is benefiting from the 
potential fraudulent activity.
    Consider also the physician in a rural community who has an 
ownership interest in the managed care organization that 
administers the capitated long-term care contract covering the 
very patients that he treats. While allegations of 
underutilization regarding the capitated patients abound, such 
as failure to prescribe antibiotics for infections, failing to 
order necessary x rays, and dispensing leftover or outdated 
drugs, indications of gang visits and unnecessary services to 
the dual eligible patients should come as no surprise.
    Who is coordinating the data to determine the scope of the 
problem? Consider also the nursing home administrator that 
operates a profitable side business involving physical therapy 
services to nursing home residents, which are billed to 
Medicare Part B, while allegations of short staffing and 
underutilization regarding Medicaid patients are widespread.
    The complications and blurring of program lines created by 
dual eligibility is but one example of the emerging and complex 
issues faced by the Medicaid Fraud Control Units. It is also a 
good example of how detection and enforcement efforts, which 
are already compromised by multilayering and decentralization 
of managed care, become further compromised by the crossover 
nature of fraud between the two programs. Fraud is no respecter 
of program boundaries.
    Although I am encouraged by the success of such programs 
like Operation Restore Trust, with its anticipated expansion 
into more States, in an effort to more fully integrate 
enforcement activities, I remain concerned that we will 
continue to play ``catch-up'' and ``hit-and-miss'' regarding 
fraud because of artificial enforcement boundaries which serve 
only to limit the Medicaid Fraud Control Units' continuing 
success in this new age of health care fraud.
    Mr. Chairman, I want to thank you for this opportunity to 
testify today and would welcome any questions that you or the 
committee may have.
    [The prepared statement of Mr. Wiggs follows:]
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    Mr. Shays. Thank you, Mr. Wiggs. I'm noting that both of 
you are obviously sharing parts of your testimony, because it's 
longer than the 5 to 10 minutes that we like, and I appreciate 
that.
    I just want to point out, before our next two witnesses 
speak, when we passed our Health Care Reform bill last time 
around, it was going to have two titles. We inserted a third 
title, actually labeled Title II, which made health care fraud 
a Federal offense both in the public and private sectors. That 
whole title came from a hearing like this hearing that we had.
    It's our intention--and we have staff on both sides of the 
aisle here--it's our intention, obviously, to go through your 
entire statements and continue the dialog we've had, but we're 
hoping that this hearing will generate some practical 
legislative changes that can happen in Congress and regulatory 
changes that we can recommend with the administration. We have 
a good working relationship with the administration.
    I just want you to know that your testimony will, I think, 
ultimately result in some changes. So that's the attitude I 
want us to have.
    Mr. Spahr.
    Mr. Spahr. Thank you. Good morning, Mr. Chairman, members 
of the committee.
    Mr. Shays. Good morning.
    Mr. Spahr. My name is Stephen Spahr. I am the director of 
the New York State Medicaid Fraud Control Unit.
    Mr. Shays. Could I ask you, Mr. Spahr, to just move the 
mike a little closer to you.
    Mr. Spahr. Certainly, sir. Is that better?
    Mr. Shays. Even a little closer, if that's all right.
    Mr. Spahr. OK.
    Mr. Shays. Can you still read your testimony?
    Mr. Spahr. Yes, I can.
    Mr. Shays. OK. Thank you.
    Mr. Spahr. Mr. Chairman, in New York, we have approximately 
666 nursing homes in operation.
    Mr. Shays. What is the number again, please?
    Mr. Spahr. 666, which accounts for an annual expenditure in 
the last year of $5.2 billion, out of a total New York State 
Medicaid expenditure of $25 billion. That represented a 7 
percent increase over the prior year.
    In New York State, in recognition of the various problems 
which have emerged in the nursing home industry in recent 
years, the Medicaid Fraud Control Unit and the single State 
agency have engaged in a series of new initiatives, including 
participation in Operation Restore Trust. The Medicaid Fraud 
Control Unit has, in the last 3 months, formed a new Special 
Projects Division to deal specifically with nursing home and 
cost-based reimbursement issues in New York State.
    The problem with dual eligibility: Cases in New York State 
have suffered, as has been indicated by other witnesses, by a 
lack of program coordination between the Medicare and the 
Medicaid programs. The data available from the fiscal 
intermediaries in the Medicare program has been slow in being 
available, and has been made available in formats which are 
difficult to use. In some cases, it can take up to a year to 
obtain information relating to Medicare beneficiaries.
    Additionally, in New York, most of our nursing homes are 
reimbursed on a cost basis, which has an all-inclusive rate 
which includes a number of various therapies and modalities 
which are included and paid for. We have particularly 
identified problems in New York where durable medical 
equipment, physical therapy, psychological services, which are 
already paid for in a nursing home's rate, are being billed 
separate by outside vendors, both to the Medicaid system, on a 
fee-for-service basis, and to the Medicare program, as well.
    In a recent survey conducted by the single State agency of 
200 durable medical equipment providers under Operation Restore 
Trust, they identified $2.5 million in services which had been 
billed to the Medicare program for durable medical equipment, 
an additional $2 million billed to the Medicaid program for 
DME, all of which were for services already included in the 
basic rate for those nursing homes.
    To date, the single State agency has recovered over 
$700,000 of the Medicaid dollars. It has referred over $1 
million for recovery to the Region A carrier, and has referred 
several cases for investigation to the Medicaid Fraud Control 
Unit.
    A similar difficulty in the unavailability of data from 
both Medicare and Medicaid, and the coordination of that data, 
creates the risk that cases which are similar, frauds committed 
under both programs, may go largely undetected or unprosecuted. 
And the increased coordination of the availability of data from 
both those programs will increase the ability of the Medicaid 
Fraud Control Units and other agencies interested in fraud 
investigation and prosecution in increasing deterrents and 
potential punishment for those persons engaged in this 
activity.
    While all of the traditional fraud activities in nursing 
homes continue in New York, most recently with a Buffalo-based 
organization which, through cost-based and cost report fraud, 
cost the program $1.2 million plus an additional $300,000 in 
identified kickbacks between related entities, we have 
identified a number of new and emerging trends in New York.
    First and foremost of those are the durable medical 
equipment crossover cases which I've just discussed. 
Additionally, we have identified difficulties with therapy 
services rendered in nursing homes, such as the so-called 
``wave therapy,'' when a therapist will come through a nursing 
home and wave hello to the patients and then bill both programs 
whenever possible, as well as billing individual therapies when 
group therapies are being provided.
    Most recently, under the aegis of Operation Restore Trust, 
we have pending in New York a case involving a physiatrist who 
billed a total of $4 million to the Medicare and Medicaid 
programs for physical therapy evaluations and expensive nerve 
tests conducted on various nursing home residents.
    As Mr. Towns indicated earlier, this provider was able to 
obtain from five nursing homes, on a monthly basis, lists of 
residents, including their Medicare and Medicaid billing 
information, and those patients were billed on a regular basis 
for therapies which were, in fact, not provided.
    Such examples of those therapies included billing for 
patients who were deceased as of the date of service, billing 
for four limb nerve conduction tests on patients who were 
double amputees, and billing for services for patients who were 
in the hospital as of the date of services that they were 
alleged to have been rendered.
    As stated earlier, the fraudulent provider will no longer 
recognize the boundaries of a program. The frauds are committed 
across all programs, both Government and private. The ability 
of the Medicaid Fraud Control Units to continue to combat fraud 
across all programs would be greatly assisted by closing the 
loopholes which Ms. McElroy referred to earlier and permitting 
the Medicaid Fraud Control Units to go after fraud in whatever 
Government program it exists.
    Mr. Chairman, I thank you for your time and will take any 
questions.
    [The prepared statement of Mr. Spahr follows:]
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    Mr. Shays. Thank you very much, Mr. Spahr.
    Mr. Allen. Again, I'm going to ask you to move the mike up 
and just lower it a bit. If you would lower the mike down. 
Thank you very much.
    Mr. Allen. Thank you, Mr. Chairman.
    My name is Richard Allen, and I am the Medicaid director 
for the State of Colorado.
    Mr. Shays. Since we've had two witnesses tell us Mr. Wiggs, 
how many nursing homes in Arizona?
    Mr. Wiggs. I don't have an exact count for that. I'm sorry. 
I can provide it.
    Mr. Shays. OK. That's all right.
    Mr. Allen. We have 105 nursing homes in Colorado 
participating in the Medicaid program, out of a total of about 
192.
    Mr. Shays. I realize that it also depends on the number of 
beds, and so on, but I'm just curious. Thank you.
    Mr. Allen. Just another statistic that I think you might 
find interesting is that in the State of Colorado, like most 
States, Medicaid pays for about 65 percent of all days of care 
in a nursing facility. Medicare pays for about 5 to 6 percent. 
And then, finally, the balance is paid for by patient payment.
    I have been involved with the Medicaid program for a long, 
long time, especially in the long-term care area. I have been 
working in this area for 17 years. While I certainly don't have 
direct knowledge of fraud and abuse type issues like the people 
to my right, what I do see is that we do have a systematic 
problem, and that is, the Medicaid world and the Medicare 
world, we live in two different worlds, and we don't work 
together very much at all.
    We have different incentives for the way we conduct our 
business, and that is probably a tragedy. The reason why I say 
that is that both of us are making significant amounts of money 
payment for the same services, for the same clients, and 
because we don't coordinate, we are setting up situations which 
are imperfectly understood by either payment system. We are 
setting up systems that perhaps invite abuse and perhaps even 
fraud. I think that's what you heard from some of the testimony 
here earlier.
    Medicaid sets up its payment system one way; Medicare sets 
up its payment system yet another way. And the provider, the 
vendor who is working in the middle, figures out how to 
maximize the reimbursement from the two systems. What I would 
like to share with you are some problems that we see with the 
Medicaid hospice benefit.
    The Medicaid hospice benefit is an optional benefit, and it 
came on line in 1986, and Colorado took advantage of the 
program in 1992. The reason why we got involved with the 
hospice program is due directly to the AIDS epidemic, and we 
knew that many persons suffering from AIDS needed to have a 
hospice type benefit. However, we were disappointed in the 
restrictions that were placed on the program by the Federal 
Government in the administration of the program.
    The hospice benefit is, indeed, also paid for by Medicare. 
Medicare pays to the nursing facility about $105 a day in my 
State for what we call routine care. That is the payment from 
Medicare. In addition to that payment, the Medicaid program 
will make another $85 payment, coupled with the patient 
payment, to the same hospice agency. The combined payment is 
about $195 a day.
    Just to put that in perspective, the average rate that I'm 
paying in my State for a full day of nursing home care is about 
$98.50. What you can see there is that, between Medicare and 
Medicaid, we've made a payment of $190, when, in fact, for most 
types of care in nursing facilities, I can get the job paid for 
by $98 a day.
    What this clearly represents, in my mind anyway, is a very 
lucrative payment system for hospice people, who have also 
Medicare and Medicaid, and then they are put into a nursing 
facility. This lucrative payment, in my opinion, has resulted 
in the hospice benefit in Medicaid, in Colorado, being now 
primarily an institutional benefit. Seventy percent of all the 
people who are on our Medicaid hospice benefit are in nursing 
facilities. And the reason why we think that is happening is 
because of the lucrative payment system that has been designed.
    Again, both of these requirements are Federal requirements. 
The Federal Government does issue this payment under the 
Medicare system for $105, and we also have to make this other 
$85 payment. By ``have to'' I mean that it is a Federal mandate 
that we have to pay the nursing home hospice 95 percent of our 
usual rate that we pay for a nursing home, even though that 
nursing home and the hospice have received another $105 from 
another payment source.
    If the States had flexibility, the States, I think, may 
choose two different things. The first thing that they may do 
is decide that, if they are going to pursue a hospice benefit, 
they would only use it in the home-based situation. Most States 
have realized the wisdom of using long-term care in the home 
situation rather than using nursing homes.
    The second thing that we would also ask for flexibility on 
is, let the State design the rate structure that it wants to 
pay for the hospice person who is in a nursing home. I would 
think that our rate, instead of being $85 a day, would be 
somewhere around $20 a day, to pay for what is loosely defined 
as room and board cost.
    The other issue I would point out is that there are very 
interesting incentives that exist between the Medicare and the 
Medicaid systems. Those, generally speaking, are that Medicare 
has an incentive to put people into nursing facilities, and the 
Medicaid program has an incentive to try to put people back 
into hospitals.
    What is happening to the client is that they are not 
getting coordinated care. We think that the long-term response 
to that is to allow the Federal Government to issue waivers to 
the Medicaid agencies to put long-term care services for both 
the Medicare and the Medicaid systems into an HMO, managed care 
environment, where you would have a private sector HMO trying 
to coordinate the money and the care for the people who are 
being served by both programs.
    They would have an interest in coordinating not only the 
money but even the care. Medicare, generally speaking, pays for 
the acute care benefit; Medicaid pays for the long-term care 
benefit. If you had one entity trying to coordinate the care, 
we believe we would see improvements in care and also doing it 
for less cost.
    We are seeking a waiver from the Federal Government. We 
have been seeking that waiver since September 1995; it is still 
not approved. We hope that it will be approved soon, but even 
that waiver is on a small scale. It would only be in a county 
of about 150,000 people and would only cover 1,000 people.
    What we believe can happen here is that the coordination 
that is so sorely missing between the Medicare and Medicaid 
programs can, in fact, can be accomplished through the use of 
managed care principles through private entities such as HMOs 
and other similar entities.
    Thank you, Mr. Chairman. I am available for any questions.
    [The prepared statement of Mr. Allen follows:]
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    Mr. Shays. Thank you very much.
    I was just asking my staff why we couldn't step in and try 
to help you with your seeking to get a waiver. Now, I 
understand the issue is that your program would be mandatory 
rather than voluntary, in terms of participation in managed 
care?
    Mr. Allen. That's not true. Actually, we have voluntary 
participation.
    Mr. Shays. I don't know if that's wrong or not. I'm not 
saying having mandatory is wrong, I'm just saying, what are you 
hearing is the challenge? Because we're going to have HCFA 
before us later, not today, but later, just to help us 
understand their thought processes.
    Mr. Allen. We believe that HCFA has real reluctance to move 
the elders into managed care. They have done their own studies, 
and they are not quite sure if the programs are cost-effective. 
The elders are also a very strong constituency and nervous 
about managed care, and things of that nature.
    We submitted our waiver in September 1995. We got our first 
questions from HCFA in May 1996, and when we got the questions, 
there were 80 questions for what we thought was a fairly 
simple, direct, forward sort of concept. And it's a pilot; it's 
just an experiment. Coupled on that, they wanted 5 years worth 
of payment data, you know, for the program that we're trying to 
set up in a small county called Mesa County in Colorado.
    Mr. Shays. So this would have been a pilot in one county; 
this would not have been Statewide.
    Mr. Allen. Exactly right.
    Mr. Shays. Interesting.
    I'm going to first acknowledge that some of what has been 
discussed, I'm not fully grasping it, so I'm going to tell you, 
I'm going to be asking some ignorant questions, and I'm going 
to try to put it in a way that I can understand. Some of this 
is just trying to remember what I knew 2 years ago and have 
just forgotten.
    It strikes me that one of the challenges we're dealing with 
is, ``legal but wrong.'' It's legal; it's just dumb the way the 
Government allows things to happen. Another way I look at it 
is, it's illegal, but it's hard to stop because of lack of 
coordination, and so on.
    I want each of you to tell me what you think is legal but 
just wrong. What is happening now that is legal, but it's just 
wrong, dumb, stupid, just unacceptable. We'll just go down the 
line.
    Ms. McElroy. Well, Mr. Chairman, I think the example that I 
gave regarding the ability of a nursing home and a related 
ancillary service provider to bill for therapy services to 
Medicare, as well as including that in its cost base for its 
cost report to Medicaid.
    Mr. Shays. OK. I want to interrupt you. When you say 
``ancillary,'' we're just talking about any service provider--
physician, psychiatrist, whatever?
    Ms. McElroy. Yes. Here's how we know what's happening in 
Maryland. When all of the nursing homes declare that they have, 
as a related party, a durable medical equipment provider, we 
know there's a reason for it. When this happens, it happens--
literally 80 to 90 percent of the nursing homes at the same 
time will do the same thing, and the other 10 percent are the 
ones that we believe are out of the loop.
    Mr. Shays. Give me some kind of examples with real numbers.
    Ms. McElroy. I'm afraid I can't do that, in terms of how 
much money.
    Mr. Shays. No, just give me an example of what--I'm just 
trying to understand how they put it in the base. I'm just not 
seeing how the system works. You can make up numbers.
    Or if someone else wants to give me an example, because 
this is a common problem with all four of you; correct? We're 
talking about ancillary services being put in the base and, in 
a sense, double billing, but legal.
    Ms. McElroy. Yes.
    Mr. Shays. But legal, not illegal.
    Ms. McElroy. Not illegal. Not prohibited.
    Mr. Shays. Not prohibited. OK.
    Ms. McElroy. A nursing home is required to screen its 
patients for therapy needs and to provide any therapy that the 
patient needs. If the nursing home determines that a patient 
needs, for instance, physical therapy, the nursing home hires a 
therapist. The therapist provides the therapy to the patient, 
and the cost of the therapist's salary would go on the nursing 
home's cost report.
    If the nursing home were to set up a related entity, say 
ABC Therapy, and it was owned by the same persons as owned the 
nursing home, they would be required to include the costs and 
the expenses of that company on their cost report because it's 
a related entity. They are all owned by the same people.
    Mr. Shays. Right.
    Ms. McElroy. But if they set up that related entity and 
they put the costs of that entity on their cost report, they 
are going to get a higher per diem rate. So if they pay the 
therapist $20,000 a year, they will put $20,000 a year on their 
cost report, and Medicaid will increase their per diem rate 
accordingly.
    Mr. Shays. Medicaid?
    Ms. McElroy. Medicaid.
    Mr. Shays. But Medicare would be paying?
    Ms. McElroy. But if they have a related entity--all right, 
it's not the nursing home itself; it's just this related 
entity--ABC Therapy can bill Medicare Part B and be paid for 
providing the therapy which is needed by the Medicare 
beneficiary in that home.
