[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
       HOW HEALTHY ARE THE GOVERNMENT'S MEDICARE FRAUD FIGHTERS?

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

                                HEARINGS

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                     JULY 14 AND SEPTEMBER 9, 1999

                               __________

                           Serial No. 106-59

                               __________

            Printed for the use of the Committee on Commerce



                     U.S. GOVERNMENT PRINTING OFFICE
58-495CC                     WASHINGTON : 1999


                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

              Subcommittee on Oversight and Investigations

                     FRED UPTON, Michigan, Chairman

JOE BARTON, Texas                    RON KLINK, Pennsylvania
CHRISTOPHER COX, California          HENRY A. WAXMAN, California
RICHARD BURR, North Carolina         BART STUPAK, Michigan
  Vice Chairman                      GENE GREEN, Texas
BRIAN P. BILBRAY, California         KAREN McCARTHY, Missouri
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  JOHN D. DINGELL, Michigan,
ED BRYANT, Tennessee                   (Ex Officio)
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    July 14, 1999................................................     1
    September 9, 1999............................................    81
Testimony of:
    Aronovitz, Leslie G., Manager, Chicago Field Office; 
      accompanied by Robert H. Hast, Acting Assistant Comptroller 
      General, Office of Special Investigations, General 
      Accounting Office:
        July 14, 1999............................................    20
        September 9, 1999........................................    87
    Becker, Norman P., President and CEO, New Mexico Blue Cross 
      and Blue Shield............................................   128
    Cain, Harry, Executive Vice President, Blue Cross and Blue 
      Shield Association, accompanied by Harvey Friedman, Vice 
      President, Medicare, Blue Cross and Blue Shield Association   150
    Flynn, Darcy.................................................    99
    Grob, George F., Deputy Inspector General for Evaluation and 
      Inspection, Office of Inspector General, accompanied by 
      Jack Hartwig, Deputy Inspector General for Investigations, 
      Office of Inspector General, Department of Health and Human 
      Services:
        July 14, 1999............................................    14
        September 9, 1999........................................    95
    Hess, Steven C., Senior Vice President and General Counsel, 
      Blue Cross and Blue Shield of Michigan.....................   135
    Huotari, Michael E., Executive Vice President and General 
      Counsel, Blue Cross and Blue Shield of Colorado............   130
    Jay, Dennis, Executive Director, Coalition Against Insurance 
      Fraud......................................................    66
    Mahon, William J., Executive Director, National Health Care 
      Anti Fraud Association.....................................    63
    Osman, Ronald E., Osman & Associates, Ltd....................   102
    Thompson, Penny, Director, Program Integrity Group, 
      accompanied by Marjorie Kanof, Deputy Director for Medicare 
      Contractor Management, Center for Beneficiary Services, 
      Health Care Financing Administration.......................    29
    Verinder, Fred B., Vice President for Compliance Operations, 
      Health Care Service Corporation............................   138
Material submitted for the record by:
    Hast, Robert H., Acting Assistant Comptroller General for 
      Investigations, General Accounting Office, letter dated 
      July 22, 1999, enclosing response for the record...........    78
    Stark, Fortney Pete, a U.S. Senator from the State of 
      California, prepared statement of..........................   163

                                 (iii)

  


       HOW HEALTHY ARE THE GOVERNMENT'S MEDICARE FRAUD FIGHTERS?

                              ----------                              


                        WEDNESDAY, JULY 14, 1999

                  House of Representatives,
                             Committee on Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Barton, Burr, 
Ganske, Bryant, Bliley (ex officio), Klink, Stupak, Green, 
Strickland, DeGette, and Dingell (ex officio).
    Staff present: Chuck Clapton, majority counsel; Duncan 
Wood, majority professional staff member; and Christopher 
Knauer, minority investigator.
    Mr. Upton. Thank you, everyone, for coming this morning.
    Today the subcommittee will hold a hearing on HCFA's 
oversight of Medicare contractors and their efforts to combat 
fraud and abuse in this program. We will hear the testimony of 
representatives from the HHS Office of Inspector General, along 
with the GAO and the Office of the Special Investigations, who 
have carefully analyzed HCFA's oversight efforts relating to 
contractors to date and found them to be woefully inadequate.
    We will also hear from representatives from HCFA who will 
discuss what they are doing to try and remedy these problems. 
HCFA relies upon contractors to process fee for service claims 
for both Medicare Part A and Part B services. These 
contractors, which include both fiscal intermediaries and 
carriers, handle the approximately 900 million claims and were 
paid $1.6 billion in fiscal year 1998.
    In addition to paying claims, HCFA also relies on the 
contractors to safeguard the Medicare programs from fraud and 
abuse by identifying inappropriate claims and payments.
    As we will hear in today's testimony, several fiscal 
intermediaries have failed to perform the very basic tasks 
necessary to reduce the opportunities for fraud and abuse which 
has led to the loss of scarce Medicare program dollars. Several 
providers even went so far as to criminally conceal their 
inadequate performance by destroying claims, falsifying 
documents and reports to HCFA and altering or hiding files 
involving claims that had been improperly paid.
    HCFA is certainly responsible for ensuring that fiscal 
intermediaries do their jobs accurately and efficiently, which 
includes overseeing contractor performance. However, in three 
of the most egregious cases of contractor fraud which have been 
uncovered, HCFA failed to uncover the fraudulent acts.
    Each of these cases were finally brought to the public's 
attention by qui tam suits, where whistleblowers identified the 
criminal practices of Blue Cross, Blue Shield of Illinois, 
California and Pennsylvania.
    The resolution of these cases resulted in over $190 million 
in criminal fines and civil settlements along with a conviction 
of several employees of the fiscal intermediaries.
    GAO has examined HCFA's contractor oversight efforts and 
identified several areas of systemic weakness that need to be 
addressed. These include the lack of review of performance data 
and contractor management controls, a lack of uniform 
performance standards to evaluate program safeguards against 
fraud and inconsistent reviews of similarly situated 
contractors due to inadequate coordination between HCFA's 
headquarters and their regional offices.
    Dr. Marjorie Kanof, who is the Deputy Director for Medicare 
Contractor Management within HCFA's Center for Beneficiary 
Services, and Penny Thompson, who is the Director of HCFA's 
Program Integrity Group, will testify about HCFA's response to 
these allegations. Dr. Kanof and Ms. Thompson will tell us what 
new initiatives HCFA is pursuing to improve its oversight of 
Medicare contractors and hopefully what steps are being taken 
to address the serious problems that have been identified in 
the GAO, OSI and OIG reports.
    Only 2 years ago Medicare had to be rescued from the threat 
of imminent bankruptcy by the changes that Congress made in the 
Balanced Budget Act of 1997. It is inexcusable to waste these 
valuable program dollars, which further limits our ability to 
better assist such valuable services such as home health care 
and skilled nursing facilities.
    In light of these continuing needs, as well as the calls to 
further expand the scope of current Medicare benefits and 
services, it is unacceptable that HCFA is not doing a better 
job of protecting the Medicare program from fraud and abuse. I 
have yet to find someone that's for it.
    However, by holding this hearing today, we can focus 
greater attention on the issue and encourage HCFA to implement 
substantive changes to ensure Medicare program integrity.
    Finally, I would like to take this opportunity to welcome 
all of our witnesses and also to acknowledge the fine work on 
these issues which was done by the Senate Permanent 
Subcommittee on Investigation. While the Commerce Committee has 
been reviewing Medicare's anti-fraud efforts for several months 
in conjunction with the GAO, I would note that Senator Collins 
from Maine has also worked extensively with GAO on a variety of 
cost-cutting issues, and as an example of bicameral cooperation 
I am pleased that she has allowed GAO to release these reports 
at this hearing.
    I look forward to further cooperation with all members, 
House and the Senate, as we continue our investigation of this 
critical area of Medicare, and I yield to the ranking member of 
this subcommittee, Mr. Klink.
    Mr. Klink. Thank you, Mr. Chairman, and we're pleased in 
the minority to join you in this hearing today. This is an 
important matter and one we've been looking forward to, as you 
mentioned, for well over a year. As you know, over many years, 
this subcommittee has spent considerable time and effort 
examining how HCFA's Medicare contractors oversee the Medicare 
program. In administering Medicare, HFCA currently uses the 
services the private sector insurance carriers, often called 
fiscal intermediaries, to process the claims, to conduct the 
audit, to provide medical reviews and to perform a host of 
other activities that are designed to prevent waste, fraud and 
abuse.
    The government has essentially privatized many of the 
functions of safeguarding the program by allowing these 
intermediaries to process and pay out claims and conduct 
related audits. Ideally these intermediaries are supposed to 
conduct such functions by applying their own private sector 
expertise to the program; in theory the taxpayer should be 
getting state-of-the-art private sector techniques applied to 
the Medicare program. Nevertheless, as has been demonstrated 
over the years through a number of investigations, the 
effectiveness of some of the fiscal intermediaries in 
safeguarding this fund is open to very serious debate, in fact, 
serious doubt.
    What we will learn today is in fact some of the very 
contractors the government hires to protect the program are the 
very entities that are ripping it off. As is revealed in GAO's 
report, no fewer than 1 in 4 contractors have been alleged 
generally by whistleblowers within the company to have 
integrity problems. In fact, GAO has identified at least 7 of 
HCFA's 58 current contractors as being actively investigated by 
HHS, OIG or by the Justice Department.
    Mr. Chairman, more than a year ago, the ranking member of 
the full committee, Mr. Dingell, and I asked the GAO to examine 
a host of questions regarding the effectiveness of these fiscal 
intermediaries in safeguarding the Medicare program, and 
whether HCFA was doing an adequate job in overseeing their 
activities.
    Specifically we asked GAO to look at the following: One, 
who were HCFA's fiscal intermediaries, and how were they being 
evaluated as to their ability to safeguard the Medicare 
program; what criteria or methodology was HCFA using to 
evaluate their activities and was it appropriate; two, did HCFA 
have reports, studies or lists ranking the caliber of 
safeguarding programs of the fiscal intermediaries then serving 
the program; three, were any of the fiscal intermediaries' 
safeguarding efforts substandard, and if so, why; for example, 
was it a reason of incompetence or was it a lack of resources? 
Was it a combination of many factors? We also asked what would 
ensure that any new contractors that were added to the program 
would not be exposed to the same problems. Fourth, and finally, 
we asked whether the addition or replacement of any fiscal 
intermediary would result in any efficiencies or any 
inefficiencies.
    Soon after we sent this request to GAO, a fiscal 
intermediary known as Health Care Services Association, also 
known as Blue Cross-Blue Shield of Illinois, pleaded guilty to 
defrauding the Medicare program and other related charges. They 
agreed to pay nearly $4 million in criminal fines to the 
government and $140 million in a civil settlement to resolve 
its liability under the Federal False Claims Act.
    The activities of this Medicare contractor included in the 
submission of false claims the falsification of its own 
performance record and substandard claims and evaluations. In 
fact, the $144 million settlement against this fiscal 
intermediary was the largest ever issued against a Medicare 
contractor. Again, this case illustrates that the very entity 
designed to be protecting Medicare was undermining it.
    This led us to expand our original request and to ask GAO 
to examine additional concerns; what were the facts surrounding 
the general performance and the illegal activities connected to 
Blue Cross-Blue Shield of Illinois; what regulatory measures 
did HCFA fail to have in place that may have prevented such an 
outcome? And finally in light of this case, what additional 
measures should HCFA immediately implement to gain better 
control over the Medicare contractors?
    Mr. Chairman, I am happy to see the many excellent 
witnesses before us today that can provide answers to these 
questions and others. It's my understanding that many issues 
that were raised by Mr. Dingell and myself in earlier requests 
have been substantially addressed in that GAO report that you 
talked about that was released by Senator Collins in the Senate 
Permanent Subcommittee on Investigations.
    I thank the members and the staff of that fine subcommittee 
for the excellent work that they have done. I also thank the 
IG's office and the GAO for their outstanding work.
    While I hope that next time we can give the witnesses more 
than 3 days to prepare for the hearing, I, nonetheless, 
appreciate all of the hard work that you have done and finally, 
while many of our questions were addressed in the Senate's 
report, it's my understanding that the GAO still has ongoing 
work for this committee and will soon provide us with 
additional information. For example, part of Mr. Dingell's and 
my original request involved an open criminal matter that I 
believe may still be pending. Some of this work had to be put 
on hold and in fact at the request of the Department of 
Justice.
    Much of the in-depth analysis that we asked GAO to perform 
on the Illinois Blue Cross-Blue Shield matter has been 
suspended until after all matters relating to the case are 
formally closed. Once that occurs, GAO will rejoin that effort, 
and I look forward to learning even more about what went wrong 
with that fiscal intermediary and HCFA's oversight of its 
operation. I also look forward to hearing what GAO has learned 
from the Department of Justice regarding when this work can be 
continued.
    Mr. Chairman, I am attaching the original request 
addressing this subject with my opening remarks. And, again, I 
thank Chairman Upton for holding this hearing. This is a great 
subject, and it's of great importance to the people of this 
Nation. I look forward to hearing from the outstanding 
witnesses before us today. And, Mr. Chairman, I yield back my 
time.
    Mr. Upton. The gentleman from Tennessee Mr. Whitfield--
excuse me.
    Mr. Bryant. Close.
    Mr. Upton. Right. Mr. Bryant.
    Mr. Bryant. Mr. Chairman, I would be happy to defer my time 
if you want to recognize the ranking member.
    Mr. Upton. Mr. Dingell.
    Mr. Dingell. Mr. Chairman, I thank you, but the gentleman 
has been most kind. I'm willing to wait and think it's 
appropriate he should go next.
    Mr. Upton. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman. Mr. Chairman, as you know, this Congress and the 
White House are currently locked in a debate regarding how best 
to use the projected budget surplus. Congressional Republicans, 
myself included, believe if the government has collected more 
money, it means the left over money ought to be returned to the 
taxpayer.
    This administration has proposed using this extra money to 
create new or expand government programs. Of concern today to 
me--and I think extremely relevant to today's hearing--is the 
President's proposal to expand the Medicare program at the cost 
of approximately $20 billion. This is certainly not the forum 
for debating the details of this proposed prescription drug 
program, but I think it's important to point out that the 
President is proposing to dramatically increase both HCFA's 
responsibility in its budget at a time when both the IG and the 
GAO are releasing reports indicating that millions and 
potentially billions of dollars are being wasted by this very 
same agency.
    Mr. Chairman, due mainly to the cold war in the 1980's, the 
Nation's and the Congress' focus was on the defense industry, 
and the media and the government watchdog groups correctly 
attacked the Department of Defense for wasting millions of 
dollars on $600 hammers and $800 toilet seats.
    The 1990's will inarguably be recalled as the health care 
decade, and I wonder, Mr. Chairman, how long it will be before 
the headlines read $1200 Band-Aid, and $1500 tongue depressor. 
I'm constantly hearing from the doctors in my district who are 
frustrated by complicated and confusing forms, delayed 
reimbursements and unresponsive bureaucrats.
    This combined with a type of waste and fraud described by 
the OIG and the GAO cannot be tolerated. They threaten both the 
solvency and credibility of this crucial program, and in my 
mind at least need to be addressed before even considering 
expanding HCFA's responsibilities.
    I'm very anxious to hear from our distinguished witnesses, 
what steps need to be taken by both HCFA and this Congress to 
restore a sense of integrity to this program. And I thank the 
chair.
    Mr. Upton. Thank you. Mr. Dingell.
    Mr. Dingell. Mr. Chairman, I thank you. First of all, I 
commend you for this hearing. You deserve great credit and I 
appreciate the work that you're doing to see to it that the GAO 
report in this matter is gone into.
    I've noted over the years, Mr. Chairman, that some of the 
most vociferous critics of waste, fraud and abuse in government 
programs seem to be blind to the role of private contractors in 
wasting tax dollars, defrauding the taxpayer and abusing the 
public trust. They also tend in many instances to be 
unconcerned about the need to have a proper and adequate 
auditing effort within the Federal Government and massive cuts 
were made early in the administration of this Congress by the 
Republican members to GAO amounting to some 25 percent of that 
budget.
    Now, I won't excuse the watchdogs at government agencies 
who slumber blissfully while the Treasury is raided; if 
anything, this subcommittee has a long history of exposing and 
criticizing the behavior of both the police and the thieves 
when we find improper expenditures of public moneys, and many 
of the matters referred to earlier in connection with defense, 
the hammers, the pliers, the toilet seats, and a large number 
of other things, were uncovered by the work of this committee.
    The General Accounting Office report on Medicare 
contractors goes directly to the points I'm mentioning, and I 
think it should be quoted at this point. They said, ``Medicare 
contractors are HCFA's first line of defense against provider 
fraud, abuse and erroneous Medicare payments. However, several 
of them have committed fraud against the government. Since 
1990, nearly 1 in 4 claims administration contractors have been 
alleged, generally by whistleblowers within the company, to 
have integrity problems. GAO identified at least 7 of HCFA's 58 
contractors as being actively investigated by HHS, OIG or 
Justice. Since 1993 HCFA has received criminal and civil 
settlement decrees totaling over $235 million from 6 
contractors after investigation of allegations that the 
contractor employees deleted claims from the processing 
systems, manufactured documentation to allow processing of 
claims that otherwise would be rejected because the services 
were not medically necessary, and deactivated automatic checks 
that would have halted the processing of questionable 
claims.''.
    These are especially troubling facts when there are efforts 
to further privatize Medicare and also when we have seen cuts 
in the General Accounting Office and in the auditing effort of 
this government. The justification for hiring private fiscal 
intermediaries in the first place was to provide state-of-the-
art private sector techniques to safeguard public funds.
    The record suggests that we may have gotten state-of-the-
art private sector efficiency in fleecing the taxpayer. Mr. 
Chairman, I hope we will go into these matters with all 
diligence and vigor.
    I look forward to the testimony of our fine witnesses, and 
I commend you again for holding this hearing. Thank you.
    Mr. Upton. Thank you. Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman. I will be brief. Let me 
at the start commend the ranking member for his work on this in 
the past and the work of this committee, because certainly it 
has held people's feet to the fire. That's not enough. Clearly 
we asked GAO periodically to go out and tell us how bad it 
still is, not that it's gotten bad but it hasn't gotten any 
better.
    Having the opportunity to look over the report, there are a 
lot of people to blame, there are intermediaries, there is 
HCFA, the one that is noticeably absent is Congress, because I 
think to some degree we deserve some of the blame. We legislate 
many of the mandates that go in. We require the system to be 
confusing and that confusion leads honest people to cut corners 
or to make decisions because of short payments, and that 
certainly is not an excuse that I'm trying to make for any of 
the third-party individuals. But clearly it has opened up a 
system to find ways to cut corners, to possibly reinterpret, to 
delay claims, not to make payments. It affects the quality of 
care, it affects the integrity of the system.
    And I think what we're here today to do is how we bring 
integrity back into this system. It's not to blow up HCFA 
tomorrow. It's not to get rid of the third-party 
intermediaries. It's to find a system that works for once. I'm 
hopeful that this will be the last of the hearings where we 
come to hear how bad it is and possibly we can turn the work of 
GAO and the work of this committee over to the authorizing 
committee where they can work on solutions.
    They can in fact look and see if we can make it simpler to 
understand this delivery system that we've designed, in fact, 
that HCFA can have an easier time at setting up a structure 
that checks claims of intermediaries and that intermediaries 
don't have an opportunity to interpret incorrectly what the 
policy is.
    It's a confusing system that we've designed, and I think we 
have a responsibility to look at that system and fix it in all 
facets.
    I thank the chairman for his time and his willingness to 
hold this hearing.
    Mr. Upton. Mr. Stupak.
    Mr. Stupak. Well, thank you, Mr. Chairman, and thank you 
for holding these hearings. As you know we've been on this 
committee for some time and I appreciate your leadership in 
this area, and I think it's particularly important that we have 
this hearing. When we're considering major overhaul of the 
Medicare program, it seems to be an especially important and 
pertinent issue at this point.
    Two weeks ago the President released his proposal to 
strengthen and reform the Medicare program. I share in the goal 
to see that the Medicare trust fund is protected for future, 
while improving services for beneficiaries, including offering 
a prescription drug benefit for our seniors. However, we should 
not forget that one of the most obvious needs for reform in 
Medicare is fighting the fraud, waste and abuse as outlined in 
the GAO report.
    As evidenced by that report, we can do better. We can do 
much more for Medicare beneficiaries across the country. Each 
year fraud, waste and abuse in the health care industry, both 
private and public, accounts for an estimated 10 percent of our 
yearly health expenditures as a nation. We can never eliminate 
every dollar of fraud, waste and abuse but we can do a lot 
better than what we're doing, and we must do everything 
possible to stop health care fraud.
    The improper and fraudulent activities committed by 
contractors as described in the GAO report are shocking to 
many. Unfortunately these are the realities which Medicare 
beneficiaries have had to live through. Their realities have 
been having their Medicare claims being destroyed or deleted 
because the contractors couldn't process them or their phone 
calls going unanswered because customer service lines were 
cutoff or that fraudulent claims were processed because 
computer edits, these specifically designed to screen 
questionable claims, were turned off.
    This has assuredly outraged Medicare beneficiaries and 
should outrage members of this committee. These contracted 
entities should be held accountable to the beneficiaries for 
the mismanagement of scarce Medicare dollars. We are constantly 
stating the need for better management and performance of 
government agencies, which I think it's obvious that it is 
needed as we see in this GAO report.
    There is also a need to have better management and 
oversight of the contracted entities who process these claims; 
however, if we're going to do that, we must give law 
enforcement and the law enforcement community the tools they 
need to enforce the fraud, waste and abuse provisions. When we 
take a look at, and Mr. Burr had mentioned that we share some 
responsibility, I remind our colleagues that back in 1997 
during the balanced budget amendment, OIG, Department of 
Justice, GAO all wanted us to go after HPPA, and were looking 
for us to expand the jurisdiction of kickback provisions, they 
asked us to look at the dumping of patients, they asked us to 
expand the subpoena power and injunctive relief, and immediate 
repayment of overpayment by the government, some of these 
examples cited in this report. We offered the amendment. 
Unfortunately the amendment failed on party lines.
    And I don't still--2 years later I still can't figure out 
when my friends on that side of the aisle would not give law 
enforcement the tools they asked for to crack down on some of 
this fraud and questionable practices going on.
    So, Mr. Chairman, I certainly thank you for holding this 
hearing. I look forward to working with you. That amendment 
that I offered before during Balanced Budget Act on HPPA and 
others, we have dusted off and ready to run it again. And I 
look forward to working with you to make sure it becomes a 
reality to give law enforcement and GAO and Department of 
Justice, Office of Inspector General, the tools they need to 
crack down in this area as they have asked for repeatedly in 
the past.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you. Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. And I would echo the 
thanks for holding today's hearing. I'm glad to see that this 
committee is looking at action to stop private companies which 
are hired by the Federal Government to safeguard Medicare 
dollars from plundering the trust fund. And I think that we 
need to make sure that the HCFA administrators are adequately 
watching these private administrators.
    In order to preserve the trust fund, it is essential that 
Medicare has an effective system to stop fraud and abuse. I 
think that, if anything, this GAO report clearly illustrates 
that our current system needs work. The fox is guarding the hen 
house when fiscal intermediaries hired by Medicare to ensure 
the validity of health care claims are the very entities who 
are committing fraud to hide their incompetencies. And as Mr. 
Stupak and others have articulated some of the these issues 
which are horrifying when you look at the GAO report; 
manufacturing documentation to justify payment of claims which 
should have been denied, and switching off of the consumer 
service lines when the staff can't answer incoming calls within 
the prescribed time limit I think has hit a chord with all of 
us.
    While HCFA must take steps to improve the oversight of 
these claims of administration contractors, I'm troubled that 
the contractors paid to preserve the integrity of the Medicare 
program are defrauding the system. When the private companies 
hired to save billions of Medicare dollars turn off the 
computer programs HCFA requires them to use to catch 
questionable claims, there's only so much blame one can place 
on the agency itself.
    Mr. Chairman, I hope that today's hearing will shed some 
light on the reasons why six companies were found guilty of 
defrauding the Medicare system and subjected to $263 million in 
criminal fines and civil settlements and why the IG's office 
believes there is more lawsuits to come. And I hope we can work 
in a bipartisan way to find ways to stem this in the future.
    I will yield back the balance of my time. Thank you, Mr. 
Chairman.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    The Commerce Committee is deeply committed to keeping Medicare safe 
and sound for all our senior citizens and disabled Americans. That's 
why stamping out waste, fraud and abuse in Medicare is one of our 
highest priorities.
    Nearly 40 million Americans rely on the health insurance provided 
by Medicare. Last year that translated into a $220 billion program 
responsible for processing nearly 1 billion Medicare claims.
    Unfortunately, a lot of this money has gone astray. According to 
the HHS Inspector General at least $12.6 billion is misspent annually 
on unnecessary or improper benefit payments. The Inspector General and 
other experts believe that the real figure is probably far higher 
because little effort has been made by the Health Care Financing 
Administration in trying to measure the full scope of waste, fraud and 
abuse in the Medicare program.
    For several months the Commerce Committee has been conducting a 
review of the anti-fraud activities of HCFA and its Medicare 
contractors. To that end we have issued requests for information in the 
form of written surveys to HCFA and to the leading fiscal 
intermediaries. In addition, the Committee has been working closely 
with GAO to examine HCFA's management structure and operational 
policies in order to determine the root causes of the HCFA management 
deficiencies that have been identified by GAO with regard to its 
oversight of fiscal intermediaries and carriers.
    Today, the O&I Subcommittee will take a close look at HCFA's 
supervision of the Medicare contractors who are responsible for 
processing Medicare claims and who are supposed to constitute the front 
line in the battle against fraudulent and deceptive billing practices. 
We are asking two simple questions? How well is HCFA doing? And how 
well are the Medicare contractors doing?
    The answers so far are deeply disturbing. In the past five years, 
criminal and civil actions have been brought against at least six major 
Medicare contractors because they have attempted to defraud Medicare. 
In each of the six cases, HCFA's own anti-fraud efforts failed to 
detect the deceptive contractor practices.
    The contractors were able to dupe HCFA Contractor Performance 
evaluators because HCFA routinely gave them advance warning about the 
dates of any reviews and about the records the agency wanted to review. 
Furthermore, in one of the cases, it appears that HCFA actually gave 
the contractor a clean bill of health, even though it had received an 
anonymous complaint describing how the company had used false documents 
to pass its annual HCFA evaluation review.
    Today's testimony from GAO and the HHS Inspector General will 
underline that the problems identified in these cases have not gone 
away and that HCFA is still failing to provide effective oversight of 
its contractors.
    I commend Chairman Upton for holding this hearing and welcome all 
of the witnesses.
                                 ______
                                 
Prepared Statement of Hon. Ron Klink, a Representative in Congress from 
                       the State of Pennsylvania
    Thank you Mr. Chairman and thank you for having this hearing. As 
you well know, over many years this Subcommittee has spent considerable 
time and effort examining how HCFA's Medicare contractors oversee the 
Medicare Program.
    In administering Medicare, HCFA currently uses the services of 
private sector insurance carriers--called fiscal intermediaries--to 
process claims, conduct audits, provide medical reviews, and perform a 
host of other activities to prevent waste, fraud, and abuse. The 
government has essentially privatized many of the functions of 
safeguarding the program by allowing intermediaries to process and pay 
out claims, and conduct related audits. Ideally, these intermediaries 
are supposed to conduct such functions by applying their own private-
sector expertise to the program. In theory, the tax payer should be 
getting ``state-of-the-art'' private sector techniques applied to the 
Medicare program.
    Nevertheless, as has been demonstrated over the years through a 
number of investigations, the effectiveness of some fiscal 
intermediaries in safeguarding this fund is open to serious debate. 
What we will learn today, in fact, is that some of the very contractors 
the government hires to protect the program are the very entities 
ripping it off: As is revealed in GAO's report, no fewer than one in 
four contractors have been alleged--generally by whistle-blowers within 
the company--to have integrity problems. In fact GAO identified at 
least 7 of HCFA's 58 current contractors as being actively investigated 
by the HHS OIG or Justice.
    Mr. Chairman, more than a year ago, the ranking member of the full 
committee--Mr. Dingell--and I asked GAO to examine a host of questions 
regarding the effectiveness of these fiscal intermediaries in 
safeguarding the Medicare program, and whether HCFA was doing an 
adequate job in overseeing their activities. Specifically we asked GAO 
to look at the following:

(1) Who were HCFA's fiscal intermediaries and how were they being 
        evaluated as to their ability to safeguard the Medicare 
        program? What criteria or methodology was HCFA using to 
        evaluate their activities, and was it appropriate?
(2) Did HCFA have reports, studies, or lists ranking the caliber of 
        safeguarding programs of the fiscal intermediaries then serving 
        the program?
(3) Were any of the fiscal intermediaries' safeguarding efforts 
        substandard, and if so why? For example, was it for reasons of 
        competence or for lack of resources? Was it a combination of 
        many factors? We also asked, what would insure that any new 
        contractors added to the program would not be exposed to the 
        same problem(s)?
(4) Finally, we asked whether the addition or replacement of any fiscal 
        intermediaries would result in any efficiencies or any 
        inefficiencies?
    Soon after we sent this request to GAO, a fiscal intermediary known 
as Health Care Services Association (also known as Blue Cross-Blue 
Shield of Illinois) pleaded guilty to defrauding the Medicare program 
(and other related charges) and agreed to pay nearly $4 million in 
criminal fines to the government, and $140 million in a civil 
settlement to resolve its liability under the Federal False Claims Act. 
The activities of this Medicare contractor included the submission of 
false claims, the falsification of its own performance record, and 
substandard claims and evaluations.
    In fact, the $144 million settlement against this fiscal 
intermediary was the largest ever issued against a Medicare contractor. 
Again, as this case illustrates, the very entity designed to protect 
Medicare, was undermining it.
    This led us to expand our original request and ask GAO to examine 
additional concerns: What were the facts surrounding the general 
performance and illegal activities connected to Blue Cross-Blue Shield 
of Illinois? What regulatory measures did HCFA fail to have in place 
that may have prevented such an outcome? And finally, in light of this 
case, what additional measures should HCFA immediately implement to 
gain better control over their Medicare contractors?
    Mr. Chairman, I am happy to see the many excellent witnesses before 
us today that can provide answers to these questions. It is my 
understanding that many issues raised by Mr. Dingell and me in these 
earlier requests have been substantially addressed in a GAO report 
being released today by the Senate's Permanent Subcommittee on 
Investigations. I thank the Members and the staff of that fine 
subcommittee for their excellent work. I also thank the IG's office and 
the GAO for their outstanding work. While I hope next time we can give 
you [the witnesses] more than three days to prepare for a hearing, I 
nonetheless appreciate all the hard work you've done.
    Finally, while many of our questions were addressed in the Senate's 
report, it is my understanding that GAO still has ongoing work for this 
Committee, and will soon provide us with additional information. For 
example, because part of Mr. Dingell's and my original request involved 
an open criminal matter (that I believe may still be pending), some of 
this work had to be put on hold. In fact, at the request of the 
Department of Justice, much of the in-depth analysis we had asked GAO 
to perform on the Illinois Blue Cross-Blue Shield matter has been 
suspended until after all matters relating to the case are formally 
closed. Once that occurs, GAO will rejoin that effort. I look forward 
to learning even more about what went wrong with that fiscal 
intermediary and HCFA's oversight of its operations. I also look 
forward to hearing what GAO has learned from DOJ regarding when this 
work can continue. (Mr. Chairman, I am attaching the original requests 
addressing this subject to my opening remarks).
    I again thank the Chairman for holding this hearing, and I look 
forward to hearing from the many outstanding witness before us today.
    With that I yield back.
                                 ______
                                 
                      U.S. House of Representatives
                                      Committee on Commerce
                                                       June 5, 1998
The Honorable James F. Hinchman
Acting Comptroller General
U.S. General Accounting Office
441 G Street, N.W.
Washington, D.C. 20548
    Dear Mr. Hinchman: Recently, the Office of Inspector General for 
the Department of Health and Human Services (HHS OIG) conducted a major 
audit of the Health Care Financing Administration's (HCFA) Medicare 
operations and found a nearly 11 percent error rate in Medicare 
provider reimbursements. Projecting this error rate to the total 
Medicare program, the HHS OIG estimates that improper payments in 
fiscal year 1997 totaled about $20.3 billion nationwide. This waste of 
the taxpayer's money is clearly unacceptable.
    In administering Medicare, HCFA currently uses the services of 
private-sector insurance carriers--called fiscal intermediaries--to 
process Medicare claims, conduct audits, provide medical reviews, and 
perform a host of other activities to fight waste, fraud, and abuse. 
The government has essentially ``privatized'' many of the functions of 
safeguarding the program by allowing intermediaries to process and pay 
out claims and conduct related audits. Ideally, these intermediaries 
are supposed to conduct such functions by applying their own private-
sector expertise to the program. In theory, the taxpayer should be 
getting ``state-of-the-art'' private sector techniques applied to the 
Medicare program. Nevertheless, given the error rate estimated by the 
recent HHS OIG audit, and the resulting billions in losses this 
translates into, the effectiveness of these fiscal intermediaries in 
safeguarding these funds is open to serious question.
    The Health Insurance Portability and Accountability Act (HIPAA) 
includes a provision that establishes the Medicare Integrity Program 
(MIP). This provision expands HCFA's contracting authority by allowing 
HCFA to enter into what is called a ``Program Safeguard Contract'' with 
new entities from the private sector to perform some or all of the 
activities now performed by existing fiscal intermediaries. Under the 
MIP contracting authority, HCFA is now planning to conduct a 
competitive bidding process to select new contractors from a pool 
broader than the one that exists today, to conduct the many 
safeguarding activities related to the program.
    These ``contract reform'' initiatives, however, beg a fundamental 
question: What are the existing shortcomings of the fiscal 
intermediaries currently serving the program? For example, does HCFA 
really understand why the current error rate in the program is so high, 
and are the fiscal intermediaries largely responsible? If so, why? Does 
HCFA have a clear vision of what safeguard activities its fiscal 
intermediaries should now be performing and whether they are doing so? 
How are fiscal intermediaries evaluated for their performance in 
safeguarding Medicare funds? Does HCFA know which fiscal intermediaries 
are doing a good job, and can they be distinguished from those doing a 
poor job?
    In light of the many questions concerning the role of fiscal 
intermediaries, the excessive error rate recently announced by the HHS 
IG report, and the reform proposals now being considered by HCFA, we 
request that GAO analyze the following:

(1) Who are HCFA's current fiscal intermediaries and how are they 
        evaluated as to safeguarding activities? What criteria or 
        methodology does HCFA use, and is it appropriate?
(2) Does HCFA have reports, studies or lists ranking the caliber of 
        safeguarding programs of the fiscal intermediaries currently 
        serving the program?
(3) Are any of the current fiscal intermediaries' safeguarding efforts 
        substandard? If so, why? For example, is it for reasons of 
        competency or for lack of resources? Is it a combination of 
        many factors? What will ensure that the new contractors will 
        not be exposed to the same problems?
(4) Will the addition or replacement of the current fiscal 
        intermediaries result in any efficiencies or inefficiencies in 
        safeguarding the program? What are the advantages and 
        disadvantages of HCFA's anticipated bidding? Moreover, what 
        factors will be used by HCFA to determine whether any new 
        contractors can perform better than the current fiscal 
        intermediaries?
    If you have any questions on this matter, please have your staff 
contact Christopher Knauer or Kristen Ieyoub of the Committee staff at 
226-3400. Your attention to this important matter is greatly 
appreciated.
            Sincerely,
                                           John D. Dingell,
                              Ranking Member, Committee on Commerce
                                                 Ron Klink,
       Ranking Member, Subcommittee on Oversight and Investigations
                                 ______
                                 
                      U.S. House of Representatives
                                      Committee on Commerce
                                                      July 31, 1998
The Honorable James F. Hinchman
Acting Comptroller General
U.S. General Accounting Office
441 G Street, N.W.
Washington, D.C. 20548
    Dear Mr. Hinchman: Last month we asked you to review the methods 
used by fiscal intermediaries to process Medicare claims, conduct 
audits, provide medical reviews, and perform a host of other activities 
to fight waste, fraud, and abuse. Some of these issues included the 
following:

(1) Who are the Health Care Financing Administration's (HCFA) current 
        fiscal intermediaries and how are they evaluated as to 
        safeguarding activities? What criteria or methodology does HCFA 
        use, and are they appropriate?
(2) Does HCFA have reports, studies, or lists ranking the caliber of 
        safeguarding programs of the fiscal intermediaries currently 
        serving the program?
(3) Are any of the current fiscal intermediaries' safeguarding efforts 
        substandard? If so, why? For example, is it for reasons of 
        competency or for lack of resources? Is it a combination of 
        many factors?
    Recently, a fiscal intermediary known as Health Care Services 
Corporation (also known as Blue Cross-Blue Shield of Illinois) pleaded 
guilty to defrauding the Medicare program (and other related charges) 
and agreed to pay nearly $4 million in criminal fines to the government 
and $140 million in a civil settlement to resolve its liability under 
the Federal False Claims Act. The activities of this Medicare 
contractor included the submission of false claims, falsification of 
its own performance record, and substandard claims evaluations. The 
$144 million settlement against this fiscal intermediary is the largest 
settlement ever issued against a Medicare contractor.
    As this case illustrates, the very entity designed to protect the 
Medicare program was itself undermining the program. This is alarming, 
to say the least, and leads us to again ask: who is ensuring that those 
charged with overseeing and protecting the Medicare program are 
adequately trained, competent, and effective?
    As indicated, this case highlights many of our initial concerns 
with the general performance of some fiscal intermediaries and how they 
are managed by HCFA. In light of this recent development, we are 
expanding our initial June 5, 1998, request to also include the 
following:

(1) Please provide an analysis of the facts surrounding the general 
        performance and illegal activities connected to the above 
        Medicare contractor. Please also provide a review of the number 
        of Medicare claims this contractor reviewed and describe what 
        impact its actions have had on the Medicare program.
(2) Please describe the regulatory measures HCFA had in place to 
        prevent such an outcome and address specifically why they 
        failed. Please also conduct an analysis of any oversight HCFA 
        provided over this contractor, including all audits, reports, 
        and investigations. Please state whether GAO believes these 
        were, or were not, adequate.
(3) Please describe, in light of this case, what additional measures 
        HCFA must put in place to gain better control over their 
        Medicare contractors.
    If you have any questions on this matter, please have your staff 
contact Mr. Chris Knauer of the Commerce Committee Minority staff at 
226-3400. Your attention to this additional development is greatly 
appreciated.
            Sincerely,
                                           John D. Dingell,
                              Ranking Member, Committee on Commerce
                                                 Ron Klink,
       Ranking Member, Subcommittee on Oversight and Investigations
                                 ______
                                 
Prepared Statement of Statement of Hon. Gene Green, a Representative in 
                    Congress from the State of Texas
    Thank you for scheduling this important hearing.
    As a Member of the Health and Environment Subcommittee, I have 
attended several hearings on the issue of Medicare fraud over the past 
few years.
    While HCFA has made significant improvements in reducing the amount 
of overpayments and mis-payments over this time period, I believe the 
new GAO report sheds new light on where we go from here.
    The fact that there is no uniform way for HCFA to monitor the 
actions of its contractors is very troubling.
    How can anyone, including HCFA and this Congress, expect to have 
accurate information for the country if every region compiles it 
differently and dedicate different levels of resources to reducing 
fraud by their contractors.
    It seems from the GAO report that HCFA's solution is simply to 
increase competition. But how can you award contracts or expect 
intermediaries to crack down on fraud when there is no explicit 
expectation that they do so.
    Before HCFA expands the number of contractors or changes which 
contractors serve each region, they need to develop an appropriate 
method of oversight.
    Ultimately, it is our responsibility to make sure HCFA is taking 
every appropriate action to reduce fraud at every level of the Medicare 
program.
    But for Congress to act on this issue, we have to have confidence 
that HCFA is doing all it can to meet it's responsibilities.
    Unfortunately, this GAO report paints a very different and 
troubling picture of an agency that is essentially neglecting to 
properly oversee their contractors.
    Mr. Chairman, I look forward to hearing from our witnesses and 
learning what steps Congress and HCFA can take together to address this 
issue.
    It's hard enough to crack down on fraud and abuse when it is 
targeted--but it is impossible to stop it if we turn a blind eye.

    Mr. Upton. Thank you.
    Now, we have a long tradition of testifying under oath. And 
do any of you have any objection to that? We also allow under 
House rules if you would like to have counsel with you, do any 
of you need counsel? Good. If you would stand and raise your 
right hand.
    [Witnesses sworn.]
    Mr. Upton. Thank you very much. We will start with Mr. 
Grob. We would like you to limit--we have your testimony, and 
we appreciate getting your testimony in advance by the way, and 
not everybody does that, we will give you 6 minutes instead of 
5. But if you would like, as a bonus, if you would like to 
summarize that and obviously your statement is made a part of 
the record, and hopefully we won't be interrupted with votes 
too much this morning. Go ahead.

   TESTIMONY OF GEORGE F. GROB, DEPUTY INSPECTOR GENERAL FOR 
    EVALUATION AND INSPECTION, OFFICE OF INSPECTOR GENERAL, 
   ACCOMPANIED BY JACK HARTWIG, DEPUTY INSPECTOR GENERAL FOR 
  INVESTIGATIONS, OFFICE OF INSPECTOR GENERAL, DEPARTMENT OF 
   HEALTH AND HUMAN SERVICES; LESLIE G. ARONOVITZ, MANAGER, 
  CHICAGO FIELD OFFICE; ACCOMPANIED BY ROBERT H. HAST, ACTING 
       ASSISTANT COMPTROLLER GENERAL, OFFICE OF SPECIAL 
INVESTIGATIONS, GENERAL ACCOUNTING OFFICE; AND PENNY THOMPSON, 
  DIRECTOR, PROGRAM INTEGRITY GROUP, ACCOMPANIED BY MARJORIE 
  KANOF, DEPUTY DIRECTOR FOR MEDICARE CONTRACTOR MANAGEMENT, 
    CENTER FOR BENEFICIARY SERVICES, HEALTH CARE FINANCING 
                         ADMINISTRATION

    Mr. Grob. Thank you, Mr. Chairman. And let me begin by 
introducing my colleague John Hartwig, who is the Deputy 
Inspector General for Investigations in our office, who is 
joining me here at the table today.
    I would like to begin my testimony by recalling one of 
those moments that I remember very well, which was a group of 
us sitting around our offices, as we do periodically, trying to 
determine what the most serious vulnerabilities there are that 
are facing the Medicare program; and I remember very distinctly 
that meeting when one of the members of that group said we now 
have to conclude from what we know that one of the most serious 
vulnerabilities that we have are the contractors that 
administer the program.
    And I remember it so well because I actually felt a little 
tremble of shock going through me, perhaps I should have felt a 
bigger one, about that because of the positions that the 
contractors hold as being right on the spot where the dollars 
ebb and flow and being the ones that we looked up to, being 
insurance companies, primarily with a competence and expertise 
to handle the flow of large sums of money, to realize we are 
having problems like that.
    We of course intensified our reviews and efforts in this 
regard, and I would like to summarize them for you today, 
highlighting three facets of it. One of them would deal with 
their financial management abilities. Another one would deal 
with their capability to refer, to detect and refer cases of 
fraud. But perhaps the most disturbing one has to do with their 
own integrity.
    I would like to deal with that one first. Between 1993 and 
1999, we have completed nine cases in which we have found six 
contractors at fault for failing to administer the Medicare 
program properly. These were in Illinois, Pennsylvania, 
Massachusetts, California, Michigan and Florida. And this 
resulted in nine civil settlements and two criminal convictions 
yielding more than $260 million in settlements, a recent large 
one being for 140 million just last year, and $5.5 million in 
criminal fines.
    The problems we uncovered in these investigations related 
to altering documents and manipulating data in order to improve 
scores and annual reviews which resulted in bonus payments and 
contract renewals. And this included such actions as covering 
up claims processing errors to increase evaluations scores, 
discarding documents that would have disclosed processing 
errors, and substituting backdated or altered documents for the 
original documents as theirs.
    We also found improper processing of Medicare secondary 
payment claims and improper deletion of claims from the system, 
rigging of samples for HCFA audits, failure to recover 
overpayments, overriding payment safeguards to bypass 
electronic audits and edits when processing claims, performing 
inadequate cursory audits, and providers disregarding 
overpayments that were due.
    The criminal convictions involved obstructing a Federal 
audit in making false statements to HFCA. I have provided each 
of you with a listing of the cases that we're talking about. 
It's hard to read the chart, but I believe that each of you has 
a sheet. I hope that you do. If not, I'm sure we can get it.
    Mr. Upton. We will find it.
    Mr. Grob. We will get it to you right away.
    Mr. Upton. If you can maybe bring that a little closer. I'm 
getting lasix surgery but not until September.
    Mr. Grob. It might be handy to make a reference to those 
from time to time here. Do you have the sheet? You should have 
it. kay. Now, a question with respect to this is how serious is 
the problem. Well, I think it is a pervasive problem, because 
right now we still have 21 active investigations of either 
former or current contractors in addition to these nine that 
were closed.
    Another way to consider how pervasive the problem is with 
another chart that I will just show you just for a moment, 
which has to do with not the scope of the number of contractors 
covered but what's happening within the contractor. Here is a 
contract relating to one of the investigations that we 
conducted with--that's an organizational chart, and those 
positions that are marked in blue are cases where there is 
evidence of participation in the cover-ups and other activities 
that we found within that organization.
    Now you have to understand that often when we detect fraud 
or abuse, we would have a case where one or two of those 
positions would have the blue, and you would solve that problem 
by conducting an audit and removing that individual or settling 
the problem occurring on that desk. But here we have a case 
that indicates a broader culture, I would say, of disregard for 
the rules that need to be implemented in a much more serious 
and pervasive problem.
    Let me switch your attention now to the question of the 
fraudulence. We released a report just last fall on the fiscal 
intermediary fraud units and a couple of years before on the 
carrier fraud units, a report with similar conclusions, which 
is back at that time there were inadequacies in the way the 
fraud units were performing. We found a great deal of 
unevenness in their output and some cases inadequacies.
    For example, in 1996, which is the year that we are using 
for that, some of these fraud units sent us only 3 complaints, 
others sent us 1800, some sent us 625 cases, some sent us zero. 
Only half of these units were actually undertaking proactive 
fraud detection that is required by the contractor.
    There will be more discussion of the fraud units as time 
goes by. So with my time limited, I will defer to the written 
record that we have on that.
    I would like to close then by mentioning the last of the 
problems, which is financial management, which is something 
that we would expect the contractors to be good at since they 
handle money for a living, and yet we have continued to find 
serious problems. For example, we actually discovered cases 
where the contractors handling our money were not using dual 
entry general ledger systems. This would be the equivalent of 
perhaps buying an interest in a baseball team and finding that 
they do not use bats. This is a very fundamental element of 
accounting.
    We found that activity of payments and collections to be 
about $23 billion with residuals of about $3.6 billion, 
deficiencies included, lack of control of accounts receivable, 
lack of controls over cash, lack of ability to perform proper 
financial reconciliations, and weaknesses in electronic data 
processing.
    Overall, to solve the problems that we've identified, we 
believe that a program which includes systematic scrutiny and 
vigilance, training, technical assistance and guidance and some 
new legislation to give HCFA additional flexibility in how it 
procures these services are all needed.
    I want to say for the record, I think it's very important, 
on the investigations, HCFA has cooperated fully with us on 
these investigations, and in the other areas we have firm 
commitments and practical commitments from HCFA to address the 
problems that we've raised, and in some cases, we can 
demonstrate some substantial progress made in the areas that 
we've addressed.
    Thank you.
    [The prepared statement of George F. Grob follows:]
  Prepared Statement of George F. Grob, Deputy Inspector General, for 
  Evaluation and Inspections, Department of Health and Human Services
                              introduction
    Good morning, I am George F. Grob, Deputy Inspector General for 
Evaluation and Inspections, Office of Inspector General, Department of 
Health and Human Services. I am accompanied by John E. Hartwig, Deputy 
Inspector General for Investigations. We are pleased to be here today 
to discuss some serious problems with the contractors who carry out 
most of the day to day operations of the Medicare program. They are 
responsible for paying health care providers for the services provided 
under Medicare fee-for-service, providing a full accounting of funds, 
and conducting activities designed to safeguard the program and its 
funds. Unfortunately, we have found weaknesses and vulnerabilities in 
these operations. For some, we have even found problems with their own 
integrity, resulting in civil and criminal violations.
                          medicare contractors
    The Medicare program provides health insurance for 39 million 
elderly and disabled Americans at an estimated cost of $217 billion for 
fiscal year 1999. The program is administered by the Health Care 
Financing Administration (HCFA) with the help of 64 contractors that 
handle claims processing and administration. There are two types of 
contractors, called fiscal intermediaries and carriers, depending on 
what type of claims they process. Intermediaries process claims filed 
under Part A of the Medicare program from institutions, such as 
hospitals and skilled nursing facilities. Carriers process claims under 
Part B of the program from other health care providers such as 
physicians and medical equipment suppliers. Hereafter, when I use the 
term contractors, I will be referring to both intermediaries and 
carriers. During this fiscal year, HCFA will pay its contractors an 
estimated $1.8 billion to carry out their responsibilities.
    Contractor tasks for the Medicare program fall into 5 functional 
areas : 1) claims processing, 2) payment safeguards, 3) fiscal 
responsibility, 4) beneficiary services, and 5) administrative 
activities. Claims processing involves receiving claims, promptly 
paying those that are appropriate, taking necessary action to identify 
inappropriate or potentially fraudulent claims and either withholding 
payment or recovering overpayments. Payment safeguard activities 
require additional actions to further safeguard the integrity of the 
Medicare program and protect against fraudulent and abusive billing. 
Safeguard activities include medical review to determine the medical 
necessity of procedures and services, Medicare Secondary Payer (MSP) 
review 1, audits, and investigations by fraud units. Fiscal 
responsibilities by the contractors include all actions to ensure a 
full and accurate reporting of Medicare accounts receivable and 
financial reconciliations.
---------------------------------------------------------------------------
    \1\ Medicare Secondary Payer activities identify other sources of 
payment, such as employer-sponsored insurance or other third-party 
payer that may cover health claims for Medicare beneficiaries. In 
overall responsibility, these payers are primary and Medicare is 
secondary.
---------------------------------------------------------------------------
                           integrity problems
    Of all the problems we have observed, perhaps the most troubling 
has to do with contractors' own integrity--misusing government funds 
and actively trying to conceal their actions, altering documents and 
falsifying statements that specific work was performed. In some cases, 
contractors prepared bogus documents to falsely demonstrate superior 
performance for which Medicare rewarded them with bonuses and 
additional contracts. In other examples, contractors adjusted their 
claims processing so that system edits designed to prevent 
inappropriate payments were turned off, resulting in misspent Medicare 
Trust Fund dollars. The examples I will describe are not isolated 
cases. At any given time, several contractors may be under 
investigation by our office. To date, our investigations have resulted 
in 9 civil settlements and 2 criminal convictions, and we currently 
have 21 former or current contractors actively under investigation.
Health Care Service Corporation
    In July of last year, Health Care Service Corporation, the Medicare 
carrier for Illinois and Michigan, agreed to pay $140 million to 
resolve its civil liability under the Civil False Claims Act and the 
Civil Monetary Penalties Law. On an annual basis, HCFA evaluates the 
performance of its carriers, relying, in large part, on information, 
data and certifications provided by the carriers. Carriers that 
demonstrate poor performance on these annual reviews are subject to 
contract termination or other adverse action by HCFA. Between 1985 and 
1997, Health Care Service Corporation altered documents and manipulated 
data in order to improve its score on these annual reviews. During our 
investigation, we found the following problems: improper processing of 
Medicare Secondary Payer claims, bypassing the system generated audits 
and edits during the processing of Part B claims, and improper deletion 
of claims from the system.
    In addition to the civil settlement, the corporation pleaded guilty 
to obstructing a federal audit, conspiracy to obstruct a federal audit 
and six counts of making false statements to HCFA. Health Care Service 
Corporation paid a $4 million criminal fine in connection with these 
charges. Two of the corporation's managers pleaded guilty and five 
others have been indicted on various criminal charges related to this 
scheme.
    HCFA terminated the Medicare contracts with Health Care Service 
Corporation as of September 30, 1998. This case resulted in the largest 
civil fraud settlement against a Medicare contractor to date.
XACT Medicare Services of Pennsylvania
    In August of last year, a Medicare carrier located in Pennsylvania 
agreed to pay $38.5 million to resolve its liability for misconduct in 
its performance as a carrier. A joint investigation by the OIG and 
other Federal agencies found that during the years 1988 through 1996, 
the carrier engaged in the following misconduct: failing to properly 
process or take appropriate action to recover improper payments related 
to Medicare secondary payer claims; obstructing the carrier performance 
evaluation program by rigging samples for HCFA audits; failing to 
recover overpayments; failing to monitor End Stage Renal Disease 
laboratory claims; and overriding payment safeguards to by-pass 
electronic audits or edits when processing Part B claims. As part of 
the settlement, the carrier agreed to enter into an extensive corporate 
integrity program to ensure proper training for its employees and 
external reviews of its performance under its contract with Medicare.
Blue Shield of California
    Blue Shield of California, the former Medicare carrier for northern 
California, agreed to pay $12 million to resolve its civil liability 
under the False Claims Act and the Civil Monetary Penalties Law. 
Between 1990 and 1996, the carrier was found to have covered up claims 
processing errors in order to obtain a more favorable score under a 
HCFA program that evaluated and graded the carrier's claims processing 
capabilities. An OIG investigation determined that employees in several 
units in the carrier's Medicare division in Chico and Marysville, 
California, altered or discarded documents that would have disclosed 
claims processing errors; substituted backdated and altered documents 
for the original documents that contained errors; and rigged 
purportedly random samples of files in order to deceive HCFA auditors 
into believing that the carrier's performance was better than it 
actually was.
    As part of the overall resolution of this matter, Blue Shield of 
California pleaded guilty in May 1996 to three felony counts of 
conspiracy and obstruction of a federal audit and was fined $1.5 
million. The criminal conviction was the first of its kind against a 
Medicare contractor. As of September 1996, Blue Shield of California 
was no longer a Medicare carrier; however, it does continue to contract 
with Medicare as a provider of managed care. In order to continue doing 
business with Medicare, Blue Shield of California was required to enter 
into a comprehensive Corporate Integrity Agreement that will be 
monitored and enforced by the OIG until the year 2002. This case was 
brought under the qui tam 2 provisions of the False Claims 
Act by a former Blue Shield of California employee who will receive 
$2.16 million as his share of the $12 million settlement.
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    \2\ A qui tam suit under the Federal False Claims Act (31 U.S.C. 
sec 3229-3733) permits a private individual, often on the basis of 
insider information, to file a civil false claims case on behalf of the 
Federal government, with the opportunity of collecting a portion of the 
recovered funds.
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Blue Cross/Blue Shield of Michigan
    On January 10, 1995, Blue Cross/Blue Shield of Michigan, a Medicare 
carrier, agreed to pay $27.6 million to settle a qui tam suit initiated 
by a former employee. At the time that the suit was filed, in June 
1993, Blue Cross/Blue Shield of Michigan was also the fiscal 
intermediary for the Medicare Part A program in Michigan and was the 
carrier for the Medicare Part B program. As of September 30, 1994, HCFA 
terminated both contracts and Blue Cross/Blue Shield of Michigan no 
longer serves as intermediary or carrier. As the intermediary, Blue 
Cross/Blue Shield of Michigan was responsible for auditing 
participating hospitals' cost reports to ensure accuracy. An Office of 
Inspector General (OIG) investigation showed that they performed 
inadequate, cursory audits in which they disregarded significant 
overpayments. They later gave HCFA fraudulent work papers in an attempt 
to show that complete and accurate audits were performed. The precise 
amount of loss to the Government could not be determined because it 
would have required auditing more than 200 hospitals. As part of the 
settlement, the Blue Cross/Blue Shield of Michigan agreed to repay the 
entire amount HCFA had paid to perform audits over a 4 year time 
period, approximately $13 million.
    Blue Cross/Blue Shield of Michigan also agreed to pay $24 million 
to settle charges of violating Medicare secondary payer laws. Under 
these laws, private insurers are required to act as the primary 
benefits payer under certain circumstances when an individual has 
medical insurance under both Medicare and an employer health plan. An 
OIG audit determined that in its capacity as the Medicare contractor in 
Michigan, Blue Cross/Blue Shield of Michigan paid thousands of dual 
coverage claims from Medicare trust funds rather than from its own 
funds in cases where there was overlapping coverage.
                         fraud unit performance
    As part of their payment safeguard activities, Medicare contractors 
are required to have Fraud Units which are designed to detect and deal 
with problems of fraud and abuse within the provider community. The 
types of problems detected range from individual cases of suspected 
fraud, as well as patterns of fraud or questionable activity which may 
represent a broader program vulnerability.
    As we work closely with these units, we in the OIG are keenly 
interested in their operations and effectiveness. In 1996 we reviewed 
the functions of the carrier fraud units, and in 1998 we reviewed the 
fiscal intermediary fraud units. Overall, we found that their 
effectiveness varies considerably and often their performance is not 
directly related to the size of the unit or the total number of 
resources allocated. Total case loads among the Fraud Units varied 
considerably, from zero to over 600 for the intermediaries. In 
reviewing carrier case files, we also found that some allegations of 
fraud were being lost during the overpayment adjustment process and 
were not properly developed as potential fraud cases.
    In addition to complaints received, Fraud Units are encouraged to 
proactively develop their own cases for potential referral to our 
office. Unfortunately, we found that less than one-half were actively 
engaged in developing their own cases. Similarly, less than one-half of 
the fraud units were active in identifying program vulnerabilities.
    One key factor in success is a contractor management's commitment 
and attention to fraud matters overall. The most successful Fraud Units 
are those given significant prominence in the contractor's 
organizational structure, reporting to the highest levels of corporate 
management. Overall, however, effectiveness of the Fraud Units has been 
hampered by staff turnover, lack of proper background and training, and 
an overall lack of uniformity and understanding of key fraud terms and 
definitions.
    Given the importance of this function, we are supportive of the new 
contracting authority granted to HCFA under the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA). The HCFA now has 
considerably more flexibility in contracting for program integrity 
functions and may enter into individual contracts or work orders for 
specific program safeguard functions, such as medical review and fraud 
detection, as well as cost report audits and Medicare Secondary Payer 
activities. We feel that, in addition to improved efficiency and 
effectiveness of program safeguard activities, HCFA may gain valuable 
insights that will be useful in considering and implementing other 
contractor reforms.
                     financial management problems
    For several years, we have reported problems in the Medicare 
contractors' financial management and accounting procedures and 
longstanding weaknesses in internal controls. In essence, their 
financial systems were not integrated with their claims processing 
systems and lacked basic accounting features, such as a dual-entry 
general ledger system, adequate source documentation, and proper cutoff 
procedures. Also, the contractors submitted periodic financial reports 
to HCFA based on subsidiary records maintained on ad hoc spreadsheets 
in lieu of entering amounts owed and tracking collections in a formal 
accounting structure. As a result, the amounts recorded, classified, 
and summarized were not always accurate. We noted millions of dollars 
in unsupported or unrecorded transactions over the years.
    Most recently, our audit of HCFA's FY 1998 financial statements 
again highlighted the need for improving contractor controls over 
Medicare accounts receivable, cash, financial reconciliations, and 
electronic data processing, along with strengthening HCFA's oversight 
of the contractors' operations. We are unable to give an unqualified 
opinion on HCFA's financial statements, in large part because the 
contractors lacked sufficient documentation to support the receivable 
amounts reported.
Accounts Receivable
    Medicare accounts receivable primarily represent funds that medical 
care providers owe to HCFA due to overpayments, as well as funds due 
from other entities in instances in which Medicare is the secondary 
payer of claims. The Medicare contractors are responsible for tracking, 
reporting, and collecting the majority of these receivables. For FY 
1998, they reported over $22.9 billion of Medicare accounts receivable 
activity (overpayments added to the account during the year, plus 
collection of current and past year overpayments) with a net balance of 
$3.3 billion. This represents approximately 90 percent of the $3.6 
billion total accounts receivable reported by HCFA at the year's end.
    We found deficiencies in nearly all facets of Medicare accounts 
receivable activity at the 12 contractors reviewed. Some contractors 
were unable to provide documentation to support their beginning 
balances, others reported incorrect activity, including collections, 
and still others were unable to reconcile their reported ending 
balances to subsidiary records. For instance, two contractors had 
unreconciled differences in their reported ending balances of $44.7 
million and $11.9 million, respectively. In addition, substantial 
amounts of receivables had been settled with insurance companies but 
were still presented as outstanding.
    Although we had reported similar deficiencies since FY 1992, this 
area has not received sufficient attention. Contractor controls for 
identifying and accounting for billions of dollars of receivables are 
still ineffective, and the potential for materially misstating 
receivable balances remains.
Controls Over Cash
    Since our first comprehensive audit of HCFA's financial statement 
in FY 1996, we have reported weaknesses in contractors' internal 
controls over cash. These controls are designed to protect assets 
against theft, loss, misuse, or unauthorized alteration and to reduce 
the opportunities for occurrence and concealment of errors or 
irregularities. However, over the last 3 years, we found inadequate 
separation of duties; lack of general ledgers supporting cash balances; 
untimely bank reconciliations; and lack of documentation to support 
outstanding checks. For instance, one contractor reported $147 million 
in FY 1998 collections that were not supported by detailed records. 
Another contractor failed to properly secure Medicare blank checks.
Financial Reconciliations
    The reconciliation of paid claims activity to ``total funds 
expended,'' which contractors report monthly to HCFA, is an important 
control to ensure that all amounts reported are accurate, supported, 
complete, and properly classified. The HCFA uses the information from 
these reports to prepare its financial statements. Beginning in May 
1998, HCFA mandated that all Medicare contractors prepare a monthly 
reconciliation of their prior months' reports to adjudicated claims 
processed and to other payments, recoveries, and adjustments as 
necessary. However, our review of the contractors' FY 1998 
reconciliations identified internal control weaknesses similar to those 
reported in prior years.
    For example: some contractors still were not reconciling their paid 
claims tape file to their monthly reports, whereas, other contractors 
took several months to produce payment tapes that reconciled with the 
reports. These reconciliations are similar to checkbook reconciliations 
to monthly bank statements. To prepare the monthly reports, most 
contractors had to obtain data from a number of sources, such as the 
computerized claims processing system, bank statements, manually 
prepared documents and ledgers, and estimates, yielding monthly reports 
more prone to errors. Several contractors did not independently verify 
the completeness and accuracy of amounts reported to HCFA.
Electronic Data Processing
    For FY 1998, HCFA relied on extensive data processing operations at 
the contractors to process and account for $176 billion in Medicare 
fee-for-service expenditures. The contractors use one of several shared 
systems to process and pay claims. The shared systems interface with 
HCFA's Common Working File to coordinate Parts A and B benefits and to 
approve claims for payment.
    Our FY 1998 review found electronic data processing control 
weaknesses at 11 of the 12 contractors sampled. Some of these 
weaknesses were also reported the previous year but were not corrected. 
For example, we were able to penetrate the security systems and obtain 
access to sensitive Medicare data. Contractors were able to deactivate 
or bypass edits, such as those used to detect duplicate claims, in two 
shared systems. We noted instances in which duplicate claims were paid 
on the same day without detection by these edits. Some paid claims 
bypassed processing by the Common Working File, and management review 
of the bypass process needed to be improved.
                               conclusion
    We in the Office of Inspector General, along with HCFA, will 
continue to identify and address problems within the Medicare 
contractor community. Through our investigations, financial audits, and 
evaluations of management practices, we hope to continue contributing 
to a system with greater integrity and effectiveness. The HCFA has 
fully cooperated with all of these investigative efforts and has 
underway a major effort to correct the accounts receivable problem with 
the contractors. We look forward to the changes in Medicare contracting 
that are taking place under the new Medicare Integrity Program, and we 
look forward to the upcoming discussions about broader contractor 
reforms.

    Mr. Upton. Thank you very much.
    Mrs. Aronovitz, we will also give you 6 minutes.

