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



 
    MEDICAID FRAUD AND ABUSE: ASSESSING STATE AND FEDERAL RESPONSES

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 9, 1999

                               __________

                           Serial No. 106-72

                               __________

            Printed for the use of the Committee on Commerce



                    U.S. GOVERNMENT PRINTING OFFICE
61-043 CC                   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

Testimony of:
    Adams, Mitchell, Chief Executive Officer, Healthwatch, 
      Technologies, LLC, accompanied by Jim Gorman, President and 
      Chief Operating Officer....................................    61
    Aronovitz, Leslie G., Director, Chicago Field Office, U.S. 
      General Accounting Office..................................     6
    Fecteau, Marc P., Assistant Director, Department of Human 
      Services, Bureau of Medical Services, State of Maine.......    40
    Glynn, Michael J., CEO, Codman Group, accompanied by Philip 
      Caper, Founder and Chairman of the Board, Codman Group.....    73
    Hartwig, John E., Deputy Inspector General for Inspections, 
      Office of the Inspector General, Department of Health and 
      Human Services.............................................    14
    Krayniak, John, Director, Medicaid Fraud Control Unit, 
      Division of Criminal Justice, State of New Jersey..........    22
    MacQuarrie, Jean, Medstat....................................    77
    Thompson, Penny, Medicare Program Integrity Group, Health 
      Care Financing Administration, accompanied by Rhonda Hall, 
      National Coordinator, Medicaid Fraud and Abuse.............    44
    Viola, Greg, Senior Manager, Deloitte and Touche.............    67
    Williams, Gwendolyn H., Montgomery, Alabama..................    34

                                 (iii)

  