    Mr. Shays. Now, when you see that, are you able to have 
them stop, or they can continue doing it because it's not 
illegal?
    Ms. McElroy. It is not illegal, but if our State contract 
auditors are advised to attempt to back out that cost from the 
Medicaid cost report, they will try to do it. They will be in 
appeals; they will be fighting.
    Mr. Shays. Something may not be illegal, therefore, they 
can attempt to do it and some can get away with it. You might 
say, this is crazy. Someone couldn't look you square in the 
eyes and say this is right. And you could basically say, stop. 
Some might fight you, and some might not. But the one thing is, 
they know they can do it.
    The bottom line is that you're telling me it's not illegal, 
and therefore someone can attempt to do it. If they are found 
out, you might attempt to stop them, and you may succeed or may 
not succeed.
    Ms. McElroy. And if we do succeed, it will take several 
years to do it. By the time we do succeed in backing it out, 
they will be doing durable medical equipment instead of 
therapy.
    Mr. Shays. OK. And that would fit my definition of legal 
but wrong.
    Ms. McElroy. Correct.
    Mr. Shays. It is just really dumb that Government would 
allow this to happen.
    Would you all agree that this is one type of an example 
that's legal but wrong?
    Mr. Wiggs. I would also suggest--I would concur with that. 
When you have owners and operators of nursing homes or 
physicians that have an ownership in either the managed care 
organization to which they are providing care--you know, they 
have an ownership in the managed care organization that has the 
patients, so they are effectively treating their own patients, 
and you can see those trends. But also in the nursing homes 
where you maybe have a side business, and you're using that 
business to bill.
    Mr. Shays. In some areas of medical care, that's illegal.
    Mr. Wiggs. Correct.
    Mr. Shays. Or just not allowed.
    Mr. Wiggs. Right. And it would be illegal if it--you know, 
kind of a violation of self-referral type of--anti-kickback.
    Mr. Shays. Right.
    Mr. Wiggs. Another area that's of concern to me, frankly.
    Mr. Shays. Still on the issue of legal, but wrong.
    Mr. Wiggs. Legal but wrong.
    Mr. Shays. OK.
    Mr. Wiggs. Or legal but leads to areas where it could go 
wrong very quickly.
    Mr. Shays. OK.
    Mr. Wiggs. Would be in the context of managed care contract 
for long-term care services, such as the mobile x-ray type of 
industry, where you have a network provider who has contracted, 
is capitated, who has gone through the bidding process, has 
shown that he's legitimate, and is providing those services 
under a capitation rate.
    Your current rules allow nursing facilities to choose any 
willing provider for the dual eligibles. For example, if it's a 
Medicare primary patient, and then the secondary coverage is 
picked up by Medicaid, they can choose whoever they want to 
come in there and do those x rays. What we're seeing is a trend 
of them choosing non-network or noncontracted vendors. That's 
perfectly legal, although the capitation has already paid for 
their coverage.
    The dilemma comes in, how is the co-pay getting billed? Who 
is billing? Is the vendor billing the nursing home, and then 
the nursing home turns around and, through their Part A cost 
report, showing it as a bad debt, perhaps, because it's 
uncollectible from the indigent or the managed care agency?
    The picture I'm trying to paint here is, it gets terribly 
complex, in terms of, gee, what's really happening here? Does 
the program end up paying more, both programs? And then how do 
you create a trail sufficient to say it's fraud or it's not 
fraud, without expending an inordinate amount of resources?
    Mr. Shays. But is it illegal for two people to submit the 
same bill? You're implying that it may not be illegal. I mean, 
two different entities.
    Mr. Wiggs. Well, what's being submitted is, the coverage is 
already there under a capitation arrangement.
    Mr. Shays. It's already paid for.
    Mr. Wiggs. It's already paid for through a Medicaid 
arrangement.
    Mr. Shays. Right.
    Mr. Wiggs. It's legal for the nursing facility to go out of 
network, basically choose any willing provider to do 
noncapitated x rays for dual eligibles. So you pull a non-
network vendor in there to do the x rays.
    Mr. Shays. So, basically, it was covered under Medicaid.
    Mr. Wiggs. It's covered under Medicare and Medicaid, but 
then it's billed out to Medicare for the Medicare portion. And 
you're supposed to bill out that co-pay, but that's already 
covered by capitation. So the non-network vendor is--there's 
kind of a benefit there.
    Mr. Shays. Let me be clear. Is Medicare paying twice, or is 
it an issue between Medicaid and Medicare both paying?
    Mr. Wiggs. They are both not getting the benefit of the 
bargain of a discounted service. Medicare would not be getting 
the bargain from a 20 percent reduction in the discounted 
service by the nonvendor; Medicaid has already paid for that. 
So both programs--it's double coverage, if you will. Medicaid 
has already paid for that through capitation. The capitation 
rates are set based upon, you know, how many people and what 
services, and so forth. So it's already there.
    There's nothing illegal about a nursing facility choosing 
any willing provider for the dual eligibles. It just gets 
terribly complex to try to sort it out.
    Mr. Shays. But the bottom line is, the taxpayer pays more.
    Mr. Wiggs. Exactly. And it makes it terribly difficult, in 
terms of investigation and prosecution, as has been alluded to. 
Where do we get the information? Who is monitoring it? Does it 
really boil down to a kickback or just a bad practice?
    Mr. Shays. OK. Well, I'd like you all to be thinking, 
ultimately, how we try to address that issue in statutory 
language.
    Mr. Snowbarger, I'm going to call on you in just a second. 
I'm not going to get to my ``illegal but hard to stop.'' I want 
to keep going just with ``legal but wrong.''
    Mr. Spahr.
    Mr. Spahr. Mr. Chairman, let me identify another issue for 
you that has to do with the dual eligibility and the crossover 
payments. Under New York's Medicaid program, DME equipment 
requires prior approval for most items, durable medical 
equipment.
    Mr. Shays. DME being?
    Mr. Spahr. DME--durable medical equipment.
    Mr. Shays. Right.
    Mr. Spahr. When Medicare is the primary payor on items 
which are then billed for a 20 percent co-payment to Medicaid, 
no prior approval is required by Medicare. In a recent example 
that arose in our Syracuse office, there were multiple bills 
being submitted for nursing home residents.
    Mr. Shays. I'm going to ask you to slow down just a little 
bit. I'm just trying to keep up with you.
    Mr. Spahr. Sure.
    Mr. Shays. You're saying Medicaid had a co-payment?
    Mr. Spahr. Yes.
    Mr. Shays. I thought you said Medicaid, and I thought you 
should have said Medicare.
    Mr. Spahr. If Medicare is primarily responsible for payment 
for the patient services, the 20 percent co-payment for a dual 
eligible patient is then billed to Medicaid.
    Mr. Shays. OK.
    Mr. Spahr. In this particular circumstance, a company was 
billing for a very expensive item, which I won't give you the 
long name of, it's basically a custom-fitted body jacket, for 
which Medicare would pay $1,231. Medicaid, because it was only 
paying the 20 percent co-pay, was not permitted to enter into a 
prior approval review of the material, and paid the 20 percent 
on Medicaid's approved rate of $951, without having the 
opportunity to examine either the medical necessity or the 
physical invoice for the material that was being provided.
    In that case, upon referral and examination by experts, it 
was determined that the actual device being provided was a $100 
seat adjustment, which Medicaid would have totally denied 
payment for, had it had the opportunity to do so.
    As a result of that, the U.S. attorney's office, I believe, 
in New Jersey, entered into a civil settlement, because 
Medicare decided that it constituted one device, at a reduced 
rate, and settled the case civilly. Whereas, New York State's 
Medicaid, had it had the opportunity to do a prior approval on 
these items, would have saved over $80,000 by not having paid 
the co-payments on those items, as well.
    And in terms of a lack of coordination, I would also point 
out that, when the settlement was entered into by the Federal 
office, it was done without attempting to collect the State's 
Medicaid share, as well. So that case is pending to try to 
recover that civilly. That's a case that was correct, to the 
extent that the difference in the regulations between the 
programs permitted a primary bill to Medicare without prior 
approval.
    Mr. Shays. What I'm having trouble understanding is--that 
sounds illegal.
    Mr. Spahr. Well, what was illegal was the question of what 
the actual device was.
    Mr. Shays. OK. What was legal but wrong?
    Mr. Spahr. What was legal was the ability to bill any 
device to the Medicare program without prior approval, without 
their being any medical review as to either the necessity or 
the quality of the material being provided, under the State 
regulations.
    Mr. Shays. Thank you.
    Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman. I guess, in the area of 
legal but wrong, I think the issue that you're hearing from the 
others around the nursing home getting paid from Medicare for a 
day of care, or they get paid from Medicare for what we call a 
Part B service, and then they are able to take that same cost 
and place it on the Medicaid cost report.
    What that does is, it causes the cost report to overstate 
the cost of treating the average person in a nursing facility. 
By doing that, Medicaid is paying out more than it should, at 
least in my State. This is what we have just recently 
discovered in our State. We went in, we examined it, we have 
found it, and now we're in the process of taking corrective 
action on the problem.
    I would not declare it to be an illegal situation; it's 
just an issue where, again, because Medicare does its thing, 
and Medicaid does its thing, we're slow to coordinate on these 
issues. In my State, what we've done is, we've put some caps on 
some rate growth, and we're also trying to get away from the 
use of the cost report and go to what we call a ``case mix'' 
reimbursement system.
    I would also add that, in my experience, this is a 
relatively new phenomenon. I think it started seriously about 5 
years ago, when, for whatever reason, Medicare started paying a 
lot more long-term care services than ever before. I've seen 
some HCFA publications that their expenses for long-term care-
related Medicare costs have increased something like 1,000 
percent over the last 5 or 6 years. I could be wrong with that 
statistic, but it was a remarkably large percentage increase.
    With that change and pattern of payment out of Medicare, 
the effect is to drive up the cost in an unrelated area such as 
the Medicaid cost report. There are things the States can do, 
perhaps like moving to a case mix reimbursement system or 
moving away from a cost report system.
    I cannot say that this system exists in the same way in 
every other State as it existed in my State. For instance, we 
did offset Part B revenues, but that's just an accounting 
thing. But we have found it also to be true in our State.
    The other thing that's legal, but dumb, is the whole issue 
of the hospice benefit. Medicare makes a $105 payment; we make 
an $85 payment. The person is still inside a nursing facility. 
And I think the answer there is to allow the State some 
flexibility to administer their own Medicaid hospice program, 
in conjunction with Federal oversight, but certainly give us 
some flexibility. We're the ones in the field. We see it day to 
day, and we suspect we can come up with some better responses 
to make sure the job is done right.
    Mr. Shays. Well, I would say that one of our attempts, 2 
years ago, was to just allow States a lot more flexibility, 
clearly, with Medicaid, and to bring in the private sector in 
competition in Medicare.
    I appreciate Mr. Snowbarger's patience here. When you just 
have two Members, you can get a little more followup here, 
which is nice.
    What I'm having trouble reconciling is, Maryland probably 
has five Members of Congress right now. I'm just trying to 
think of your size.
    Ms. McElroy. Six, at least.
    Mr. Shays. What is your population in Maryland?
    Ms. McElroy. About 2 million.
    Mr. Shays. These are not trick questions, honestly.
    Ms. McElroy. Yes, but they're the ones I can't answer.
    Mr. Shays. Let me just tell you what I'm wrestling with. 
I'm not going to ask--you know, I feel like I just did 
something very dirty pool-like. You know, if you asked me who 
the President was of a particular country, and I might get 
flushed or not be able to tell you. And then you say, he's a 
Member of Congress, good grief.
    What I'm trying to reconcile is, if I heard you, Mr. Spahr, 
you said there were only 666 nursing homes?
    Mr. Spahr. That's correct. Serving a population of about 
117,000 right now.
    Mr. Shays. You have, in your State of New York; correct?
    Mr. Spahr. Correct.
    Mr. Shays. In the entire State there are how many nursing 
homes?
    Mr. Spahr. 666 Medicaid-certified skilled nursing 
facilities.
    Mr. Shays. But there are lots more nursing homes. I'm 
comparing apples to oranges here. You were talking just total 
nursing homes.
    Ms. McElroy. 243 nursing homes, 30,000 beds in Maryland.
    Mr. Shays. But we're not comparing apples to apples here, 
are we? Yes or no? How many skilled?
    Mr. Spahr. Skilled nursing facilities, Medicaid-funded, 
666.
    Mr. Shays. And how many in Maryland, do you know?
    Ms. McElroy. How many of those beds are skilled, I don't 
know. Most of our facilities have some skilled beds and some 
intermediate beds.
    Mr. Shays. I'm just trying to see the difference, because 
it would seem to me your difference would be one to eight, or 
something. That seems so close. It's just surprising to me.
    Mr. Snowbarger.
    Mr. Snowbarger. Mr. Chairman, first of all, let me 
apologize to the panel and to you for being late.
    Mr. Shays. You never need to apologize. You have 100 
different meetings.
    Mr. Snowbarger. Well, I will. I'll apologize anyway.
    Mr. Shays. I'm not going to do it when I'm late.
    Mr. Snowbarger. The other thing is, I know that you're on a 
tight timeframe, and I think it might be the best use of our 
time if I would yield back to you and let you continue.
    Mr. Shays. If you don't mind.
    Mr. Snowbarger. That's fine.
    Mr. Shays. If I could just have you go through ``illegal 
but hard to stop.''
    Ms. McElroy. Mr. Chairman, I think probably the thing that 
concerns me a great deal is that anytime you get into a 
situation with a nursing home contracting for a service or 
allowing another vendor to come in and provide a service, you 
have the potential for a kickback. And the kickbacks that we 
would like to see, as criminal prosecutors, are a situation 
where, if I am allowed to sell $100 worth of my wound care kits 
in your nursing home, I will give you $10. We don't see that at 
all.
    You are far more likely to see, if I'm allowed to sell $100 
worth of wound care kits in your office, I will allow you to 
come to the sky box at the Orioles, at Camden Yards, with me. 
And then, if I'm allowed to sell 200 or 500, then, you know, 
we'll go to the Caribbean and play golf.
    These are extraordinarily difficult situations for us to 
investigate and prosecute, and yet there is very little doubt 
that there is a lot of quid pro quo when it comes to being 
permitted to provide services.
    To go back to the situation of therapy in nursing homes, 
both mental health therapy, occupational, physical, what have 
you, if you look at the increase in the therapy services over 
the past 5 years, any kind of therapy, you're going to find 
that it has doubled and tripled, as an item provided to 
Medicare and Medicaid patients in nursing homes, sometimes to 
the point where the therapy services billed to Medicaid and 
Medicare, together, cost more than the programs are paying for 
the long-term care.
    In some instances, therapy services are required. People 
must be screened for them. You get an outside contract agency 
to come in. The people who are doing the screening are the ones 
who ultimately are going to be providing the service. Well, 
guess what they recommend? They recommend that this person 
could benefit from therapy.
    You have frequent cases where people with Alzheimer's and 
diseases that will just not be corrected by any type of therapy 
being treated and, at a great cost to both programs, receiving 
virtually useless mental health therapy and counseling or 
occupational therapy.
    This kind of situation, when we look at it, we do not 
believe that it does not come with a kickback. If the kickback 
is, ``I will refer these people to you, if you will refer these 
people to me,'' it becomes extraordinarily difficult for us to 
prosecute that in a court of law.
    Mr. Shays. I'm trying to understand, though, what the cost 
to the taxpayers is. In other words, are we overpaying for 
these services? Are these services you wouldn't have otherwise?
    Ms. McElroy. Frequently, we're overpaying. If you bring in 
an outside contract service, you do not have that cost included 
on the cost report; it's billed separately. And if the company 
decides to bill it at $100 an hour, and Medicare is going to 
pay $100 an hour, but they pay the therapist only $5 an hour, 
then there's a $95 profit figure in there. If it were included 
on the Medicaid cost report, they would not be able to take the 
$95 profit figure. So, yes, it does cost more to bring an 
outside company in.
    You also have the cost that's associated with the incentive 
to provide a service that is not necessary and is not 
beneficial. And you have virtually no checks or controls. You 
have the therapy company itself screening the patient for 
necessity. You may even have a doctor that is affiliated with 
the therapy company, or really not very involved with a 
particular patient, signing off on that.
    And you have a therapist who probably is trained to go in 
and market the therapy services at the nursing home, to market 
to the families: ``This might help. This might help. It can't 
hurt, and you don't have to pay for it.'' So you wind up, in 
the end, paying for a service which, even if you get it, has 
not helped either the patient or the program or the cause.
    Mr. Shays. So, in some cases, it's legal but wrong, and in 
other cases, it's simply illegal.
    Ms. McElroy. If there's a kickback of any type involved, it 
is illegal, but it is hard to prove.
    Mr. Shays. OK. As a general rule, any kickback is illegal?
    Ms. McElroy. Yes.
    Mr. Shays. OK. And we define ``kickback'' by all the 
different ways you described it: some financial gain.
    Ms. McElroy. Yes.
    Mr. Shays. OK. Mr. Wiggs.
    Mr. Wiggs. I think it's simple.
    Mr. Shays. We're talking about ``illegal but hard to 
stop.''
    Mr. Wiggs. I think it's a two-part answer. One is, I think 
it's as simple as a dual billing might be, where you have a 
billing to the Medicaid program and a duplicate billing to the 
Medicare program, certainly illegal, certainly hard to stop 
because of the lack of coordination between the two programs. 
That's a very simplistic level that's just pretty much always 
going to be there as long as you have the different methods of 
payment, et cetera.
    Mr. Shays. But there could be a solution to that.
    Mr. Wiggs. Sure. I think what concerns me, once again, in 
the managed care context, in addition to kickbacks that will be 
hidden because of the capitation contracting from the managed 
care organization to the various vendors. I think you're going 
to have concerns that rise naturally with managed care because 
of underutilization potential, and ownership interest, et 
cetera. I can't blame that on dual program eligibility, 
necessarily, but that's very difficult to sift through and get 
to the information.