                STATEMENT OF LESLIE G. ARONOVITZ

    Ms. Aronovitz. Okay. Mr. Chairman, and members of the 
subcommittee, first I would like to introduce my colleague, Bob 
Hast, who is head of our Office of Special Investigations. 
We're both pleased to be here today as you discuss HCFA's 
oversight of the Medicare fee-for-service claims administration 
contractors and demonstrate your interest in ensuring that 
HCFA's contractors are earnest stewards of the trust fund.
    We also acknowledge the longstanding concerns expressed by 
the ranking minority member and Mr. Dingell, especially in the 
area of HCFA's selection and oversight of the fiscal 
intermediaries. We hope that our testimony today provides some 
information regarding the concerns you both expressed on this 
topic to us last year. We will be initiating additional related 
work when the needed data become available.
    Today we are releasing two reports prepared for the 
chairman, Permanent Subcommittee on Investigations, Senate 
Governmental Affairs Committee, on weaknesses in HCFA's 
contractor oversight activities that could make Medicare more 
vulnerable to fraud, waste and improper payments. Our first 
report, which is the real thick one that's only in 
prepublication--we should have the blue-cover version next 
week--addresses systemic and programmatic issues which, if 
corrected, could make HCFA more effective in overseeing its 
fiscal intermediaries and carriers. In this report, we also 
considered whether any changes in HCFA's contracting authority 
might improve the agency's ability to manage its contractors.
    Our second report provides more detail on Medicare 
contractor integrity cases in which there have been 
convictions, fines or civil settlements. The investigative 
report, which does have a blue cover and is issued in final 
today, identifies over $235 million that has been assessed in 
civil and criminal penalties against six current or former 
contractors since 1993.
    I know you've alluded to some of these, but we would like 
to reiterate that, among the charges involved in these cases, 
are that contractor employees improperly screened, processed 
and paid claims, destroyed or deleted backlogged claims, 
manufactured documentation to support paying claims that 
otherwise would have been rejected as medically unnecessary, 
switched off customer service telephone lines when staff could 
not answer incoming calls within the prescribed time limit, 
arbitrarily turned off computer edits that would have subjected 
questionable claims to more intensive review, and falsified 
documentation and reports to HCFA regarding the fiscal 
intermediaries' performance.
    Currently, HCFA has no assurance that fiscal intermediaries 
and carriers are fulfilling their contractual obligations, 
including paying providers appropriately. We found that HCFA's 
regional reviewers did not often check the validity of 
contractors' self-reported financial and management data, nor 
look behind the contractors certifications of their internal 
controls. For years, HCFA left decisions about oversight 
priorities entirely in the hands of regional reviewers, which 
has resulted in regional offices not providing consistent and 
adequate oversight. For example, while some regions have 
imposed performance improvement plans on contractors when 
problems were identified, other regions rarely, if ever, 
required them. Central office has not formally evaluated its 
regional office performance nor has it regularly shared one 
region's best practices with the others.
    HCFA officials believe that increased competition among 
contractors could enhance contractor performance, but that 
statute and current regulations limit its authority. HCFA is 
seeking new or explicit authority from the Congress that would 
allow it to do a few things: No. 1, choose its intermediaries 
rather than having providers nominate, and contract with 
nonhealth insurance companies; contract separately for specific 
functions, such as responding to beneficiary inquiries; and use 
payment methods that would allow contractors to earn profits on 
their Medicare business rather than reimbursing contractors 
only for their costs up to a preset target.
    We endorse HCFA's efforts, as these changes may broaden the 
pool of contractors HCFA could choose from and would increase 
its flexibility in contracting for specific functions. However, 
past experience with other efforts to change the program has 
shown that HCFA will need several years to carefully plan, 
properly implement, and conduct a post-implementation review of 
any new contracting authorities.
    HCFA has acknowledged to us that its oversight of 
contractors needs to be strengthened and has recently taken 
many, many steps to improve. For example, HCFA set oversight 
priorities when its regions performed fiscal year 1998 
contractor evaluations, and this year it restructured 
headquarters offices that are responsible for oversight 
activities. We believe that HCFA's initiatives are indeed 
positive. But it is still way too early to tell whether HCFA's 
actions to date will address many of the fundamental problems 
it faces in ensuring quality performance from its contractors.
    Mr. Chairman, this concludes our formal statement, and we 
would certainly be happy to answer any questions you or other 
members of the subcommittee may have.
    [The prepared statement of Leslie G. Aronovitz follows:]
 Prepared Statement of Leslie G. Aronovitz, Associate Director, Health 
    Financing and Public Health Issues, and Robert H. Hast, Acting 
   Assistant Comptroller General for Special Investigations, General 
                           Accounting Office
    Mr. Chairman and Members of the Subcommittee: We are pleased to be 
here today as you discuss the Health Care Financing Administration's 
(HCFA) oversight of its Medicare fee-for-service claims administration 
contractors. HCFA paid these contractors $1.6 billion in fiscal year 
1998 to serve as Medicare's first line of defense against inappropriate 
and fraudulent claims made on Medicare funds. They pay out over $700 
million each business day--making it a business whose size and nature 
require careful scrutiny. Revelations of inappropriate Medicare 
payments to providers totaling billions of dollars each year have 
heightened concerns about the program's management, as have cases in 
which contractors themselves have defrauded Medicare.
    Mr. Chairman, by holding this hearing, we appreciate the interest 
you have shown in ensuring that HCFA's Medicare contractors are earnest 
stewards of the trust fund. We also acknowledge the long-standing 
concerns expressed by the Ranking Minority Member, especially in the 
area of HCFA's selection, oversight, and evaluation of the fiscal 
intermediaries. We hope that our testimony today provides some 
information regarding the concerns he expressed on this topic to us 
last year. We will be initiating additional related work when needed 
data become available.
    Today we are releasing our report, prepared for the Chairman, 
Permanent Subcommittee on Investigations, Senate Committee on 
Governmental Affairs, on the weaknesses in HCFA's contractor oversight 
activities that could make Medicare more vulnerable to fraud, waste, or 
abuse. We also considered whether any changes in HCFA's contracting 
authority might improve its ability to manage contractors.1 
We are also releasing a separate report today that provides more detail 
on Medicare contractor integrity cases in which there have been 
convictions, fines, or civil settlements.2 That report

    \1\ Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure 
Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).
    \2\ Medicare: Improprieties by Contractors Compromised Medicare 
Program Integrity (GAO/OSI-99-7, July 14, 1999).
---------------------------------------------------------------------------
 identifies recently completed cases of criminal conduct or 
        False Claims Act violations committed by Medicare contractors,
 describes the deceptive contractor activities set forth in 
        those cases or alleged by investigating agents and former 
        contractor employees, and
 describes how these activities were carried out without 
        detection by HCFA.
    Our comments today are based upon both our report of HCFA's 
oversight and our investigative report. Although you are focusing 
primarily on the activities of the fiscal intermediaries, our reports 
cover both part A fiscal intermediaries and part B carriers.
    In brief, although HCFA has taken recent steps to improve its 
oversight of claims administration contractors, HCFA's oversight 
process has weaknesses that leave the agency without assurance that 
contractors are fulfilling their contractual obligations, including 
paying providers appropriately. Since 1993, at least six contractors 
have settled civil and criminal charges following allegations that they 
were not checking claims to ensure proper payment, were allowing 
Medicare to pay claims that should have been paid by other insurers, or 
were committing other improprieties. For years HCFA left decisions 
about oversight priorities entirely in the hands of regional reviewers, 
did not evaluate regional oversight to achieve consistency, and set few 
performance standards for contractors to aid in holding them 
accountable. This has led to uneven review of key program safeguards 
designed to prevent payment errors. Our report contains several 
recommendations to correct identified weaknesses and improve HCFA's 
oversight of its claims administration contractors.
    HCFA is also seeking new contracting authority that could help the 
agency increase competition and better ensure contractor performance. 
We believe the Congress may wish to consider amending the Social 
Security Act to allow the Secretary of the Department of Health and 
Human Services (HHS) explicit authority to more freely contract with 
appropriate types of companies for claims administration. Even if such 
legislation were enacted, however, HCFA would need several years to 
carefully plan and properly implement any new contracting initiatives 
to avoid the types of problems it encountered in the past when it tried 
to make changes to its contracting methods. We further believe that 
HCFA should be required to report to the Congress with an independent 
evaluation on the impact of any new authorities on the Medicare 
program.
   weak contractor oversight increases the vulnerability of medicare
    Our work indicates that HCFA has had numerous cases in which 
questions about contractor integrity have surfaced, but HCFA has yet to 
incorporate the lessons from these cases into its oversight. Since 
1990, nearly one in four claims administration contractors have been 
alleged, usually by whistle-blowers inside the company, to be 
conducting improper or fraudulent activities. We identified at least 17 
contractors that have been either the target of qui tam suits 
3 or the subject of HCFA integrity reviews. At the time of 
our review, at least 7 of the 58 current contractors were being 
actively investigated by the Department of Justice or by HHS' Office of 
Inspector General (OIG). Since 1993, over $235 million has been 
assessed in civil and criminal penalties against six current or former 
contractors. Among the charges involved in these cases are that 
contractor employees

    \3\ Qui tam suits are filed under the False Claims Act, 31 U.S.C. 
sections 3729-3733. The act's qui tam provisions permit filers to share 
in financial recoveries resulting from their cases.
---------------------------------------------------------------------------
 improperly screened, processed, and paid claims, resulting in 
        additional costs to the Medicare program;
 destroyed or deleted backlogged claims;
 failed to recoup within the prescribed time moneys owed by 
        providers, and failed to collect required interest payments;
 manufactured documentation to support paying claims that 
        otherwise would have been rejected as medically unnecessary;
 switched off customer service telephone lines when staff could 
        not answer incoming calls within the prescribed time limit;
 arbitrarily turned off computer edits that would have 
        subjected questionable claims to more intensive review;
 altered or hid files that involved claims that had been 
        incorrectly processed or paid and altered contractor audits of 
        Medicare providers before HCFA reviews; and
 falsified documentation and reports to HCFA regarding their 
        performance.
    Our investigative report focuses on three Medicare fee-for-service 
contractors with cited integrity problems. In these three cases, the 
contractors entered into civil settlements totaling about $180 million. 
Also, in two of the cases, contractors pleaded guilty to multiple 
counts of criminal fraud.
    The following illustrates the types of problems alleged at some 
contractors. A qui tam complaint filed in June 1993 alleged that from 
1988 through 1993, Blue Cross and Blue Shield (BCBS) of Michigan (1) 
routinely altered its audit work papers in order to fix deficiencies 
and then forwarded the altered papers to HCFA for review, rather than 
forwarding the original work papers as required; (2) concealed its 
``clean up'' efforts from HCFA and the participating hospitals; (3) 
lied to HCFA about the status of certain of its audits of providers to 
steer HCFA away from audits that were so poorly done that they could 
not be fixed before submission to HCFA; and (4) circumvented a 
requirement to collect overpayments within 30 days by using various 
evasive means to make it appear that payments were collected on time 
when, in fact, they were not.
    In January 1995, this case was settled for $27.6 million. In the 
settlement agreement, the contractor denied the allegations contained 
in the qui tam complaint. Nevertheless, as a result of the allegations 
and resulting investigations, the Medicare fiscal intermediary and 
carrier contracts of BCBS of Michigan were not renewed. HCFA chose BCBS 
of Illinois as the replacement for both contracts. In 1998, BCBS of 
Illinois settled criminal and civil allegations of wrongdoing for $144 
million and withdrew from the Medicare program.
    Unfortunately, few contractor integrity problems have been detected 
through HCFA's oversight. Of the 17 contractors we identified as having 
had integrity problems, only 3 were first identified by HCFA. Despite 
this record of contractor problems, HCFA's oversight is not designed to 
detect deliberate contractor fraud. Information from whistle-blowers, 
federal investigators, former contractor employees, and HCFA officials 
familiar with integrity investigations suggests that the way HCFA 
conducted on-site verification of contractors' work allowed problems to 
go undetected. For example, for many years, HCFA notified contractor 
officials in advance of the review dates and the specific or probable 
records that would be reviewed. In addition, HCFA reviewers sometimes 
relied on contractor officials to pull claims or files for review, and 
sometimes reviewed copies of information made by the contractors rather 
than the original documents. HCFA's reviews were so predictable that 
companies were able to identify the areas in their audit operations 
that could be improperly altered to achieve favorable reviews. Based on 
our interviews with investigators and former contractor employees, we 
believe that HCFA may have placed too much trust in its contractors.
HCFA Oversight Is Uneven and Inconsistent
    One of the key problems is that HCFA's current oversight process 
does not ensure that contractors are efficiently and effectively paying 
claims and protecting the integrity of the program. Poor management 
controls and falsified data have been common in the integrity cases, 
yet HCFA continues to rely on contractor self-certifications of 
management controls and contractor self-reported performance data it 
rarely validates. HCFA currently has few performance standards to 
measure contractors, has been uneven in setting priorities, and has 
given regional oversight staff broad discretion over what aspects of 
contractor performance to review and how to review them. Furthermore, 
HCFA does not check on the quality of regional oversight. Not 
surprisingly, important program safeguards have received little 
scrutiny at some contractors, and regions have been inconsistent in 
dealing with contractor performance problems.
    HCFA Does Not Validate Contractors' Internal Management Controls or 
Workload Data--HCFA's first critical weakness is that it accepts 
Medicare contractors' self-certification of management controls without 
routinely checking that controls are working as intended. Medicare 
contractors are required to certify annually that they have established 
a system of internal management controls over all aspects of their 
operations. This helps ensure that they meet program objectives, comply 
with laws and regulations, and are able to provide HCFA with reliable 
financial and management information concerning their operations. In 
April 1998, the HHS OIG reported that the regional offices were not 
evaluating the accuracy and reliability of contractor internal control 
certifications. In response, HCFA headquarters sent guidance to the 
regional offices reminding them to validate contractors' self-reports 
within the 1998 evaluation review cycle. Our analysis of fiscal year 
1998 reviews performed for seven contractors found no case in which a 
self-report of internal controls was validated. We believe systematic 
validations of contractor internal controls would significantly 
contribute to reducing the likelihood of contractor fraud.
    An equally fundamental activity in overseeing contractor 
performance is obtaining reasonable assurance that performance and 
financial data self-reported by the contractor are accurate. We 
analyzed 170 contractor reviews for fiscal years 1995 through 1997 for 
the seven contracts we studied; only two of these reviews documented 
efforts to validate contractor-supplied performance data. For 1998, 
staff in one of the three regions we visited validated contractor data 
in five reviews. Staffs of the other two regions did not validate 
performance data over the 4-year period for the contractors we 
examined.
    To address these weaknesses, we have recommended that the HCFA 
Administrator establish a contractor management policy that requires 
the verification that each contractor has the internal controls 
necessary to ensure the adequacy of its operations. We have also 
recommended that HCFA require the systematic validation of 
statistically significant samples of contractor-reported data. HCFA 
agreed on the importance of validating contractors' internal controls 
and reported workload data. In its response to our draft report, HCFA 
stated that it was hiring a firm to develop procedures and 
methodologies to evaluate contractor self-certifications of internal 
controls. HCFA also plans to contract for the development of a protocol 
to be used for data validation reviews that would begin in fiscal year 
2001.
    HCFA Sets Few Performance Standards for Contractors--Holding 
contractors accountable for meeting performance standards and measuring 
contractors on reaching these outcomes is one recognized way to improve 
performance quality. From 1980 to 1995, HCFA used an evaluation process 
for which performance standards were explicit but which focused on 
process rather than outcome. For example, it did not score contractors 
on the outcomes of their postpayment programs, such as whether their 
efforts resulted in recovering overpayments. Also, HCFA limited its 
review to standards published in the Federal Register at the beginning 
of each year, which, HCFA believed, caused contractors to mainly focus 
on those standards to ensure a high score. In response, in 1995, HCFA 
developed the Contractor Performance Evaluation (CPE) process to allow 
individual reviewers ``greater flexibility in determining the 
appropriate types and levels of review for each contractor.'' 
4 Under the CPE model, HCFA's reviewers have broad 
discretion to examine any aspect of contractor operations. Until fiscal 
year 1998, HCFA headquarters did not, however, issue guidance for 
reviewers to evaluate a minimum set of essential operations and did not 
require CPE reports to follow a standard format.
---------------------------------------------------------------------------
    \4\ HCFA, Regional Office Manual, Section 1100, ``Contractor 
Performance Evaluation'' (Washington, D.C.: HCFA).
---------------------------------------------------------------------------
    Except for standards mandated by legislation, regulation, or 
judicial decision, HCFA's current CPE process is more descriptive than 
outcome oriented. There are only a few mandated standards, such as 
processing certain types of claims within specific time periods. There 
are no standards required for HCFA reviewers to ensure that contractors 
adequately perform the most important program safeguards--such as 
medical review of claims. The lack of standards is worrisome because 
HCFA has made more effective medical review part of its plan to 
strengthen program integrity. In our opinion, the lack of clearly 
defined and measurable payment safeguard performance standards 
decreases the likelihood that HCFA will get maximum performance from 
contractors.
    HCFA's mandated standards generally apply to contractors' claims 
processing--rather than program integrity--activities. We found, 
however, that HCFA has not ensured that regional reviewers check 
contractor performance on these standards. Reviewers are only required 
to evaluate whether contractors meet the mandated standards when the 
reviewers choose that specific area of contractor performance to 
review. Our analysis of CPE reports for three regional offices found 
that when HCFA reviewers did assess claims processing activities, they 
only checked about half of the applicable mandated standards. The three 
regions varied considerably in their reviews, with one region checking 
less than 15 percent of the standards, while another region checked 
over 80 percent.
    To address these weaknesses, we have made a number of 
recommendations, including the development of a comprehensive set of 
clearly defined and measurable performance standards, the regular 
assessment of all contractors on core performance standards, and the 
development of performance reports that allow contractor comparisons on 
the core performance standards across regions. HCFA agreed with these 
recommendations and, in response to our draft report, outlined a number 
of steps it is taking to implement them including the development of a 
contractor-specific claim payment error rate as well as a contractor-
specific fraud rate, which should facilitate contractor comparisons.
    HCFA Regions Provide Uneven and Inconsistent Reviews and Remedies--
With limited headquarters guidance and little follow-up to ensure that 
guidance is followed, contractor oversight is highly variable across 
regions. Without a set of common performance standards or measures, 
reviewers and contractors lack clear expectations. This has resulted in 
both uneven review of critical program safeguards and inconsistencies 
in HCFA reviewers' handling of contractor performance problems. Besides 
the inequity for contractors, such uneven review leaves HCFA without an 
ability to discriminate between contractors' performance when assigning 
new workload.
    One such critical program safeguard for which oversight has been 
limited and uneven is that of Medicare Secondary Payer--so-called MSP--
activities. Contractor MSP activities seek to identify insurers that 
should pay claims mistakenly billed to Medicare and to recover payments 
made by Medicare that should have been paid by others. This program 
safeguard has saved about $3 billion annually from 1994 through 1998. 
Our review of three regions' CPE reports shows that many of the key MSP 
activities most germane to spotting claims covered by MSP provisions 
were not reviewed at the seven contractors in our study. Also, the 
three regions varied considerably in how much review they gave to MSP, 
with one region rarely checking MSP activities at any of its 
contractors whose CPEs we reviewed.
    This paucity of review is particularly disturbing because the 
potential for contractor fraud regarding MSP activities is significant 
as a result of an inherent conflict of interest. According to a former 
contractor employee, one contractor with a private line of business in 
health insurance in the same geographic area as its contract sometimes 
failed to send out letters to newly enrolled beneficiaries to determine 
whether Medicare payments should be secondary to those of another 
health insurer. HCFA has had to pursue several insurance companies--
some with related corporations that serve as Medicare contractors--in 
federal civil court for refusing to pay before Medicare when Medicare 
should have been the secondary payer. In such a case filed by HCFA 
against BCBS of Michigan, the company paid $24 million in settlement of 
the MSP case, in addition to $27.6 million to settle fraud allegations 
lodged against it in another case. Since 1995, settlements in the civil 
cases filed by HCFA in which a company with related interests was also 
a Medicare carrier or intermediary have totaled almost $66 million. 
HCFA currently has an additional $98 million in claims filed against 
current and former contractors as a result of its MSP activities
    HCFA's regions differ in their identification of problem 
contractors. For example, one company held two contracts for two 
states--each overseen by a different region. As part of its program 
safeguard activities, the company analyzed paid claims at one central 
location to identify possible fraudulent or abusive provider billing 
trends. While the company conducted identical types of analyses for 
both contracts, one region found that the contractor's data analysis 
activities were not fulfilling HCFA's expectations, while the other 
region found the contractor to be in compliance with HCFA's analytic 
expectations. Although these regions had signed a memorandum of 
understanding to seek consistency in how they directed the contractor 
and to coordinate oversight to avoid duplication of effort, they did 
not work together to resolve their differences and guide the contractor 
with one voice.
    HCFA reviewers may not only disagree about whether a problem exists 
but also take dissimilar actions once a performance problem is 
identified. When it identifies a deficiency, HCFA's normal procedure is 
to require the contractor to develop a Performance Improvement Plan 
(PIP) to correct the problem, and then to monitor the plan. PIPs can be 
stringent corrective actions for contractors. Contractors operating 
under a PIP can be required to make complex changes in operations and 
to submit performance data and reports about their activities until 
HCFA decides that their performance has improved.
    HCFA reviewers differ about whether they require PIPs, even in 
cases in which contractor performance is clearly not satisfactory. For 
example, one region required Contractor A to develop and follow PIPs 
for deficiencies in its performance in fraud and abuse prevention and 
detection. In contrast, another region, reviewing Contractor B, found 
many more serious weaknesses with its fraud and abuse prevention and 
detection activities. Contractor B was spending little or no time 
actively detecting fraud and abuse, failing to use data to detect 
possible fraud, not developing large and complex cases, and not 
referring cases to the HHS OIG. Furthermore, Contractor B was 
inadequately recovering overpayments, failing to focus on the highest-
priority cases, preparing no fraud alerts, and not suspending payments 
to questionable providers. The reviewer concluded that Contractor B 
failed to meet HCFA's performance expectations, yet the region did not 
require the contractor to be put on a PIP.
    To address this weakness, we have recommended that the HCFA 
Administrator designate one of the agency's organizational units to be 
responsible for

 evaluating the effectiveness of contractor oversight policy 
        and procedural direction that headquarters staff provide to the 
        regions,
 evaluating regional office performance in conducting 
        contractor oversight activities, and
 enforcing minimum standards for the conduct of oversight 
        activities.
    Again, HCFA agreed with these recommendations, stating that it is 
exploring the use of an independent evaluation of its oversight policy 
and procedures and is laying the groundwork for evaluating regional 
office performance and establishing uniform requirements for CPE 
reports.
    HCFA Has Started to Move to a More Structured Evaluation Process--
HCFA has recognized that its oversight of contractors has been less 
than adequate and issued guidance in fiscal year 1998 to have regional 
reviewers follow a somewhat more structured evaluation process. 
However, these actions are only a first step in addressing problems 
with contractor oversight.
    In May 1998, citing concerns raised by the HHS OIG and us regarding 
HCFA's level of contractor oversight, HCFA announced the ``need to 
reengineer our current contractor monitoring and evaluation approach 
and develop a strategy demonstrating stronger commitment to this 
effort.'' As a result, HCFA issued a contractor performance evaluation 
plan specifying three evaluation priorities for fiscal year 1998: (1) 
year 2000 compliance activities, (2) activities focusing on a subset of 
financial management operations--accounts receivable and payable, and 
(3) activities focusing on a subset of medical review activities.
    In 1998, HCFA also emphasized the need for regions to follow its 
structured CPE report format, including clearly stating whether or not 
the contractor complied with HCFA's performance requirements. 
Nonetheless, we found that some of the 1998 reviews continued to lack a 
structured format making it difficult to compare contractor 
performance. For example, HCFA's contractor evaluation plan for fiscal 
year 1998, issued 5 months before the close of the fiscal year, called 
for examining contractors' activities to review claims for medical 
necessity before they are paid (prepayment medical review). Our review 
of the three regions' fiscal year 1998 CPE reports shows that (1) two 
regions did not review contractors' determinations of medical necessity 
prior to payment at all contractors included in our study and (2) two 
regions did not consistently follow the structured report format, 
making it difficult for HCFA headquarters to evaluate or compare the 
results.
    Despite HCFA's intent to provide more direction to the regions on 
contractor oversight activities, it continues to issue review guidance 
late in the year. Agency officials recently told us that its plan for 
CPE reviews for fiscal year 1999 will include more headquarters 
involvement in the assessment process, review teams from headquarters 
and the regions, and multiregional reviews. However, it was not until 8 
months into the fiscal year that HCFA finally issued its fiscal year 
1999 guidance.
HCFA Lacks a Structure That Ensures Accountability
    HCFA's structure is not designed to ensure oversight 
accountability, with two aspects creating particular problems. First, 
HCFA reorganized its headquarters operations in 1997, dispersing 
responsibility for contractor activities from one headquarters 
component to seven. Second, HCFA's 10 regional offices--the front line 
for overseeing contractors--do not have a direct reporting relationship 
to other headquarters units responsible for contractor performance. 
Instead, they report to the HCFA Administrator through their respective 
regional administrators and consortia directors. We found that this 
structural relationship and the dispersion of responsibility for 
contractor activities to multiple headquarters components contribute to 
communications problems with contractors, exacerbates the weaknesses of 
HCFA's oversight process, and blurs accountability for (1) having 
regions adopt best practices; (2) routinely evaluating the regional 
offices' performance of its oversight; and (3) enforcing minimum 
standards for conducting oversight activities, including taking action 
when a particular region may not be performing well in overseeing 
contractors. In an effort to establish more consistency and improve the 
quality of contractor management and oversight, HCFA has recently 
modified its organizational structure once again by consolidating 
responsibility for contractor management within the agency and creating 
a high-level contractor oversight board. It is too early, however, to 
tell whether these changes will be sufficient.
 hcfa would need time and careful implementation to reap benefits from 
                       new contracting authority
    To address perceived barriers to effective contracting for Medicare 
claims administration services and to help attract new companies to 
become contractors, HCFA has proposed legislative changes. The 
proposals include obtaining repeal of the nomination provision--which 
allows institutional providers to select their intermediary--and 
authority to (1) contract with other than health insurers, (2) contract 
for specific functions, and (3) award other-than-cost-based contracts.
    When Medicare was enacted, the Congress authorized HCFA to use 
health payers--almost all health insurance companies--to be its 
contractors. Because providers were fearful that the new program would 
give the government too much control over medicine, institutional 
providers such as hospitals were allowed to designate an intermediary 
between themselves and the government. The American Hospital 
Association picked the national Blue Cross Association to serve as the 
intermediary for its members. Today, the Association is one of 
Medicare's five intermediaries and serves as prime contractor for 32 
local member plan subcontractors that together process over 85 percent 
of all benefits paid by intermediaries. Under the prime contract, when 
one of the local Blue Cross plans declines to renew its Medicare 
contract, the Association, rather than HCFA, chooses the replacement. 
While this may have made sense to ensure that the fledgling program 
became successfully launched, today it leaves HCFA with less ability to 
choose and manage its contractors.
    Similarly, HCFA's regulations limit its ability to contract for 
specific functions, rather than have each contractor perform the full 
range of Medicare functions. As a result, with one recent exception, 
HCFA has not experimented with having one or two contractors performing 
consolidated functions to achieve economies of scale. The one area 
where HCFA has begun to try functional contracting is for program 
safeguards, because in 1996, HCFA was given new authority to contract 
separately for these activities. However, HCFA's experience in 
implementing its new payment safeguard contract authority attests to 
the need for significant time to explore and resolve feasibility 
issues. Implementing these functional contracts will provide useful 
experience in the advantages and possible pitfalls of such functional 
contracts.
    Apart from program safeguards, other functions might be better 
performed if consolidated at a few contractors. For example, in the 
fee-for-service Medicare program, each contractor conducts hearings on 
provider and beneficiary appeals of its own claims decisions, despite 
the possible conflict of interest and inefficiency. While choosing 
certain functions and consolidating them in a limited number of 
contractors could benefit Medicare, current Medicare contractors have 
expressed concern that contracting by function would be disruptive to 
their operations and the program. After 30 years of integration, 
contractors' functions may not be easy to separate, and having multiple 
companies doing different tasks could create coordination difficulties. 
Which functions would be best suited for separate functional contracts 
has not yet been determined, suggesting that some experimentation would 
be a necessary step for the success of such an initiative.
    Contractor payment is a third area where HCFA is seeking change. 
Medicare law generally requires intermediary and carrier contracts to 
be paid on the basis of cost. Though generally not able to earn 
profits, contractors benefit when Medicare pays a share of corporate 
overhead. Nevertheless, the adequacy of current funding to attract and 
retain contractors is being questioned and may be contributing to 
contractors' withdrawing from the program. Existing constraints on 
earning a profit make participation in the Medicare program less 
attractive to companies that have been part of the program for years.
    Under HCFA's proposal to repeal the cost-based contract 
restrictions, HCFA would be free to award contracts that would permit 
contractors to earn profits. However, HCFA's past experiments with 
using financial incentives generally have not been successful and raise 
concerns about the success of any immediate implementation of such 
authority. HCFA has experimented with competitive fixed-price-plus-
incentive-fee contracts and with adding financial incentives to cost-
based contracts. Between 1977 and 1986, eight competitive fixed-price 
contracts were established as an experiment. Our 1986 report noted that 
three of the contracts generated administrative savings, 5 
but two resulted in over $130 million in benefit payment errors (both 
overpayments and underpayments) so that much of the administrative 
savings of the successful experiments was offset by program losses.
---------------------------------------------------------------------------
    \5\ Medicare: Existing Contract Authority Can Provide for Effective 
Program Administration (GAO/HRD-86-48, Apr. 22, 1986).
---------------------------------------------------------------------------
    HCFA also had problems when, beginning in 1989, it was given 
limited authority to award other-than-cost contracts. HCFA provided 
financial incentives in several cost-based contracts, but some of the 
self-reported data contractors used to claim incentive payments were 
inaccurate. In one case, the incentives would not have been paid had a 
contractor with integrity problems not cheated by ``correcting'' errors 
in about a quarter of the 60 claims reviewed by HCFA.
    The problems in previous experiments suggest that any change from 
cost-based contracting will need to be carefully designed and 
thoughtfully monitored to prevent loss to the Medicare program. Testing 
different methods of contracting could help HCFA ensure that 
implementation would improve, rather than weaken, program 
administration.
                conclusions and recommendations to hcfa
    Medicare's fee-for-service program pays out the lion's share of 
program dollars expended by HCFA, making it a business that must be 
carefully monitored. However, we found that HCFA conducted limited 
scrutiny of contractor performance. Until HCFA starts regularly 
assessing the validity of contractor controls and data, it cannot be 
assured of a contractor's integrity, the accuracy of its payments to 
providers, or the contractor's fiscal responsibility in handling 
Medicare funds.
    Contractor oversight could be strengthened if HCFA balanced an 
appropriate level of regional discretion with sufficient effort to 
establish measurable contractor performance standards, set programwide 
priorities for the assessment of all contractors, and developed a 
standardized report format facilitating contractor comparisons. HCFA 
needs to ensure that regions adopt best practices and incorporate 
lessons learned into its oversight--beginning with those learned from 
integrity cases. In addition, HCFA needs an organizational structure 
for contractor oversight that will ensure that there is evaluation of 
the quality of contractor oversight activities and of the effectiveness 
of contractor oversight policy and procedural direction.
    Over the long term, HCFA could benefit from a strategic plan for 
managing claims administration contractors that could be used as a 
guide on the path from its current contracting mode to a new one. HCFA 
could design this plan to help it determine (1) the contractor 
activities that are most conducive to functional contracting, (2) the 
activities that could be performed by other than health insurance 
payers, (3) better cost information to facilitate the move to 
competitive contracting, (4) the functional contracts that might be 
conducive to other-than-cost payments, and (5) the feasibility of 
building financial incentives into the contracts.
    In our oversight report, we make a number of specific 
recommendations to improve HCFA's oversight. Implementing these 
recommendations should help ensure that

 contractor internal controls are working;
 contractor-reported data are accurate and useful for 
        management decision-making;
 contractor performance is evaluated against a comprehensive 
        set of measurable standards;
 HCFA's treatment of contractors is more consistent; and
 HCFA has a strategic plan for implementing the legislative 
        changes that it is seeking.
    Mr. Chairman, this concludes my prepared statement. We would be 
happy to answer any questions you or other Members of the Subcommittee 
may have.
                    gao contacts and acknowledgments
    For future contacts regarding this testimony, please call William 
J. Scanlon at (202) 512-4161 or Leslie G. Aronovitz at (312) 220-7767. 
Individuals who made key contributions to this testimony included 
Sheila Avruch, Mary Balberchak, Elizabeth Bradley, Stephen Iannucci, 
Bob Lappi, Don Walthall, and Don Wheeler.

    Mr. Upton. Thank you. Ms. Thompson.

                   STATEMENT OF PENNY THOMPSON

    Ms. Thompson. Thank you. Mr. Chairman, Congressman Klink, 
distinguished subcommittee members. I am pleased to have this 
opportunity to discuss the Health Care Financing 
Administration's management of fiscal intermediaries and their 
efforts to combat fraud, waste and abuse in the Medicare 
program.
    I would like to thank the HHS, OIG and the General 
Accounting Office for the invaluable assistance that they have 
provided us in improving and enhancing our oversight of 
contractors. We are committed to improving those activities. 
The results of the fiscal year 1998 chief financial officer's 
audit of HCFA by the IG are evidence of progress that we have 
made over the past few years.
    This year's audits show that we have cut the Medicare 
payment error rate in half in 2 years from 14 percent to 7 
percent. That 7 percent still represents $12.5 billion of 
taxpayer money and so there's no sitting on our laurels or 
feeling that we've made all the progress that we need to make.
    It is far too high still and we commit ourselves to 
sustaining and increasing the improvement that we have made 
thus far.
    Let me talk a little bit about our benefit integrity units 
and the responses that we've made to the IG's report on 
contractor fraud units. Our benefit integrity units are an 
important component of our program integrity strategy. In fact, 
improving the effectiveness and efficiency of our benefit 
integrity and medical review activities is the first of 10 
areas in our comprehensive plan for program integrity.
    And I'm happy to report today on a number of activities 
that we have undertaken in that regard. Contractor fraud units 
received about $54 million this past year for their activities 
in combatting fraud. With those funds, those units are 
responsible for complaint processing and development, outreach 
and training, law enforcement support and fraud case 
development.
    Let me mention briefly six activities that are underway or 
are completed which are designed to improve the performance of 
our contractor fraud units. First is with regard to improving 
our contractor performance evaluation. In order to enhance our 
ongoing contractor oversight and provide consistency in our 
review process, we have implemented a new national contractor 
performance evaluation strategy.
    This new effort is a national multitiered approach and 
focuses our review on key high risk contractors and program 
benefit categories. National teams comprised of HCFA regional 
and central office staff are evaluating the fraud and abuse 
operations, as well as other functions of a number of fiscal 
intermediaries and carriers, including the five regional home 
health intermediaries and the four durable medical equipment 
regional carriers.
    We have also strengthened review protocols for contractor 
benefit integrity performance to be incorporated in our 
contractor performance evaluation review protocols. These 
protocols provide consistent guidance to reviewers as to what 
areas of performance should be examined and what data should be 
collected and reviewed in order to inform the reviews.
    The evaluations for benefit integrity center on the 
contractors' use of proactive and reactive techniques in 
detecting and developing fraud cases, use of corrective 
actions, such as payment suspensions, civil money penalties, 
overpayment assessments, prepayment reviews, edits and claims 
denials as well as referral to law enforcement and response to 
patterns indicative of fraud, proper development of fraud cases 
before the cases are referred to law enforcement entities so 
they can make appropriate judgments about whether to pursue 
those cases further, and improving the effectiveness of working 
relationships with internal and external partners, most 
particularly within the contractor in terms of its medical 
review activities externally with our law enforcement partners.
    We are also developing new measurements for assessing 
contractor performance. One that I have high hopes for is in 
developing a contractor specific error rate methodology. Right 
now we have an overall program error rate methodology. We think 
it would be very useful to have that kind of error rate 
assessment done at a contractor specific level, so that we can 
determine whether there are specific problems either in the 
claims being submitted to contractors, or in the way that 
contractors are handling those claims in terms of contributing 
to the errors.
    We also are improving contractor referral practices. We 
have recently sent out guidance to the contractors reminding 
them of their obligation to refer any cases of suspected fraud 
to the OIG, and to take administrative actions within their 
authority to respond to those cases as quickly as possible.
    We have conducted a national contractor training with the 
assistance of the Office of Inspector General, the Department 
of Justice involving the Federal Bureau of Investigation, and 
Assistant U.S. Attorneys across the country in working with our 
contractors on referral of fraud cases.
    We are developing a catalog of anti-fraud software and 
technology to assess both the tools currently being used by our 
contractors, who use a host of different tools, as well as the 
tools the private sector uses to identify patterns of fraud. We 
also will be pursuing a demonstration conference with the OIG 
and the Department of Justice in the next year to assess 
whether or not we want to require the use of some of that 
technology by our contractors.
    We are also requiring this year that each of our 
contractors, in response to some of the issues identified by 
the OIG and GAO, develop a quality improvement program for 
their medical review and benefit integrity activities. And we 
are implementing our authorities under the Medicare integrity 
program to award new contracts for work to different kinds of 
entities other than the ones with which we were currently 
engaged. One of those task orders is a Benefit Integrity 
Support Center in New England, which is an idea that we've had, 
that if we can have a support center working very closely with 
law enforcement and with our current contractors to actively 
search out and respond to suspected fraud. We think that could 
be a successful model that could be implemented elsewhere.
    These are all part and parcel of a larger set of activities 
designed to improve contractor performance, designed to improve 
our oversight, designed to improve our knowledge of contractor 
activities. Both good performance and the integrity of our 
contractors is essential to good functioning of the Medicare 
program.
    Before I end, I do want to mention one of the most 
immediate steps of the Administrator, who recently launched a 
management initiative focused on our contractor oversight 
assessment and integrity, was to appoint Dr. Marjorie Kanof, 
who is with me on my right, as directly responsible for all 
contractor management activities within the agency. She is the 
Deputy Director, in the Center for Beneficiary Services, for 
Medicare Contractor Management.
    Thank you.
    [The prepared statement of Penny Thompson follows:]
   Prepared Statement of Penny Thompson, Director, Program Integrity 
              Group, Health Care Financing Administration
    Chairman Upton, Congressman Klink, distinguished Subcommittee 
members, I am pleased to have this opportunity to discuss the Health 
Care Financing Administration's (HCFA) management of fiscal 
intermediaries in their efforts to combat fraud, waste, and abuse in 
the Medicare program. I would like to thank the Department of Health 
and Human Services Office of Inspector General (IG) and the General 
Accounting Office (GAO) for the invaluable assistance they have 
provided HCFA in improving and enhancing our oversight of the 
contractors. We are committed to improving our management and oversight 
of contractor activities and are making solid progress in addressing 
the IG's findings in their November 1998 Report, Fiscal Intermediary 
(FI) Fraud Units.
    The results of the Fiscal Year 1998 Chief Financial Officer's (CFO) 
audit of HCFA by the IG are evidence of the progress we have made over 
the last few years. This year's audit shows that we have cut the 
Medicare payment error rate in half in just two years, from 14 percent 
to 7 percent. That 7 percent represents 12.6 billion taxpayer dollars, 
which is a big step forward. But it is still too high and we must be 
diligent in sustaining and increasing the improvement we have made thus 
far.
    Since the Clinton Administration took office, the Department of 
Health and Human Services has taken a number of steps to implement a 
``zero tolerance'' policy for fraud, waste, and abuse. To do this, we 
must assure that Medicare pays the right amount, to a legitimate 
provider, for covered, reasonable, and necessary services for an 
eligible beneficiary. Achieving this goal is one of our top priorities 
at HCFA. With help from Congress, our contractors, providers, 
beneficiaries, and our many other partners, we have achieved record 
success in assuring proper payments. We also have made considerable 
progress in fighting fraud by increasing investigations, indictments, 
convictions, fines, penalties, and restitutions.
    To this end, we developed a Comprehensive Plan for Program 
Integrity, which was released in March 1999. Its development began a 
year earlier when we sponsored an unprecedented national conference on 
waste, fraud, and abuse in Washington, D.C., with broad representation 
from our many partners in this effort. The bulk of the conference 
consisted of discussions on how we could build on the highly successful 
Operation Restore Trust demonstration project, in which we increased 
collaboration with law enforcement and other partners to target known 
problem areas.
    Groups of experts, including private insurers, consumer advocates, 
health care providers, state health officials, and law enforcement 
representatives, shared successful techniques and explored new ideas 
for ensuring program integrity. Their suggestions were synthesized and 
analyzed to determine the most effective strategies and practices 
already in place, and the new ideas that deserved further exploration. 
The result was our Comprehensive Plan for Program Integrity. One of the 
ten key areas included in this plan is related to improving the 
effectiveness of medical review and fraud detection within our 
contractors, including the fiscal intermediaries (FI) that process 
Medicare claims.
    Improving Medicare Contractor Performance Evaluation. In order to 
enhance our ongoing contractor oversight and provide consistency in our 
review processes, HCFA implemented a new National Contractor 
Performance Evaluation Strategy in May. This new effort is a 
nationwide, multi-tiered approach and focuses our review on key, high 
risk contractors and program benefits categories. Our evaluation 
strategy for fiscal 1999 includes ten core evaluation areas such as 
millennium compliance, accounts receivable, audit quality, standards 
for timely processing of claims and customer service, as well as 
follow-up on performance improvement plans that we required contractors 
to submit based on program deficiencies identified during our fiscal 
1998 reviews.
    National teams comprised of HCFA regional and central office staff 
are evaluating the fraud and abuse operations, as well as other 
functions of a number of fiscal intermediaries and carriers, including 
the five Regional Home Health Intermediaries and the four Durable 
Medical Equipment Regional Carriers. In conducting their reviews, the 
teams will use a standardized fraud and abuse review protocol, and team 
members will participate in reviews at multiple contractors, thus 
helping to ensure the consistency of our evaluations across different 
contractors.
    We also have established specific, objective standards for 
contractor benefit integrity performance that have been incorporated 
into our Contractor Performance Evaluation (CPE) review protocol. These 
standards provide consistent guidance to contractors as to what 
improvements are needed. The CPE system uses a standard data set to 
measure FI fraud units' performance in accomplishing established 
performance objectives.
    Contractor evaluations center on the contractors':

 Use of proactive and reactive techniques in detecting and 
        developing fraud cases;
 Use of corrective actions, such as payment suspensions, Civil 
        Monetary Penalties, overpayment assessments, pre-payment or 
        post-payment claims reviews, edits, and claims denials;
 Proper development of fraud cases before referral to law 
        enforcement entities; and
 Effectiveness of working relationships with internal and 
        external partners.
    Improving Contractor Referral Practices. In December 1998, 
President Clinton announced that HCFA is now ``requiring all Medicare 
contractors to notify the government immediately when they learn of any 
evidence of fraud, so that we can detect patterns of fraud quickly and 
take swift action to stop them.'' To implement this, in December 1998 
we issued a Program Memorandum to all contractors clarifying their 
obligation to protect the Medicare Trust Funds, and we are requiring 
contractors to take all necessary administrative action to prevent or 
recover inappropriate payments. This includes a reminder that 
contractors refer all cases of suspected fraud to the IG.
    National Contractor Training. Beginning in May and continuing 
through July 1999, HCFA, the IG, and the Department of Justice (DOJ), 
conducted contractor training sessions for all Medicare contractor 
fraud units across the country to ensure timely and appropriate 
referral of fraud cases. We provided our contractors with expert 
guidance on how best to identify and develop cases of fraud for further 
investigation by law enforcement authorities. During the course of 
training, contractor program integrity personnel, HCFA central and 
regional office staff, as well as law enforcement personnel learned the 
proper procedures, documentation processes, and analytical methods 
necessary to ensure that the IG and law enforcement can take aggressive 
action and successfully prosecute all legitimate fraud cases.
    Using Technology. We are always looking for ways to use technology 
to help us ``pay it right.'' To ensure we are taking advantage of the 
latest in anti-fraud technology, we recently completed a comprehensive 
survey of software employed by our contractors to detect fraud and 
abuse. We are now expanding that survey to identify private sector 
tools. Our goal is to establish a system to routinely evaluate emerging 
technologies to ensure we possess the most effective tools for fighting 
Medicare fraud. We plan to undertake an analysis of these tools and 
their effectiveness in concert with our law enforcement partners.
    Improving Qualifications of Contractor Program Integrity Staff. We 
will require both current and future contractors to ensure that their 
program integrity staff have the knowledge and skills critical for 
their jobs. Contractors will be required to demonstrate that they have 
appropriate staff to meet program integrity objectives. In particular, 
we are requiring contractor fraud units to implement training programs 
focused on fraud detection techniques, interviewing, and data analysis.
    Quality Improvement Program. As recommended by the IG, we also are 
requiring each contractor to establish a Quality Improvement program 
that is tailored to best suit their particular operational procedures. 
The Quality Improvement program must be approved by the appropriate 
HCFA regional office. To assist the contractors in developing these 
programs, we will be sharing ``best practice'' findings gathered by our 
regional office staff, as well as providing technical assistance 
through our Fraud Unit Improvement Task Force.
    Feedback from Performance Reviews. We also want to build on 
effective practices now employed in our fraud units and develop 
constructive solutions to common problems. At the end of the Fiscal 
Year 1999 contractor review cycle, we are holding a conference for our 
national and regional contractor review team members to provide an 
opportunity for all our reviewers to share their experiences, including 
contractor problems and best practice information, face-to-face.
    Implementing the Medicare Integrity Program. In May, HCFA named 12 
businesses with expertise in conducting audits, medical reviews, and 
other program integrity activities, to be the first-ever Medicare 
Integrity Program (MIP) contractors. MIP, as authorized under the 
Health Insurance Portability and Accountability Act, allows us to hire 
special contractors whose sole responsibility is ensuring Medicare 
program integrity. Until now, only the insurance companies who process 
Medicare claims have been able to conduct audits, medical reviews, and 
other program integrity activities. Under this new authority, we are 
contracting with these 12 firms to bring new energy and ideas to this 
essential task.
    MIP allows us to issue Task Orders for any or all program integrity 
activities. And provides us a pool of contractors who are available to 
undertake work before we solicit proposals for specific contractors' 
workloads. We also will be able to turn to these contractors on-the-
spot when various situations arise, such as the appearance of new fraud 
schemes or the departure of another contractor.
    These 12 selected contractors are now eligible to compete for 
specific work assignments. Beginning with the six initial Task Orders 
also released in May, contractors will be selected for each of the 
following tasks:

 Conducting cost-report audits for large health-care chains. 
        Through careful review of the way large health care chains 
        allocate their home office costs, this task will ensure that 
        Medicare pays providers appropriately.
 Preventing possible Year 2000 threats to program integrity. 
        This task involves conducting national data analyses to detect 
        and prevent potential risks of fraud and abuse during the 
        critical months surrounding the millennium change.
 Conducting on-site reviews of Community Mental Health Centers 
        (CMHC). These reviews will build on HCFA's ongoing CMHC 
        initiative and require qualified mental health professionals to 
        conduct unannounced visits to CMHCs to ensure they provide the 
        services required by law and meet all other applicable federal 
        and state requirements.
 Identifying effective areas to target for national provider 
        education. Under this task the contractor will provide analysis 
        of data and trends, surveys of health-care providers, and other 
        research to develop target areas for a national provider 
        educational plan.
 Performing data analysis and other activities to support the 
        fraud units in New England. This work will support the efforts 
        of the relatively small fraud units at New England's Part A 
        Medicare contractors, which will continue their current 
        workload and staffing levels. The contractor will analyze 
        regional data and develop fraud cases.
 Ensuring providers comply with settlement agreements with the 
        IG. This work involves on-site reviews of providers who have 
        established corporate integrity agreements to ensure the 
        contractors meet the terms of the agreement as well as follow 
        proper procedures.
                     overall contractor management
    The improvements discussed above are part of a larger initiative to 
improve our management of the contractors in all areas. I would like to 
take a few moments to highlight some aspects of this larger strategy. I 
also would like to express our appreciation to the GAO for the 
recommendations that they have provided us in this regard.
    One of the first, and among the most important, steps we took was 
to restructure and consolidate HCFA's management of the contractors. In 
November 1998, we established the position of Deputy Director for 
Medicare Contractor Management as part of the Center for Beneficiary 
Services. Marjorie Kanof, M.D., is directly responsible for all 
contractor management activities within the Agency. Dr. Kanof 
previously served as a Medical Director of Blue Cross of Massachusetts 
and has firsthand knowledge of both contractor performance and HCFA's 
oversight.
    In order to ensure the overall financial integrity of the Medicare 
program, we are taking action to ensure the accuracy of all of our 
contractors' internal financial controls and reported performance data. 
To this end, we are planning to contract with an Independent Public 
Accounting (IPA) firm to develop standard review procedures and 
methodologies for evaluating the documentation submitted by the 
contractors during the annual self-certification of their internal 
controls. In addition to preparing individual contractor review 
reports, the IPA will provide the contractors with information on best 
practices, as well as ways to improve management control certification 
processes and evaluation activities. Based on the results of these 
internal reviews, we are considering conducting additional audits to 
examine in detail the adequacy of the contractors' internal control 
policies, procedures, and documentation. And we anticipate issuing a 
contract to develop protocols for validating data reported to HCFA by 
the contractors.
    We also are developing a new management reporting system, called 
Program Integrity Management Reporting (PIMR), to assist us in 
measuring contractor performance in the area of program integrity. This 
new procedure will use data derived directly from the contractors' 
claims processing systems, as opposed to the current system which 
relies on self-reported data, and will significantly increase the 
reliability and usefulness of the data.
    We also are developing a business strategy for Medicare fee-for-
service contractor operations, taking into account both our past 
experience and current environmental factors, including the changing 
business environment for Medicare contractors. One of our primary goals 
is to be more consistent in our management of fee-for-service 
contractor performance. The validation of several strategic management 
approaches, through limited pilot programs, will be critical to this 
effort. For example, our experience with the new MIP Program Safeguard 
Contractors will provide valuable information to us on how we can 
improve our contracting processes and oversight. Furthermore, we have 
established the Medicare Contractor Oversight Board, which provides 
executive leadership and establishes guiding principles for HCFA's 
oversight of the Medicare fee-for-service contractor network.
    Finally, the Administration has proposed comprehensive contracting 
reform legislation numerous times since 1993. If enacted, this 
legislation would provide the Secretary with more contracting 
flexibility, bring Medicare contracting more in line with standard 
contracting procedures used throughout the Federal government, and 
create an open marketplace so we do not have to rely on a steadily 
shrinking pool of contractors.
                               conclusion
    We are making substantial progress in fighting fraud, waste, and 
abuse in the Medicare program and ensuring that we pay right. We 
realize that more work needs to be done. And we are committed to 
continuing to build on the improvements we have made in our management 
and oversight of our contractors. We appreciate this Committee's 
leadership in this area, and the important work that our colleagues at 
the IG have done in highlighting areas that need improvement. I thank 
the Committee for holding this hearing and I am happy to answer any 
questions you may have.