    MEDICAID FRAUD AND ABUSE: ASSESSING STATE AND FEDERAL RESPONSES

                              ----------                              


                       TUESDAY, NOVEMBER 9, 1999

                  House of Representatives,
                             Committee on Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:30 a.m., in 
room 2322, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Burr, Bilbray, 
Bryant and Green.
    Staff present: Chuck Clapton, majority counsel; Amy 
Davidge, legislative clerk; and Chris Knauer, minority 
investigator.
    Mr. Upton. It must be 10:30. Good morning, everyone.
    Today we're going to hold a hearing to look at fraud and 
abuse in the Medicaid program. Unlike the more publicized 
problem of Medicare fraud, less attention has been paid to 
fraud in the Medicaid program, which helps to pay for the 
health care costs of many of our poorest and oldest citizens.
    I hope that by focusing greater attention on this problem, 
we can encourage State and Federal authorities to increase 
their efforts to reduce Medicaid fraud and abuse. The amounts 
of money being lost to Medicaid fraud are staggering. Using the 
more conservative estimate of 10 percent that has been 
previously suggested by the GAO, Medicaid may have lost as much 
as $17 billion to fraud and abuse during fiscal year 1998.
    No one knows precisely how much fraud has actually cost the 
Medicaid program, however, although many experts believe the 
number may be far higher than the 10 percent estimate that I 
used.
    As we will hear from our witnesses today, Medicaid fraud 
and abuse is a problem which appears to be growing worse. Just 
last week, the GAO released a report which had been requested 
by Senator Susan Collins from Maine. This report described how 
Medicaid and Medicare are increasingly being defrauded by 
organized criminal groups which are carrying out sophisticated 
and well-organized crimes and scams. Each of these frauds can 
cost the Medicaid program tens and even hundreds of thousands 
of dollars every month, maybe even millions. According to the 
report, many criminals now regard Medicaid cards as their own 
personal Visa or MasterCards which can be used to obtain money 
wherever and whenever they need it.
    In order to assess how well States and the Federal 
Government are responding to the Medicaid fraud problems, we 
should heed the advice of Professor Malcolm Sparrow and count 
the zeros. Professor Sparrow, one of the foremost academic 
experts in the field of health care fraud, has described a 
process for comparing the total value of claims paid, estimated 
losses to Medicaid fraud and the amounts invested in program 
integrity efforts.
    For example, Medicaid last year paid approximately $177 
billion in claims and, using a conservative estimate, lost $17 
billion to fraud and abuse. That's a 17 followed by 9 zeroes. 
Funding for Medicaid Fraud Control Units, which serve as the 
principal agent for investigating and prosecuting Medicaid 
fraud, was only $85 million--or 85 followed by 6 zeroes.
    Even taking into account additional funding for other 
program integrity activities, Professor Sparrow estimated that 
the total amount invested to protect Medicaid from fraud and 
abuse is no more than a few hundred million dollars. This 
clearly reflects a severe underinvestment in program integrity 
amounts.
    Nowhere are the effects of this underinvestment more 
pronounced than in the acquisition and use of computer tools to 
detect fraud and abuse. As anyone who has recently purchased a 
PC can tell you, technology is changing so rapidly that a 
computer bought only last year is now out of date, and one 
purchased 5 years ago is almost hopelessly antiquated. How then 
can we expect State Medicaid agencies, some of which are still 
using 10-year-old computer systems to process and review 
Medicaid claims, to have any hope of uncovering these new, 
highly complex fraud schemes?
    In order to address these concerns, several technology 
vendors have developed new computer tools to assist State 
efforts to detect Medicaid fraud and abuse. The witnesses on 
the second panel today, including Jean McQuarrie from Medstat 
technologies from Michigan, are providing new and innovative 
ways for States to acquire the latest in technology systems to 
improve their anti-fraud efforts.
    I look forward to hearing from these witnesses and seeing 
demonstrations of how these products can, in fact, improve 
anti-fraud efforts. In addition, I look forward to hearing from 
all of today's witnesses on what else can be done to control 
the Medicaid fraud problem. Whether it is through policy 
changes or through the continuing use of congressional 
oversight to identify problem areas, we in Congress do have an 
obligation to do our very best to protect this important 
program.
    I yield to the gentleman from Texas, Mr. Green, for an 
opening statement.
    Mr. Green. Thank you, Mr. Chairman. And thank you for 
scheduling this important hearing and bringing this to our 
attention.
    As a member of the Health and Environment Subcommittee, I 
have attended several hearings on the issue of health care 
fraud. Traditionally, because of how these programs are 
financed, our primary focus has been reducing Medicare fraud, 
in fact, not only on this committee but in earlier service on 
the Government Operations Committee.
    While HCFA has made significant improvements in reducing 
the amount of overpayments and mispayments to Medicare 
providers, it's time for us to focus our attention to the 
Medicaid program. The fact that the amount of fraud in the 
Medicaid program is estimated to be at least 10 percent of all 
claims and as much as 30 percent tells us we have a lot of work 
to do.
    If the conservative estimate of 10 percent is accurate, 
then it translates into approximately $17 billion in improper 
payments. As the overall percentage of fraud increases, it 
becomes clear that we may be misspending over $50 billion per 
year. This, incidentally, would be enough to pay for things 
such as a prescription drug benefit for seniors.
    Unfortunately it's our responsibility to make sure that 
every appropriate action to reduce fraud at every level of the 
Medicaid program is implemented. But before we can do that, we 
have to first identify how much money is being wasted and what 
steps can be taken to reduce that fraud.
    I look forward to the witnesses and the hearing we have 
today, Mr. Chairman, especially the GAO who is releasing a 
report today on this very issue; and I yield back my time.
    Mr. Upton. Thank you.
    Mr. Burr, the vice chairman, for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman; and thank you for this 
hearing on Medicaid fraud and abuse. It's not the first, it 
won't be the last, and as I walked over I've got to admit I've 
got some great questions today. But the big question is. Will 
the answers be different than anything this committee has heard 
before? We always do a tremendous job of reiterating in 5 or 6 
different ways that staff memo as to why we're holding this 
hearing.
    I want to thank all the witnesses, Panel I and Panel II, 
for their willingness to come today, but I would also plead 
with you, tell us what the solution is. I'm tired of having IG 
reports that tell us that waste, fraud and abuse exists; and 
whether it's 5 percent or 10 percent or 30 percent, if it 
exists, it ought to be eliminated. Tell us what the problem is. 
Is the problem that we need to get the Federal Government out 
of the structure of the programs and let the States do it or 
get more involvement from the private sector as it relates to 
determining where the fraud and abuse is and identifying how to 
eliminate it?
    We can all speculate as to what the problem is. But until 
those who are the closest to it can tell us how to eliminate 
it, we will continue to hold hearings that continue to discuss 
waste, fraud and abuse, a rip-off of the American taxpayers 
but, more importantly, money that is devoted to health care to 
individuals across this country that does not make it to them 
and does not make it to their coverage.
    I agree with Mr. Green, there are many things we can do 
with this money if we can figure out how to make sure that it's 
accounted for and to make sure that the criminal element in 
there--I made comments when I came to Congress, Mr. Chairman, 
that there's one thing I will always be convinced of, coming 
from the private sector, that thieves are much smarter than 
bureaucrats.
    It will always exist that they will outsmart every trap 
that we're able to create, but there will be an element always 
of waste, fraud and abuse and that our objective is to make 
sure it's as small as it can possibly be. I don't know that we 
can get there until we layer back the complicated delivery 
systems that we have designed, and I look forward to our 
witnesses' comments on that.
    And I yield back.
    Mr. Upton. Thank you.
    Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman.
    Let me immediately associate myself with the remarks of my 
colleague from North Carolina on this and just tell you that I 
have a long opening statement that I will give that I will 
submit for the record.
    I will also add that, as a former United States attorney, 
we were one of the first offices--one of the first, there were 
several ahead of us--one of the first to open up a fraud and 
abuse section on health care. And what we found out immediately 
was that our Federal investigative agencies--and I'm not going 
to name the names, but you all know who they are--did not have 
that in those days as a priority. And, of course, they were out 
fighting drugs and white collar crime and bank robberies and 
all kinds of other things that are very important, but we found 
an amazing group of Statewide people who regulated the State 
medical industry, investigators there who, they cannot find 
prosecutors, local district attorneys to prosecute their cases. 
So we put together that team of Federal prosecutors primarily 
with State investigators and had some success there.
    But I remember sort of what my friend from North Carolina 
said. I remember back in those days it was not that big of a 
push. But I think poignant to this hearing is the fact that we 
were finding criminals from other areas, we were getting out of 
the old areas of ripping off people and getting into the health 
care because it was so easy and so much money involved here, 
and I sense, after hearing some of the reports that we've had 
and some the statements that will be presented today, that that 
still is going on.
    So I wish you could come in here and give us an easy 
answer. There is no easy answer. We know that. But if you can--
as my colleague has said, if you can give us some ideas of what 
we can do, it may be this is just such a massive area that it 
cannot be controllable, but we have to do better. And we will 
never get to the end, but we have to do better.
    And, again, thank all of you for coming in. I look forward 
to hearing from you and you answering our questions. Thank you.
    Mr. Upton. Thank you.
    Mr. Bilbray.
    Mr. Bilbray. Mr. Chairman, I think my colleagues on both 
sides of the aisle have addressed this item for opening 
statements quite appropriately, and I would yield back with the 
request that we get to testimony. Thank you very much.
    Mr. Upton. Thank you.
    I would just like to ask for unanimous consent that all 
members of the subcommittee may submit in full, in their 
entirety, any opening statements that they may have. And so 
moved.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Let me begin by thanking Subcommittee Chairman Upton for holding 
this hearing today. By focusing public scrutiny on the issue of 
Medicaid fraud and abuse, we can hopefully raise the level of awareness 
about this troubling problem, and encourage the state and Federal 
agencies to redouble their efforts.
    Health care fraud and abuse is an enormous problem in this country, 
with a cost that has been estimated by some experts to exceed $100 
billion every year. In the Medicaid program alone, the cost of fraud 
and abuse may exceed $17 billion every year. While these numbers are 
shocking, they fail to convey the human impact of this sort of fraud. 
Our greatest concern should relate to how this type of fraud hurts our 
most vulnerable citizens, the poor, the elderly and the disabled, who 
all depend on Medicaid to provide their health care needs. Every dollar 
that Medicaid loses to fraud and abuse is a dollar that does not go to 
health care for these individuals. So, it is particularly troubling to 
me that Medicaid fraud is on the rise.
    Too often, Medicaid anti-fraud efforts have been overshadowed by 
larger initiatives which focused on fraud and abuse affecting Medicare. 
The Committee on Commerce has sought to focus attention on the issue of 
Medicaid fraud through its recent oversight work. Committee staff have 
interviewed many of the agencies and individuals who serve on the front 
lines of current efforts to control Medicaid fraud, to learn what can 
be done to improve current efforts. A recent General Accounting Office 
report, prepared for Senator Susan Collins, detailed the growing 
sophistication of criminal organizations exploiting Medicaid and other 
government health care programs. Increasingly complex fraud schemes, 
each of which can cost State Medicaid programs hundreds of thousands of 
dollars every month are detailed. To further avoid detection, these 
groups often rapidly move from State to State. They also often quickly 
move the proceeds overseas, which makes it almost impossible for law 
enforcement to recover these monies, if and when the fraud is ever 
detected.
    To combat this problem, the Medicaid program relies upon an array 
of State and Federal agencies. Unfortunately, these agencies are not 
set up to work in concert. Activities are often uncoordinated, and in 
many cases the agencies lack the resources to adequately address fraud.
    We will hear today from current and former State officials who will 
describe how some Medicaid agencies are still relying on twenty year 
old computers to detect and track fraud and are operating on budgets 
that under fund Medicaid program integrity efforts.
    If we are to make progress to protect Medicaid recipients from 
fraud and abuse, we must encourage the States to take the necessary 
steps to address these issues. At the Federal level, both the Health 
Care Financing Administration (HCFA) and the Office of Inspector 
General at the Department of Health and Human Services need to better 
coordinate their efforts.
    The benefits from such efforts have already been demonstrated. In 
recent years, limited multi-state anti-fraud initiatives, coordinating 
the activities of a wide array of agencies responsible for combating 
health care fraud, have lead to finding almost $200 million in 
inappropriate payments. Such initiatives should serve as a model for 
future efforts to detect and prevent Medicaid fraud. We have the 
capability to combat this problem, and we have an obligation to the 
folks who use the Medicaid program to ensure that we are doing all that 
we can to stop fraud and abuse in this important program.