    If you had access to that information, you could compare 
Medicare services to Medicaid services and start to get a 
picture of what this physician--what are his or her practice 
patterns relative to the long-term care patients. In an 
underutilization case, it's going to be hard to show anyway. 
We're further handcuffed because we can't really gather all the 
data and say, here's the complete picture.
    I'm trying to think of other examples.
    Mr. Shays. We've covered one. That's all right. We can just 
go on to Mr. Spahr. In other words, you would agree with Ms. 
McElroy's example, as well.
    Mr. Wiggs. Certainly, the kickback arrangements, they are 
there, and it's a matter of sifting through the data to get the 
information that it's there, No. 1, and then being able to 
build your case based upon all the information available, to 
carry it forward to a prosecution.
    Mr. Shays. Thank you. Mr. Spahr.
    Mr. Spahr. First, I would agree with what Ms. McElroy said 
with respect to the existence of the kickbacks in these 
ancillary services being provided in the nursing homes. An 
additional problem is, to establish, in a criminal case, 
whether those ancillary services have, in fact, even been 
provided to the residents of the nursing homes is extremely 
difficult to prove.
    You're dealing with a population that is vulnerable, often 
ill, almost exclusively unable to testify whether or not a 
particular service was ever received. In many cases, even where 
we are able to establish the existence of criminal activity, we 
cannot establish the full extent of the criminal activity 
because the dollars stolen can only be established 
circumstantially.
    I am reminded of a recent case where, in establishing the 
existence of a scheme to bill for services not rendered, a 
doctor, on some occasions, attached copies of test studies 
which had been xeroxed out of a textbook for a marathon runner 
and were being offered up as proof of services rendered to a 
96-year-old nursing home resident. But where that doesn't exist 
for all of the residents in that nursing home, you cannot 
conclusively or circumstantially establish that every single 
bill was fraudulent.
    So those types of activities, where there has already been 
a financial incentive to bring an ancillary service into the 
home, and a greedy provider can further enhance his 
profitability by simply not rendering the service at all, it 
becomes difficult to prove not only the existence of the crime 
but the extent of the crime.
    Mr. Shays. Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman.
    I'm not the head of a Medicaid Fraud Control Unit, so I'm a 
little bit out of my league; that's for sure. What I have heard 
and what staff have told me about is a situation where you've 
got the nursing home owned by the same entity that also 
controls something called the management company. And the 
management company then has a contract with the nursing 
facility to say, we will provide various consultant services, 
and what have you, and so a fee is paid.
    The issue is, have services ever been rendered, or are they 
rendered in the full amount. That's very difficult to prove, 
simply because, in both entities, they are both controlled by 
the same party. So, in an arms length arrangement, if I paid 
someone for service and the vendor did not show up, you 
terminate the contract, or you don't make the payment. But when 
you have owner-related situations, you don't have that normal 
check that you have in the marketplace.
    Mr. Shays. OK. I'm struck by the fact, as you were talking, 
that it would be very difficult to know if you have just 
someone who is doing therapy with a patient, who is just pretty 
much coming in and asking how they feel, and in the end you 
don't know how long they spent. So I would think your task 
would be very difficult, in some ways, really determining 
clearly if a service had been rendered or not.
    You have to prove it wasn't rendered; they don't have to 
prove it was rendered. Correct? In a criminal case, is that 
accurate?
    Ms. McElroy. That's correct. Not only that, sir, but they 
bill in units, so they have perhaps a minimum, one unit being 
15 minutes. But if a service actually only takes 5, they are 
permitted to bill the one unit, or 15 minutes. So you can look 
at a case where a therapist has billed a 12-hour day and worked 
8.5 hours, and still have something that you could not prove 
beyond a reasonable doubt in a court of law, was a service not 
rendered.
    Mr. Shays. Very interesting.
    Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin with Ms. McElroy. We do have some problems. 
There's no question about it. I want to get clear in my mind--
you indicated that most facilities are audited. Were you 
talking about the State of Maryland, or were you speaking 
nationally, at the time?
    Ms. McElroy. I speak only for the State of Maryland on 
that. We have a contract agency which does at least a desk 
audit, and most times an onsite audit at the major facilities, 
every year.
    Mr. Towns. Mr. Spahr, what legislative changes would you 
propose to deal with the problems of therapy services, managed 
care, and drug diversions that you have outlined in your 
testimony. What recommendations or suggestions would you make?
    Mr. Spahr. With respect to managed care, there are a group 
of model statutes which Ms. McElroy, I hope, has with her, on 
behalf of the National Association of Medicaid Fraud Control 
Units. They have been introduced in various State legislatures.
    They have been introduced, in one form, in New York's 
legislature this year by Attorney General Vacco, which will 
seek to provide the tools which prosecutors will need to 
address the oncoming frauds in managed care. Arizona has had 
long experience with it. New York has been seeking an 1115 
waiver to mandate managed care for its 2.6 million recipients, 
I think since 1995.
    With respect to the problems of drug diversion, again, New 
York, in November 1995, enacted or adopted the first 
noncontrolled drug diversion statute in the United States, at 
the State level, which made it a crime up to a 5- to 15-year C 
felony to sell noncontrolled substances outside the normal 
course of business.
    Several weeks ago, in Manhattan, the Medicaid Fraud Unit 
had the occasion to seize, during the execution of a search 
warrant, over $350,000 in cash from the back room of an 
apartment, along with numerous drugs that had been diverted 
from the legitimate marketplace, most of which or much of which 
is paid for by the Medicaid program, not only once, but on some 
occasions two and three times, because the drugs are paid for 
by the Medicaid program, resold back into pharmacies, and paid 
for by the Medicaid program again.
    Before the New York legislature this year is a proposal to 
criminalize the possession of those diverted drugs, which was 
not included in the original statutory package in 1995, which 
will make it a crime up to a B felony to possess in excess of a 
million dollars worth of drugs.
    Since January 1997, the New York Medicaid Fraud Unit has 
taken over a million dollars worth of drugs from various 
locations, including, on one occasion, over 30,000 capsules of 
AZT contained in garbage bags, in an apartment in the Bronx.
    So that's a continuing problem, and legislation concerning 
possession and diversion of drugs at the Federal level would be 
appropriate, as we have seen more and more occasions where 
those drugs are crossing State lines or, in fact, being 
diverted out of the country.
    What was the third? Managed care, drug diversion?
    Mr. Towns. Managed care, drug diversion and, of course, the 
other one was therapy services.
    Mr. Spahr. With respect to therapy services, the ability of 
the Medicaid Fraud Control Units to examine, investigate, and 
prosecute instance of dual eligibility, and prosecute the 
Medicare sides of the cases on a regular basis, would allow us 
to address that problem substantially.
    Also, the further coordination or the mandated availability 
of information from the Medicare and Medicaid programs to each 
other, so that they can coordinate what services are being 
rendered, would go a long way toward alleviating that problem, 
as well.
    Mr. Towns. Let me raise the issue here. Mr. Chairman, I 
think that it's something I want to talk further with you about 
as we move along. But I think that we have some experts here, 
and I would like to get their opinions on this issue.
    I'm concerned about the uniformity of recordkeeping. The 
fact that, in some States, if a facility closes, nobody is 
responsible for the records. They can throw them out the 
window; they can do anything they want to do with them. Now, in 
your area, in terms of those of you who have the burden of 
going to look and see, whether somebody has done something 
illegally, if those records are gone, I think it makes it very 
difficult for you to be able to establish a case.
    What suggestions or recommendations do you have that we 
might--I must say, Mr. Spahr, New York State has been taken 
care of. We've done that. But the point is, in other States, we 
do not have that. So what suggestions do you have for us here 
that we might be able to do that, because I think this ties in 
to the whole thing of fraud.
    We're talking about downsizing, in terms of hospitals, you 
know. We're saying that the stay is no longer needed. A lot of 
things now can be treated on an ambulatory basis rather than in 
a hospital setting, which means that some hospitals are going 
to close. Some facilities are going to close, and when they 
close, nobody has jurisdiction over those records.
    I even take it a step further, Mr. Chairman, that even when 
physicians die now, nobody is taking over their practices. In 
the past, it would become a part of the estate, and somebody 
would come in and they would buy it. But now all of a sudden, 
there is no interest. In many areas of this country, if a 
physician's office closes, it just stays closed; nobody takes 
over, which means that those records become the property of no 
one.
    I would like to get your input on that while you are here. 
I really would like to hear, because I'm looking very seriously 
at that issue.
    Mr. Wiggs. That problem arises also in a managed care type 
of setting where we've recently seen, in a particular case, 
where you might be investigating some particular organization 
who has closed shop, so to speak, for whatever reasons might 
attend to that, but the records disappear.
    So it's not only a problem for ongoing treatment of those 
patients, in terms of whoever takes over the care, but it's 
certainly a problem if you're trying to establish any kind of 
paper trail, what was provided, what wasn't provided, regarding 
a criminal prosecution or any kind of civil restitution that 
may be warranted.
    I don't think we've adequately dealt with the necessity to 
have some type of sanctions for, you know, making sure that 
those records are where they should be. Certainly, we have 
fraud laws and forgery laws that we can deal with it if they 
are altered, which is frequently the case. But in terms of 
where they are retained, I don't think we've dealt with this 
sufficiently.
    Ms. McElroy. I'm going to get in trouble for making this 
point, but I'm going to do it anyway.
    When we have Medicare intermediaries change or when we have 
Medicaid data holders change, we can't even get the records 
from the Medicare intermediaries that have stopped being paid 
by Medicare. So it is, indeed, a problem. But from criminal 
prosecution standpoint, we have more problems getting records 
from defunct fiscal intermediaries than anywhere else.
    Mr. Towns. Mr. Allen.
    Mr. Allen. I really wouldn't have much to add to that. It's 
been my experience that, when a nursing facility changes hands, 
the medical records stay with the facility, for continuity 
purposes. I would share what you have seen about physicians. In 
the old days, it used to be that, when a physician passed on or 
got out of the business, they would sell the practice, and with 
the practice would come the medical records.
    I have seen, just in the last few years, that no longer is 
the case. Physicians are getting out of the business, and they 
are not selling their practices, which leaves a care 
coordination issue for us in the Medicaid program, trying to 
pick up a new physician for the client. But I've not really 
seen that in the nursing home area, to any extent.
    The only thing I would add is that there is something 
called the minimum data set. All the nursing homes are supposed 
to use the same sort of a client evaluation system, nationwide. 
And it's pretty much a computerized-looking form, which is a 
good thing. Unfortunately, it's still not automated, and that 
was the original intent. They are still piloting it and 
experimenting with it.
    This requirement was done in, I believe, 1987, and we're 
still not automated on a nationwide basis, which is really 
unfortunate, because then you could have data to make 
comparisons across the States, which would help with operating 
the programs better.
    Mr. Towns. Mr. Spahr.
    Mr. Spahr. If I may just add to the size of the problem for 
you, if you may recall, in New York, the nursing homes were 
reimbursed on a 1983 cost year, which was trended forward. New 
York State's regulations require that all the records 
underlying the cost reports be maintained for a period of 6 
years.
    In 1989, it became suddenly apparent that all of the 
nursing homes were going to be in a position to destroy all the 
records underlying their cost reports, and an emergency 
regulation was passed which required that they be kept 6 years 
past the last year in which that cost year is maintained.
    But there are other problems. When conducting a fraud audit 
with respect to a cost report, you are not only going to look 
at the records in the possession of the nursing home, you are 
looking at the records of the vendors, who may have done the 
construction, or provided the food services, or provided 
various equipment.
    Those vendors are not bound by any of the regulations 
requiring them to maintain records beyond whatever the IRS 
would require for tax purposes. So, when looking at older cost 
years, it is often difficult to establish a case because those 
records of vendors are no longer in existence.
    Mr. Towns. That's interesting. Let me throw this one out, 
then I will yield back, Mr. Chairman.
    Are we devoting sufficient resources to combat Medicaid and 
Medicare fraud? We're talking a lot of stuff, but do we really 
have the resources out there to deal with it effectively? I 
don't want to put anybody on the spot, but I sure want to get 
some information.
    Ms. McElroy. We would certainly like to have more money. 
You know, quite frankly, as you know, the Medicaid Fraud 
Control Units are 75 percent federally funded. And the problem 
that I have is not in getting the 75 percent Federal money, it 
is getting the 25 percent State money from my own State.
    The States are extraordinarily strapped at this point, and 
coming up with that first quarter, as little as it is, is 
sometimes very difficult. So my unit has lost investigators, 
lawyers, staff attorneys, over the past 3 or 4 years, and the 
people I have working for me are leaving to go to other jobs 
because they haven't had a raise in 4 years.
    So I am dealing with a personal problem, and it's affecting 
what we do, but I don't know that it's a problem that the 
Federal Government can solve under the current funding 
structure.
    Mr. Wiggs. We have the same dilemma. I revert money back 
from our Federal grant every year because we can't use it, 
because we don't have the adequate State match from which to 
use those funds. So I'm a bit chagrined when I send money back 
that I think that I could use in other ways.
    For example, we see a lot of areas that we could perhaps 
become more proactively involved, that would require some 
detailed auditing, inspection-type activity, but there's no way 
that I'm really going to seriously consider it when I'm short-
staffed in the area that we are.
    Again, not to beat the managed care drum too loudly, but it 
does increase the level of sophistication and the degree to 
which crime hides and fraud hides, that you do need to throw 
those resources into it just to get the picture and to be able 
to do the detailed runs that you need to, in a managed care 
setting.
    So I, too, would like to see more resources, but more 
importantly, I would like to see more of a coordinated effort 
with the resources that are there, to hit head on the problems 
that we identify. If I think those resources could be used 
strategically, I think we'd see more effect.
    Mr. Towns. Mr. Spahr.
    Mr. Spahr. I have to agree with both my colleagues that the 
resource question is a problem. It's primarily a question at 
the State level. In 1978, when the New York State Medicaid 
Fraud Control Unit was first certified, it had a staff which 
was 40 percent larger than it does now. And in that time, since 
1978, New York State's Medicaid budget has gone up 90 percent. 
So we are policing a Medicaid program that is almost 10 times 
as large, and doing it with nearly half the staff at this point 
in time.
    I would also point out that, in Kennedy-Kassebaum last 
year, the Federal Government dedicated large amounts of 
resources to combat health care fraud and to coordinate the 
Federal, State, and local investigations into health care 
fraud. But as I look at it, that fund which was created 
dedicates the resources primarily to Federal agencies and 
doesn't make any of that funding available to assist either the 
State or local agencies in the battle that they have been 
fighting for the last 20 years.
    Mr. Allen. It's a sad tale. States don't have enough 
resources to do the jobs that need to happen. I would like see 
some innovation, because getting a State legislature to see the 
wisdom of investment is one of the harder things to do.
    But one thing that we're doing in our State is that we've 
just entered into a contract with a private legal firm, on a 
contingency basis, so they may look into taking on those cases 
which the Medicaid Fraud Control Unit has determined that it 
would be very difficult to prove fraud.
    They would go in under another statute which is called, I 
think, the Civil Claim Penalty Act, and they would come in on 
that side. They would work on a contingency basis so that 
there's Federal fund or general fund obligation to pay those 
folks, but they would take up the case if they thought it was 
worthwhile.
    The other thing, I think, that could be done is--you've 
heard people here, from four different States, all find the 
same problem on their own around the inclusion of costs on the 
Medicaid cost report. Four separate jurisdictions had to find 
that problem on their own.
    It's interesting that the Federal Government, who has 
jurisdiction over it all, has not found the problem yet. And I 
wonder if we shouldn't be bringing more coordinated resources 
together, especially at the national level, maybe to bring more 
experts in and to examine the whole Medicare/Medicaid payment 
relationship.
    You do have a lot of resources out there now. Take 
advantage of what you have and spread the information, and it 
can go a lot further.
    Thank you.
    Mr. Towns. Thank you very, very much. Let me thank all of 
you. I really think you've been extremely helpful.
    I yield back, Mr. Chairman.
    Mr. Snowbarger [presiding]. Thank you, Mr. Towns.
    I'm going to ask what I think are some fairly simple and 
short answer questions. I've found before that what I think 
should be short answers never come out that way.
    In your investigations, do you find that you're focused and 
finding more in the nursing home operations or in the vendor 
side of things?
    Ms. McElroy. The vendor side of things.
    Mr. Wiggs. Vendor.
    Mr. Allen. Quite frankly, I'm finding, in our experience, 
it's home health agencies that we really need to worry about. 
And transportation is also very troublesome. But especially 
home health. It's a growing part of the industry, and what 
we've got is a lot of claims being submitted that no care was 
behind it, or we have what we typically refer to as ``procedure 
creep,'' things of that nature.
    Mr. Snowbarger. OK. Let's go to a short answer on 
kickbacks. I believe, Ms. McElroy, you were the one that 
mentioned the sky box tickets or the trip to the Caribbean. All 
of those are pretty obvious examples of kickbacks. Why are 
those so difficult to track and to prove that there has been a 
kickback?
    Ms. McElroy. In order to prove that you have a kickback, 
you have to show that the benefit that was received had, as one 
of its material purposes, the intention that it would induce a 
referral for an item that was going to be paid out of the 
Federal or the State program.
    The defense to the tickets to the Orioles is, well, you 
know, I got to know this gentleman through my business dealings 
with him, and I genuinely liked him, and I wanted to take him 
to the Orioles, and that is the only reason why I took him to 
the Orioles game. And that is a very difficult defense.
    Again, keep in mind, we are dealing with a standard. All 
the Medicaid Fraud Control Units are primarily criminal 
prosecution units. We deal with the ``beyond a reasonable doubt 
standard.'' If you are unable to show a pattern that is an 
exact quid pro quo, it gets to be a little bit more difficult 
to prove that the purpose was for the obtaining of a referral, 
or a vendor contract, or another benefit.
    Mr. Snowbarger. Are there changes in law that would help 
that by loosening the standard? You know, the general public 
doesn't have any problem indicting me if I accept those things 
and they can't show a quid pro quo. We have ethics reform at 
least every 2 years, even numbered years, for some strange 
reason. So I don't quite understand the difficulty. I'm going 
to act like the general public does toward politicians. It sure 
seems to me like there's a quid pro quo, if that kind of thing 
is happening.