    Mr. Upton. Thank you. Thank you all for your testimony. And 
we would just like to announce that we've had a number of 
members that have come in.
    Mr. Strickland, did you want to give an opening statement?
    Mr. Strickland. No, thank you, Mr. Chairman.
    Mr. Upton. I would note--Mr. Green, would you like an 
opening statement?
    Mr. Green. I will submit one for the record.
    Mr. Upton. And I know Mr. Bliley was here as well and Mr. 
Bilbray, so that offer remains and all members will be allowed 
by unanimous consent to put their opening statement in the 
record.
    You know as I read these reports and listen to the 
testimony, it seems--and I hear the laundry list of abuse, 
particularly by Mr. Grob and Ms. Aronovitz, there's just a 
laundry list of problems that persist, and as careful as we 
might have tried to be in the Congress in trying to help the 
process and identify and correct areas of fraud and abuse in 
this massive program, it just seems like we haven't done a very 
good job.
    We've identified abuses and they just persist and persist 
and persist. And as you all have looked at a number of specific 
cases outlined in your testimony and materials that were 
presented to us today, it's really--I sense that it's--you 
haven't examined all 50 States, right? You only looked at a 
handful of States. As I understand it, a majority of the States 
that you've looked at have enormous trouble. And so we probably 
don't still have a handle in terms of the fraud and abuse 
that's out there in this program. Am I correct?
    Mr. Grob. We still have those 21 investigations underway.
    Mr. Upton. But how--if you're trying to extrapolate that 
for the whole country, we're still only scratching the surface.
    Mr. Grob. We conduct our investigations when we have 
credible reason to believe that there's something to be 
investigated. So the fact that we have what approximately--I'm 
not sure it's one-third, but say one-fourth or so, is certainly 
an indication that they have reached the stage that we have to 
conduct investigations. Then that's certainly an indication 
there are serious problems.
    I would like to state too that the problems of the 
accounting, the financial management that I mentioned, were 
found in all 12 of the contractors that we looked at, which 
were randomly drawn for the purpose of CFO review, so every one 
of those had that accounting problem.
    Mr. Upton. Ms. Aronovitz.
    Ms. Aronovitz. We looked at cases that were a matter of 
public record that had already been closed and settled, so we 
do not know the extent of ongoing criminal behavior.
    Mr. Upton. Ms. Aronovitz, when you testified, you indicated 
that some regions of the country have done better than others, 
and yet a frustration that you were able to identify was that 
HCFA failed to share those results and sort of allow regions to 
compete with some strengths to correct the problems that were 
out there.
    Ms. Thompson, I don't know if you have looked specifically 
at some of the results or some of those regions. But as you 
look to the future, is that something that HCFA plans to do?
    Ms. Kanof. Well, in fact we have. We've begun to initiate 
some of those best practices. Specifically what we've begun for 
our fiscal year 1999 reviews, is to have national teams. Most 
of the large contractors are no longer just being reviewed by 
single staff from one regional office. Now, there are networks 
of regional office staff and central office staff going out to 
visit all the contractors that we've selected that are at high 
risk as well as the RHHIs and the durable medical equipment 
contractors. We are forming national teams so that we have 
consistency. We've learned from some of our best practices that 
we need coordination, consistency and centralization.
    In addition, we are collecting information and we will be 
having a session at the end of this fiscal year specifically 
looking at what we've learned and addressing the best 
practices. So we have basically taken every one of the GAO 
recommendations and have either activity in progress addressing 
those recommendations, or plans to address each one of them.
    Mr. Upton. One of the things that Ms. Aronovitz mentioned 
was that with some of the changes that have been recommended 
that there was no assurance in fact that they may in the long 
term be able to correct some of the problems that were out 
there.
    Are there some shortcomings that you see in HCFA not taking 
advantage of some of the things that you identified?
    Ms. Aronovitz. No, we're actually very pleased that HCFA 
has responded so well and so quickly to some of the findings 
and concerns that we've had. As we started our work, we like to 
make an agency aware of what we're finding because we don't 
like to surprise them, we like to work with them, and along the 
way HCFA has made some fundamental changes.
    The problem we have is that clearly these changes are 
either several weeks or months old or on the drawing board, and 
it would be probably unfair to the agency and to us to try to 
evaluate those until they're fully implemented. So we plan to 
continue to look at HCFA's actions, and we will be in the 
future able to comment on whether these actions will deal with 
a lot of the fundamental problems.
    Mr. Upton. We look forward to hearing your recommendations 
and thoughts in the future.
    Mr. Klink.
    Mr. Klink. To start out, Mr. Grob, you know, to paraphrase, 
why would a baseball team not use bats? Did all 12 of these 
firms that you looked at not use the credible accounting 
system? I mean that sticks out like a sore thumb.
    Mr. Grob. I think it's because it's not their money. I 
think what we have is the way that the system is constructed 
here we have cost-based contracting. We pay these contractors 
for their costs of doing this, which I believe is a very 
inadequate way to guarantee that you get a good product from 
government procurement as a general rule.
    It basically motivates people to demonstrate that they have 
insured costs in order to get reimbursed. So I think it 
motivates people to do their accounting that way, but I think 
more fundamentally, it is not their money that is being managed 
so the incentives are not as strong.
    Mr. Klink. By not using the credible accounting methods 
does it also leave the ability to have all of those blue marks 
on the chart where people can be working toward ripping off the 
system and showing more of a financial advantage for their own 
companies?
    Mr. Grob. It is a serious vulnerability to not have the 
normal expected accounting systems when tens of millions of 
dollars are passing through the office.
    Mr. Klink. I mean that to me is one of the most frightening 
things you have shown us thus far, and I assume that Medicare 
carrier X [referring to chart], this is an actual company.
    Mr. Grob. Yes.
    Mr. Klink. This is not something that you just dreamt up 
and put an X on top, there is a company that this is their 
structure and every one that is blue there is evidence that 
they are participating in ripping off Medicare, the very people 
who are supposed to be protecting Medicare who we've hired to 
bring state-of-the-art private sector technology to show us how 
to manage Medicare to cover waste, fraud and abuse, to recover 
those dollars for the taxpayers and for the Medicare 
recipients, that many people are taking part for the private 
sector company in--at least there's the evidence that they are 
taking part in participating in ripping it off.
    Mr. Grob. Yes.
    Mr. Klink. Ms. Aronovitz, I'm sure that you gathered from 
my opening remarks that we're still very much interested in 
having you revisit the work that Mr. Dingell and I requested 
last year on the Illinois Blue Cross-Blue Shield case.
    What can you tell me about where the effort is now and any 
discussions you've had with the Department of Justice regarding 
when the job can be restarted?
    Ms. Aronovitz. Yes. We've been in ongoing discussions with 
the Department of Justice. As you know, three management 
officials from that company have pled guilty. There are 
currently 5 criminal indictments that are pending; those trials 
are scheduled for September 13 of this year. The Department of 
Justice expects that those cases will take between 8 and 9 
weeks.
    They also state that there could be some actions after 
these trials are over in the form of appeals. But I should also 
say that the corporate plea agreement on the civil settlement 
for $140 some odd million is now final. The court has accepted 
that.
    So we're in the process now of monitoring the status of the 
ongoing indictments and those trials, and we will work with you 
when those are finished to figure out what we can do to 
continue to look at that.
    Mr. Klink. You anticipate at this point that your Office of 
Special Investigations is going to be part of this continuing 
effort?
    Ms. Aronovitz. I think a lot of it would depend on the 
specific issues that we agree need to be looked at further. And 
certainly our Office of Special Investigations and our division 
work very closely together and certainly we would provide you 
with any resources that are necessary to answer your questions.
    Mr. Klink. Thank you. We look forward to working with you 
on that.
    Without a doubt, I got to tell you I'm very disturbed by 
the kind of activities that were being perpetrated by these 
various contractors that you identify in your report. Even 
though Mr. Dingell read this, I just want to read it again to 
you, and then I want to go over some of the points. This is 
from the report, ``Medicare contractors are HCFA's front line 
of defense against provider fraud, abuse and erroneous Medicare 
payments. However, several of them have committed fraud against 
the government. Since 1990, nearly 1 in 4 claims administration 
contractors have been alleged generally by whistleblowers 
within the company to have integrity problems. One-fourth.
    ``GAO has identified at least 7 of HCFA's 58 contractors as 
being actively investigated by HHS, OIG or Justice. Since 1993, 
HCFA has received criminal and civil settlement decrees 
totaling over $235 million from 6 contractors after 
investigations of allegations that the contractors employees 
deleted claims from the processing system, manufactured 
documentation to allow processing of claims that otherwise 
would have been rejected because the services were not 
medically necessary and deactivated automatic checks that would 
have halted the processing of questionable claims.''
    We've had hearings in this very subcommittee talking about 
getting the latest software, make the software available so 
that--we should use Cox technology, we put money out for other 
technology, what in the hell are we supposed to do when they're 
turning it off? I mean is there not a check on the people that 
are supposed to be checking the system?
    Ms. Aronovitz. We think there are a few fundamental actions 
that HCFA needs to take and they have now agreed to take in 
their strategic plan for overseeing contractors. One had to do 
with the fact that HCFA was not routinely validating the 
workload financial and management data that was being submitted 
to the regions in the process of overseeing the contractors.
    You don't necessarily always want to rely on contractor-
provided information; you want to go and verify that. Also, 
there's a requirement for contractors to certify that their 
internal controls are in place and are effective. And it's very 
important that HCFA reviewers go out and look behind those 
certifications to assure that in fact the company is conducting 
itself with integrity. Those are the kinds of things that HCFA 
was not able to do on a routine basis across the country.
    It's those kind of actions that you would always want, no 
matter who is your contractor or processing your claims, you 
always want to have that arm's length oversight, and that 
oversight needs to be very vigilant, especially in the type of 
program that is so vulnerable to so many areas.
    Mr. Klink. Thank you very much for your work on this report 
and for your efforts. We look forward to working with you 
further on in this. Thank you, Mr. Chairman, I yield back.
    Mr. Upton. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman.
    This is always a very popular subject in town meetings. And 
I know it's not the end-all to our health care problem, but it 
certainly is a big chunk of our money going out the door. In 
reading the materials, I find that in fiscal year 1998 there 
was $220 billion in outlays. Is that right, $220 billion in 
outlays? Does that mean money that was paid out to--supposedly 
paid out to providers?
    Mr. Grob. Yes.
    Mr. Bryant. In other words, that was not administrative 
costs and salaries to HCFA?
    Mr. Grob. That's right, billion.
    Mr. Bryant. $220 billion. And of that, as I understand the 
system, you've got Medicare and HCFA, and then you've got a 
layer of contractors----
    Mr. Grob. Yes.
    Mr. Bryant. [continuing] that are in between HCFA and the 
providers?
    Mr. Grob. Yes.
    Mr. Bryant. Now, there are two sources of fraud and waste; 
one is at the second layer, the contractors?
    Mr. Grob. Yes.
    Mr. Bryant. And the other one is the provider level?
    Mr. Grob. Yes.
    Mr. Bryant. Of the $220 billion how much of that do you 
estimate would be this fraud and waste?
    Ms. Aronovitz. We can say that $220 billion was paid out in 
benefits on behalf of beneficiaries to providers and $1.6 
billion was paid to the contractors in fiscal year 1998 to 
conduct their claims administration activities and their 
program integrity activities. I don't know if that helps in 
terms of the way that the money breaks down.
    Mr. Bryant. $221.6 billion total to those two groups? How 
much of that would be fraud, waste?
    Mr. Grob. Let me try to answer. We really don't know how 
much is fraud, and we do know this and Mrs. Thompson already 
alluded to that, in 1998, we incorrectly paid about $12 billion 
of the $220 billion to providers, payments that should not have 
been made, most of them because the services weren't medically 
necessary or the people weren't eligible for it. In some cases 
because the documentation wasn't there.
    This was a major improvement compared to a couple of years 
before that, and it truly is a matter of some celebration with 
the reservations that Ms. Thompson made that we still have to 
whittle this down. The reason we don't know how much of it is 
fraud, because by definition, fraud has not occurred until 
someone has been found guilty. So we really don't know if we 
have an investigation whether it's a mistake or whether it's 
just sloppiness, or whether it's an intention to see what you 
can get by with, whether it's something that is--you might want 
to classify as abuse instead of fraud--that is best recovered 
through a simple recovery of an overpayment, we really don't 
know, and we don't want to say that it is all fraud.
    There's probably also some fraud that's not detected in 
that audit. If someone is really good at it, we won't find it.
    Mr. Bryant. Let me ask again, I am just trying to get a 
handle on this. You're saying at the intermediary level $1.6 
billion was paid to those folks, and from that $1.6 billion 
that's where they take their fraud and waste from?
    Mr. Grob. No. I see what you're saying now. The total 
improper payments in the program would be the $12 billion. Now 
the problem we're finding here among the intermediaries, we 
found the settlements totaling $260 million out of the roughly 
billion and a half that they have for administering the 
program.
    Mr. Bryant. From the $1.6 billion that is paid to the 
intermediaries, that's the pool from which they steal?
    Mr. Grob. Yes.
    Mr. Bryant. Okay. And you can call them to the tune of $260 
million?
    Mr. Grob. Yes. Over a number of years.
    Mr. Bryant. They can't steal from the $220 billion, can 
they?
    Mr. Grob. One distinction if I can make for you, most of 
the money was defrauding how much we were supposed to pay them 
for doing their job, it's not as if they diverted money from 
the Medicare program to their own coffers. The only exception 
to that has to do with Medicare secondary payer provisions, 
that is whether or not they knowingly have Medicare pay for 
something that they themselves should have paid for because 
they were the primary payer of the beneficiary. But in general 
the point you're making is accurate.
    What we're talking about here is fraudulently receiving 
money from us for not administering the program, not doing the 
job that we were paying them to do.
    Mr. Bryant. Now it seems to me that the intermediary 
problem would be easy to fix, and I may have overstated when I 
said steal, I know there's some of the things you alluded to, 
negligence and good faith and just simply mistakes, but I think 
there's more of that probably in the third tier, the provider 
area, where you've got $220 billion that's going out, I know 
that's caught through U.S. Attorneys and so forth. But how much 
can we improve this system in the provider area with the 
doctors and the hospitals and giving them better resources and 
better education and better training to avoid these mistakes, 
lack of bad faith, negligent situations where there's not an 
intentional fraud or abuse involved? Is it that we're not doing 
a good enough job in educating the provider level, doctors and 
hospitals?
    And my time is up, so if one of you can answer briefly.
    Ms. Thompson. I would be happy to answer that because I 
think we're not doing enough in terms of provider education. 
It's one of the reasons why we are instituting a new program 
that the Administrator has just accepted as a national program 
that was developed by one of our contractors in Florida. As 
part of this program, we will go out to physician groups and 
hospitals and so forth and do very intensive educational 
activities, use satellite technology, use computer-based 
training, so that people have access to information about what 
they should be doing and how they should be doing it.
    Of the set of the initial task orders that we're giving to 
our new Medicare Integrity Program contractors, I mentioned 
earlier that the Benefit Integrity Support Center in New 
England will try to gather all of the parties together and get 
all the skill sets in one place to really look at data and look 
and partnership and decide what to pursue.
    Another one of the task orders is to develop a national 
integrity program provider education effort. I think a large 
portion of the reduction that we saw in the error rate in the 
last 2 years has been because providers have been paying better 
attention and we've been providing them information and they've 
been responding to that when they submit claims in the first 
place.
    Mr. Bryant. Thank you.
    Mr. Upton. Mr. Dingell.
    Mr. Dingell. Thank you, Mr. Chairman. Thank you for your 
kind mention, and I want to thank and commend the entire panel 
for your good work here.
    I note that there have been a number of cutbacks at 
regional offices in the GAO, New York, Cincinnati, 
Philadelphia, Detroit. The number of people in these offices of 
special investigations continues to approximate about 38.
    What is the practical effect on your efforts to address 
Medicare fraud, waste and abuse find in the closure of these 
three facilities? I note that you complained about the Michigan 
Blue Cross handling. I note New York is one of the major cities 
in the United States with an awful lot of government offices. I 
note the same is true about Philadelphia and Cincinnati.
    What does the effect of those closures have on your efforts 
of addressing your problem of waste, fraud and abuse?
    Ms. Aronovitz. I think we try very hard to use whatever 
resources Congress gives us as best as we can.
    Mr. Dingell. Closing those offices was not helpful, was it?
    Ms. Aronovitz. Closing offices are never helpful to any 
type of resource.
    Mr. Dingell. What was the impact on your efforts to address 
waste, fraud and abuse?
    Ms. Aronovitz. I think we have had to learn to work much 
smarter and to be much more efficient in terms of the way we 
use our audit resources.
    Mr. Dingell. But your efforts to address waste, fraud and 
abuse is done by communicating between your office and the 
folks in the regional offices and saying go out and audit these 
people, isn't that what you do?
    Ms. Aronovitz. Right.
    Mr. Dingell. You aren't able to do that now with the 
closure of these offices in New York, Philadelphia , Detroit 
and Cincinnati, isn't that right?
    Ms. Aronovitz. I actually hold two titles. I'm actually 
regional manager of our Chicago office, where we now are 
responsible for the work that is being done in Michigan.
    Mr. Dingell. Do you investigate waste, fraud and abuse in 
Detroit or in Cincinnati? You've got to send people there.
    Ms. Aronovitz. We do travel extensively.
    Mr. Dingell. That means you have higher costs and time 
loss, doesn't it, and much less efficiency in the use of your 
personnel, isn't that right?
    Ms. Aronovitz. We devote a lot of resources to travel. It's 
hard to say. I think we're working a lot smarter also but 
certainly it is a challenge for us.
    Mr. Dingell. But you're not able to function as well 
because you've closed these offices; isn't that true? Just talk 
to me. You're a friend. I'm not after you.
    Ms. Aronovitz. To be very honest, I would like to give you 
a very honest answer. I think we have learned through this 
experience to try to figure out how to be more efficient.
    Mr. Dingell. I will accept that answer. I've got to say 
after 40 years of this I'm really kind of tired of it. And what 
I really want to hear, can you honestly tell me that you can't 
do your job as well because of the closures of these offices?
    Ms. Aronovitz. With all due respect, I don't believe that 
that is necessarily true.
    Mr. Dingell. You don't think so? That's remarkable. Let's 
talk here about some other things. You tell us that they 
arbitrarily turned off computer audits that would have 
subjected questionable claims to more intensive review. This 
had a bad effect on the Medicare trust fund, did it not?
    Ms. Aronovitz. Yes.
    Mr. Dingell. Okay. I'm going to ask you to submit what it 
did exactly for the record.
    Ms. Aronovitz. Sure.
    Mr. Dingell. The next one, is that you said they falsified 
documentation and reports to HCFA regarding the contractor's 
performance. This had a bad impact upon the taxpayer budget, 
did it not?
    Ms. Aronovitz. Yes.
    Mr. Dingell. I'm going to ask you to submit for the record 
precisely what that meant.
    You said they destroyed or deleted backlog claims. Again 
this had a bad impact on both the taxpayer and the trust fund, 
did it not?
    Ms. Aronovitz. Yes.
    Mr. Dingell. I'm going to ask you to submit for the record 
exactly what that did.
    You say then that they improperly screened, processed and 
paid claims resulting in additional costs to Medicare program. 
Again, this had a bad impact upon the taxpayers, did it not?
    Ms. Aronovitz. Yes.
    Mr. Dingell. I'm going to ask you to submit precisely what 
that did.
    You said they failed to recoup within the prescribed time 
money owed by providers and failed to collect required interest 
payments. Again this had a bad impact on the taxpayer and the 
trust fund did it not?
    Mr. Hast. It did.
    Mr. Dingell. I'm going to ask you to submit that for the 
record exactly what it did.
    And you said some Medicare contractors altered or hidden 
files that involved claims that had been incorrectly processed 
or paid and, altered contractor audits of Medicare providers 
before HCFA reviews. Again this had a bad impact on the 
taxpayer, did it not?
    Ms. Aronovitz. It did.
    Mr. Dingell. I'm going to ask you to submit exactly what 
that did.
    Do any of the other witnesses or do you, Ms. Aronovitz, or 
you, Mr. Hast, desire to give us any comment about any other 
activities that might have adversely impacted the Medicare 
program and the business that we're discussing today?
    Mr. Hast. I think that the litany that Leslie has gone 
through pretty much covers the things that we found. I think 
that one of the things that we found is that because of HCFA 
not being able to detect this, these types of activities could 
have taken place in any contractor. I mean we looked at several 
and these same type of----
    Mr. Dingell. But you got 25 percent of them that hadn't 
been looked at, isn't that right, or you only looked at 25 
percent?
    Mr. Hast. I think there are 25 percent that are under 
investigation.
    Mr. Dingell. How many haven't you looked at at all?
    Mr. Hast. I would say that I would have to ask the 
Inspector General's office. But we have only looked at the ones 
that are actually in our report.
    Mr. Dingell. Okay. You have a lot of them that haven't been 
looked at. Is there any reason to assume these are a group of 
choir buys or angels who are preparing to sing in the heavenly 
choir about goodness of man?
    Mr. Hast. I think they could have asked--any contractor 
could have done exactly what the ones we looked at did, if they 
were so inclined. We have no reason to think they did.
    Mr. Dingell. Why have these other folks not been audited?
    Mr. Grob. I can address that if you wish. We do conduct the 
audit every year now, the so-called CFO audit, and part of that 
does include a representative sampling of the claims and the 
processing of them, and in the course of doing that, we picked 
randomly 12 contractors whose accounting systems and control 
systems we did review. And the financial management problems 
that I referred to, we did find those serious problems in all 
12 of those that were randomly selected. So that would indicate 
that that those kinds of problems would be persuasive across 
the board because it was a random sample.
    Mr. Dingell. When are you going to get around to auditing 
so we can catch some other rascals?
    Ms. Kanof. I think that is part of the HCFA program that 
began in 1999 and will continue in the future. Some of these 
referrals that the OIG has investigated, at least most 
recently, have been made by HCFA while they were doing a 
contract performance evaluation, and I think that's a 
significant forward step.
    And I believe that as we provide rigorous oversight of our 
contractors and follow the recommendations of the GAO and the 
IG, that we will be doing more internal controls and more 
audits and, as appropriate be making referrals to the OIG for 
additional investigations.
    Mr. Dingell. Mr. Chairman, I note my time is expired. I 
thank you for your courtesy.
    Mr. Burr [presiding]. The gentleman's time has expired. The 
chair would recognize himself for 5 minutes.
    Let me also take the opportunity to thank all of you and to 
commend you for your work as well as to commend HCFA, even 
though I think we agree that there's still work to do.
    Let me just ask all of our panelists, is there anyone that 
would disagree that waste, fraud and abuse still exists today?
    Everybody acknowledges it does.
    In your professional opinion, has it always existed?
    Everybody acknowledges it has.
    Is there any solution that assures us that it won't exist 
in the future?
    Ms. Aronovitz. I think you can never be sure and in fact 
there will always be some level of problems. It's really 
important to note that HCFA would not be expected to identify 
fraud in a company if there was an extraordinary effort to 
indulge in collusion or some activity where it would be 
impossible for an oversight organization to identify this. What 
we hope is that HCFA will try to do the things that are 
necessary to minimize the possibility of fraud being able to 
exist.
    Mr. Burr. A solution would minimize the opportunity for it?
    Ms. Aronovitz. Yes. That's really what we're talking about.
    Mr. Burr. I think we would all agree. Mr. Grob, you talked 
earlier about some specific areas or deficiencies that you 
found. Dual entry accounting, I can't remember the litany of 
things. Let me ask you how difficult those were to identify.
    Mr. Grob. Those were not difficult to identify at all, 
because it's a standard kind of review that's done.
    Mr. Burr. In your assessment, do you believe that they 
adopted a single entry accounting system after they became a 
contractor?
    Mr. Grob. It's really a mystery why those kinds of problems 
should be occurring.
    Mr. Burr. I guess what I'm getting at, and to some degree 
this is a black eye to HCFA, if that existed when they applied 
to become a contractor, should they ever have been accepted 
with a single entry accounting system and the litany of other 
things that you identified?
    Mr. Grob. I don't think that they should be contractors if 
they have those kinds of serious accounting problems. Those 
problems are also easily corrected and they should be 
corrected. You're asking a broader question, and if you would 
permit me to answer it in a broader way, I would like to, which 
is the way we got into the situation. In my opinion, is a 
cultural one that someone alluded to earlier and was something 
that everyone was kind of responsible for.
    What happened here is that when the Medicare program was 
started, the real concern was to make sure that people could 
enroll in it and could get their benefits, and it was very 
logical at the time to look at the large insurance companies to 
be able to handle the funds that were going there, and I think 
people generally had a lot of respect for the way that those 
insurance companies operated.
    So the law has been set up in such a way that essentially 
requires that those kinds of companies be chosen for this. So 
it's been built into the law, kind of a conflict of interest, 
in a way, kind of a limitation of choice as to who can do this 
job, a limitation on how and what they should get paid for, a 
limitation on the kind of flexibility that HCFA ought to have 
in being able to manage this.
    So there are built into this some very fundamental 
structures that make it a bit more difficult to correct easily. 
Now, that's not to say that legislative changes alone, you 
know, would solve it at all.
    Mr. Burr. Let me ask you, given the elementary deficiencies 
that you found, I think we would all agree----
    Mr. Grob. Yes.
    Mr. Burr. [continuing] how much should that play a part of 
Congress' decision that at the request of HCFA to expand the 
pool of intermediaries?
    Mr. Grob. I think that HCFA should definitely have the 
authority to expand the pool to be able to choose from others 
and to have much greater flexibility in deciding who to pick 
and to have much greater flexibility in the nature of the 
instrument that is used to pay them, the contractual 
instrument. I think choice, pool, flexibility, and perhaps even 
more importantly, how they organize the work. They can perhaps 
even separate the functions in different ways and organize it 
in different ways.
    Mr. Burr. Ms. Aronovitz, let me turn to a book hopefully 
you're familiar with, High Risk Series, January edition, High 
Risk Program Management Areas, Reducing Inordinate Program 
Management Risk. I want to read you one part of it under the 
Medicare section. With an annual payment totaling $200 billion 
responsibility for financing health services delivered by 
hundreds of thousands of providers on behalf of tens of 
millions of beneficiaries, Medicare is inherently vulnerable to 
waste, fraud and abuse. For example, Department of HHS and the 
Health Care Financing Administration had not developed its own 
process for estimating the national error rate for fee for 
service payments for fiscal year 1997. The HHS inspector 
estimated that 11 percent of all Medicare fees for service 
payments for claims are about $20 billion, did not comply with 
Medicare laws and regulations, did not comply with laws and 
Medicare laws and regulations. Is that waste, fraud and abuse?
    Ms. Aronovitz. Not necessarily fraud. What that means they 
were claims that should not have been paid. Now some of those 
claims on their face look perfectly acceptable and it was only 
after the auditors went behind the claims to look at the 
medical records and look at the local medical policy or the 
rules governing claims payment was it noted that they should 
not have been paid.
    So some of that could in fact be fraud, if in fact it's 
proved; that also involves waste and just improper payments.
    Mr. Burr. Let me go one paragraph further, while the 
Congress has given HHS new resources and authorities to improve 
oversight of Medicare, HCFA's deployment of these tools has 
lagged specifically. I will just mention one. HCFA has been 
slow to distribute funding and implementation, implement new 
authority to help prevent fraud, abuse and mispayments in the 
Medicare program. HCFA has not yet implemented a specific 
specialty contract for claim reviews or other program 
safeguards, activities due to design issues. Furthermore, when 
implemented, the contract will likely have a more limited scope 
and provide fewer benefits than originally envisioned.
    And the only reason that I mention that is to say in your 
January report, you basically said that the plan they've got in 
place, one, the resources we supplied have not been used as 
efficiently and effectively, they have dragged their feet and 
the plan that they have will not reach as far and will not be 
as beneficial as what they claim or what they sought.
    Is that an accurate statement?
    Ms. Aronovitz. Yes, we're referring to a specific set of 
authorities, and I would like to explain that if I could. At 
the time that HIPAA passed and developed a Medicare Integrity 
Program which created assured funding for Medicare and the 
contractors, it also authorized HCFA to engage in more of a 
demonstration or on a small scale the use of payment safeguard 
contractors, they would do one function, not process and pay 
claims, but just look at program safeguard activities.
    The law did not require HCFA to do that right away, it 
authorized them to do that. In the process of doing that 
particular contract, HCFA was also responding to many, many 
requirements and program design in response to the Balanced 
Budget Act. So it was a very, very busy time for HCFA, but in 
fact, the program safeguard contractor initiative was slow to 
start and was on a much smaller scale.
    It is now underway. They are being very careful and 
deliberate about how they're initiating that. The big problem 
we have right now with that particular effort is that it's not 
the right time to actually substitute a current program, claims 
administration contractor for one of these program safeguard 
contractors. Right now they're just supplementing what the 
contractors are currently doing.
    Where we are really going to learn whether HCFA is able to 
do functional contracting is at the point where they're 
actually substituting their current contractors for the 
specialized contractors, and that's not going to happen at 
least until next year, after Y2K is complete.
    I think HCFA legitimately is very concerned that if they do 
anything to distract the contractors right now that contractors 
could either leave the program or in fact not be ready for Y2K. 
So we are on--not exactly on hold, but we are slowing down in 
terms of some of the benefits that I think ultimately we will 
be able to show.
    Mr. Burr. My time is expired. But I will allow you an 
opportunity to respond.
    Ms. Thompson. Thanks. I have to actually disagree somewhat 
in terms of saying that we're moving more slowly than we would 
like. I think that we're doing the right thing in the right 
way. We have 12 contractors, many of whom we have not done 
business with or who have not done this work for us before, and 
I think that before we move a bunch of work from current 
contractors who have largely been doing this work for many 
years and throw it over to a whole new group of people, I would 
like the new contractors to demonstrate that they can perform 
this work before we restructure the entire program to give it 
to them. I would like to see how they do, in very precise ways, 
demonstrating their capabilities and their performance.
    Obviously Y2K has been an issue for us, and we have been 
very reluctant to do anything to disrupt our current 
contractors. But I think even under the best of circumstances, 
that the way we did it would have been the right way to proceed 
with that authority.
    Ms. Aronovitz. I agree right now that is the way to 
proceed. What I'm concerned about more is that HIPAA was passed 
in 1996, and it is 1999, so it has taken you 3 years to get to 
this point and that is what we were a little bit concerned 
about in terms of getting underway.
    Ms. Thompson. I think that's a fair point. There was a lot 
of work to be done in terms of developing a whole scope of work 
for an activity that we had never developed a scope of work 
for, and to develop our regulation. For example, how we would 
deal with conflicts of interests for entities that were coming 
in to bid for this work and so forth. So there was quite a bit 
a work, and obviously, as the GAO points out, at a time when we 
also had a substantial list of other activities to implement as 
part of the Balanced Budget Act.
    Mr. Burr. The Chair is awfully tempted to ask about Y2K, 
but my time is expired.
    I would recognize the gentleman from Michigan, Mr. Stupak.
    Mr. Stupak. Well, thank you, Mr. Chairman. I would like to 
pick up with Ms. Thompson on the comments made there, and I'm 
not looking to blame the victim and government taxpayers gets 
ripped off and the government sort of gets the blame. But in 
the HCFA--I mean excuse me, in the GAO report, they said that 
the closed relationship with HCFA representatives and the 
contractors had led to some of these abuses. It says--in fact I 
think it was the Michigan case where it's especially true the 
HCFA representatives has a long or exclusive relationship with 
the contractor, one interviewee noted that if the contractor 
looks bad, the HCFA representative who performs monitoring also 
looks bad.
    Then it goes down here Blue Cross-Blue Shield, when you 
talk about experience, you need experience on these 
contractors, reassigned their most experienced employees to 
conduct claim reviews when they knew HCFA would be in there, 
slow down the process so these people would just do a couple 
and show 100 percent accuracy. It's too cozy of a relationship 
is what GAO is saying.
    Ms. Kanof. We absolutely agree and, in fact, under one of 
our initiatives that also complements the GAO recommendations, 
we are looking at the relationship between the central office 
and regional office and believe these are national contractors. 
That's why this year the teams are not just having a regional 
office representative and in many cases it's not the regional 
office representative who is providing daily oversight to the 
contractor, but teams from several regions and the central 
office.
    Mr. Stupak. But what if we look at this whole thing. If you 
read the GAO report and you go all the way through this, you 
have outright fraud and deception going on here, and in these 
cases, I have to ask the question, is there really anything 
that HCFA can do that could implement that would prevent such 
activities from occurring? I mean isn't relying on the 
contractors also a trust program, and that is, if we trust 
private fiscal intermediaries to do their job correctly, then 
they have to do their job with integrity and honesty. No matter 
what you implement isn't going to work if you don't have honest 
and integrity amongst the contracts, right?
    Ms. Kanof. That's correct, but you can create the playing 
field differently and we were giving the contractors 
significantly advanced notice before we came in.
    Mr. Stupak. Are you telling me there is a field that you 
can develop that will promote trust and integrity and honesty?
    Ms. Kanof. I believe if we focus more on the contractors' 
internal controls and develop compliance plans that can be 
implemented then we would be able to do audits, interview the 
staff, and we will promote integrity--we cannot give you 100 
percent assurance. And I don't think anyone here can. But there 
are many things we can do to shift the pendulum.
    Mr. Stupak. Ms. Aronovitz, do you want to respond?
    Ms. Aronovitz. I think some of the things that Dr. Kanof is 
talking about, HCFA would at least be able to identify problems 
way sooner than they do right now. Right now, sometime it's 
really left to either qui tam suits or whistleblowers to 
identify what's going on internally. We think HCFA needs to do 
a lot more things where they are much more aggressively 
overseeing and understanding what's going on with the 
contractor.
    Mr. Stupak. Let me ask this question, and I guess it's what 
I'm driving at here. The entire system of relying on private 
companies to run the Medicare program is starting to remind me 
of the 7 years I've been here. Like the Department of Energy, 
the government originally contracts out work because Congress 
doesn't believe that the government can do it efficiently. But 
often it's more trouble than what it's worth, as many of my 
colleagues on this committee have seen, we've had huge problems 
with the Department of Energy contracts such as Lockheed, Pit 
Number 9, a contract in Idaho which involved hundreds of 
millions of dollars of cost overrun. We see the University of 
California contract with the DOE labs which have resulted in 
serious security breaches.
    At what point does micromanaging a private sector 
contractor being so burdensome for the government that's easier 
to keep the entire job in-house as opposed to contract out, 
especially when you have to rely on things like honesty and 
integrity and trust which obviously we haven't been getting? 
Where do we reach that point?
    Ms. Aronovitz. With all due respect to HCFA, I don't really 
think they were micromanaging the contractors. As a matter of 
fact, I think they were exercising more hands off than they 
probably should have. I think there's some core things that you 
would have to do whenever you have a relationship with a 
contractor, your overseer must provide an ongoing risk 
assessment of where you think there are problems in that 
organization.
    In addition, you need to have core areas of review that, no 
matter what you're going to look at those and make sure those 
are reviewed. You need to validate the data that you're 
receiving and assure that internal controls are in place.
    The other thing that HCFA needs to do is to spend a lot 
more time worried about looking at the way contractors are 
conducting their program safeguard activities, not just their 
claims administration or claims processing activities. It will 
not in any way change the climate in an organization, you're 
absolutely right.
    If you have a contractor or a fiscal intermediary that 
wants to cheat or somehow has an incentive to do less than what 
they're being contracted to do, it's a very, very difficult 
thing. But there are aggressive actions that HCFA could and 
needs to take that would at least ameliorate some of these 
problems.
    Mr. Stupak. Mr. Chairman, if I may just follow up. But at 
what point, when do you say, look it, I mean every time I come 
to one of these hearings, it's always hundreds of millions of 
dollars wasted, fraud, blown off, can't find it, can't do this, 
we have serious security breaches with the nuclear weapon 
system? At what point do you stop contracting out and say wait 
a minute, any government isn't as inefficient as we look to 
portray it, and there's got to be a point in time when we've 
got to start looking at this differently and contracting out 
isn't always the answer.
    Ms. Aronovitz. I agree with you, there are 22,000 people 
working at the contractors around the country both on the 
carrier side and on the fiscal intermediary side. If you wanted 
to ask 22,000 additional people to work for HCFA, that in 
itself is another consideration. It's a whole different 
discussion, and there are other challenges to try to manage 
that many people.
    So, you know, I really don't have the answer. Although you 
wouldn't necessarily solve your problems by trying to bring it 
all in-house.
    Mr. Stupak. Thank you. Thank you, Mr. Chairman.
    Mr. Upton [presiding]. Mr. Barton.
    Mr. Barton. Thank you, Mr. Chairman. John Dingell was 
chairman of this subcommittee I think for about 12 years, and 
he was also chairman of the full committee, and I became 
chairman for 4 years and now we have Congressman Upton. I 
remember the first hearing I did on Medicare waste, fraud and 
abuse. The people didn't even know how big the problem was, 
that they estimated it was around $20 billion a year.
    And so the committee on a bipartisan basis insisted that 
some things be done and Nancy Anne DeParle promised that things 
would be done, and apparently a little has been done. We now 
have an estimate of about $12 billion, which is about 5 percent 
of the $220 billion.
    But you read Mr. Grob's testimony, it says of all of the 
problems we have observed, perhaps the most troubling has to do 
with the contractor's own integrity, misusing government funds 
and actively trying to conceal their actions, offering 
documents and falsifying statements as specific work was 
performed.
    And you go on to say there's 64 contractors, there have 
been 9 civil settlements, 2 criminal convictions and there are 
21 former current contractors actively under investigation. 
Well, if you add 21 to 11, that's 33, that's half of the 
contractors. And then you go over later on in here, and it 
talks about these fraud units that have been put in place to 
try--by the contractors, and according to Mr. Grob, it says 
that the caseloads among the fraud units varies considerably 
from zero to over 600.
    We found that less than one-half are actively engaged in 
developing their own cases, and similarly less than one-half of 
the fraud units were active in identifying program 
vulnerabilities. You know, I'm just kind of at a loss. I have a 
little hospital in my own hometown, we have 15,000 people, it 
is a 32-bed hospital, there are about 8 people a day in the 
beds. The company that owns it told me 2 weeks ago they're 
going to close it in December because they lost $2 million.
    We've got $12 billion in fraud. We've got the Balanced 
Budget Act of 1997. And according to the hospitals in Texas, 
that act, because of the way HCFA is implemented, it is 
ostensibly going to save $31 billion more over the next 5 years 
than it was intended to, which is about $6 billion a year, 
which is half of fraud. If we can cut the fraud down, we would 
have more money to keep my hospital open.
    Now, which of you two from HCFA is the top dog? Is it Dr. 
Kanof or Ms. Thompson?
    Ms. Kanof. We're a matrix management. I am responsible for 
the complete oversight of contractor management. If you wish to 
talk to the lead for the specific program integrity units 
within our contractors, that would be Ms. Thompson.
    Mr. Barton. Dr. Kanof, how can you put in place a system 
with the contractors for fraud and have half the fraud units 
not even actively engaged in developing cases? How can you look 
yourself in the mirror in the morning knowing that this program 
that was put in place at the insistence of the Congress, half 
the contractor units out there that are supposed to be checking 
for fraud aren't doing it?
    Ms. Kanof. In fact, we do find that quite disturbing, and 
have set up new protocols to begin to evaluate the contractors 
more stringently and more consistently to evaluate what they're 
doing.
    In addition, Ms. Thompson has given them new instructions 
that specifically direct their activities to begin to address 
your concerns.
    Ms. Thompson. But I do want to point out that referrals to 
law enforcement are part of what we expect these units to do. 
That is not all of what we expect them to do. In fact, about 
half of the money that we give them they expend, with our 
support, in resolving beneficiary complaints of fraud.
    That is when the Medicare beneficiaries call up and say, 
``I think somebody has done something really wrong here,'' and 
we want to have it investigated, and we want to be responsive 
to that beneficiary.
    We also ask them to provide support to law enforcement so 
that as law enforcement begins a case or is undertaking a case 
both in terms of any agent from the Office of Inspector General 
or any agent from the Federal Bureau of Investigation or an 
assistant U.S. Attorney, oftentimes they need the contractor's 
support in looking at data with regard to a provider and so 
forth. So that is an important element of their responsibility 
as well.
    Mr. Barton. My time has just expired. Is there a sense of 
urgency, do you all understand----
    Ms. Thompson. Yes.
    Mr. Barton. Congressman Bryant alluded to this earlier. 
When we do a town meeting every one of us, every Congressman, 
there is going to be somebody in that town meeting that stands 
up with a Medicare problem, a bill they don't understand, a 
horror story that they didn't get the treatment that they 
thought they were going to get, a doctor who is going to drop 
out of Medicare, a hospital that is going to close. Do you all 
go into the real world? Do you see the impact of sitting on 
your tail and really not taking this seriously how it affects 
the real world? This is not an academic exercise, it is a real 
problem.
    Ms. Thompson. It is not taken as an academic exercise. You 
know our Administrator. She is committed to this effort.
    Mr. Barton. I think she is a fine woman. I think she 
personally wants to do the right thing.
    Ms. Thompson. There is nobody here sitting on their tails 
not caring about this issue. There are people actively working 
in concert with provider groups, with law enforcement, with our 
contractors initiating a lot of activities to improve these 
outcomes. We recognize the amount of dollars that are at stake. 
We recognize the impact that it has on beneficiaries. We 
recognize the impact that it has on the Trust Fund. And we work 
at this very diligently every day.
    Mr. Barton. Well, I don't know what Chairman Upton intends 
to do, but I stayed on this subcommittee this year specifically 
to work on this kind of issue, because it's real dollars, it's 
big dollars, it impacts real people in the real world, and I 
expect you, Ms. Thompson, and you, Dr. Kanof, to take these 
recommendations seriously and not just shuffle the papers.
    I mean if you're the two people in charge of this at HCFA, 
you've got billions of dollars that you ought to be out there 
trying to save so that the people that need the Medicare 
reimbursement, the hospitals, the doctors and the patients, 
they get it.
    Ms. Thompson. We couldn't agree more.
    Mr. Barton. Okay.
    Mr. Upton. Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. Well, you know, I'm 
sitting here listening to my friend and colleague from Texas, 
and I can't disagree. But it seems to me that part of the 
reason Congress privatized in this area was to eliminate some 
of these problems of fraud and abuse and everything we were 
identifying, and we were blaming HCFA for those problems.
    Now we're blaming HCFA because the private companies are 
engaged in this process of fraud and abuse. It seems to me that 
the goal should be not to blame HCFA, but to figure out if this 
is really working, is this something we should do. I think we 
should look--if in fact we want to privatize, well, that's 
great, but then let's put the blame where it's due, and let's 
also make sure that HCFA has the tools so that it really can 
stop this from happening.
    Let me ask a question related to that. Ms. Aronovitz said 
that there were some changes in the law that she thought would 
help HCFA to do a better job with these private contractors. 
One of them is giving HCFA broader discretion on contractors to 
choose, one of them is giving more detailed oversight.
    I'm wondering, Ms. Thompson, what you think about those 
recommendations and if there are any other changes to the law 
that we could positively look at so that we can help HCFA 
better do its job in overseeing these private industries?
    Ms. Thompson. Well, I will let Dr. Kanof answer part of 
this question, but certainly the administration has proposed 
contracting reform. That's something we've asked for 
consistently over the years, so that we do have alternatives, 
so that we can structure our contractor community in a 
different way, and perhaps Dr. Kanof would like to talk more 
about that.
    Ms. Kanof. And really key to contracting reform is really 
the flexibility to be able to have contracts with other 
entities that we have currently. We are constrained by statute 
to our current pool of contractors, and we really believe that 
it is necessary to enter into a more competitive and broader 
market in which we can reach out beyond just insurers to do 
some of this processing.
    In addition, if we had FAR authority, we would just gain 
additional ability to do different types of contracting than we 
currently have now. So those are really the two key issues that 
we believe would allow us to do what you've been talking about.
    Ms. DeGette. Let me ask Mr. Grob and Ms. Aronovitz a 
question. You're talking about what these private businesses 
are doing with the Federal dollars, and I'm wondering if either 
of your agencies has ever looked at how these private firms run 
the private side of their businesses, and if you see some of 
these excesses in the private side of their businesses as well?
    Mr. Grob. I'm not aware of studies we've done about that in 
particular, because we tend to audit within our authority that 
reaches for the Federal dollar. I can clarify though my earlier 
remarks about when the system was originally set up, that the 
requirements for these accounting systems and these control 
systems which we all regard as fairly elementary were not made 
an explicit part of the requirements when we contracted with 
these organizations.
    I think we all assumed that, of course, they would conduct 
their business that way. Now, in recent years there's been a 
refinement of those requirements and the clarification of them, 
and I think that will lead to some of these improvements where 
we get beyond the troubles that we're in.
    Ms. DeGette. Ms. Aronovitz.
    Ms. Aronovitz. I would agree. We consistently and primarily 
focused on where the Federal dollars are and have not spent too 
much time looking at the private side of some of these 
businesses, except to the extent where the private side and the 
public side in fact have a relationship, and that would be in 
the Medicare secondary payer program and other initiatives 
where it's very important to look at the whole company.
    Ms. DeGette. It just seems to me that especially if you're 
looking at intent, for example, being a defense lawyer myself, 
that it would be instructive for us who write these HCFA rules 
to know if these companies handling public money in a different 
and less responsible way than they're handling private money.
    And I would certainly be one that would be in favor of 
looking at that. I don't know if it's possible or not.
    Mr. Grob. I would comment on that, because I think we are 
seeing some signs of progress, some of which as a result of 
taking that viewpoint. First I would go back to what I said 
before, that really this is not their money and their financial 
stake isn't there, and it won't be. So what you've got to do is 
recognize that when there is a government program, different 
methods come into play. However one thing that was used in the 
private sector for many years was the financial statement, and 
there never was a requirement for those combined financial 
statements of the Medicare program in the past.
    But in recent years, that requirement was put into place. 
It was true in the audit of financial statements that we were 
all finally able to get a handle on exactly how big the problem 
was, what institutions, and what parts of the program were 
problematic. It was that ability to see, through using those 
private sector type systems, that enables us, I think, to form 
the framework for the reduction in waste and fraud that 
occurred in the last few years, which has been significant.
    Ms. DeGette. Thank you. Thank you, Mr. Chairman.
    Mr. Upton. Mr. Strickland.
    Mr. Strickland. Yes, sir. Thank you, Mr. Chairman. I would 
like to concur with my colleague, Ms. DeGette. I think that to 
blame HCFA for these problems that we've heard today is sort of 
like blaming the cop on the beat for the criminal who breaks 
into the convenience store. The fact is that the real culprits 
here are the dishonest people who set out to defraud the 
taxpayer.
    Let me ask you, does the accusation or the charge or 
finding of fraud indicate purposeful intent?
    Mr. Hast. Yes.
    Mr. Strickland. And is it true that HCFA has identified 
contractors who have engaged in purposeful fraud?
    Mr. Hast. In some cases, but not all.
    Mr. Strickland. When that has happened, has HCFA terminated 
its relationship with that contractor?
    Ms. Aronovitz. Most of the time.
    Mr. Strickland. Most of the time. Is it possible that we 
could have a contract with a contractor that it purposefully 
defrauded the government and we would continue a relationship 
with that contractor?
    Ms. Aronovitz. When I say most of the time, it's all the 
time except for one specific case where the--there was not 
evidence of a corporate culture, there was evidence that there 
was some rogue employees and when that was brought to 
management's attention, they immediately reported it to HCFA 
and cooperated in the investigation.
    Mr. Strickland. Is this a real company?
    Mr. Grob. Yes.
    Mr. Strickland. The vice president for Medicare operations 
apparently is in blue or she's in blue. Is it likely that that 
person would ever go to jail? Is that possible?
    Mr. Hast. It's absolutely possible, but not very likely.
    Mr. Strickland. Why not likely?
    Mr. Hast. Just in general, blue collar crime--or white 
collar crime----
    Mr. Strickland. Absolutely. I worked in a maximum security 
prison with poor people who were serving years in prison for 
breaking into a store to steal food. And I think if we had some 
of these folks facing jail time, if we treated them like they 
really are, criminals, criminals, we may have a different set 
of circumstances. But if we negotiate or plea bargain or cut 
deals or whatever and they are able to achieve hundreds of 
millions of dollars in fraudulent resources and settle for, you 
know, something that enables them to maintain their reputations 
and their status in life and their lifestyles, I mean there is 
such unfairness in this system.
    And I would like to see those people in jail, and I think 
if they were in jail and if we took that kind of hard-nosed 
approach to this, Mr. Chairman, I am just sick and tired of the 
kind of injustice that we find throughout our system where blue 
collar, poor people who commit crimes, and I think they ought 
to be jail when they commit crimes, are treated differently 
than white collar executives that commit crimes and get off 
with their reputations or their life-styles intact, and until 
we get serious about enforcing these kinds of laws I think this 
kind of abuse will continue.
    I will tell you I believe that a corporate executive who 
thinks that they personally may be held responsible and may 
have to pay that kind of penalty would be much less likely to 
engage in purposeful fraud. I'm not talking about mistakes, but 
purposeful fraud, that's a serious thing. We're talking about 
billions of tax dollars.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you. I know a number of members have 
additional questions, so we're going to yield 5 minutes to 
members again for a second round for those of us who need it. I 
will take the first 5 minutes and yield 1\1/2\ minutes for 
someone who is running to a lunch, Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. I agree with Mr. 
Strickland, and certainly I think it's incumbent particularly 
on the Department of Justice at the Federal level to enforce 
the laws that are on the books that can catch these people. 
When I was a U.S. Attorney we had a health care task force and 
drastically pursued these types of cases.
    Just quickly to follow-up on a comment Ms. Thompson made 
about asking for new contracting authority. I wanted to ask our 
GAO people about this, because every dollar, every delay that 
we have, every dollar that we lose is coming out of the 
Medicare trust fund. And, again, I'm with Mr. Barton on this, 
this is a real world situation.
    I know that in the Balanced Budget Act of 1997, we gave a 
new limited authority to HCFA to let them contract for program 
integrity efforts, and I understand it's only recently been 
that HCFA has actually issued an RFP, request for proposal, for 
those so-called program safeguard contractors from GAO. I want 
to ask about HCFA's delay in implementing this new initiative 
and what concerns GAO would have about HCFA being given this 
sweeping new contract authority.
    Ms. Aronovitz. I think Ms. Thompson said it very well. A 
lot of the things that have to go into contracting, according 
to FAR, where you have a statement of work and you have to 
describe the specific tasks that you want a contractor to do 
and you have to have a cost estimate of what those would cost, 
that is not the expertise that HCFA has, traditionally, because 
the way they've contracted up to this point has not required 
that they have those types of--engage in those types of 
activities. So it has taken quite a while for HCFA to gain the 
experience, and we think they're just beginning to do that.
    And we think that the program safeguard contractor is a 
very good lesson for HCFA to start learning how to develop the 
statements of work and how to do this on a much wider scale. So 
although we were very frustrated with HCFA, we could certainly 
understand some of the tasks it needed to learn before it could 
go full fledged into a different way of contracting.
    Now, we again endorse HCFA having these new contracting 
authorities, however, we're very, very aware that in the past, 
when HCFA had some of these authorities on a very limited 
basis, that the experiments that they indulged in did not 
always work out. For instance, there were some incentive 
contracts that HCFA let where the incentives created perverse 
incentives for contractors and, therefore, the Medicare program 
instead of finding ways for contractors to do more efficient 
processing, in fact, lost more money for the trust fund.
    So we think that HCFA should have these authorities, but 
they need to take a lot of time and a lot of care and they need 
to report to you on the evaluations they do in terms of their 
experience, developing the expertise to use these authorities 
correctly.
    Mr. Bryant. Thank you. Thank you, Mr. Chairman.
    Mr. Upton. Thank you. I have two questions. And I guess I 
would like both Ms. Thompson, Mr. Grob to respond.
    First of all, are these penalties enough that you shared 
with us on your chart? Let me tell my two questions first and 
then comment on both. Are these penalties enough? I remember 
when we dealt with the Medicare reform bill in this committee a 
couple of years ago, and I had an amendment that passed that 
was later dropped in the conference, and it said that any 
individual, this sort of goes back to Mr. Strickland's 
comments, any individual that's convicted of fraud and abuse 
with Medicare would lose their own personal right to 
participate as a beneficiary in the Medicare program for life. 
Whatever your role is, pay your taxes, you're just not going to 
get Medicare period. I thought it was a good amendment, but the 
Senate didn't think so. So I would like to know what your 
thoughts are with penalties.
    The other thing, I guess specifically with Mr. Grob, we 
wrote to the major contractors, as you know, asking them for 
their status on implementing recommendations in your report, 
and we forwarded those responses to you and I would be 
interested to know if you've had a chance to analyze their 
responses and it would be particularly important because we are 
looking for additional hearings on this topic and we're going 
to get some of the other folks involved that are not here today 
to come before we break in August. And we're working on getting 
a date that's good for both Mr. Klink and myself and the 
subcommittee to work on. So obviously these would be important. 
I would like if you could both comment on that, and then I will 
yield.
    Mr. Grob. Can I take your second question first?
    Mr. Upton. Yes.
    Mr. Grob. Yes, thank you very much. We were provided the 
answers that were received as a result of your inquiring from 
the 10 largest intermediaries what actions they had taken in 
the report. I did some additional sleuthing as well to see how 
things were going since our report was issued. People could 
probably use a dose of good news here in this hearing, so I 
will deliver a bit of that. Both from the reports that we 
received back from these responses as well as other things that 
we know about the Health Care Financing Administration is 
doing, and some results that we have seen in our investigative 
efforts, we can report some progress and positive developments 
for the fraud units.
    First of all, with regard to the responses that we 
received--that you received rather, I see from these there was 
definitely an increase in the resources that were now being 
applied to these fraud units in terms of the peoples and the 
dollars. There was certainly an increase evident in the amount 
of training that they were receiving, and there was certainly 
an increase in the referrals that we were getting from them 
based on the responses.
    Some places that probably still need a little bit more 
improvement is in the definitions, but we're not there yet. The 
definitions of case complaints are important because we need to 
be able to track how well they're doing, and that needs a 
little more refinement.
    The goals that we thought should be established still need 
to be established. I think Dr. Kanof mentioned there was a plan 
to do so.
    Ms. Thompson. Those actually have been established.
    Mr. Grob. Good. And the tracking needs to be improved. I 
would like to give you another indication. Our data goes back 
to 1996. We looked at the percentage of cases that the 
Inspector General's Office was receiving that were attributable 
to the units, and several years ago about 25 percent of our 
cases came from the carriers and intermediaries. Today it's 
about 38 percent.
    Now, that's really good, because the ultimate measure of 
referral is whether the material we get is good enough to use 
for a case, not just that it's a complaint. So the fact that 
that has increased and that it is of the quality that we can 
use to pursue an investigation is a very good sign.
    And I do know that HCFA did sponsor some very important 
training over the last year for these units. We helped them do 
that and, I give them great credit for sponsoring that training 
and for being pretty systematic. Out of all of this we see some 
light shining here, and I'm very happy to be able to report 
that.
    Now, I don't know if you want Ms. Thompson to comment on 
that before we take the general question.
    Mr. Upton. Yes, go ahead.
    Ms. Thompson. Well, actually, I know that the inquiries had 
gone out to our contractors, but actually we don't have the 
responses. I would actually be interested in seeing what the 
contractors responded, that would be useful for us. And I am 
happy to hear what Mr. Grob has to report because I think it 
reflects the kind of effort and investment that we've made in 
this area.
    I would also just as an aside say that in last year's 
budget round, there were 7 contractors that had not made any 
referrals to the Office of Inspector General for several years. 
And they had asked for more money, and we said, ``No. Do a 
better job of using the money that we're giving you now, and 
then we will consider whether to supply you some additional 
funding.'' So I think that message was clear to the contractors 
that budget issues were going to be tied to performance 
measurement, and I think that's always a healthy message to 
send.
    Mr. Upton. What do you think about these penalties? Are 
they too much, too light?
    Ms. Thompson. I will let Dr. Kanof talk about that. But 
those are the result of very significant negotiations and 
assessments by the U.S. Department of Justice, as well as by 
the Office of Inspector General about the financial resources 
and the damages to the government and so forth. I don't know if 
you want to make more comments about that. But, you know, 
sometimes you would like to have them be quite, quite large, 
but whether or not that is appropriate is another matter.
    Ms. Kanof. I think the other factor that you need to add to 
that list are those contractors that are no longer doing 
business as Medicare fee-for-service contractors. The last 
contractor on the list, HCSC, had its contract nonrenewed and 
when they were going through an acquisition with Texas, we did 
not allow the Texas Blue Cross-Blue Shield Medicare work to be 
transferred over into that corporation.
    So I think there are additional measures that you're not 
seeing on that sheet that have significant impact on 
businesses.
    Mr. Upton. Mr. Grob.
    Mr. Grob. Overall I think they're reasonable. The justice 
system always results in something that when you're done, you 
have to say was reasonable because it always reflects by 
definition the best attempt to come up with a penalty that's 
consistent with the evidence that you have in the cases that 
are brought. But overall it does seem reasonable and, in fact, 
many of these contractors are not performing in the Medicare 
program.
    There also have been some criminal fines levied to 
individuals and there's a sentencing or two that needs to occur 
here.
    Mr. Upton. Thank you. I have a copy of some responses I 
will personally put this in your hand here in a second.
    Mr. Klink.
    Mr. Klink. Before I get started, Ms. Aronovitz, I enjoyed 
your discussion with Mr. Dingell about the closing of offices 
and how it's affected you, and I thought that was instructive. 
However, just on the side, we have had a lot of requests from 
our side of the aisle on this subcommittee that have been 
backlogged by GAO for quite some time. We would like to review 
those with you. If, in fact, resources are not a problem I 
would like to know why some of these things have taken in fact 
months. We're just getting around to an on-line securities 
investigation that we made probably at the beginning of this 
year.
    Ms. Aronovitz. I would actually like to expand a little.
    Mr. Klink. Please do.
    Ms. Aronovitz. What I would like to have said to Mr. 
Dingell if I could expand on my answer a little bit is that, 
clearly, more limited resources certainly don't make our life 
any easier and actually make it much more challenging for us. 
However, over the last few years in trying to be as responsive 
as possible, we have figured out much different ways to do our 
work. We have tried to use technology, and we've tried to use 
the resources within our organization to be able to respond 
much quicker and to work much harder.
    So hopefully the lack of resources has been made up by the 
techniques and the efficiencies we've tried to encourage. I 
certainly don't want to imply that we don't need more 
resources. Of course, we always need more resources.
    Mr. Klink. As I say some of our investigations are impeded 
because it's taking us months to be able to get GAO, and we 
understand that you're pushed at any rate we would like to have 
that discussion.
    I'm very much disturbed and I guess Ms. DeGette really 
touched on this briefly at the end of her questions. If there 
is a culture within these corporations, a reason that all of 
those blue blocks are up there, that many people there's 
evidence of participating in something that is in some 
instances perhaps criminal, in other cases it may or may not be 
criminal, we don't know, maybe careless, maybe inept, we don't 
know, what is the corporate culture on the other side--because 
we're talking about fiscal intermediary, they're insurance 
companies. On one side they sell private insurance, they make 
decisions, and it strikes me as very odd that the discussion in 
the other body, as they say--yesterday there was an amendment 
on whether or not with we allow the insurance companies to make 
a decision as to whether or not a woman can choose her OB/GYN 
to be her primary doctor or not. And it was decided that, by 
the majority that, yeah, we will let the insurance companies 
make that decision, not the woman.
    Now we come here today, we're holding a hearing, and we're 
finding out that they're turning off software, they're losing 
claims, they're paying things that shouldn't be paid. They're 
doing all of these things which causes them since 1993 to have 
to pay $235 million in civil and criminal penalties. But we're 
going to trust them to run the insurance business for us to 
make medical decisions.
    What evidence is there that these same insurance companies 
who are fiscal intermediaries are operating any differently on 
the private side of their insurance business making any better 
decisions not defrauding rate payers, not defrauding medical 
providers, than they are being found guilty of or being 
certainly suspected of when it deals with Medicare?
    Ms. Aronovitz. I just want to say one thing about that in 
response. I believe that fundamentally on the private side, the 
fiscal intermediaries are pretty much spending their own money 
in their insurance business. In Medicare, they're representing 
the government in trying to be prudent payers, but the money 
that is coming out of the trust fund is the taxpayer's money, 
it's not the private companies' money; therefore the incentives 
are different. And I'm not sure that would account for the 
difference, but it's clearly a difference.
    Mr. Klink. If you just suspend. But the question is this, 
by denying claims, by denying the ability of a patient to see a 
doctor on the private side, by making it more difficult, by 
delaying the period of time at which you pay a medical 
provider, I'm asking if there is a culture, any evidence of a 
culture within these same questions on the private side where 
it would be to their fiscal incentive to operate differently, 
to make it more difficult for the rate payers to get the 
services that they in fact have purchased that insurance for. 
Is anyone looking at that?
    Is there a simultaneous parallel investigation that if on 
one side as a fiscal intermediary you're doing something that 
is illegal, immoral, unethical, fattening, whatever you want to 
describe it as, are you on your profit side, is there a culture 
within your company, these same managers, these same 
supervisors or their counterparts that are doing something 
unethical, illegal, untold to deny the payment of benefits to 
increase corporate profits?
    Mr. Grob. We don't have a study that addresses that, so we 
can only speculate about it in the same way that we all have 
been speculating about it simply using good principles of 
financial management and understanding human beings the way 
they are.
    Mr. Klink. Mr. Grob, what we know is that they've been 
found guilty of perpetuating fraud, they paid civil penalties, 
they paid criminal penalties. My question simply would be is 
there anyone within the Justice Department, within the GAO, 
within HHS, with anywhere else that can determine have they 
compartmentalized that fraud just in that portion of the 
insurance company which deals with Medicare, or is it prevalent 
within the entire corporation?
    Because if we're going to trust these people to be making 
medical decisions, to be making life and death decisions, and 
that is the hot topic, it deals not only with the Medicare, the 
discussion going on in the other body right now is they're 
making all kinds of decisions. I'm also troubled by the fact, 
because I am from Pennsylvania, XACT Medicare Services of 
Pennsylvania, Mr. Grob, on page 3 of your testimony, you talk 
some rather--what appears to be some very serious things here, 
they were found guilty of failing to recover overpayments, 
failing to monitor end stage renal disease, laboratory claims, 
overriding payment safeguards to bypass electronic audits or 
edits when processing part B claims, they paid $38.5 million to 
resolve their liability.
    And as part of the settlement, the carrier agreed to enter 
into an extensive corporate integrity program to ensure proper 
training for its employees and external reviews of its 
performance under its contract with Medicare, like they didn't 
know what they were doing was wrong.
    Please tell me somebody was punished for this.
    Mr. Strickland. Yes, please.
    Mr. Klink. Tell me that somebody was punished for what they 
did. This can't be just an oversight. These are very serious 
things that were done.
    Mr. Hartwig. Pennsylvania Blue Shield, the XACT case 
differed slightly from the others, because we did charge 
individuals criminally with the activity. In the case of 
Pennsylvania Blue Shield, we did not believe that there was 
sufficient evidence to charge that it was a corporate culture. 
In Pennsylvania Blue Shield, we were able to identify specific 
employees that had engaged in specific crimes, three of whom 
have already been convicted and that investigation and other 
individuals is continuing. So the case of XACT was just a 
little different in that we did not find all of those blue 
boxes necessarily at the XACT case.
    Mr. Klink. Thank you. I would just end, and I thank you for 
your patience, Mr. Chairman, page 10 of the GAO report, the 
draft report that we have here, page 10 it says, according to 
public records and statements, such activities, and we're 
talking about the illegal activities, allegedly spread as 
employees at various levels and units taught each other how to 
commit such improprieties. They're teaching each other how to 
rip off the public.
    And my question is, is it only on the public side or is it 
happening on the private side of those same companies? I thank 
you, Mr. Chairman. And I thank you for holding these hearings.
    Mr. Burr [presiding]. The gentleman's time is expired and 
the chair recognizes himself for 5 minutes, and also says that 
normally the ranking member and I agree on everything, but I 
think that the conclusions that he's trying to drive out of his 
questions as it relates to the results that we might find 
permeating the private side. In fact, if there were a study, I 
think it's a valid thing for us to look at.
    It does not get us any further to a solution to the waste, 
fraud and abuse that exists in the Medicare system. And I would 
only point to the fact that I think that HCFA has prosecuted 
and found waste, fraud and abuse in physicians, am I correct, 
and in hospitals, am I correct?
    Does that mean that all physicians and hospitals shouldn't 
be trusted for the delivery of care and that we should no 
longer empower them to make some of the medical decisions that 
we currently allow them to do and the answer I know is no, we 
shouldn't change the system.
    Let me ask real pointedly, why do contractors cheat? What 
did you find? What's the reason?
    Mr. Grob. Well, in these cases, there was a financial 
incentive for them to cheat, because they were receiving 
contracts from the Federal Government, and, furthermore, at the 
time of these activities, there was a system for scoring their 
performance. If they scored high, then they got bonus payments. 
So if they could manipulate the scores they would get more 
money.
    Mr. Burr. So the system that we have in place to reward 
actually in some cases was the incentive to cheat?
    Mr. Grob. The system that was in use for some of these is 
no longer in use. For that reason the scoring system as such is 
not in use any more, and this is probably one good reason for 
it. But, yes, that's what I believe, that if you get paid 
according to the scores, then you have an incentive to show 
that your scores are high.
    Mr. Burr. Let me ask you, are there any intermediaries 
where their sole business is a contractor for HCFA for 
Medicare, or was Mr. Klink's conclusion correct that all of 
these companies have some private sector health insurance 
policy that they provide?
    Mr. Grob. All of them do.
    Mr. Burr. Is it safe to say to be found--to be accused of 
an impropriety would destroy the reputation of these companies 
as a health insurance provider in whatever markets they were 
in?
    Mr. Grob. I don't think it's happened.
    Mr. Burr. In any of the cases that we have found some 
question about the practices of the intermediary, I guess what 
I'm driving at, how many of the cases that have been settled do 
you think were settled because they didn't want to go through 
the litigation process because of the public black eye that 
they would have to their business?
    Mr. Hartwig. I think it's hard to determine why they 
settled the cases. I think they actually settled them because 
they had done what was charged, and it was just the easiest 
thing to do.
    Mr. Burr. Do you agree with the fact that it would hurt the 
other side of their business?
    Mr. Hartwig. I certainly think going through a trial and 
losing hurts your public image.
    Mr. Burr. Great. Let me go back to your request or 
suggestion that you be allowed to expand the pool of 
contractors. How many companies do you currently have who are 
asking HCFA we want to be--we want to contract with Medicare, 
we want to be an intermediary? How many additional companies 
are out there that are not part of the system today?
    Ms. Thompson. Well, the best evidence of that is what 
happened when we went forward with the Scope of Work for 
Program Safeguard Contractors. One of the things people said 
about that was, ``There is nobody out there that wants this 
business other than the people that HCFA is currently 
contracting with; you're going to go out there and throw a 
party, and nobody is going to come.''
    So we actually put together a solicitation conference for 
people who were interested in bidding on program safeguard 
work. And there were more than 400 people present at that 
conference, and actually we had a number of people who 
expressed interest in bidding.
    When we structured the request for proposals for the 
program safeguard work we asked businesses to demonstrate that 
they could perform the whole range of program safeguard 
activities. That is, they needed to be able to demonstrate they 
could do auditing, they needed to be able to demonstrate they 
could do fraud case development, they needed to be able to 
demonstrate they could do medical review, and they needed to be 
able to demonstrate they could do provider education. I believe 
the number of actual, full proposals that we received was 24, 
of which we actually selected 12.
    So I think, from that evidence, there's a great deal of 
interest, and there were a number of companies who also 
participated in that solicitation as subcontractors for a total 
of more than 50 companies participating in that bidding.
    Mr. Burr. I would like to yield to Chairman Barton for one 
question.
    Mr. Barton. Thank you, Chairman Burr. I want to ask the 
HCFA people if they will send us either a monthly or quarterly 
report to this subcommittee on their monitoring efforts with 
their anti-fraud units and the contracts.
    Ms. Thompson. I would be happy to do that. Can that be 
quarterly?
    Mr. Barton. I don't know how you all get the information. I 
would rather have it monthly, but if you can--if quarterly is 
what your normal system is, that's fine.
    Ms. Thompson. That's right.
    Mr. Barton. I want to personally monitor what you all do, 
not that I don't trust you, but I think if you have us watching 
you, you're going to watch them a little more closely.
    The second thing if you've got a problem in Texas, you let 
me know, and I will be your strongest ally. I may not clean up 
the whole country, but by God I bet I can help you clean up 
Texas. So I am willing to kick their butts, if you need a 
Congressman to get their attention.
    Ms. Thompson. Thank you. We will come talk to you.
    Mr. Barton. Thank you.
    Mr. Burr. I will attest to the fact that he can kick butt.
    Let me just ask one question before I yield to Mr. 
Strickland. These requests to be part of the contractor world 
by these companies, was this after they understood what the 
reimbursement was for services?
    Ms. Thompson. What we have basically pursued is that 
different contracts will be let with different kinds of 
reimbursements. For example, on the first 6 task orders that we 
developed, there's both fixed price contracts, where we feel 
like we can identify exactly how much we think that ought to 
cost us.
    Mr. Burr. And do those companies who have shown interest 
know what that reimbursement is?
    Ms. Thompson. They know there will be a fixed price, there 
will be cost plus, there will be time and materials, there will 
be different kinds of contracting, and they can decide of those 
12 that are now eligible whether they want to or don't want to 
compete for any given task.
    Mr. Burr. I can only speak for myself, but I'm sure that 
other members are experiencing the same thing when we look at 
the physician world with Medicare today; we don't see a lot of 
people applying to get in. We see a lot of people searching for 
a way not to handle Medicare patients, not to deal with the 
paperwork, but more importantly not to be reimbursed at a 
cost--at a price below their cost of delivering the services is 
the argument that we hear, and clearly my interest is more 
toward, is that the case for contractors as well. And certainly 
it's not based upon Mr. Grob's answer earlier, but you also 
said we've changed that. And I will be curious to monitor this 
as we go along.
    Very quickly.
    Mr. Grob. The change is only with regard to the fraud 
contractors, the contracts to do the mammoth work----
    Mr. Burr. There's still performance based incentives for 
the other?
    Ms. Aronovitz. That's cost-reimbursed contracts.
    Mr. Grob. The main line is still cost reimbursement. The 
fraud units have the flexibility now to try out these new 
instruments, which I think is a very beneficial thing to do.
    Mr. Burr. The Chair would recognize Mr. Strickland. And the 
Chair would also take this opportunity to announce that we do 
have a vote on. We will leave here with 5 minutes left in the 
vote or earlier, depending on Mr. Strickland.
    I would ask our second panel, we will be back in 20 
minutes, if you want to grab something real quick, but we would 
like to get the second panel called up and get this hearing 
underway.
    Mr. Strickland.
    Mr. Strickland. I will be short. I want to thank you for 
the information you brought to us. And I want to say that I 
don't think that character or integrity can be 
compartmentalized. And if the individuals and the corporations 
and the companies that engage in this fraud using public 
dollars are willing to do that, that denotes a corporate and an 
individual character problem, and they don't suddenly become 
honest individuals when they start dealing with their own 
money, especially if their own money involves whether or not to 
provide medical care to their customers. The bottom line here 
is increasing profits, and you can do that by defrauding 
Medicare, using public dollars or you can do it by denying 
patients legitimate medical need in order to increase profits. 
I think we've got a serious problem here.
    Now, the mentality that has prevailed in the House of 
Representatives over the last couple of weeks would say that 
maybe every contractor with Medicare should be required to post 
in their corporate offices a copy of the Ten Commandments, one 
of those commandments being thou shall not steal. Maybe they 
are just unaware that they ought not to be doing this.
    Thank you.
    Mr. Burr. I thank the gentleman from Ohio.
    At this time the committee would recess until 12:35.
    [Brief recess.]
    Mr. Burr. The hearing will come back to order.
    The Chair would like to call up Bill Mahon, Executive 
Director, National Health Care anti-fraud Association, and Mr. 
Dennis Jay, the Executive Director, Coalition Against Insurance 
Fraud.
    Welcome to both of you. I'm sure that other members will 
find their way back here after the vote. I apologize. We had 
two votes instead of one, so it delayed us another 10 minutes.
    At this time, Mr. Mahon, I would recognize you for your 
opening statement.

  TESTIMONY OF WILLIAM J. MAHON, EXECUTIVE DIRECTOR, NATIONAL 
 HEALTH CARE ANTI FRAUD ASSOCIATION; AND DENNIS JAY, EXECUTIVE 
          DIRECTOR, COALITION AGAINST INSURANCE FRAUD

    Mr. Mahon. Thank you, Mr. Chairman. Just for the sake of 
perspective, our organization is a private public organization 
that focuses on billing fraud typically by dishonest providers 
against third-party payers, either private or public, including 
Medicare, Medicaid, any tax funded program, and private health 
insurance plans, and that is the perspective from which I was 
asked to comment on some of the subject matter of today's 
hearing.
    Fraud is a problem common to the private and public 
sectors. The estimates place the annual loss at between 3 
percent to perhaps as much of 10 percent of what we spend on 
health care every year, which this year will be a $30 to $100 
billion estimated loss to fraud, if those estimates are 
correct.
    In the context of today's hearing, it's important to 
emphasize that no one has yet cornered the market on how you 
address health care fraud successfully. There's no one out 
there who would claim to have found the right formula to get 
every bit of it and get all the money back and what have you. 
It's an insidious type of problem that, as one of the witnesses 
pointed out this morning, can't even be officially called fraud 
until and unless someone is convicted or pleads guilty to 
intentional efforts to defraud.
    Having said that, I am familiar with the anti-provider 
fraud efforts of the private payers who are most active in this 
area, and as I noted in my remarks, there are three fundamental 
aspects of having a somewhat successful anti-fraud program. You 
have to allocate adequate resources to the task of detecting 
and investigating potential fraud, resources both in terms of 
people and technical capability that's required today in the 
electronic claims era.
    You have to rest heavily on continuing education and 
training of the people who are charged with that 
responsibility. Because no one has the market cornered, one of 
the principal things that people do through our group is 
precisely that cooperatively teach other what it is they're 
finding, what is going on and how it can be addressed.
    Finally, you need to have an organized effort to share 
investigative information with other private payers and with 
law enforcement, because typically the person who is defrauding 
one payer is doing it to many at a time so as to take it in 
smaller bites and reduce the risks of being detected.
    In that context when you look at Mr. Grob's and his 
colleagues and his report on fiscal intermediaries, several 
things that jump to mind are the tremendous lack of consistency 
across those 41 fiscal intermediaries, at least as of 1996, in 
terms of these three key factors: The resources allocated to 
the task, the reliance on training as a principal means of case 
of development, and staying current with the state-of-the-art 
and also the referral patterns for matters that were referred 
to the Office of Inspector General.
    There seem to be very few factors common to some of these 
inconsistencies. They vary according to size, to method of 
fraud detection and so forth, but one fundamental factor that I 
would like to note here is to say that at the bottom of the 
list of 41 FIs here is one intermediary that pays $110 million 
a year in Medicare claims, has a fraud unit budget of $15,400, 
and a fraud unit full-time equivalent staff of 1 quarter of 1 
person. By no means under the sun does that constitute a fraud 
unit or an effective anti-fraud effort. You can't expect to do 
anything about fraud with a quarter FTE and 15,000 compared to 
a $110 million outlay. And of course the numbers go up from 
there.
    So you have to make a respectable commitment at the front 
line to address the problem. One way in which the private 
sector is being required to address this more effectively is 
what the States have been doing in recent years. Now a total of 
17 States say to private health insurers and other companies as 
a condition of insurance licensure in our State you can't just 
put your feet up and say fraud happens, it's the cost of doing 
business; you have to demonstrate to the State as a condition 
of doing business that you have an anti-fraud plan, a special 
investigations unit that meets certain criteria that you have 
to refer specific cases to law enforcement. You have to provide 
specific types of training to anti-fraud people and so forth.
    And granted in Medicare, the fiscal intermediaries are also 
constrained by the policies and procedures that the Health Care 
Financing Administration establishes for how you go about 
detecting and investigating fraud and what have you, and some 
of the policies sometimes can help, sometimes they might hinder 
those functions, but one general observation I would make based 
on comments this morning is that when HCFA contracts out for 
both the processing of Medicare business and the anti-fraud 
activities involved with that, I don't see why HCFA should have 
to bear the entire burden of brainstorming the fraud problem 
and saying to these private contractors, here is how we want 
you to go about going after the fraud and here's what needs to 
be done and what have you. Those entities on the outside should 
be coming to HCFA and saying we're the experts, here's what 
we're finding, we're on the front lines, here's what needs to 
be done from a regulatory legal standpoint to make this anti-
fraud activity work better.
    I think it's unfair and unrealistic to put all the burden 
on HCFA to write chapter and verse about what all of these 
entities are supposed to be doing.
    I would suggest that HCFA, as a member of our organization, 
I would respectfully suggest that they look at what the States 
have done, and difficult as it seems to say, you know, simple 
HCFA solution in the same phrase, I think they really need to 
try to simplify. If HCFA is to be the anti-fraud arm, it 
represents a weapon that weighs 50,000 tons and has to be 
carried to the point of use by 100,000 people. HCFA cannot be 
the principal enforcement arm and detection arm. They have to 
exercise good oversight, but I think they also can lead by 
saying we're going to simplify and look at what the States have 
done and say if you want to be a contractor, these are the 
certain minimal standards you have to meet or exceed from the 
anti-fraud standpoint before we will even consider giving you a 
Medicare contract.You have to show that, you know, that you're 
up to the task of protecting us against the fraudulent aspect 
of the business.
    Other things that they might pursue, there has been a start 
of sort toward tearing down the walls that have existed between 
the Medicare side of the house and the private side of many of 
these intermediaries. When it comes to the sharing of 
investigative information between the Medicare fraud people and 
the private insurance fraud people, there is no logical or 
legal reason that that sharing shouldn't take place because 
oftentimes these two segregated anti-fraud units are looking at 
the same suspect providers and conducting parallel 
investigations of the same people, unbeknownst to each other, 
and there has been a cultural, if not an actual legal barrier 
within HCFA for many years that prevents that sort of common 
sense discussion among these people.
    HCFA started down the road last year of providing for that 
information sharing, but that has been stalled in part because 
it provoked a reaction in Congress when some members mistakenly 
assumed that that meant sharing information about Medicare 
beneficiaries in this age of privacy concern. What it means is 
sharing information on active investigations and suspect 
providers and what have you within the proper legal 
constraints, but those are the kinds of things that sometimes 
stand in the way of a more effective effort being carried out 
at the front lines.
    Other types of things that go to the way the system works; 
for example, HCFA has no claim-by-claim authority to suspend 
payment to a given health care provider, something analogous to 
a line item veto in the legislature. When they suspect fraud on 
the part of a provider or they think they have a given claim as 
fishy, the only option they have is either pay, deny or suspend 
all payments to that provider indefinitely.
    There are little nuts and bolts things there that could 
make a big difference in the real world of going after some of 
these folks. Those are just some general and very hastily 
assembled observations that I would make. But I would be 
delighted to try to address any questions that you all might 
have as well.
    But we thank you very much for the opportunity to come and 
offer our thoughts today.
    [The prepared statement of William J. Mahon follows:]
 Prepared Statement of William J. Mahon, Executive Director, National 
                   Health Care Anti-Fraud Association
    Fraud has a substantial impact not only on Medicare and other tax-
funded health care programs, but also on private health insurers. 
Across the board, fraudulent billings are estimated to account for 
between 3% to as much as 10% of the United States' $1 trillion annual 
health care expenditure--or between $30 billion to as much as $100 
million each year.
    Effective anti-fraud efforts rest on (1) allocation of adequate 
resources, both personnel and systems capability; (2) ongoing education 
and training of anti-fraud personnel; (3) structured, ongoing sharing 
of investigative information among payers' anti-fraud units.
    The November, 1998 HHS-OIG Final Report on Fiscal Intermediary 
Fraud Units illustrates a significant lack of consistency in these key 
areas among the 41 F.I.s that were the subject of that report.
    In the private health insurance sector, the states have taken the 
lead in requiring health and other insurers to establish and maintain a 
certain level of anti-fraud capability (see attached Guide to State 
Anti-Fraud Requirements).
    Among Medicare F.I.s and carriers, the nature and ultimate 
effectiveness of anti-fraud activities also rests to some extent on the 
policies and procedures established by the Health Care Financing 
Administration, which in recent years has placed considerably greater 
emphasis on the issue.
    In this context, HCFA might look toward establishing more specific 
standards for the funding, structure and workings of F.I.s' and 
carriers' anti-fraud operations; it also can continue to pursue 
practical implementation of its stated intention to establish effective 
information-sharing mechanisms between Medicare payers' and private 
health insurers' anti-fraud units--a function that is consistent with 
the universal acknowledgement on the part of private industry and law 
enforcement of the need for such information-sharing.