    Mr. Upton. With that, we will start with the testimony.
    Ladies and gentlemen, we have a long tradition in this 
subcommittee, and you may know, of taking testimony under oath. 
Do any of you have objection to that?
    We also allow for counsel both under committee rules and 
under House rules. Do you need counsel? And, if not, if you 
would all stand and raise your right hand.
    [Witnesses sworn.]
    Mr. Upton. Thank you. Let me just introduce you for the 
audience, and we will proceed.
    Ms. Leslie Aronovitz, the Director of the Chicago Field 
Office, GAO; Mr. Jack Hartwig, Deputy Inspector General for 
Inspections, Office of the Inspector General; John Krayniak, 
Director of the Medicaid Fraud Control Unit, Division of 
Criminal Justice for the State of New Jersey; Ms. Gwen 
Williams, from Montgomery, Alabama; Mr. Marc Fecteau, Assistant 
Director, Department of Human Services, Bureau of Medical 
Services, for the State of Maine; and Ms. Penny Thompson, 
Director, Medicare Program Integrity Group, Health Care 
Financing Administration, HCFA, from Baltimore, accompanied by 
Ms. Rhonda Hall, the National Coordinator of Medicaid Fraud and 
Abuse.
    Ladies and gentlemen, we thank you and welcome. We would 
like you to limit your remarks to 5 minutes. We've got this new 
timer up here instead of the kitchen timer that we've had for a 
year. So this is brand new. It will give you a little warm-up 
light, a yellow light, before your 5 minutes expires. Your 
testimony will be made part of the record in its entirety.
    Ms. Aronovitz, we will begin with you. Thank you for coming 
this morning.

   TESTIMONY OF LESLIE G. ARONOVITZ, DIRECTOR, CHICAGO FIELD 
OFFICE, U.S. GENERAL ACCOUNTING OFFICE; JOHN E. HARTWIG, DEPUTY 
  INSPECTOR GENERAL FOR INSPECTIONS, OFFICE OF THE INSPECTOR 
 GENERAL HHS; JOHN KRAYNIAK, DIRECTOR, MEDICAID FRAUD CONTROL 
   UNIT, DIVISION OF CRIMINAL JUSTICE, STATE OF NEW JERSEY; 
 GWENDOLYN H. WILLIAMS, MONTGOMERY, ALABAMA; MARC P. FECTEAU, 
  ASSISTANT DIRECTOR, DEPARTMENT OF HUMAN SERVICES, BUREAU OF 
MEDICAL SERVICES, STATE OF MAINE; AND PENNY THOMPSON, MEDICARE 
PROGRAM INTEGRITY GROUP, HEALTH CARE FINANCING ADMINISTRATION, 
  ACCOMPANIED BY RHONDA HALL, NATIONAL COORDINATOR, MEDICAID 
                        FRAUD AND ABUSE