    Are there changes in law that we might be able to enact 
that would make that an easier thing to prove?
    Ms. McElroy. Certainly, thinking along the lines--any 
provision that prohibited conflict of interest between vendors 
and nursing home owners and administrators would be something 
that would be welcomed by someone seeking to prosecute a 
kickback case. Whether or not something like that would be 
feasible, I would not venture to say.
    Mr. Snowbarger. Problem in defining conflict of interest?
    Ms. McElroy. Yes.
    Mr. Snowbarger. Most of these facilities, I presume, not 
only provide services to Medicaid and Medicare patients, but 
also to other patients?
    Ms. McElroy. Correct.
    Mr. Snowbarger. Private pay, either individually or through 
other plans, I presume. I presume there are no prohibitions for 
private pay or for private insurance companies on these 
kickbacks. Is that a fair statement?
    Ms. McElroy. The answer is going to be found on a State by 
State basis. As to Maryland, the answer is yes, there is no 
prohibition against private.
    Mr. Snowbarger. The answer is no.
    Ms. McElroy. In Maryland, there is no prohibition against 
any kickback that relates to anything other than Medicaid.
    Mr. Snowbarger. What about the other States?
    Mr. Wiggs. In Arizona, we have an anti-kickback statute, 
but there has to be a nexus to the Medicaid program. You can 
usually establish a nexus to the Medicaid program simply 
because a facility delivers services. But the difficulty lies 
in that the statute is so convoluted, really, on how it defines 
what the quid pro quo that it is of no value, frankly, for 
staunch enforcement efforts.
    Mr. Spahr. In New York, the answer is, it depends on the 
service that's being rendered. We have a kickback statute 
similar to Arizona's that makes it a felony to pay a kickback 
of over $7,000 in connection with the Medicaid program. 
However, it's only a crime for a medical provider to do so, 
because of the way the statute was originally drafted; whereas, 
the Federal law makes it a crime for any person to do so.
    There has been introduced in our legislature this year a 
felony all-payor kickback statute. But also on the books, it is 
a crime under our public health law to make a self-referral or 
a kickback with respect to certain types of services, which 
would include laboratory services, radiation therapy, x ray, 
things of that type. So while it doesn't cover all services 
under that case, it does cover certain services.
    Mr. Snowbarger. Let me go to a little different issue, and 
that's on the dual eligible population. Do I understand from 
all of you that one of the major problems there is that--well, 
maybe I need to ask an initial question.
    What tools and methods do you normally use to investigate 
these potential fraud situations? In connection with that, I 
note that you just don't have access to the Medicare side of 
things. So how do you get a handle on the dual eligible fraud 
issue?
    Does that look for a simple answer?
    Ms. McElroy. Well, there's a simple answer, and the answer 
is, it's very difficult to do. We go beyond that. I think 
Stephen Spahr mentioned this, as well. When the Medicaid 
program pays a co-pay, we can't even tell what the underlying 
service was unless we go back to the Medicare intermediary and 
get a copy of the claim.
    So, we don't even know what this money is paid for. We 
would be unable to tell whether or not a therapy service that 
was billed to Medicaid had also been billed 100 percent to 
Medicare, because we would not know what the Medicare billings 
were. So that becomes extraordinarily difficult.
    We don't have jurisdiction, currently, to investigate and 
prosecute any Medicare fraud. That lies with the U.S. 
attorney's office in Maryland. So we don't have any incentive 
to look at it, and we actually really probably should not look 
at it. So it becomes difficult.
    The situation we're talking about here, where Medicaid and 
Medicare are paying for a patient, for the same day, in a 
nursing home, really is a Medicaid issue, because Medicaid, as 
the payor of last resort, is the program that I would see as 
the one primarily harmed by such a scheme.
    In order to get that information, I have gone to HCFA and 
asked them to provide the information for all of the Maryland 
nursing home residents to me, and they have indicated that this 
is possible.
    Mr. Snowbarger. That it is possible?
    Ms. McElroy. It is possible. In fact, I don't believe it's 
going to be very difficult.
    Mr. Snowbarger. OK. So this has just been a matter of 
asking for that information, and you will be able to 
coordinate?
    Ms. McElroy. Well, I will say it took me 2 years trying to 
figure out where to go to get it, but yes, the answer is just 
asking, executing a Memorandum of Understanding, which is 
similar to that which HCFA has with the Federal Bureau of 
Investigation.
    Mr. Snowbarger. It may get back to Mr. Allen's comment that 
50 States shouldn't have to figure this out, that HCFA should 
figure it out and be able to offer it.
    Mr. Allen. In collaboration with the Medicaid States. If 
one State gets a bright idea, it should quickly get spread to 
the other 50 States, and HCFA would be the obvious vehicle to 
do that.
    If I could just add, there is a wonderful instrument out 
there, and that is the Medicare nursing home-cost report. It is 
a stepped-down cost report. What that means is, it isolates the 
costs associated with the Medicare client, the Medicaid client, 
and other payors, which is pretty much the business.
    I say it's a wonderful instrument because it's much more 
sophisticated a tool than what most States are using for their 
own cost reporting mechanisms. The way that we were able to 
identify our problem was, it came out of the Medicare cost 
report. The only problem with the Medicare cost report is that 
it's slow to be audited. So oftentimes you, in the State, are 
dealing with a 1996 or 1997 cost basis, but the Medicare cost 
report perhaps is reflecting costs in 1994.
    So it makes it hard for the comparison to be done, but it 
can tell a big part of the story. And like I said, it's a 
wonderful instrument, and all States should be encouraged to 
secure the Medicare cost report in their States, and analyze it 
and put it on spreadsheets. What will come from it is very 
valued and good information.
    Quite frankly, in my State, I require the nursing 
facilities to submit their latest Medicare cost report when 
they submit their Medicaid cost reports, just so I can do this 
comparison. And it's interesting, the nursing homes get a 
little grumpy in handing over the Medicare cost report. They 
will do it, but they complain about it. I think one of the 
reasons why they complain about it is, they know we're doing 
these comparisons and things of that nature.
    Mr. Snowbarger. Yes.
    Mr. Wiggs. I might add that, typically, we will be called 
into a facility, for example, because of a patient abuse type 
of case that opens the door to investigation of resident abuse, 
physical abuse.
    We will often see that there may be some allegations that 
some staff may want to say about, you know, billing patterns, 
et cetera. But usually we will have to just carve out maybe the 
abuse allegations and separate them from the fraud allegations; 
whereas, we would really prefer to be able to put those 
together.
    Because not only do you have crossover between the two 
programs, but, typically, in a patient abuse type of 
investigation, we may want to look at how these services are 
being billed, or is that part of the problem. But we end up 
referring those types of cases to the Office of Inspector 
General, appropriately so, but they may not have the 
inclination nor the interest nor the resources focused, at that 
time, on that particular case.
    So a lot of it is energy-driven, which is determined by, if 
you have an investigative unit that's in there, that's looking, 
and has the energy to go forward with the prosecution, why not 
bring all components together and be able to deal with it that 
way, rather than carving it out.
    Mr. Snowbarger. This is a very elementary, basic question: 
what are the consequences for the perpetrator of the fraud?
    Ms. McElroy. In Maryland, 5 years in jail and a $10,000 
fine.
    Mr. Snowbarger. OK.
    Mr. Wiggs. In Arizona, it depends on the class of felony. 
If it's a fraud scheme, class 2 felony, it depends on how many 
prior convictions, et cetera, but you're looking at up to 10, 
15 years, potentially. Typically, though, white collar crime, 
you know, first offense, is not viewed as abhorrent, if you 
will, as some kind of blue collar crime, if you will. So 
probation or something like that usually occurs.
    Mr. Snowbarger. What is the range of the fines? I'm sorry. 
Was it $5,000? $10,000.
    Ms. McElroy. $10,000 in Maryland, currently. We have just 
passed a new statute which would increase that up to $250,000, 
in the case of a corporate provider.
    Mr. Wiggs. Up to $150,000, for an individual, for Arizona.
    Mr. Spahr. In New York, if, say, it's a larceny of over $1 
million, it would be mandatory State prison up to a period of 
25 years, with a fine equal to double the gain.
    Mr. Allen. I certainly don't know the provisions for 
criminal misconduct, but one of the biggest deterrents would 
be, you kick the vendor out of the program. Right now, there 
are some limits over how long it goes on, but that will get 
especially a national corporation's attention, which is, you're 
not only out in Colorado, but you're out in all the other 
States that you do business in, as well. That's a major 
deterrent.
    Mr. Snowbarger. Now, is that nationwide? I mean, if you 
find something in Maryland with a national vendor, they can no 
longer be a Medicaid vendor. Is that by Federal law?
    Ms. McElroy. It's Federal law. If there is a criminal 
conviction, there is a mandatory exclusion of a minimum of 5 
years for a health care related offense.
    Mr. Snowbarger. Corporate offenders, up to $250,000. What 
constitutes a corporate offender, if you're incorporated?
    Ms. McElroy. Anyone who is not an individual.
    Mr. Snowbarger. OK.
    Ms. McElroy. Again, we patterned that on the Federal 
statute.
    Mr. Snowbarger. OK. Is that enough deterrence? I mean, if 
you're talking about multimillions of dollars. Now, in New 
York, I understand, where you've got a multiple of the benefit 
that was gained, I see that. In other States, I'm concerned 
that $10,000 is certainly worth the risk; $250,000 may be worth 
the risk. Was it $150,000? I don't remember.
    But are the penalties stiff enough, or is this a risk of 
doing business that most vendors are willing to take their 
chances on?
    Ms. McElroy. In cases where there is no real probability of 
exclusion, I think it's a risk of doing business that the 
vendors will accept.
    Mr. Wiggs. I think all criminals, to whatever degree of 
sophistication, do some form of cost-benefit analysis, in terms 
of the likelihood of getting caught, to getting prosecuted, to 
getting significant jail time. To the extent that you have 
aggressive prosecution, you're going to create that deterrent 
effect.
    Mr. Snowbarger. Do these penalties get to the owners of the 
business? In other words, it's pretty easy for a corporation, 
particularly if they are just doing business in one State, to 
go out of business. Like we mentioned before, you lose the 
records at that point. Are there penalties, though, for the 
business owners, if you find the fraud?
    Mr. Spahr. If the fraud can be traced directly back to the 
individuals, it is a policy, with our unit, to prosecute both 
the individuals responsible for the acts as well as the 
corporate entities. And yes, they would trace directly back.
    I would also just point out, in terms of the deterrent 
effect, the difference between a single State's attempt to 
collect, civilly, dollars, as opposed to the effect of a 
criminal deterrence. In a recent case, we had a subject of an 
investigation who, being threatened with a civil audit by a 
single State agency, made the statement, ``Who cares if we get 
audited; we've already made millions.'' If that becomes the 
threat of criminal prosecution and a permanent or a long-term 
exclusion, it becomes a significant deterrent to the future 
activity.
    Mr. Snowbarger. Let me throw out one more topic and get a 
response from all four of you, just real quickly, if I could. 
Could you assess for us what you would see as the value or not 
of consolidated billing by nursing homes? In other words, where 
nursing homes are billing for the other providers, so that 
you're not getting flooded from all different directions, I 
suppose.
    Ms. McElroy. To be perfectly honest, I'd have to see how it 
worked before I could answer that. It sounds like a good idea, 
but I don't know whether it would be feasible.
    Mr. Snowbarger. And I'm thinking particularly on the dual 
eligibles.
    Mr. Wiggs. I think, in theory, the better you are able to 
consolidate where the information is going to be to determine 
fraud, the more likelihood you're going to be able to have 
effective program integrity. But, again, it depends on how it 
takes place.
    Mr. Spahr. I am in general agreement. I would just be 
concerned that, by creating a billing umbrella in one location, 
you would permit criminal activity which may go on around the 
services done for the nursing home that would then never hit 
the information data bases that the Government programs 
maintain. Either the names of the vendors or the services that 
they are billing would never appear anywhere except under the 
name of a facility.
    Mr. Snowbarger. So it would depend on how the program is 
set up.
    Mr. Allen. I really can't comment on whether a consolidated 
billing process would solve the problem. You may have other 
difficulties, which is then the nursing home is responsible for 
the pharmacy billing, and all the rest of it, and I'm not sure 
you would necessarily want that.
    It does seem to me that you should allow the States to 
experiment with more managed care type operations in long-term 
care, for the dual eligibles, which is, all the billing 
information now goes to one HMO that has to pay all the 
Medicare and the Medicaid bills, with all that information 
being centralized, plus the financial responsibility. You've 
brought marketplace dynamics onto the problem, which is, why do 
I want to pay for this; I think I already paid for this 
somewhere else.
    Mr. Snowbarger. Thank you very much.
    Mr. Towns.
    Mr. Towns. Thank you.
    I just wanted to explore something that was raised earlier. 
Now, I understand, in terms of if a person is convicted in one 
State, then they can't practice in that State, but I'm not 
sure, in terms of whether or not we are able to do this 
nationally. If a company is doing business in more than one 
State, do we really have the information to prevent them from 
doing business elsewhere?
    Ms. McElroy. Yes, we do. The Medicaid Fraud Control Units 
are required to report their convictions to the Federal 
Government. The Office of Inspector General regularly 
publishes, and it is on the Internet, a list of all of the 
providers that are barred from doing business. If Maryland 
convicts someone, the Federal Government will bar that provider 
from participating in the Medicare program and in any other 
State Medicaid program.
    Mr. Towns. The same?
    Mr. Allen. Yes. Indeed, the information is well shared. So, 
indeed, if something happened in New York, we do learn about it 
in Colorado. We get those just about on a monthly basis.
    The only thing I would throw out for consideration is, is 5 
years long enough? We've seen in Colorado where a nursing home 
owner was found guilty of fraud. They waited their 5 years, and 
they came back. And it was quite disturbing to me, because I 
thought we had seen the last of them. So I'm not sure if 5 
years is long enough. In a business cycle, it's not really very 
long.
    Mr. Towns. Let me ask a question along those lines. Let me 
make sure, because this is a part where we've had a lot of 
problems, in terms of dealing with various pharmacists, in 
particular, in terms of doing business in different States. 
Shut them down in one State; they do in the next State.
    Let me ask, in terms of the extent of that, that means, if 
it's a husband, can a wife take over the business? What are we 
really talking about here? Or is it the fact that, one brother 
is convicted, then the other one now takes over and is able to 
do business?
    I just want to get as close to this as we can, because I 
just feel that there is a big problem in terms of fraud. So you 
grab me, and, of course, my younger brother now takes over and 
still continues to do business. He might even change the name 
for a minute, and then 5 years later we change it back. Is that 
a problem?
    Mr. Spahr. It's a problem. It's also a problem of proof, in 
many respects. In New York, I believe it's an unacceptable 
practice for any Medicaid provider to employ a person who has 
been debarred from any State or Federal program, or to have 
them have an ownership, I believe, of more than 5 percent.
    But proving the existence of the relationship between 
yourself and your brother, that you actually have an interest 
or that you are actually performing a service for that company, 
can be extremely difficult. We have done it, on occasion. Where 
we have been able to prove that a debarred provider is out 
acting as a salesman for a company, we have been able to put 
the additional company out of business or put them out of the 
system. It's a difficult question to prove.
    Mr. Wiggs. I would say there's nothing stopping that 
individual from closing down their shop, incorporating under a 
new name, and having a new board of directors, their brother, 
or something like that, and continuing on in the practice. I 
don't see how that's going to be--as Steve says, it's going to 
be hard to establish the relationship, the link there, to be 
able to say that that falls under the exclusion categories. I 
think your concern is well-founded.
    Mr. Allen. The only thing I would add is that I've seen the 
same dodge that you're describing. You do get the brother, and 
then you find a sister comes in to operate the company, things 
of that nature, or the wife, or what have you. We've seen that 
very same thing, and it is, from what I can tell from our 
Medicaid Fraud Control people, very hard to stop it.
    Mr. Towns. It's a tough situation, I tell you. But thank 
you very, very much.
    Mr. Chairman, I yield back.
    Mr. Snowbarger. Thank you.
    Thank you to the panel members. I think that will conclude 
the questioning of this panel, and we will move on to the next.
    Mr. Grob and Ms. Aronovitz, if you will come forward, we 
will swear you in and get started on the next round. I should 
have caught both of you before you sat down. If you would both 
stand up, we've made a practice of swearing in those who are 
going to testify before us. So if you would raise your right 
hand.
    [Witnesses sworn.]
    Mr. Snowbarger. Mr. Grob, if you want to lead.
    Mr. Grob. Mr. Chairman, would you mind if Ms. Aronovitz 
goes first?
    Mr. Snowbarger. That's fine with me. I have no problem with 
that.
    Ms. Aronovitz.

  STATEMENTS OF LESLIE ARONOVITZ, ASSOCIATE DIRECTOR, HEALTH 
 FINANCING AND SYSTEMS ISSUES/HEHS, GENERAL ACCOUNTING OFFICE; 
 AND GEORGE GROB, DEPUTY INSPECTOR GENERAL FOR EVALUATIONS AND 
      INSPECTIONS, DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Ms. Aronovitz. Members of the subcommittee, I am pleased to 
be here today to discuss the challenges that exist in combating 
fraud and abuse in the nursing facility environment. While the 
Medicaid program, as you heard, is the largest payor for 
nursing facility care, Medicare does pay a substantial portion 
of the health care costs of nursing facility residents.
    For the opportunistic provider, a nursing home represents a 
vulnerable elderly population in a single location, and the 
opportunity for multiple billings. That is why it is so 
important for nursing facilities to be aware of and oversee the 
services and supplies that are being billed on residents' 
behalf.
    While most providers abide by the rules, some providers of 
supplies and services have used the nursing facility setting as 
a target of opportunity. This has occurred for two main 
reasons: First, the complexities of the reimbursement process 
invite exploitation. And second, insufficient control over 
Medicare claims has reduced the likelihood that inappropriate 
claims will be denied.