    Mr. Burr. Thank you for your statement. Mr. Jay, you're 
recognized for an opening statement.

                     TESTIMONY OF DENNIS JAY

    Mr. Jay. Thank you, Mr. Chairman. The Coalition Against 
Insurance Fraud for the record is a national alliance of 
consumer groups, government organizations and private insurance 
companies who are dedicated to fighting all forms of insurance 
fraud.
    We seek to curb fraud through public advocacy, consumer 
education and research. And what I would like to do today is 
just very briefly talk about some of our experiences that we've 
had in looking at anti-fraud units of private insurance 
companies, and how there may be some lessons there for HCFA and 
their fiscal intermediaries and their own fraud units, and 
particularly talk about some of the property casualty insurance 
companies which we have more expertise in.
    The property casualty industry has a great deal in common 
with health insurance in that a lot of the focus of anti-fraud 
activities are on medical providers who treat auto accident 
victims as well as people hurt in the workplace. In fact, it's 
some of the same medical providers who are defrauding property 
casualty companies, who are defrauding private health care 
companies, who are defrauding Medicare. They're truly equal 
opportunity crooks.
    But what we have done over the last 6 years, we've had an 
opportunity to go into private insurance companies and take a 
look at some of the finest state-of-the-art anti-fraud programs 
out there that seem to be very successful and effective in not 
only detecting fraud but preventing it in the first place. And 
we've tried to isolate some key elements that we've seen in 
these programs, and perhaps HCFA would also like to take a look 
at whether the contractors that they're dealing with also have 
some of these same common elements.
    I would like to quickly run down the list of things that 
we've seen common to excellent private programs out there. The 
first one is the recognition that there is a problem with 
fraud. And while this sounds like a very simple concept, 
because of the hidden nature of fraud, if you don't go looking 
for it, you're not going to find it. And frankly what we have 
found with private insurance companies, they tend to fall into 
three different categories when it comes to rooting out fraud, 
and those at the top recognize that there are problems, they 
dedicate resources to it, and they're doing an outstanding job 
of being leaders in going after it.
    And in the middle, we have a whole bunch of private 
insurers that with a little bit of nudge basically through some 
of the State requirements that Mr. Mahon talked about, they 
have gotten into the ball game and they are investing some 
resources to go after fraud. And then we've got this bottom 
group of private insurers that basically don't have a clue. 
They don't recognize they're being defrauded and they don't 
recognize the importance of dedicating resources to going out 
and looking for fraud.
    And frankly I hope that HCFA is looking at the top tier of 
contractors and not the middleman and bottom tier. But frankly 
our experience with private insurers is that health insurers 
more so than others tend to be in the middle and bottom tiers, 
and I don't know why that is, but in fact health insurers more 
than others have actually worked against our efforts in trying 
to build infrastructure in the States to try to set up anti-
fraud programs.
    But again there's excellent ones out there, and I think we 
should be isolating those and taking a look at them. These 
excellent anti-fraud programs on the part of private insurers 
take an integrated approach to fighting fraud. There is a 
dedication to rooting out fraud from the CEO on down, it's not 
just a single unit going out to look for fraud.
    There's a willingness to work in partnerships, whether 
that's with other insurers, whether that's with law 
enforcement, and they understand that in the best of 
circumstances fighting fraud is very difficult, trying to do it 
alone in isolation is nearly impossible. And we see some of the 
mature programs understand that there must be a partnership.
    We see the good programs out there have informal 
communication networks set up, and I think it's one reason why 
property casualty may be a little bit more ahead of the game 
than life--than health insurers, and that's because they've 
been at it a little bit longer, their investigators are a 
little more seasoned and they've been allowed to set informal 
networks to be able to cover some of these scams a little bit 
earlier.
    And frankly, one of the activities on the State level that 
has allowed for such communications has been the broad immunity 
from civil action that insurers enjoy and being able to share 
information back and forth. I'm not sure whether the FIs share 
or enjoy such immunity.
    But with that said, we still see a great degree of a lack 
of communication out there. Within the insurance industry 
itself, we don't see property casualty insurers who are dealing 
with some of the same medical providers talking to the health 
insurers. We need to work on that. And we surely, as Mr. Mahon 
has pointed out, don't see the type of communication between 
the public and the private sectors in fighting fraud and, 
again, we're dealing with some of the same type of culprits out 
there, yet we tend to think that they may not be defrauding, 
and I think if we ever get to the point of information sharing 
the game will be half over.
    The excellent programs out there are also very proactive, 
and I think we've heard a little bit about some of the 
shortcomings of the intermediaries in that they're not 
necessarily doing the things like data mining and initiating 
cases themselves. If you're just sitting there waiting for 
complaints to come in, the game will never be won.
    And again the property casualty industry has done an 
excellent job of developing data bases. They have an all-claims 
data base now, and they're able to use these type of tools to 
detect patterns going on out there that health insurers and 
Medicare are starting to go in that direction but still have a 
long way to go.
    And last, and again to reemphasize something that Mr. Mahon 
says, the States have been--some of them, excellent partners 
with the private insurers in setting up infrastructure to root 
out fraud, and I would also suggest that HCFA take a look at 
some of the experimentation that's going out there within State 
governments and the 44 fraud bureaus that have been set up.
    We take a look at State activity on an annual basis. We 
have a study that's going to be coming out next month that 
shows that, for example, referrals that are going to some of 
these State agencies have gone from 61,000 to 92,000 in the 
last 3 years. The referrals that they're sending on for 
criminal prosecution has more than doubled in the last 2 years, 
and the conviction from those prosecutions have more than 
doubled.
    So I think that there's a lot that is going on in anti-
fraud activity in the State level that can be looked at as 
well.
    In summing up, we found that overall it takes more than 
just an insurance company or the government to really have a 
successful program overall. We see a lot of different types of 
activities going on right now, but unless we can go together 
and look at where the money is draining out of the system, and 
still the big numbers tell us that medical providers are 
defrauding both public and private program at astronomical 
numbers, a coordinated approach to that is going to be the best 
approach to control this problem, we're not going to eliminate 
it, but to cut down drastically on some of those problems.
    So I thank you for the opportunity today. I would be happy 
to answer any questions.
    [The prepared statement of Dennis Jay follows:]
Prepared Statement of Dennis Jay, Executive Director, Coalition Against 
                            Insurance Fraud
    Good morning and thank you for the opportunity to testify here 
today. My name is Dennis Jay and I'm the Executive Director of the 
Coalition Against Insurance Fraud. We are a Washington, D.C.-based 
national alliance of public interest groups, government organizations 
and private insurance companies who are dedicated to fighting all forms 
of insurance fraud. We seek to curb fraud through public advocacy, 
consumer education and research.
    When it comes to the nuts and bolts of claims paying and fraud in 
the Medicare program, I will yield to the expertise of my colleagues on 
today's panels. However, because we seek to reduce all forms of fraud, 
we have a great interest in these issues and watch them closely. Today, 
I'd like to share our perspective and experiences of fraud-fighting by 
private insurers, and in particular that of the property/casualty 
insurance industry and what lessons might be applicable to the Medicare 
fiscal intermediary program.
    The property/casualty industry has a great deal in common with 
health insurers and faces many of the same problems. Much of the focus 
of this anti-fraud activity deals with medical providers who treat 
injuries from automobile accidents and workplace accidents. What we see 
again and again is that providers who defraud tend to be equal 
opportunity crooks. They don't care whether an insurer is public or 
private, provides health insurance or property/casualty coverage. If 
there's a pool of money to be tapped into, they will find it and 
exploit it.
    The property/casualty industry generally has been more involved 
than health insurers in fraud fighting efforts and has a longer history 
in combating fraud. While there is still a long way to go in 
controlling property/casualty fraud, these insurers have achieved some 
successes against the same kinds of medical fraud rings that plague 
health insurers and the Medicare program.
    We have attempted to analyze successful anti-fraud programs to 
isolate key elements and shed light on why some programs seem to be 
effective while others are much less so. Many of these elements are 
common sense approaches to crime deterrence and detection, but 
important to note nonetheless.
    The first element we found is that there must be recognition of a 
problem. This sounds simple, but with the hidden nature of fraud, 
unless you go looking for it, you may not recognize the existence or 
the severity of the problem. There are some insurers who have taken the 
lead on combating fraud and have very successful programs. Others have 
to be nudged into recognizing the problem and investing resources. And 
still others haven't a clue. Many states have enacted regulations 
requiring anti-fraud activities by insurers, and some private carriers 
come into the fraud fighting arena screaming and kicking. This seems to 
be especially so when it comes to health insurers.
    It seems many fail to recognize they are being defrauded. They are 
not convinced that the severity of the problem warrants the invested 
capital it takes to sponsor an effective anti-fraud problem.
    In the state of Washington, for example, health insurers got a law 
passed exempting themselves from modest regulations that most insurers 
supported. They claimed fraud was not a problem in health insurance in 
that state, and thus, the regulations were not necessary.
    In Louisiana, they currently are trying to get themselves carved 
out of a proposed law that would fund a state law enforcement agency to 
fight fraud. Two years ago they were successful in doing exactly that 
in Virginia. While other insurance companies see these state agencies 
as good investments in combating fraud, some health insurers aren't 
convinced it is worth spending the money.
    California passed a law several years ago that mandates that all 
insurers licensed in the state must maintain a special investigations 
unit to detect fraudulent claims. The only insurers fined so far for 
ignoring this law are health insurance companies.
    And in Florida, where like many states, insurers are required to 
report all suspected cases of insurance fraud, the fraud bureau has 
reported that 75 health insurance companies have not referred one case 
in five years.
    Some health insurers have excellent anti-fraud programs and should 
be commended for making the commitment to curb fraud. We wish more were 
in this camp.
    Just recognizing the problem obviously is not sufficient. There 
must be a commitment to the anti-fraud effort from top managers on down 
and then it must become an integral part of the corporate culture. 
Half-hearted attempts rarely succeed.
    Another common element we see in successful programs is the 
willingness to work in partnership with other entities. Fighting fraud 
in the best of circumstances is difficult, but nearly impossible if 
working in isolation. There should be a commitment by all parties 
affected that they will work together to reduce fraud. No one person, 
no one law enforcement unit, no one company, no one government 
organization can stop fraud. All of us together, including the general 
public, are affected by medical fraud, and we all must step up and do 
our part.
    This means cultivating relationships internally and externally and 
communicating well. The best programs align the anti-fraud interests of 
consumers, insurers and law enforcement to fulfill of common goal of 
prevention and detection of fraud.
    Along with partnership building is the need to communicate well. 
One reason property/casualty insurers may be more successful is because 
their investigators are more seasoned and have developed informal 
networks to share information about fraud cases. State laws that have 
provided insurers immunity from civil action in sharing information 
have been extremely helpful in getting a big picture on fraud. Each 
insurer may have a single piece to a fraud puzzle that together, they 
can solve, or at least provide sufficient documentation for law 
enforcement to take it to the next step. I question whether fiscal 
intermediaries feel that they can freely share such information among 
themselves. Perhaps their anti-fraud efforts could be enhanced with 
broader immunity protections as well.
    With immunity and an increased willingness to share information, 
communications among fraud fighters has never been greater. Yet, while 
these informal networks are growing, there still is little 
communication outside of a small sphere of activity. While the 
property/casualty industry and health insurers are defrauded by the 
same people, there's little interaction between the two camps. The same 
can be said about communication between public and private insurance 
programs. Recent government information sharing programs are 
commendable, but the outreach needs to be much more aggressive and on-
going to be effective.
    On the state level, we have seen that once government starts to 
build an infrastructure to combat fraud, including laws, fraud units 
and outreach programs, private insurers seem much more willing to 
invest in their own anti-fraud programs and make long-term commitments 
to funding anti-fraud programs.
    Once that commitment is made, the insurer's anti-fraud plan must be 
a part of an overall strategy. That plan must include detailed 
strategies for obvious things such as detection and investigation, 
education and training, technology and building public awareness.
    Part of this strategy must be to adopt a pro-active stance in 
fighting fraud. Claims handlers and investigators who are properly 
trained and motivated can use 21st century techniques to discover 
schemes before claims are paid. The ``pay and chase'' method of 
fighting fraud is an expensive, time-consuming way to combat this 
crime, albeit currently a necessary one. More resources should be 
dedicated to the real savings in fraud--prevention. A pro-active 
strategy can work towards this end. Mature anti-fraud programs develop 
a long-term, holistic approach to the problem. They realize that this 
war won't be won by fighting fraud one claim at a time.
    In the public awareness arena, property/casualty insurers have 
taken to lead to create effective and broad-based information and 
advertising campaigns designed to educate consumers about the costs of 
fraud--that it is in fact not a victimless crime, but that every 
consumer and taxpayer pays for fraud. We are not aware of similar 
efforts on the part of health insurers.
    This is the critical issue, because unless we can change the 
American perception that fraud is not a serious crime deserving of our 
attention and resources, we will not be successful in the long run. For 
that reason, we applaud the creation of the ``Who Pays? You Pay!'' 
outreach effort undertaken recently by HFCA in partnership with the 
AARP. Regardless of the protests from the medical profession, we 
believe this kind of effort is crucial to the anti-fraud fight because 
consumers are the first line of defense, as well as being the ones most 
affected by fraud.
    Some states also recognize the value of public awareness programs. 
Pennsylvania's Insurance Fraud Prevention Authority created an anti-
fraud campaign that many consider to be a model for raising awareness 
and changing attitudes. While the end results are not yet known, the 
initial positive signs have inspired neighboring states to take steps 
to put similar campaigns in place. For example, New York recently 
adopted a regulation requiring insurers to design and implement an 
anti-fraud awareness program as part of their overall anti-fraud plans. 
The Coalition Against Insurance Fraud, along with other groups, are 
developing broad-based outreach programs to consumers in that state.
    However, no amount of legislation or regulation can force an 
attitude change in a corporation, be it a property/casualty company or 
a health insurer. But modest requirements can be a good start to 
building effective programs by some insurers. In our model legislation 
for the states 1, we require that all insurers create an 
anti-fraud plan to fight fraud. Several states have adopted this 
approach, and because of it, many insurers that otherwise have no plan 
of action are discovering the benefits to combating fraud.
---------------------------------------------------------------------------
    \1\ Coalition Against Insurance Fraud. Model Insurance Fraud Act, 
drafted 1995, amended 1997.
---------------------------------------------------------------------------
    We would encourage HFCA and this committee to consider some of the 
anti-fraud programs adopted in the states. There is a good deal of 
experimentation occurring that can further shed light on key elements 
for success in fighting fraud. Overall, the level of activity by state 
fraud bureaus is rising by almost every measure. In a study soon to be 
released by the Coalition Against Insurance Fraud, the number of 
referrals to these state agencies has climbed from 61,000 in 1995 to 
more than 92,000 in 1998 2. Cases presented for prosecution 
have more than doubled in that three-year period as have the number of 
convictions.
---------------------------------------------------------------------------
    \2\ Coalition Against Insurance Fraud. A Statistical Study of State 
Insurance Fraud Bureaus, third edition, to be published August 1999.
---------------------------------------------------------------------------
    One area in which the government could be helpful is encouraging 
greater communications among private insurers. One way the property/
casualty industry has been successful in uncovering sophisticated rings 
is through the use of claims databases. With access to a new all-claims 
database that includes bodily injury and workers compensation claims, 
an investigator can easily check a provider's claim record. In 
addition, sophisticated datamining tools exist that allow investigators 
to look deep into the data and uncover suspicious connections that are 
indicative of fraud activity much more quickly than humanly possible. 
Of course, that doesn't replace an investigator's gut instinct, which 
comes from long experience, but it does make the job easier. There is 
no equivalent database in the health care industry.
    In summary, combating insurance fraud--whether in public programs 
or in the private sector is an extremely difficult task, especially 
when it is nearly impossible to quantity the level of fraud or place a 
quantifiable measure on fraud solutions. We shouldn't lose perspective 
that tremendous progress has been made in virtually every facet of 
fighting fraud during the last five years. But in some areas the 
progress has been slow. It's frustrating to know that the potential for 
greater gains is at hand if only we can every marshal the resources of 
both private and public sector
    By taking a holistic approach involving partnerships among all 
interests, progress can be made. Government needs to hold industry 
accountable and vis versa in order to ensure that this partnership 
maintains needed balance for continued success.

    Mr. Burr. Thank you for your testimony. What I will do is 
open it up for questions. I'm not going to keep a clock since 
Mr. Bryant and I are the only ones here. We will just sort of 
hit back and forth whenever we feel like it.
    Let me right off the bat thank you for your willingness to 
come in and to share suggestions. I'm a little disheartened to 
hear that there are good models out there. You mentioned the 
State, you mentioned some excellent models to look at in the 
private sector. And we still hear GAO going through an 
evaluation of HCFA where they're saying they haven't found the 
right things to do yet, yet you're telling me in the world of 
health care today there are people that have discovered what 
works.
    And I think one of the challenges for this committee, even 
though, Mr. Mahon, you said that the responsibility shouldn't 
fall on HCFA. And I don't disagree with you. I would say that 
we assume a big responsibility as the ultimate facilitator of 
the programs as the gatekeeper of the finances. They have 
chosen the intermediaries, they have chosen the words of the 
contract, they have chosen to assess the capabilities of those 
intermediaries based upon some criteria that HCFA chose. So I 
think that some of the responsibility falls on them 
automatically. And when I hear the Inspector General say that 
the functions of some of the intermediaries would not pass his 
test for what they needed in place to be an intermediary, 
single accounting systems, and he had a litany of things. So 
I'm hopeful that that doesn't happen any more and that HCFA has 
gone back and repaired some of them.
    But let me just go to a couple of specific things that you 
addressed. You said that HCFA needs to assure a minimum fraud 
standard for their contractors, some blueprint of here's the 
minimum we want you to do. How can we do that if in fact what 
the IG said is true, that we can't even assess whether their 
internal functions are great enough to be an intermediary? I 
mean should we have--I guess my question is, should we have a 
level of trust that is very high given that we've handed over a 
blueprint, but we have no idea and apparently we have no 
follow-through on did anybody fulfill the minimum requirements?
    Mr. Mahon. Well, I think we're probably agreeing somewhere 
in there with respect to, you know, the responsibility that 
HCFA should bear ultimately for this anti-fraud function. My 
point I think is that there is no reason they should invent 
wheels that have already been invented and are being used 
elsewhere.
    Mr. Burr. But they should pass them on, shouldn't they; if 
they see them out there, they should pass them on to these 
intermediaries?
    Mr. Mahon. Absolutely, I think one of the phenomena at work 
in this whole thing is that HCFA and the Medicare program and 
other anti-fraud efforts in the private sector and even through 
law enforcement anti-fraud activities sometimes seem to fall 
into parallel universes, where a lot of reinvention is being 
done within the Medicare side by HCFA instead of a focus on 
being part of the mainstream of, you know, what the entire 
collective health care system is doing about fraud.
    Mr. Burr. So how do you accomplish a dissemination of 
information from public to the private intermediary given this 
communication gap that both of you express exists, and I feel 
fairly confident that it does?
    Mr. Mahon. There's a great deal of communication out there 
and the whole world has come to look at health care fraud in 
recent years, as you know, and there's a lot written about it, 
a lot said, a lot reported in the media. One of our main 
purposes in life as an organization is to provide ongoing 
training. We do 15, 16 real nuts and bolts training seminars a 
year for investigators, attorneys, what have you, and that's 
really the primary source of training and detection, 
investigation and prosecution that goes on in the country 
today.
    I would like to see HCFA be much more involved in 
participation in that sort of training, rather than sit and say 
well, gee, we should conduct some training, how are we going to 
put together a training program, those wheels have already been 
invented, and they're being used by the rest of the universe, 
there's not necessarily a need to do a discrete program from 
scratch.
    Mr. Burr. How much does the complicated Medicare structure 
contribute to the inability to identify fraud?
    Mr. Mahon. Considerably. As one of the witnesses mentioned 
this morning, I think it was Ms. Aronovitz that payers pay, 
payers get kicked silly all the time for paying fraudulent 
claims, but the reality is that most fraudulent claims look 
perfectly good on the face of them. If you're a reasonably 
smart crook, you're not going to do something on their claim 
that gives it away as being fraudulent.
    The system is very complex, the whole health care system 
pays about 4.5 billion claims and other transactions a year, 
you've got 1,500 payers out there, a million health care 
providers, and the typical MO in health care fraud as I said is 
to--you don't defraud just one payer, typically, if you're 
doing it to one, you're doing it to many, if you're doing it to 
Medicare, you're doing it to private insurers and vice versa, 
because that's how you stay below the radar screen with most of 
these folks for as long as you can.
    So there's a very complex undertaking and all of this anti-
fraud work happens in a system in which the pressure to pay 
claims rapidly is immense. The Medicare carriers are expected 
to pay claims rapidly and efficiently. State laws around the 
country sometimes require health insurers to pay claims within 
15 days, you know, unless they're fraudulent. You're not going 
to have a clue that they're fraudulent in 15 days. You're going 
to pay the claim and then put yourself in the pay and chase 
situation when you find out it was a fraudulent claim.
    So there's a great deal about the complexity of the 
Medicare system itself, the diversity of the players in it that 
makes it a very fertile environment in which to commit fraud. 
There's a lot of camouflage you can use.
    Mr. Burr. Let me ask both of you, and then I would yield to 
my colleague, if either one of you would like to comment on the 
privacy hysteria, I will call it hysteria, it's a legitimate 
concern that is being raised in Congress and in the country. I 
think when we dwell on it to the degree that we are right now, 
hysteria is probably the right word. With that feeling that's 
out there, how will that affect our ability to detect fraud, 
waste and abuse, not only in Medicare, but in the health care 
delivery system, public or private, in the future?
    Mr. Mahon. In looking at the bills that have been proposed 
most recently, they are somewhat more friendly to the need for 
an effective anti-fraud function than the bills that came out 3 
or 4 years ago were. At that time there were tremendous 
obstacles that were being placed in the way of law enforcement 
and private insurers when it came to doing the essential work 
to investigate fraud and to prosecute it and what have you.
    My sense of the bills that are up here today is that they 
present more of a potential problem for law enforcement, more 
hoops for law enforcement to jump through in the course of 
conducting an investigation, than they would for private 
payers. When it comes to investigating fraud, the main thing 
you are looking at 90 percent of the time is not the patient 
and the patient's medical information, you're looking at the 
actions of a health care provider who billed for things he 
didn't do, who billed for more expensive things than he did, 
who billed for things that weren't medically necessary, so only 
at a certain point in a given case do you get close to having 
to provide identifiable information about a patient, either as 
a part of an evidence package you turn over to law enforcement 
or as evidence you present in court, and even there in some 
court cases, the patient involved is known as, you know, 
patient A or patient B, what have you. Unless there's a 
compelling need to identify the subject of phoney claims, that 
generally is not done.
    Mr. Burr. It is done incorrectly. Insurance company hires 
or creates a separate entity as their fraud arm, the 
legislation that addresses privacy is written in a way that 
forbids the insurance company from sharing the patient 
information or the claim with their anti-fraud arm. That would 
be a distinct problem for the system, wouldn't it?
    Mr. Mahon. No question.
    Mr. Burr. Does a relationship like that currently exist out 
in the private sector market? Let me go further into the public 
model. One might interpret that that if HCFA holds the 
information that the General Accounting Office would have to 
have the release of an individual to audit any specific set of 
claims, would that be a good interpretation?
    Mr. Jay. Sure. There are many private insurers that 
subcontract for their anti-fraud activities, especially small 
or medium sized insurers, and that obviously would hamper their 
anti-fraud efforts.
    But getting back to the law enforcement aspect of it, we're 
very concerned that not just the letter of the law may throw up 
a little bit of a roadblock, but just a cloud that potentially 
there could be problems with privacy, may deter law enforcement 
from taking some of these cases.
    I mean these cases tend to be very complex, paper intensive 
cases for law enforcement to begin with. To give them any 
further disincentive to take a fraud case is going to hurt the 
effort.
    And let me just also say that we're very concerned in some 
of the State legislation that we see in the privacy realm that 
would maybe not intentionally go after fraud investigators. 
They are always written for other purposes, but will have an 
impact of hurting fraud cases. Paparazzi legislation in 
California, for example, would have potentially hurt fraud 
investigators.
    And it's an education effort with legislators. And I think 
what Bill talked about, as far as making legislators understand 
that most investigations do not entail patient information is 
one way that I think has really helped the whole debate and 
hopefully it will continue along that line.
    Mr. Burr. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. Mr. Mahon, you had 
mentioned, and I think the chairman has also alluded to this 
subject in his questioning, about how one of the ways you 
suggest that we can do better and HCFA can do better, and that 
was this communication between the various investigators, and 
your example would be Medicare and the private sector.
    It seems to me that was an initiative that HCFA had 
suggested sometime back that they would do, and I gather from 
what I heard today they haven't done that at all.
    What is your view of that in relation to HCFA, would you 
comment?
    Mr. Mahon. Just about a year ago, last July, HCFA published 
in the Federal Register a notice of what they called three new 
routine uses for HCFA systems of records, which translated 
meant that they were establishing procedures through which HCFA 
could make disclosures of fraud related or fraud investigation 
related information to Medicare contractors, to law enforcement 
agencies and to any other entity that paid for health care 
services, meaning a private health insurer, and so long as the 
information was disclosed for the purpose of fighting fraud in 
a variety of ways.
    We sort of hailed that as the end of an era of the 
prohibition against information sharing between the Medicare 
and the private side people and were anticipating its 
implementation, but as I say, it immediately provoked a 
response in the House here where one Member who is quite 
involved in health matters jumped all over HCFA, I believe, on 
the thesis that this meant HCFA was going to be trading 
beneficiary information with all kinds of private insurers and 
other entities and so forth, when as I say the reality is it is 
intended to allow fraud investigators to exchange information 
on providers who are the subject of their investigation.
    Whatever took place after that, it is something that has 
not been implemented, and we have talked with the program 
integrity group at HCFA about some of the practical problems 
involved in how they proposed to do that initially, and we are 
looking at working with the Office of Inspector General to see 
if we can find a more practical alternative to the regulatory 
scheme in which that was proposed, but bottom line is nothing 
is happening yet to alter that cultural prohibition.
    Mr. Bryant. You feel it was someone in the House that 
perhaps stopped this initiative?
    Mr. Mahon. I think so. It had the support of the 
Administrator, strong support I believe, and it had cleared all 
of the privacy offices and hurdles within HCFA itself, and I 
think they were quite pleased that they had reached the point 
of announcing this initiative, and so I say for whatever 
reasons, beginning with some congressional objections, I think 
it just became dead in the water after a while.
    Mr. Bryant. Now, you said your organization is primarily 
focused on what I referenced earlier today as the primary, the 
provider fraud, doctors and hospitals and clinics and labs and 
so forth.
    Mr. Mahon. Yes.
    Mr. Bryant. What could HCFA do directly involving that tier 
to better find or ferret out this actual fraud because, you 
know, what I would do is divide it into the fraud that is the 
intentional, you know, a person goes out and says I am going to 
stick it to the government, and I am going to do something 
illegal and intentionally versus as we talked about a little 
bit earlier today with the HCFA people where we might need more 
education and training, where it is just too complicated, when 
people put the wrong code in or they don't have qualified 
people doing the job or whatever. But focusing on the fraud 
part, what could HCFA do better at the provider level because I 
know at one point I used to hear about the explanation of 
benefits form, the EOB form. I think Medicare uses that now, 
don't they? Don't they send that to the patient?
    Mr. Mahon. Thanks to HCFA in 1996, if I recall correctly, 
they required Medicare to provide an explanation of benefits 
for every Medicare service. Prior to that it was going south in 
that respect. The idea was we are going to cut administrative 
dollars by eliminating the benefit statement, and now it has 
come 180 degrees and there is a great emphasis on using the 
beneficiaries as a frontline set of eyes to say I wasn't in the 
doctor's office on that alleged date of service and to report 
that discrepancy. That is one thing that can and should be 
done, and ironically it is something that in the private sector 
often is not done. Eliminating an EOB is a valuable cost 
savings.
    Mr. Bryant. What other avenues could HCFA use?
    Mr. Mahon. They should, I believe, look at the existing 
contractor, the carriers and the FIs and at these new payment 
safeguard contractors, the 12 firms to which Ms. Thompson 
alluded, and just say, look, in the statistics, at least from 
1996, a very small proportion of the cases that were referred 
to the OIG were developed proactively, as they call it. In the 
private sector, when we surveyed our 90 member companies a 
couple of years ago, we found that about 58 percent of their 
cases are developed internally, about 10 percent come from 
hotlines, a small percentage come from health care providers 
who report other providers, but the main reliance these days 
because of the complexity of the system is on doing some heavy 
duty data analysis with tools that let you see the outliers and 
see other patterns that are indicative of potential fraud and 
then looking, doing the investigative work you have to do to 
follow up those leads.
    There is a great disparity between what Mr. Grob and his 
colleagues found and how most active private payers develop 
their cases.
    Mr. Bryant. I was astounded with the statistics you 
provided in the beginning of your statement. I think you said 
one company that pays out something like $110 million a year 
has the equivalent of one-quarter of an employee that is in 
charge of investigating fraud and waste, and again, I just 
wonder how can that company deal in good faith with HCFA? I 
mean, would HCFA not know that and how could HCFA deal in good 
faith as a fiduciary to the taxpayers, both really the company, 
but with responsibility back to HCFA, how can that exist? Whose 
fault is that?
    Mr. Mahon. Well, I think it is probably a cultural, 
institutional matter that hasn't been addressed, but you look 
at a State like New Jersey, for example, and I am not 
suggesting they get too specific but New Jersey requires health 
insurers to have a special investigation unit staffed with a 
ratio of 1 investigator for every 60,000 lives covered by the 
health policies, and this means if you cover 6 million lives 
you need 10 investigators, and so forth--I am not a math major, 
but hundreds, and so, but they went so far as to say there must 
be a specific minimum number of investigators compared to 
covered lives. That is an extreme and some call it 
micromanagement, but it is a marker for saying, well, there 
should be some reasonable minimum number you would expect in 
any fraud unit that purports to be a fraud unit, and the 
formulas are many. You can say X investigators per dollar is 
paid out, X investigators per providers with whom you deal and 
were submitting the claims, but there should be some threshold 
one would think below which you don't meet the anti-fraud 
qualifications to be a participant here.
    Mr. Bryant. Mr. Chairman, I don't have any further 
questions. I would yield back the time.
    Mr. Upton. I would thank the gentleman. Let me make a few 
last comments. Let me first thank both of you for your 
willingness to stick around and your honesty with the 
committee.
    I think that this member especially has tremendous 
confidence in our current HCFA Administrator, not only in her 
capabilities but I believe in her passion and determination to 
make changes. I don't expect all of those to be right, but I 
think her willingness to try things is certainly a light at the 
end of the tunnel.
    My hope today is that this committee will actually turn up 
the heat, that we won't go away; that not only HCFA feel the 
heat, that the intermediaries feel the heat, that the private 
sector companies feel the heat; that people understand that 
there has to be change and there has to be enforcement, and for 
those who choose to continue to work outside of the framework 
of the contract or, as Mr. Klink referred to, the moral 
obligation that they have as part of the health care delivery 
chain or the ethical responsibilities that they have as part of 
the chain, that they are going to get caught and they are going 
to be prosecuted and they are going to pay.
    I think that Mr. Dingell reminded me that it has been the 
experience of this committee that when we turn the heat up on 
defense contractors, I think it related to Department of Energy 
issues, when they became believers that they were going to get 
caught, they quit cheating. I think clearly we have got that 
same challenge before us as it relates to health care.
    None of us can be naive enough to believe that you will 
ever eliminate 100 percent of the cheaters. There are going to 
be some bad apples everywhere, and one bad apple begins to 
spoil the rest of the bushel if in fact you are not successful 
at removing the bad one. I think it is clear we haven't been 
successful at removing many, that it has permeated a lot of 
areas for different reasons, and I think Mr. Bryant hit on a 
very important factor, that not all the claims that are before 
us are about the company. Some of them are about bad 
individuals at the company, and those companies have to police 
their own.
    But clearly we have got our work cut out as it relates to 
the structural changes, to the simplification that we have 
talked about, to the communication that both of you have 
addressed. It demands that we open our eyes and look at the 
successful models that exist, whether they are in the private 
sector or the public sector, and I think that this committee 
will not stand for another year to go by where we follow up 
with a new GAO report that tells us the same thing they told us 
this year, only for us to reconfirm that we have a waste, fraud 
and abuse problem where everybody speculates that the amount of 
money, nobody really knows what that money is, but there is one 
thing that you and every member up here will agree with.
    Whatever money goes to waste, fraud and abuse does not go 
to patients. It is in fact a quality of care issue that we are 
here to address, and I think the quicker we can do it, the more 
resources we have, not only to assure there is no waste, fraud 
and abuse in the future, but we also can have a greater 
confidence in the Medicare system as far as a delivery of 
health that everybody appreciates.
    I thank both of you for your willingness. This hearing is 
adjourned.
    [Whereupon, at 1:30 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

            United States General Accounting Office
                           Office of Special Investigations
                                                      July 22, 1999
The Honorable Fred Upton
Chairman, Subcommittee on Oversight and Investigations
Committee on Commerce
House of Representatives
    Dear Mr. Chairman: On July 14, 1999, representatives of GAO's 
Health, Education and Human Services Division and Office of Special 
Investigations (OSI) presented testimony, entitled Medicare: HCFA 
Should Exercise Greater Oversight of Claims Administration Contractors, 
before your Subcommittee. At that hearing, Representative John Dingell 
requested that OSI provide additional information to the Subcommittee. 
Specifically, he asked that we elaborate on the bulletted examples of 
contractor improprieties enumerated in the testimony and explain the 
effect of the improprieties on taxpayers. The enclosed document is 
submitted for the record in response to Representative Dingell's 
request.
            Sincerely yours,
                                             Robert H. Hast
            Acting Assistant Comptroller General for Investigations
Enclosure
cc: Representative John D. Dingell
                   medicare contractor improprieties
1. Contractors improperly screened, processed, and paid claims, 
        resulting in additional costs to the Medicare program. 
        Contractors arbitrarily turned off computer edits that would 
        have subjected questionable claims to more intensive review
    HCFA required contractors to properly screen and process claims to 
ensure that (1) claims submitted for payment were, in fact, eligible 
for payment under the Medicare program and (2) Medicare paid the 
appropriate amount on claims. Contractors' computer edits were designed 
to catch claims with errors or other problems, such as duplicate 
claims, claims with missing or inaccurate information, claims for 
services that were not medically necessary, or claims for services that 
exceeded the limit for such services. Claims that contained errors or 
that were incomplete were to be ``developed'' (reviewed and corrected) 
before payment to ensure that payments were correct.
    In our review, however, we found that Medicare contractors had been 
accused of, or had admitted to, failing to abide by the above 
requirements. For example, it was alleged that:

 BCBS of Illinois sometimes failed to send out MSP \1\ letters 
        to beneficiaries, thus using Medicare funds to pay claims that 
        were potentially the responsibility of other insurers. In 
        addition, in times of high claim inventory, BCBS of Illinois 
        paid incomplete or improperly filed claims of less than $50 
        without developing them as required.
---------------------------------------------------------------------------
    \1\ In the early to mid-1980s, Congress passed legislation making 
Medicare the secondary payer on claims involving beneficiaries who are 
also covered by Black Lung, Veterans Health Administration, or private 
employee health plans, which are now treated as primary payers. HCFA 
requires carriers to send MSP letters to beneficiaries for completion 
when a Medicare claim is first filed for their benefit. MSP letters 
establish whether beneficiaries are covered by other insurance plans, 
are used to determine the order in which Medicare will pay claims 
relative to other insurers, and affect the dollar amount Medicare will 
pay on claims.
---------------------------------------------------------------------------
 In an effort to receive the maximum payment for the number of 
        claims processed, Blue Shield of California rushed claims 
        through the processing system, shutting off computer edits 
        designed to catch problem claims. Blue Shield of California 
        also paid claims without proper physician signatures or backup 
        documentation. In other instances, it denied claims instead of 
        developing them as required.
2. Contractors destroyed or deleted backlogged claims
    Contractors admitted or were alleged to have unproperly destroyed 
or deleted claims before processing them so as to appear to meet HCFA's 
timeliness standards for claims processing.
    For example, it was alleged that:

 BCBS of Illinois, using special computer coding, sometimes 
        deleted (by pulling from the nominal processing line) claims 
        that contained incomplete or incorrect information, which 
        needed development, in order to eliminate backlogs of 
        unprocessed claims. Once deleted, the claims were neither paid 
        nor developed. Claimants were neither notified of the 
        nonpayment of their claims nor informed of the items that 
        needed development.
 When Blue Shield of California fell behind and was unable to 
        process claims in accord with HCFA's timeliness standards, it 
        sometimes deleted claims and then reentered them with new dates 
        and control numbers. In doing this, the contractor gained 
        additional time to process the claims while it appeared to meet 
        HCFA's timeliness criteria.
3. Contractors failed to recoup within the prescribed time moneys owed 
        by providers and failed to collect required interest payments
    HCFA required that contractors recoup overpayments to providers 
within 30 days of the date an overpayment was determined. If 
overpayments were not secured within 30 days, contractors were required 
to assess interest on the overpayment amount and to withhold the total 
amount due from future weekly payments \2\ to the providers. Despite 
this requirement, it was alleged that from 1988 through 1993, BCBS of 
Michigan had circumvented a requirement to collect provider 
overpayments within 30 days of the overpayment determination date and 
had used various evasive means to make it appear that payments were 
collected on time when, in fact, they were not. As a result, Medicare 
suffered not only from the untimely repayment of such overpayments but 
also from the lost interest that should have been assessed on overdue 
overpayments but was not.
---------------------------------------------------------------------------
    \2\ Some Part A providers receive weekly payments from HCFA under 
the Periodic Interim Payment program, based on their prior-year cost 
reports and current-year quarterly reports. Fiscal intermediaries are 
required to adjust weekly payments, if necessary, each time the 
provider files a quarterly report. The goal is for weekly payments to 
total at least 95 percent of the total actual provider costs for the 
year. At the end of the year, the fiscal intermediary must collect any 
overpayment from, or pay any underpayment to, a provider, as determined 
by the year-end cost report, within 30 days of the date of 
determination of an overpayment or underpayment, per HCFA criteria.
---------------------------------------------------------------------------
    Pennsylvania Blue Shield also allegedly failed to recover 
overpayments resulting from computer system errors.
4. Contractors switched off customer service telephone lines when staff 
        could not answer incoming calls within the prescribed time 
        limit
    Individuals we interviewed told us that HCFA evaluated contractor 
response time to incoming customer telephone calls, which generally 
were considered ``answered late'' if they were not answered within 120 
seconds. When BCBS of Illinois monitors showed that it was exceeding 
the 120-second time limit, supervisors, including the qui tam relator, 
were instructed to shut off some or all of its 1-800-telephone lines. 
This prevented the calls from showing up as ``answered late'' on 
computer reports, from which data was forwarded to HCFA.
5. Contractors altered or hid files that involved claims that had been 
        incorrectly processed or paid and altered contractor audits of 
        Medicare providers before HCFA reviews. Contractors 
        manufactured documentation to support paying claims which 
        otherwise would have been rejected as medically unnecessary. 
        Contractors falsified documentation and reports to HCFA 
        regarding their performance
    To circumvent HCFA's annual and periodic reviews of the 
contractors' actual performance, according to admissions and 
allegations, contractors, among other actions, improperly altered 
problem claim and audit files, hid problem files, or otherwise did not 
make problem files available to HCFA. For example, a former contractor 
employee told us that, for the weekly quality assurance reviews, Blue 
Shield of California improperly fixed claims that had been processed 
incorrectly and were to be reviewed by HCFA. It did so, for example, by 
(1) stamping ``signature on file'' on claims that had been paid without 
a doctor's signature; (2) detaching documents, such as another 
insurance company's Explanation of Benefits, from improperly denied MSP 
claims to give the appearance that the denials were correct; and (3) 
altering procedure codes to make it appear that claims had been paid 
properly when they had not.
    HCFA's CPEP and CPE evaluations of contractor performance included, 
among other aspects, reviews of claims processing and payment 
safeguards. In support of these performance evaluations, Medicare 
contractors were required to file periodic reports with HCFA. These 
reports included information about claims processing errors, MSP 
errors, claims-processing timeliness, and contractor response time to 
incoming customer telephone calls. Both BCBS of Illinois and Blue 
Shield of California admitted in their plea agreements with the 
government that they had falsified reports to make their performance 
appear acceptable to HCFA.
        effect of medicare contractor improprieties on taxpayers
    When contractors improperly turn off edits, fail to properly 
develop, process, or audit claims, or improperly deny or delete claims, 
Medicare pays more or less than it should on claims. If Medicare pays 
more than it should, the result is additional costs to the Medicare 
program. If Medicare pays less than it should, Medicare beneficiaries 
do not receive the benefits to which they are entitled.
    Customer service is also affected by improper contractor 
activities. Providers and beneficiaries are forced to resubmit claims 
that are improperly destroyed, deleted, or denied, causing delays in 
payment, unnecessary duplication of effort, and additional 
administrative costs to providers who must resubmit such claims. When 
claims are denied or deleted without the claimants being notified of 
any underlying problems with the claims, the claimants may me 
replacement claims containing the same mistakes. Further, shutting off 
customer service telephone lines results in customer calls not getting 
through to the contractor.
    Providing HCFA with false work-processing samples relative to their 
performance under Medicare contracts resulted in contractors receiving 
false high scores and the false appearance of superior performance. 
This resulted in Medicare contractors retaining their contracts even 
when their performance was deficient. In the case of BCBS of Illinois, 
this also resulted in the receipt of over $1 million in incentive 
payments, for its supposedly superior performance, to which it was not 
entitled. Finally, it resulted in HCFA malting incorrect management 
decisions, such as when it awarded the intermediary and carrier 
responsibility for the state of Michigan to BCBS of Illinois after 
alleged contractor improprieties by BCBS of Illinois were brought to 
light. Later, BCBS of Illinois pled guilty to similar improprieties.
    Medicare is a publicly funded program supported by taxpayer 
dollars. Taxpayers, including Medicare beneficiaries, may lose 
confidence in the Medicare program when it is the subject of fraud, 
waste, and abuse as the result of contractor improprieties.


       HOW HEALTHY ARE THE GOVERNMENT'S MEDICARE FRAUD FIGHTERS?

                              ----------                              


                      THURSDAY, SEPTEMBER 9, 1999

                  House of Representatives,
                             Committee on Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Barton, Cox, 
Bilbray, Ganske, Blunt, Bryant, Bliley (ex officio), Klink, 
Stupak, Green, McCarthy, and DeGette.
    Staff present: Chuck Clapton, majority counsel; Amy 
Davidge, legislative clerk; and Chris Knauer, minority 
investigator.
    Mr. Upton. Good morning, everyone. Welcome back.
    Today, the subcommittee holds another hearing examining the 
problem of fraud, abuse and mismanagement affecting the 
Medicare program. The focus of today's hearing will be on the 
Medicare contractors who are supposed to serve as Medicare's 
front line of defense in the war against health care fraud and 
abuse.
    During the subcommittee's hearing last July we learned that 
at least some of these contractors have in fact been part of 
the fraud and abuse problem that they were supposed to be 
combatting. In too many cases, we found that the fox was 
guarding the hen house.
    Medicare, which provides health benefits for the majority 
of America's seniors, faces a daunting problem relating to 
fraud and abuse, which costs the program billions of dollars 
every year. The Office of Inspector General at the Department 
of HHS has estimated that every year more than $12.6 billion 
worth of improper Medicare payments are made. Every time that a 
medical provider is paid for a fraudulent claim, a hospital is 
able to double bill for a service or a nursing home inflates 
the amount of care above which it actually provided, scarce 
Medicare funds are wasted. Every one of these dollars could 
otherwise be going to improve the quality of health care for 
America's seniors. It is imperative that we in the Congress do 
all that we can to combat this rampant abuse.
    In several cases Medicare contractors were found to be 
committing acts of fraud which resulted in the waste of 
millions of Medicare dollars. During the July hearing before 
this subcommittee, the GAO released two reports which detailed 
several of the cases which had been brought against these 
contractors. These cases to date have resulted in civil and 
criminal fines being leveled against these contractors in 
excess of $260 million.
    We will hear from several witnesses who observed firsthand 
how these contractors cheated the system, either for their own 
gain or to hide their inadequate performance. These witnesses 
and other whistle-blowers like them are to be commended. But 
for them, many of these fraudulent schemes would never have 
been uncovered, and Medicare would in all likelihood still be 
continuing to waste untold sums of money on additional improper 
payments.
    The activities these witnesses will describe are 
particularly disturbing: Contractors fabricating audits and 
other performance evaluation documents, failing to recoup 
moneys owed to the Medicare program, destroying Medicare 
claims, and improperly screening claims so that fraudulent or 
abusive claims went undetected. We will also hear about the 
ongoing nature of this problem with pending investigations of 
Medicare contractors continuing to relate to these types of 
allegations.
    We will also hear from several Medicare contractors who 
have entered into civil and/or criminal settlements with the 
U.S. Government as a result of these allegations. Their 
testimony will hopefully shed light on how and why these abuses 
could have happened.
    The subcommittee hopes to learn from this testimony what 
factors encouraged some contractors to break the law and why 
their activities went undetected for so long. In addition to 
reviewing the culpability of individual contractors, the 
subcommittee will also inquire into the role that HCFA's 
management of these contractors played in contributing to these 
activities.
    During the previous hearing, GAO testified how HCFA's 
woeful lack of oversight of its contractors contributed to the 
problem. By assessing the reasons why this happened and 
possibly continues to happen, the members of this subcommittee 
will then be better prepared to consider appropriate reforms to 
combat this problem with the Medicare program.
    Finally, the committee will hear from the National 
Association of Blue Cross and Blue Shield plans. Blue Cross 
Blue Shield plans represent the majority of Medicare 
contractors, under both Part A and B of the program. The 
Association will testify about some of the initiatives their 
plans are pursuing to ensure greater compliance with Medicare 
regulations, along with rigorous self-auditing and employee 
ethics training that will be used to detect and/or prevent 
future abuses. They will also make several recommendations 
regarding programmatic changes to reduce the opportunity for 
future abuses of the Medicare program.
    I would like to thank the Association for agreeing to 
testify today and also for their assistance in setting up 
inspections by the committee staff of two of the better 
Medicare contractors over the past August recess. These 
inspections, which included meeting with senior management of 
the plans and examinations of their claims processing and anti-
fraud units, shed valuable light upon what Medicare contractors 
are capable of when properly organized and operated. The 
standards of quality and commitment to program integrity 
maintained by these contractors should be commended and, more 
importantly, should be studied and emulated by all Medicare 
contractors.
    This subcommittee is committed to working with all 
interested parties to ensure that the problem is resolved once 
and for all. Chairman Bliley, along with Mr. Barton and myself, 
recently wrote to Penny Thompson, Director of Program Integrity 
Efforts at HCFA, asking her to provide regular reports on the 
progress that has been made to remedy the numerous problems 
that have been identified with Medicare contractors in their 
processing of Medicare claims. Hopefully, by continuing to 
pursue such efforts and engaging in rigorous oversight of these 
issues, the subcommittee can effect some meaningful changes 
that will in fact reduce the incidence of fraud and abuse 
within the Medicare program. America's seniors and all who 
depend on Medicare for their health care should expect no less.
    I welcome all of the witnesses who have come to testify 
today and at this time recognize my friend and ranking member 
of the subcommittee, Mr. Klink from Pennsylvania.
    Mr. Klink. I thank the distinguished chairman and welcome 
him back to Washington, DC. I trust everything was well in 
Michigan.
    I thank the chairman for having this hearing. As you well 
know, over many years this subcommittee has spent considerable 
time and effort examining how HCFA's Medicare contractors 
oversee the Medicare program. In administering Medicare, HCFA 
currently uses the services of private sector insurance 
carriers called fiscal intermediaries. They process the claims, 
conduct the audits, provide medical reviews and perform a host 
of other activities designed to prevent waste and fraud and 
abuse.
    The government has essentially privatized many of the 
functions of safeguarding the program by allowing these 
intermediaries to process and pay out claims and to conduct 
related audits. Ideally, these intermediaries are supposed to 
conduct such functions by applying their own private sector 
expertise to protecting Medicare dollars. In theory, the 
taxpayer should be getting state-of-the-art private sector 
techniques with the $1.6 billion that we pay Medicare 
contractors to run the programs. Nevertheless, as has been 
demonstrated over the years through a number of investigations, 
the effectiveness of some fiscal intermediaries in safeguarding 
this fund is open to serious debate.
    What we will hear again today is that some of the very 
contractors the government hires to protect the program are in 
some cases the very entities that are abusing it. As was 
revealed in the GAO's July testimony, no fewer than one in four 
contractors have been alleged, generally by whistle-blowers 
within the company, to have integrity problems. In fact, GAO 
has identified at least seven of HCFA's 58 current contractors 
as being actively invested by the HHS OIG or Justice. That is a 
problem.
    We need to figure out what is happening. We need to figure 
out its implications on safeguarding the Medicare program.
    So I look forward to learning even more about what went 
wrong with the Colorado and the New Mexico fiscal 
intermediaries which both the HHS IG and the GAO will discuss 
in further detail today, and I look forward to hearing from 
some of the lawyers and the whistle-blowers related to certain 
Medicare contractors' integrity cases, including Blue Cross 
Blue Shield of Illinois and Blue Cross Blue Shield of Michigan.
    Finally, I look forward to hearing from some of the 
Medicare contractors themselves, as well as their national 
associations, so that they might provide some insight or shed 
some light into what went wrong with each of their respective 
companies and what changes must be made to prevent such abuses 
from occurring again in the future.
    Again, I thank the chairman for holding this hearing, and I 
look forward to hearing from many of the outstanding witnesses 
today. And with that I yield back my time.
    Mr. Upton. Thank you, Mr. Klink.
    I yield to the chairman of the full committee, Mr. Bliley.
    Mr. Bliley. Thank you, Mr. Chairman.
    Fraud directed against the Medicare program is never 
acceptable. Whether it is committed by doctors, hospitals or 
pharmacies, such fraud impacts and diminishes the quality of 
healthcare which would otherwise be available for the 40 
million American senior citizens and other beneficiaries who 
depend upon Medicare to help pay for their health care costs. 
In addition, these types of fraud cost the American taxpayers 
billions of dollars every year.
    One of the most egregious form of Medicare fraud discovered 
by the committee has been those illegal activities perpetrated 
by the very contractors who are supposed to administer the 
Medicare program. These contractors are supposed to be 
protecting the program by leading the efforts to detect and 
prevent fraud and abuse. To the contrary, we have heard in 
previous hearings how some contractors have engaged in 
fraudulent conduct for their own enrichment or to hide their 
inadequate performance from the Health Care Financing 
Administration.
    We learned at the last hearing on this topic how six 
Medicare contractors have either settled or been convicted of a 
variety of civil and criminal charges relating to their efforts 
to defraud Medicare. These settlements resulted in fines of 
over $260 million being assessed against these contractors. 
After the July 14 hearing, we then learned of a new Medicare 
contractor case which involves similar allegations of 
misconduct. This case involved the Medicare contractors in New 
Mexico and Colorado and resulted in guilty pleas on two serious 
felony charges as well as over $13 million in civil and 
criminal fines being paid to settle the government's claims.
    It is unacceptable for contractors to be engaging in these 
types of behavior. Schemes such as the one I have detailed have 
caused Medicare to be deprived of untold millions of scarce 
program dollars. The organizations and persons responsible for 
this conduct should be vigorously investigated, prosecuted and, 
if found guilty, expelled from the Medicare program. In 
addition, they should be subject to the full range of penalties 
and punishments that the Department of Justice and the Office 
of Inspector General can impose upon them. There can be no 
excuse for cheating the Medicare program, and we must do 
everything possible to ensure that those that attempt to do so 
will fully understand that they will eventually be caught and 
punished accordingly.
    While fully supporting the vigorous prosecution of all 
Medicare contractors who attempt to defraud the program, it is 
also important that we learn how and why these activities 
occurred. In our last hearing we heard how HCFA's lax 
management of its own contractors, coupled with arbitrary 
performance standards, contradictory guidance for regional 
offices and complex and sometimes conflicting regulations all 
contributed to the contractor fraud problem.
    I look forward to hearing from all of the witnesses, both 
whistle-blowers and representatives from the contractors, on 
their views on how these factors contributed to the problem. We 
have an obligation to ensure that Medicare is doing the best 
job possible in fairly and accurately paying for the health 
care costs of America's seniors. The evidence developed by the 
committee to date suggests that the current program is failing 
to do so.
    I would like to thank Chairman Upton for holding this 
hearing today, which will hopefully shed new light on how this 
program is being taken advantage of and how it should be 
improved to prevent further abuse.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you.
    My friend from Michigan, Mr. Stupak.
    Mr. Stupak. Well, thank you, Mr. Chairman.
    I don't have an opening statement.
    I want to apologize to our witnesses. I have got a 10:30 I 
have to be at on youth violence. Then I will be back. So I will 
be in and out all day.
    But this is an area I have worked on with all my years of 
experience in law enforcement. So I look forward to the hearing 
and thank you for holding it.
    Mr. Upton. Mr. Blunt.
    Mr. Blunt. Thank you, Mr. Chairman; and thank you for 
holding this hearing.
    I'd like to associate myself with the remarks just made by 
the chairman of the full committee. I certainly agree in 
totality with his sense that this is a system where the 
Congress needs to be vigilant in ensuring that fraud doesn't 
occur.
    I'd also like to add to that, though, that those agencies 
that work to eliminate fraud in this system have to be cautious 
that they don't do so in a way that stands in the way of 
legitimate health care. I think we have to be careful that we 
don't make the daily activities of health care providers 
subject to fraud where clearly mistakes can and will occur. I 
think that is the biggest thing we need to be aware of as we 
look at the answer to the fraud problem, that we deal with the 
problem of fraud and still create a system that allows health 
care providers to provide health care, not to constantly be 
subject to criminal penalty because of some paperwork mistake 
that can be made.
    Now that is a difficult line to walk. I am not sure this 
committee can figure out how to walk it, but I am sure that we 
have an obligation to monitor the progress of fighting fraud 
and, at the same time, ensuring quality health care and that 
health care providers are provided health care, not filling out 
a single needless form but at the same time complying with all 
the things that have to be complied with to ensure that this 
system works the way it should work.
    I look forward to the hearing and testimony, and I 
appreciate you having this hearing today, Mr. Chairman.
    Mr. Upton. Thank you, Mr. Blunt.
    Mr. Green, do you have an opening statement?
    Mr. Green. No, Mr. Chairman. I appreciate the opportunity.
    Mr. Upton. Well, we would note there are a number of 
subcommittees meeting this morning, all at the same time, and 
we will leave the record open for all members to make their 
opening statements as part of the record by unanimous consent.
    [Additional statement submitted for the record follows:]
Prepared Statement of Hon. Diana DeGette, a Representative in Congress 
                       from the State of Colorado
    I thank the chairman for holding today's hearing. I would like to 
thank all of our panelists for being here this morning, and extend a 
special welcome to Michael Huotari from Blue Cross and Blue Shield of 
Colorado.
    In our first hearing we heard that private companies, hired by the 
federal government to safeguard Medicare dollars, are plundering the 
Medicare Trust Fund through fraud and abuse. Nine companies had entered 
into civil settlements with the Federal Government as a result of 
fraud, and two had been convicted of criminal wrong doing. Today we 
will hear about three more guilty pleas. I hope we will use today's 
hearing to explore how we can prevent such activity. While HCFA and its 
entities have some of this responsibility, I am anxious to hear from 
the contractors themselves to learn what steps they have taken to 
prevent these abuses in the future.
    In order to preserve the Trust Fund, it is essential that Medicare 
have an effective system to stop fraud and abuse. The GA0 report 
clearly illustrates that the current system needs significant work. It 
is inexcusable that the fiscal intermediaries hired by Medicare to 
ensure the validity of health care claims are the very entities who are 
committing fraud to hide their incompetencies. We must evaluate the 
current system that breeds these abuses and search for new ways to 
provide incentives for good performance as well as incentives for 
companies to report improper conduct should it occur.
    The GAO reports of destroyed or deleted backlogged claims and 
revelations of manufactured documentation to mislead HCFA auditors 
certainly illustrate that there is plenty of blame to go around. It is 
shocking that seventeen of eighty Medicare contractors are currently 
under some sort of review for impropriety. The Federal Government pays 
billions to its Medicare contractors to police the Medicare program and 
ensure that taxpayer dollars are going toward necessary medical care. 
Now that we have learned that some of the cops on the beat have been 
skimming off the top, it is time to reassess. Let me make this clear, 
if Medicare contractors defraud the Federal Government knowingly and 
purposefully, they will be punished. But punishment after the fact will 
not solve the problem. If contractors are covering up mismanagement and 
failure to perform contractual obligations, perhaps HCFA should enlarge 
its oversight and improve its methods of measuring contractor 
performance. If contractors look the other way when improper conduct 
occurs for fear of retribution, perhaps these companies should improve 
their internal auditing practices and HCFA should develop guidelines to 
help companies come clean.
    I hope today's hearing will shed some light on why six companies 
were found guilty of defrauding the Medicare system and subjected to 
$263 million in criminal fines and civil settlements. But, more 
importantly, I hope we will begin to hear how HCFA and its contractors 
can turn the tide against these abuses in order to safeguard the 
Medicare program and ensure that Medicare beneficiaries get the care 
they deserve.
    Thank you Mr. Chairman, I yield back the balance of my time.

    Mr. Upton. At this point, I'd like to welcome the first 
panel: Ms. Leslie Aronovitz, a CPA from the Chicago field 
office of GAO, accompanied by Mr. Robert Hast, the Acting 
Assistant Comptroller General; Mr. George Grob, Deputy 
Inspector General for Evaluations and Inspection from the 
Office of Inspector General from the Department of HHS, 
accompanied by Mr. Jack Hartwig, who is the Deputy Inspector 
General for Investigations; Mr. Darcy Flynn; and Mr. Ronald 
Osman.
    As you all may know, this subcommittee has a long tradition 
of taking testimony under oath. Do you have any objection to 
that?
    We also, under committee rules, allow you to be represented 
by counsel, if you desire that; and seeing not, if you'd stand 
and raise your right hand.
    [Witnesses sworn]
    Mr. Upton. You are now under oath, and I want to compliment 
you for turning in your testimony in advance. We were able to 
read it last night, and your testimony will be made part of the 
record in full. We would like you to limit your remarks, if you 
can, to 5 minutes or so.
    We will start with Ms. Aronovitz. Thank you for coming.

   TESTIMONY OF LESLIE G. ARONOVITZ, MANAGER, CHICAGO FIELD 
OFFICE, UNITED STATES GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY 
 ROBERT HAST, ACTING ASSISTANT COMPTROLLER GENERAL; GEORGE F. 
GROB, DEPUTY INSPECTOR GENERAL FOR EVALUATIONS AND INSPECTION, 
OFFICE OF THE INSPECTOR GENERAL, DEPARTMENT OF HEALTH AND HUMAN 
SERVICES, ACCOMPANIED BY JACK HARTWIG, DEPUTY INSPECTOR GENERAL 
  FOR INVESTIGATIONS, OFFICE OF THE INSPECTOR GENERAL; DARCY 
      FLYNN; AND RONALD E. OSMAN, OSMAN & ASSOCIATES, LTD.