    Ms. Aronovitz. You're very welcome.
    Mr. Chairman and members of the subcommittee, we are 
pleased to be here today to discuss ways to combat fraud and 
abuse in the Medicaid program. Federal and State expenditures 
total over $175 billion a year and pay for the health care of 
40 million poor mothers, their children, and poor elderly, 
blind and disabled individuals. Neither the beneficiaries nor 
Federal and State taxpayers can afford to see these funds 
misspent.
    We have just launched a study to better understand the 
scope and effectiveness of Medicaid program integrity efforts 
at the Federal and State levels and we will report on our 
results next spring.
    Today my remarks will focus on a brief overview of the 
multiple players involved in addressing Medicaid fraud and the 
importance of Federal and State cooperation.
    Medicaid fraud and abuse control entails a complex mix of 
characters and entities. For a composite view of this mix, I 
call your attention to the easel on your right. You can find a 
more detailed chart on page 4 of your written statement, and 
you should have a small copy of the chart with your materials.
    As a practical matter, the front line of oversight and 
enforcement takes place in the States, so I will begin with the 
middle section of the chart first. The two key players at the 
State level are the State Medicaid agency and the Medicaid 
Fraud Control Unit, which--and I'm not making this up--as 
everyone in the enforcement business calls it, the MFCU. Each 
State has its own Medicaid agency, generally located in the 
State's Department of Health and Welfare or Human Services. The 
State Medicaid agency not only pays claims and performs other 
administrative duties, but it also conducts program integrity 
activities.
    State Medicaid agencies typically have a data analysis unit 
called a SURS, which stands for Surveillance and Utilization 
Review Subsystem. The SURS unit is dedicated to reviewing paid 
claims to identify suspect billing practices or other 
aberrations indicating potential wrongdoing. Separate from the 
State Medicaid agency, 47 States have MFCUs, again the Medicaid 
Fraud Control Unit, which are generally located in the State's 
Attorney General's Office. The MFCUs carry out investigations 
and in most States have the authority to prosecute.
    This brings us to the local level, where the local district 
attorney can assist the State MFCU or prosecute in situations 
where MFCUs do not have prosectorial authority.
    At the Federal level, you will notice that the two key 
departments are Health and Human Services, and Justice. Within 
HHS are the Health Care Financing Administration and the Office 
of Inspector General HCFA oversees the States' Medicaid 
agencies and the IG oversees the States' MFCUs. In the Justice 
Department, the key players are the U.S. Attorneys and the FBI.
    Our previous work shows that various Federal, State and 
local agencies may have different or competing priorities in 
their efforts to investigate, prosecute and enforce compliance. 
This complicates Federal and State fraud control efforts and 
makes such orchestrated government stings as Operation Gold 
Pill and Operation Restore Trust, which are discussed in our 
written statement, remarkable examples of interagency 
coordination.
    Our work in this area also shows that, in addition to 
coordinating the multiple players, investing in preventive 
strategies and dedicating adequate resources to fraud control, 
units are essential components of an effective program 
integrity strategy.
    One issue we are pursuing in our study is the appropriate 
role for HCFA in working with the States. We recognize the 
difficulty in striking a balance between the stewardship of 
Federal Medicaid funds and the need for flexible approaches in 
dealing with 50-plus separate Medicaid programs. However, 
mindful of that balance, HCFA is in a position to explore in 
partnership with all of the States the appropriate level of 
commitment to preventing and detecting fraud and abuse. We 
think it's important because both have a fiduciary 
responsibility to administer Medicaid efficiently and 
effectively.
    This concludes my prepared statement, and I will be happy 
to answer questions that 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, Health, Education, and Human 
                         Services Division, GAO
    Mr. Chairman and Members of the Subcommittee: We are pleased to be 
here today as you discuss ways to combat fraud and abuse in the 
Medicaid program. Some 40 million Americans--not only poor mothers and 
children but also poor elderly, blind, and disabled individuals--depend 
on health care services made possible by the Medicaid program. With 
total expenditures of over $177 billion in fiscal year 1998, Medicaid 
is the third largest social program in the federal budget and 
represents a significant share of individual state budgets as well.
    Fraud and abuse drains away vital program dollars and exploits 
taxpayers and vulnerable beneficiaries. As we recently reported, 
consumers and legitimate health care providers have been victimized by 
the fraud schemes of career criminals and organized criminal 
groups.1 While the Department of Health and Human Services 
(HHS) and the Department of Justice have recently augmented their 
program integrity activities for Medicare, the Congress is concerned 
that a similar emphasis be placed on fraud and abuse control in 
Medicaid. We have just launched a study to better understand the scope 
and effectiveness of Medicaid program integrity efforts at the federal 
and state levels and will report our results next spring. Today, my 
remarks will focus on a brief overview of the problem, several key 
components of fraud control, and the importance of federal and state 
cooperation. My comments are based on observations gleaned from our 
prior work addressing both Medicaid and Medicare program integrity 
issues and from our ongoing Medicaid study.
---------------------------------------------------------------------------
    \1\ Health Care: Fraud Schemes Committed by Career Criminals and 
Organized Criminal Groups and Impact on Consumers and Legitimate Health 
Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).
---------------------------------------------------------------------------
    In summary, our body of work on health care fraud and abuse 
indicates that programs the size and structure of Medicaid are 
inherently vulnerable to exploitation. Fraud schemes often cross state 
lines and enforcement jurisdictions, entailing a number of federal, 
state, and local agencies that may have different or competing 
priorities in their efforts to investigate, prosecute, and enforce 
compliance. Experience shows that coordinating the efforts of the 
multiple players, investing in preventive strategies, and dedicating 
adequate resources to fraud control units are essential components of 
an effective program integrity strategy. Finally, our work shows that 
the Health Care Financing Administration (HCFA), the agency in HHS 
responsible for administering Medicaid federally, is in a position to 
work in partnership with the states to ensure an appropriate level of 
commitment in states' efforts to control Medicaid fraud and abuse.
                               background
    Medicaid is a jointly funded federal-state health insurance program 
for eligible low-income and needy people. Although it is one federal 
program, as a practical matter, it consists of 56 separate programs 
(including the District of Columbia, Puerto Rico, and the U.S. 
territories). Within broad federal guidelines, each state establishes 
its own eligibility standards; determines the type, amount, duration, 
and scope of services; sets the rate of payment for services; and 
administers its own program. For fiscal year 1998, federal Medicaid 
expenditures were over $101 billion, with the states contributing about 
$76 billion. For each state, the federal share varies according to a 
statutory formula. The federal government picks up at least half the 
cost for medical services, and in nine states, it pays for more than 70 
percent.
    Medicaid fraud and abuse control entails a complex mix of actors 
and entities. At the federal level, HCFA and the HHS Office of 
Inspector General (OIG) have program oversight responsibilities. The 
Federal Bureau of Investigation (FBI) and the U.S. Attorneys in the 
Department of Justice are responsible for enforcement under certain 
conditions. However, front line oversight and enforcement reside 
primarily with the states. Each state administers its Medicaid program 
through a state Medicaid agency--variously situated in departments such 
as health, welfare, or human services. In addition to paying claims and 
performing other administrative duties, the state Medicaid agencies 
conduct program integrity activities. Many state Medicaid agencies have 
a ``data mining'' unit--a surveillance and utilization review subsystem 
(SURS) unit--dedicated to reviewing paid claims to identify suspect 
billing practices or other aberrations indicating potential wrongdoing. 
Separate from the state Medicaid agency, 47 states have Medicaid Fraud 
Control Units (MFCU), generally located in the state's attorney 
general's office, which carry out investigations and prosecutions. For 
a composite view of the multiple agencies involved in Medicaid fraud 
and abuse control, see table 1.