    First, I would like to briefly address the complexities of 
the reimbursement system. Ancillary services and items for 
Medicare beneficiaries in nursing facilities can be provided by 
the nursing facility itself, a company wholly or partially 
owned by the nursing facility, or an independent supplier or 
practitioner. As a matter of fact, our work has shown that 
independent providers and suppliers can bill directly for 
services or supplies without confirmation from the nursing 
facility that the care or items were necessary or delivered as 
claimed.
    Billing for therapy service is even more complicated. 
Reimbursement rates and procedures vary according to the 
patients circumstances, who provides the services, and who 
submits the bills to Medicare. These factors also affect the 
type of contractor which reviews and processes the claims, and 
whether the claim is paid from Part A or Part B.
    Until recently, HCFA had not established salary guidelines, 
which are needed to define reasonable costs for occupational or 
speech therapy. Even for physical therapy, for which salary 
guidelines do exist, the Medicare established limits don't 
apply if the therapy company bills Medicare directly.
    In regard to HCFA's lax oversight, we have long been 
critical of the unstable funding support HCFA's contractors 
have to carry out program integrity activities. While Medicare 
contractors do employ a number of effective automated controls 
to prevent some inappropriate payments, our 1996 report on 70 
fraud and abuse cases showed that atypical charges or very 
large reimbursements routinely escape those controls and 
typically went unquestioned.
    Initiatives on various fronts are now under way to address 
fraud and abuse that we are talking about today. To address the 
root cause of the problems, the administration has announced an 
initiative to change the way Medicare reimburses for services 
and supplies in skilled nursing facilities. They are calling 
this consolidated billing.
    This proposal will require skilled nursing facilities to 
bill Medicare for all services provided to their beneficiary 
residents, except for physician and some other practitioner 
services. We support this proposal. A consolidated billing 
requirement would make it easier to control payments for these 
services and give nursing facilities the incentive to monitor 
them.
    In regard to therapy services, after a lengthy 
administrative process, HCFA proposed salary guidelines last 
month for occupational and speech therapists, and revised 
current guideline amounts for physical and respiratory 
therapists who furnish care to beneficiaries under a 
contractual arrangement with a nursing facility. The 
administration estimates these changes will result in savings 
to Medicare of $1.7 million between now and the year 2001.
    On the legislative front, the Health Insurance Portability 
and Accountability Act established the Medicare Integrity 
Program, which ensures that the program safeguard activities 
function is funded separately from other processing activities. 
The act also included provisions on administrative 
simplification, and there is also a requirement that HCFA send 
out explanations of Medicare benefits for all services billed, 
not just where co-payments or deductibles are involved.
    We are encouraged by these recent efforts to combat fraud 
and abuse. As more details concerning these or other proposals 
become available, we will be glad to work with the subcommittee 
and others to sort out their potential implications.
    This concludes my prepared remarks, and I would be happy to 
answer any questions.
    [The prepared statement of Ms. Aronovitz follows:]
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    Mr. Snowbarger. Thank you.
    Mr. Grob.
    Mr. Grob. Mr. Chairman and Mr. Towns, all of my colleagues 
on both panels have given numerous examples of fraud, waste, 
and abuse in the nursing home setting. I have a set of my own, 
but I thought that it might be more useful if I would just take 
a few minutes to try to explain at least the backbone of the 
complicated reimbursement system that currently exists in the 
Medicare and Medicaid programs.
    I can't explain it in all of its complexity, but at least I 
can outline the major features of it. Even at the highest level 
of aggregation, I think you will see that it is, indeed, a very 
complex system. It reminds me of Gordian's knot, for which 
there was a promise that, if it was untied, the untier could 
conquer the world. No one ever untied it, although Alexander 
the Great came up with a solution which I will refer to at the 
end of my presentation.
    The system is outlined on the charts that you see before 
you. First of all, it is good to remember that we are talking 
about several different financing sources for nursing homes. 
The first one is Medicare Part A, about $9 billion in 1995. 
What we're talking about there is the basic payment that is 
made to a Medicare beneficiary who is in a nursing home to 
receive skilled nursing care after a hospital stay. I will call 
this a Medicare Part A stay, and we are talking about basically 
being in the nursing home, with some services, collateral 
services, related to that.
    Medicaid, $33 billion in 1995, would be for poor 
individuals who receive care under the Medicaid program to be 
in a nursing home. This could include skilled care, or it could 
also include long-term care. I have included in that $33 
billion the money spent for both kinds of nursing homes, not 
just the skilled nursing homes.
    Now, the reason that I put Medicare Part B last instead of 
putting it right into Part A, where most people think it 
belongs, is because the payments made under Part B would be for 
other services, physician services, for example, or some of the 
other services people have mentioned. I will refer to some of 
them later. Those payments can be made for a Medicare 
beneficiary in a nursing home, no matter which nursing home 
that beneficiary is in.
    So, for example, if a Medicare beneficiary is in a Medicare 
Part A paid stay, the physician's payment will be made out of 
Medicare Part B. But if that Medicare patient is also poor and 
is in a Medicaid nursing home, Medicare Part B will still pay 
the physician's payment for that resident, and that's logical 
enough. But it also provides other services, as well, some of 
which might duplicate payments made under Part A or in the 
Medicaid program.
    Now, on the other chart, we can see clearly what the 
structure of the payment is. Under the Medicare Part A program, 
the payment is divided into three parts: a per diem, which is 
basically room and board and related services that all nursing 
patients receive; the so-called ``ancillary services,'' 
primarily therapy services, but also things like portable x 
rays; and capital payments: the beds, the facility itself, and 
things of that nature.
    Medicaid is paid for in a variety of ways, because every 
State sets up its own system for paying for Medicaid programs. 
There you see just a listing of some of the different systems 
that are used in the Medicaid nursing home. And then Medicare 
Part B pays for supplies and services for Medicare 
beneficiaries who are in nursing homes.
    With all these different payment mechanisms, it would be 
easy to see why a decision that a biller might make would be to 
bill for the service on the line item that would pay the 
greatest amount. That, basically, is what will often happen for 
the sophisticated biller. Again, it falls into the categories 
that Mr. Shays referred earlier as legal but troublesome, 
perhaps.
    I would like to now just give a few examples. Some of them 
you have heard before, but I would like to relate them to that 
payment system, because I think that will help in understanding 
the possible ways to fix it.
    On my left, we see here a pole for a nursing bed. Now, 
traditionally, in Medicare, we don't pay separately for that 
pole. That pole is covered under the capital expenses. It is 
just a cost item. It is well placed in that category because it 
gives the nursing home the incentive to economize in the 
purchasing of equipment like that. They don't bill for the 
pole.
    However, recently, starting in 1994, enteral nutrition 
services were regarded as a billable service under Medicare 
Part B. Now, since the nutrient is covered under Medicare Part 
B, someone thought, well, the pole ought to be, as well. So 
starting in 1994, we started receiving billings for the pole. 
In 2 years, we've worked our way up to $3.5 million. That was 
at the end of 1995.
    I think we're seeing the beginning of one of those rocket 
ship curves that we see so often in the billing practices, 
where we're going to see something take off, because as people 
begin to understand that they can bill for these, they will.
    Also, the incentives change. If you were, under Medicare 
Part A, receiving reimbursement for that pole under capital 
expenses, you would try to bulk purchase them. And if you did, 
you could get them for about $33 each. But if you bill Medicare 
Part B, you can get $110 for that pole. This is an example of 
where the billing mechanism does provide incentives for things 
that could be very inefficient.
    Mr. Chairman, I see that I've used up my 5 minutes on one 
example. I could give a few more. If you have a preference, I 
will end my testimony here. If you would like me to give a few 
more, I would be happy to do so. Whatever your choice is.
    Mr. Snowbarger. We have normally allowed people to go 
beyond their 5 minutes, so if you want to continue with a 
couple more, we have the time. We're going on the second round. 
Why don't you go ahead.
    Mr. Grob. OK. So we showed with the pole the thing that can 
occur, primarily resulting in a loss of economy.
    Now, let me give you another couple examples. The example 
of the pole that I just gave would fit Mr. Shays' earlier 
example of legal but dumb, perfectly legal. In fact, if you 
were a nursing home operator, you would probably be chastised 
by your company if you didn't bill that way.
    Let me give some examples now that I would call outright 
fraud. We found in a study we did that incontinence supplies 
billed to Medicare patients, most of whom were in nursing 
homes, were falsely billed. Bills were made for services not 
rendered; they were billed for supplies that Medicare doesn't 
cover; they were billed for excessive use, to the tune of about 
$100 million a year.
    This is flat-out fraud. The rules were clear. The billers 
knew they were violating the rules. We just put someone in jail 
for 10 years who admitted to billing Medicare for $70 million 
of incontinence supplies, and he received $45 million of that, 
all illegal billings.
    A couple years ago we looked at wound care supplies under 
Part B for people in nursing homes. Again, about $100 million 
that probably should not have been billed, given the guidelines 
that were in effect in those days. One of them was for 12 miles 
worth of bandages and dressings for one patient and 5 gallons 
of gel for the wounds. Now, we are sure that patient didn't get 
that amount; it was probably stored in the nursing home for the 
other patients.
    The famous orthotic body jackets that virtually every 
speaker has mentioned in their testimony was something that we 
found. That was a jacket that Medicare pays about $1,000 for, 
if you need the lumbar support for critical injury of your 
back, but we were finding that people were billing for seat 
cushions to keep people in their wheelchairs. But they were 
billing for the $1,000 instead of the $50 or $100 worth.
    Mr. Shays [presiding]. That's clearly illegal.
    Mr. Grob. That's clearly illegal. They were falsely billing 
for the item that clearly was not covered by the Medicare 
program. We found that 95 percent of the billings for that item 
were illegal billings. We started out paying $1 million a year 
for that item, and it suddenly shot up to $14 million year, and 
95 percent of that we found to be illegal.
    Sad to say, we recently did a study where we looked at 
mental health services for people in nursing homes, and we 
found that one-fourth of the billings that we looked at were 
not properly billed. These were for services that were 
inappropriate. The previous speakers mentioned examples of 
these: people with Alzheimer's disease, incapable of 
understanding, were given therapy sessions; or people giving 
coffee klatches charged for group therapy, things of this 
nature.
    These are examples of where you have outright fraud. And, 
of course, the fraud is possible because, as people have 
mentioned, it is the supplier billing for this without any 
coordination necessarily with the nursing home owner. For some 
of these supplies, the biller could go to the nursing home 
operator and say, ``Look, let me take care of things for you. 
I'll check your patients out. I'll make sure they get 
everything they need. And, don't worry, it won't cost you a 
penny; I will bill Medicare directly.'' And they bill Medicare 
directly for that.
    Consolidated billing is meant to overcome that kind of 
problem of lack of supervision. I might mention that this 
creates a serious problem of quality of care for the patient, 
as well, since the nursing home is not now necessarily 
supervising the care. As Mr. Towns previously made reference 
to, we have a problem of access to patients' records and a 
violation of the privacy of records, if suppliers go into those 
nursing homes and look at the records to see how much services 
can be billed for these patients.
    To show you that every aspect of the system can be 
``gamed,'' if you will, and again, perhaps legitimately, I will 
go back to a case of ``legal but dumb.'' We would be going back 
to the ancillary services. Several people have mentioned this. 
If you bill for a service such as therapies or portable x rays 
under ancillary services instead of under Part B, there is no 
Part B limit. It's based on reasonable charge. So we may end up 
paying considerably more, even several times more, for the same 
item under the ancillary service portion of the payment than we 
do under Part B.
    In fact, to make matters worse, if the payment is made 
under arrangement, there may be additional overhead and 
business expenses that are added on, and sometimes those can be 
higher if there is some collaboration between the nursing home 
operator and the nursing home supplier.
    Finally, I would like to mention something that's not quite 
on a chart, that an earlier speaker mentioned. We are also 
concerned about hospice services for people in nursing homes. 
There is, indeed, a double payment for that. There are 
questions being raised about the level of service provided for 
the hospice services and the legitimacy of the payments. We 
have that under study right now, and we will be hoping to 
provide you some information about that very soon.
    With regard to solutions for this problem, I believe the 
knot cannot be untied. I believe we should take the approach 
Alexander the Great did, which was to simply cut the knot and 
then proceed to take over the world. And I believe what we need 
to do here is to simply cut the whole thing. If the problem is 
complexity, I think the solution is simplicity.
    So the idea, first, of a prospective payment system under 
the Medicare Part A program is probably a pretty reasonable one 
where a flat payment could cover all the services. This has 
been proposed by the administration, and if it were adopted, 
our strong recommendation would be that you would put as many 
of the services as possible under that prospective payment 
rate, so that they would not be separately billed under Part B, 
for example, as separate services.
    In my opinion, this would certainly include enteral 
nutrition, which is basically food for people who need special 
help with nutrition, which is one of the reasons why they go to 
the nursing home. It could include all the incontinent 
supplies, and probably should include much of the wound care, 
as well.
    For the parts that don't belong under that prospective 
payment, we strongly support the idea of consolidated billing. 
We recognize that this creates additional billing problems; we 
are well aware of that. Perhaps there would even be some 
inefficiencies. But we believe that the nursing home would now 
have responsibility to supervise the care that is being given 
in a nursing home, and we believe that would be a step up, as 
far as quality of care is concerned, and also provide a better 
handle on where to look for problems as they occur.
    If those broad kinds of actions cannot be taken, we would 
recommend some fixes such as more limits on what we pay, 
limiting the amount we pay to what a prudent purchaser might 
pay, for example, per capita payments, and finally, correcting 
that discrepancy between the ancillary and the Part B services 
that I mentioned earlier.
    So that's my explanation. I hope that you find it useful. 
We're happy to answer questions.
    [The prepared statement of Mr. Grob follows:]
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    Mr. Shays. I will ask questions last. Do you want to start, 
Mr. Snowbarger?
    Mr. Snowbarger. Let me ask a couple real quickly.
    One, I still don't quite understand about the pole here. I 
mean, it wasn't difficult for you to figure out that it was 
being paid for under Part A and then being paid for again under 
Part B. When you said that somebody figured out that, because 
it's part of the delivery system for the nutrition, they 
decided to include it, who is ``they''?
    Mr. Grob. The decision to allow the billing for that came 
from HCFA. It was an interpretation, because enteral nutrition 
is a covered service under Part B. So it was an interpretation. 
I understand now that they may be reconsidering that decision.
    Mr. Snowbarger. Why are they just billing for a pole? Why 
don't they bill for an employee to stand there and hold it? 
Wouldn't they get more money that way?
    Mr. Shays. Don't give them any ideas.
    Mr. Snowbarger. Well, I understand. I shouldn't have given 
them the idea. But it's just that ridiculous. It seems to me, 
you've already paid for that pole once; why are we paying for 
it a second time? You and I both saw that pretty clearly. What 
was wrong with HCFA?
    Mr. Grob. Well, again, we've called the problem to the 
attention of HCFA in a report that we've issued, and they have 
agreed that this needs looking at, and hopefully, they will fix 
it real soon.
    It actually is much more complicated than that. If you hang 
a cancer drug bag on that pole, then it's not covered. But if 
you hang an enteral nutrition bag on that pole, it is covered, 
because it's the enteral nutrition that is paid for, not the 
pole. The pole is part of capital, and should be.
    Mr. Snowbarger. Well, I'm not going to pursue that line of 
questioning, because it would presume rational thought on the 
part of somebody, and there doesn't seem to be any.
    Mr. Grob. It is complicated.
    Mr. Snowbarger. This is a question that I really probably 
should have asked the panel before, but it goes back to the 
whole overall payment system. Somebody had mentioned in that 
panel that there is a requirement, when a person goes into the 
nursing home, that there be some assessment about their needs 
and what services need to be provided. And they were talking 
about that, in essence, being a conflict, because it's normally 
the nursing home that does that assessment.
    Is that a correct assessment of that?
    Mr. Grob. Yes.
    Mr. Snowbarger. I agree; that is a conflict. Do you know 
why we have it set up that way? It had seemed to me that, in 
dealing with this at the State level in Medicaid, we had 
required the assessment to be done. For instance, if it was a 
patient that was coming out of a hospital into a nursing home, 
it was done by a social worker, or whomever, at the hospital, 
as opposed to the nursing home, to try to get around that 
conflict.
    Does it vary by State?
    Mr. Grob. Well, Mr. Snowbarger, in that case, I would have 
to say that it probably was a great advancement in medical care 
that that requirement was put in place. That stems from the 
reforms of the nursing home care that were the result of 
several years of study that occurred around the late 1980's and 
the early 1990's.
    The problem that they were addressing there was the 
conditions in the nursing homes where patients would languish a 
long time in nursing homes, perhaps, without having the kind of 
care that they needed. So that was really trying to make sure 
that the needs of the patient were assessed during their stay 
in a nursing home.
    Ms. Aronovitz. One thing I should mention is that we are in 
no way advocating that services that are medically necessary do 
be provided. I mean, clearly, in 1987 and after that, there was 
some indication that nursing home patients were not receiving 
all the services that they needed.
    Nursing home patients are very, very vulnerable. Half of 
them probably have dementia. They don't have a family support 
system in the community. They do rely on the nursing home 
itself to make sure that they get the services they need.
    The nursing home itself already has a significant role in 
planning and providing patient care. They are the closest. They 
are the people who are responsibility for the care of that 
patient. This is not a hotel; it's not a boarding house.
    So, therefore, it makes a lot of sense, in our minds, that 
because the nursing home is responsible for coordinating and 
helping establish a comprehensive assessment of that patient's 
medical, nursing, mental, and psychosocial needs, that it would 
also then be responsible for assuring that the proper services 
and items that are being delivered on behalf of that patient in 
fact are delivered.
    So it's just a little bit of an extension beyond what we 
think is a rational approach to what the responsibility of a 
nursing home is anyway.
    Mr. Snowbarger. I can tell you that it's not only the 
patients that rely on that, but it's the families of the 
patients.
    Ms. Aronovitz. Yes, that's true.