    Ms. Aronovitz. Mr. Chairman and members of the 
subcommittee, first I would like to introduce my colleague, Bob 
Hast.
    We are very pleased to be here today to discuss the 
activities of Medicare fee-for-service service claims 
administration contractors. These contractors, as Mr. Klink 
noted, received $1.6 billion in fiscal year 1998 to process 
more than $700 million in Medicare claims each business day on 
behalf of HCFA. Findings of inappropriate Medicare payments to 
providers, totaling billions of dollars each year, have 
heightened concerns about the program's management. Cases in 
which contractors themselves have engaged in improper 
activities and even defrauded Medicare dramatically compound 
these concerns.
    Our testimony today expands onto that we provided to the 
subcommittee this past July. In it we focus on how deceptive 
activities became a way of doing business at some of HCFA's 
Medicare contractors, why HCFA did not detect these activities 
through its oversight, and weaknesses in HCFA's current 
monitoring process that could allow these types of activities 
to continue without detection.
    Following allegations that they engaged in fraudulent or 
otherwise improper activities, at least six Medicare 
contractors have been convicted of criminal offenses, have been 
fined or have entered into civil settlements since 1993, and we 
heard in the IG's July testimony that several others are 
currently under investigation. This does not include additional 
contractors whose cases are the subject of Mr. Grob's testimony 
today.
    As examples of the types of activities we are talking 
about, we found that some contractor employees engaged in 
improprieties and covered up poor performance to allow 
contractors to keep their Medicare business. Admitted or 
alleged improper activities included but were not limited to 
improperly screening, processing and paying Medicare claims, 
destroying claims and failing to properly collect money owed to 
Medicare by providers. In addition, contractors falsified their 
performance results and engaged in activities designed to 
deceive HCFA and circumvent its review of contractor 
performance. Also, because HCFA gave contractors too much 
advance notice of its oversight visits and the specific records 
that would be reviewed, it often failed to detect improper 
contractor activities.
    The fraud alleged in integrity cases, such as those we have 
described today and will continue to describe, began when CPEP, 
which is the Contractor Performance Evaluation Program, was 
HCFA's primary means of assessing contractors from fiscal years 
1980 through 1995. In some cases, the fraud continued under 
HCFA's current system, which is called the CPE oversight 
process.
    The CPE process has a number of weaknesses that continue to 
make the program vulnerable to contractor fraud. For example, 
HCFA relied on contractors' self-certification of management 
controls and contractors' self-reported performance data, both 
of which it rarely checked. Further, HCFA currently has few 
standards to measure a contractor's performance. Until recently 
it had not set evaluation priorities for its regional review 
staff and still does not check on the quality of regional 
oversight to ensure that HCFA staff are held accountable for 
providing adequate oversight. Important program safeguards have 
received little scrutiny at some contractors, and regional 
staffs have been inconsistent in dealing with contractor 
performance problems.
    In an effort to establish more consistency and to improve 
the quality of contractor management and oversight, HCFA has 
recently modified its organizational structure and is planning 
to take a number of other steps to improve its management and 
oversight of its claims administration contractors. We believe 
these actions have the potential to make the Medicare program 
less vulnerable to the types of abuses that have been described 
here today, but even the most sound oversight strategy is not 
foolproof.
    Government contractors, especially those that play an 
important stewardship role in protecting the Medicare trust 
fund, must conduct themselves with the utmost integrity and 
honesty. We believe that there is no excuse for anything less.
    Mr. Chairman, this concludes my formal statement. We will 
be happy to answer any questions you may have.
    [The prepared statement of Leslie G. Aronovitz follows:]
 Prepared Statement of Leslie G. Aronovitz, Associate Director, health 
    Financing and Public Health Issues, and Robert H. Hast, Acting 
     Assistant Comptroller General for Special Investigations, GAO
    Mr. Chairman and Members of the Subcommittee: We are pleased to be 
here today to discuss HCFA's efforts to monitor the activities of 
Medicare fee-for-service claims administration contractors. These 
contractors pay more than $700 million in Medicare claims each business 
day on behalf of the Health Care Financing Administration (HCFA)--the 
primary steward of Medicare funds. HCFA paid these contractors $1.6 
billion in fiscal year 1998 to serve as Medicare's first line of 
defense against inappropriate and fraudulent claims. Findings of 
inappropriate Medicare payments to providers totaling billions of 
dollars each year have heightened concerns about the program's 
management. Cases in which contractors themselves have engaged in 
improper activities and even defrauded Medicare dramatically compound 
the concerns.
    Our testimony today will expand on the testimony we provided to 
this Subcommittee this past July.1 Specifically, we will 
discuss how deceptive activities became a way of doing business at some 
of HCFA's Medicare fee-for-service contractors; the details of Medicare 
contractor improprieties for which there have been criminal 
convictions, fines, or civil settlements; and the effect of these 
activities on the Medicare program.2 We will also discuss 
why HCFA did not detect these activities through its oversight. 
Finally, based on the findings of our report on HCFA's oversight of its 
claims administration contractors, we will describe weaknesses in 
HCFA's current monitoring process that could allow these types of 
activities to recur without detection.3
---------------------------------------------------------------------------
    \1\ Medicare: HCFA Should Exercise Greater Oversight of Claims 
Administration Contractors (GAO/T-HEHS/OSI-99-167, July 14, 1999).
    \2\ Medicare: Improprieties by Contractors Compromised Medicare 
Program Integrity (GAO/OSI-99-7, July 14, 1999).
    \3\ Medicare Contractors: Despite its Efforts, HCFA Cannot Ensure 
Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).
---------------------------------------------------------------------------
    In brief, following allegations that they engaged in fraudulent or 
otherwise improper activities, at least eight Medicare contractors have 
been convicted of criminal offenses, have been fined, or have entered 
into civil settlements since 1993. Over several years, some of these 
contractors' employees engaged in improprieties and covered up poor 
performance to allow contractors to keep their Medicare business. 
Admitted or alleged improper activities included, but were not limited 
to, improperly screening, processing, and paying Medicare claims; 
destroying claims; and failing to properly collect money owed to 
Medicare by providers. In addition, contractors falsified their 
performance results and engaged in activities designed to deceive HCFA 
and circumvent its review of contractor performance. These fraudulent 
and improper activities have adversely affected taxpayers, providers, 
and beneficiaries. Because HCFA gave contractors too much advance 
notice of its oversight visits and the records that would be reviewed, 
it often failed to detect improper contractor activities. HCFA's 
current oversight has other weaknesses that might allow the same types 
of improper contractor activities to continue undetected.
                               background
    To illustrate the significance of the contractors' improprieties, I 
will first explain briefly what the insurance companies are required to 
do while processing claims and how HCFA determines whether the 
companies meet those requirements.
    Under their contracts with HCFA, Medicare contractors are required 
to process claims in accordance with HCFA guidelines and report their 
performance accurately to HCFA. The contractors are required to, among 
other activities, (1) properly screen and process claims to ensure that 
the claims are eligible for Medicare payment and that Medicare pays the 
correct amount; (2) process claims in a timely manner; (3) answer 
beneficiary and provider telephone calls in a timely fashion; (4) 
provide samples of claims, provider audit files, and related workpapers 
to HCFA; and (5) accurately report claims processing and payment errors 
to HCFA.
    During the 1980s and through fiscal year 1994, HCFA evaluated 
contractor performance through its Contractor Performance Evaluation 
Program (CPEP). During CPEP audits, HCFA examined sample files from 
various contractor units to score functions performed by each unit. 
HCFA used CPEP scores in several ways--for example, to determine 
whether contracts should be renewed, and sometimes to award incentive 
payments to contractors. HCFA terminated CPEP in 1994 because it found 
that contractors strove merely to maximize CPEP scores rather than 
improve their overall performance, and several contractors provided 
false information to HCFA to achieve higher CPEP scores. In fiscal year 
1995, HCFA replaced CPEP with the Contractor Performance Evaluation, or 
CPE. The CPE process allows HCFA's reviewers discretion to evaluate any 
contractor activity, including claims processing, customer service, 
payment safeguards, fiscal responsibility, and administrative 
activities.
      contractors deceived hcfa concerning their poor performance
    As we reported on July 14, 1999,4 since 1993, criminal 
or civil actions have been taken against at least six Medicare 
contractors because of their performance. The criminal actions 
generally involved conspiracy, obstruction of federal audits, and false 
statements. The civil actions involved settlements related to qui tam 
5 complaints filed by contractor employees in which the 
federal government intervened. Over $235 million in civil and criminal 
fines have been assessed against those six contractors.6 On 
July 28, 1999, the Justice Department announced that two additional 
contractors 7 and a related company that the contractors 
jointly owned 8 have pleaded guilty to criminal felony 
counts related to their Medicare business. Similar to the cases we 
discussed in our July reports and testimony, the two Medicare 
contractors and the related company pleaded guilty to conspiracy to 
obstruct a federal audit after admitting they concealed evidence of 
poor performance from federal auditors. In addition, the two 
contractors pleaded guilty to attempting to obstruct a federal audit. 
The three companies agreed to pay a total of $1.5 million in criminal 
fines to the government. Also, the two Medicare contractors have 
entered into a civil settlement of nearly $12 million.
---------------------------------------------------------------------------
    \4\ GAO/OSI-99-7, July 14, 1999.
    \5\ Qui tam suits are filed under the False Claims Act, 31 U.S.C. 
sections 3729-3733. The act's qui tam provisions permit filers, often 
referred to as ``relators'' or whistleblowers, to share in financial 
recoveries resulting from their cases.
    \6\ In addition to the $235 million recovered from these companies 
as civil settlements and criminal fines and penalties in civil and 
criminal fraud cases, at least three of these companies have also 
entered into settlements in civil liability cases brought by HCFA for 
recovery of about an additional $30 million owed to Medicare under the 
Medicare Secondary Payer program.
    \7\ Rocky Mountain Hospital and Medical Service (doing business as 
Blue Cross and Blue Shield of Colorado) and New Mexico Blue Cross and 
Blue Shield, Inc.
    \8\ Rocky Mountain Health Care Corporation.
---------------------------------------------------------------------------
    Our report on contractor improprieties focused primarily on three 
contractors--Blue Cross Blue Shield (BCBS) of Illinois, Blue Shield of 
California, and BCBS of Michigan. In all these cases, the contractors 
entered into civil settlements and, in two, contractors pleaded guilty 
to multiple counts of criminal fraud.
    Employees at all levels of those contractors--including vice-
presidents for Medicare operations, their directors of operations, 
managers, supervisors, and staff-level employees--had engaged, or were 
alleged to have engaged, in fraudulent and other improper activities 
for prolonged periods of time. These employees failed to properly 
conduct claims processing and safeguard activities and then covered up 
their poor performance by doctoring records that HCFA staff reviewed. 
The employees did so because they feared losing their Medicare 
contracts and their jobs if they did not meet HCFA's expectations. 
Investigators and former contractor employees told us that manipulating 
samples, covering up errors, and ``fixing'' HCFA-selected records 
before HCFA's review became a way of life at each of the three 
contractors. Indeed, the contractors allegedly designed the activities 
to deceive HCFA by creating the false appearance that they were meeting 
HCFA's criteria. According to three former contractor employees and 
investigators in two of the cases, such activities spread as employees 
at various levels and units taught each other how to commit 
improprieties.
Improper Contractor Activities Hid Poor Performance
    Our report presents a number of examples of criminal and other 
improper activities that contractors allegedly or admittedly engaged in 
to deceive HCFA. In the three cases on which we focused, federal 
investigators documented many of the activities alleged by the qui tam 
whistleblowers. The five general categories of alleged improper 
activities illustrated by the following examples were related to us by 
federal investigators, qui tam whistleblowers and other former 
contractor employees, and one whistleblower's attorney, or were 
described in qui tam complaints, plea agreements, or other public 
documents:

 Improperly screening, processing, and paying Medicare claims. 
        In an effort to receive the maximum payment by maximizing the 
        number of claims processed, Blue Shield of California, 
        according to the investigating agent, rushed claims through the 
        processing system, shutting off computer edits designed to 
        catch problem claims. Blue Shield of California, according to 
        the qui tam whistleblower, also paid claims without proper 
        physician signatures or backup documentation.
 Improperly destroying or deleting claims. In order to 
        eliminate backlogs of unprocessed claims, BCBS of Illinois 
        allegedly deleted some claims that contained incomplete or 
        incorrect information by using special computer coding. 
        Claimants were not notified that these claims would not be paid 
        nor told what information was needed to correctly process their 
        claims and then given an opportunity to provide it.
 Failing to collect Medicare overpayments and interest, as 
        required. While not admitting to wrongdoing, BCBS of Michigan 
        settled a civil suit for $27.6 million. Among the allegations 
        in that suit was that, from 1988 through 1993, BCBS of Michigan 
        circumvented a requirement to collect provider overpayments 
        within 30 days of the overpayment determination date by making 
        it appear that payments were collected on time when, in fact, 
        they were not. As a result, the contractor allegedly did not 
        assess interest on the overpayments as required.
 Falsifying documentation and reports to HCFA regarding 
        performance. BCBS of Illinois and Blue Shield of California 
        admitted in their plea agreements with the government that they 
        had falsified reports on which CPEP and CPE performance 
        evaluations were based in order to make their performance 
        appear acceptable to HCFA. These reports included information 
        about claims processing errors, claims processing timeliness, 
        and timely contractor response to incoming customer telephone 
        calls.
 Improperly altering or hiding files that involved incorrectly 
        processed or paid claims and inadequately performed contractor 
        audits of Medicare providers prior to HCFA's review of such 
        files. Blue Shield of California improperly fixed claims that 
        had been processed incorrectly and were to be reviewed by HCFA. 
        It did so, for example, by (1) stamping ``signature on file'' 
        on claims that had been paid without a signature; (2) detaching 
        documents, such as another insurance company's Explanation of 
        Benefits, from improperly denied Medicare Secondary Payer 
        claims 9 to give the appearance that the denials 
        were correct; and (3) altering procedure codes to make it 
        appear that claims had been paid properly when they had not. 
        The whistleblower in the BCBS of Michigan case alleged that 
        this contractor, prior to HCFA's review, redid original audit 
        workpapers, improperly altered audit records, did required 
        audit work that had not been completed, and obtained new 
        information from providers that should have been collected in 
        the original audit. In some cases, according to the 
        whistleblower, the contractor steered HCFA away from problem 
        audits by lying about their status if the audits could not be 
        adequately ``fixed'' in time for HCFA's review.
---------------------------------------------------------------------------
    \9\ Medicare is the secondary payer on claims involving 
beneficiaries who are also covered by Black Lung, Veterans Health 
Administration, or employer-sponsored group health plans.
---------------------------------------------------------------------------
Improprieties Harm the Medicare Program, Its Providers, and 
        Beneficiaries
    Medicare pays claims incorrectly when contractors improperly turn 
off edits; fail to properly develop, process, or audit claims; or 
improperly deny or delete claims. This can lead to additional costs to 
the Medicare program. When contractors use evasive means to make it 
appear that overpayments are collected on time, Medicare suffers not 
only from the untimely repayment of such overpayments but also from the 
lost interest that should have been assessed on overdue overpayments.
    Customer service is also affected by improper contractor 
activities. Providers and beneficiaries are forced to resubmit claims 
that are improperly destroyed, deleted, or denied. This causes delays 
in payment, unnecessary duplication of effort, and additional 
administrative costs to Medicare claimants. When claims are denied or 
deleted without the claimants being notified of any underlying problems 
with the claims, the claimants may file replacement claims containing 
the same mistakes.
    Providing HCFA with false work-processing samples relative to their 
performance under Medicare contracts resulted in contractors receiving 
scores that were too high, leading to the false appearance of superior 
performance. This allowed Medicare contractors to retain their 
contracts even when their performance was deficient. BCBS of Illinois 
received over $1 million in incentive payments as a result of its 
offenses.
    In addition, providing false information led HCFA to make a poor 
management decision in reassigning claims administration workload. In 
1994, HCFA awarded BCBS of Illinois the intermediary and carrier 
contracts for the state of Michigan, after alleged contractor 
improprieties by BCBS of Michigan were revealed. In a March 1994 
announcement of this workload transfer, a former HCFA Administrator was 
quoted as saying, apparently based on HCFA evaluations tainted by the 
contractor's deceptive activities, that the Health Care Service 
Corporation (BCBS of Illinois) ``has a record of outstanding 
performance in administering the Medicare program in Illinois.'' He was 
also quoted as saying that ``the selection of Health Care Service 
Corporation as the replacement contractor was based on a record of 
integrity, cost-effective performance, claims-processing efficiency, 
ability to assume the workload, and experience.'' In 1998, BCBS of 
Illinois pleaded guilty to improprieties similar to those allegedly 
committed by BCBS of Michigan.
                 why hcfa did not detect improprieties
    HCFA did not detect fraudulent and improper activities in the three 
cases we reviewed in depth until former contractor employees brought 
them to light by filing qui tam complaints under the False Claims Act. 
The individuals we interviewed--including federal investigators, qui 
tam whistleblowers, and other former employees--gave the following 
reasons why HCFA did not detect contractor improprieties:

 HCFA notified contractors in advance concerning (1) the dates 
        on which it would conduct CPEP reviews and (2) the specific or 
        probable records that it would review. This gave contractors 
        the time and opportunity to manipulate samples and hide 
        problems. HCFA officials sometimes had contractors pull the 
        records to be reviewed and relied on contractor-provided 
        documents that consisted largely of copies, not originals. 
        Document copies could be, and were, altered and recopied 
        without detection.
 Contractors allegedly circumvented HCFA's review of their 
        performance and deceived HCFA about their efficiency in 
        customer service. For example, a former employee of BCBS of 
        Illinois told us that he tracked HCFA's periodic, unannounced 
        telephone calls, which HCFA had designed to check the 
        contractor's response time. In doing so, he identified HCFA's 
        calling pattern. The unit manager then used that pattern to 
        circumvent HCFA's review by putting extra employees on the 
        telephone lines during the anticipated times until they 
        received HCFA's call.
 Contractors also allegedly deviated from their normal 
        procedures to deceive HCFA. For example, according to former 
        contractor employees, BCBS of Illinois reassigned its two most 
        experienced employees to conduct claim reviews that occurred on 
        the days that HCFA had scheduled for review. Contractor 
        managers instructed these employees to slow down the review 
        process and take their time to ensure that the reviews were 
        done with 100-percent accuracy and included proper 
        documentation.
  problems could be continuing under hcfa's current oversight process
    The fraud alleged in integrity cases such as those we have 
described today began when CPEP was HCFA's primary means of assessing 
contractors--from fiscal years 1980 to 1995. In some cases, the fraud 
continued under HCFA's current CPE oversight process. The CPE process 
has a number of weaknesses that continue to make the program vulnerable 
to contractor fraud. HCFA places too much trust in its contractors by 
relying on contractor self-certifications of management controls and 
contractors' self-reported performance data--both of which it rarely 
checks. Further, HCFA currently has few standards to measure 
contractors' performance. Until recently, it had not set evaluation 
priorities for its regional review staff and still does not check on 
the quality of regional oversight to ensure that HCFA staff are held 
accountable for providing adequate oversight. Important program 
safeguards have received little scrutiny at some contractors, and 
regional staffs have been inconsistent in dealing with contractor 
performance problems.
HCFA Seldom Validates Contractors' Internal Controls or Workload Data
    Medicare contractors are required to certify annually that they 
have established a system of internal management controls over all 
aspects of their operations. This helps ensure that they meet program 
objectives, comply with laws and regulations, and are able to provide 
HCFA with reliable financial and management information concerning 
their operations. However, we found that HCFA accepts Medicare 
contractors' self-certification of management controls without 
routinely checking that the controls are working as intended. In April 
1998, the Department of Health and Human Services (HHS) Office of 
Inspector General (OIG) reported that the regional offices were not 
evaluating the accuracy and reliability of contractor internal control 
certifications. In response, HCFA headquarters sent guidance to the 
regional offices reminding them to validate contractors' self-reports 
during the 1998 evaluation review cycle. Our analysis of fiscal year 
1998 reviews performed for seven contractors found no case in which a 
self-report was validated. We believe systematic validations of 
contractor internal controls would contribute significantly to reducing 
the likelihood of contractor fraud.
    An equally fundamental activity in overseeing contractor 
performance is obtaining reasonable assurance that self-reported 
contractor performance data are accurate. HCFA, however, has largely 
relied on unvalidated contractor-submitted data to evaluate and monitor 
performance. We analyzed 170 reports related to contractor performance 
for fiscal years 1995 through 1997 for the seven contracts we studied; 
only two of these reports documented efforts to validate contractor-
supplied performance data. For 1998, staff in one of the three regions 
we visited validated contractor data in five reports. Staffs of the 
other two regions did not validate any performance data over the 4-year 
period for the contractors we examined.
HCFA Sets Few Performance Standards for Contractors
    Except for standards mandated by legislation, regulation, or 
judicial decision, HCFA's current CPE process is more descriptive than 
evaluative. There are only a few mandated standards, such as processing 
claims within specific time periods. No standards require HCFA 
reviewers to ensure that contractors adequately perform the most 
important program safeguards--such as medical review of claims. There 
are few performance standards to motivate contractors and no benchmarks 
for HCFA to use in holding contractors accountable.
    Even where statute or regulation requires HCFA to follow clearly 
defined and measurable standards, we found that HCFA has not held its 
reviewers accountable for checking contractor performance for these 
standards. Reviewers have not always evaluated whether contractors met 
the mandated standards even when the reviewers were required to do so. 
Our analysis of CPE reports for three regional offices found that when 
HCFA reviewers assessed claims processing activities, for example, they 
only checked contractor compliance with about half of the applicable 
mandated standards. Furthermore, the three regions varied considerably 
in their performance of this requirement, with one region checking less 
than 15 percent of the standards, while another region checked over 80 
percent.
HCFA Regions Provide Uneven and Inconsistent Reviews and Remedies
    With limited headquarters guidance and little follow-up to ensure 
that what guidance there is is followed, contractor oversight is highly 
variable across regions. Without a set of common performance standards 
or measures, reviewers and contractors lack clear expectations. This 
has resulted in both uneven review of critical program safeguards--such 
as checking how effective contractors are at identifying insurers 
primary to Medicare--and inconsistencies in how HCFA reviewers handle 
contractor performance problems. Uneven review continues to leave HCFA 
unable to discriminate among contractors' performance when it needs to 
reassign workload.
    One such critical program safeguard where oversight has been 
limited and uneven is that of Medicare Secondary Payer--so-called MSP 
activities. Contractor MSP activities seek to identify insurers that 
should pay claims mistakenly billed to Medicare and to recover payments 
made by Medicare that should have been paid by others. This program 
safeguard has saved about $3 billion annually from 1994 through 1998. 
Our review of three regions' CPE reports shows that many of the key MSP 
activities most germane to spotting claims covered by MSP provisions 
were not reviewed at the seven contractors in our study. Also, the 
three regions varied considerably in how often they reviewed MSP, with 
one region rarely checking MSP activities at any of its contractors 
whose CPEs we reviewed.
    The low level of review is particularly disturbing because the 
potential for contractor fraud regarding MSP activities is significant 
as a result of an inherent conflict of interest: the private insurance 
business of the contractor can be the primary payer for some claims 
subject to the MSP provisions. HCFA has had to pursue several insurance 
companies--including some with related corporations that serve as 
Medicare contractors--in federal court for refusing to pay before 
Medicare when Medicare should have been the secondary payer. In such a 
case filed by HCFA against BCBS of Michigan, the company agreed to a 
$24 million settlement. Since 1995, almost $66 million in settlements 
have been made in cases filed by HCFA in which a health insurance 
company with private policies that were sometimes primary to Medicare 
was also a Medicare carrier or intermediary. HCFA currently has filed 
an additional $98 million in claims against companies affiliated with 
current and former contractors.
    We also found that HCFA's regions differ in their identification of 
contractor problems and took dissimilar actions once a performance 
problem was identified. For example, one region required Contractor A 
to take steps to address deficiencies in its performance in fraud and 
abuse prevention and detection. In contrast, another region, reviewing 
Contractor B, found many more serious weaknesses with its fraud and 
abuse prevention and detection activities. Contractor B was spending 
little or no time actively detecting fraud and abuse, failed to use 
data to detect possible fraud, failed to adequately develop large and 
complex cases, and was not referring cases to the HHS OIG. Furthermore, 
Contractor B was performing poorly in recovering overpayments, had not 
focused on the highest-priority cases, prepared no fraud alerts, and 
was not suspending payments to questionable providers. The reviewer 
concluded that Contractor B failed to meet HCFA's performance 
expectations, yet the region did not even require the contractor to 
develop and follow improvement plans. Because HCFA reviewers are not 
held accountable for conducting adequate oversight, deficient 
contractor performance can continue.
HCFA Has Started to Develop a More Structured Evaluation Process
    HCFA has recognized that its oversight of contractors has been 
inadequate and issued guidance in fiscal year 1998 to have regional 
reviewers follow a somewhat more structured evaluation process. In May 
1998, citing concerns raised by the HHS OIG and us regarding HCFA's 
level of contractor oversight, HCFA announced the ``need to reengineer 
our current contractor monitoring and evaluation approach and develop a 
strategy demonstrating stronger commitment to this effort.'' As a 
result, HCFA issued a contractor performance evaluation plan specifying 
three evaluation priorities for fiscal year 1998: year 2000 computer 
compliance activities, activities focusing on a subset of financial 
management operations (accounts receivable and payable), and activities 
focusing on a subset of medical review activities.
    In 1998, HCFA also emphasized the need for regions to follow its 
structured CPE report format, including clearly stating whether the 
contractor complied with HCFA's performance requirements. In addition, 
the regions were supposed to review certain activities at all 
contractors. Nonetheless, we found that some of the 1998 reviews 
continued to lack a structured format, making it difficult to compare 
contractor performance. Although regions were supposed to review 
contractors' determinations of medical necessity prior to payment, we 
found that two of the regions we reviewed did not do so for all of the 
seven contractors included in our study. Plans for this year's CPE 
reviews include more central office involvement in the assessment 
process, joint review teams from headquarters and the regions, and 
multi-regional team reviews.
HCFA Lacks A Structure That Assures Accountability
    HCFA's organizational structure is not designed to ensure oversight 
accountability, with two aspects creating particular problems. First, 
HCFA reorganized its headquarters operations in 1997, dispersing 
responsibility for contractor activities from one headquarters 
component to seven. This functional dispersion was, in part, in 
response to concern that one office should not oversee all contractor 
activities. Second, HCFA's 10 regional offices--the front line for 
overseeing contractors--do not have a direct reporting relationship to 
headquarters units responsible for contractor performance. Instead, 
they report to the HCFA Administrator through their respective regional 
administrators and consortia directors.
    In our July 1999 report, we found that these two aspects of 
reorganization--dispersion of responsibility for contractor activities 
to multiple headquarters components and regional office reporting 
relationships--contribute to communications problems with contractors, 
exacerbate the weaknesses of HCFA's oversight process, and blur 
accountability for (1) requiring regions to adopt best practices; (2) 
routinely evaluating the regional offices' performance of their 
oversight; and (3) enforcing minimum standards for conducting oversight 
activities, including taking action when a particular region may not be 
performing well in overseeing contractors. In an effort to establish 
more consistency and improve the quality of contractor management and 
oversight, HCFA has recently modified its organizational structure once 
again by consolidating responsibility for contractor management within 
the agency and creating a high-level contractor oversight board. It is 
too early, however, to tell how effective these changes will be in 
improving accountability for ensuring sufficient and consistent 
contractor oversight.
          gao's previous recommendations to the administrator
    To improve HCFA's oversight of contractors, we made five 
recommendations to the Administrator in our July 14, 1999, report:

1. Establish a contractor management policy that requires (1) 
        verification that all contractors have effective internal 
        controls, and (2) systematic validation of statistically 
        significant samples of essential contractor-reported data.
2. Improve annual contractor assessments by:
    --developing a comprehensive set of clearly defined and measurable 
            performance standards, including measures for program 
            safeguard activities;
    --assessing all contractors regularly on core performance standards 
            and reviewing individual contractors on other activities 
            identified by risk assessments; and
    --developing an annual report for each contractor that includes 
            performance on the core standards and other HCFA-assessed 
            standards, using a uniform format that permits comparisons 
            among contractors and longitudinal assessments of 
            individual contractors.
3. Designate a HCFA unit to be responsible for:
    --evaluating the effectiveness of contractor oversight policy and 
            direction from headquarters to regional offices;
    --evaluating regional office contractor oversight based on the 
            headquarters' policy and direction; and
    --enforcing minimum oversight standards.
4. Ensure that all relevant HCFA staff learns about contractor problems 
        and best practices and that HCFA reviewers adopt best oversight 
        practices.
5. Develop a strategic plan for managing Medicare's claims 
        administration contractors.
    In written comments to a draft of our report, HCFA agreed with each 
of our recommendations and described how it plans to implement them. 
Overall, we believe that HCFA is planning to take a number of steps in 
response to these recommendations that--if properly designed and 
implemented--should help improve its management and oversight of 
Medicare's claims administration contractors. While we do not believe 
that implementation of these recommendations will guarantee that 
contractors will no longer have integrity problems in their dealings 
with HCFA, we do believe that it will make the Medicare program less 
vulnerable to the types of abuses that have been described here today.
    Mr. Chairman, this concludes my prepared statement. We will be 
happy to answer any questions you or other Members of the Subcommittee 
may have.
GAO Contacts and Acknowledgment
    For future contacts regarding this testimony, please contact Leslie 
G. Aronovitz at (312) 220-7600 or Robert Hast at (202) 512-7455. 
Individuals who made key contributions to this testimony included 
Sheila Avruch, Mary Balberchak, Elizabeth Bradley, Stephen Iannucci, 
Bob Lappi, Don Walthall, and Don Wheeler.
                          gao related products
    Medicare: HCFA Should Exercise Greater Oversight of Claims 
Administration Contractors (GAO/T-HEHS/OSI-99-167, July 14, 1999)
    Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their 
Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999)
    Medicare: Improprieties by Contractors Compromised Medicare Program 
Integrity (GAO/OSI-99-7, July 14, 1999).
    HCFA Management: Agency Faces Multiple Challenges in Managing Its 
Transition to the 21st Century (GAO/T-HEHS-99-58, Feb. 11, 1999).
    Medicare Computer Systems: Year 2000 Challenges Put Benefits and 
Services in Jeopardy (GAO/AIMD-98-284, Sept. 28, 1998).
    Medicare: HCFA's Use of Anti-Fraud-and-Abuse Funding and 
Authorities (GAO/HEHS-98-160, June 1, 1998).
    Medicare: Control Over Fraud and Abuse Remains Elusive (GAO/T-HEHS-
97-165, June 26, 1997).
    High-Risk Series: Medicare (GAO/HR-97-10, Feb. 1997)
    Medicare: HCFA's Contracting Authority for Processing Medicare 
Claims (GAO/HEHS-94-171, Aug. 2, 1994).
    Medicare: Inadequate Review of Claims Payments Limits Ability to 
Control Spending (GAO/HEHS-94-42, Apr. 28, 1994).
    Blue Cross And Blue Shield: Experiences of Weak Plans Underscore 
the Role of Effective State Oversight (GAO/HEHS-94-71, Apr. 13, 1994).
    Medicare Secondary Payer Program: Identifying Beneficiaries with 
Other Insurance Coverage Is Difficult (GAO/T-HRD-93-13, Apr. 2, 1993)
    Medicare: Contractor Oversight and Funding Need Improvement (GAO/T-
HRD-92-32, May 21, 1992).
    Medicare: Existing Contract Authority Can Provide for Effective 
Program Administration (GAO/HRD-86-48, Apr. 22, 1986).

    Mr. Upton. Thank very much.
    Mr. Grob, welcome back.

                   TESTIMONY OF GEORGE F. GROB

    Mr. Grob. Thank you. And I would like to introduce as well 
John Hartwig, who is our Deputy Inspector General for 
Investigations.
    The two of us were here on July 14, less than 2 months ago, 
and at that time we outlined three problems for your 
consideration: Material weaknesses in the financial management 
system used by the contractors, ineffective fraud units, and 
deliberate failure to carry out their contractual 
responsibilities and then fraudulently covering it up. Today, 
I'd like to give you an update.
    Since we were last here, three companies have pled guilty 
to obstructing and conspiring to obstruct the Federal audit. 
You should have--that was just provided to you--a paper version 
of that chart which is an update of the one I used in my last 
testimony by adding these three cases at the bottom of it.
    New Mexico Blue Cross and Blue Shield, a Part A 
intermediary, had concealed billing errors. Blue Cross and Blue 
Shield of Colorado, a Part B carrier, had concealed, destroyed, 
and falsified documents related to HCFA's evaluation of its 
performance. And Rocky Mountain Health Care Corporation, which 
provided management services for the first two, was also 
implicated in the wrongdoings. All three companies had the same 
top executive officers from 1987 to 1995. The total settlement 
for all three entities amounts to $16 million, bringing our 
total so far up to about $277 million in settlements.
    In addition to those three, two individuals were found 
guilty of fraud on cases unrelated to these.
    The former Chief Operating Officer of Blue Shield of 
Western New York submitted false information to HCFA regarding 
his company's performance. In 1991, the company ranked in the 
bottom 20 percent of all carriers. As a result of its 
falsification, the company was ranked best in the Nation.
    The former Chief Operating Officer with Blue Shield of 
Eastern New York, a subsidiary of the above company, generated 
false documentation indicating that private side employees were 
performing Medicare-related work. Those will be sentenced on 
October 21.
    You had asked me to include in my testimony our 
recommendations to address the contractor performance issues. 
In response, I first want to note that the three general 
problem areas we have identified, weak financial management, 
ineffective fraud units, and deliberate failure to perform 
contractual duties, are interrelated and should be dealt with 
simultaneously.
    Based on our knowledge gleaned from our investigations, 
audits and evaluations, we recommend strengthening HCFA's 
contractor performance evaluation protocol; integrating 
contractors' financial management systems with their claims 
processing systems and including in the systems such basic 
accounting features as a dual-entry general ledger system; 
strengthening internal controls over accounts receivable, cash, 
financial reconciliations and electronic data processing; 
routinely auditing contractors' internal control systems; 
giving HCFA broader legal authority in choosing what kind of 
entities may carry out contractor functions and more 
flexibility in organizing and assigning functions to them; and 
improving standards and training for contractor fraud control 
units, upgrading their proactive fraud detection and education 
efforts and evaluating their performance more rigorously.
    We hope that the latest criminal pleadings and findings, 
which I have described here, will strengthen the resolve of all 
parties to make the necessary improvements in Medicare 
contractor operations and oversight. We in the Office of 
Inspector General will continue to work with HCFA and others to 
identify, address and, if necessary, investigate and prosecute 
problems in these areas.
    Thank you.
    [The prepared statement of George F. Grob follows:]
  Prepared Statement of George F. Grob, Deputy Inspector General for 
  Evaluation and Inspections, Department of Health and Human Services
                              introduction
    Good Morning, I am George F. Grob, Deputy Inspector General for 
Evaluation and Inspections, Office of Inspector General, Department of 
Health and Human Services. Here with me today is John E. Hartwig, 
Deputy Inspector General for Investigations. Two months ago we came 
before this Committee to discuss some serious problems related to 
contractors hired by Medicare to process Medicare bills. These 
contractors are responsible for paying health care providers for the 
services provided under Medicare fee-for-service, providing a full 
accounting of funds, and conducting activities designed to safeguard 
the program and its funds. We specifically discussed three problems: 1) 
integrity--some contractors had failed to perform their contractual 
duties and had fraudulently covered up their poor performance by 
altering documents and falsifying statements that specific work was 
performed; 2) financial management--the accounting methods, reporting 
systems, and internal controls of many contractors are inadequate to 
keep track of Medicare funds entrusted to them; and 3) fraud control--
the contractors' fraud units are often ineffective in preventing, 
detecting, and referring fraud in the Medicare program.
    During my last testimony I described the results of 9 civil 
settlements and 2 criminal convictions which are also the subject of a 
General Accounting Office review. Today, I would like to provide you 
with an update of recent activity. In the past two months, three 
additional corporations have pleaded guilty and two individuals were 
found guilty of fraud and misconduct in connection with their 
responsibilities as Medicare contractors.
                       three medicare contractors
New Mexico Blue Cross and Blue Shield
    New Mexico Blue Cross and Blue Shield was a fiscal intermediary 
responsible for administering the Medicare Part A program. It pleaded 
guilty to two felony counts that included obstruction of a Federal 
audit and conspiracy to obstruct a Federal audit. A joint investigation 
by the Office of Inspector General and the Federal Bureau of 
Investigation found that the company concealed billing errors during an 
annual field audit and impeded Federal auditors who were reviewing 
hospital billing. The nonprofit company agreed to pay $5.86 million to 
settle its False Claims Act liability. In addition, the company agreed 
to forgo $1.1 million in contract claims.
Blue Cross and Blue Shield of Colorado
    Blue Cross and Blue Shield of Colorado was a contractor responsible 
for administering the Medicare Part B program. It pleaded guilty to two 
felony counts that included obstruction of a Federal audit and 
conspiracy to obstruct a Federal audit. The company admitted to 
concealing, destroying, and falsifying documents for the Health Care 
Financing Administration's (HCFA) Contractor Performance Evaluation 
Program. This is the system which HCFA used to evaluate the 
effectiveness of contractors in carrying out their responsibilities. 
Results of these reviews were considered in determining whether the 
contracts would be renewed and if financial bonuses would be given for 
superior performance. The company has paid $6.84 million to settle its 
False Claims Act liability. In addition, the company agreed to forgo $2 
million in contract claims.
Rocky Mountain Health Care Corporation
    Blue Cross and Blue Shield of Colorado and New Mexico Blue Cross 
and Blue Shield jointly own Rocky Mountain Health Care Corporation 
which provided management services for the companies in administering 
contracts to process Medicare claims. All the companies had the same 
top executive officers from 1987-1995. This company pleaded guilty to 
one count of conspiring to obstruct a Federal audit and was fined 
$500,000.
    In summary, New Mexico Blue Cross Blue Shield is no longer a fiscal 
intermediary and Blue Cross and Blue Shield of Colorado is no longer a 
carrier. The total settlement for all three entities amounts to 
approximately $16 million.
                            two individuals
    On June 24, 1999 a former Chief Operating Officer of Blue Shield of 
Western New York, the upstate New York Medicare carrier, was found 
guilty of fraud. The individual was found guilty of causing false 
information to be submitted to HCFA in 1992 concerning HCFA's 
Contractor Performance Evaluation Program. In 1991, the company ranked 
in the bottom twenty percent of all carriers, when compared against its 
peers. In 1992, as a result of the falsification the company was ranked 
as the best carrier in the nation. The individual is to be sentenced on 
October 21, 1999.
    Also on June 24, 1999, a former Chief Operating Officer with Blue 
Shield of North Eastern New York, a subsidiary of the former company, 
was found guilty of aiding and abetting the former Chief Operating 
Officer of Blue Shield of Western New York. This individual was found 
guilty because he generated false documentation indicating that in 1992 
professional relations employees of the private side of the company 
were performing Medicare-related work. Evidence presented showed that 
the professional relations employees were not performing any Medicare 
work. The individual is scheduled to be sentenced on October 21, 1999.
                     conclusion and recommendations
    These cases are similar in character to the cases in Illinois, 
Michigan, Pennsylvania, and California which I highlighted in my 
testimony on July 14. Other investigations are underway.
    Problems with Medicare contractors remain a serious concern. 
Dealing with them will require a two fold approach. First, we will 
continue to pursue thorough investigations and legal action with the 
appropriate remedies for contractors who have violated the law. Second, 
more systemic responses are needed to address the underlying causes of 
these problems.
    At first blush, the three problem areas which I highlighted in my 
July appearance here--integrity, financial management, and fraud 
control--may seem to be discrete and unrelated. To some extent this is 
true, and it is possible and useful to construct remedies for each one 
by reforming the overall systems or general approaches for 
administering each function associated with these activities. However, 
there are important connections among them, and an overall approach 
dealing with all three problems simultaneously will be more effective 
than dealing with them in isolation of one another.
    For example, the fraudulent activity of convicted contractors or 
their senior management officials is not generally due to their having 
stolen money from the Medicare trust funds. While this is the case with 
regard to the false claiming of costs for personnel not actually 
working on Medicare business and for deliberately paying for private 
side insurance claims using Medicare dollars (so-called ``Medicare 
secondary payer'' situations), most of the fraud is related to the 
contractors covering up their mismanagement and failure to perform 
their contractual duties. In some cases, this mismanagement included 
the turning off of computer edits which would have prevented improper 
payments of Medicare funds. This mismanagement increases the need for 
HCFA oversight and for effective methods to measure contractor 
performance. It is also worth noting that while fraudulent cover-up of 
mismanagement and dereliction of duty are far more prevalent than is 
acceptable, the inadequacies of contractor financial management systems 
and the shortcomings of their fraud units are more generally pervasive 
and may possibly be more damaging to the Medicare program.
    Based on our knowledge of contractor operations and performance--
gleaned from our investigations, audits, and evaluations--we believe 
that the following steps are needed to bring contractor operations up 
to a level compatible with their responsibilities for the Medicare 
program:

--Strengthen HCFA's contractor performance evaluation protocol;
--Integrate contractors' financial management systems with their claims 
        processing systems and include in the systems such basic 
        accounting features as a dual-entry general ledger system;
--Strengthen internal controls over accounts receivable, cash, 
        financial reconciliations, and electronic data processing;
--Routinely audit contractors' internal control systems;
--Give HCFA broader legal authority in choosing what kind of entities 
        may carry out contractor functions and more flexibility in 
        organizing and assigning functions to them; and
--Improve standards and training for contractor fraud control units; 
        upgrade their pro-active fraud detection and education efforts; 
        and evaluate their performance more rigorously.
    I hope the latest criminal pleadings and findings which I have 
described here will strengthen the resolve of all parties to make the 
necessary improvements in Medicare contractor operations and oversight. 
We in the Office of Inspector General will continue to work with HCFA 
and others to identify, address, and, if necessary, investigate and 
prosecute problems in this area.

    Mr. Upton. Thank you very much.
    Mr. Flynn, welcome.

                    TESTIMONY OF DARCY FLYNN

    Mr. Flynn. Thank you, Chairman Upton and distinguished 
subcommittee members.
    Mr. Upton. Excuse me 1 second. If you could pull one of 
those mikes a little closer.
    Mr. Flynn. I have always held the position that I would 
discuss this otherwise private matter with an appropriate body 
that was concerned with policy and not the human interest side 
of it. I am, therefore, pleased to have this opportunity to 
testify before this subcommittee.
    My testimony concerns three major points. First, from 1988 
to 1993 the Medicare system in Michigan broke down. Obsessed 
with keeping its contract, Blue Cross Blue Shield of Michigan 
resorted to cheating in the CPEP process rather than producing 
quality audits. As part of the CPEP process, HCFA randomly 
selected five of the 50 Blue Cross audits for review annually 
to determine Blue Cross's CPEP score.
    Faced with low CPEP scores prior to 1989 and the resultant 
threat of losing its Medicare contracts, Blue Cross needed to 
dramatically increase its scores. It hired two consultants to 
lead a CPEP team of auditors in efforts to fix the original 
audits prior to submission to HCFA by performing various audit 
steps that were never performed in the original audit. To 
conceal from HCFA the fact that the audit work papers were 
newly created, Blue Cross would back date the work papers. 
Sometimes employees back dated work papers to dates prior to 
their hire date. HCFA never caught this or any of the items I 
will address.
    Blue Cross also mischarged its time of the CPEP team to 
special projects rather than to the specific provider it 
cleaned up. Part of the CPEP team's procedure was to have these 
consultants play the role of a CPEP reviewer and give the audit 
an initial score which often was around 50 percent. In the 
cleanup process--the cleanup process typically resulted in 
large recoupments of overpayments. Thus, where the money was 
really lost was in the 45 audits per year that were not 
selected by HCFA for review and were not cleaned up and hence 
probably would have gotten similar scores, around 50 percent, 
signaling huge overpayments to those hospitals each year.
    Blue Cross also skirted its HCFA requirement to recoup 
overpayments from providers within 30 days by dividing large 
overpayments into small segments, then collecting from 
providers one small segment at a time. Another way around this 
requirement was to work out an arrangement with the provider 
whereby Blue Cross would set up a suspense account, withholding 
usually 20 percent of a provider's payment, letting that 
accumulate until they had enough to offset against the amount 
that the provider had been overpaid. This could take months to 
do and in the process cost the Medicare program millions of 
dollars just in this practice alone. Once the money was 
accumulated, it would then be offset against that overpayment.
    The second point is that the network between Blue Cross and 
the providers was too close. Because Blue Cross in its capacity 
as a large private insurer had its own business relationships 
with the very providers it was charged with monitoring under 
the Medicare program, Blue Cross had little incentive to crack 
down on these providers in the Medicare audits. Providers had 
little incentive to object to Blue Cross's cheating because 
they benefited from Blue Cross's substandard audits by getting 
away with overbilling the Medicare program.
    Third is the importance of the qui tam statute under which 
I filed my claim. It is clear that HCFA's oversight of the 
Medicare program failed. I am certain that had I reported this 
matter to HCFA little, if any, action would have resulted. In 
fact, just a few weeks after my complaint was filed in June 
1993, a former Blue Cross employee sent a letter to HCFA 
describing the fraud in detail. However, months later, after 
the FBI was well into its investigation of my complaints, HCFA 
had taken no action on the former employee's letter, and even 
during my investigation, rather than contributing to it, HCFA 
seemed more of a hindrance.
    I will leave it at that. Thank you .
    [The prepared statement of Darcy Flynn follows:]
                   Prepared Statement of Darcy Flynn
    Chairman Upton and distinguished Subcommittee members, I have 
refused several newspaper reporters' requests to discuss my Qui Tam 
case against Blue Cross Blue Shield of Michigan (BCBSM), because I 
thought their focus was more on human interest than on policy. I have 
held to the position that I would discuss this otherwise private 
matter, which until today very few of my acquaintances were aware of, 
with an appropriate body that was concerned with policy. I am therefore 
pleased to have this opportunity to testify before this Subcommittee.
    My testimony concerns three major points. First, in Michigan, in 
the late 1980's and early 1990's, the Medicare system broke down. 
During that time period, HCFA monitored the performance of its fiscal 
intermediaries and carriers through the Contractor Performance 
Evaluation Program, known as ``CPEP''. Under CPEP, HCFA was supposed to 
randomly draw work performed by the intermediaries and carriers and 
evaluate the work to determine the overall performance of the 
contractor. In order to keep its Medicare contract, BCBSM's Provider 
Audit Department resorted to cheating in the CPEP process, rather than 
earning high CPEP scores by virtue of the underlying quality of the 
audits performed. That cheating cost the Medicare program tens, and 
possibly hundreds of millions of dollars.
    Second, the network between BCBSM and the providers it was hired to 
audit was too close. Because BCBSM had its own contractual 
relationships with the providers, it had little incentive to crack down 
in its Medicare audits of the same providers. Providers had little 
incentive to object to BCBSM's cheating because they benefited from it. 
Most fired BCBSM managers slid easily into the private sector. A 
consultant who directed the clean-up scheme continues to profit from 
Medicare seminars.
    My third point concerns the importance of the Qui Tam statute. It 
is clear that HCFA's oversight of the Medicare program has failed. I 
have reason to believe that had I reported the matter to HCFA, little, 
if any action would have resulted. The Qui Tam statute provides the 
efficiency, perseverance, and tenacity of a private Attorney General.
   i. the medicare system broke down and, obsessed with keeping its 
 contract, blue cross blue shield of michigan resorted to cheating in 
         the cpep process rather than producing quality audits
    When performed correctly, a fiscal intermediary's Medicare audits 
often result in the recoupment by Medicare of millions of dollars. When 
performed poorly, as was the case at BCBSM for five years, the audits 
fail to recoup tens, and perhaps hundreds of millions of Medicare 
dollars.
    Under its HCFA contract, BCBSM performed full audits on 
approximately 50 of Michigan's 200 hospitals annually. As part of the 
CPEP process, HCFA randomly selected five of the 50 BCBSM audits for 
review annually, to determine BCBSM's CPEP score. Faced with low CPEP 
scores prior to 1989 and the resultant threat of losing its Medicare 
contract, Blue Cross Blue Shield of Michigan (BCBSM) needed to 
dramatically increase its CPEP scores. Because of the trusting 
relationship between BCBSM and HCFA, BCBSM was able to convince HCFA 
that because workpapers were often scattered around in different 
locations , BCBSM needed two weeks to gather its audit workpapers, when 
in fact the audit workpapers were invariably sitting on a shelf.
    HCFA allowed BCBSM the two weeks to collect and submit its 
workpapers. However, rather than submitting its audit workpapers intact 
to HCFA, BCBSM hired two consultants to lead a CPEP Team of auditors in 
efforts to fix the original audits prior to submission to HCFA by 
performing various audit steps that were never performed in the first 
place. In order to conceal from HCFA the fact that the audit workpapers 
were newly created, BCBSM would back date the workpapers, either to the 
time of the original audit, or to the time of a fictitious ``follow-
up'' audit that purportedly was done at BCBSM's own initiative well 
prior to the HCFA reviews, but in fact never existed.
    In a further attempt to conceal the workings of the CPEP Team from 
HCFA, BCBSM mis-charged the time of the CPEP Team to ``Special 
Projects'', rather than charging the time to that specific provider. 
Blue Cross also attempted to conceal its clean-up efforts from 
providers, although many were aware of it.
    Part of the CPEP Team's procedure was to have the consultants play 
the role of a HCFA CPEP reviewer and, at the outset of the two-week 
period, score the initial audit. Those scores often were around 50%. 
After the clean-up process, which typically resulted in large 
recoupments of overpayments, audits would often receive a perfect 100% 
from HCFA. Where the money was really lost was in the 45 audits per 
year that were not selected by HCFA for review, which would have 
received likely scores around 50%, signaling huge overpayments to the 
hospitals.
    The consultants' scores on the initial mock-reviews of audits 
selected by HCFA were used by upper management in reviewing the 
performance of subordinates. Many employees acknowledged that were it 
not for BCBSM's cheating, HCFA would have hired another intermediary 
sooner. Employees also acknowledged that the cheating had a damaging 
effect on both the normal audit function and on morale.
    In some cases, an original audit was done so poorly that it could 
not be salvaged in the two week period. In that case, Blue Cross 
successfully steered HCFA away from that audit by lying to HCFA about 
its status, falsely telling HCFA that the cost report had recently been 
reopened at the hospital's request, and therefore was not appropriate 
for review.
    The Field Audit section of the Provider Audit Department was not 
alone in cheating in CPEP. The Administrative section also skirted its 
HCFA requirement to recoup overpayments from providers within 30 days 
by dividing large overpayments into small segments, then making demand 
for payments from providers one small segment at a time. BCBSM's other 
way around this requirement was to set up a ``suspense account'', in 
which BCBSM would put a partial (typically 20%) hold on a provider's 
payments, and accumulate the amount in a separate ``suspense account''. 
Once enough money had been saved, a revised overpayment settlement was 
processed, and the funds in suspense were applied against the 
overpayment, giving the false impression that BCBSM had recovered the 
overpayment in just one day. Providers did not object to using the 
suspense account to repay overpayments because they were able to avoid 
the 9% interest HCFA required on all overpayments taking longer than 30 
days to recover. The Medicare program lost millions of dollars just in 
lost interest income as a result of the ``suspense account'' practice.
    BCBSM claims that because no criminal charges were filed, its fraud 
was less egregious than that of other intermediaries. However, I 
believe it was prosecutorial discretion at the United States Attorney's 
Office in Michigan, and not BCBSM's lack of culpability, which allowed 
BCBSM to escape criminal charges. My belief is bolstered by the fact 
that the U.S. Attorney's office in Baltimore, where the complaint was 
originally filed, indicated a strong possibility that both BCBSM and 
several managers would face criminal fraud charges. To the extent I am 
familiar with the underlying facts of cases against other 
intermediaries, I believe the conduct of BCBSM to be every bit as 
egregious.
     ii. the network between bcbsm and the providers was too close
    Because BCBSM, in its capacity as a large private insurer, had its 
own business relationships with the very providers BCBSM was charged 
with monitoring under the Medicare program, BCBSM had little incentive 
to crack down in these providers in the Medicare audits. While the CPEP 
clean-up process was no secret among the provider community, providers 
had little incentive to object to BCBSM's cheating because they 
benefited from BCBSM's sub-standard audits by getting away with over-
billing the Medicare program. In fact, at a Healthcare reimbursement 
seminar in 1992, two certified public accountants from a prominent 
``Big 6'' CPA firm, in an effort to attract clients in the audience, 
touted their practice of coaching providers on how to aggressively 
claim non-reimbursable costs and how to account for such claims by 
placing the money in a ``cushion account'', to be repaid to Medicare 
if, and only if, the provider were to get audited that year and if 
BCBSM detected the overcharge in its audit.
    Most fired BCBSM managers slid easily into the private sector. At 
least one of the BCBSM consultants, who contemporaneously directed the 
CPEP team and advised certain hospitals on how to prepare cost reports 
and maximize reimbursement--an apparent conflict of interest--continues 
to profit by hosting various Medicare reimbursement seminars. III. THE 
IMPORTANCE OF THE QUI TAM STATUTE
    It is clear that HCFA's oversight of the Medicare program has 
failed. In April, 1993, I described BCBSM's clean-up practice to a 
professor of criminal law, who not only assured me the activities were 
fraudulent, but urged me to report the matter to the appropriate 
authorities.
    Having vowed to do just that, the only question was which avenue to 
take. In retrospect, I am certain that had I reported the matter to 
HCFA, little, if any action would have resulted. In fact, just a few 
weeks after my Qui Tam complaint was filed in June, 1993, a former 
BCBSM employee sent a letter to HCFA describing the fraud in detail. 
However, months later, after the FBI was well into its investigation of 
my complaint, HCFA had taken no action on the former employee's letter.
    Rather than contributing to the investigation of my complaint, HCFA 
seemed more of a hindrance. The Department of Justice Trial Attorney 
assigned to my case, Sara Strauss, almost single handedly handled the 
case. The couple of experiences I had dealing with one seemingly 
incompetent HCFA investigator were very frustrating. The same 
investigator claimed to have built a ``trusting relationship'' with the 
very BCBSM managers who deceived him for five years.

    Mr. Upton. Mr. Osman.