         1. Overview of Medicaid Fraud and Abuse Control Efforts
------------------------------------------------------------------------
             Agency                 Responsibility    Related activities
------------------------------------------------------------------------
Federal
Department of Health and Human Services (HHS)
Health Care Financing             Oversees state      Among other
 Administration (HCFA).            Medicaid agencies.  activities,
                                                       through its
                                                       Medicaid Fraud
                                                       and Abuse
                                                       National
                                                       Initiative, HCFA
                                                       provides an
                                                       ongoing forum and
                                                       training for
                                                       state officials
                                                       on fraud control.
Office of Inspector General       Oversees state      The OIG can
 (OIG).                            Medicaid Fraud      sanction
                                   Control Units.      fraudulent
                                  Investigates         providers by
                                   federal Medicaid    imposing
                                   fraud cases.        exclusions and
                                                       civil monetary
                                                       penalties.
                                                      It refers
                                                       investigative
                                                       findings to DOJ.
Department of Justice (DOJ)
U.S. Attorneys..................  Prosecute Medicaid  The U.S. Attorneys
                                   fraud cases         also indict,
                                   referred by FBI     negotiate
                                   and HHS OIG.        settlements, and
                                                       make recoveries.
Federal Bureau of Investigation   Investigates        The FBI refers
 (FBI).                            federal fraud       investigative
                                   cases but cannot    findings to the
                                   impose sanctions.   U.S. Attorneys.
State
State Medicaid agency (located    Administers state   The state Medicaid
 in such departments as health,    Medicaid program    agency's
 human services, and welfare).     and oversees        activities may
                                   Medicaid program    include
                                   integrity           conducting pre-
                                   activities.         and postpayment
                                                       claims reviews
                                                       and administering
                                                       the provider
                                                       enrollment
                                                       process.
Program integrity/surveillance    Reviews claims      SURS units refer
 and utilization review            data to detect      suspected fraud
 subsystem (SURS) \1\ unit.        and investigate     cases to the
                                   aberrant payment    state's MFCU and
                                   patterns and        noncriminal cases
                                   conducts other      to the state
                                   types of            Medicaid agency's
                                   integrity           collection unit.
                                   activities.
Medicaid Fraud Control Unit       Investigates and    The MFCU may refer
 (MFCU) \2\ (generally in state    prosecutes cases    cases that will
 Attorney General office).         involving           not be prosecuted
                                   fraudulent          to the state
                                   Medicaid            Medicaid agency
                                   activities.         or other
                                  Investigates and     authority for
                                   acts on             administrative
                                   complaints of       action.
                                   abuse or neglect
                                   of patients in
                                   facilities
                                   receiving
                                   Medicaid funding.
Local
District attorney...............  Prosecutes
                                   Medicaid fraud
                                   cases in states
                                   where MFCUs do
                                   not have
                                   prosecutorial
                                   authority.
------------------------------------------------------------------------
\1\ States vary in how their program integrity activities are organized
  and in what the units are called.
\2\ Three states do not have MFCUs--Idaho, Nebraska, and North Dakota.

      fraud and abuse are a persistent problem in medicaid program
    The magnitude of fraud and abuse in the Medicaid program has not 
been quantified. Nevertheless, similar fraud and abuse schemes crop up 
in different states, and states have problems with fraud and abuse 
under both fee-for-service and managed care payment methods. Medicaid 
is vulnerable to fraud because of some intrinsic characteristics--such 
as its share of states' budgets and its vulnerable beneficiary 
population.
Several Types of Fraud and Abuse Are Common in Medicaid
    Common Medicaid fraud and abuse schemes generally fall into three 
broad groups: improper billing practices, misrepresentations of 
professional or service qualifications, and improper business 
practices.2 Improper billing practices include ``upcoding,'' 
in which the provider misrepresents treatment provided and bills for a 
more costly procedure; ``ghost'' or ``phantom'' billing, in which a 
provider bills for services never provided; and delivering more 
treatment than is either necessary or appropriate for the patient's 
diagnosis. Misrepresenting qualifications encompasses such offenses as 
submitting false credentials to obtain a Medicaid provider number and 
performing treatments outside the bounds of what is permitted by one's 
license. Among the improper business practices found in Medicaid are 
kickbacks for referring or otherwise steering patients to a particular 
provider or product such as pharmaceuticals; self-referrals, in which 
providers, for example, may order and request lab tests from companies 
they own or have a financial interest in; and antitrust violations, in 
which companies collude with each other or with providers to improperly 
influence payments or fees. Table 2 contains examples of fraud and 
abuse cases from the files of state MFCUs.
---------------------------------------------------------------------------
    \2\ Fraud involves a willful act to deceive for gain, whereas abuse 
typically involves actions that are inconsistent with acceptable 
business and medical practices.