    Mr. Snowbarger. Because those families don't know any 
better. Maybe we've got a little better handle on things and 
watch for services that we don't see a need for, but we, as a 
family, don't particularly have the incentive to keep them from 
doing something extra. If someone says your mother really needs 
this, then you think, well, OK then, she must really need that.
    Ms. Aronovitz. You're exactly right. And very often family 
members don't always know all the services that are being 
provided. And you're right, there's a real sense that family 
members are happy that their parents or the people they care 
about the most are being looked after.
    Mr. Snowbarger. Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentleman.
    Ms. Aronovitz, on page 5 of the ``Early Resolution of 
Overcharges for Therapy in Nursing Homes''--do you have that 
document?
    Ms. Aronovitz. Yes.
    Mr. Shays. Walk me through this chart. Physical therapy, is 
that a capped expenditure?
    Ms. Aronovitz. I'm sorry. I'm not sure what you're 
referring to. Oh, I see. That's something else.
    Mr. Shays. It's ``Early Resolution of Overcharges for 
Therapy in Nursing Homes Is Unlikely,'' August 1996.
    Ms. Aronovitz. OK.
    Mr. Shays. What I'm wrestling with, are all of them 
uncapped expenditures?
    Ms. Aronovitz. No. It gets very, very complicated. This is 
pertaining to therapy services. How the therapy services are 
billed has a lot to say about whether the amount is capped or 
not.
    If a nursing home contracts with a therapy company and pays 
that therapy company, and then puts that amount in its cost 
report, that amount is capped, if it was physical therapy. 
There were also salary guidelines for respiratory therapy. So 
later, when that nursing home would get audited, there would be 
a limit on how much the nursing home could have reimbursed a 
physical therapy company. And that's called an arrangement, 
where the nursing home reimburses the therapy company.
    If, on the other hand, the nursing home agrees or has an 
agreement with a rehabilitation company to come in and provide 
that same service to the same beneficiary, and the nursing home 
doesn't actually reimburse the therapy company but the therapy 
company bills Medicare directly, then there is no limit. It's 
not capped, in terms of how much they could charge. And that's 
one of the reasons why you see these exorbitant amounts that 
are charged, because they are billed directly.
    Mr. Shays. So you're not saying that physical therapy was 
capped and the others. All of these could be capped or 
noncapped, depending on how they are billed?
    Ms. Aronovitz. Right.
    Mr. Shays. And all of them went up significantly.
    Ms. Aronovitz. Right. What we're advocating, though, is 
that, at least in the sense where you have an arrangement 
between a nursing home and a therapy company, you do want to 
make sure--right now, speech and occupational therapy don't 
even have any salary guidelines.
    So for those two services, even if the nursing home 
reimburses the therapy company and then puts it in the cost 
report, in that case, Medicare will probably pay the whole 
amount, because there aren't any salary guidelines for those 
two types of therapies. Medicare can come back to the nursing 
home and say, you've overstated in your cost report how much, 
or you paid this therapy company way too much money, based on 
salary guidelines.
    Mr. Shays. I'm not clear on that. I'm not clear. There has 
to be some limit that they can't charge. A certain amount per 
hour, a certain amount per episode; something.
    Ms. Aronovitz. I know you seem surprised. We were very 
surprised also. But, in fact, when you have a therapy company 
which is billing directly to Medicare, it would get what is 
considered to be their reasonable cost. And if it could show 
that these were its reasonable costs, whatever these costs are, 
it would get those reimbursed.
    Or if it was reimbursed by a nursing home for speech or 
occupational therapy, it could actually bill the nursing home--
we found some examples where they could bill the nursing home 
for $100 a unit, and that would go into the nursing home's cost 
report.
    Now, another complication--and I certainly don't mean to 
overcomplicate this more than it already is--but there is no 
real good definition of what a unit of billing is either. 
Typically, or in the industry lingo, a unit could be 15 
minutes. So if you're billing $100 to a nursing home for a unit 
of service, that's $400 for an hour. If there is no salary 
guideline, which there is not for speech or occupational--
although HCFA is in the process of trying to establish those 
guidelines--then the nursing home reimburses you.
    The nursing home could reimburse you $400 for an hour, and 
it has an incentive to do that, because it goes in their cost 
report and ultimately it would get paid a certain amount of 
administrative reimbursement for having paid the therapy 
company and put it in its cost report. So it has an incentive 
to let the therapy company charge it whatever the therapy 
company wants to.
    Mr. Shays. In a rational world, particularly in a business 
environment, this would be an absurdity.
    Ms. Aronovitz. We think it borders on absurdity, in certain 
cases.
    Mr. Shays. No, it is an absurdity. I look at this, and I 
realize that we may--because Lord knows we do it--have mandated 
nursing homes do certain things and certain services, and all 
these services are important services. But to see, in a period 
of about 6 years, a 646 percent increase in--that's 
utilization.
    Ms. Aronovitz. That's correct.
    Mr. Shays. For physical therapy. A 1,270 percent increase 
in occupational therapy--excuse me, in speech therapy. And a 
1,968 percent increase in occupational therapy, for the last 
one. It just boggles the mind.
    Ms. Aronovitz. That's correct. It is outrageous. I should 
say one thing, though, and that is that this chart does show 
charges. In all due respect, we can't determine for sure that 
all the amounts, the complete amount that was billed was 
actually paid. However, in most cases, you have to wait for the 
cost report and get audited later on, and most of that would 
get paid.
    Mr. Shays. But the issue is, the billings went up by those 
percentages.
    Ms. Aronovitz. Exactly.
    Mr. Shays. It's an example of, you give people what they 
pay for, not what they need.
    Ms. Aronovitz. Exactly. I think this is a clear indication 
that people realized that this was a benefit, that this was a 
way to really take advantage of the Medicare program.
    Mr. Shays. Let me back up and say, I have no trouble 
whatsoever arguing that Medicaid for health care for the poor 
be managed care, because my view is that most of the recipients 
didn't pay into the tax stream, but they are getting a benefit 
which they are not forced to take, which they would be fools 
not to take. So I feel very comfortable mandating managed care, 
frankly, for the poor.
    I have argued in my own mind that managed care for the 
elderly in Medicare should be discretionary, given that they 
put into a fund. But I would also probably have to admit that 
some of it is political, as well. They have argued they put 
into the fund for all these years, they also are primary 
taxpayers, as well, so they can make that argument.
    But I have made it optional, in the work that I was doing 2 
years ago, but believe that, ultimately, managed care, because 
of all the waste and the fraud and the games in the system, 
could actually capture a lot of volunteers under managed care. 
They could promise eye care, dental care, pay the entire 
premium, pay the co-payment, and do a lot of things that say 
you would be foolish not to consider them. And then we would 
let them go out, if they didn't like the system.
    But what I'm wondering is, what kind of mechanism could you 
have for Medicaid-paid nursing care cost? What would be the 
mechanism for having managed care in a nursing home? Just 
basically saying, you get a lump sum, and whatever you save, 
you save; whatever your costs are, so be it.
    Ms. Aronovitz. Actually, George, you might want to address 
the whole idea of PPS, because that's getting at that exactly, 
but not per episode, but for per diem.
    Mr. Shays. I'm not talking Medicare; I'm talking Medicaid.
    Mr. Grob. Yes, and I think that's a point well worth 
making. The administration has now proposed a prospective 
payment system.
    Mr. Shays. I'm going to have you speak a little more 
slowly.
    Mr. Grob. OK.
    Mr. Shays. Some of this, you know, you're using acronyms, 
and so on, and I'm just a little behind here.
    Mr. Grob. The administration has proposed to adopt a 
prospective payment system for the Medicare Part A nursing 
homes. Some of us believe that it would be equally reasonable 
to use a system like that for all Medicaid stays, as well. Some 
States already have prospective payment systems.
    Now, the prospective payment system is perhaps the nursing 
home version of what you're talking about. You would pay so 
much for the patient to stay or so much per day, a simple flat 
rate. There are various ways to construct it. And it could 
depend upon the patient's condition, for example, if you could 
structure a way to classify the patient's needs.
    So there are a lot of details to work out about it, but 
still you could make a simple payment, basically, rather than 
having many different billings.
    Mr. Shays. Could you have an insurance company basically 
assume the responsibility and manage the health of individuals, 
and then place them in nursing homes and negotiate, with the 
nursing home, fees?
    Mr. Grob. To be honest with you, I haven't thought my way 
through the relationships with the insurance companies. I know 
that the long-term care insurance business has not come to be 
the protection that everyone wished that it would be, perhaps 
because it's so discretionary.
    Mr. Shays. Help me sort out how we can combine under one--
my simple view is, basically, Medicare is a Federal program; 
Medicaid is a partnership, federally matched. But I keep in my 
office the big yellow manual, which, ultimately, we wanted to 
dump in a waste paper basket.
    One of the more exciting parts of what we did 2 years ago 
was to get people in the health field, and we'd say, we want to 
slow the growth of Medicare and Medicaid from 10 to 7 percent, 
and they'd say, you can't do it. We'd say, why not? And they 
would tell us all these reasons why, and basically, they were 
Federal rules and regulations.
    Then we'd say, we're not going to do that. And they would 
look at us, what do you mean? What right do you have to say 
we're not going to do it? And we'd say, well, we're Congress, 
and we're going to change the law; we're going to change the 
law governing the regulations.
    Then we'd say, what happens if we do this? They would say, 
we can't do this because of this. And finally, we couldn't get 
in their minds that we were going to literally take this yellow 
book and dump it in the waste paper basket. But if we could, we 
would allow so much flexibility.
    I don't think the Federal Government has the ability to 
properly regulate. And it's not disrespect toward the Federal 
Government, or HCFA, or whomever; it's that we can't keep up 
with the times. We basically have a floor that becomes a 
ceiling. This ``one-size-fits-all'' particularly bothers me.
    We want to keep it simple. If we keep it simple, frankly, 
there are more ways to ``game'' the system, in some ways. In 
complexity you can hide yourself, but the simplicity means that 
you can do certain things because you haven't put rules and 
regulations that say you can't.
    So, you make it too complex, people will hide in the 
system; you make it too simple, there are 100 different ways to 
abuse it. So either way, people can abuse it. And that's why I 
begin to think that maybe we shouldn't be in the business, and 
we should let the private sector sort it out and just give them 
lump sums.
    Now, do you think it is possible to write the laws in a way 
that simplifies and reduces the abuses? If so, tell me the 
biggest area--sorry, I've taken a long time to come to this 
question--tell me the biggest payback, the least difficult 
thing to do with the biggest payback, the least difficult 
change with the biggest payback.
    Mr. Grob. In the nursing home area?
    Mr. Shays. Yes.
    Mr. Grob. I do believe that it would be some kind of a flat 
payment or prospective payment system. For people in nursing 
homes, that would capture as many as possible of the services 
into one payment.
    Mr. Shays. Including Medicare services?
    Mr. Grob. Yes.
    Ms. Aronovitz. Especially Medicare services.
    Mr. Shays. Especially.
    Mr. Grob. Medicare Part B services. Some of those could not 
be. The professional services, like physician services, you 
know, someone needs heart surgery, you're not going to put that 
in the nursing home payment. But the nonprofessional services, 
as many of those as possible, to put in that flat payment.
    And those that you just couldn't tolerate that even, I 
would use the consolidated billing as the way to try to 
exercise some control over it.
    Ms. Aronovitz. At least, if you use consolidated billing, 
there would be one entity, which would be the nursing home 
itself, that would be responsible for overseeing all the 
services that were ordered and delivered for a particular 
patient in that facility. Right now, because you could bill 
directly for Medicare ancillary services under Part B, very 
often the nursing home should but doesn't, or claims it 
doesn't, or it, in fact, doesn't know all the services that are 
being provided.
    Now, there are quite a few nursing homes in this country 
which do a wonderful job at becoming very involved with the 
needs and the services provided to their nursing home 
residents. This is not an outrageous request that nursing homes 
do this. It's done every day, and it's done very well.
    We think that there needs to be some accountability in one 
place, so that therapy companies know, and the nursing home 
would say to a therapy company, I'm sorry, you can't bill $400 
for this therapy. This person doesn't even need it; we didn't 
ask for it, and so on.
    Mr. Shays. My best sources for abuses in the medical 
profession are from nurses, male and female nurses who tend to 
be paid on an hourly rate, and who will describe various 
services that are provided that they just feel are an absolute 
outrage. We know we've got a big problem.
    I'm wondering if staff, on either side, has a question. Do 
you have any questions?
    Ms. Sayer. Yes, I wanted to ask a question.
    Mr. Shays. Identify your name, please.
    Ms. Sayer. Marcia Sayer.
    I want to ask a question on the consolidated billing that 
you've talked about, and you've indicated that it is a possible 
solution. If the industry takes the position that, indeed, 
consolidated billing is good but they would need some 
additional revenues or reimbursement in order to take on this 
additional responsibility, what would be your reaction to that? 
Are they already reimbursed for that function? Would they need 
additional resources in order to take on the consolidated 
billing concept?
    Ms. Aronovitz. When the nursing home provides or 
coordinates or conducts a plan of care, and makes sure that it 
knows all the services that are needed on behalf of a resident, 
it needs to update that plan of care every 3 months and reflect 
that in the plan of care. It is very involved on the quality 
side already.
    Admittedly, nursing facilities are not as involved right 
now in monitoring all the services from outside entities, and 
they don't do the billing for these entities. So there is a 
little bit more work there. We believe that it would not be an 
inordinate cost, although we haven't studied it in depth, and 
we need to study it more.
    But any type of administrative services or administrative 
costs that are involved with patient care can be put into the 
cost report. So if we're talking about very efficient nursing 
homes that are currently under the Medicare ceiling on their 
cost reports, they will be able to add those costs to their 
cost report and get reimbursed for it. It's really the less 
efficient nursing homes that are at or above the Medicare 
ceiling, that would be hurt.
    Congress has tried very hard to encourage nursing homes to 
become more efficient, and this would be along those lines.
    Mr. Grob. Also, in that sense, I believe that it's 
conceivable that the nursing homes would need to cover that 
cost of billing, but, of course, there are economies in the 
billing process in a nursing home.
    I would like to point out, as well, that by having those 
services bundled in a nursing home, I believe the nursing home 
might well be looking for opportunities to gain the economies 
and the efficiencies in the procurement of the services.
    We did a study where we looked at enteral nutrition, for 
example, and we found that nursing homes that bulk purchased 
the enteral nutrition for the patients, that Medicare was 
paying 40 percent more for the enteral nutrition under Part B 
than was being paid for by the nursing homes that were bulk 
purchasing it for the patients. So we think there's lots of 
room in there to economize, and that the forces of economy 
would come into play to perhaps offset some of those 
administrative costs.
    Mr. Shays. We have a vote now. If we only have one vote, 
then we will start in about 15 minutes with the next panel.
    I have a few minutes more. I'm just interested to know if 
there is any question you wished had been asked, that we should 
have asked you, something that you feel needs to be put on the 
table?
    Mr. Grob. Mr. Shays, if I could mention one thing.
    Mr. Shays. Sure.
    Mr. Grob. I'll try to be very brief about it.
    Mr. Shays. Let me also say, if there was any question we 
asked the previous witnesses that you wished we had asked you.
    Mr. Grob. Could I take the opportunity to elaborate 
slightly on the earlier question about the kind of reform that 
would be needed?
    Mr. Shays. Yes.
    Mr. Grob. Considering those extra payments under Medicare 
Part B, if you could briefly think of them this way. Get in 
your mind a kind of continuum here.
    On the one end, think of things that everyone would think 
of as things that should be part of the daily rate. Nutrition 
might be a good example, the pole, whatever, it's part of going 
to the nursing home, nutrition, wound care. At the other end of 
it, put heart surgery, physician payment.
    Clearly, we would not want to include the heart surgery in 
the nursing home payment. Many people would think that the 
nutrition should be in. You could run the gamut, and you would 
find things in the middle. Let me give an example: mental 
health care, psychotherapy services, group counseling, 
whatever, some of those therapies.
    I think that honest people would disagree where to draw 
those lines. So I see three categories: The first category are 
things that obviously belong to the daily stay; they just 
belong to going to a nursing home. Then there are things you 
clearly would exclude. Then the things that are in the middle, 
and I think it's probably just a process of people coming to an 
agreement, perhaps even an arbitrary one, that would be the 
subject of the consolidated billing.
    So perhaps that will help explain the categories that we're 
talking about here. I hope that helps.
    Mr. Shays. OK. Thank you very much.
    Do you have any last comment?
    Ms. Aronovitz. There are probably two things that are worth 
mentioning, and they are probably not the most critical, but 
they certainly would help with these problems.
    One of them has to do with something that--and the 
legislation has already passed, in the Health Portability and 
Accountability Act, and that's making sure that EOMBs, 
explanations of Medicare benefits, go to beneficiaries for 
every service, not just ones where there's a co-payment or a 
deductible involved. I think that will help a lot in just 
making sure that the families, to the extent that they get 
these, are aware of the services that are being provided.
    One other thing that was very frustrating for us and has 
continued to be is that it's very hard to get a handle, with 
HCFA data, on the services or the money spent on behalf of 
nursing home recipients, because nursing homes are not a unit a 
analysis.
    Mr. Shays. Yes, I hear you.
    Ms. Aronovitz. In other words, the place of service block 
on the Medicare form is either unreliable or incomplete. And 
the reason for that is, it's not a billing item; it's not 
necessary to get reimbursed. If that block could be more 
reliable, and if we could assure that we could do more analyses 
based on that, I think we'd have a chance to try to get in 
front of the problem.
    Mr. Shays. Are you suggesting, in a way, that if you were 
in a nursing home, being billed by Medicare, that the bill 
might have to go to the nursing home? I'm just wondering why 
you couldn't do it that way. In other words, what I'm hearing 
you saying is, if my mother were in a nursing home, she would 
be billed as if she were living in my house.
    Ms. Aronovitz. Right. Very often, it's impossible to tell 
whether your mother is in a nursing home or not.
    Mr. Shays. Which tells me you don't even know the problem 
then.
    Ms. Aronovitz. We don't know the extent of the problem, 
especially on the Part B side.
    Mr. Shays. You don't even begin to know it.