                  TESTIMONY OF RONALD E. OSMAN

    Mr. Osman. Thank you, Chairman Upton, distinguished 
members. It's really a pleasure for me to be here today. It's 
very seldom that a country lawyer that originally came from a 
town of 830 people gets an opportunity to participate in this 
democracy, and it is my pleasure to be here.
    I have given you a written statement. It is a little short 
on detail for a reason. I represent Evelyn Knoob, who was the 
relator; and let me take this opportunity to ask the committee, 
as they go forward into the new millennium, the word ``whistle-
blower'' has a bad connotation. I like to use the word 
``relator''. Since we have been 5-year-olds we have been taught 
not to tattle on anybody, but yet we expect people to come 
forward and we have an Act that calls them whistle-blowers. I'm 
probably swimming upstream in a utopian world, but I prefer the 
term ``relator'' instead of ``whistle-blowers'' because of the 
bad connotation.
    I represent Evelyn Knoob, who was the relator in the Blue 
Cross Blue Shield of Illinois case. As a result of Ms. Knoob's 
courage to stand up, it resulted in the largest civil money 
fine of any of the carriers of $140 million, a $4 million fine.
    Blue Cross Blue Shield of Illinois, their corporate name, 
Health Care Service Corporation, pled guilty to eight felony 
counts, and there are eight individuals that have been 
indicted, four of whom have pled guilty, four of whom will be 
going on trial soon. That is the reason for my lack of detail 
in my statement in regards to these individuals, because they 
deserve a fair trial, and we do not want to do anything that 
might in any way impinge upon the upcoming trial.
    I believe from reading the testimony from the last hearing 
and also hearing the previous speakers that this committee has 
a flavor for the problem. We could see from the chart that the 
problem is obviously ongoing and has been long in the making.
    I didn't come here today to denigrate Blue Cross Blue 
Shield, Health Care Service Corporation. I didn't come here 
today to talk about HCFA not doing their job, nor did I come 
here today to talk about the Department of Justice or anyone 
else. I think that there's enough blame to go around for 
everybody.
    From my observation, it starts with Congress. Congress has 
established criteria for the processing of these claims that in 
my opinion are in many cases almost unattainable. They do so 
because of the pressure from the beneficiaries to get their 
claims paid quickly and correctly, but what they don't do is 
they do not take into account the problems that that causes for 
the carriers.
    Federal Registers that I have here for 1994, list just one 
of several of the criteria, answer 98 percent of the phone 
calls within 120 seconds and have no more than 20 percent of 
your trunks busy at any one time. Think about that for a 
second. It's almost unattainable. The only way to pass that in 
many cases without getting their cost of claims extremely high 
was for them to cheat.
    I believe that the first solution, the way to solve this 
problem, begins with Congress looking--sitting down with the 
intermediaries and carriers and getting realistic criteria of 
which to be graded by.
    Now the second thing is we all wonder how this went on in 
the Blue Cross Blue Shield's case for 10 years without being 
caught. It's a simple answer. Nobody looked very hard. Nobody 
looked very hard at all.
    To give you an example, in Marion, Illinois, where I now 
have my practice and live, there's a VA hospital. I have a 
client that did a subcontract on a project at the VA hospital. 
The total project was about $15 million, and during the time he 
did that project he had a resident engineer that looked at his 
work every day. They had an outside engineer that came in once 
a week. They even had a photographer that came in and took 
pictures once a month, three sets of photographs to see what 
the progress was, for a $15 million contract.
    In 1996, Blue Cross Blue Shield of Illinois processed 22 
million claims and paid out $1.4 billion and change of our 
money and nobody looked. They had a weekly report that was sent 
in that nobody checked the source data. They had several 
monthly reports that were sent in. Nobody checked the source 
data. They had one CPEP a year where two to three people came 
down at a preannounced time and looked at prearranged files, 
and we wonder why they didn't catch it. It was because they 
didn't have the resources.
    Every year Congress cuts HCFA's budget for oversight. Every 
year Congress expects them to do more with less. It's a very 
simple problem, a very simple solution in my opinion. Put one 
person at each of the 60 intermediaries from HCFA every day, 40 
hours a week, to be sure they comply with the contract. Develop 
a strike force of about 20 auditors that have the right to go 
in at any time and randomly audit. Talk to the people actually 
doing the claims, don't talk to the managers. Go down on the 
floor, talk to the people doing the claims. Do the things that 
private industry does, do the things that we do in the 
military, do the things that anyone with just a little common 
sense would do, is make sure the contractors know maybe once 
every 3 years they're going to have a surprise inspection. They 
will then do the job correctly. They will give you a good 
product.
    I do not agree that this is an area where the government 
should become more involved in paying the claims. I believe you 
have a good contractor community out there, but over the past 
10 years, they have been allowed to become lax. They have been 
under pressure for profits from their shareholders, and they 
will do exactly what all of us will do if we're not watched 
fairly closely, they will stray. And, as I said earlier, I do 
not believe there's any bad people involved in any of these 
instances. It's good people with lax supervision, and I believe 
that supervision, if it comes from this subcommittee, could 
greatly benefit Medicare.
    Thank you.
    [The prepared statement of Ronald E. Osman follows:]
Prepared Statement of Ronald E. Osman, Attorney at Law, Ronald E. Osman 
                           & Associates, Ltd.
    Chairman Upton, distinguished ladies and gentlemen of the Oversight 
& Investigations Subcommittee, and interested listeners, my name is 
Ronald E. Osman. I am an attorney whose practice is based in Marion, 
Illinois. I specialize in the investigation and prosecution of 
violations of the Federal False Claims Act, 31 U.S.C. Sec. Sec. 3729-
3733.
    I have come here today to tell you a story. It is not a very pretty 
story. It is not a very nice story. Some aspects of this story sound 
like excerpts from a novel you might find advertised on the New York 
Times bestsellers list. I assure you, however, that this story is not 
fiction. This story is true. This is the story of one woman, Evelyn 
Knoob, and how that one woman had the courage to stand up and stop 
Health Care Service Corporation, the Medicare carrier for the State of 
Illinois, (``HCSC'') from continuing to commit the Medicare fraud it 
had engaged in for over ten years.
    On Friday, October 23, 1993, HCSC employees working under Evelyn's 
supervision found a box containing over 10,000 railroad retiree 
Medicare claims in the mailroom. Under its contract, HCSC was not 
required to process railroad retiree claims but was required to 
promptly forward all such claims it received to Travelers Insurance 
Company. From the receipt date stamped on the claims, Evelyn determined 
this particular batch of railroad retiree claims had been sitting in 
HCSC's mailroom for approximately three months. Evelyn reported the 
discovery to her manager and requested instruction on what should be 
done about these claims.
    As all other employees were leaving for the night, Evelyn was 
instructed by her manager to bring the box of claims to his office. 
When Evelyn arrived, the manager pulled his curtains and locked the 
door. Evelyn was then forced by that manager to sit quietly on a couch 
and watch for three hours as he personally shredded all the railroad 
retiree Medicare claims which had been found that day. The manager then 
stuffed the shredded claims in twelve lawn-size garbage bags and 
discarded the remains in a trash dumpster in back of the HCSC building.
    Evelyn adamantly protested the managers action while the shredding 
was occurring. Evelyn repeatedly requested upper level HCSC management 
be called to determine how the situation could be rectified. Evelyn's 
pleas, however, were responded to with threats of her being fired if 
she left the room. The Monday following the shredding, Evelyn again 
attempted to convince her manager that he should report the shredding 
of the claims to upper level HCSC management. In response, Evelyn was 
bluntly threatened that if she ever reported the shredding the blame 
would be put on her and the manager would personally insure she went to 
prison.
    Despite these threats, Evelyn did report the shredding to upper 
level HCSC management. Management, however, refused to take any action 
concerning the shredding. The only step taken by HCSC management in 
response to Evelyn's report was to embark on a two year campaign to 
brazenly harass Evelyn daily with threats of being sent to prison for 
the shredding of the claims.
    A once exemplary employee, Evelyn abruptly began receiving negative 
reviews. Managers intentionally transferred Evelyn to work positions 
which were known to be the most stressful positions in the office. When 
Evelyn requested less stressful positions, she was singled out by 
supervisors as a ``target'' to be bullied. Evelyn's emotional balance 
quickly deteriorated from the never-ending harassment she endured from 
supervisors and managers. HCSC supervisory employees began placing 
derogatory memorandums into Evelyn's personnel file, with seven 
negative memos being drafted by the one supervisor on October 11, 1994 
alone. On that same day, October 11, 1994, Evelyn was told by that same 
supervisor that she was being placed on involuntarily stress leave. On 
that same day, October 11, 1994, Evelyn attempted to take her own life.
    I know this story brings several questions to your mind. Why did 
the manager destroy the claims? Why did the upper level management of 
HCSC allow this activity to go unreported? Why didn't HCSC just forward 
the claims to Travelers Insurance Company? Why would a large 
corporation like HCSC single out one employee in one of its numerous 
divisions and embark on an intentional campaign to destroy her both 
personally and professionally? The simple answer to all these questions 
is money.
    By the time Evelyn witnessed the shredding of the claims on October 
23, 1993, HCSC had transformed its Medicare contract into a substantial 
money making opportunity for HCSC and to a smaller extent to its upper 
level Medicare management. The Government was of the opinion that HCSC 
was one of the top Medicare Carriers in the nation. HCFA showed its 
appreciation for this ``outstanding'' carrier performance by awarding 
HCSC incentive payments, which were then partially passed on to HCSC's 
Medicare management, renewing the carrier contract, and expanding the 
carrier contract to include Michigan. Ironically, HCSC received the 
Michigan contract because Michigan was caught committing fraud. At the 
time HCSC took over the Michigan contract, its fraud, unknown to the 
Government, dwarfed the fraud committed by the Michigan carrier. Had 
HCSC reported the delay in sending the claims to Travelers Insurance, 
its performance rating in that area would have went down. A lowered 
score in this area would have affected HCSC's overall carrier 
performance rating and would have jeopardized the contract and the 
incentive payments HCSC was receiving from HCFA.
    Evelyn was rendered totally unable to normally function by the 
mental harassment she endured at the hands of HCSC employees. Evelyn 
first came to my office seeking assistance with a workers compensation 
claim. Evelyn merely wanted to be compensated by HCSC for the wages she 
was losing as a result of their rendering her mentally incapable of 
working. When Evelyn arrived at my office, I had been involved in one 
False Claims Act action. Consequently, when I heard Evelyn's story, I 
recognized that several of the things she had been trained by HCSC to 
do in the course of her employment were actually flagrant violations of 
the False Claims Act. My firm performed a preliminary investigation 
into Evelyn's explanation of HCSC's Medicare operations. From our 
findings, it was obvious thatHCSC's status as an exceptional Medicare 
carrier for the people of Illinois was a carefully designed facade.
    In March of 1995, my office filed, on Evelyn's and the Government's 
behalf, a Complaint against HCSC for violations of the Federal False 
Claims Act, 31 U.S.C. Sec. Sec. 3729-3733, (``FCA''). An extensive 
investigation into HCSC's performance under its Medicare carrier 
contract was conducted by the Department of Justice, United States 
Attorneys Office for the Southern District of Illinois, the Federal 
Bureau of Investigation, the United States Postal Inspector, Department 
of Health and Human Services, Office of Inspector General and my 
office. The degree of fraudulent activities revealed by this 
investigation is nothing but incredible.
    Under its Medicare contract, HCSC was charged with the 
responsibility to process Medicare claims correctly under Medicare 
rules and guidelines in the most effective and efficient way possible. 
HCSC, however, took the stance that its duty was to process Medicare 
claims at the lowest possible cost and bypassed several required 
procedures in processing claims. For example, rather than requesting 
information from new Medicare beneficiaries to determine whether or not 
Medicare was primarily responsible for payment of health costs, HCSC 
just paid the claims. Rather than determining whether or not claims 
under $50.00 that suspended during processing were actually charges 
covered by Medicare, HCSC just paid the claims. Rather than having to 
work extensive denials for claims for durable medical equipment, such 
as wheelchairs, in times of high claim inventory, HCSC just paid the 
claims.
    Medicare claims processing software has in place several edits and 
audits which effectively stop claims which should not be paid from 
going through the system so that a determination regarding payment 
could be made. These edits and audits were supposed to be HCFA's way of 
making sure carriers don't ``just pay the claims.'' HCSC bypassed these 
check points in times of high inventory by simply turning them off. No 
claims would then be stopped by the computer system, and HCSC could pay 
all the claims in its systems with a touch of a single button. When the 
edits and audits were left on, claims did get caught in these check 
points because of incorrect information, no coverage, etc. On one 
million separate occasions when this happened, HCSC simply deleted the 
claims. Problem solved.
    HCSC also was given the responsibility under its contract to 
provide telephone customer service to Medicare beneficiaries. Under 
this responsibility, beneficiaries could call the HCSC Medicare office 
and speak to a HCSC representative who could give them information over 
the phone regarding claims which had been submitted for processing. The 
telephone customer service was governed by guidelines covering such 
things as the timeliness of the calls being answered and questions 
being responded to. Due to the volume of beneficiaries it served, HCSC 
rarely met the service level required. Consequently, HCSC submitted 
phone records to HCFA wherein its service level and phone line down 
time were falsified. HCSC instructed its employees to place incorrect 
dates on telephone inquiries so its reporting documents appeared to be 
in compliance with timeliness processing requirements. HCSC even 
installed a shut-off switch on its beneficiary phone lines so, when 
call volume went up and HCSC was not meeting its timeliness requirement 
for answering calls, it could just turn the phones off. In addition to 
the above examples, HCSC engaged in several similar actions in either 
manipulating or falsifying dates to pass HCFA's annual inspection. The 
entire corporate culture at HCSC became one of doing whatever was 
necessary to pass the test instead of processing claims efficiently and 
effectively.
    By now, many of you are asking, ``How could HCSC be doing this? 
Weren't they required to make reports on their work to HCFA? Wouldn't 
these reports show they were not properly doing the work they had been 
contracted with to do?'' HCFA did require HCSC to submit weekly and 
monthly reports to it so HCSC's work performance could be monitored. 
HCSC, however, simply submitted reports showing what it was supposed to 
be doing rather than reporting what it actually was doing. For example, 
HCSC was required to make weekly reports, through its Post Payment 
Quality Assurance Program, which provided HCFA an estimate of the 
incorrect payments made by HCSC. HCSC simply falsified these documents 
to make it appear it was conforming with its performance requirements 
and then manipulated supporting documentation to conform to the false 
information submitted. HCSC submitted false savings reports in which 
actual savings resulting from its Medicare Secondary Payor program were 
inflated. HCSC submitted false monthly timeliness reports to cover the 
true age of its unprocessed claims inventory and the true time it took 
for it to process claims.
    HCFA performed a yearly on-site evaluation of HCSC's performance 
called a ``CPEP''. This evaluation determined whether or not HCSC's 
contract would be renewed. You might think, ``Surely this evaluation 
would have uncovered the fraudulent information being sent to HCFA on a 
monthly basis.'' My response is that it might have--except HCSC was 
providing HCFA false information during its yearly evaluations as well 
and frankly HCFA was not looking very closely. In preparation for these 
evaluations, HCSC intentionally changed the manner in which it normally 
processed claims by allowing only its best claims examiners and 
reviewers to process claims to insure error free processing. If HCSC 
had a high inventory of unprocessed claims which it was unable to 
process prior to the on-site visit, the unprocessed claims would be 
hidden in employee vehicles or HCSC warehouses so the inspectors would 
not see the back log.
    When HCSC first became a Medicare contractor, it was allowed to 
prepare its own sample of files to be evaluated. It was therefore easy 
for HCSC to have evaluated only those claims and reviews which were 
uncomplicated. When HCFA began selecting the sample of files to be 
evaluated from a range of control numbers, HCSC carefully reviewed the 
range selected and corrected all processing errors that had been made. 
In 1993 alone, HCSC changed 17 files out of a 60 file sample to cover 
its mistakes. HCFA's auditors did not discover the alterations.
    Even errors which could not be corrected did not present a problem 
for HCSC. Employees were instructed to put a black dot on any file 
which could not be corrected. This black dot was a signal to every HCSC 
employee that this file was not to be shown to the HCFA representative. 
Such files were hidden away during the on-site inspection, and the HCFA 
representative was told the file could not be located.
    HCFA also ran an annual computer systems test to evaluate the 
computer check points which were in place to catch claims which needed 
additional information for processing. HCSC manipulated its computer 
system so that HCFA's computer systems test would show that the check 
points were operating effectively during the time of the systems test.
    The topic of discussion today is ``How Healthy Are the Government's 
Medicare Fraud Fighters?'' From my experiences with the HCSC case as 
well as the several other Medicare fraud claims my office is currently 
investigating, my answer to this question must be that the Government's 
strength over Medicare fraud is deteriorating. At this point, I believe 
that the battle is being lost because the Government is not providing 
the manpower needed to effectively fight Medicare fraud.
    HCSC was evaluated on site by HCFA representatives once per year. 
HCSC was notified in advance of when HCFA would arrive and what HCFA 
wanted to look at while it was there. HCSC then had the opportunity to 
``cover its tracks'' by correcting errors on the items requested and 
literally hiding thousands of documents from the inspectors. No 
surprise inspections were made of HCSC's various Medicare offices. No 
extensive checks were made into the information being provided to HCFA. 
HCSC got away with Medicare fraud because no one was really paying 
attention to what they were doing.
    The Government needs to place more emphasis on the enforcement of 
the penalties for Medicare fraud. HCSC made the largest repayment ever 
made by a Medicare Carrier as a penalty for its Medicare fraud. The 
Department of Justice, however, had wanted to resolve the HCSC issue 
for a small fraction of this amount immediately after HCSC's fraud was 
brought to its attention. The Department of Justice seemed to merely 
want to say, ``Okay, we caught you. Now go along and be a good 
carrier.'' The United States Attorneys Office for the Southern District 
of Illinois, however, is dedicated to fighting Medicare fraud. The 
United States Attorneys Office refused to agree to the settlement the 
Department of Justice proposed and pushed ahead with the investigation 
uncovering more fraudulent activity at every turn.
    I believe it is impossible for the Government to fight fraud 
without public assistance. The public needs to be made aware of the 
items which constitute Medicare fraud and given the courage to speak up 
and stop the fraud. Persons who report Medicare fraud are currently 
referred to as whistleblowers. ``Whistleblower'' is synonymous with 
tattletale--something no one has wanted to be since they were five 
years old. The negative connotation given to those who report Medicare 
needs to be turned into something positive. The only entity that can 
make that change is the Government.
    Evelyn, after all the mental stress and anguish she had been put 
through, found the strength to stand up to HCSC. I will confess to you 
that the duration of the investigation of HCSC was a long, hard road 
for Evelyn. At many points along with way, Evelyn almost gave up. HCSC 
tried to convince the Government Evelyn was a liar. HCSC tried to 
convince the government Evelyn had perpetrated the fraud. HCSC tried to 
convince the government Evelyn was out for revenge. The way Evelyn 
finally made it through the investigation is the way I hope each of you 
leave this hearing today. Evelyn got mad. Of course, Evelyn was mad at 
HCSC for what it did to her and her family. Evelyn was more angry, 
however, about what HCSC was doing to the elderly population of the 
United States by allowing money to be inappropriately paid from the 
Medicare fund. Evelyn became angry that her elderly friends, family, 
and former co-workers were having trouble making ends meet because of 
cuts in their Medicare benefits due to decreasing Medicare funds. 
Evelyn became angry that when her grandchildren reached the age of 
Medicare eligibility there would be no Medicare money left.
    I hope you become mad that Medicare carriers and providers are 
providing false information to the Government so their management can 
receive large bonuses. I hope you become mad that the Medicare fund is 
shrinking rapidly as a result of Medicare carriers' and providers' 
fraudulent representations. I hope you become mad that when your 
grandchildren reach the age of Medicare eligibility it is very possible 
there will be no Medicare money left. I hope you become mad enough to 
provide HCFA the seed money to establish a simple and effective 
compliance program that I believe will return multiple thousands of 
dollars for each dollar spent.
    It is common every day sense that unless there is constant 
monitoring of a contract there will be the tendency for Government 
contractors to begin to finesse the system. That attitude, if left 
unchecked, will result in cheating. I would propose that first the 
Congress, along with representatives from Intermediaries, establish 
realistic guidelines for processing claims. I understand the pressure 
placed on Congress by its constituents to process the claims quickly 
and respond immediately to beneficiary complaints; however, the claims 
processing guidelines must be realistic and obtainable. Second, each 
and every intermediary should be assigned an on-site HCFA 
representative whose sole job is to insure compliance with the contract 
and that claims are processed correctly. These on-site representatives 
should be rotated on a regular basis to prevent familiarity with the 
contractor. In addition to the on-site HCFA representative and the 
annual review, HCFA should assemble a twenty (20) person audit team 
that would be broken down into five (5) four (4) person teams to do 
surprise inspections of the contractors on a random and unannounced 
basis. If the above was implemented, each contractor would know that it 
had reasonable criteria to be judged by and that someone was insuring 
that it was performing its contract appropriately.
    This solution certainly seems simple. It will work because it is 
the same system that is being used in the private sector for banking, 
private insurance and other industries. In addition, it is basically 
the same system the Government uses when it enters into contracts for 
the construction of many of its Government projects. This is not a 
complicated problem, and the solution is simple. I urge you to consider 
some form of HCFA oversight similar to what I have described.
    Thank you for allowing me to share our story. I commend the 
Oversight & Investigations sub-committee for taking an interest in the 
issue of Medicare fraud.

    Mr. Upton. Thank you all for your testimony.
    We are going to proceed with questions from those of us on 
the subcommittee for 7 minutes each. The light will reflect 
such time.
    First of all, Mr. Grob, I appreciated your testimony and 
insinuation that perhaps because of this subcommittee's work in 
July it was a little easier to come up with some convictions or 
some announcements of guilt in time, in the last 2 months.
    And, Mr. Osman, I appreciated your testimony, too, and 
particularly in terms of the surprise audits.
    As I sat here thinking about your testimony, yesterday was 
my daughter's first day at middle school, a big event. And as I 
quizzed her last night and she went through all of her courses, 
I believe it is the English teacher who is going to be having a 
quiz every week. You don't know what day it's going to be, but 
it's going to be there, and she is going to be ready for it.
    And I think the idea of having a surprise audit with some 
regularity is a very good one and that all Medicare providers 
across the country ought to know at some point somebody's going 
to be knocking on that door wanting to look at the books and 
wanting to talk to some of the folks, in fact, that are 
preparing the forms.
    But I guess the question that I have for all of you is, 
despite some success here in the last couple of months and 
really over the last couple of years in this subcommittee's 
efforts, not only under my chairmanship but others as well, 
trying to get after fraud and abuse, how widespread is it? The 
tools that we have been able to provide you all in the field I 
think have been good ones. I don't know that we have gone far 
enough, and I am curious to know what additional legislation 
you might recommend to us, whether it be an annual audit or 
maybe a quarterly audit, that type of thing.
    I remember one of the provisions that I was able to get 
passed in the full committee was that anyone convicted of fraud 
in the Medicare program would lose their own right to 
participate in that program for their life. The Senate didn't 
agree with that, and it fell out of the conference bill, but at 
least it was another provision that was tacked on that anyone 
convicted would lose their personal right to participate in 
that program in their later years.
    What types of efforts would you like to see us do here in 
this committee to have a stronger hand combatting fraud and 
abuse? Where can it be made easier?
    Your comment, Mr. Osman, about not enough funds being 
appropriated by the Congress for enforcement, there was an 
actual increase in 1996. I don't know what's happened since 
then, but it's something I think we should look at. But how can 
we make the job easier and how widespread do you think fraud 
and abuse is? What dollar value would you think is out there in 
terms of the efforts that we ought to undertake?
    Maybe we will start with Ms. Aronovitz.
    Ms. Aronovitz. First of all, I really do think that there's 
a lot that can be done by all parties; and I think an 
underlying foundation statement, though, is that we never would 
like a contractor to stay in a program or participate in any 
activity where they feel that there's no corporate reason for 
them to be in it. There's no excuse to be in an activity and 
have to cheat, no matter how complex or difficult the rules 
are.
    On the other hand, there really are ways that HCFA could do 
a lot better.
    I think the two areas that HCFA could be helped is, No. 1, 
in some contract reform. We had recommended in our prior report 
that HCFA have more flexibility in the type of entities that it 
contracts with and the type of contracts that it lets. Right 
now HCFA pays contractor costs--it cannot pay a contractor to 
make a profit or to have other incentives to do a good job. So 
we think that there's some room there. And, also, the 
nomination process on the Part A side might have outlived its 
usefulness and more of a direct relationship--a direct 
contracting relationship would help HCFA.
    The other area that would help HCFA immensely would be to 
have a sufficient administrative budget to properly go out and 
do its oversight activities. We heard over and over again in 
the regional offices we visited that travel money and resources 
were very, very tight. Now, I think it's very important that 
HCFA show that it's doing the best it can with the resources it 
has. We don't always advocate that you need more and more 
money. That's not the panacea. Although we do think that HCFA 
does struggle very much with balancing a lot of oversight 
activities in different programs, and it could use that 
support.
    Mr. Upton. Do you know about how much more money it would 
need?
    Ms. Aronovitz. We would have to look at that more closely, 
but we would certainly be happy to try to figure out at least 
from a regional standpoint what--what would help them.
    In terms of the Medicare integrity program, the MIP money, 
that program has really helped HCFA assure that contractors 
have the money to do program safeguard activities; and we 
issued a report about a month ago that shows that, in fact, 
HCFA is doing a better job with its contractors on program 
integrity activities. They have assured funding. They get the 
funding at the beginning of the year, and we think that will 
help.
    And the last thing I wanted to say is that HCFA has taken 
some of what you talked about in July and even before that 
very, very seriously, and they're making organizational changes 
and also taking other steps to do what our recommendations 
mentioned in our July report, where they will focus and have 
not a strike force but clearly have national teams that are 
focusing on core evaluation areas that have to be reviewed in 
the same format at all the contractors each year. So we are 
hoping that those types of initiatives will make a difference, 
and it's just a little bit too early to know for sure.
    Mr. Upton. Mr. Grob, do you want to comment on that?
    Mr. Grob. Yes.
    First of all, let me address the first part of your 
question, which is how widespread is it. I think these cases 
where people have been convicted of fraud as a result of 
covering up their mismanagement are the most dramatic, and they 
are very troublesome. They do represent a minority of the 
contractors. That is, it's a substantial and worrisome 
minority, a quarter or so that are under investigation, and we 
are having these convictions.
    But if you think about it, the weaknesses in the financial 
management and the fraud units are probably more serious 
because they are more pervasive. In other words, when we did 
the CFO audits, we found the weaknesses in the financial 
management to be pretty much across the board in the 
contractors, and since those are the systems to control the 
outflow of the money and to keep track of they money, in a way 
they may have a more profound effect on Medicare than the 
occasional fraud case that we uncover.
    I did list my recommendations already in my testimony. They 
do cover the areas that have already been addressed by the 
other speakers so I will stand by those.
    Mr. Upton. Okay. Mr. Klink.
    Mr. Klink. Thank you very much.
    First question for Ms. Aronovitz and Mr. Grob. We as a 
Federal Government originally hired these fiscal intermediaries 
to provide us with state-of-the-art private sector techniques. 
We wanted technology, we wanted the latest technology, we 
wanted some integrity. Is that not why we outsourced this work 
in the first place, so that the private sector would be able to 
add some efficiencies that we didn't think we would find in the 
government?
    Let's start with Ms. Aronovitz and Mr. Grob.
    Ms. Aronovitz. Yes, absolutely. We thought that the private 
sector companies had technology and creativity to be able to 
develop new initiatives and new approaches to doing these 
functions, and they had more experience.
    Mr. Grob. I would say, too, a primary factor was there was 
a strong desire to get the Medicare program moving, and you had 
in place organizations that were able to do it, and at that 
time I think the financial institutions such as the large 
insurance companies in this country were looked up to as having 
the kind of expertise that you're talking about, and no one 
felt at that time there was any reason to question that.
    Mr. Klink. I am willing to whack the folks at HCFA for not 
having directed enough oversight to catch some of these things 
that were going on, and I think we need to look at their 
procedures, and some of that has been mentioned today, but 
ultimately the commission--I mean, HCFA's problem might be 
omission, of not having a system in place, it appears to me--
but the commission of the fraudulent, purposeful act of ripping 
off these dollars appears to be done, by everything that we 
have heard today, by the contractor. They appear to be their 
transgressions. Am I missing something there?
    Mr. Grob. No, you're right.
    Mr. Klink. Let me--we know that we pay and we mentioned the 
figure of $1.6 billion, that is a lot of money, every year. We 
ask them to take care of paying out $700 million each day. 
Again, that is almost incomprehensible. So I want to walk 
through some of the behaviors, Ms. Aronovitz, that you 
described in your July 14 testimony and some of the things that 
you have mentioned today regarding unscrupulous activities of 
some of these contractors--and for each of these things, I will 
read you what you said, and I want you to tell me if in your 
estimation it was because the HCFA rules were too complicated 
or for some other reason, like greed, that you think these 
things were done.
    You said on July 14 that they arbitrarily turned off 
computer edits that would have subjected questionable claims to 
more intensive review. Is that because the HCFA rules were too 
complex?
    Ms. Aronovitz. No.
    Mr. Klink. You said today, and I like this--I will just 
read it directly--admitted or allegedly improper activities, 
included but not limited to improper screening, processing, 
paying Medicare claims, destroying claims, failing to properly 
collect money owed to Medicare by providers. In addition, 
contractors falsified their performance results and engaged in 
activities designed to deceive HCFA and circumvent its review 
of contractor's performance. Was that because HCFA's rules were 
too complex?
    Ms. Aronovitz. I don't believe so.
    Mr. Klink. Mr. Grob, do you have an opinion on that?
    Mr. Grob. I agree.
    Mr. Klink. I'm sorry, for the record, in the microphone, 
you agree as well?
    Mr. Grob. Yes, I agree.
    Mr. Klink. That they falsified documents in reports to 
HCFA, they destroyed or deleted backlogged claims, that they 
altered or hid files that involved claims that had been 
incorrectly processed or paid and altered contractor audits of 
Medicare providers before HCFA's review. So, again, was it 
because the rules were too complicated?
    Ms. Aronovitz. No.
    Mr. Grob. I think they understood what they were doing.
    Mr. Klink. I want to get this clear, because we are going 
to have another panel after you, and I hope that you are 
familiar with the cases concerning the fiscal intermediaries on 
the next panel.
    Each of the contracts with HCFA, as a fiscal intermediary, 
was terminated because of behaviors engaged in by at least some 
of the former employees of these FIs. Of the companies 
represented on that second panel, do you think that there are 
any that should not have had their Medicare contracts 
terminated? In other words, how serious do you think the issues 
were that were involved, and what was the potential or actual 
harm to the Medicare program?
    Ms. Aronovitz. No, I don't believe so. But I would also 
like Mr. Hast, my colleague, to answer that. He has been 
involved in some of those--in reviewing some of those 
investigations.
    Mr. Klink. Thank you. That would be good.
    Mr. Hast.
    Mr. Hast. Yes, on the cases we reviewed, we do believe HCFA 
acted appropriately.
    Mr. Klink. Can you walk me through this a little bit, if 
it's possible, and tell me a little bit about some of these 
cases that--we understand it's three cases since we last met in 
July. Talk in a little more detail, if it's possible, or is 
there anybody here who might be able to talk about that, talk a 
little bit about these cases?
    Mr. Hartwig, good. Thank you, sir.
    Mr. Hartwig. Actually, the three cases with the guilty 
pleas earlier in the summer were pretty much the same as the 
cases we described to you in July. Contractors had altered 
records or destroyed records to make their CPEP scores look 
better on the processing of claims and the timeliness of 
claims.
    One of the contractors actually had altered their 
congressional inquiries. HCFA puts a time limit on the 
contractor to get congressional inquiries out on a timely 
basis. They were not making that standard, and so they had two 
files. One file they maintained where the congressional 
inquiries were moved out appropriately, and another file where 
they did not make the timeliness goal. They would show only 
HCFA that one copy. So they were well aware of the fact that 
they were not handling congressional inquiries on a timely 
basis and just didn't disclose that to HCFA.
    We had another contractor that did a similar thing with 
their correspondence.
    And one of the concerns that we have is that it is just not 
handling, but that they are not handling correspondence in a 
timely basis. The rights of beneficiaries to appeal their 
claims are based on a time limit that starts with the 
submission of the claims, and where contractors don't handle 
their inquiries appropriately they may be actually infringing 
on their right of due process.
    Mr. Klink. Just very quickly, Mr. Osman didn't go through 
his entire written testimony, but I just wanted to take a look 
at this Illinois case where the woman that he represents, Ms. 
Knoob, found a box containing over 10,000 railroad retiree 
Medicare claims in the mail room. Now, this intermediary didn't 
have to process it. They were supposed to forward this to 
Traveler's Insurance, and when she brought this to their 
attention, rather than admit that these things had been sitting 
for several months, they set in the office and shredded them, 
and then took them out in laundry bags and got rid of them. And 
when she persisted on telling other people about it, they made 
her life horrible, to the point that she attempted to take her 
own life. I am giving you a real brief Reader's Digest version.
    But the thing that is also kind of unbelievable is that the 
same company is alleged then to have installed a shut-off 
switch on its beneficiary phone line so when the volume of 
calls went up they just shut down the system so that they 
appeared to be doing the job in an adequate manner. So I'm 
asking you, these are some extraordinary allegations. Are they 
that different than the kinds of practices that we have seen by 
fiscal intermediaries that have been thrown out of the Medicare 
system?
    Mr. Hartwig. I believe that the conduct in many of these 
cases of the contractors is similar: that is, the destruction 
of claims we see over and over again of backlogs of claims and 
the destruction of correspondence. The events that you 
described today have been similar in a number of contractors. 
The fact that employees have notified senior management of 
contractors that these things are going on and nothing has been 
done is a common element of all the criminal cases and the 
civil settlements that we have testified about before you.
    Mr. Klink. Thank you very much. I yield back my time.
    Mr. Upton. Mr. Blunt.
    Mr. Blunt. Thank you, Mr. Chairman.
    Mr. Flynn, in your testimony you said that the level of 
corruption at the Michigan plan appeared to include a large 
number of managers and senior staff. The Inspector General's 
corporate management chart indicate that the corruption was 
widespread. Can you tell us how high that corruption went and 
how you think that culture of corruption developed?
    Mr. Flynn. Sure. The levels, I am sure it went up to the 
vice president's level, as far as knowledge of the practice 
that I described, and I have--I have reason to believe it went 
to the senior vice president level, which was simply one level 
removed from the CEO of the company.
    I have something that's not in--I went through--I kept 
records of conversations with everybody during this time 
period, and I came across one--I reviewed all of these last 
night, and in one that senior vice president actually came to 
our offices and put pressure on us to do all we could do to 
reverse our position of 5 years that a particular hospital was 
not entitled to $1.5 million of Medicare money, and in order to 
appease the CEO as well as the Wayne County executive to do all 
we could to give the provider that money.
    I was asked as a new person in the department to write a 
letter saying that I've taken a fresh look--a letter to HCFA--
I've taken a fresh look at this, and I think that the hospital 
should get the money.
    That's just one example, and that's the only example I 
have.
    Mr. Blunt. Do you have any idea how that atmosphere 
developed in the plan?
    Mr. Flynn. My understanding is that prior to 1989 Michigan 
almost lost the contract. It took heavy lobbying by Senators 
Riegle and Levin to keep the contract because they were doing 
poorly on CPEP. Having retained the contract, they simply had 
to improve their scores, and I think they made a genuine effort 
to do it. They cleaned house. They brought in new auditors. I 
was one of these new auditors brought in, and I was excited to 
have the job, as were a lot of young new auditors.
    They got rid of company cars and a lot of the perks that 
the previous auditors had had. But for some reason, in addition 
to really making a concerted effort to do better work, they 
brought in these consultants, and I think they thought maybe 
just in the meantime, for a temporary quick fix for the 
previous audits that we know were done poorly, we'll bring in 
the consultants to clean those up, and that's why it was 
originally started. Because previous audits, it was known that 
they done so poorly that they would never pass. They had to be 
fixed, and once they got into that system it simply never 
stopped.
    Mr. Blunt. I don't want to misphrase Mr. Osman's comment, 
and I will let him respond to this in a minute, but he said 
that he thought in the other plan it was good people with bad 
supervision. Do you think that----
    Mr. Flynn. I said just as much. These are all decent 
people, I mean, accountants, good neighbors, and they--from my 
perspective, when you were first confronted with this, you 
thought, well, that seems kind of odd, I don't know if that 
should be allowed, but you were grateful to have the job. You 
wanted to do well. You wanted to please your supervisor, and 
you were surrounded by other people who were going along on 
with it. They expressed some concerns, and also the company 
effectively told us, you know, this is just a game we have to 
play with HCFA. They know we're doing it. There's this sort of 
a wink and a nod. They have these burdensome regulations so 
they kind of know we're doing it. They'd never admit it but 
they know, and so this is the dance that we do.
    And we just figured, hey, if people three and four levels 
above me know what's going on, so if someone ever comes after 
me, I know they're going to come after the people four levels 
above me, too, and I think that was the general attitude.
    Mr. Blunt. Mr. Osman, you want to comment on that?
    Mr. Osman. Yes, thank you. We found the same thing in Blue 
Cross Blue Shield of Illinois. In 1986 they were in serious 
jeopardy of losing their contract because of their poor 
postpayment quality assurance scores, and the new director that 
was brought in was brought in to fix that. His methodology of 
fixing it was to begin to cheat and finesse the system.
    At that same time, HCFA, by the way, used to have a policy 
that they had an onsite representative at the carrier's place 
of business to ensure that they complied with the contract. In 
the latter part of 1986, the HCFA onsite representative for 
Blue Cross Blue Shield went to work for HCSC. He knew that the 
contract was about to be terminated, and then miraculously they 
went from number 47 in the Nation to number 3 in just a period 
of 2 or 3 years. Someone--a bell should have gone off someplace 
that there's a problem here. It didn't.
    But getting back to what Mr. Flynn said, there was a 
corporate culture. I heard the same thing from witness after 
witness. HCFA's too stringent. This is a game we play. We're 
just getting ready for the test. They're too picky. We have to 
do this to keep our contract. In my case, they would have what 
they call town hall meetings and talk about--if you can imagine 
350 people in one room talking about processing claims $50 and 
under and not reviewing them when they suspended because we 
have to do--we have to do the claims. So there was a corporate 
culture, and I think it was the same as Mr. Flynn talked about.
    I really believe that Blue Cross Blue Shield of Illinois 
wanted to keep that contract. They got engaged in this system 
of finessing or cheating and couldn't get out of it because 
once you're a leader and you say to your subordinate it's okay 
to cheat on one item, what do you think they do the next day 
whenever they have to meet their data quota? They cheat on that 
also. And you as a leader are compromised. You cannot go back 
to that employee and chastise them for cheating or finessing 
because you have condoned it in the future.
    So when they got into this corporate culture, there was no 
way out. They absolutely could not get out of it. They did 
seriously try, I think, to correct their problems, but they got 
into this problem. They couldn't get out of it. And 
unfortunately HCFA, by announcing when they were going to come 
in to do their CPEP, and by allowing them to pull their samples 
themselves, didn't provide effective oversight, and as I said 
earlier, you know, if that one man, a good person, would have 
been there the entire time, every bit of this could have been 
prevented.
    Mr. Blunt. Thank you, Mr. Osman. Thank you, Mr. Chairman.
    Mr. Upton. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I think from the panel 
we've heard not only from GAO, but also from the attorney that, 
one, there are no surprise inspections, and if there are, then 
they give you dates and what you're looking for. So maybe we 
need to look at that and see if HCFA can make some changes.
    Mr. Osman, let me just ask one question from you. The 
opinion--what you're stating, is that something that was proven 
in court, testimony, or was that obtained through discovery, or 
was this just allegations or whatever? For example, the phones 
were turned off and things like that, was that actually proven 
by the Department of Justice?
    Mr. Osman. Absolutely. There's absolutely no doubt that 
they had--and it was admitted to, and there was no doubt that 
there was a phone--whenever the volume of calls just got too 
great, they just turned off.
    Mr. Green. I also appreciate in your testimony you talked 
about the local U.S. Attorney was making every effort to 
prosecute, yet the Department of Justice here in Washington 
were discouraging them from going forward?
    Mr. Osman. Well, as you know, whenever there's a false 
claims action filed, you file the complaint under seal. You 
file it with the U.S. Attorney's Office, the local U.S. 
Attorneys and Department of Justice. The Department of Justice 
then circulates it, and they look at it from the Civil Division 
and also the Criminal Division. Early on I believed that there 
had been criminal activity and stated that. The Department of 
Justice in Washington did not believe so, and it would not 
institute nor start a criminal investigation.
    After the first settlement conference, it became painfully 
aware to me that the case had not been investigated enough to 
be entering into settlement negotiations. I kind of reversed 
the procedure, went back to the U.S. Attorney Chuck Grace, and 
made a presentation to Mr. Grace. And much to his credit, he 
began a criminal investigation, and he is one of the--in my 
opinion, one of the heroes in this case and one of the reasons 
that the government received $140 million, because once the 
criminal investigation started, we had more assets in the form 
of OIG agents, FBI agents, postal inspectors to do a better job 
of investigating, and as we kept turning over rocks, we kept 
finding more fraud. And Mr. Grace and his civil assistant Laura 
Jones and Tom Daly deserve just an enormous amount of credit. 
Although I was pushing and was investigating and was developing 
formulas for the government, and in assistance with him, I 
certainly didn't have the wherewithal to push that, and Mr. 
Grace is primarily responsible for the government receiving 
that $140 million.
    Mr. Green. Mr. Flynn in his testimony and just under 
question from my colleague said that HCFA--this is a game they 
play. HCFA knows you have to comply, and I hope I'm quoting you 
correctly. Does HCFA know you turn off the phones when the 
volume gets too much or things like that? Was that ever shown 
in your investigation?
    Mr. Osman. There was never any direct evidence. You keep in 
mind that there were only two people who would come down once a 
year, and I don't know what their schedule was. They may have 
had 15 other--it may have been overloaded. I think that's one 
thing that needs to be looked at. But it was the same person 
year after year after year. There was evidence that they took 
this HCFA official to dinner quite frequently, and there was 
evidence they would entertain him at their homes after there 
was an edict put out that you cannot accept payment of dinners. 
They became too familiar.
    There was--one of the things that I didn't say in my 
statement is if you do this auditing, or if you put someone 
onsite, you have to rotate them because you cannot allow them 
to get so familiar with the people that they're overseeing that 
they begin to feel sorry for them. And so there was evidence of 
that. I mean, if you look at it, if you have limited resources, 
and you have a lot of work to do, you don't want to find 
mistakes in a lot of cases because what happens is if HCFA 
found this problem, then they had to go find another carrier. 
Then they would have to come back to a committee somewhere in 
Congress and explain to them why they had to replace this 
carrier. So in a lot of ways, it was not to HCFA's benefit to 
say, but it was much easier not to find the fraud than it was 
to find the fraud.
    Mr. Green. Mr. Grob, Ms. Aronovitz, it appears we're 
starting to have more and more integrity problems. I see the 
list here, the last hearing from our financial intermediator. 
Is this area becoming more troublesome? Does it appear that way 
only because we're spending more time on resources 
investigating? Is it because you were looking more that we're 
finding these problems?
    Mr. Grob. First of all, I do think it's been troublesome 
all along. We've had these investigations under way for a long 
time. Some of these investigations go back to acts that were 
committed in the early 1990's, for example, and continue 
through the years. We've had some investigations under way for 
some time. So I don't think it's because we're just discovering 
it now. I think we're discovering things that were there. But 
it is good to see the concerted attention now being paid at 
every level.
    I think the system runs through all the layers of 
government, and I think by paying that attention, we're both 
coming up with solutions, but at the same time becoming more 
aware of the details of them.
    Mr. Green. Ms. Aronovitz, you mentioned in your July 
testimony before the committee that falsified data reported to 
HCFA was a common theme for some financial or fiscal 
intermediators. My question regarding these fiscal 
intermediators, whether they also falsified the data they use 
on the private side of their business. Also, what's the nature 
of the data they're faking, and what's their motivation for 
doing so, obviously outside of greed and incentives and what 
have you?
    Ms. Aronovitz. We did not look at the private side. So, I 
really can't address the private side of their business, 
unfortunately.
    Mr. Green. Some of the audits, though, were the same 
personnel used for the HCFA that were also used--for example, 
Blue Cross Blue Shield of Illinois, I'm sure they have other 
programs, the same personnel, or did they have a separate 
location for the HCFA?
    Mr. Grob. Everything was supposed to have a good fire wall 
between the private side and the Medicare side.
    Ms. Aronovitz. I'm sure the companies that will be speaking 
can elaborate on that, but I do believe there is quite a fire 
wall because you really do want to avoid a company working on 
the private side and also with Medicare, because there are some 
situations where a company--where Medicare would be a secondary 
payer, and you don't want a company to get confused in terms of 
what part of the business is going to be paying the claim.
    Mr. Klink. Would the gentleman yield for one quick moment?
    Mr. Green. I will yield whatever time I have.
    Mr. Klink. I think we're also owing the chairman some time.
    You did mention in July that they arbitrarily turned off 
computer edits that would have subjected questionable claims to 
more intensive review. You just testified you don't have the 
authority to look into the private side. Who would be able to 
tell us whether or not that same practice were taking place in 
the private side or if, in fact, falsified documentation was 
taking place or destroyed or deleted claims or altered files, 
these kinds of things? How would we be able to find out if 
they're conducting business the same way on the private side as 
they are on the financial intermediary side? Getting thrown out 
of the Medicare program is pretty serious, and these dollar 
figures they've settled for is pretty serious, too. How would 
we find that out?
    Mr. Grob. We'd have to start a study of that, and we'd have 
to--to see how we can reach that. What we have reached in our 
studies is that where that fire wall was breached--in the cases 
we have here--there were a couple of cases. One was a case in 
which the Medicare payer used Medicare funds to pay for 
insurance coverage which it knew it was responsible for on the 
private side. That was the Medicare secondary payer situation. 
And the other one was where they had charged to the Medicare 
program the expenses of employees who were definitely working 
the private side, and they knew they were working the private 
side and that they weren't working for Medicare, but they 
charged their time to the Medicare program. In fact, that was 
in one of the three recent cases where that happened. But in 
terms of reaching an analysis of their business practices on 
the private side, we certainly have not done that except where 
we have suspicions about its relationship to the Medicare 
program.
    Mr. Upton. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman.
    Mr. Flynn, from your standpoint as an employee, I think you 
provide a great perspective on the problem with the inside 
information that you've already testified to. You've indicated 
today that whistle-blowers are sometimes motivated exclusively 
by desire of financial gratification, and that the proper 
course--you haven't testified to that, we have heard that--and 
that perhaps a better course would be for the employees to 
notify the proper authorities. In other words, the people on 
the other side are saying that this is all just about money, 
and what you should do is go up the chain of command and report 
what is going on. Based on what I'm hearing, that's almost 
ludicrous, but I will ask you that question. Would that be an 
effective means without the lawsuits that you simply go up and 
report it to your supervisors?
    Mr. Flynn. No, I don't think so at all. It's also my 
understanding that this is what Blue Cross is going to testify 
to this afternoon, the point you just made. And at least in my 
case, I have written documentary evidence going right back to 
before I even consulted my attorney that shows that I struggled 
with what should I do with this. I wrote, ``Do I owe management 
an opportunity to somehow explain all this?'' I talked to a law 
professor. I talked to a great trusted friend. I talked to two 
attorneys. I called Barbra Hoff at HCFA anonymously and asked 
her if there's a wink and a nod with this practice, and she 
said, you can take that straight to -OIG. That's fraud, flat 
out fraud. She didn't say you had to. Nobody suggested I report 
this internally. And then throughout this entire case, Federal 
investigators, including the Attorney General, unanimously told 
me I did the right thing by taking this externally.
    So I grappled with it, and in deciding to pursue it 
externally, I know it was the right decision. And, in fact, in 
a meeting I had with Lisa DeMoss at Blue Cross near the time of 
our settlement, she acknowledged--well, let me back up. Ms. 
DeMoss challenged my admission to the New York bar. Blue Cross, 
I had to ask them to write a letter on my behalf when I applied 
for the New York bar, and Blue Cross' response was, it was 
wrong and immoral of him--me--to not pursue his grievances with 
his colleagues in the Office of the General Counsel or at other 
levels of management as required by the Corporate Code of 
Conduct. In this three-page letter I first assert that I 
complied completely with the code of conduct, which provided 
many alternative ways to report this type of behavior.
    Mr. Klink. Would the gentleman yield for a quick question?
    Mr. Bryant. Sure.
    Mr. Klink. Do you think, Mr. Flynn, at that point in time 
that the company had faith in their compliance program? Did 
they have any trust in the compliance program that was in 
place?
    Mr. Flynn. I think they did. I think they had--I'm not 
sure----
    Mr. Klink. Did the employees?
    Mr. Flynn. I don't know. I don't know if the other 
employees did. I sure didn't. To the extent I did, I had faith 
in them with the providers. I think they probably did a good 
job going out to the hospitals, recouping money from----
    Mr. Klink. Why didn't you have faith?
    Mr. Flynn. I didn't know of any internal investigations 
they did. When I called the number, it clearly--I did. I called 
this 800 number. This woman said, we pretty much just 
investigate hospitals. I said, do you ever do anything 
internally? No. She was oblivious.
    Mr. Klink. I thank the gentleman.
    Mr. Flynn. Ms. DeMoss told me there was a separate number I 
should have called. I never heard of it.
    Mr. Bryant. Let me say this. This is a difficult complaints 
area. I know there's blame to go around in many instances. HCFA 
regulations are complex. And I'm not just completely condemning 
your employer, Blue Cross Blue Shield, but I think there's some 
individual judgment you had to make at the time when you go up 
to your supervisors, or whether you felt it was so bad that 
perhaps there is a balance there that has to be achieved, and 
maybe just on a case-by-case basis how this is done. But I 
think I have concern, too, about how you were treated 
afterwards.
    There's some indication--I know I've read a lot about this, 
retaliation, harassment, things like that, and of course that's 
one of the factors that you face if you go up the chain and you 
don't get results, and potentially somebody could really cause 
you some problems.
    Mr. Flynn. First of all, going up the chain I knew that my 
supervisor, manager, director and vice president were all 
taking part in it. The only person--and then I was pretty sure 
the senior vice president, based on what I said earlier, was 
not that concerned about with enforcing Medicare regulations. 
That left Dick Whitmer, the president and CEO of Blue Cross. I 
just wasn't going to go to him and----
    Mr. Bryant. Mr. Osman, as an attorney in these whistle-
blower lawsuits, qui tam lawsuits, do we need a separate 
criminal statute on the books to protect employees from that 
type of harassment, or do you know if there's sufficient law on 
the books already, obstruction, intimidation of witnesses, 
things like that that would be helpful?
    Mr. Osman. I don't believe you need a new criminal law. I 
think we have enough laws in the United States the way it is. 
The civil law, the whistle-blower statute as everyone calls it, 
has protections in there. It's subsection H which gives you 
protection in the event that you are retaliated against. 
Unfortunately nothing that you could write down is going to 
stop people from retaliating against you.
    I agree 100 percent with Mr. Flynn. In my case, my client 
went all the way to the director of the Blue Cross Blue Shield 
at Marion, who was at that time the vice president. She went 
all the way to him, and it continued to be covered up. So 
without the qui tam statute and without the threat, without her 
coming into my office, which was the fifth attorney she'd come 
to, I'm convinced that Blue Cross Blue Shield of Illinois would 
still have their five Medicare contracts and would still be 
processing claims, and without that particular statute, she 
would not have been able to do it. In her case, she's 
completely disabled, so the retaliation--she didn't go back to 
work, so there was no further retaliation, but at one point her 
supervisor put seven negative evaluations in her file on the 
same day, seven. Now, they were backdated, but dated for months 
before, but she put seven negative evaluations in her file on 
the same day. So there was a concerted effort to discourage any 
of this type of activity.
    Mr. Bryant. Thank you.
    I thank the Chair.
    Mr. Upton. Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. When we had this 
hearing in July, I was impatient, and I feel impatient sitting 
here again today because frankly I think we should do things 
like encourage the HCFA auditors to be independent. We should 
find structural ways to make that happen. I think that we 
should simplify HCFA's rules and regulations so that people 
understand what they're doing.
    But, you know, I practiced law for a number of years before 
I got demoted to this job, and you talk to thieves, for 
example, and they say, well, you know, the police coverage in 
this part of town is kind of low, so that's why we burglarize 
all the houses there, because we know the police patrol is not 
going to come by. Of course, they beefed up the police patrols 
when they had a series of burglaries, but nobody blamed the 
police.
    I find some of this testimony shocking about how it's 
HCFA's fault because corporations are committing fraud, and I 
will also say--and this is not to accuse corporations or to 
excuse them, but I have found that where something is not 
clear, they will take that opening. Mr. Osman, I think you 
talked about that somewhat, too.
    I guess my question short of stationing a HCFA employee or 
someone else next to the lady with the laundry bag and the 
paper shredder, next to everybody, how can we encourage legal 
behavior, and how can we beef up our enforcement or whatever 
we're going to do to stop illegal behavior? One of the 
questions I have is are there any incentives that we can give 
to folks, to FRIs, to take the legal route versus the shady 
perhaps and probably illegal route? I wonder if anyone can 
comment on that. Mr. Osman and then Ms. Aronovitz.
    Mr. Osman. As I said when I started my testimony, I'm not 
here to bash HCFA, but I think--I think it's maybe a little 
Pollyanna, and I'm one also to believe that corporations are 
going to always do the right thing. Corporations are guided by 
principles that are a little different than individuals. They 
have stockholders to report to, or in the case of these 
companies, they have mutual reserve insurance companies that 
they have policyholders to report to to keep the cost as low as 
they can. I believe you have to assume, and you have to design 
a system that assumes, that someone is going to try to do 
something illegal, not design a system that assumes they're 
going to do everything right.
    Ms. DeGette. That's not my question though. My question is 
are there incentives that we can give to people to do things 
right?
    Mr. Osman. We had an incentive in the Blue Cross Blue 
Shield case. That incentive was if you process claims in a 
certain manner with a certain quality, you get extra money. 
What they did in that instance was they cheated on the CPEP, 
and they got an additional $1.2 million.
    Ms. DeGette. Your answer is you don't think there are 
incentives that we can give.
    Mr. Osman. I think there are incentives that you give, but 
you have to then temper it with and you have to make sure 
they're monitored.
    Ms. DeGette. I agree. I'm not saying I disagree. You have 
to have both.
    Mr. Osman. I don't think that what I have said is that you 
have to have one individual sitting at all 350 people's desks. 
You have to have one individual onsite whose primary job is to 
monitor that contract, and this--someone asked how much more 
money it would cost. I think for $10 million a year, you can do 
exactly what I've said you can do, and this problem will be 
solved. Now, it sounds simple, but it is simple. This is a 
simple problem, and there's a simple solution.
    Ms. DeGette. I kind of disagree.
    Ms. Aronovitz?
    Ms. Aronovitz. For many years HCFA has proposed legislative 
reform, and some of these reforms do make a lot of sense, in 
our opinion. Right now HCFA does have a hard time competing 
contracts because the universe of potential contractors is very 
limited, and they would like to have more flexibility in being 
able to contract with any type of competent business or public 
entity. They're also interested in having reform where they 
would be able to contract for a particular function, like the 
appeals process or mailings and printing where you could take 
it out of a contractor and just separate a function. Now, I 
know that the current contractors are very, very concerned 
about that. They do think it would add tremendous cost because 
you are, in fact, having to interface with two contractors, and 
they're going to have to work together and all, but I think 
this is something that we would think HCFA should be able to 
experiment with.
    But one other area is different payment methods for 
different types of contracting. Right now HCFA could only use 
cost-based reimbursement, and there are--there have been in the 
past certain experiments or demonstrations where HCFA has used 
incentive contractors that have not necessarily worked that 
well because of the perverse incentives involved. However, we 
do think it's time to experiment again and with very controlled 
demonstrations and with the right incentives to make companies 
have more of an incentive by being able to earn additional 
bonuses with the right oversight.
    Ms. DeGette. What do you think of this idea to have one 
person in each site?
    Ms. Aronovitz. When we went to the different regional 
offices, there was a lot of discussion and a lot of 
disagreement among the HCFA regions about whether an in-house 
or an onsite contract manager was appropriate. We heard a lot 
of pros and cons, and there's no final answer, I don't think. I 
think we're still studying this. On one hand Mr. Osman and Mr. 
Flynn had mentioned it's very easy to get too cozy, and you're 
having--if you have one HCFA person who is in a company, and 
they're by themselves, they eat their lunch by themselves or 
whatever, it's natural to interact and maybe even get too 
comfortable. That's why the rotation idea does make some sense. 
On the other hand, it is true that in our study we found that 
HCFA overseers really didn't make that many trips to the 
contractor. So there might be something in between in terms of 
having the resources to do better oversight, make surprise 
visits, do a lot more in that regard. But on the other hand, 
you also have an issue of quality of life and to try to find a 
contractor who would be willing to travel extensively, you have 
to find that person.
    Ms. DeGette. The problem you get is this coziness idea, but 
on the other hand, sometimes corporate policies, especially to 
midlevel or lower-level employees, seems so murky. Someone like 
Mr. Flynn, he would have someone he could go in to and say, I'm 
being told to do this, and I'm not so sure. I think that's the 
point.
    Ms. Aronovitz. One thing that we found that really could 
work, and we found it in a few situations after an integrity 
problem was found and reported to HCFA, on occasion HCFA's 
central office went out and did what they called an integrity 
review. What that was was to privately meet with every single 
employee in the unit, or in the division or branch, and have a 
private conversation and say, what do you think about the 
operations of this company, how do you think things are 
working, do you have anything you want to discuss privately 
with us? Having the opportunity--giving an employee an 
opportunity to talk to someone at HCFA who they trust and know 
could take action--we think is very important, and we think if 
HCFA would just go out and do integrity audits occasionally, 
not only when problems are found, that that might go far to 
identify problems. Thank you.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Upton. Mr. Bilbray.
    Mr. Bilbray. Mr. Chairman, I just, I guess, would ask Mr. 
Grob, the availability of these records electronically to 
whoever is doing the auditing, there's a pretty well-developed 
electronic data base right now, isn't there? What percentage 
would you say of these records are available electronically?
    Mr. Grob. I would say most of them are electronic.
    Mr. Bilbray. Historically that's not been the rule?
    Mr. Grob. No, but it's where we're at and where we're 
going.
    Mr. Bilbray. Now we're moving.
    Mr. Grob. Right.
    Mr. Bilbray. I only say this because I think we can find 
blame and say it's the private sector, it's the public sector, 
and we all take our historical positions there, but I think we 
need to take a look at the fact that everybody has to do their 
job, and everybody has got to be reminded that playing by the 
rules is not only nice, it's essential. It's got to be 
mandated.
    My big question is with the advent of electronic data base, 
the private sector jumped into in the 1970's, I remember 
General Motors, because of all the fraud and abuse in their 
warranty process, set up a whole electronic data base that 
would not only allow access for audits, but would actually 
start automatic audits based on historical models. What's the 
ability for us to develop that technology, or are we developing 
that technology that the private sector has been looking at for 
20 years to basically do what they would say in the IRS, throw 
the red flags up to start a ping based on certain patterns and 
certain data, so we don't have to literally go in and someone 
doesn't have to literally go into an office. This thing of 
telling someone we're going to come, we're going to look at 
this, those records should be available electronically at any 
time.
    Mr. Grob. First of all, clearly, the broad use of 
electronics for processing the claims and for reviewing them is 
very much the wave of the future, and there is a lot of 
progress being made. Most claims are paid electronically. 
They're submitted electronically, and they're paid 
electronically. The vast majority of them are. The 
sophistication of dealing with those electronic systems is also 
increasing on both sides of the equation, both the ability to 
game it and the ability to discover it. Don't forget, one of 
the things we found that these contractors were doing is 
turning off exactly those edits that would ping the bad claim 
coming in, turning them off.
    So I would say on both sides it's sort of like the chess 
game has become more complicated, and the players are getting 
more sophisticated, and we're certainly all working to improve 
both sides of that equation.
    Mr. Bilbray. Some people in the administration will learn 
you don't necessarily erase e-mails and stuff on your personal 
computers. The fact is do you have the ability to track when 
those things have been turned off?
    Mr. Grob. I can't answer that one.
    Mr. Osman. I can tell you that that was one of the 
allegations that came out of the Blue Cross Blue Shield of 
Illinois, and in 1995, just a little bit background, when a 
claim comes through the system and there's something wrong with 
it, one of the edits and audit sets, it suspends. In 1994--
these are round numbers--there was about 18 percent of the 
claims suspended. In 1995, it was 9.1 percent suspended. And in 
1996, it went back up to 14 percent suspended.
    I always suspected that the edits and audits were being 
turned off in 1995 because 1995 was the year that Blue Cross 
Blue Shield of Illinois, because of their great performance, 
was given the Michigan contract that Mr. Flynn talked about, 
and they were having problems administering both contracts, and 
I always suspected that they turned the edits and audits off. 
We were never able to get the data to prove that they'd been 
turned on and off because there's 1,004 edits and audits, and 
there was no--nothing in the system--we were told--whenever we 
requested this data, we were told there was no way in the 
system for us to run a report and see when a particular edit 
was set and when it was disabled. So we were not able to, in 
our case, do that.
    Mr. Bilbray. Now, in 1999----
    Mr. Osman. I don't know.
    Mr. Hartwig. I think it's very difficult to show that edits 
were turned off. The way we have used it in some of the 
criminal cases is there have been actual memos saying, please 
turn the edits off for these dates. It makes it somewhat 
easier; but without that evidence, it's very difficult to show 
that edits were turned off.
    We also have instances where claims were force-coded, where 
they were kicked out of the system, and then a code was entered 
to get them paid. That process is easier to show because you 
have a record.
    Where we found it very difficult to go back and reconstruct 
exactly when computer edits have been turned off. We also found 
instances where computer data was recreated, and that is a 
difficult investigative process where you actually have 
computer files recreated to show something different. It's a 
much more tedious task, and you really rely on witness 
testimony on a lot of these instances to go back to the 
beginning. So where you turn edits off, it's difficult. Where 
you force-code it, it may be a little bit easier.
    Mr. Bilbray. I would be very interested for us to seriously 
look at what major corporations have done to address their 
audit process and try to address these problems because I think 
we could learn a lot. My background is environmental health. 
One of the greatest breakthroughs we had in air emissions and 
water emissions was to the ability to constantly monitor 
electronically rather than go and do a test of what a 
smokestack was putting out. We actually had sensors that could 
tell you 24 hours a day what was going on so that on Sundays or 
midnight somebody didn't pump all the garbage out the stack; 
we'd detect it. It would be nice to be able to use that 
technology to make sure the process is working as it was 
designed.
    I think we're looking at technology being used in a lot of 
ways to help double-check and check. We ought to be as 
innovative as the private sector has been. Maybe Microsoft has 
some ideas for us.
    But thank you very much, Mr. Chairman. I know it didn't 
answer all the questions, but I think we raised enough 
questions where we can say there may be some opportunities out 
there. I yield back.
    Mr. Upton. Thank you.
    Mr. Cox?
    Mr. Cox. Thank you, Mr. Chairman.
    Mr. Flynn, your testimony and your responses to questions 
indicate, I think, your conclusion that there is a relationship 
between HCFA and, in your case, Blue Cross Blue Shield of 
Michigan that is perhaps too cozy to permit the kind of 
aggressive audits that should be performed; is that right?
    Mr. Flynn. Right.
    Mr. Cox. And likewise, Blue Cross Blue Shield had too cozy 
a relationship with the providers--who also had an incentive, 
that is, getting paid--to permit them to have the proper 
incentive to go in and do what's right. So between Blue Cross 
Blue Shield, the providers, now the government--and this even 
extended to the Department of Justice, although Justice in your 
case provided you a lawyer who is handling it by herself and 
doing a good job, it is my understanding--so that more of these 
parties, but for the qui tam procedure, was up to the task. 
Blue Cross Blue Shield wasn't up to the task. The providers 
were not up to the task; is that all right?
    Mr. Flynn. That's right.
    Mr. Cox. That leaves us then with the qui tam procedure. 
What's the status of your case?
    Mr. Flynn. It's settled.
    Mr. Cox. It is now finally settled?
    Mr. Flynn. Right.
    Mr. Cox. When did that occur?
    Mr. Flynn. January 1995.
    Mr. Cox. A long time ago. Okay. Pardon me. It was not clear 
from your testimony that that was the case. How much money was 
involved in the settlement?
    Mr. Flynn. $27 million.
    Mr. Cox. You had stated in your testimony that the cheating 
has cost the Medicare program tens, if not hundreds of millions 
of dollars. And just to understand the workings of the qui tam 
statute in specific detail, that $27 million was the 
government's recovery?
    Mr. Flynn. Right.
    Mr. Cox. And then as the relator, you got a share which, by 
statute, since there was Justice Department intervention, 
should have been a minimum of 15 percent and a maximum of 25. 
What actually happened in your case?
    Mr. Flynn. Twenty percent.
    Mr. Cox. You got 20 percent. So roughly $5.4 million.
    Mr. Flynn. Yes.
    Mr. Cox. How many years was it from the time that you filed 
your qui tam action until the date of the settlement?
    Mr. Flynn. It was about 1\1/2\ years.
    Mr. Cox. And the Federal False Claims Act, unlike some 
statutes and unlike most civil litigation, provides that you 
also separately get to recover your attorney's fees, so that 
doesn't come out of a contingent fee percentage, right?
    Mr. Flynn. Right.
    Mr. Cox. Was there an additional payment on top of the 20 
percent for attorney's fees, or in your case did the attorney's 
fees come out of the 20 percent?
    Mr. Flynn. I had an arrangement with my attorney that we 
shared the recovery, and so my 20 percent was before both taxes 
and attorney fees. But there are also--there are statutory 
attorney fees that the company has to pay above and beyond the 
settlement. They resisted, and the compromise that we struck 
was that they pay 50,000 some dollars to five charities that I 
selected in the Detroit area.
    Mr. Cox. So between your lawyer--how many private lawyers 
did you engage?
    Mr. Flynn. One.
    Mr. Cox. The two of you then split $5.4 million.
    Mr. Flynn. Right.
    Mr. Cox. And that works out to be something like a rate of 
about $3 million a year for 1\1/2\ years work. My question is 
whether, in the same way that taxpayers are paying too much 
because of Medicare fraud, we are also overpaying through the 
qui tam procedure to get these results. Because in the end the 
taxpayer is the same taxpayer, and whether we get cheated by 
Blue Cross Blue Shield or whether or not we pay $5.4 million 
for a two-person audit that lasts 1\1/2\ years, it's real 
taxpayer money. That $5.4 million is in the end going to come 
out of the Medicare system somehow.
    Mr. Flynn. That's right.
    Mr. Cox. What can we do to make the Federal False Claims 
Act more efficient so it doesn't cost us so much money? And 
also--this is an important part of the question--I don't mean 
to suggest by asking this question that this in any way has 
anything to do with your case or your bona fides, but also--how 
do we address the problem that we have already seen with HCFA 
having the wrong incentives, the government having the wrong 
incentives, and the provider having the wrong incentives, when 
we now have given somebody the opportunity to get 25 percent or 
even more of recoveries that can run into the hundreds of 
millions of dollars? They have an incentive to have fraudulent 
lawsuits because those are big numbers. What can we do to make 
sure that the Federal False Claims Act is tightened up?
    Mr. Flynn. I guess a couple of thoughts. You can--first of 
all, I have no objection with the percentage being smaller. I'm 
sure plaintiffs' attorneys wouldn't want to hear that. I didn't 
even know what the percentages were when I pursued it. I'm sure 
a lot of relators would be still willing--to the extent they're 
motivated by money, they'd still be willing to do it for much 
lower percentages than I would have.
    Mr. Cox. Maybe $2 million a year.
    Mr. Flynn. I honestly----
    Mr. Cox. Seriously. You could still have big numbers if you 
reduce those percentages.
    Mr. Flynn. Absolutely. Absolutely. And I think you could 
lean on the companies to pay attorney fees above and beyond the 
settlement. You could separate it out. You could give the 
government's money back in the taxpayers' pockets and work out 
the compensation for the relater and their attorneys.
    Mr. Cox. That's enormously helpful, Mr. Flynn. I appreciate 
it. I see my time has expired.
    Mr. Upton. Mr. Ganske.
    Mr. Ganske. Thank you, Mr. Chairman. We have votes so I'll 
be pretty brief. I appreciate this panel's testimony.
    Mr. Osman, I find the story that you related to be pretty 
incredible but believable as a health care practitioner, 
physician, before coming to Congress. I can relate to some 
personal experiences where clearly it was very difficult to get 
the Medicare administrator to actually process claims or to get 
a determination that another carrier was responsible in the 
first place so that you didn't have to bill Medicare. I always 
thought that was very strange, and your testimony kind of threw 
some light on maybe why that would be. I mean, I thought to 
myself, look, why would they--why would Medicare want to pay 
for this when another company is responsible?
    And I think that your testimony was also interesting to the 
effect that how important it is to have whistle-blower 
protections. In fact, I should point out to Mr. Cox and other 
members of this committee that we just had a big debate on the 
floor of Congress related to the Department of Defense 
inappropriately harassing and hassling a Department of Defense 
employee who blew the whistle, and it got rather--a lot of 
national attention, and I would be willing to bet that almost 
everybody in the Commerce Committee voted to protect that 
employee's right to blow the whistle.
    I mean, I think this is crucial having this protection, 
this Federal protection, for Federal employees who blow the 
whistle. And I would point out that we have legislation pending 
before Congress that would provide the same whistle-blower 
protection to health care professionals who blow the whistle on 
HMO activities that could endanger the lives of their patients. 
They do not in our legislation have any qui tam reimbursement 
or things other than for simply protecting them from being 
harassed like your client was or possibly fired. And the 
provisions in the bill, H.R. 2723, the Bipartisan Managed Care 
Protection Act, are quite carefully crafted so that it would 
not interfere with an employer from appropriately reviewing an 
employee's performance and terminating an employee who is not 
doing their job properly. But there is a balance that you have 
to have in there, and I think it's in the public health 
insurance that we look at extending rights for those who blow 
the whistle on aberrant behavior that can affect people's 
health.
    So I appreciate the testimony of this panel because it just 
simply, I think, identifies a problem that we need to extend in 
further Federal legislation as it relates to people not fearing 
for the loss of their jobs when they point out that behavior by 
an HMO, for instance, could be--is way past standard care and 
is actually--could result in the loss of life of a subscriber 
to that health plan.
    So that's my comment. I look forward to hearing the next 
panel because we'll get the other side of this story, and, Mr. 
Chairman, I appreciate very much your having this hearing. The 
problem with identifying fraud and abuse is important. It is a 
balancing act. I've been a strong proponent of providing the 
Health Care Financing Administration with additional funding so 
that they can fulfill their job and so that we don't have so 
many stories like the ones we've heard today. Thank you, Mr. 
Chairman, and thank you to the panel.
    Mr. Upton. Thank you, Dr. Ganske. I would note we have 
about 4 minutes before the vote is completed. We are going to 
excuse you all, panel one. Thank you for your testimony. We 
look forward to your comments certainly in the future, and I 
would note that we will start promptly with panel two at 12:30. 
Thank you.
    [Brief recess.]
    Mr. Upton. Welcome back. Our next panel, Panel II, includes 
Mr. Norman Becker, President and CEO of the New Mexico Blue 
Cross and Blue Shield; Mr. Michael Huotari--did I say that 
right?
    Mr. Huotari. Yes.
    Mr. Upton. Thank you--executive vice president and general 
counsel of Blue Cross and Blue Shield of Colorado; Mr. Steven 
Hess, Senior Vice President and General Counsel of Blue Cross 
and Blue Shield of Michigan; and Mr. Fred Verinder, Vice 
President for Compliance Operations, Health Care Service 
Corporation in Chicago.
    You heard our first panel. I think you were all here. We 
have a long history of taking testimony under oath. Do you have 
any problem with that?
    Mr. Huotari. No, I don't.
    Mr. Upton. And under House rules you're allowed to have 
counsel, if you wish so. Do you wish to have counsel? You will 
be the first, if you did.
    If you'd stand, raise your right hand.
    [Witnesses sworn.]
    Mr. Upton. Thank you. You're now under oath.
    I know members are coming back. There are a variety of 
different things that are going on. Again, if you could keep 
your comments to 5 minutes, that would be terrific. Your entire 
statement obviously will be made part of the record.
    Mr. Becker, we will start with you. Thank you.