              Table 2: Examples of Medicaid Fraud and Abuse
------------------------------------------------------------------------
               Type of fraud                           Example
------------------------------------------------------------------------
Billing Fraud.............................  A psychiatrist operated a
                                             ``psychotherapy mill,'' in
                                             which parents were enticed
                                             to enroll their children in
                                             ``free'' enrichment
                                             programs such as after-
                                             school tutoring, field
                                             trips, and supervised
                                             recreation in exchange for
                                             their children's Medicaid
                                             numbers. Using these
                                             numbers, the psychiatrist
                                             billed Medicaid for
                                             psychotherapy services not
                                             provided. A psychologist he
                                             employed discovered the
                                             scam and negotiated a
                                             higher salary from him. The
                                             psychologist also set up
                                             her own copycat operation.
                                             State officials estimated
                                             that the two fraudulently
                                             obtained $421,000 from
                                             Medicaid. The defendants
                                             pleaded guilty, were
                                             ordered to pay fines and
                                             restitution, and received
                                             probation. Source: Georgia
                                             State Health Care Fraud
                                             Control Unit.
Business Practices Fraud..................  Two businessmen pleaded
                                             guilty to felony charges
                                             related to a complex scheme
                                             of submitting fraudulent
                                             nursing home cost reports
                                             to the state's Medicaid
                                             program. The scheme
                                             involved a nursing home
                                             chain and a shell
                                             corporation that the chain
                                             allegedly contracted with,
                                             enabling the owners to bill
                                             Medicaid for inflated
                                             expenses related to phony
                                             contracts with the nursing
                                             homes. Through a complex
                                             web of bank and investment
                                             accounts, the owners
                                             laundered payments. The
                                             scheme, which netted the
                                             owners nearly $10 million
                                             in excess Medicaid
                                             reimbursements, was
                                             discovered when a state
                                             auditor became suspicious
                                             of high payments to the
                                             shell company. One of the
                                             defendants received 50
                                             months in prison and a
                                             $70,000 fine; the other, 36
                                             months in prison and a
                                             $50,000 fine. Both received
                                             an additional 3 years of
                                             supervised release. As
                                             restitution, the pair
                                             agreed to pay about $6
                                             million to the state
                                             Medicaid program and to
                                             forfeit of an additional $2-
                                             million-plus in assets.
                                             Source: Georgia State
                                             Health Care Fraud Control
                                             Unit.
Fraudulent Misrepresentation of             A woman, who had never
 Qualifications.                             attended, graduated, or
                                             received a degree from a
                                             nursing school, presented a
                                             false nursing license to
                                             several nursing homes that
                                             employed her. She also
                                             contracted with a county
                                             Board of Mental Retardation
                                             and Developmental
                                             Disabilities to provide
                                             nursing and counseling
                                             services. The
                                             misrepresentation was
                                             discovered when substandard
                                             care she provided led to
                                             complaints and a subsequent
                                             investigation. A state
                                             nursing board determined
                                             that the woman posed as a
                                             nurse for at least 5 years.
                                             She was charged with felony
                                             Medicaid fraud, felony
                                             forgery, and misdemeanor
                                             practice of unlicensed
                                             nursing. She pleaded guilty
                                             and was sentenced to 5
                                             years' probation and was
                                             ordered to either pay some
                                             $3,850 in restitution or
                                             perform 84 days of
                                             community service. Source:
                                             Ohio Attorney General's
                                             Health Care Fraud Section.
------------------------------------------------------------------------

    Fee-for-service providers do not have a monopoly on fraudulent and 
abusive health care practices. Under managed care, providers intending 
to exploit the program have adapted to new financial incentives. 
Whereas receiving a fee for each service enables providers to enhance 
revenues by ordering too many services, receiving a lump-sum payment in 
advance for each enrollee can encourage dishonest providers to enhance 
their profits by stinting on patient care. Consistent with this 
incentive are examples of Medicaid managed care fraud and abuse by 
prepaid health plans: avoiding expensive treatments, underfinancing 
plan operations, providing poor quality care, using deceptive marketing 
practices, and claiming phony enrollments. In a specific instance in 
Tennessee, a managed care plan used a homeless shelter as the address 
for nearly 4,500 fictitious enrollees--a scheme that was generating 
nearly $450,000 a month in fraud losses to Medicaid. The scheme came to 
light once the shelter tipped off the state Medicaid agency. Managed 
care plans can also engage in fraudulent business practices similar to 
those in fee-for-service health care--such as providing kickbacks for 
referrals or having unqualified personnel provide services.
    Fraud and abuse schemes also cross jurisdictional and program 
boundaries, complicating the task of pursuing the perpetrators. In our 
October 1999 correspondence on health care fraud, we noted that 
criminal groups have created interstate health care fraud schemes and 
have used associates in foreign countries to transfer ill-gotten 
proceeds out of the United States. For example, a group with ties to a 
New Jersey scheme purchased a lab in Illinois and began bilking 
Medicaid and Medicare there. In another case, two individuals 
investigated for Medicaid fraud in south Florida were tied to three 
individuals in North Carolina who used a similar scheme to falsely bill 
Medicare. Proceeds from this scam were laundered through associates in 
Mexico.
Medicaid Is Vulnerable to Fraudulent and Abusive Practices
    Certain characteristics of the program make Medicaid an attractive 
target for exploitation, as follows:

 As a third-party payer, Medicaid pays for services provided by 
        others and cannot, as a practical matter, police each claim for 
        reimbursement submitted. In a state like New York, the very 
        size of the program invites exploitation. In fiscal year 1998, 
        New York's Medicaid program, covering roughly 2 million 
        beneficiaries,\3\ cost an estimated $27 billion. Medicaid 
        consumes, on average, 20 percent of a state's budget.
---------------------------------------------------------------------------
    \3\ Our data on New York's beneficiary enrollment reflects calendar 
year 1998.
---------------------------------------------------------------------------
 The impermanence of the population, owing to beneficiaries' 
        changing eligibility status, makes the program a target for 
        such schemes as billing for services provided to ineligible or 
        deceased individuals.
 Because many states pay considerably less under Medicaid than 
        providers' customary charges, Medicaid providers are often in 
        short supply. Thus, program administrators are reluctant to 
        impose controls that are perceived as burdensome for fear of 
        discouraging provider participation.
coordination, prevention, and adequate resources are key fraud control 
                                elements
    Our prior health care program integrity work has shown that strong 
federal and state leadership is needed to ensure that three essential 
fraud control elements are in place. First, the multiple agencies 
involved must coordinate their efforts effectively. Second, HCFA and 
the states must focus on preventive strategies, since detection and 
prosecution efforts alone cannot stem program losses. Finally, state 
agencies need the administrative and technical tools and resources to 
accomplish their mission.
Coordination Essential, but Difficult to Achieve
    Examples from our prior program integrity work underscore the 
importance of coordinating the efforts of multiple law enforcement and 
oversight agencies. One of our reports focused on Medicaid prescription 
drug diversion,\4\ often referred to as ``pill-mill'' fraud, in which 
physicians, clinic owners, and pharmacists collude with willing 
beneficiaries by fraudulently prescribing and distributing prescription 
drugs. In some cases, pharmacists added medications to beneficiaries' 
orders and kept the extra for resale; clinics provided unneeded 
prescriptions to beneficiaries, who would trade them for merchandise; 
and providers gave beneficiaries prescriptions for drugs in exchange 
for their Medicaid number to bill for services not provided. We noted 
that a drug diversion case could typically involve five or more state, 
local, and federal agencies in its investigation, prosecution, and 
resolution. Network diversion schemes could involve third-party payers 
other than Medicaid, entrepreneurs, beneficiaries, middlemen, and 
physicians not enrolled in Medicaid. Handling such schemes could entail 
coordination between, for example, a MFCU in the state's department of 
law and other agencies with jurisdiction, such as an office of 
professional medical conduct in the state's department of health, an 
audit office in the state's department of social services, and an 
office of professional discipline in the state's department of 
education.
---------------------------------------------------------------------------
    \4\ Medicaid Drug Diversion Fraud: Federal Leadership Needed to 
Reduce Program Vulnerabilities (GAO/HRD-93-118, Aug. 2, 1993).
---------------------------------------------------------------------------
    Two examples illustrate the payoff resulting from agency 
cooperation. One is the FBI's Operation Goldpill. Working with other 
federal agencies and with state MFCUs and regulators, approximately 
1,000 FBI agents participated in the FBI's largest health care 
undercover operation at that time, involving 50 cities nationwide. This 
initiative reflected a new strategy focusing on multidefendant 
conspiracy indictments rather than single-defendant prosecutions. 
Through this effort, law enforcement agencies were able to charge 254 
defendants; seize $10.8 million in assets, including 11 pharmacies; and 
levy $6.6 million in fines.
    The second example--Operation Restore Trust (ORT)--represented a 
cornerstone in recent health care fraud coordination, which focused on 
Medicare and Medicaid fraud and abuse. ORT brought together the HHS OIG 
and other federal, state, and local agencies to target wrongdoing by 
home health, nursing home, and durable medical equipment providers, 
initially in five states. In its first 2 years of operation, ORT 
identified $188 million in inappropriate payments. Among the lessons 
learned was the importance of coordination among the various program 
and enforcement agencies involved at the federal, state, and local 
levels. For example, coordination between Medicare claims 
administration contractors and state licensing inspectors in the 
project states resulted in the decertification of many of the targeted 
home health agencies and the recovery of substantial sums in 
inappropriate payments. Through the Medicare contractors' efforts to 
train state inspectors on specific billing and beneficiary coverage 
issues, the inspectors were able to provide the contractors information 
they might not otherwise have been able to obtain on beneficiaries who 
were not eligible or home health agencies that billed for services not 
provided. Through this mutual exchange of information, contractors were 
able to identify an array of billing abuses costing the government 
millions of dollars.
    As obvious as the benefits are from interagency coordination, 
several barriers exist that discourage such cooperative efforts. Among 
these are the following:

 Labor-intensity of building a case with uncertain outcome. The 
        level of resources and interagency coordination required for 
        case development can stall the pursuit of a case at many 
        junctures and delay the resolution of a case for many years. 
        The pursuit of fraud often begins with the state Medicaid 
        agency, which, to refer the case to a MFCU, must typically 
        prepare careful documentation through data analyses, claims 
        audits, interviews with patients, and medical record reviews. 
        The MFCU may reject cases because of its backlog, insufficient 
        evidence, or estimated dollar losses below a certain threshold. 
        At the time of our drug diversion study, one state's MFCU 
        typically rejected more than 90 percent of the Medicaid 
        agency's fraud referrals because of staffing constraints. For 
        cases accepted, MFCU investigations can involve, among other 
        things, additional interviews or analyses of medical records 
        and subpoena of financial records. If the case enters federal 
        jurisdiction, the MFCU may forward the case to a U.S. Attorney. 
        If the case is prosecuted and convictions are obtained, further 
        work also may be necessary to establish administrative 
        sanctions and recover overpayments.
 Timing of actions to maximize administrative as well as 
        criminal sanctions. In our drug diversion study, we reported 
        that the state agencies and MFCUs made little effort to time 
        audits and criminal investigations so that civil recoveries 
        could be made without compromising criminal prosecution. When 
        poor communication exists between a MFCU and the state Medicaid 
        agency, the state agency may be delayed in taking civil action 
        before the statute of limitations has expired. In such cases, 
        the agency may have to forgo the opportunity to assess monetary 
        penalties or obtain recoveries that can restore financial 
        losses to the Medicaid program.
 Competing productivity goals between agencies. One state's 
        MFCU officials told us that a state Medicaid agency's SURS 
        unit, for example, may be reluctant to classify provider 
        overpayment cases as fraud. Fraud cases must generally be 
        referred to the state MFCU. Cases classified as overpayments 
        generally remain the within the SURS' jurisdiction, and 
        recoveries are credited to the SURS' performance results.
 Federal payback rules. Federal law creates a fiscal incentive 
        for states to avoid finding fraud.\5\ The law requires that the 
        state pay back the federal share of these overpayments within 
        60 days of discovery, regardless of whether the state has 
        recouped its losses.\6\
---------------------------------------------------------------------------
    \5\ 42 U.S.C. 1396b(d)(2)(C).
    \6\ While this requirement may be appropriate under ordinary 
circumstances so that states are encouraged to seek recovery, it may 
not be appropriate in criminal cases in which recovery efforts could 
damage the investigation by alerting the suspect.
---------------------------------------------------------------------------
    We are currently reviewing states' efforts to enhance coordination 
in our ongoing study for the Committee. In Georgia, the MFCU has 
established working teams consisting of members from three state 
agencies--prosecutors from the Attorney General's office, investigators 
from the Georgia Bureau of Investigation, and auditors from the 
Department of Audits.
Prevention Is Key to Avoiding Program Losses
    Preventive strategies designed to stop improper activity before 
Medicaid incurs losses is another essential control. Our observations 
on coordination difficulties demonstrate that efforts to detect and 
prosecute wrongdoing are important but are typically expensive and 
labor-intensive, sometimes with little financial recovery to show for 
the effort. Consistent with this view is HCFA's philosophy ``to pay it 
right'' instead of paying and chasing.
    Preventive strategies can be embedded in the design of provider 
enrollment procedures, payment methods, coverage policies, and 
beneficiary eligibility verification. As we concluded from previous 
work, states' emphasis on developing preventive measures were well-
placed because efforts to recover losses were often unsuccessful. In 
our ongoing study, we will examine states' approaches to fraud control 
prevention. One example--provider enrollment controls in the Medicare 
program--illustrates how such approaches help avert fraud.