    Ms. Aronovitz. That's correct.
    Mr. Shays. How would you know it?
    Ms. Aronovitz. That's correct.
    Mr. Shays. I'm really happy you made that point.
    Mr. Grob. Mr. Shays, the $4 billion on our chart there for 
Part B, we had to conduct a random sample of cases and go 
backward and get the data. It took quite a bit of work to find 
that number.
    Mr. Shays. This begs a lot more questions. I've never 
missed a vote yet, and I have 4 minutes left. So I'm going 
recess, and we're going to take the next panel.
    Thank you. And I would like staff to followup on just this 
whole point. Thank you. We will be about 15, 20 minutes.
    [Recess.]
    Mr. Shays. I call this hearing to order and thank our third 
panel: Paul Willging and Suzanne Weiss.
    Paul Willging is executive vice president of American 
Health Care Association, and Suzanne Weiss is vice president 
and counsel, Public Policy, American Association of Homes and 
Services for the Aging.
    Thank you for remaining standing. I will swear you in, if 
you would raise your right hand.
    [Witnesses sworn.]
    Mr. Shays. Let me say that one of the disadvantages of the 
third panel is, you have to be here from the beginning, in some 
cases. But the advantage is that you can hear the questions and 
you have comments. So you get the last word, which is an 
advantage.
    So I would welcome you to deliver your testimony, part of 
your testimony--certainly, you've been here, and you deserve to 
be able to do that--but also welcome you to just comment on 
what you've heard. You can ask yourself the questions that we 
asked and answer them, if they are questions you want to 
answer.
    We will start with you, Mr. Willging.

STATEMENTS OF PAUL WILLGING, EXECUTIVE VICE PRESIDENT, AMERICAN 
HEALTH CARE ASSOCIATION; AND SUZANNE WEISS, VICE PRESIDENT AND 
   COUNSEL, PUBLIC POLICY, AMERICAN ASSOCIATION OF HOMES AND 
                     SERVICES FOR THE AGING

    Mr. Willging. Thank you, Mr. Chairman. I thought our being 
last was more a reference to Biblical studies and the wedding 
feast at Cana, the best wine was saved until last.
    Mr. Shays. This is true.
    Mr. Willging. So I have no problem whatsoever with that.
    Mr. Shays. And the first shall be last.
    Mr. Willging. I actually am pleased to be here, pleased for 
a variety of reasons. One of them is that we share a common 
goal, which is the eradication of fraud and abuse, either in 
America's nursing homes or on the part of those who provide 
services to America's nursing homes.
    That mission becomes even more critical when one deals with 
a population that's frail.
    Mr. Shays. I have to give fair advertising here. I 
misrepresented. I said you'd get the last word, but I will say 
to you--I'm sorry to interrupt--but anyone from the first and 
second panel who stayed will be able to have some dialog with 
you, as well.
    I'm going to let you start over, but I just want to say 
that you can say whatever you want. I'm going to stay as long 
as it takes, but I will also invite anyone who stayed, if they 
want to, just at the end, dialog, have a little question and a 
good exchange.
    I'm sorry to interrupt you.
    Mr. Willging. You might find that fairly dull, though, 
because this may surprise you, Mr. Chairman, as it turns out we 
probably agree with a great number of the solutions that the 
previous panels have put on the table.
    Mr. Shays. Right.
    Mr. Willging. I've been in Washington some 30 years, and 
I'm not sure I've ever agreed with the Inspector General's 
Office before. But this time I can't disagree with most of 
their proposals.
    As I said in my initial comment, it is because I think we 
share a common goal, which is the eradication of fraud and 
abuse. And I think we probably share a zero-tolerance level, as 
far as fraud and abuse are concerned.
    I understood, from your opening statement, Mr. Chairman, 
that we may agree on a third point, which is, let us make sure 
we know what is fraud and abuse and what is simply confusion. 
You referred to the labyrinth of confusing, sometimes 
conflicting, Federal and State regulations.
    I think we want to make sure that we apply the harshest 
possible penalties to those who are truly defrauding the 
programs, and engage the ultimate in education for those who 
are simply confused. And I didn't sense any disagreement there 
either.
    I think the key is, what do we want to do about the 
problems? I don't feel the necessity today to quibble about 
whether it's a huge problem, a minor problem. If we're both at 
zero-tolerance, it really doesn't make any difference how big 
it is. How do we get rid of it, is the critical issue.
    It was interesting, as I suggested, to hear much of what 
was proposed by some of the previous panels. We, as an 
industry, as an association representing 70 percent of all 
nursing facilities in the country, essentially, we're in lock 
step, as far as those solutions are concerned.
    What I would like to suggest, in just the couple of minutes 
I want to take in my opening comments, however, is whether the 
solutions should be focused on the symptoms of the problem or 
whether we ought to try to get a sense of what the underlying 
root causes are.
    As it turns out, we support consolidated billing. We 
certainly support consolidated billing for the Part B services 
provided to Part A patients. That has been a long part of our 
congressional testimony over the years.
    Mr. Shays. Would you define ``consolidated billing,'' as 
you understand it?
    Mr. Willging. Essentially, as you have heard from some of 
the preceding panelists, for Part B services, the vendor of the 
service can bill, under certain circumstances, the Medicare 
program directly. That bill may never be seen at the facility.
    Mr. Shays. Right.
    Mr. Willging. One of the reasons I think we have to look 
carefully.
    Mr. Shays. OK. Keep defining the consolidated billing.
    Mr. Willging. Consolidated billing essentially means that 
the bills go through, are consolidated at the point of the 
facility itself. In other words, the therapy company, the 
pharmacy company, everything goes through the facility.
    Mr. Shays. Everything goes through.
    Mr. Willging. Now, there are different ways of managing 
that. One can, in effect, say only the facility may actually 
bill, and they are ultimately responsible. One can say simply 
that they have to flow through the facility, so that the 
facility is familiar with what's being billed. And the devil is 
in the details, obviously.
    Mr. Shays. Yes.
    Mr. Willging. But the concept is an important one. The 
reason the concept is important, back in 1987, this Congress 
enacted the Nursing Home Reform Law. That law made it 
unequivocally clear that it was the nursing facility 
responsible for the totality of services provided to the 
residents in that facility.
    Mr. Shays. And that was 1987?
    Mr. Willging. That was 1987, in the Omnibus Budget 
Reconciliation Act of 1987, a major provision, a watershed 
provision for our industry, which, in effect, said, we bear, 
ultimately, the responsibility for the services. You can't 
blame it on all those other suppliers; the nursing home is 
responsible. If we are responsible, then perhaps we ought to 
see who is billing under that area of responsibility.
    But that's just an immediate and, I think, an interim step. 
You don't even have to worry about consolidated billing if you 
take the next step, which was referenced by at least two or 
three panelists, prospective reimbursement. Why do we want to 
have multiple bills and multiple payments for what is 
essentially one service? We should have one bill and one 
payment.
    Now, the big debate: Should we do it on a per diem basis, 
or should we do it on an episodic basis? We actually prefer an 
episodic basis, but nobody has yet been able to figure out 
exactly how you do that. It's analogous to the DRG program in 
hospitals, but it was much easier to group patients in the 
hospital setting. It becomes very difficult to do it in the 
nursing facility setting. But we still support that.
    If you have prospective reimbursement, a lot of these 
issues we've been talking about fall by the wayside; they 
really do. If you have a price which accurately reflects what 
the payor, be it Medicare or Medicaid, should be paying for 
that service, and you have at the same time the regulations--
and we would not propose eliminating all regulations.
    The regulation that says we are responsible, as an 
industry, to maintain the highest practicable level of 
physical, mental, and psychosocial wellbeing, that provides a 
balance. It keeps us from taking that single payment for a 
service and trying to skim, because we have this other 
requirement that says we have to provide the highest 
practicable.
    So I think prospective reimbursement takes care of a lot of 
the problems. But here's where I really want to color outside 
the lines. It doesn't take care of the problem.
    Mr. Shays. You want to what? I'm sorry.
    Mr. Willging. Color outside the lines. It's one of these 
cliches I throw out every so often. Be innovative.
    Mr. Shays. Where did you grow up?
    Mr. Willging. I grew up in St. Paul, MN.
    Mr. Shays. OK.
    Mr. Willging. I had hoped to grow up in Connecticut, but, 
unfortunately, my parents weren't there at the time.
    None of what we've talked about really deals with the issue 
of Medicare and Medicaid, and the potential for ``gaming.'' And 
everyone games. States game; the Federal Government games. Do 
providers game? Of course not. But, hypothetically, I'll say we 
do.
    How do you deal with that? Well, if the problem is we're 
not coordinating effectively, why don't we coordinate 
effectively? And here's where I'm going to be a little bit off 
the wall.
    The long-term care part of Medicaid, Mr. Chairman, was 
never intended, by the enactors of that bill, Title XIX. They 
thought that Medicaid was going to be basically acute care and 
ambulatory services for the traditional welfare population, the 
AFDC population. Nobody thought a whole new program was going 
to grow up within the program, which was elder care in nursing 
facilities.
    Mr. Shays. I'm a very impressionable person, and I will say 
this to someone else, and they will say I'm crazy. So you have 
to be very careful what you're telling me. You're saying to me 
that nursing care was never part of the original Medicaid bill?
    Mr. Willging. I'm saying that the growth, the size that 
nursing home care became was never envisioned by those who 
enacted it.
    Mr. Shays. We didn't envision any of the health care 
programs to be that size. So I don't know why that would be any 
more significant with nursing homes.
    Mr. Willging. Because of something called ``spend-down,'' 
Mr. Chairman. There is a provision in Medicaid that is referred 
to as ``spend-down.''
    Mr. Shays. OK. Right. Yes.
    Mr. Willging. That is, if you deplete all of your 
resources, and essentially you have no resources, assets, or 
income, you are then deemed to have spent down to Medicaid 
eligibility.
    And basically, the vast majority of those people on 
Medicaid in nursing facility are not your traditional welfare 
population. They are, as I put it, mom and dad; my mom, your 
dad. These are taxpaying, middle class, American citizens who, 
except for the unfortunate circumstance of having gotten old, 
having gotten sick, had to pay so much in bills to nursing home 
care that they spent down to eligibility.
    Mr. Shays. I understand that issue.
    Mr. Willging. That, I don't think, was ever envisioned, the 
growth, the size. So what we have here is, at the State level, 
run by 50-some separate jurisdictions, a program for elder care 
which almost begs to be controversial when it comes up against 
Medicare, the other major program designed for the elderly.
    What we are suggesting is, pull them both together. Give 
the welfare part of Medicaid to the States, lock, stock, and 
little green apples--it ties into the devolution of 
responsibility this Congress had already enacted as far as the 
welfare program is concerned--and coordinate. And do it all in 
a budget neutral fashion. I think it can be done.
    Bring the elder care part of Medicaid, nursing homes being 
primary, up to the Federal level, where you can, finally, with 
one basic program, coordinate these two funding streams. At the 
same time, I would certainly take your suggestion, move as much 
of that out into the marketplace as you can, and let the 
marketplace do a lot of the regulating.
    Mr. Shays. What's interesting is, you are going totally 
contrary to the trend of Congress last year. I mean, we were 
going to have Medicaid be a block grant to States, and we were 
looking to give the States a lot more flexibility. You are 
saying the component that is health care for the poor stay with 
the States, and nursing care for the elderly come to the 
Federal Government.
    Mr. Willging. Because you already have, at the Federal 
level, the two major support mechanisms for the elderly: Social 
Security and Medicare.
    Mr. Shays. That's interesting. I'd like to think about 
that.
    Mr. Willging. It will ultimately resolve all the issues 
we've talked about, in terms of these conflicts between the 
Medicare and the Medicaid programs.
    Mr. Shays. It's interesting.
    Mr. Willging. And I think it can be done in a budget 
neutral fashion. You've got to do some switching and swapping, 
obviously.
    Mr. Shays. It's very provocative.
    Mr. Willging. Well, that's the point at which I will then 
close my testimony.
    [The prepared statement of Mr. Willging follows:]
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    Mr. Shays. I thought you said you were going to be boring.
    Mr. Willging. Only in the sense that I'm not going to be 
disagreeing a lot with my colleagues from the GAO or the 
Inspector General's Office.
    Mr. Shays. You're just trying to set a good example for 
Congress.
    Ms. Weiss.
    Ms. Weiss. Thank you, sir.
    May I begin, Mr. Chairman, by clarifying some of the 
remarks and some of the questions that came up a little 
earlier?
    Mr. Shays. Sure.
    Ms. Weiss. I would specifically like to address an issue 
raised by Mr. Towns, and that is the issue of confidentiality 
of records. He is absolutely correct about that.
    Mr. Shays. Could I just--just so I have it--define to me 
how you both have similar responsibilities and different 
responsibilities. Do you represent certain nursing home 
associations? Where is your perspective?
    Ms. Weiss. Our perspective is from a continuum of care, Mr. 
Chairman. We represent only 501(c)(3) organizations. They must 
be not-for-profit. They represent freestanding nursing 
facilities, retirement communities, senior housing or 
apartments, assisted living, and home and community-based 
services.
    Mr. Shays. And you tend to have a smaller constituency. Do 
you sometimes have the same organizations?
    Mr. Willging. We sometimes even have the same members, Mr. 
Chairman.
    Mr. Shays. That's what I meant.
    Mr. Willging. What the American Association of Homes and 
Services for the Aging does is, indeed, the entire continuum, 
including housing.
    Mr. Shays. I've got it.
    Mr. Willging. Total non-health care. We do not represent 
any housing. We do represent the entire array of facility-based 
long-term care: subacute, assisted living, and nursing 
facilities.
    Mr. Shays. You have nursing facilities, but you have other 
activities, as well.
    Ms. Weiss. That's correct.
    Mr. Shays. Thank you.
    Ms. Weiss. May I just address Mr. Towns' remark on the 
confidentiality of records?
    Mr. Shays. Sure.
    Ms. Weiss. We want to emphasize that he is correct, that 
nobody should have access to resident records in a nursing 
facility except bona fide clinicians who need to see that 
record for the purpose of treatment planning. I am unaware that 
our members are making those records available to vendors so 
that they can copy beneficiary numbers and use those for 
fraudulent purposes. But we will caution our members again and 
try to alleviate some of his concern.
    The other question I wanted to address is the issue of dual 
eligibles and the interaction between Medicaid and Medicare. I 
think a lot of the people from the first panel described that 
as ``legal but ridiculous.'' I'm not sure it's legal. I think 
the tendency there was to equate the term ``legal'' or 
``illegal'' with ``criminal.''
    It is against the regulations to be paid from both sources. 
Medicaid is always the last payment resort, always the last, 
which means there can only be one that's the last. So what they 
should do, and what many States do, is to first look at the 
Medicaid coverage.
    Some States cover it very differently. Wisconsin, for 
instance, takes the therapies out of the Medicaid rate, and 
they are always billed separately. New York combines therapies 
in their Medicaid rate. Texas combines it in their Medicaid 
rate.
    So what should happen is that, if Medicare Part B is paying 
for that therapy, there should be some kind of carve-out from 
that Medicaid payment that represents that payment was made 
from another source. In the case of Wisconsin, for instance, 
where they have separate billing for therapies, then it's not 
an issue, because Medicaid wouldn't be paying for that anyway, 
within the daily rate.
    So there is not a criminal penalty for that kind of thing, 
but there is a source of recovery. And the problem, probably, 
is that when you do a Part B payment, billing for these 
therapies, and so on, to Medicare, what you're dealing with is 
Medicare carriers, the contractors who pay those claims on 
behalf of Medicare.
    They often cover claims from a several-State area, and it's 
very doubtful that they would understand how every State 
Medicaid system is set up to cover therapy costs. So they 
probably pay it, not realizing that the therapies may be in 
that Medicaid rate. So that would be the issue to be concerned 
with there.
    All right. The other thing I would like to talk a little 
bit about is the consolidated billing issue that wasn't raised. 
You asked if it would require added reimbursement on the part 
of providers. I think the GAO's response was that they hadn't 
really studied the issue, but there would be tradeoffs, and so 
on.
    We haven't done an exhaustive study either, but we did call 
some of our members who do Part B billing now, on a voluntary 
basis. What they told us is, eventually, over a long period of 
time, you can recover those costs in many ways. There are 
benefits. But the startup costs are enormous for this kind of 
thing.
    If you've got the volume so that you do Medicare Part B 
billing, consolidated billing, in your facility, you have a 
dedicated staff member who does nothing for a living but Part B 
billing. A miserable life, but some people choose to have it. 
OK.
    The other thing is that you need a computer system to do 
that, and it's not the same system that you use to check your 
census data every day, which separates Medicaid billings, 
Medicare billings, private pay billings. So that's a separate, 
parallel system. You also need training. We've been talking 
about how badly the therapists handle their billing when they 
do it themselves, well that's because it's very complicated.
    So all those things together mean resources. And they may 
not mean resources for 20 years, but they are going to need 
resources initially.
    That said, I would like to move on to a point that I don't 
think has been made in front of the committee today, Mr. 
Chairman, and that is the issue of what we fear is the looming 
conflict between nursing home regulatory provisions and the 
False Claims Act.
    The False Claims Act is part of the Medicare fraud and 
abuse regulatory scheme. It's probably the oldest part. It goes 
way back to the Civil War, when suppliers were giving rotten 
food and blind mules and ammunition made with sawdust to the 
Union Army. And they passed this law so that they could go 
after those suppliers. That has carried forward to this day and 
is now a major component of the Fraud and Abuse Act.
    I'm surprised that so far nobody on these panels has 
mentioned a nursing home case that we call ``Geri-Med,'' the 
official name being U.S. v. GMS Management and Tucker House. 
Mr. Chairman, that was a terrible, terrible nursing home 
situation, in 1996. What it involved was residents who had 
gotten such poor nutrition in the nursing home that they 
developed decubitus ulcers, the video of which made people 
leave the room. It was a very bad situation.