  TESTIMONY OF NORMAN P. BECKER, PRESIDENT AND CEO, NEW MEXICO 
BLUE CROSS AND BLUE SHIELD; MICHAEL E. HUOTARI, EXECUTIVE VICE 
 PRESIDENT AND GENERAL COUNSEL, BLUE CROSS AND BLUE SHIELD OF 
  COLORADO; STEVEN C. HESS, SENIOR VICE PRESIDENT AND GENERAL 
 COUNSEL, BLUE CROSS AND BLUE SHIELD OF MICHIGAN; AND FRED B. 
VERINDER, VICE PRESIDENT FOR COMPLIANCE OPERATIONS, HEALTH CARE 
                      SERVICE CORPORATION

    Mr. Becker. Chairman Upton, distinguished subcommittee 
members, my name is Norm Becker. I am President, Chief 
Executive Officer of New Mexico Blue Cross and Blue Shield. I 
am pleased to have this opportunity to appear before you to 
share the lessons we have learned at our company over the past 
few years.
    New Mexico Blue Cross has been a major health insurer in 
the State of New Mexico since 1940. At present, the company 
provides HMO, Point-of-Service, Preferred Provider and 
indemnity coverage to over 210,000 New Mexicans. In many States 
that would be considered a small health plan. In our State it 
is considered very much a large health plan based on our 
population. Blue Cross is one of the top three health care 
carriers in the State. In addition to providing health care 
coverage and other services, New Mexico Blue Cross employs 
about 600 New Mexicans, putting our company in the top 150 
employers in the State.
    I began work as President of New Mexico Blue Cross in 1996. 
When I came, we had recently lost our Medicare Part A contract, 
under which the company had furnished provider audits and other 
administrative services to HCFA. New Mexico Blue Cross was in 
the midst of an investigation involving allegations that the 
company's provider audit unit had performed certain hospital 
audits poorly and that management personnel had attempted to 
conceal that fact from HCFA.
    It was apparent that we had significant problems that 
needed to be remedied if the company were to survive. The 
allegations involving the provider audit unit had to be 
investigated and appropriate resolution reached with the 
government. Employees involved in misconduct had to be 
separated from our company, and we had to implement policies 
and procedures to ensure that our employees understood the 
importance of absolute integrity in all of our dealings with 
the government, with providers, with the people we insured and 
with each other.
    We have accomplished each of those goals. First, through a 
lengthy process marked by complete cooperation with our 
company, we achieved a fair resolution this year with all 
outstanding civil, criminal and administrative issues. The 
resolution compensates the government fairly. It punishes the 
company appropriately for the past misconduct. It puts in place 
a corporate integrity agreement that we frankly welcome and, 
most importantly, allows us to move forward.
    Second, none of the employees connected with the problems 
involved in the provider audit unit remain with our company in 
any capacity. Indeed, the provider audit unit itself no longer 
exists.
    Third, we hired Angela Vigil as Vice President for 
Compliance in 1997. Ms. Vigil has extensive experience as a 
former regulator with the New Mexico Department of Insurance. 
Under Ms. Vigil's guidance, we have instituted a detailed Code 
of Business Conduct and a stringent Corporate Compliance Plan, 
both of which is instilled in employees through mandatory 
compliance training. The corporate integrity agreement that we 
entered into with HCFA this year further strengthens the Code 
and the Plan.
    Although I am proud of the action we have taken in our 
company to remedy the past problems and to ensure they do not 
recur, none of the steps that I have outlined get to the heart 
of the matter. The core problem that we had was the corporate 
culture that permitted employees to sacrifice integrity in some 
cases for business advantage in an intensely competitive 
environment.
    The key to solving that problem has been a fundamental 
change in our culture. No legislation, regulation or compliance 
plan will prevent fraud and abuse if a corporate culture 
implicitly condones such conduct--by, for example, stressing 
productivity over all other objectives. By the same token, the 
corporate culture that imbues employees with the conviction 
that absolute integrity is the highest value and implements 
that culture through an appropriate code of business conduct 
and compliance plan ensures that improper conduct will rarely 
occur and that when it does it will be detected, it will be 
reported and it will be corrected.
    Through our management team, we have worked very hard to 
instill a corporate culture in our company that puts integrity 
first. In that effort, I have received the wholehearted support 
of our board of directors. My introduction is an example to the 
New Mexico Code of Business Conduct's--New Mexico Blue Cross 
and Blue Shield Code of Business Conduct which all employees 
receive, read and must sign, declares integrity and 
accountability are the core values of New Mexico Blue Cross and 
Blue Shield. In today's changing and highly competitive 
environments, the pressure to succeed seems is greater than 
ever. That pressure, however, does not absolve us of the 
responsibility to always do the right thing as we perform our 
jobs and operate our company.
    That statement is more than a slogan for the management 
team. This is a credo that we attempt to manifest daily in 
every decision we make for our company, in every interaction we 
have with our regulators, with our providers of care, with 
patients, and in our dealings with each other. We are far from 
perfect, we are human, and we do make mistakes, but we firmly 
believe that we cannot do business--that if we cannot do 
business with honesty and integrity, then we should not be in 
business at all.
    Thank you very much.
    [The prepared statement of Norman P. Becker follows:]
Prepared Statement of Norman P. Becker, New Mexico Blue Cross and Blue 
                                 Shield
    Chairman Upton, Congressman Klink, distinguished Subcommittee 
members, my name is Norman Becker, and I am the President and Chief 
Executive Officer of New Mexico Blue Cross Blue Shield (``NMBCBS''). I 
am pleased to have this opportunity to appear before you to share the 
lessons we have learned at NMBCBS over the past few years.
    NMBCBS has been a major health care insurer in New Mexico since 
1940. At present, the company provides HMO, Point-of-Service, Preferred 
Provider, and Indemnity coverage to over 210,000 New Mexicans. It is 
one of the top three health care insurers in New Mexico. In addition to 
providing health care coverage and other services, NMBCBS employs 
almost 600 New Mexicans, putting the company in the top 150 employers 
in the state.
    I began work as President of NMBCBS in 1996. When I came on duty, 
NMBCBS had recently lost its Medicare Part A contract, under which the 
company had furnished provider audit and other administrative services 
to HCFA. NMBCBS was in the midst of an investigation involving 
allegations that the company's Provider Audit Unit had performed 
certain hospital audits poorly and that management personnel had 
attempted to conceal that fact from HCFA.
    It was apparent that NMBCBS had significant problems that needed to 
be remedied if the company were to survive. The allegations involving 
the Provider Audit Unit had to be investigated and an appropriate 
resolution reached with the government. Employees involved in 
misconduct had to be separated from the company. And NMBCBS had to 
implement policies and procedures to ensure that employees understood 
the importance of absolute integrity in all of our dealings with the 
government, with providers, and with the persons we insure.
    We have accomplished each of those goals. First, through a lengthy 
process marked by complete cooperation from NMBCBS, we achieved a fair 
resolution this year of all outstanding civil, criminal, and 
administrative issues. The resolution compensates the government 
fairly, punishes the company appropriately for its past misconduct, 
puts in place a corporate integrity agreement that we welcome, and 
allows NMBCBS to move forward. Second, none of the employees connected 
with the problems involving the Provider Audit Unit remains with NMBCBS 
in any capacity. Indeed, the Provider Audit Unit itself no longer 
exists. Third, NMBCBS hired Angela Vigil as Vice-President for 
Compliance in 1997. Ms. Vigil has extensive experience as a former 
regulator with the New Mexico Department of Insurance. Under Ms. 
Vigil's guidance, NMBCBS has instituted a detailed Code of Business 
Conduct and a stringent Corporate Compliance Plan, both of which are 
instilled in employees through mandatory compliance training. The 
corporate integrity agreement that NMBCBS entered into with HCFA this 
year further strengthens the Code and the Plan.
    Although I am proud of the action we have taken at NMBCBS to remedy 
the past problems and to ensure that they do not recur, none of the 
steps that I have outlined gets to the heart of the matter. The core 
problem at NMBCBS when I arrived was a corporate culture that permitted 
employees to sacrifice integrity for business advantage in an intensely 
competitive environment. The key to solving that problem has been a 
fundamental change in culture. No legislation, regulation, or 
compliance plan will prevent fraud and abuse if the corporate culture 
implicitly condones such conduct--by, for example, stressing 
productivity over all other objectives. By the same token, a corporate 
culture that imbues employees with the conviction that absolute 
integrity is the highest value--and implements that culture through an 
appropriate code of business conduct and compliance plan--ensures that 
improper conduct will rarely occur and that, when it does happen, it 
will be detected, reported, and corrected.
    Together with Ms. Vigil and the rest of the NMBCBS management team, 
I have worked hard to instill a corporate culture at NMBCBS that puts 
integrity first. In that effort, I have received the whole-hearted 
support of the NMBCBS board of directors. My introduction to the NMBCBS 
Code of Business Conduct, which all employees receive and read, 
declares: ``Integrity and accountability are the core values of New 
Mexico Blue Cross and Blue Shield . . . In today's changing and highly 
competitive environment, the pressure to succeed seems greater than 
ever. That pressure, however, does not absolve us of the responsibility 
to always do the right thing as we perform our jobs and operate our 
company.'' This is more than a slogan for the new NMBCBS management; it 
is a credo that we attempt to manifest daily in every decision we make 
for the company, in every interaction we have with a regulator, 
provider, or patient, and in our dealings with each other and our 
employees. We are far from perfect; we are human, and we will make 
mistakes. But at the new NMBCBS, we firmly believe that if we cannot do 
business with honesty and integrity, then we should not do business at 
all.
    I will be pleased to answer any questions you may have.

    Mr. Upton. Thank you.
    Mr. Huotari.

                 TESTIMONY OF MICHAEL E. HUOTARI

    Mr. Huotari. Good afternoon, Mr. Chairman and members of 
the committee. My name is Michael Huotari. Since 1996 I have 
been Executive Vice President and General Counsel of Blue Cross 
and Blue Shield of Colorado.
    Blue Cross Blue Shield of Colorado administered the 
Medicare B program in New Mexico and Colorado from 1966 to 
1994. My testimony today is limited to matters related to the 
administration of that program.
    In July 1999, the company entered into an agreement with 
the Department of Justice to settle the qui tam suit filed 
against the New Mexico Blue Cross and an affiliated management 
company, Rocky Mountain Health Care Corporation. You heard some 
of the details of that suit this morning. Specifically, it 
alleged, among other things, the manipulation of audit samples 
for HCFA CPEP scores.
    What happened historically is that, in 1994, company 
management investigated an anonymous complaint regarding 
employee manipulation of CPEP results in connection with timely 
response to correspondence. The investigation revealed that 
employees in the communications unit had altered CPEP samples 
to improve response times for correspondence from beneficiaries 
and others. These actions were wrong and contrary to company 
policy. The employees responsible for wrongdoing were 
terminated or otherwise disciplined.
    The company promptly reported the improper actions to HCFA. 
After HCFA completed its investigation--and this is all in the 
1994 timeframe, Mr. Chairman--it was agreed that Blue Cross and 
Blue Shield of Colorado would relinquish its contract with the 
Federal Government. No further civil, criminal or 
administrative charges or claims were brought at that time.
    There are several key facts the committee should consider 
regarding this matter.
    First, it is important to note that the company notified 
the government of these wrongful acts. The wrongdoing was 
brought to management's attention as a result of a code of 
conduct program that existed or was instituted in 1994. We blew 
the whistle on ourselves by bringing these matters to HCFA's 
attention.
    Also, none of the inappropriate actions by Colorado 
employees resulted in denial of benefits to any Medicare 
beneficiary. No correspondence was lost, destroyed or ignored. 
I'm not suggesting that samples were not altered, but no 
correspondence was lost, destroyed or ignored.
    Finally, it's important to note that, while wrong, none of 
these actions directly affected claims processing or payment of 
claims by the government.
    We settled the lawsuit and what had been a lengthy and 
expensive legal dispute. The company cooperated fully with the 
U.S. Attorney, OIG and HCFA investigations throughout the 
entire period from 1994 through the present. The U.S. 
Government asserted damages in excess of $70 million and 
criminal fines of $5,000 for each separate act of misconduct.
    Make no mistake, we settled this lawsuit because our 
employees engaged in wrongdoing. The action that took place in 
1992 and 1993 was wrong, and there's no question about that, no 
excuses for it. But we also settled it because we faced 
potentially catastrophic damages, penalties and fines.
    The corporate culture of Blue Cross Blue Shield of Colorado 
has never tolerated and will never tolerate any inappropriate 
or illegal activities. We have established a corporate 
integrity and business unit to foster a culture based on ethics 
and compliance. By that I mean we strive for a culture that not 
only assures compliance with the law but also seeks to do what 
is right.
    What could Congress do about this? What should be done? 
What can be addressed, addressing some of the questions that 
were asked this morning?
    There should be some protection in the law for self-
reporting, particularly when it's evident that there was no 
participation in or knowledge of wrongdoing on the part of 
management. Companies can often be deterred by disproportionate 
penalties from reporting wrongdoing. Some agencies of the 
Federal Government have developed corporate amnesty or self-
disclosure programs that self-report wrongdoing. I understand 
that HCFA has initiated a prototype disclosure, but I know 
nothing further about it.
    Blue Cross Blue Shield of Colorado is committed to being a 
good corporate citizen and to possessing a high degree of 
business honesty and integrity required to keep on track with 
the Federal Government.
    Thank you for your attention.
    [The prepared statement of Michael E. Huotari follows:]
Prepared Statement of Michael E. Huotari, Executive Vice President and 
        General Counsel, Blue Cross and Blue Shield of Colorado
    Mr. Chairman and members of the committee, my name is Michael 
Huotari. Since 1996, I have been the Executive Vice President and 
General Counsel for Rocky Mountain Health and Medical Service, doing 
business as Blue Cross Blue Shield of Colorado.
                               background
    Blue Cross Blue Shield of Colorado is a Colorado non-profit 
corporation. New Mexico Blue Cross Blue Shield is an independent New 
Mexico non-profit corporation with its own board of directors, 
management, and employees. Rocky Mountain Health Care Corporation is 50 
percent owned by Blue Cross Blue Shield of Colorado and New Mexico Blue 
Cross Blue Shield. It was organized to provide management services to 
both companies and their subsidiaries. It no longer provides services 
to any company.
    During the relevant time periods, Blue Cross Blue Shield of 
Colorado administered the Medicare Part B program in New Mexico, 
Colorado, and North Dakota and New Mexico Blue Cross Blue Shield 
administered the Medicare Part A program in New Mexico and Colorado. 
Each company administered its respective program through its own 
employees.
    On July 28, 1999, Blue Cross Blue Shield of Colorado entered into 
an agreement with the Department of Justice to settle a qui tam suit 
filed against it, New Mexico Blue Cross Blue Shield, and Rocky Mountain 
Health Care Corporation. The suit arose from an internal Rocky Mountain 
Health Care Corporation investigation that began in May, 1994, and a 
government investigation that began in June, 1994. Rocky Mountain 
Health Care Corporation reported internal allegations of improper 
actions regarding Medicare Part A administration to the Health Care 
Financing Administration (HCFA). The suit was filed in Albuquerque, New 
Mexico against all three companies in May, 1996, by two former 
employees of New Mexico Blue Cross Blue Shield. The United States 
determined to intervene and pursue the case.
    The suit alleged, among other things, wrongdoing by certain 
employees of New Mexico Blue Cross Blue Shield in administration of the 
Medicare A contact and Blue Cross Blue Shield of Colorado employees in 
administration of the Medicare Part B contract. Specifically, with 
regard to Part B, the suit alleged improper reporting of HCFA 
performance measures contained in HCFA's Contractor Performance 
Evaluation Program, commonly known as CPEP.
    My testimony is limited to matters involving the administration of 
the Medicare Part B program by Blue Cross Blue Shield of Colorado. Mr. 
Norm Becker, President and CEO of New Mexico Blue Cross Blue Shield 
will/has address(ed) issues arising in connection with the 
administration of Medicare Part A by New Mexico Blue Cross Blue Shield.
                               medicare b
    Blue Cross Blue Shield of Colorado began processing Medicare Part B 
claims in 1966. The Company's Part B contract was renewed by the 
federal government every year from 1966 to 1993.
    In 1994, institution of a company-wide code of conduct program 
prompted an anonymous complaint regarding employee wrongdoing in 
connection with the Medicare B administration in 1993. A prompt 
investigation was undertaken by management of Blue Cross Blue Shield of 
Colorado. The internal investigation by the Company found that certain 
employees had altered reporting documents making it appear that the 
Company had responded to requests for information faster than it 
actually had, resulting in a higher CPEP score than was actually 
earned. It was also discovered that certain Colorado employees had 
attempted to improperly collect and group electronic claims submissions 
from providers during a specific time period so it would appear a 
higher percentage of providers were submitting their claims 
electronically than if the electronic submissions were not grouped 
together, again resulting in a higher CPEP score than was actually 
earned.
    These actions by Blue Cross employees were wrong and in direct 
violation of Company policy. The employees responsible for manipulating 
HCFA CPEP performance records were terminated or disciplined. However, 
it is important to note that the wrongdoing did not involve claims 
processing.
     The Company promptly reported allegations of improper 
correspondence procedures and misreporting of performance measures to 
HCFA. After HCFA completed its investigation, it was agreed that Blue 
Cross Blue Shield of Colorado would voluntarily relinquish its contract 
with the federal government to process Medicare Part B claims. No 
further civil, criminal, or administration charges or claims were 
brought at that time. There was no evidence that any Medicare Part B 
beneficiary had been denied benefits or needed care as a result of the 
improper actions by these few employees of Blue Cross Blue Shield of 
Colorado, and there was and is no evidence that actions taken by 
Colorado employees resulted in any financial loss to the government.
    There are four key facts the Committee should consider regarding 
this matter.
    First, it is important to note that Blue Cross Blue Shield of 
Colorado notified the government of these allegations. We ``blew the 
whistle'' on ourselves. We had internal policies and procedures to 
prevent and detect wrongdoing on the part of our employees. The 
inappropriate actions taken by certain Colorado employees were reported 
to management by their colleagues; management then launched an internal 
investigation and notified the government that these employees may have 
violated the law.
    Second, there was no pattern of sustained wrongdoing. Rather, a 
limited number of misdirected employees took it upon themselves to 
engage in improper behavior. Senior management did not and could not 
have known about the alteration of records until an employee in the 
department brought it to their attention. Blue Cross Blue Shield of 
Colorado's internal policing and reporting policies reflected in its 
code of conduct worked and worked well.
    Third, it is important to note that, while wrong, none of the 
inappropriate actions taken by certain Colorado employees resulted in 
any physical or financial harm to any Medicare Part B beneficiary. No 
inquiries were lost or ignored. All correspondence was answered and 
reviews were completed as required.
    Finally, it is important to note that, while wrong, none of the 
inappropriate actions taken by certain Colorado employees resulted in 
any financial harm to the U.S. government. The government was not 
overcharged, nor did the government overpay as a result of these acts. 
The government received significant value for the services performed by 
Blue Cross Blue Shield of Colorado under the Medicare B contract. While 
Blue Cross Blue Shield of Colorado did receive a somewhat higher HCFA 
CPEP score than it earned as a result of employee wrongdoing, neither 
any individual employee nor the Company as a whole financially profited 
from that act. HCFA investigated the improper conduct and declined to 
impose any fines or penalties on the Company. After the improper 
conduct was discovered, reported, and corrected, HCFA, with full 
knowledge of these events, continued negotiating with Blue Cross Blue 
Shield of Colorado for continued service under the Medicare Part B 
contract. At the request of HCFA, Blue Cross Blue Shield of Colorado 
extended the contract for two months to facilitate transfer of the 
contract to North Dakota Blue Cross Blue Shield. This transition was 
smooth and caused no disruption to the Medicare B program.
                             why we settled
    Blue Cross Blue Shield of Colorado settled this suit to end what 
had been a lengthy and expensive legal dispute and avoid additional 
cost and time-consuming litigation in the face of potentially 
catastrophic damages and penalties. Because the False Claims Act is a 
strict liability statute, the fact that the Company had itself 
disclosed the improper reporting of performance evaluations to the 
government had little, if any, mitigating effect. Further, the fact 
that the government was never overcharged and did not overpay any party 
did not prevent the government from seeking damages from Colorado 
which, if proven, could have resulted in insolvency for the company. 
The U.S. Attorney argued he could impose joint and several liability 
against Colorado, New Mexico and Rocky Mountain Health Care for both 
the Medicare A and Medicare B contracts. The United States government 
argued that the False Claims Act entitled it to seek damages and 
penalties in excess of $70 million. Furthermore, the U.S. Attorney 
threatened to seek criminal fines and penalties of up to $5,000 for 
each separate act of misconduct. Make no mistake, the Company settled 
this suit because its employees engaged in wrongdoing, but Blue Cross 
Blue Shield of Colorado also settled because it faced potentially 
catastrophic damages, penalties, and fines that arguably did not 
reflect the culpability of the company as a whole or the 
proportionality of limited harm to the government or beneficiaries in 
this matter.
    Blue Cross Blue Shield of Colorado determined the best course of 
action to protect the company and its subscribers was to settle this 
suit, avoid protracted litigation and possible financial disaster, and 
get back to work.
         blue cross blue shield of colorado's corporate culture
    The corporate culture of Blue Cross Blue Shield of Colorado has 
never tolerated, and will not tolerate, any inappropriate activities 
that could harm subscribers, payors, or governmental entities. As part 
of its settlement with the government, Blue Cross Blue Shield of 
Colorado has entered into a Corporate Integrity Agreement that builds 
on the code of conduct program already in place to prevent, detect, and 
eliminate any wrongdoing on the part of Blue Cross Blue Shield 
employees, officers, or directors. We are committed to strict 
compliance with all laws and regulations and have procedures in place 
to prevent future problems. For example, all employees are given 
intensive training on the laws and regulations relevant to their areas 
of responsibility. Since 1994, we have had a code of conduct officer 
who trains employees on compliance issues and is the first line of 
defense for detecting and investigating potential problems. Each year, 
outside auditors evaluate the practices and procedures in place to make 
sure our procedures comply with the law and that our employees comply 
with our procedures. Every employee is trained to know where to report 
suspected wrongdoing, but in the event an employee is uncomfortable 
with the process, the Company has a toll-free hotline where individuals 
may report suspected wrongdoing anonymously.
    Blue Cross Blue Shield of Colorado has also created a corporate 
unit to provide leadership and accountability for compliance and ethics 
activities. The Corporate Integrity and Business Practices unit is 
under the supervision of a company vice president who reports directly 
to the CEO and the Audit Committee of the Board of Directors. The unit 
serves as the center of accountability for activities that enhance 
compliance and acts as the catalyst to foster an ethical business 
environment. Blue Cross Blue Shield of Colorado will maintain a 
superior compliance program worthy of the trust of its subscribers and 
the federal government.
                         how congress can help
    As I have said before, Blue Cross Blue Shield of Colorado felt 
compelled under the circumstances to settle the suit against it and 
return to our regular business. Our experience with the False Claims 
Act has, however, given us some insight into the law that may be of 
some use to Congress. There should be some protection in the law for 
self-reporting, particularly when it is evident that there was no 
participation in, or knowledge of, wrongdoing on the part of 
management. Companies are often in the best position to detect 
wrongdoing relating to government contracts, but they may be deterred 
from reporting suspected violations of the law. Contrary to sound 
public policy, our experience could be interpreted to encourage 
companies to look away from suspected bad acts rather than investigate, 
cure, and report possible problems to the government. While violations 
of the law should not be overlooked, legitimate self-reporting of 
suspected violations should serve as a significant mitigating factor 
for any liability, damages, and/or penalties.
                               conclusion
    Blue Cross Blue Shield of Colorado is pleased to have this matter 
behind us and pleased that our employees brought this matter to the 
attention of management, enabling us to remedy the situation. In spite 
of the significant cost of settling this suit and the loss of the 
Medicare B contract, Blue Cross Blue Shield of Colorado does not regret 
reporting suspected violations of the law by certain employees to the 
government. We are committed to being a good corporate citizen and to 
possessing the high degree of business honesty and integrity required 
to contract with the federal government. We note we continue to be 
eligible to serve as a government contractor and are prepared to serve 
as such in the future if the need arises.
    Thank you for your attention to my statement.

    Mr. Upton. Thank you.
    Mr. Hess.

                   TESTIMONY OF STEVEN C. HESS

    Mr. Hess. Thank you, Mr. Chairman.
    Chairman Upton, members of the subcommittee, good 
afternoon. My name is Steven Hess. I am Senior Vice President 
and General Counsel of Blue Cross and Blue Shield of Michigan. 
As you know, Mr. Chairman, we are proud to be one of Michigan's 
largest businesses, employing more than 8,000 workers and 
serving over 4.5 million members.
    The subject of today's hearing is an important one. On 
behalf of Blue Cross and Blue Shield of Michigan, I am pleased 
to assist the committee in its efforts by offering such 
insights as can be gained from a consideration of the integrity 
problems that were identified in our company in the late 1980's 
and the early 1990's. Although a more detailed discussion is 
contained in our written testimony, I would like to summarize 
those problems.
    In October 1993, Blue Cross and Blue Shield of Michigan 
first became aware of a Federal Government inquiry into the 
operations of the company's Medicare provider audit department. 
This department audited hospitals and other institutional 
payers as part of Blue Cross and Blue Shield of Michigan's 
responsibilities as a fiscal intermediary for the Medicare Part 
A program in Michigan.
    With the permission of the Federal authorities, Blue Cross 
and Blue Shield of Michigan was allowed to conduct an extensive 
internal investigation. In February 1994 the results were 
shared with government officials. It was determined that in 
order to achieve higher scores under HCFA's Contractor 
Performance Evaluation Program, CPEP, changes were made to 
audits after those audits were reported to HCFA as having been 
completed but before they were reviewed and scored by the 
regional office in Chicago.
    Blue Cross and Blue Shield of Michigan also identified 
other improper efforts to maximize CPEP points, principally by 
manipulating the timing of the recognition and the recovery of 
overpayments.
    Altogether, 21 people were separated from the company for 
participating in this activity. This conduct, which was clearly 
wrong and for which no excuse can be offered, was motivated by 
a desire to maximize the annual CPEP score which would, by that 
means, enable Blue Cross to retain the Part A contract. Blue 
Cross and Blue Shield of Michigan did receive higher CPEP 
scores than performance warranted.
    We cooperated fully with the Federal authorities, and the 
case was completely resolved by a civil settlement some 4\1/2\ 
years ago in January 1995. Significantly, in our situation, 
there were no criminal charges of any sort, either corporate or 
individual, that were ever filed or pursued or even seriously 
considered, as far as we know.
    As you can appreciate, our integrity problems as a Medicare 
contractor in the early 1990's are extremely regrettable. We 
pride ourselves on being a highly ethical and reliable company, 
not only for government business but for all the people who 
choose our health insurance. These problems forced serious 
introspection by the corporation and an increased emphasis on 
the critical importance of ethical behavior and ethical 
decisionmaking and not just for government programs but for our 
private business as well.
    The lessons that we learned from this experience have 
become an integral part of the employee education component of 
the Blue Cross and Blue Shield of Michigan compliance policy. 
Blue Cross and Blue Shield of Michigan remains a subcontractor 
for the FEP program, and through Blue Care Network, our 
subsidiary HMO, a contractor in the Medicare Plus Choice 
program. We take our responsibilities to the government very 
seriously. We have a compliance program that is strong and 
constantly improving. It is a compliance program that routinely 
uses our experience of the early 1990's as an object lesson to 
what can happen when a company or its employees lose sight of 
the ethical implications of its actions.
    As you know, Blue Cross and Blue Shield of Michigan has not 
been a Medicare Part A and B contractor since 1994. 
Nevertheless, we are pleased to assist this committee in any 
way we can as it proceeds with this inquiry. I would be happy 
to respond to any questions you might have. Thank you.
    [The prepared statement of Steven C. Hess follows:]
Prepared Statement of Steven C. Hess, Senior Vice President and General 
              Counsel, Blue Cross Blue Shield of Michigan
    Blue Cross Blue Shield of Michigan (BCBSM) is pleased to assist the 
subcommittee as it examines the issue of ``How Healthy are the 
Government's Medicare Fraud Fighters.'' We hope that the insights which 
can be gained by an examination of the problems that were identified by 
our company in the late 1980's and early 1990's will prove constructive 
to the subcommittee.
    In October of 1993, BCBSM first became aware of a federal 
government inquiry into the operations of the Company's Medicare 
Provider Audit Department. This department audited hospitals and other 
institutional payers as part of BCBSM's responsibilities as a fiscal 
intermediary for the Medicare Part A Program in Michigan.
    In response to these concerns, with the permission of the federal 
authorities, and under the direction of its Board, BCBSM conducted an 
extensive internal investigation. In February of 1994, the results were 
shared with government officials. It was determined that, in order to 
achieve higher scores under HCFA's Contractor Performance Evaluation 
Program (CPEP), changes were made, largely cosmetic in nature, to 
audits after those audits were reported to HCFA as having been 
completed, but before they were reviewed and scored by the Regional 
HCFA Office in Chicago. In substance, the result was an attempt to take 
good quality audits and make them perfect. A perfect audit in this 
context meant absolute compliance with every HCFA standard and 
guideline with respect to audit form, format and substance.
    It was conceded at the time that it was inappropriate to ``clean-
up'' these audit reports after they had been reported as completed but 
before they were reviewed by HCFA. While in substance, the audits were 
of high quality and the accounting results largely unaffected by the 
clean-up activity, the ``cleaned up'' audits submitted to HCFA for 
review and scoring did not reflect typical audit work product, at least 
insofar as compliance with all of the very precise and exacting HCFA 
cost report audit standards.
    BCBSM also identified other shortcuts and efforts to maximize CPEP 
points in certain categories of reporting and collection of hospital 
overpayments. Principally, these included some adjustments to the 
timing of the reconciliation of provider payments. Additionally, BCBSM 
took large overpayments identified through audit and broke them into 
two or more components for collection purposes. These smaller 
collections from the hospital enabled the facility to fully repay the 
overpayment within two, successive 30 day periods, thus scoring points 
on the CPEP standard relating to collection of overpayments within 
thirty days.
    Unfortunately, the highly technical nature of this audit activity, 
involving adherence to thousands of pages of government rules, 
regulations and standards that are subject to routine modification and 
reinterpretation does not lend itself to the usual oversight controls 
deployed in other areas of corporate activity. Accordingly, this 
perverse obsession with CPEP scores went unrecognized outside this 
unit. Within the unit, BCBSM was guided, or perhaps misguided, in some 
of these activities by consultants who were subject matter experts and 
who were retained to develop and administer quality assurance programs 
applicable to the cost auditing functions of the HCFA contract.
    Altogether, twenty-one people, including one vice-president, were 
separated from the Company for participating in this activity. None of 
these individuals or any other BCBSM employee profited from this 
conduct. The conduct was motivated exclusively by a desire to maximize 
the annual CPEP score which would enable BCBSM to retain the Part A 
contract. BCBSM did receive somewhat higher CPEP scores than 
performance perhaps warranted. There was no other benefit to BCBSM.
    Notwithstanding a promise by BCBSM to make HCFA whole for any 
losses that could be shown to have been sustained as a result of these 
activities, and a pledge to do whatever was necessary to regain the 
trust of HCFA, the Contracting Officer elected not to renew the Parts A 
and B Contracts when they expired at fiscal year end 1994.
    It has been over four years since the civil settlement was 
finalized and almost five years since the contracts expired. It has 
been nearly six years since BCBSM first became aware of allegations of 
improper activities, which activities occurred between six and ten 
years ago. BCBSM no longer contracts directly with HCFA. This is a 
regrettable chapter in the history of BCBSM which we have put long 
behind us. But, we have learned from the past.
    The experience has provided valuable insight into necessary 
modifications to the BCBSM Corporate Compliance Program. The 
investigative findings have been used since 1994 as an object lesson in 
the educational component of the Program. This Program, which was 
reviewed by the Chief Assistant United States Attorney in Detroit prior 
to implementation in the early 1990s, is a good Program, which can 
always be made better. Clearly, its effectiveness is diminished if 
employees refuse to avail themselves of it. The employee who became the 
relator in the case against BCBSM chose not to contact the confidential 
hot line to initiate an internal review of his concerns. He also chose 
not to contact various individuals known to him within the Office of 
the General Counsel or the compliance officer at BCBSM. Instead of 
allowing BCBSM to investigate and timely address these issues, he chose 
a more aggressive and momentarily rewarding means of redress.
    Today, BCBSM continues to serve the Federal government under a 
subcontract for the Federal Employee Program and through a wholly owned 
HMO subsidiary, as a direct contractor for the Medicare Plus Choice 
Program. These responsibilities are taken very seriously and continuous 
enhancements and improvements are made to the Corporate Compliance 
Programs of the parent and subsidiary. Included among these activities 
are efforts to modernize and expand upon employee education and to 
focus training on new employees with regard to expected behaviors. 
These include compliance with all laws, rules and regulations relative 
to the work that we do, as well as adherence to values based ethical 
decision making. Moreover, between 1994 and the present, BCBSM has 
conducted compliance reviews of the work performed for the government 
under these subcontracts. These have included both operational and 
legal reviews. Issues arising out of that process that required 
clarification or review by the federal government have been referred to 
their representatives and addressed to their satisfaction. This is 
consistent with the purpose and intent of corporate compliance 
activity.
    In 1994, BCBSM responded quickly and appropriately to government 
allegations of inappropriate conduct relating to Provider Audit 
activity. No criminal charges were filed or pursued against BCBSM, in 
part due to BCBSM's full cooperation into the investigation and 
resolution of HCFA's concerns. The CPEP method for evaluating 
contractor performance was apparently eliminated after 1994 and 
replaced with a system of contractor performance evaluations which 
measure performance in a much broader context.
    On the same day, and because BCBSM and the Justice Department found 
it to be expedient and desirable, BCBSM settled an unrelated national 
test case, involving an interpretation of the Medicare Secondary Payor 
laws. BCBSM was one of three private payors sued in 1989 by the Justice 
Department and HCFA for alleged misinterpretation and application of 
the Medicare Secondary Payor laws which specify that the working aged 
with Medicare coverage could look to Medicare only on a secondary basis 
for health care coverage. BCBSM processed all of the subject claims in 
good faith reliance upon the information filed by the medical providers 
and indeed the Medicare beneficiaries themselves who claimed to be 
Medicare primary at the point of service. After extensive discovery 
undertaken in the test case, it was determined that a number of 
Michigan based Medicare beneficiaries' claims should have been paid as 
Medicare secondary, under the working aged coordination of benefits 
rules. BCBSM calculated a refund and settled the test case. BCBSM 
strongly disagrees with the inference that it intentionally used HCFA 
monies to pay for private health services incurred by working Medicare 
beneficiaries. This civil action was nothing more than a coordination 
of benefits dispute.
    To the extent that these hearings are intended to focus on the 
performance of HCFA in fighting Medicare fraud, BCBSM advances the 
record and national reputation of its Corporate and Financial 
Investigations unit which reports to the Compliance Officer. This BCBSM 
department is a nationally recognized leader in fraud detection 
activities and works closely with federal law enforcement agencies in 
that regard.
    BCBSM and its employees teamed a valuable lesson regarding the 
balancing of business efficiency with process and performance 
integrity. That lesson continues to be taught today in the employee 
educational component of the BCBSM Compliance Policy.
    Because BCBSM has not been a Medicare contractor for almost six 
years and, has not had cause to maintain currency on contractor rules, 
regulations and oversight activities in the interim, we do not feel 
that we are in a position to offer much insight into proposed 
improvements or enhancements to the current relationship between HCFA 
and those contractors.
    We appreciate this opportunity to discuss our experience with 
members of this Subcommittee.

    Mr. Upton. Thank you.
    Mr. Verinder.

                  TESTIMONY OF FRED B. VERINDER

    Mr. Verinder. Good afternoon, Mr. Chairman and members of 
the subcommittee. I am pleased to be here today to assist this 
subcommittee in its evaluation of the Health Care Financing 
Administration's management of its Medicare contractor.
    My name is Fred Verinder. I am currently the Vice President 
for Compliance Operations of Health Care Service Corporation. I 
have served in that position since December, 1997.
    Before I came to work for Health Care Service Corporation, 
I spent 26 years in the Federal Bureau of Investigation, 
retiring in July, 1994, as the Deputy Assistant Director of the 
Criminal Investigative Division. The responsibilities in that 
position included the development of the FBI strategies in 
combating health care fraud.
    After leaving the FBI, I served as Vice President of 
Compliance and Security at Laboratory Corporation of America, 
where I directed the company's compliance and ethics program.
    I have also served as the Executive Vice President of the 
Counsel of Ethical Organizations. In that capacity I designed 
and implemented compliance programs, including development of 
hotlines, training programs and conducting internal 
investigations.
    I am presently a member of the Ethics Officer Association 
and previously served on the board of directors and as chairman 
of the membership. On May 20, 1999, I was elected as a Fellow 
of the Health Ethics Trust.
    I joined Health Care Service Corporation in response to the 
government investigation of the submission of incorrect 
Contractor Performance Evaluation Program reports and the 
company's concern about compliance. My charge was to develop a 
state-of-the-art compliance program.
    We are not here today to make any excuses for our 
misconduct, which was plainly wrong. We cooperated with the 
government's investigation and entered into a global settlement 
of all criminal, civil and administrative charges in order to 
fully accept responsibilities for our conduct.
    We hope that our appearance today will help the committee 
ensure that other essentially good corporate citizens do not 
have to learn the lessons of Medicare contract compliance in 
the same costly and painful way that we did.
    Our company provides health coverage for one out of every 
four Illinois residents. In 1998, we merged with Blue Cross 
Blue Shield of Texas and today have statutory reserves of more 
than $1.2 billion, insure more than 6 million individuals and 
employ more than 10,000 people in Illinois and Texas. We 
process approximately 65 million insurance claims per year and 
paid benefits to our insured members of approximately $6.5 
billion per year.
    Let us look at what happened, why it happened and what we 
have done to make sure it never happens again.
    We first learned that there was a problem with our Medicare 
Part B operations in Marion, Illinois, in August, 1995, when we 
received a subpoena from the Office of the Inspector General. 
Upon receipt of that subpoena, senior management directed the 
company's full cooperation with the government inquiry. The 
company hired an outside law firm to conduct an internal 
investigation, who quickly discovered evidence of CPEP 
misreporting. This turned out to be the essence of the 
government's charges against us. We continued to cooperate with 
the government investigation for the next 2\1/2\ years.
    How could this happen to a company like us? Given my 
experience in the FBI, I am inclined to consider two things, 
motive and opportunity. Here, both were present, which in my 
view led individuals to make choices that were plainly wrong.
    First, CPEP provided the motive. For many reasons, getting 
a good CPEP score was seen by Marion, Illinois, employees as 
critical to keeping their jobs, a factor which cannot be 
overlooked in the economically depressed southern Illinois 
region.
    Second, I believe the remote location of the Marion 
operations, along with the way in which oversight of the CPEP 
functions was handled by both the company and HCFA, provided 
the opportunity.
    We have learned some important lessons and have used these 
lessons to help us develop a first-rate compliance program. A 
compliance program is not what industry experts refer to as a 
paper program. It isn't just teaching and preaching but, 
rather, includes training, in-depth auditing, monitoring 
functions, investigations and fixing problems that we find. 
Specifics of the program are outlined in my written statement.
    I am looking forward to answering any questions you might 
have. Thank you.
    [The prepared statement of Fred B. Verinder follows:]
 Prepared Statement of Fred B. Verinder, Vice President for Compliance 
              Operations, Health Care Service Corporation
    Good morning Mr. Chairman and Members of the Subcommittee. I am 
pleased to be here today to assist the Subcommittee in its evaluation 
of the Health Care Financing Administration's management of its 
Medicare contractors.
    My name is Fred B. Verinder, and I am currently Vice President for 
Compliance Operations at Health Care Service Corporation (``HCSC''). I 
have served in that position since December 1997. Before I came to work 
for HCSC, I spent 26 years in the Federal Bureau of Investigation, 
retiring in July 1994 as Deputy Assistant Director of the Criminal 
Investigation Division. After leaving the FBI, I served as Vice 
President of Compliance and Security at Laboratory Corporation of 
America, where I directed the company's compliance and ethics programs.
    I have also served as the Executive Vice President of the Council 
of Ethical Organizations. In that capacity, I designed and implemented 
compliance programs, including the development of hotlines and training 
programs, and conducted internal investigations. I am presently a 
Member of the Ethics Officer Association, and previously served on the 
Board of Directors and as Chairman of the Membership Committee. On May 
20, 1999, I was elected as a Fellow of the Health Ethics Trust.
    I was appointed to head HCSC's Compliance Operations in the wake of 
the government's investigation into the submission by certain HCSC 
employees of incorrect reports and data under the Contract Performance 
Evaluation Program (``CPEP''). HCSC does not make any excuses for the 
misconduct of those employees, which in so many respects was plainly 
wrong. Indeed, HCSC cooperated with the government's investigation and 
entered into a global settlement of all criminal, civil and 
administrative charges in order to fully accept responsibility for the 
conduct of its employees. We hope that our appearance today will help 
the Subcommittee ensure that other essentially good corporate citizens 
do not have to learn the lessons of Medicare contract compliance in the 
same costly and painful way that HCSC did.
    i. hcsc is a good corporate citizen with a history of positive 
                     involvement in its community.
    HCSC is the largest and most experienced health insurance company 
in the State of Illinois, providing affordable, high-quality health 
coverage for one out of every four Illinois residents. HCSC was 
incorporated in 1936 and enrolled its first member on Jan. 1, 1937. 
Since then, HCSC has grown to become one of the strongest health 
insurance companies in the country. In 1998, HCSC merged with Blue 
Cross and Blue Shield of Texas and today has statutory reserves of more 
than $1.2 billion, insures more than six million individuals, and 
employs more than 10,000 people in Illinois and Texas. HCSC processes 
65 million insurance claims per year and pays benefits to its insured 
members of approximately $6.5 billion per year. In the highly 
competitive environment of the health care financing marketplace, we 
view these results as a vote of confidence in our ability to deliver a 
quality product.
    HCSC has a long-standing, deep-rooted commitment to Chicago and the 
State of Illinois. That commitment is expressed through HCSC's 
corporate and personal involvement in community affairs and its active 
participation in government programs. In the early 1990s, rather than 
follow other companies to distant suburbs, HCSC chose to remain in 
downtown Chicago. Construction of the company's new corporate 
headquarters ended a five-year drought on building in downtown Chicago, 
reconfirmed HCSC's commitment to its largely Chicago-based employee 
force, and contributed to a renewed burst of economic vitality in its 
core community.
    HCSC's involvement in community affairs includes its sponsorship of 
the ``HCSC CareVans,'' two mobile immunization clinics that travel to 
the city's poorest neighborhoods helping in the battle against disease. 
Since this program began in 1990 on the heels of a deadly measles 
outbreak, CareVan nurses have administered hundreds of thousands of 
immunizations. In addition, a third HCSC CareVan serves the small 
communities and rural areas of downstate Illinois.
    HCSC also sponsors Gallery 37, the City of Chicago's award-winning 
job training program in visual, literary and performing arts for young 
people. In 1996, HCSC was the driving force for creation of The West 
Side Children's Garden, a teaching site which has literally planted 
seeds of hope for students at two Chicago elementary schools.
    HCSC is also a major supporter of numerous community events around 
the state of Illinois, including food drives and fund-raising efforts 
on behalf of local organizations. Statewide groups such as the Illinois 
Violence Prevention Authority (``IVPA''), the Mental Health Association 
of Illinois, and the Chicago Area Council of the Boy Scouts of America 
also receive support from HCSC.
    Finally, as part of its commitment to the community, HCSC 
historically has been an enthusiastic, innovative participant in 
government programs. In addition to our 30-year history with the 
Medicare program, HCSC administers the Illinois Comprehensive Health 
Insurance Program, which provides access to health insurance coverage 
for individuals not otherwise able to obtain it. Moreover, as the only 
corporate member of IVPA, HCSC is one of the founding members in the 
``Safe Illinois'' model program designed to prevent domestic-partner 
violence.
    ii. hcsc reacted as a good corporate citizen in response to the 
 discovery of the improprieties in the administration of its medicare 
                               contract.
    As you know, in July 1998, HCSC entered into a global settlement 
with the United States Departments of Justice and Health and Human 
Services and the Health Care Financing Administration (``HCFA'') to 
resolve criminal, civil, and administrative liabilities arising out of 
a government investigation instituted in response to a qui tam 
complaint filed in 1995. The subject of the qui tam complaint was the 
processing of Medicare Part B claims by certain employees in HCSC's 
Marion, Illinois facility under HCSC's contract with HCFA. The qui tam 
complaint alleged that certain Marion employees submitted misleading 
performance data to HCFA and did not appropriately perform certain 
claims functions under the Medicare Part B contract. The complaint 
further alleged that the Marion employees falsified records to improve 
the evaluation they would receive in reviews by HCFA.
    As soon as HCSC learned that it was under investigation by the 
government, senior management directed the company's full cooperation. 
HCSC hired an independent outside law firm to conduct an internal 
investigation and turned over the results of that investigation to the 
government. HCSC's full cooperation continued throughout the 
government's nearly three-year investigation, ultimately resulting in 
its entry of a guilty plea to eight felony counts and the payment of a 
$4 million criminal fine in addition to a $140 million damage 
settlement.
    Both the government and the Federal district court with 
jurisdiction over this matter have explicitly recognized HCSC's full 
cooperation in the government investigation and its acceptance of 
responsibility for the actions of its employees. The government has 
publicly acknowledged that HCSC ``fully cooperated in the 
investigation'' and ``clearly demonstrated recognition of affirmative 
acceptance of responsibility'' for the actions of its employees. See 
Transcript of December 10, 1998 Sentencing Hearing (quoting Assistant 
United States Attorney Michael Quinley). As a result of this statement, 
United States District Court Judge J. Phil Gilbert ruled that HCSC was 
entitled to receive full credit under the Sentencing Guidelines for its 
cooperation with the government's investigation. See id
    I believe it is very important to note that the company's senior 
management neither authorized nor had any knowledge of the activities 
of the Marion employees. Indeed, the government has publicly stated its 
view that the Marion employees concealed their improper activities from 
senior management at HCSC. See, e.g., United States of America vs. 
Thomas F. Bartels, et al, Crim. No. 98-40070-JPG (July 8, 1998) at 
para. 18 (indictment of five Marion employees which notes that as part 
of their conspiracy, the ``co-conspirators would conceal their 
manipulation and falsification of samples and data submitted to HCFA 
from higher HCSC management.''); Transcript of July 16, 1998 Plea 
Hearing at 19 (Assistant U.S. Attorney Michael Quinley noting that 
lower-level employees succeeded in ``concealing their conduct from 
anyone in higher management at HCSC who might have stopped their 
activity.''). In addition, during the Department of Justice's press 
conference to announce the settlement, the U.S. Attorney for the 
Southern District of Illinois, W. Charles Grace, whose office 
spearheaded the investigation, stated that ``[t]here was no evidence 
whatsoever in this case that there was any fraudulent activity or any 
involvement by individuals outside of the Marion, Illinois, Part B 
facility.'' See Transcript of News Conference Announcing Settlement, 
Federal News Service (July 16, 1998).
                       iii. how did this happen?
    I understand that you may have questions about how the events 
leading to the global settlement could have happened. In order to fully 
understand those events, I believe it is useful to consider some 
general observations about the Medicare program and HCSC's Marion 
office, where the Medicare Part B operations were headquartered. By 
making these observations, HCSC does not intend to absolve itself of 
responsibility for the wrongful conduct of its employees. Thus, these 
observations are offered not as an excuse but rather to help the 
Subcommittee understand the context in which the conduct took place.
    HCSC's involvement with Medicare began in 1966, when the program 
was first implemented, and continued without interruption until 1978, 
when it lost its Part B contract in a competitive procurement to the 
lowest fixed-price bidder. Five years later, HCSC won that contract 
back as the lowest fixed-price bidder in a second competitive 
procurement, and began its performance in 1984.
    The start of HCSC's performance on the second phase of its 
relationship with the Medicare program coincided with a period of great 
volatility in the Medicare program. During this time, Congress enacted 
a number of statutes that significantly changed the Medicare program, 
including the Tax Equity and Fiscal Responsibility Act (``TEFRA''), the 
Deficit Reduction Act of 1984 (``DEFRA''), and the Consolidated Omnibus 
Budget Reconciliation Act (``COBRA''). These legislative initiatives 
led to the implementation by HCFA of the Medicare Secondary Payer 
(``MSP'') program, and changed the reimbursement mechanisms for 
numerous items and services, such as durable medical equipment 
(``DME'') and hospital-based physicians. They also, however, greatly 
increased the volume of claims being received by all contractors, while 
at the same time increasing the complexity of the work being performed. 
Thus, between 1984 and 1987, changes mandated under TEFRA and DEFRA 
increased HCSC's claims volume by nearly 7.5 million claims. This 
represented a 37% increase over what both HCFA and HCSC believed would 
be HCSC's claim volume during that three-year period.
    Also during this time, HCFA used the Contractor Performance 
Evaluation Program (``CPEP'') to evaluate contractor performance. Under 
this program, HCFA audited contractor work to determine whether or not 
the contractor met a particular CPEP standard, and awarded points based 
upon that determination. HCFA then used contractors' CPEP scores to 
rank contractors, correct inadequate performance, and make 
determinations as to whether contracts should be renewed.
    Unfortunately, as the GAO has concluded, the CPEP program had a 
number of problems. First, HCFA often did not announce CPEP standards 
until well into the review period, thus requiring contractors to 
operate without knowing what HCFA's priorities and performance 
expectations were. See How Healthy Are the Government's Medicare Fraud 
Fighters?: Hearings Before the Subcomm. on Oversight and 
Investigations, 106th Cong., 1st Sess. 11(1999) (prepared statement of 
Robert H. Hast, GAO). Second, as the GAO has noted, HCFA's evaluation 
process was focused more on process than outcome. Third, HCFA 
encouraged contractors to manage their activities in a way that would 
maximize their CPEP scores. See Medicare Contractors: Despite Its 
Efforts, HCFA Cannot Ensure Their Effectiveness or Integrity (GAO/HEHS-
99-115, July 1999) at 27. Perhaps most fundamentally, however, the 
audit methodology that HCFA used was flawed. As the GAO has noted, 
HCFA's auditing methodology allowed problems to remain undetected 
because ``HCFA reviewers notified contractors in advance concerning the 
dates of their on-site reviews and specific or probable records to 
examine, which allowed contractors to manipulate what HCFA reviewed.'' 
Id. at 23.
    Now, let's turn to the situation in Marion. When HCSC was awarded 
the Medicare Part B contract, it consented to the request of various 
government officials that it locate its Part B operations in Marion, 
Illinois. Marion is approximately 330 miles south of HCSC's Chicago 
headquarters, and at that time was an area of high unemployment. In the 
economically disadvantaged Southern Illinois region, good jobs were 
scarce, so a job with HCSC was a highly valued commodity. Yet the 
office was relatively new, the volume of claims was exploding and the 
procedures for doing so were growing more complex by the day. Moreover, 
because the company had entered into a fixed-priced contract with the 
government for its services, the financial resources of the Medicare 
Part B operations were stretched to the limit. Accordingly, the 
employees of the Marion office were under tremendous pressure to 
perform. All of these factors created a culture where the Marion staff 
believed that the company was in constant danger of losing the Part B 
contract. Accordingly, a few of the Marion employees, in reaction to 
this pressure, crossed the line into clearly improper conduct.
    HCSC's senior management in Chicago had no reason to suspect 
improper conduct in connection with its Part B contract. The Marion 
office was headed by an individual whom the company hired after a 
national search conducted by an outside recruiting office. This 
individual, along with other members of Marion's management team, 
actively withheld from HCSC's senior management the CPEP reporting 
problems in the Marion office.
    Indeed, the information senior management did receive about its 
Medicare Part B operations showed that HCSC provided low-cost, often 
innovative, service. For most of the period covered by the government's 
investigation, HCSC's unit cost per claim was among the very lowest in 
the country. In addition, HCSC's telephone review process and use of 
Provider and Beneficiary Advisory groups were cited by HCFA as models 
for the nation, and HCFA's own customer satisfaction surveys provided 
positive reports regarding the quality of HCSC's service. Moreover, 
HCSC's claim denial rates, as well as other claims history data, showed 
that HCSC's overall claims payment profile was in many respects in line 
or superior to that of comparable carriers.
iv. hcsc is fully committed to ensuring that its business is conducted 
           with the highest degree of integrity and honesty.
    Looking to the future, HCSC is making every effort to ensure that 
the painful lessons teamed in Marion do not recur. In order to do this, 
HCSC undertook to develop a state-of-the-art compliance program, the 
elements of which are summarized below.
    First, HCSC's Board of Directors has adopted a Corporate Integrity 
and Compliance Program (``Compliance Program'') that incorporates the 
principles and guidelines which the Board believes are appropriate to 
ensure that HCSC always does business with the highest standards of 
integrity. HCSC's Compliance Program has the absolute support, 
direction and commitment of top management.
    HCSC's Compliance Program is directed by a Corporate Compliance 
Committee whose membership includes an outside member of HCSC's Board 
of Directors and HCSC's President and Chief Executive Officer 
(``CEO''), Ray McCaskey, who is personally involved in the Committee's 
activities. HCSC also appointed a Corporate Compliance Officer who 
reports directly to the Board of Directors, HCSC's CEO (Mr. McCaskey), 
and HCSC's Senior Vice President for Law and Audit.
    Second, HCSC codified its high expectations relating to ethics and 
conduct through development of its Corporate Code of Business Ethics 
and Conduct (``Code'' or ``Code of Conduct'') which was approved by 
HCSC's Board of Directors on July 28, 1998. HCSC's Code, which has 
since been distributed to all employees, contains a letter from Mr. 
McCaskey to all HCSC employees stressing both Mr. McCaskey's and the 
company's strong commitment to compliance and ethics. The Code also 
describes HCSC's core values, and sets forth eleven ``Integrity 
Standards'' with which employees must comply, along with questions and 
answers to help clarify issues for the reader. On an annual basis, 
every employee must sign an acknowledgment that they have received, 
understand, and will comply with the Code.
    HCSC's Code further states that all employees have an obligation to 
step forward and report any compliance or ethical issues of which they 
are or may become aware. The Code makes it clear that HCSC has an 
absolute policy against any retribution or retaliation for bringing 
forth a good faith concern regarding compliance. The Code provides 
instructions for addressing integrity concerns through HCSC's 
management structure, specific individuals within the company and/or 
the Company's Corporate Integrity Hotline.
    The Code also states that supervisory personnel are responsible for 
the work-related acts of their employees, and have a special 
responsibility to create and sustain a work environment in which 
employees know that ethical and legal behavior is expected of them. To 
that end, beginning on March 1, 1999, advancing and adhering to HCSC's 
compliance initiative have been made a part of the performance 
standards for each HCSC officer, manager and supervisor.
    Third, HCSC is committed to training its employees to ensure that 
they understand and are able to comply with HCSC's expectations 
concerning ethical business conduct. HCSC requires all employees to 
attend annual, mandatory Corporate Compliance Training. HCSC's upper 
management completed five hours of Compliance Training, which consisted 
of a detailed legal presentation, an explanation of the Corporate 
Integrity and Compliance Program, and a review of the Code of Conduct. 
Officers, managers and supervisors received a minimum of three and one 
half hours of training. Staff level employees received at least two 
hours of training, which included a general explanation of ethics and 
integrity, the presentation of a compliance training video, discussion 
of the most critical aspects of the Code of Conduct, and the 
presentation and discussion of selected case studies. The first of the 
training sessions began on August 20, 1998, and was completed, with the 
exception of limited make-up sessions, on June 4, 1999. Thus, more than 
10,000 employees completed their mandatory compliance training in less 
than ten months' time.
    Fourth, HCSC has provided a resource for employees and others to 
address ethical concerns and ensure that those concerns are addressed. 
The Compliance Department has developed specific and detailed 
procedures for documenting and tracking information concerning 
potential violations of the Code of Conduct. In addition, HCSC has 
created and now operates a Corporate Integrity Hotline in order to 
allow HCSC employees to address integrity or ethical concerns, and to 
report any activities that they feel are questionable. The Hotline is 
staffed for nine hours each workday by employees who have been trained 
in Hotline operations. HCSC has widely publicized the existence and 
availability of the Hotline through its Code of Conduct, employee 
training, and posters that have been placed throughout HCSC's offices.
    In order to help ensure that every employee has every opportunity 
to disclose any ethical concerns they may have, HCSC's Compliance 
Department also uses an exit interview process. Each departing employee 
is given the opportunity to complete a comprehensive Compliance 
Questionnaire. The Compliance Questionnaire provides employees with an 
opportunity to disclose any potential compliance issues of which they 
are aware, and to make suggestions concerning possible improvements to 
the Compliance Program.
    Fifth, while HCSC's Compliance Program strongly emphasizes 
prevention, it also recognizes the importance of investigating issues 
brought to the company's attention. Trained investigators in the 
Compliance Department review each potential compliance matter brought 
to the Department's attention. If the matter requires further review, 
it will either be referred to the area with the most expertise relating 
to the issue (e.g., HCSC's Human Resources Department) or investigated 
by the Compliance Department. Where warranted, the company takes 
corrective action to minimize the possibility of similar problems 
arising in the future, and if disciplinary action is appropriate, it is 
applied on a fair and consistent basis.
    Sixth, HCSC has implemented a risk assessment program to evaluate 
its internal control structure and its ability to conduct business in 
accordance with all applicable laws and regulations. After performing a 
high level assessment of a particular function, department or contract, 
the Compliance Department works with management in charge of that area 
to address and correct any identified weaknesses and to strengthen 
existing control processes as needed.
    Seventh, HCSC performs regular reviews to ensure that its 
procedures are being followed. The Compliance Department maintains 
audit staff in order to ensure proper implementation of HCSC's 
compliance controls. The Compliance Department's auditors work closely 
with (and complement the work of) HCSC's Internal Audit Department by 
reviewing compliance-related issues and procedures. Their duties will 
include tracking regulatory changes and where necessary, implementing 
policies and training designed to conform with those changes. They will 
also include monitoring the corporate business environment to keep 
abreast of current developments requiring changes in corporate policies 
and the Code, and auditing for compliance with the Corporate Compliance 
Policy.
                             iv. conclusion
    In HCSC's case, wrongful actions by a small number of employees 
resulted in serious repercussions for the corporation and its 
employees. Once HCSC became aware of these wrongful actions, it took 
every possible step to correct and atone for those actions on an 
ongoing basis. Also on an ongoing basis, HCSC has devoted a significant 
amount of resources to ensuring that such activity does not occur in 
the future. HCSC welcomes and is always in search of new ideas and 
suggestions to ensure that the corporation is a model for ethical 
behavior in the marketplace.