    Somehow that was not picked up in the normal regulatory 
scheme. So what happened is that the Inspector General took 
that case and applied the False Claims Act in a way that it had 
never been applied before. What they said was--the argument 
went like this: We gave you a certain amount of money--this 
being Medicaid--to provide care to this resident. The condition 
of this resident shows that you could not have used the money 
that way. Therefore, submitting the claim for reimbursement was 
a false claim.
    The case never went to court, so we don't know if it's a 
good theory, it's a bad theory, or whatever, but it was an 
impressive enough theory and threat to the facility that the 
case was settled the day the complaint was filed, for $600,000. 
Now, that's a penalty facilities almost never would see under 
the normal survey and certification process.
    Mr. Shays. Was she one of many patients?
    Ms. Weiss. It was a ``he,'' and he was one of three 
patients who were in that condition. There were three named in 
the complaint. That's correct.
    All right. Nobody in our field, whether this is a good 
theory or not, nobody in our field would ever attempt to defend 
or even explain the facts of Geri-Med. It just should never 
have happened. Those residents, the bottom line is, they didn't 
get what they needed. OK.
    At the other side of the extreme, the other extreme case, 
we have been informed by the OIG's fraud alerts and other 
anecdotes that we have occupational therapists now in 
facilities, giving OT to comatose residents; the other extreme, 
another false claim unnecessary service, and something we don't 
condone.
    But what we see happening is that between these two 
extremes there is a vast difference and a vast middle ground 
where things are not as clear as they were in these cases. In 
thinking this through, we have to remember what Mr. Willging 
said, that nursing homes are the only entities that, as a 
matter of law, are mandated to guarantee certain outcomes. As 
he said, those outcomes are lumped together, collectively, 
under the highest practicable level of care for each resident.
    In effect, the highest practicable level is a ``failure to 
thrive'' standard for the nursing home population, the vast 
majority of whom are over 80, with multiple chronic conditions. 
The term ``failure to thrive,'' too, is very differently 
applied and very newly applied in long-term care.
    This is what we use in the criminal law to look at child 
abuse, that standard. We look at what the measurements are for 
a normal child developing at a certain stage. We look at the 
child before us, and we see if that child has unexplainable 
failures to reach the averages.
    We aren't sure what this standard yet means, in terms of 
nursing home residents, and HCFA is very ready to admit that. 
We won't know, in terms of benchmarks, for several years. But 
because of this standard, even before we have benchmarks, 
nursing homes are required to work as aggressively as possible 
to assure improvement whenever possible, not the status quo. 
That is not enough. We have to keep trying until we go as far 
as we can to get improvement.
    The irony of this to us is that, in the current fraud and 
abuse climate, the harder we work to meet that standard, and 
the closer we get to the goal, the more likely it is that some 
of these services are going to be considered unnecessary.
    So, from our point of view, the world looks like this now: 
If we're bad, that's fraud. If we're really good, that's fraud. 
So the most practicable standard for us is mediocre, and then 
we will surely be cited for noncompliance by the State 
licensure agency, and we should be, because that means that we 
didn't live with OBRA. That's not what OBRA is about, and 
frankly, that's not what we are about.
    Mr. Shays. Well, it is interesting. I mean, I think that's 
a very interesting analysis. But I was thinking, before you 
were talking about this, we want nursing care patients to be 
getting very good health care.
    Ms. Weiss. Right.
    Mr. Shays. I'm just thinking, do we want it to be fair, do 
we want it to be good, or do we want it to be excellent. I'm 
not sure. In my judgment, it would be good to excellent, 
somewhere in that range. But we don't want it to be fair.
    Ms. Weiss. Right.
    Mr. Shays. And I realize we would have to define that. But 
kids in school, I mean, we have two different standards. For 
kids under special education, they have to get ``the best.'' 
And the best may mean that you take in special ed someone out 
of a school system and send them 300 miles away to get ``the 
best.'' But we don't mandate ``the best'' for the vast majority 
of students there, because ``the best'' would be unaffordable.
    So we're not saying ``the best.'' If we are, then we have 
created a circumstance that we would go bankrupt.
    Ms. Weiss. And some people feel that that's where we're 
going, and that's one of the problems. Think of it in terms of 
the regulatory structure. HCFA's standards area is saying ``the 
best,'' that's what the law says. The payment agency is saying, 
``the best,'' but we can't pay for it or we will be bankrupt.
    Mr. Shays. Right.
    Ms. Weiss. And the IG's Office is saying, ``the best,'' and 
maybe it's a crime. I mean, literally, that's where we find 
ourselves.
    Mr. Shays. ``The best'' may be having a nurse in every 
room. It can get carried away. Reading to the patient. Your 
point is valid. I'm not discounting your point. I'm just 
thinking that we have to look at that. As I was saying that, I 
was thinking, ``My God, I hope there's not a reporter here 
saying I don't want the best care for people in nursing 
homes.''
    Ms. Weiss. The problem is, we all want the best care, 
because someday it's going to be our parent. But the problem is 
how we accomplish that within the resources we have available.
    Mr. Shays. I would want very good health care for my 
mother. And to me that would be very good. And I would want it 
for me.
    Mr. Willging. If I could, in one of the previous panels, 
Suzanne, there was a suggestion that there was something 
perhaps ``iffy'' about the provision of occupational therapy to 
Alzheimer's patients. Well, I suggest, Mr. Chairman, if you had 
the head of the Alzheimer's Association here, they would demand 
that same kind of highest practicable care.
    It is a definitional issue. Unfortunately, this word in the 
law, and it is in the Nursing Home Reform provisions of OBRA 
1987, it does say our responsibility is to bring the resident 
up to and maintain the resident at--and I'm quoting exactly 
from the law--the highest practicable level.
    Mr. Shays. No, you left out ``practical.'' ``Practical'' is 
good. I like that.
    Mr. Willging. And that's what they haven't defined yet. 
That is our dilemma.
    Mr. Shays. OK. But, no, that satisfies me. I want the 
highest practical, most excellent care we can give.
    Mr. Willging. And we would all like to be able to define it 
before it gets to the courts, I suspect.
    Mr. Shays. Right. Yes.
    Ms. Weiss. May I just build on his reference to the 
Alzheimer's case, Mr. Chairman?
    Mr. Shays. Yes.
    Ms. Weiss. That is quite real. What you heard today is 
actually, we fear, becoming Government payment policy. Today, 
one of our members in Oregon is meeting with a fiscal 
intermediary, the contractor that pays Medicare Part A claims, 
because that fiscal intermediary has said to that member that 
Medicare should no longer be paying for any therapies for 
people with Alzheimer's.
    What that is going to result in is people who could be up 
and on their own, are people bedfast, with contractures, limbs 
that have contorted from lack of exercise, feeding tubes, and, 
at worst, pressure sores. We will be right back to the Geri-Med 
case.
    Mr. Shays. Right. I hear you.
    Ms. Weiss. Thank you, Mr. Chairman. We really look forward 
to working with you.
    [The prepared statement of Ms. Weiss follows:]
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    Mr. Shays. Well, you will have a chance at that.
    Do you want to just speak directly to it now? I would be 
happy to have you, if you want to make a comment.
    Mr. Grob. If I could.
    Mr. Shays. Just state, for the recorder, your name again.
    Mr. Grob. Mr. Chairman, just to address the concerns.
    Mr. Shays. No, for the record, since you're joining the 
panel, your name.
    Mr. Grob. It's George Grob, and I'm with the Office of 
Inspector General.
    I just would like to address some of the concerns that were 
raised here about the Office of Inspector General. I think that 
any police force, in any place, can be abused. And I think it 
is incumbent upon all the people who govern that in the country 
to be very wary of that ever happening.
    I think that if we did reach a situation where the 
Inspector General's Office was bringing cases against people 
for providing legitimate services, I think that everyone 
should, in fact, make sure, through the political process or 
whatever, that that doesn't happen.
    I certainly hope that we're not there right now. I think 
the cases that were brought up were rather extreme. In the case 
of Tucker House, as I understand it--and I hope you will 
correct me here, if I'm wrong about the detail--criminal 
charges were brought by the State against that nursing home.
    Mr. Shays. Which nursing home are we talking about?
    Mr. Grob. The Tucker House nursing home that was mentioned.
    Mr. Shays. Right.
    Mr. Grob. I believe several people died there as a result 
of malnutrition.
    Mr. Shays. But I don't think your testimony was that there 
shouldn't have been this case.
    Ms. Weiss. No.
    Mr. Shays. No. I don't think she was--correct me if I'm 
wrong, but, Ms. Weiss, I think you were just giving us a 
spectrum on the kinds of cases.
    Ms. Weiss. That's correct.
    Mr. Grob. I think the concern was that there was a creative 
use of an authority here to deal with that, and probably 
properly used in this case.
    Mr. Shays. And that's the point. In this case, properly, 
but just think, that could be carried to an extreme.
    Mr. Grob. It could be.
    Mr. Shays. Correct? Is that your point?
    Ms. Weiss. That's correct.
    Mr. Shays. In this case, you weren't making that claim?
    Ms. Weiss. No.
    Mr. Shays. Yes.
    Mr. Grob. Again, I just wanted to emphasize that it was a 
pretty extreme case, and that doesn't necessarily mean that the 
Inspector General's Office is out there looking for the 
marginal.
    Mr. Shays. Don't be too sensitive. I think we're doing 
pretty well.
    Mr. Grob. That's good. OK.
    Mr. Willging. When have I ever agreed with you this much?
    Mr. Grob. No.
    Mr. Willging. Somebody once said, when you've sold the car, 
get off the lot.
    Mr. Grob. The other one I'd like to mention had to do with 
the Alzheimer's patients and the therapies. The reference was 
to occupation therapy. I don't remember that reference. My 
reference, in my testimony, was to mental health services. And 
the reviewers that looked at those cases did not reject, out of 
hand, any mental health therapy for anybody with Alzheimer's. 
They looked at the record to see whether those particular 
individuals could benefit from the treatment or needed it.
    So, again, I would agree with you about the concern for 
making sure that Alzheimer's patients receive all the services 
they need.
    Ms. Weiss. And we would have no objection to individual 
reviews made by qualified people. My concern at this point is 
the fiscal intermediary's position that Medicare should not pay 
for any therapies, and there were no qualifications.
    Mr. Shays. We bring different experiences to the table, but 
as a State legislator, I remember there was a very old 
facility--it almost had the feeling of a house to it--but 
patients didn't have certain activities, but they loved that 
place. They loved being out on the porch; they loved the 
flowers and the lawn.
    But our local paper went after them because of one or two 
things they didn't do. And you could come and take pictures of 
this place and make it look a certain way, and they shut it 
down. I would have submitted that the people at that nursing 
home were far happier--they had a really family feel to it--
than some of the new ones with everything according to 
Government regulations, the hallways just the right size, and 
so on.
    It's a difficulty when we, in Government, just try to 
regulate to fit some kind of view of what we want. We don't 
always accomplish that. So I have a lot of sympathy for nursing 
home facilities, in terms of you have to not only do it right, 
you have to look right, as well.
    But I do know we have tremendous abuses, and you all know 
that, as well. You all know that, given the amount of money 
we're talking about, 10 percent, or 5 percent, whatever it is, 
I would just say to you, I do think that we're talking billions 
of dollars of problem, not millions or not even hundreds of 
millions.
    Mr. Willging. Regardless, Mr. Chairman, it should be 
eradicated.
    Mr. Shays. But, see, I'm going to go--you said 
``regardless.'' No, it always should, and I think that's the 
view, whenever you have your legalities, and so on. But I'm 
just saying to you, in this one, it conks us over the head to 
do it quickly and to save the taxpayers a lot of money.
    Mr. Willging. But I think what we're also saying, and I 
repeat what you said, is, let's make sure we know what is a 
result of confusing interpretations of regulations and what is 
indeed fraud. And let's go after the fraud vigorously.
    Mr. Shays. Ms. Weiss, I will call on you in just a second.
    This staff is eager to work with all three panels, not just 
the first two. You are partners in this effort. I would defend 
anyone, if they said you weren't involved in this process, to 
say, who better to be involved than people who have to deal 
with it every day.
    What did you want to say?
    Ms. Weiss. The only thing I wanted to say was that I agree 
with Paul, that it should be zero-tolerance and that we should 
get it under control. Where I don't agree with him is that it 
doesn't matter what the source is. It does matter what the 
source is, because the ``fixes'' are very different, and the 
resources should be directed differently.
    If we have criminal behavior, then resources should be put 
there. But if we have misunderstanding and bad reimbursement 
policy, which is what an awful lot of this is about, then we 
ought to give HCFA the resources to put in a couple of GS-14s 
and work on this problem. They could save a lot more money by 
curing that problem than they would save just by cutting the 
HCFA staff.
    Mr. Shays. I have a feeling, though, we have the biggest 
chunk in the middle. And the biggest chunk in the middle are 
the people who know it's probably wrong and criminal, but it's 
confusing enough to give them cover. I suspect we have a large 
chunk right in that area.
    Ms. Weiss. We are providing them with a lot of loopholes 
that could be closed.
    Mr. Shays. True, true. Other comments you all want to make? 
Any questions that we had asked earlier?
    Does Colorado want to respond in any way? You have such a 
nice smile, I was thinking, what is he thinking?
    Mr. Allen. If I may, Mr. Chairman.
    Mr. Shays. Sure. Just state your name and title.
    Mr. Allen. Richard Allen, Colorado Medicaid program.
    Mr. Shays. We have New York here, too, if New York wants to 
respond.
    Mr. Allen. Just a few comments. In the area of the best, 
let's make sure we do the best, and how we ever are going to 
afford it, the big problem we have in long-term care is that 
it's financed through the Medicaid program. The Medicaid 
program is a welfare program. It's not an actuarially sound 
program at all. There is no money being put aside like you 
typically see in insurance, getting ready for the day where you 
need something like long-term care insurance, just like car 
insurance, or life insurance, or something like that.
    There is a new product on the market; it is called long-
term care insurance. My department believes that that is a 
prudent new policy that should really be pursued by both the 
Federal and the State level. Several years back, there was 
something called asset protection, which is that if an elder 
bought a long-term care insurance policy, the State then would 
promise to protect their assets as they went through the spend-
down process, or what have you. We think that was a very good 
model.
    The real thing we need to do is to get the entire long-term 
care industry, if you will, set up on an actuarially sound 
basis, which is some sort of insurance program other than the 
Medicaid insurance program, where we're really cutting 
ourselves all short, in the long run. It's only 20 years from 
now that many of us will, indeed, be looking at the same 
situation, and do you really want it to be the Medicaid program 
that's going to come in and pay for your care, especially with 
the baby boomer situation out there? The clock is ticking, and 
we've got a real problem.
    In terms of this sharing back and forth on the Medicaid 
program, States, you take the acute care program, and the 
Federal Government will take over the long-term care program, 
it is an intriguing idea. As a Medicaid director, I get to do 
long-term care and acute care, and I think it would be a 
wonderful bargain for the Federal Government, because the acute 
care side, which would remain with the State, is the larger 
portion of the Medicaid program right now.
    Mr. Shays. Let me just tell you, in my judgment, what I 
recall, using more of the averages, is that one-third of the 
patients are nursing care, and they take two-thirds of the 
money. And the two-thirds that are AFDC recipients under 
Medicaid health, they get one-third of the money. I think the 
national statistic is close to that.
    Mr. Willging. That is correct. There's no question that the 
smaller percentage of beneficiaries, the elderly, take the 
disproportionate amount, because they are in nursing 
facilities, to a considerable extent, and at the end of life.
    Mr. Shays. Exactly. I was trying to think of the reasons 
why we didn't think of this idea, because Congressmen are 
always brighter, obviously, you know, than everyone else. Why 
didn't we think of this idea?
    Mr. Willging. We, unfortunately, just were not articulate 
enough at the time.
    Mr. Shays. To make us think it was our idea.
    Mr. Willging. That's right.
    Mr. Shays. Yes.
    Mr. Willging. You pointed out the reason. If you don't look 
behind that proposal, it does appear to run against the grain, 
in terms of what this town--and I don't think just Republicans, 
Mr. Chairman--what this town has generally been moving toward, 
which is a devolution of more authority to the States, not 
something coming back up to the feds.
    But you make this swap. Actually, one of your colleagues on 
the Republican side in the Senate, Nancy Kassebaum, a former 
colleague, had, in effect, broached this idea, oh, 3, 4, 5 
years ago.
    Mr. Shays. I knew it was a Member of Congress.
    Mr. Willging. Oh, it was. Just took me a while to think of 
it.
    Mr. Shays. Yes. Right. Well, the other reason may be, and 
this would be sad, but those who are on one committee, Ways and 
Means, or, in this case, Commerce, may not want to give that 
authority to Ways and Means, because it would become a Ways and 
Means responsibility.
    Mr. Willging. But for the greater good of the American 
people.
    Mr. Shays. No, I'm just being very candid with you. I'm not 
saying that's good; I'm just saying that this is one of the 
things that has been very disturbing to me. Why do you have 48 
percent of all education programs only in the Department of 
Education, and 52 percent outside the Department of Education?
    The reason is, when you check it, some Member of Congress 
had an idea, and they put it through their committee, and they 
wanted their jurisdiction. I mean, the Agriculture Department 
has all rural housing. That's not in HUD. Don't get me started 
here.
    But, anyway, you had an intriguing idea. I will claim it as 
my own, if I like it, and I will go on to better things because 
of it.
    Mr. Willging. And we will give you all the credit.
    Mr. Shays. May I ask if anybody else has any last comment 
here?
    [No response.]
    Mr. Shays. If not, let me say this has been a very 
interesting hearing. I think you will see its impact in 
legislation, if not this year, sometime next year, but maybe 
this year. We don't begin to know what that is, but we're 
getting a sense of the problem.
    With that, I would like to thank Marcia Sayer and Jared 
Carpenter, on the majority side of the staff, and Ron Stroman 
and Ashan Detok, on the minority side, and Donna Ferguson, who 
was our transcriber. Thank you very much, as well.
    And I thank all of our witnesses. You have provided this 
committee a tremendous amount of helpful information. We thank 
you for being here.
    Mr. Willging. Thank you, Mr. Chairman.
    Mr. Shays. This meeting is closed.
    [Whereupon, at 1:45 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]
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