    Mr. Upton. Well, thank you very much. As you can tell with 
those buzzers, we have a vote on, and we are going to 
temporarily recess for about 15 minutes, and then we will come 
back. Thank you.
    [Brief recess.]
    Mr. Upton. Okay. We are back. The votes, a lot of things 
got pushed back, a number of press conferences, that type of 
thing. So we will see what members' schedules are. Originally 
we thought this hearing would only go to about 12:30, so 
everyone's schedule got a little scrambled.
    I have a couple of questions.
    First of all, I appreciate all of you coming, and I 
appreciate getting your testimony in advance and being able to 
go through it last night, and I was also glad in listening to 
your statement, in reading it as well, that none of you took 
the Pete Rose strategy. Pete Rose, one of the greatest 
ballplayers of all time, banned from baseball forever, never 
agreed that he had a gambling problem, even today; and you all 
have admitted that there were problems. You all have agreed 
that integrity ought to stand first and foremost, and I think 
all four, of all the problems that were undertaken in the past, 
in essence there is really nobody left in any of your shops 
that was guilty that is still there today. Is that correct?
    Mr. Becker. True.
    Mr. Huotari. It is.
    Mr. Upton. And is it also correct that none of you were 
there then? You indicated that in your testimony, Mr. Becker. 
Mr. Huotari?
    Mr. Huotari. That's my testimony as well.
    Mr. Hess. I was there.
    Mr. Upton. I am not a lawyer. I called Mr. Hyde a little 
bit earlier his excellency, but that was just a joke. I was 
trying to get a bill passed. That's what you have got to do.
    You know, as we listened to some of the testimony, you all 
were here for the first panel. The influence of whistle-blowers 
or the impact of whistle-blowers we all feel is very important 
to bring some of these charges public, and thank goodness we 
had some of those that testified today and others throughout 
the government as well. But in addition to the steps that you 
have taken--the guidebooks, the regulations, the training for 
your employees, the emphasis on integrity and honesty to do the 
right thing--I would sense that if we had your predecessors 
maybe once, twice or even three times removed here where these 
things happened on their watch, my guess is that they, at least 
publicly, would have thought that they had those things in 
place then. Is that not right?
    Mr. Becker. It would be.
    Mr. Upton. What can we do? I mean, what is it that we can 
try and do to make sure that this doesn't happen again?
    Obviously, we start with a clean slate. You all are in a 
new responsibility from where you were when things went bad and 
new emphasis, for sure. The companies have had more than their 
fingers slammed in the drawer. I mean, pretty big, hefty 
penalties. But what is it that we have to do to try and make 
sure that this system works in the right way? What else can 
HCFA do to ensure that from day one we don't have this type of 
thing happen again? What comments would you have to offer? Do 
you think you can go beyond what you have done already?
    Mr. Becker. Mr. Chairman, what I think each one of us said, 
which I think is very important--and I will answer your 
question more directly--is that the culture has to be right so 
you are not punished for coming forward and saying I have 
detected a problem. What we have done in New Mexico Blue Cross 
and Blue Shield, for example, in addition to what you heard, 
there's a direct hot line to our vice president of compliance 
who reports to the president. Anybody can call and remain 
anonymous if they don't want to identify themselves.
    Mr. Upton. I am going to save that question for the next 
panel, the National Blue Cross Blue Shield, but do you know if 
that happens in other providers across the country? Is that 
same system in place in pretty much all of them, maybe some of 
them, do you know?
    Mr. Becker. I think--my guess is that several of them do 
have such a mechanism where you can call a compliance officer 
directly and even report your superior. I think that we have 
all learned our lessons through these types of arrangements.
    As far as what can HCFA do, I look at how we are regulated 
by our department of insurance, every State is regulated by a 
department of insurance in our commercial business. They, too, 
audit us; and they conduct what is called a market conduct 
audit. And once every so often, it's a fairly regular--in our 
case it's every 3 years--they simply come into your building, 
and they open all your files.
    Mr. Upton. So sort of like the story with my daughter with 
her English teacher?
    Mr. Becker. Exactly.
    Mr. Upton. Pop quiz.
    Mr. Becker. Exactly. And you don't know exactly what 
they're going to be looking at. They'll follow trails, if it 
looks like there's something running down that trail that might 
be inappropriate.
    Mr. Upton. How often do they come?
    Mr. Becker. They have authority to come anytime they want 
to if they suspect something, but they come at least every 3 
years. It's a triennial exam, and I think that, because if your 
culture is such that you have got fraud and abuse in your 
company and there's not ways to cure itself, there's not much 
you can do from a regulatory legislative standpoint that is 
going to cure that. There is always a way around it. And 
sticking a HCFA auditor, for example, inside my company I think 
in many ways compounds the problem for all of the reasons 
talked about earlier today, but, also, it makes us less and 
less efficient, which adds to the cost of the program. We all 
talked about the fact that this is underfunded already.
    So that's my recommendation, Mr. Chairman.
    Mr. Upton. Mr. Huotari.
    Mr. Huotari. Mr. Chairman, as you noted, I wasn't with the 
company back at that time, 1993, and the company hasn't had a 
contract since 1994, so I'm not in a very good position to talk 
about what HCFA does now or doesn't do with Medicare 
contractors.
    I do see one pattern here that appears, at least to me, has 
been when these audit samples were taken, rather than taking 
the samples directly from the documents, they were allowing the 
company personnel to, in effect, pull samples. I think in my 
experience in the insurance industry and insurance department 
audits and other audits, outside auditors oftentimes go back to 
source documents and the like, and so that was clearly a flaw 
in the process.
    I don't know what HCFA does today. I don't know whether 
that's been corrected, but that is one pattern I see. That 
certainly happened in our company where the samples were--were 
selected to improve the result.
    Mr. Upton. Mr. Hess.
    Mr. Hess. We also are subject to triennial audits by our 
insurance commissioner. And I agree with Mr. Becker. Those are 
very intensive. They are every 3 years, but they last probably 
6 to 8 to 10 to 12 months.
    People do come into your offices. They have rooms in our 
facilities, and they really do have the ability to follow up on 
whatever they find, and I think that is very valuable. An audit 
is one thing. An audit in-depth is something else again. I 
think that's an important, important feature.
    I know, to be fair to HCFA, perhaps after our problems HCFA 
did change the CPEP scoring which was, we thought as we looked 
at it, primarily related to process issues, not so much to 
outcome. So they changed it to the contractor performance 
evaluation, which my understanding is--again, we are not in the 
program either, but my understanding is was more oriented 
toward outcome. I think that was probably a good first step.
    I think that the challenge on compliance programs, and we 
saw when Mr. Flynn testified and I believe that he went through 
a difficult sort of agonizing appraisal, what to do with his 
information, but the challenge is to get the program out there 
and get the employees to really believe that the company means 
it, and it's difficult. It's an ongoing process. Because you 
need to convince the employees that if they do report something 
people will take it seriously and that they will investigate 
it, and I think there's a fair amount of cynicism and maybe 
that's been justified in the past, but that's something you 
have to get over.
    Over and over again, you have to try to convince employees 
that no audit--no system of compliance is going to work without 
their assistance and without their help, without bringing these 
issues to the compliance officer or the compliance process and 
giving it a chance to work.
    Mr. Upton. And do you think that that mindset has now come 
about with the changes that you have done? Do you think that 
the Darcy Flynns of the world in fact have changed their mind 
in terms of the way things are working?
    Mr. Hess. I can't say they have. I certainly hope they 
have.
    Mr. Upton. He is in the back, so I can ask him later.
    Mr. Hess. I certainly hope they have.
    I do know that since 1993 there has been an increased 
emphasis on compliance programs. We have spent a lot more time 
getting information out, giving speeches, incorporating it into 
various parts of our company process, doing much more training 
and, again, trying to get across the point to all of the 
employees that we are interested. We don't want them to lie or 
cheat or steal for us. The company doesn't want that. We want 
them to report it, and the company will try to investigate it.
    That's something that's hard to get across, and I don't 
know if we have done a perfect job yet. No doubt we haven't, 
but it's a constant sort of effort. I think that most 
employees, if not all the employees, of Blue Cross and Blue 
Shield of Michigan would say the compliance is a much more 
important and much more pervasive program today than it was 
back in 1993, and I hope they would say that they would give it 
an opportunity.
    Mr. Upton. And does Michigan have a system similar as New 
Mexico does with a direct link to the compliance officer?
    Mr. Hess. We have a number of links. I happen to be the 
compliance office of Blue Cross Blue Shield of Michigan. My 
name is listed along with the general auditor's name, along 
with the head of our corporate financial investigations unit, 
which is our fraud unit.
    We also indicate they can call anybody they want. And there 
is also a hot line, which is a totally anonymous way of 
informing the company of some concerns you might have regarding 
processes. All of these things do prompt some level of 
investigation. So, whatever the call, the calls are noted; and 
there is some level of investigation. Obviously, if we find 
something, we investigate it further, but all of them are 
investigated.
    Mr. Upton. Mr. Verinder.
    Mr. Verinder. Mr. Chairman, there must be an environment of 
trust and willingness to do the right thing, and it must be 
top-down driven, and it must be accepted across the board. In 
setting up compliance programs with different entities, I 
believe in training, training, training, followed by 
investigation, investigation, investigation. Be there for your 
employees, a policy of absolutely no retaliation, a trust. That 
broke down in our company. It's a culture. Our company's 
working hard. Bring that culture of trust so they wouldn't have 
the fear of bringing forth an issue. That is essential, and a 
compliance program is costly and has to be a commitment and is 
something I would insist on with companies.
    The second part is, don't give the opportunity. Audit and 
audit for real. Don't call me up and give me the dates, the 
amounts, the files.
    Mr. Upton. Do you think that HCFA has the adequate 
resources to do the audits that they ought to be doing?
    Mr. Verinder. I have got a background in law enforcement, 
and people are refocusing on where they have to go, and that 
has to be an essential ingredient. You will have to ask that 
question of them and, if they don't, support them in their 
effort, if there is that need. But that has to be for real.
    Mr. Upton. Okay. I think that's fine.
    Any of you want to add anything to your testimony?
    Mr. Becker. Mr. Chairman, I would like to say something 
that I think is important for you to hear because you have been 
kind of asking something that's fairly nebulous, and can it 
work, and we have talked about culture, and culture you 
absolutely can't get your hands around.
    A few years ago, we had another fiscal intermediary 
contract with the Federal Government that was not part of the 
Medicare contract, and a few years, not long after I arrived, 
one of our employees who realized that compliance was 
important--we had a compliance office code of conduct. She had 
signed it, had known for 2 years that there was a problem in 
this FI contract with one employee who was doing something 
wrong and covering it quite well. So she now came forward after 
2 years of thinking she couldn't come forward.
    She went up the line of command, which is very important, 
because we talked about that this morning, that some felt they 
couldn't go up the line of command or they weren't recognized. 
She went to her supervisor, who that day reported to her boss, 
who that day got ahold of me, and I was out of town. We 
immediately called a council. We immediately ordered an 
independent investigation of this particular process, and we 
immediately reported it to our client, told them what the 
problem was and what we were going to do to fix it and that 
they were made whole.
    And what came out of that was not only did those things 
occur, the person who was performing the misdeed was 
immediately suspended and later resigned, but we were not 
penalized. We did--in fact, we didn't lose the contract. We 
just renewed it for another 4\1/2\ years.
    So I guess the theme of my story is that compliance plans 
very much do work if the culture is right and employees think 
that they don't have to file a qui tam lawsuit to make this 
happen.
    Mr. Upton. Thank you for that instance.
    I have one other question that maybe would be worthwhile 
for me to ask. I know that--I guess for both New Mexico and 
Colorado the sentencing date is not until October; is that 
right? Wait--which--Illinois, I am sorry Illinois. And I don't 
know what sentence may be meted out, but I know in Michigan's 
case, and Mr. Hess, you indicate no criminal charges were 
filed. Do you think that it's--and I don't know the reason 
behind that--but do you think that as a means for the Federal 
Government to go after fraud and abuse that in fact we should 
hold individuals criminally responsible for their actions on 
this and maybe the Federal Government might have missed an 
opportunity if, in fact, there was grounds to do so?
    Mr. Hess. You're speaking of the Michigan case?
    Mr. Upton. I am going to ask everybody the same.
    Mr. Hess. I think that's an issue that has to be looked at 
on individual circumstances.
    Mr. Upton. The reason I ask that is because of my 
amendment, which passed in this committee before and passed on 
the House floor, which in fact did hold individuals criminally 
responsible for fraud and abuse. I thought that that would be 
an added layer of protection for the taxpayer if in fact it was 
known to be part of the equation, and for it not to be part of 
the equation I think makes our means to enforce the law less 
effective.
    Mr. Hess. I can understand that possibility. I do think 
that there is certainly the possibility--I think everybody 
should recognize that that there is a possibility that this 
sort of conduct will lead to criminal sanctions. We've seen a 
number of situations where individuals as well as the 
corporations have been held criminally liable. I think it would 
have to be addressed, in my opinion, on a case-by-case basis to 
take a look at the situations that the individuals are in, the 
nature of the conduct and, to some extent, leave it to the 
prosecutor's discretion as whether to charge or not.
    Mr. Upton. Mr. Becker.
    Mr. Becker. I agree with what Mr. Hess said, except that I 
would just add one thing in our particular case. The people who 
actually performed the misdeeds were terminated by the company 
or left the company, and my assumption is--and I don't know 
where they are today--but my assumption is they are out working 
and living their life. They are not sitting here with us. So 
the 600 people left behind in Albuquerque are paying for it. I 
am not talking about the financial side of it, because we are 
not writing checks personally, but reputationally we were on 
the front page of the newspaper for something a few people did 
6 years ago, and it infuriates me, quite frankly, and I happen 
to believe in our particular position that would be one that I 
think they ought to be criminally prosecuted.
    Mr. Upton. Mr. Huotari.
    Mr. Huotari. It's my understanding, Mr. Chairman, that both 
individuals and corporations are criminally liable or 
potentially criminally liable for submission of false claims to 
the Federal Government, and so I think that penalty exists in 
potentially in every case. I think, as Mr. Hess said, it's a 
case-by-case determination of the circumstances. I also 
understand in each case there is a potential penalty for 
individual debarment from the Medicare or other government 
programs that exist. Again, I think that is a decision that's 
made under the circumstances of each case, and so it would vary 
from case to case.
    Mr. Upton. Mr. Verinder.
    Mr. Verinder. Mr. Chairman, the Federal Government must do 
a thorough and complete investigation and then a decision must 
be made on a case-by-case basis. So that's make us in 
agreement, with all four of us believing case-by-case basis 
here.
    Mr. Upton. Okay. Well, again, I appreciate your testimony. 
I might ask you that--I know that my colleague, Ms. DeGette, 
did want to come back, and she has got, I guess, the mayor of 
her community at a very important event relating to youth 
violence on the steps of the Capitol, but there may be some 
other members that may have some questions, and, if they do, we 
will ask that they may pose them in writing. If that happens, 
if you could report back in a timely fashion we would 
appreciate that.
    You are excused. Thank you very much for your testimony as 
it helps us move on the right path. Thank you.
    Our last panel includes Mr. Harry Cain, who is Executive 
Vice President of Blue Cross Blue Shield. Welcome to the 
subcommittee. It's a little lengthier hearing than many of us 
had anticipated when we brought the gavel down this morning. As 
you know our routine, we have asked all panelists to testify 
under oath. Do you have any objection to that?
    Mr. Cain. No, sir.
    Mr. Upton. And do you need to have counsel?
    Mr. Cain. No, sir.
    I should introduce my colleague, Mr. Harvey Friedman, who 
is a Vice President of the Association, who has immediate 
responsibilities for the areas that we will be discussing 
today.
    Mr. Upton. Certainly.
    If you both might stand and raise your right hand.
    [Witnesses sworn.]
    Mr. Upton. You are now under oath. And, again, your entire 
testimony will be made a part of the record. And try to limit 
your remarks to 5 minutes. That will be terrific.

 TESTIMONY OF HARRY CAIN, EXECUTIVE VICE PRESIDENT, BLUE CROSS 
 AND BLUE SHIELD ASSOCIATION, ACCOMPANIED BY HARVEY FRIEDMAN, 
     VICE PRESIDENT, MEDICARE, BLUE CROSS AND BLUE SHIELD 
                          ASSOCIATION

    Mr. Cain. I shall.
    Mr. Chairman, I will just quickly try to summarize the 
essence of the remarks and along the way make a couple of 
comments on what I have heard here earlier today.
    I want to talk first about the unethical and illegal 
behaviors that have been discussed here and the context in 
which they occurred. Second, how has that context changed in 
the last few years? And, third, what about the future? What 
actions might the Congress consider to address these problems?
    In terms of the behaviors themselves, we don't have any 
excuses. Neither the Association nor any of the Blue companies 
in which these behaviors transpired are going to try to excuse 
it.
    The second, the context which may help put it in 
perspective. First, a broad observation that this program has 
been going on now for some 34 years; and, overall, the history 
is very impressive, very tough job done by lots of people, 
often under adverse circumstances. The whole picture is quite 
impressive. So I want to try to draw your attention to the fact 
that we're focusing here today on some broken pieces in a very 
large and handsome mosaic that goes back a long time. I'd hate 
to have the few broken pieces somehow impugn the entire 
history.
    Third comment is, these unfortunate behaviors that have 
been discussed here earlier appear to have occurred in a 
particular period, beginning in around 1985 and going up until 
maybe 1994 or 1995. That's what everything that I have seen 
suggests is the case.
    In that period, the contractors were in a particularly 
challenging situation, somewhat squeezed between three forces. 
One, the program itself was becoming significantly more 
complex, and the volume was growing greatly; two, HCFA had 
established a very high performance standard, performance 
requirements; and, three, the administrative funds made 
available to the contractors, even by HCFA's agreement at the 
time, were inadequate to support the kind of performance that 
was being required.
    Now, contractors in that environment had essentially three 
choices. One was to get out of the program and terminate all of 
the affected staff, which over time a few of the contractors 
actually decided to do. The second choice was to get a lot more 
efficient and more productive, and all of the contractors that 
remained in the program had to in order to survive. And then of 
course the third choice was to cheat, and clearly some 
employees in some contractors took that third choice, and that 
choice remains inexcusable, but it is not incomprehensible as 
to how it happened.
    Now, what has changed since those three forces formed the 
context of that kind of behavior? Well, one might argue that 
many of the same forces are still in place. A couple of 
changes. One, beginning in 1993, 1994, the Association and all 
the Blue plans have begun to put in place and greatly emphasize 
the kinds of codes of conduct that would prohibit or prevent 
such behaviors and effective compliance in programs. In today's 
world, we can no longer assume ethical behavior, unfortunately. 
We are now doing what we can to assure it and/or to assure that 
we can detect and respond to unethical behavior when it occurs. 
My full testimony gives more examples.
    A second change in the context is that one of the most 
egregious features of the HCFA performance program has been 
dropped, which helps. If you want to get into that, I will be 
glad to.
    And, third, in one area of Medicare administration, there 
is now more adequate funding, but in the other general 
administrative areas, the situation is very much the same today 
as it was in the 1980's.
    The future, where do we go from here? Well, I am going to 
give you a short--two short answers. Given the current 
structure of Medicare, Congress I think can do two things to 
improve the situation. One is to allow, encourage, authorize 
and improve the contracting program, and our testimony, as well 
as suggestions from the GAO and the IG, have many specific 
examples. Mostly they rely on requiring HCFA to get more in 
concert with the Federal acquisition rules.
    The second thing that Congress can do is to provide more 
adequate funding for administration. There is a very long 
history in this program now going back about 25 years of the 
Congress being somewhat penny wise and pound foolish regarding 
Medicare administration.
    The other approach which you might do simultaneously is to 
reconsider the entire structure of the Medicare program. It is 
inherently an administrative morass. Better contracting and 
more adequate funding can improve it but fundamentally this 
program is exceedingly difficult to run. There are other 
alternative ways to go about it, even for a publicly funded 
entitlement program, but that is a fairly large subject for 
another time, perhaps some other set of hearings, and I thank 
you very much for the opportunity to be here, Mr. Chairman.
    [The prepared statement of Harry Cain follows:]
Prepared Statement of Harry Cain, Executive Vice President, Blue Cross 
                      and Blue Shield Association
    Mr. Chairman and members of the Subcommittee, I am Harry Cain, 
Executive Vice President of the Blue Cross and Blue Shield Association. 
We represent 51 independent Blue Cross and Blue Shield Plans throughout 
the nation. I appreciate the opportunity to testify before the 
Subcommittee on various issues related to Medicare contractors, with 
particular emphasis on fraud and abuse.
    Medicare is administered through a long-standing partnership 
between the private health insurance industry and the Health Care 
Financing Administration (HCFA). Since 1965, Blue Cross and Blue Shield 
Plans have played a leading role in administering the program. They 
have contracted with the federal government to handle much of the day-
to-day work of paying Medicare claims accurately and in a timely 
manner. Nationally, Blue Cross and Blue Shield Plans process over 85 
percent of Medicare Part A claims and about 57 percent of all Part B 
claims.
    Medicare contractors have three major areas of responsibility on 
behalf of the federal government:
1. Paying Claims: Medicare contractors process all the bills for the 
        traditional Medicare fee-for-service program. In FY 1999, it is 
        estimated that contractors will process over 900 million 
        claims, more than 3.5 million every working day.
2. Providing Beneficiary and Provider Customer Services: Contractors 
        are the main points of routine contact with the Medicare 
        program for both beneficiaries and providers. Contractors 
        educate beneficiaries and providers about Medicare and respond 
        to about 40 million inquiries annually.
3. Special Initiatives to Fight Medicare Fraud, Waste, and Abuse: All 
        contractors have separate fraud and abuse departments dedicated 
        to assuring that Medicare payments are made properly. According 
        to the Department of Health and Human Services (HHS), these 
        activities saved the government $9 billion in 1998.
    Medicare contractors have been extremely efficient and cost 
effective for the federal government. In 1999, contractors' 
administrative costs represent less than 1 percent of total Medicare 
benefits. While workloads have soared over the last 25 years, operating 
costs--on a unit cost basis--have declined about two-thirds from 1975 
to 1999. Few government expenditures produce the documented, tangible 
savings of taxpayers' dollars generated by Medicare anti-fraud and 
abuse activities. For every $1 spent fighting fraud and abuse, Medicare 
contractors save the government $17.
    Medicare contractors proactively combat Medicare fraud, waste, and 
abuse through a multi-faceted program under HCFA's direction and 
review. Thanks to recent increases in funding, Medicare contractors are 
now able to expand their anti-fraud and abuse efforts, and we are 
seeing excellent results. We believe continued improvements are 
essential.
    With this as background, I would like to focus on the following 
three areas in my testimony:

I. Contractor initiatives to combat fraud, waste, and abuse in the 
        Medicare program;
II. BCBSA recommendations for contractor reform; and
III. BCBSA's response to the recent General Accounting Office (GAO) and 
        1998 HHS Office of Inspector General (OIG) reports.
             i. combatting medicare fraud, waste, and abuse
    Contractors collectively employ over 22,000 workers across the 
country to process claims and prevent excessive, improper, or 
unnecessary spending in the Medicare program. Through their long-term 
relationship with Medicare, Blue Cross and Blue Shield Medicare 
contractors have acquired extensive experience and knowledge about this 
complex program. Our Plans have become experts in detecting ways in 
which some providers attempt to abuse or defraud Medicare. Blue Cross 
and Blue Shield companies also hire experienced investigators with 
diverse backgrounds to fight fraud, waste, and abuse. These 
professionals include law enforcement officials, physicians, nurses, 
attorneys, accountants, statisticians, and business managers.
Contractor Operations to Fight Fraud
    The task of safeguarding Medicare funds is not limited to 
identifying instances where providers have intentionally sought 
overpayments. Instead, contractors rely on a multi-pronged approach. A 
successful program begins when a Medicare claim is submitted for 
payment. Once the claim enters a Medicare contractor's system, it is 
subjected to several layers of review to ensure its appropriateness. 
The following summarizes contractor anti-fraud and abuse activities:
    Claims processing screens: Contractors' computer systems are 
programmed so that all Medicare claims are screened on the front-end. 
These initial computer checks seek to:

 identify duplicate bills;
 ensure the claim is from an enrolled provider;
 ensure the claim is for services rendered to an eligible 
        beneficiary;
 determine the appropriate payment amount for a specific 
        service;
 assure the bill is complete and consistent (for example, the 
        screens would reject a bill for cataract surgery that listed 
        the diagnosis as congestive heart failure); and
 screen out claims that appear suspicious and should be 
        investigated before they are paid.
    Provider registration screening: All providers must receive a 
Medicare registration number from a contractor before they can bill 
Medicare. Contractors review provider applications closely to prevent 
fraudulent providers from getting into the program by using false names 
or addresses.
    Medical review: The purpose of medical review is to examine claims 
and supporting documentation to assure services are medically necessary 
and appropriate. Contractors' medical review staffs are assisted by 
physicians who obtain input from the local provider community in 
establishing each contractor's policies. Because of funding 
constraints, only a small percentage of Medicare claims and supporting 
documentation is actually reviewed. Recent increases in funding for 
anti-fraud and abuse activities have allowed contractors to review more 
claims; but the proportion of all claims reviewed by contractors 
remains limited.
    Contractors conduct two types of medical reviews:

 Prepayment review: Contractors use a cost-effective, focused 
        medical review process to determine which bills need to be 
        reviewed further before payment is authorized. All contractors 
        screen bills before payment to detect potential problems, such 
        as unnecessarily intense or frequent care. Some screens are 
        nationally set by HCFA, while others are developed locally to 
        reflect regional problems. These screens are based on policies 
        applicable to specific procedures, frequency of services, and 
        provider-specific data accumulated from data analyses of 
        previous services. Physicians are integral to the medical 
        review process and lead reviews of complex cases.
 Postpayment review: After bills are paid, contractors monitor 
        the Medicare claims experience of all providers and services in 
        a region. Contractors typically focus on high-dollar and 
        frequently performed services. Aggregated data are analyzed to 
        identify providers whose utilization patterns differ 
        substantially from their peers. Contractors use different 
        statistical software packages to track data and identify 
        patterns or trends that may reveal inappropriate levels or 
        types of treatments provided to beneficiaries. Examples of this 
        type of profiling are identifying providers performing an 
        unusually high number of services on beneficiaries, or ordering 
        an excessive number of tests. These in-depth reviews can last 
        several months and can involve patient surveys, review of 
        medical records and discussions with providers. Actions taken 
        based on these findings include: provider education; payment 
        recovery where investigations reveal inappropriate or 
        fraudulent billings; referrals to the OIG; and development of 
        prepayment screens to identify future problems before bills are 
        paid.
    Cost report audits: The Medicare audit function represents the most 
all-inclusive opportunity for Medicare Part A contractors to impact 
Medicare dollars. The audit function is similar to the role of the 
Internal Revenue Service. Cost reports are the vehicle through which 
Medicare Part A providers make a final, comprehensive claim against the 
federal government for reimbursement at the end of the year for 
providing services to Medicare beneficiaries.
    Professional accountants review the reports to ensure that all 
costs are appropriate and that they match previously submitted claims. 
Specifically, these accountants check for areas that indicate excessive 
claims for reimbursement, violations of program law or regulation, 
mathematical errors, or fraud and abuse. Contractors will send 
professional accountants to the provider site to perform a limited 
financial audit of a selected number of the provider's books and 
records, if judged necessary and cost-effective within constraints of 
available funding.
    Medicare Secondary Payer (MSP): Contractors constantly check claims 
to determine instances where a beneficiary has private insurance 
coverage that should pay the bill instead of Medicare. The other payers 
whose coverage should pay before Medicare coverage begins include: 
employer group health plans covering working beneficiaries, workers' 
compensation, and auto, liability, and no-fault insurance. The primary 
functions of MSP include:

 reviewing claims for indications of other coverage;
 developing claims with indications of other coverage to 
        determine if other coverage actually exists;
 ensuring that appropriate Medicare payment is made on claims 
        for which Medicare is the secondary payer;
 tracking auto, liability, and workers' compensation cases to 
        assure Medicare payments are either not made or are recovered 
        from any settlement awards; and
 conducting outreach activities to educate beneficiaries, 
        providers, attorneys, and insurers about MSP.
    Provider and beneficiary education: Contractors educate both 
beneficiaries and providers on payment integrity and quality assurance 
issues. For example, contractors send providers newsletters, hold 
seminars, and host conferences to explain the latest billing techniques 
or new Medicare coverage rules. These educational efforts save the 
Medicare Trust Funds money by having the sentinel effect of preventing 
future fraud.
Contractors Work with Other Entities
    Equally important as contractors' own anti-fraud activities is the 
interaction of contractors with other agencies. Contractors work with 
HCFA's central and regional offices to detect fraud and develop medical 
policies to prevent unnecessary spending of Trust Fund dollars. 
Contractors have also established relationships with other contractors, 
states, and local anti-fraud task forces to detect and fight Medicare 
fraud. One Blue Cross and Blue Shield Plan has worked with its local 
Operation Restore Trust office in a special fraud task force designed 
specifically to proactively identify the top fraudulent providers 
billing Medicare.
    Contractors also work closely with law enforcement agencies. When 
contractors have identified and substantiated a case of potential 
fraud, they forward it to the HHS OIG for further investigation. HCFA's 
instructions direct contractors to give the highest priority to those 
cases that have the greatest impact on the Medicare program. These 
include multi-state fraud, patient abuse, high dollar amounts of 
potential overpayment, and likelihood for an increase in the amount of 
fraud or enlargement of a pattern. However, contractors do not refer 
potential cases to law enforcement solely on the magnitude of the case; 
each is evaluated and referred based on its own merit. Contractors 
develop various criteria based on guidance issued by HCFA in the 
Medicare Carrier and Intermediary Manuals. In general, contractors 
refer cases to the OIG once they have knowledge that the provider has 
intentionally engaged in improper billing, submitted improper claims 
with actual knowledge of their falsity, or submitted claims with 
reckless disregard or deliberate ignorance of their inaccuracy.
    Potential fraud cases can also be referred to the Department of 
Justice for prosecution. Contractors also hold training sessions for 
law enforcement agents to educate them on various aspects of the 
Medicare program, including proper billing procedures and how to read 
cost reports.
HCFA Review of Contractors
    Medicare contractors operate under detailed instructions from HCFA. 
As government contractors, Medicare contractors must comply with 
numerous federal statutes, regulations, and Executive Orders. In 
addition, contractors must follow extensive HCFA issued program 
guidelines and manual instructions. To monitor compliance with these 
guidelines, contractors are visited annually by their local HCFA 
regional office staff for an assessment of their performance against 
HCFA's requirements. These reviews, termed Contractor Performance 
Evaluations, are conducted in various functional areas and culminate in 
a formal annual report called the Report of Contractor Performance. 
Also, several annual or special certifications are expected to be 
executed by contractors in support of the Chief Financial Officers Act, 
the Federal Managers Fiscal Integrity Act, the fiscal year budget 
proposal, and other areas of specific interest, such as Y2K readiness.
Challenges Facing Contractors
    Medicare contractors face three key challenges to continued success 
in fighting fraud and abuse: (1) Inadequate funding levels; (2) 
Increased complexity of Medicare rules; and (3) Constant changes in 
direction. These challenges are described below:
    Inadequate funding levels: Of utmost importance to attaining 
outstanding performance is an adequate budget.
    However, Medicare contractors have been severely underfunded since 
the early 1990's and are facing poor prospects of receiving adequate 
funding next year. During the early to mid-1990's, reductions in 
funding relative to increases in workload seriously eroded contractors' 
ability to fight fraud and abuse. Between 1989 and 1996, the number of 
Medicare claims climbed almost 70 percent to over 800 million, while 
payment review resources grew less than 11 percent. As a result, the 
amount allocated to contractors to review claims shrank from 74 cents 
to 48 cents per claim. Because of the significant cost of reviewing 
claims, this decline in funding resulted in HCFA's directions to 
contractors to reduce the percentage of claims that were scrutinized 
and investigated. Similarly, the percentage of cost reports audited 
declined: between 1991 and 1996, the chances that any institutional 
provider's cost report would be reviewed in detail fell from about 1 in 
6 to about 1 in 13.
    Throughout this period, contractors identified to HCFA additional 
anti-fraud efforts they could undertake if awarded additional 
resources. BCBSA and Blue Plans urged both Congress and the 
Administration to allocate significantly more funds for critical anti-
fraud and abuse efforts. Finally, in 1996, Congress created the 
Medicare Integrity Program (MIP) in the Health Insurance Portability 
and Accountability Act. MIP provided a permanent, stable funding 
authority for the portion of the Medicare contractor budget that is 
explicitly designated as fraud and abuse detection activities. MIP 
funding was set at $500 million in 1998 and is authorized to rise to 
$720 million in 2002.
    Thanks to this new funding mechanism, Medicare contractors have 
been able to improve their efforts to reduce the amount of fraud, 
waste, and abuse in the Medicare program. Earlier this year, the HHS 
OIG released its 1998 financial audit indicating that Medicare provider 
billing errors had fallen dramatically. Contractors' enhanced anti-
fraud and abuse efforts due to MIP funding contributed to that 
significant decline in improper claims and documentation submission by 
providers. The OIG also found a greater number of providers submitting 
claims with proper documentation--a sign of contractors' enhanced 
education efforts to inform providers of proper documentation 
procedures. The Congressional Budget Office also has attributed the 
abrupt slowdown in Medicare spending between 1998-99, in part, to 
stepped-up policing of fraud and abuse, in which contractors have 
played a significant role.
    But, the creation of MIP did not solve the budget problems for the 
remainder of the contractor budget. Even with increased MIP funding, 
total contractor funding (including MIP), on a per-claim basis was 
lower in 1998 than in every previous year back to 1989.
    The largest portion of the contractor budget--program management --
is subject to the annual appropriations process and continues to face 
severe funding pressures. Program management activities include claims 
processing activities, beneficiary and provider communications, and 
hearings and appeals of claims initially denied. Under the 
appropriations process, contractors must compete for funding with high 
priority agencies such as the National Institutes of Health.
    For example, between 1989 and 1998, funding for program management 
activities (adjusted for inflation) declined by 18 percent. During this 
period, the volume of Medicare claims increased by 84 percent; Medicare 
outlays (in real dollars), by 65 percent. Whenever possible, 
contractors responded to reduced funding by achieving significant 
efficiencies in claims processing, lowering program management costs 
per claim by 56 percent in real dollars over this period. But even 
these efficiencies have not been enough to keep pace with rising 
Medicare claims volume and diminishing funding levels: In 1998, for 
example, HCFA made up for funding short falls by instructing 
contractors to slow down payments to hospitals and doctors, make 
greater use of voice mail, and send fewer explanations of benefits 
notices to beneficiaries.
    Inadequate budgets for program management also impacts Medicare's 
fight against fraud and abuse. While many think of program management 
activities as simply paying claims, these activities are Medicare's 
first line of defense and are critically linked to MIP anti-fraud and 
abuse activities. As an example, many of the front-end computer edits 
described earlier (e.g., preventing duplicate payments and detecting 
suspicious claims) are funded through program management. Inadequate 
funding impacts different functions at different times, but always 
disrupts the integration of all the functional components needed to 
``get things right the first time.'' It thus results in inefficiency 
and higher costs.
    Moreover, increased anti-fraud initiatives have created increased 
workloads for program management activities. An expert study 
commissioned by BCBSA last year demonstrates that contractor program 
management funding will be significantly strained by the increased 
anti-fraud and abuse detection efforts under MIP. The report shows that 
every 10 percent increase in MIP funding will result in a $13 million 
increase in contractor costs due to increased appeals, inquiries, and 
hearings.
    Increased complexity of Medicare rules: Another challenge faced by 
contractors is the significantly greater workload expected next year 
and in future years as the Medicare program grows more and more 
complex. The new payment mechanisms for outpatient departments, home 
health agencies, and skilled nursing facilities, to name a few, are 
very complicated and will require a great deal of resources to 
implement. Just as Members of Congress are hearing from these 
providers, so too are contractors who must answer their questions and 
concerns about new payment methodologies.
    Furthermore, any Medicare reform legislation could have a profound 
impact on contractor activities. For example, the President's FY 2000 
HCFA budget request included $60 million to implement various 
provisions of the 1997 Balanced Budget Act. Clearly, changes to 
Medicare coverage rules can have financial impacts on contractor 
budgets. Unfortunately, Congress does not generally provide the 
necessary administrative resources when enacting Medicare legislation. 
We urge Congress to assure that contractors are adequately funded when 
considering legislative changes.
    Constant Changes in Direction: Medicare contractors are challenged 
by the very nature of the business. Medicare contractors must deal with 
hundreds of pages of instructions from HCFA. When last we counted 
(1993), the Medicare contractors had received, on average, a new 
instruction from HCFA every five hours of every day of every year. And 
the program has become even more complex since 1993. This constant 
state of change requires contractors to be extremely flexible--both in 
terms of its operations and its budget. It has not been uncommon in the 
past for contractors to be forced to abandon projects or reallocate 
staff midyear in order to adapt to HCFA's suddenly revised priorities 
or modified funding levels. HCFA and Congress seldom realize that these 
continuous changes in direction require time and money.
    By law, Medicare contractors are not allowed any profit. Medicare 
contractors operate under cost contracts, and HCFA places budget caps, 
or limits, on the unit costs paid to contractors to process claims. 
Under these contracts, Medicare contractors essentially do whatever 
work HCFA requests, without ``change orders.'' There is not a clear 
statement of work at the beginning of the year, and contractors 
generally must comply with constant change orders from HCFA without 
additional reimbursement. These demands make the Medicare contractor 
business extremely challenging.
  ii. bcbsa recommendations to improve the medicare contractor program
    Consistent with the views of the GAO and the HHS OIG, BCBSA agrees 
that revisions to the Medicare contractor program are necessary to 
strengthen contractors' abilities to effectively and efficiently handle 
day-to-day administration of the Medicare program. Blue Cross and Blue 
Shield Medicare contractors are committed to achieving outstanding 
performance levels. We want to work with the Congress and HCFA to 
attain this objective. We recommend consideration of the following 
recommendations:

1. Competitive Contracting: We believe that Congress should explore 
        revising Medicare contracts to allow qualified companies to 
        compete based on the Federal Acquisition Rules (FAR)-the 
        federal government's rules on competitive contracting. The FAR 
        would instill at least two disciplines now missing in the 
        program: a clear scope of work, and a professional contracting 
        officer for each contract, through whom contract changes are 
        made. Conducting such a competition under the FAR--which now 
        governs all other government contracts--would ensure that 
        contracts are awarded on the basis of fair competition, and it 
        would give all contractors appropriate appeal rights and due 
        process.
      The FAR would also ensure that HCFA pays termination costs to 
        contractors that leave the program. I would note that HCFA's 
        reform proposal would deviate from the FAR by eliminating this 
        requirement. This would be unprecedented. No other type of 
        government contract, including defense contracts, lacks the 
        requirement that the government pay contractors reasonable 
        termination costs.
      It is essential that any move to competitive bidding of these 
        contracts be based on a strategic plan that lays out the 
        timetable for this change to minimize disruption to Medicare 
        beneficiaries and providers. Moving to a competitive bidding 
        process will require careful planning, a sufficient transition, 
        and additional HCFA staff to manage this major new contracting 
        initiative. Congress may want to review a proposed strategic 
        plan before granting HCFA this new authority.
2. Alternatives to the current cost contracts: Moving to the FAR would 
        allow HCFA to contract with entities using other payment 
        options, including fixed-price, cost-plus-fee, or cost-plus-
        incentive contracts. But before moving ahead too quickly, we 
        urge that HCFA study the various contracting options available 
        under the FAR to determine which method would be most 
        appropriate. BCBSA would like to work with Congress and the 
        Administration to develop the most promising proposals for 
        improving the public-private partnership that administers the 
        Medicare program.
3. Voluntary Self-Disclosure Protocol: Blue Cross and Blue Shield 
        companies place the utmost importance on maintaining the 
        highest possible levels of compliance and ethics--not only 
        where Medicare is concerned, but in all aspects of their 
        business. They are committed to assuring that there is a code 
        of conduct, as well as effective compliance programs, within 
        each Plan. However, it is critical that Medicare contractors 
        have the appropriate incentives to report to the federal 
        government when they detect probable wrongdoing in their own 
        business. And most importantly, these incentives must be 
        structured to allow these companies to take immediate 
        corrective actions to remedy any identified problems. We 
        believe HCFA should adopt a program similar to the Department 
        of Defense's Voluntary Disclosure Program, which provides 
        companies incentives to report problems and resolve them. Well-
        designed compliance programs should include the following seven 
        elements considered necessary for a comprehensive program under 
        the United States Sentencing Guidelines:
       development of written policies and procedures;
       designation of a compliance officer and/or other 
        appropriate bodies;
       development and implementation of effective training and 
        education about compliance and ethics;
       development and maintenance of effective lines of 
        communication, including a hotline where employees can report 
        concerns outside the normal chain of command;
       enforcement of standards through well-publicized 
        disciplinary guidelines;
       use of audits and other methods to monitor compliance; 
        and
       development of procedures to respond to problems and to 
        initiate corrective actions.
4. Adequate and stable funding levels: Congress should provide adequate 
        funding levels to assure that contractors can perform the range 
        of functions necessary to safeguard program funds. As 
        highlighted earlier, funding has not kept pace with 
        programmatic needs--important functions are not being funded. 
        We urge Congress and the Administration to explore using a new 
        methodology to develop Medicare contractor budgets. This method 
        should assure that a set percentage of Medicare claims is 
        reviewed annually and that each time a new Medicare law is 
        passed, there are sufficient administrative resources to handle 
        the new workload. While Blue Cross and Blue Shield Medicare 
        contractors are committed to continually achieving greater 
        efficiencies, it is simply not realistic to expect contractors 
        to attain outstanding performance levels with greater workloads 
        and tighter budgets.
      The prospects for adequate funding for program management 
        activities, which are subject to the annual appropriations 
        process, do not appear promising for FY 2000. The 
        Administration is essentially proposing a reduction in funding 
        for the administration of the Medicare program of 7 percent. 
        This budget proposes $1,274 million, just $4 million above the 
        FY 1999 level. However, the President's budget level is 
        dependent on $93 million in new provider user fees, which 
        Congress has consistently rejected in past years. Excluding 
        these funds lowers the President's budget request to $1,181 
        million, 7 percent below FY 1999. Yet increased funding is 
        critically needed next year to cover increased claims volume, 
        implementation of provisions in BBA and HIPAA, and increased 
        workload associated with expanded anti-fraud and abuse 
        activities. It is imperative that Congress provide a stable and 
        adequate funding stream for all contractor activities. As 
        indicated earlier, underfunding program management activities 
        can result in payment slowdowns to providers and beneficiaries, 
        and deterioration in effective anti-fraud efforts given that 
        program management and MIP functions are intertwined in the 
        fight against fraud and abuse.
      In the President's FY 2000 budget, HCFA indicated its interest in 
        exploring alternative funding options for Medicare 
        administrative activities. We support HCFA's efforts and would 
        like to work with the Congress to move toward a stable and 
        reliable funding source for the future.
5. Coordinated Administration: Finally, we recommend against awarding 
        contracts in a way that would fragment and weaken Medicare 
        administration, as proposed by HCFA in its contractor reform 
        proposal. Competition does not have to mean fragmentation. 
        Instead, competition should mean contractors compete on a level 
        playing field to be the single manager of a contract, and be 
        held responsible for subcontracting more specialized work to 
        other entities, if appropriate. By breaking up contracting 
        functions and spreading them among a large pool of new 
        entities--many of whom would be inexperienced in Medicare--the 
        claims payment process would be fragmented. This is likely to 
        disrupt effective management of the program. Costs would 
        invariably increase because claims processing, customer 
        service, and fraud and abuse activities are interconnected; for 
        example, claims processing and fraud control efforts would 
        still require coordination and extensive data sharing after 
        these responsibilities are divided. At the very least, a 
        comprehensive plan to ensure efficient coordination among the 
        functional contractors and an infrastructure to support the 
        coordination must be developed and implemented prior to 
        adopting HCFA's proposal.
    Moreover, separating key functions to different contractors could 
hinder efforts to fight fraud and abuse for at least four reasons.
    First, such fragmentation is likely to create competing, 
counterproductive incentives. BCBSA is very concerned with the 
unintended consequences of breaking up contractor functions. On the one 
hand, contractors are responsible for claims processing and paying 
claims based on a time schedule set by Congress. On the other hand, 
contractors are responsible for program safeguard activities--in 
essence, taking the time to review claims carefully to make sure they 
are paid properly. In a single organization, contractor management can 
balance these competing priorities to reach a productive synergy. 
However, were HCFA to separate these functions among competing 
organizations, neither organization would have the incentive to work 
together. This problem would be exacerbated if claims processing 
activities were further fragmented.
    Second, the staffing resources required to implement and manage 
this type of new contracting authority are so immense that they would 
undermine HCFA's efforts to administer its other initiatives 
effectively. Potentially, HCFA would have to manage numerous additional 
new contracts for claims processing services and beneficiary/provider 
communications centers with entities unfamiliar with Medicare. 
Contractors currently work without a scope of work and without 
individual contract officers. This new legislation would require that 
each contractor have a unique contract with a specific scope of work 
and a separate contracting officer. Most significantly, HCFA would have 
to directly manage each of these separate functional contracts to 
assure the entire claims administration process runs smoothly. These 
requirements--in and of themselves--could not be met without HCFA 
adding more people with greater contracting experience than they 
currently employ. HCFA is already burdened by many other new 
responsibilities. With these other large workloads, we believe the 
agency does not have the resources, staff, or expertise to implement 
this type of new procurement activity.
    Third, contracts could be awarded to entities that have no 
experience working with the Medicare program (a current program 
requirement), or even entities that have no familiarity with health 
claims processing. Allowing HCFA to contract with organizations 
unfamiliar with Medicare's intricate payment methodologies for critical 
claims payment or fraud detection activities could reduce payment 
accuracy, delay payments to providers, and reduce the quality of 
service providers and beneficiaries expect. An expert study 
commissioned by BCBSA found that awarding Medicare fraud detection 
functions to inexperienced contractors would be ``highly questionable 
and risky.''
    Fourth, functional contracts are likely to increase, not decrease 
costs. Having multiple functional contractors replace single 
contractors is likely to increase costs to the government. There is 
likely to be significant duplication and overlap of efforts, including 
increased overhead costs, in addition to increased resource 
requirements for HCFA.
    Above all else, fragmenting the claims payment process would 
destroy the current single point of accountability now available to 
HCFA, providers, and beneficiaries. I cannot emphasize enough the 
potential confusion and difficulty that may arise from managing a 
multitude of independent specialty contractors who share work but do 
not share accountability for the outcome (e.g., for a correctly and 
efficiently processed claim), and may even consider themselves 
competitors to each other. It is conceivable that under HCFA's proposal 
an individual claim could be handled by three or more individual 
contractors before it is finally processed. This fragmentation could 
increase claims payment timeframes, and such a proposal removes any 
accountability for processing a single claim properly --from beginning 
to end. GAO's previous statement to this Subcommittee sums up our 
concerns as well: ``After 30 years of integration, contractor's 
functions may not be easy to separate, and having multiple companies 
doing different tasks could create coordination difficulties.''
               iii. bcbsa response to gao and oig reports
    In addition to recommending broad reform of the Medicare contractor 
program, GAO and the HHS OIG made several more specific recommendations 
to improve program management. We agree with many of these 
recommendations--some entirely, and some with certain qualifications.

1. GAO recommended establishing an internal contractor management 
        policy group to oversee contractor certifications. We support 
        this recommendation, but urge HCFA to ensure that the emphasis 
        on certifications should be to look behind the existing 
        contractor certifications and not to look for reasons to 
        proliferate the number and type of required certifications.
2. GAO recommended that HCFA establish annual core benchmarks for 
        contractor performance and assess contractors based on those 
        standards. We support benchmarks for contractor performance 
        that are well-defined, achievable, and in line with annual 
        funding levels. These standards should measure the key 
        components of expected contractor performance and not be based 
        on measurement of micro-level, transaction-oriented activities, 
        as in the past.
3. GAO recommended designating an internal HCFA unit to evaluate 
        effectiveness of oversight policy and direction by headquarters 
        to regional offices, as well as regional office oversight of 
        contractors. We support any efforts to improve the consistency 
        of information disseminated from regional and central offices.
4. GAO recommended that a strategic plan be developed on how HCFA would 
        implement contractor reform if HCFA were granted such 
        authority. We agree that HCFA should establish a strategic 
        plan--including an independent study of its proposal--before 
        proceeding with any reforms. This study should determine 
        whether these administrative changes improve the efficiency and 
        effectiveness of Medicare program operations. Because of its 
        potential impact on the Medicare program, Medicare 
        expenditures, and Medicare beneficiaries and providers, 
        contractor reform must be carefully planned and its impacts 
        fully understood before proceeding. This plan must also analyze 
        the cost implications of functional contracting, which we 
        believe may be substantial.
      HCFA has just awarded 12 new MIP contractors. Despite the fact 
        that MIP allows HCFA to contract with new entities to perform 
        program safeguards activities, HCFA has decided that these new 
        contractors will supplement, not replace, program integrity 
        functions performed by current contractors at this point in 
        time. We approve of HCFA's actions, and recommend that HCFA's 
        strategic plan for further contractor reforms include an 
        analysis of this recent MIP procurement.
      A strategic plan would also allow HCFA to understand the internal 
        workload implications that contractor reform would impose on 
        the agency. At a time when HCFA already has significant new 
        responsibilities, including implementing the BBA and HIPAA, 
        HCFA should have the resources necessary to properly and 
        effectively carry out these new contractor changes before new 
        authority is provided.
5. GAO and OIG recommended improving contractor controls over Medicare 
        accounts receivable, cash, financial reconciliations, and 
        electronic data processing. Contractors are continually working 
        to improve their financial oversight functions. We would 
        support moving to a dual entry accounting system once HCFA 
        specifies the systems requirements and provides the funding to 
        make the changes. Because of Y2K priorities, HCFA has indicated 
        it will not allow any systems changes until 2001.
6. OIG recommended establishing clear definitions of key words and 
        terms (e.g. complaint, case, program vulnerability, and 
        overpayment). We would support having clear, consistent 
        definitions and instructions regarding the operation of 
        Medicare contractor fraud units.
7. GAO recommended eliminating provider nomination--the process by 
        which providers can choose their intermediaries. Provider 
        nomination was originally implemented to offer greater ease and 
        simplicity of claims payment for institutional providers. This 
        process is especially important for provider chains that are 
        able to choose one contractor to handle claims from their 
        providers on a nationwide basis. As Congress considers this 
        recommendation, we urge you to obtain input from the provider 
        community on the impact of such a change.
Response to Recent OIG Reports
    Over the past year, OIG has issued two key reports related to 
Medicare contractor performance.
    In November 1998, the OIG released a report that reviewed the 
effectiveness of Medicare contractors' fraud control units based on 
1996 data. The OIG found that staff turnover, lack of proper training, 
and a lack of uniformity and understanding of key fraud terms and 
definitions have hampered the fraud units. In reviewing the results of 
this report, the Subcommittee must realize that effective anti-fraud 
and abuse efforts--especially the ability to retain trained staff--have 
been severely impeded by lack of adequate and, importantly, stable 
funding levels.
    Unpredictable and insufficient funding patterns in the early and 
mid-1990's--when contractors were subjected to unpredictable cutbacks 
or additional funding late in the year--made it extremely difficult for 
contractors to recruit and retain well-trained staffs. This environment 
often made it necessary for contractors to reduce their fraud staffs 
(i.e., lay off experienced people), and later try to recruit new 
untrained staff as funding became available. It takes approximately one 
year to adequately train anti-fraud and abuse staff so that they become 
familiar with the complex Medicare rules. As mentioned earlier, the MIP 
funding which first became available in 1997 has eased this problem.
    Congress should also be aware of another problem contractors faced 
in the early 1990's. Before 1997, contractors were often told by OIG to 
refer only ``big dollar'' cases to the agency, since it was ill-
equipped to handle a large volume of smaller cases. OIG did not receive 
adequate anti-fraud and abuse funds to increase its own staff until 
1997.
    In February 1999, the OIG released its annual Chief Financial 
Officers report that demonstrated the new MIP funding had significantly 
reduced Medicare overpayments. While we are pleased that this study 
shows the outstanding job contractors performed in 1998 in reducing 
overpayments, this report indicated that additional efforts are needed. 
In assessing the performance of contractors, it is important to realize 
that the kind of errors identified by the OIG were associated with 
claims that, based on the information submitted, were correctly 
processed by Medicare contractors. However, the OIG in this audit had 
Medicare contractors look beyond the actual claim to the medical 
documentation (i.e., the patient's medical record in the physician's 
office) related to the service. By doing this, Medicare contractors 
found significant overpayments. However, Medicare contractors are not 
routinely instructed nor paid by HCFA to conduct this resource 
intensive type of review.
Medicare Contractor Compliance Efforts
    Finally, allow me to address the serious compliance issues that 
were raised in the Subcommittee's July 14th hearing. The Blue Cross and 
Blue Shield Association deeply regrets any cloud over our Member Plans' 
role in the Medicare program due to actual or alleged misconduct of 
employees of certain Plans. For more than 30 years, the Blues have been 
committed to providing high-quality, cost-effective customer service to 
Medicare beneficiaries, providers, and our partners in the federal 
government. We are saddened that, in the eyes of some, the developments 
described in GAO's report may tarnish our long-standing track record as 
Medicare contractors.
    Since the inception of Medicare, the Blues have been the undisputed 
leaders in private sector Medicare administration. Furthermore, Blue 
companies perform this public service at cost; they do not generate a 
profit on their Medicare claims processing work. Many health insurers 
believe that the legal risks and financial liabilities associated with 
being a Medicare fee-for-service contractor far outweigh the rewards or 
benefits. But many Blue companies remain committed to helping HCFA 
deliver timely, cost-effective services to beneficiaries who need them. 
Blue Plans also are committed to proactively rooting out provider fraud 
and abuse.
    Medicare contractors collectively process more than 900 million 
claims involving more than $200 billion annually. The overwhelming 
majority of these transactions are handled without any adverse 
incident. In fact, HCFA has accepted and reimbursed more than 99 
percent of the Medicare administrative costs submitted by Blue Plans 
over the life of the program.
    With this said, all Blue Plans have, as part of the BCBSA licensing 
requirements, a code of conduct for all employees. In addition, all 
Blue Plans are committed to having a compliance plan and have taken 
significant actions to enhance their compliance plans and management 
controls to ensure that problems in the past do not occur in the 
future. Examples of Plan efforts include: appointing a compliance 
officer to oversee compliance efforts; routine training for employees 
on compliance; implementing an internal compliance committee; and 
implementing a 24-hour compliance hotline where employees can report 
concerns. Plans also use innovative ways to update compliance awareness 
in the organization. One Plan distributes a compliance question to all 
employees once a week. Employees must answer a certain number during 
the year. Answers are then announced and discussed. It keeps everyone 
thinking about compliance all the time. The same Plan requires managers 
to talk to their staff monthly about compliance and makes random phone 
calls to employees to see if managers are in fact discussing compliance 
issues with them.
    In addition to the activities Blue Plans take to promote compliance 
and ethics within their own company operations, Blue Medicare 
contractors each year certify their compliance with Medicare rules and 
regulations using the Medicare Management and Operations Review Program 
(MMORP). The MMORP was created in 1995 by BCBSA and is a comprehensive 
audit program developed to verify the accuracy and completeness of Plan 
data. It is a national compendium of the 25,000 pages of laws, 
regulations, general instructions, and contract requirements that 
Medicare contractors must meet condensed into one manual, including 
step-by-step tests to help plans ensure the accuracy of their data. 
Blue Plans use the MMORP as a management tool to assist them with 
compliance with their Medicare contracts. Blue Plans provide BCBSA with 
suggestions about new enhancements to the MMORP; each year, we update 
and expand the manual to provide new, detailed information at the 
request of our member companies.
    Along with using the MMORP, Blue Cross and Blue Shield Plans take 
part in numerous compliance training programs and examinations offered 
by BCBSA. BCBSA holds an annual conference for Plan compliance 
officers, legal staff, and other Plan staff that provides the most up-
to-date information on compliance and ethics issues in health care and 
government programs. A forum is provided at the conference where Plans 
can share best practices of their own compliance and ethics programs. 
Following the successful completion of an examination, participants in 
each conference receive a certification of their compliance and ethics 
training.
    BCBSA also provides different levels of compliance training 
programs to Plans. BCBSA supplies video presentations, case studies, 
and extensive discussion materials to Plans to inform them of 
compliance and ethics issues affecting their organization's operations. 
These training materials review such issues as conducting risk 
assessments, creating effective internal controls, and developing a 
conflict of interest avoidance plan. Plans can use these tools to 
conduct their own internal training or Plans can request that BCBSA 
staff run a training session for them. More advanced training is also 
available for Plan senior staff involved in compliance and ethics 
activities. BCBSA staff is also available to answer questions about 
compliance or help Plans with modifications to their compliance plans. 
Finally, BCBSA also makes compliance and ethics information available 
to Plans on the Association's Intranet.
                               conclusion
    Blue Cross and Blue Shield Medicare contractors are committed to 
achieving outstanding performance. We believe more can and should be 
done to improve contractor's and HCFA's ability to safeguard the 
Medicare Trust Funds. Thus, we support exploring reform proposals that 
would allow contractors to compete on a level playing field, contract 
competitively as typical FAR-based government contractors, and contract 
on other than a pure cost reimbursement basis.
    Success in Medicare claims administration requires that HCFA and 
the contractors work together toward their mutual goal of accurate and 
timely claims payment. Fragmenting contracts, as HCFA has proposed, 
would take us in the wrong direction. The true path to strengthening 
Medicare administration lies in raising performance standards, 
aggressively enforcing them, and terminating the contracts of 
underperformers. To get there, Medicare contractors will need (1) 
adequate and stable funding levels; (2) clear and consistent guidance; 
and (3) specific performance expectations.
    We look forward to working with this Subcommittee and HCFA to make 
these needed improvements.

    Mr. Upton. We appreciate your testimony and again, like the 
others, appreciate your ability to get it up to us in advance 
in compliance with committee rules. I do have a couple of 
questions, and this has come out in a couple of the panels 
we've had now today, and that is the inadequate budget for 
enforcement. I realize, I guess in the plan they're supposed to 
do regular audits and I don't know if regular means once a year 
or once every 3 years. Someone earlier today testified that 
there had actually been cuts in HCFA's budget for 
administration. In earlier years I think though, from 1995 to 
1996, it did go up but it's one of the things I know Dr. Ganske 
touched on, and I want to follow up with HCFA folks as well in 
terms of what has been the level of funding for the fraud and 
abuse arm of HCFA in their role and as we deal with their 
budget in the next couple of weeks. We want to work with the 
appropriators to make sure in fact their level of funding is 
adequate for fiscal year 2000. But are you--when you talk about 
codes of conduct and other very good practices that have been 
put into place by your subsidiaries across the country, you did 
mention that there was an egregious conduct of HCFA that was 
dropped. Tell me a little bit more about that. What was it that 
they did?
    Mr. Cain. Sure. First, a slight correction on some of what 
you just said. The association doesn't have subsidiaries. All 
the Blue plans are independent----
    Mr. Upton. Family members.
    Mr. Cain. [continuing] companies. Careful with it. What was 
the egregious action? Actually I believe it came out of a 
provision that was in a law that passed the Congress in about 
1984 or 1985. It said that all the contractors would be 
annually ranked according to their CPEP scores. And the 
contractors whose scores were in the bottom 20 percent, no 
matter what their score was, if it was in the bottom 20 
percent, the contractor was subject to immediate termination. 
Now, we had examples of contractors scoring 95 out of a hundred 
two consecutive years and being in the bottom 20 percent, 
which--I mean, this is an A student whose jobs are all at risk. 
It just didn't make any sense at all and I understand had only 
lasted for about 4 or 5 years. That is no longer in place. But 
I can tell you it scared the contractors to death.
    Mr. Upton. What else would you say we ought to do? We heard 
from the earlier panels about annual audits or full audits, 
certainly within 3 years. What else in addition to beefing up 
the fraud and abuse arm of HCFA with more administrative staff 
to try and walk people through the right lanes? Do you have 
other suggestions in terms of what we might be able to do in 
terms of legislation?
    Mr. Cain. Well, again, it goes down two lines. If you keep 
the current structure of the whole program, then you really 
need to spend a lot more money on administration. Earlier today 
Mr. Klink a couple of times referred to the $1.6 billion spent 
on Medicare contractors, and he made it very clear that's a 
huge amount of money and it is. What is the total program? It's 
over $200 billion which means essentially something under 2 
percent of the program is going to administration. Now, there 
isn't a private insurance program in the world which would be 
anywhere close to only spending 2 percent on trying to 
administer an effective program.
    Mr. Upton. In the earlier panel, four States indicated that 
none of the people involved in the malfeasance criminal acts 
were with the company anymore. Do you know where those--do you 
all track those people in terms of where they might have gone? 
Do you have some way to verify they didn't go from New Mexico 
to Arizona or Michigan or California? Do you have any idea?
    Mr. Cain. I haven't. I haven't a clue as to where they are. 
I can tell you----
    Mr. Upton. Can you tell us they don't work for Blue Cross/
Blue Shield anywhere?
    Mr. Cain. No, I can't, but I would assume that's the case 
because the plan's hiring practices always requires 
investigating where did the person come from. So if nobody 
showed up at Blue Cross of Arizona having just departed from 
Colorado, Arizona is going to call up and find out what 
happened. So it's very improbable. It could happen, but it's 
improbable.
    Mr. Upton. Again, we appreciate your testimony and I would 
also like to put the same offer for all members of both the 
minority and majority to put their questions in writing if that 
is necessary and if you could respond in a timely manner, that 
would be appropriate. I ask unanimous consent--since nobody is 
here to object, it's not a problem--Pete Starks' testimony be 
made a part of the record as well. So without objection, it 
will be.
    And you are excused. Thank you very much.
    [Whereupon, at 2 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
Prepared Statement of Hon. Fortney Pete Stark, a U.S. Senator from the 
                          State of California
    Mr. Chairman: Thank you for holding this hearing today on the fight 
against Medicare fraud. It has been an uphill battle. But I believe 
there is substantial evidence that we have begun to make progress.
    First, the Congressional Budget Office's July Economic and Budget 
Outlook concludes that Medicare outlays in 1999 are down by $1 billion 
from last year, due in large measure to stepped up efforts by the 
federal government to crack down on fraud and abuse. Like many other 
members, I hope and expect that the Medicare Integrity Program will 
scrutinize claims and billings by providers much more closely and 
carefully than Medicare's current contractors have done.
    It is also good news for the government that many providers are 
showing signs of billing more cautiously. For example, the Health Care 
Financing Administration's chief actuary recently reported that for the 
first time ever, the hospital case-mix index went down by half a 
percentage point last year. There was a big shift away from DRGs with 
complications to those without complications. Similarly, there has been 
a big shift away from DRGs for respiratory conditions, to the much less 
expensive pneumonia DRGs. It is noteworthy that the Department of 
Justice investigated those two types of DRGs last year. This suggests 
that unlike the Inspector in Casablanca, we should not be ``shocked.'' 
When we have enough resources to monitor providers, the level of fraud, 
waste, and abuse declines. It is that simple.
    Second, the HHS Inspector General's annual audit of the Health Care 
Financing Administration's payment error rate found that in 1998, 
improper payments were roughly half what they had been just two years 
before.
    That's good news, but we must do better. By the IG's account, HCFA 
paid out almost $13 billion that it shouldn't have, and a substantial 
portion of those improper payments are likely due to fraud, waste and 
abuse.
    If we are not vigilant, Medicare's recent record of success in 
combating fraud could easily be derailed. It was only last year that 
providers launched a full-frontal assault on the False Claims Act, the 
government's primary civil statute for fighting not only health care 
fraud, but defense fraud, and all other contractor fraud. Fortunately, 
with the help of Chairman Bliley, Congressman Barton, Sen. Grassley and 
others, those efforts were turned back.
    If legislation gutting the False Claims Act had been enacted last 
year, the General Accounting Office's testimony on Medicare contractor 
fraud that was given at this subcommittee's oversight hearing on July 
14 would have been far more troubling. Without the False Claims Act, 
there would have been no effective way to halt and penalize contractor 
fraud in New Mexico and Colorado, which resulted in guilty pleas on two 
felony counts this summer by two Blue Cross & Blue Shield companies. 
Criminal fines in the case are $1.5 million, and the civil settlement 
under the False Claims Act has been set at $12 million.
    Reducing waste, fraud and abuse perpetrated by individual providers 
is just as critical to keeping Medicare whole. That's why efforts to 
gut the physician self-referral should be summarily rejected.
    The law is designed to prevent doctors from ripping off fee-for-
service Medicare by entering into referral-for-profit ownership and 
compensation schemes. We learned a long time ago that when physicians 
enter into compensation arrangements in which they receive free rent, 
discounts, large consulting fees, and other goodies in exchange for 
referring their patients to a particular facility, these doctors order 
many more services--at the taxpayer's and the patient's expense. Before 
the law was enacted, seniors were being steered to facilities in which 
their doctor had a financial interest, where they were given 
unnecessary services.
    Critics of the self-referral law charge that it is too complex. In 
some respects, I would agree. That's why I have introduced the Medicare 
Physician Self-Referral Improvement Act of 1999. In contrast to a 
counterproposal that would wipe out the federal government's ability to 
set any parameters for physician compensation relationships, H.R. 2650 
would make certain streamlining and clarifying changes. These changes 
would benefit honest doctors by adding flexibility to the law. I invite 
members of this committee to examine the bill I have introduced, a 
summary of which is attached, and to forward any comments you have to 
my staff or myself.
    It is simply wrong and hypocritical for the American Medical 
Association and other provider groups to come up here and tell members 
that the self-referral law is not working. It is working so well, in 
fact, that Columbia-HCA, a hospital chain I have long criticized, today 
has in place a comprehensive system that scrubs all arrangements with 
physicians before any contract is signed.
    One final point: The anti-kickback law is no substitute for the 
self-referral statute. As a criminal statute with an intent standard, 
it is applied retrospectively and is not effective at stopping the 
formation of sham arrangements in the first instance. Moreover, in some 
circuits, the anti-kickback law's intent standard requirement is 
impossible to meet.
    Recently, a federal judge in Kansas City overturned a conviction of 
one hospital executive in a closely followed case, U.S. v. Anderson, on 
the grounds that the evidence for the jury's conviction did not hold up 
``on the element of intent.''
    Mr. Chairman, not only must we keep current laws intact and strong, 
we must take additional steps to pursue health care fraud. Following 
are several recommendations that I hope will be considered.
    Medicare's accreditation process needs reform: A recent series of 
reports by the HHS Inspector General makes it clear that we must take 
steps to make the Joint Commission on Accreditation of Health Care 
Organizations more accountable. In brief, the IG found JCAHO's reviews 
have become far too ``collegial,'' or soft. I believe JCAHO needs to be 
far tougher, and that the organization itself should be subject to 
federal review. As a start in that direction, I have introduced 
legislation, H.R. 2174, that would require a simple majority of the 
governing board of all accrediting organizations to be individuals who 
do not have a financial stake in the organization or any of the 
facilities it accredits. I will be proposing other reforms soon.
    Far too many of our nation's long-term care facilities are 
delivering poor care. I commend the Commerce Committee for its fine 
work on the Nursing Home Research Protection Amendments of 1999. And I 
commend Sen. Grassley and the Senate Aging Committee for conducting a 
series of hearings on the abysmal quality of care in some facilities, 
and on the lack of oversight generally of our nation's nursing homes. I 
was among the group of members in 1997 who commissioned GAO's report on 
California's nursing homes, which produced a long list of 
recommendations for various reforms.
    Some of those are included in omnibus long-term care legislation 
(H.R. 2691) that I introduced last month with Rep. Ed Markey and Jim 
McGovern. The bill calls for nursing homes to disclose the ratio of 
licensed and unlicensed staff to residents. Another allows states to 
assess a fee on facilities that are substantially out of compliance to 
cover the costs of re-inspections. This way, facilities will have 
greater incentive to correct problems more quickly than they do today.
    In addition, I hope the subcommittee will consider legislation I 
introduced this summer with Sen. Herb Kohl (H.R. 2627). It requires all 
long-term care facilities to conduct criminal background checks on 
applicants. And it establishes a national abuse registry that builds on 
existing state registries to screen out prospective workers who have a 
history of patient abuse.
    Other reforms that could be considered are beefing up Medicare 
survey and certification funding for home health agencies and other 
providers. That will take money, and I strongly recommend that members 
of this subcommittee and others with jurisdiction over HCFA reject 
proposals to sharply cut the agency's funding. The true test of whether 
Congress is willing to continue to fight Medicare fraud and waste will 
be evident in how much we fund HCFA's administrative budget for FY 
2000. I have testified before Chairman Porter's subcommittee on the 
urgent need to boost the agency's administrative funding from current 
levels, and I hope that you will join me in support of those efforts. I 
must ask, what good is an entitlement if no one is there to administer 
it?
    I also urge this Congress to take steps to tighten parameters for 
providers to participate in Medicare's partial hospitalization program 
(H.R. 1543), which this subcommittee has held hearings on already. And 
while it is good news that voluntary compliance plans are slowly 
becoming more common among sectors in the health care industry, I 
believe that Congress should take steps to require that by date 
certain, all providers, large and small, have working compliance plans 
in place as a condition of participation in Medicare.
    Finally, we are being lobbied by many to undo parts of the BBA 
which did so much to fight fraud:

--We must resist efforts to undo consolidated billing for skilled 
        nursing facilities. If we give in and unbundle services, 
        nursing home patients will again be flooded with supplies and 
        equipment and SNFs will have less incentive to manage costs.
--We must also resist efforts to block competitive bidding for durable 
        medical equipment and Medicare HMOs. We are being lobbied to 
        block those programs because competitive bidding does result in 
        savings to the taxpayer. The data out of Florida are exciting: 
        equipment we have been told for years could not possibly be 
        delivered for a penny less will be offered for as much as 31% 
        less.
--We must continue HCFA's program of expanding the number of DRGs that 
        are covered under the BBA's discharge and transfer rule (H.R. 
        1936). The data are clear that hospitals have been discharging 
        patients quicker than average, usually to downstream facilities 
        they own, where the patient stays longer and total costs to 
        Medicare are often increased.
--We should resist the mis-statements of the managed care industry that 
        they aren't being paid enough. The fact is that the HMO program 
        costs Medicare and the 83% of seniors who are not in managed 
        care more than if the enrollees had stayed in fee-for-service 
        Medicare. Cries for a delay in risk adjustment are really 
        statements that ``we've enrolled healthier-than-average people, 
        but please look the other way and keep paying us more than you 
        should.''
--We need to pass legislation such as H.R. 2559 of the 105th Congress, 
        which bans the proliferation of hospitals now buying doctors' 
        practices and calling them hospital outpatient departments. 
        That is simply a way to increase charges on patients and 
        Medicare.
--We should pass H.R. 2229, the President's package of anti-fraud 
        initiatives. In particular, paying pharmaceuticals at 95% of 
        the Average Wholesale Price is an insulting joke on the 
        American taxpayer. The AWP system is basically an organized 
        conspiracy to rip off taxpayers and patients. We should move to 
        Actual Acquisition Cost plus an administrative fee.
    We've come a long way in the last decade. But we still have a long 
way to go--and we should not retreat.
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