 Until recently, when new requirements were established, 
        Medicare procedures for certifying home health agencies were 
        seriously flawed. For example, in a 1997 report,\7\ we noted 
        that becoming a Medicare- certified home health agency had been 
        too easy, particularly in light of the number of problem 
        agencies that had been identified in past years. There had been 
        little screening of those seeking Medicare certification. For 
        example, Medicare certified an agency owned by an individual 
        with no home health experience who turned out to be a convicted 
        drug felon and who later pleaded guilty with an associate to 
        having defrauded Medicare of over $2.5 million. Rarely did new 
        home health agencies fail the program's certification 
        requirements. HCFA has since developed procedures to better 
        scrutinize the qualifications and background of home health 
        agency applicants.
---------------------------------------------------------------------------
    \7\ Medicare Home Health Agencies: Certification Process 
Ineffective in Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 
1997).
---------------------------------------------------------------------------
Adequate Resources Include Qualified Staff and Modern Technology
    An investment in adequate resources, consisting of qualified staff 
and modern payment safeguard technology, is a third element essential 
to effective Medicaid fraud and abuse control. Over time, health care 
fraud schemes have become increasingly complex, frequently involving 
networks of people, sophisticated computer techniques, and multiple 
geographic locations. In a 1994 Medicare report,\8\ we focused on the 
results of a HCFA demonstration examining the effect of additional 
program safeguard funding. We found that the ``demonstration'' 
contractors had achieved higher medical review savings than the control 
group contractors because they committed more resources to improving 
their analytic tools and hiring qualified technical staff.
---------------------------------------------------------------------------
    \8\ Medicare: Greater Investment in Claims Review Would Save 
Millions (GAO/HEHS-94-35, Mar. 2, 1994).
---------------------------------------------------------------------------
    In recent interviews, officials in several states have expressed 
concerns that the lack of effective data systems has hampered their 
efforts to identify fraud. For example, one state official said that 
the state's Medicaid automated detection system is 15 years old and not 
well designed for the types of analysis needed today. Another official 
noted that the state lacked a system to perform electronic prepayment 
screening of claims, a tool that we have reported on in Medicare 
reports as a fundamental payment safeguard. Reflecting these concerns, 
a MFCU official stated that service data, staff capable of mining them, 
and state-of-the-art detection software are important tools for fraud 
control. Our ongoing study will examine the extent of states' capacity 
to identify fraud or abuse.
                 hcfa's role in medicaid fraud control
    In recent years, HCFA has taken steps to improve its program 
integrity efforts in both Medicare and Medicaid. For Medicaid in 
particular, HCFA's role to date has been largely to facilitate training 
and information-sharing efforts for the states.
    In 1997, HCFA established the Medicaid fraud and abuse national 
initiative designed to bring different components among and within 
states together at meetings and to provide training, share information, 
and address common concerns. As part of the initiative, individual 
committees have been created to work on specific problems and 
solutions. For example, a state legislation committee developed a 
database on a Web site that all states can access that catalogues 
states' program integrity legislation. This serves states seeking 
models for anti-fraud-and-abuse legislation and contacts for further 
information. A federal legislation committee has developed proposals to 
increase state effectiveness that have been added to HHS' legislative 
proposals. HCFA has also formed and funded a technical advisory group 
that meets regularly to discuss Medicaid program integrity issues.
    Despite HCFA's positive efforts to facilitate states' activities, 
we are concerned about the agency's efforts to ensure that all states 
have effective program integrity strategies. In our June 1999 testimony 
on Medicaid payments for school-based services, we raised concerns 
about HCFA's role as steward of Medicaid funds. We noted that the 
agency's regional offices, lacking specific guidance, were inconsistent 
in their determinations of whether a given state's practices for 
claiming administrative costs were appropriate. Practices that HCFA had 
allowed in one state had not been allowed in others, resulting in 
confusion. It also created an environment in which school systems 
``pushed the envelope'' into the realm of questionable billing 
practices.
    From this particular work we made observations that apply to 
Medicaid fraud and abuse control in general. First, striking a balance 
between the stewardship of Medicaid and the need for flexible 
approaches in dealing with 50-plus Medicaid programs is difficult. 
However, mindful of that balance, HCFA is in a position to explore, in 
partnership with states, the appropriate level of commitment to 
preventing and detecting fraud and abuse. We think this is important 
because both have a fiduciary responsibility to administer Medicaid 
efficiently and effectively.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions you or the Subcommittee Members may have.
                    gao contact and acknowledgments
    For future contacts regarding this testimony, please call Sheila K. 
Avruch, Assistant Director, on (202) 512-7277. Key contributors to this 
testimony include Barrett W. Bader, Bonnie L. Brown, Hannah F. Fein, 
and Robert L. Lappi.
                          related gao products
    Financial Management: Increased Attention Needed to Prevent 
Billions in Improper Payments (GAO/AIMD-00-10, Oct. 29, 1999).
    Health Care: Fraud Schemes Committed by Career Criminals and 
Organized Criminal Groups and Impact on Consumers and Legitimate Health 
Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).
    Medicaid: Questionable Practices Boost Federal Payments for School-
Based Services (GAO/T-HEHS-99-148, June 17, 1999).
    Fraud, Waste, and Abuse: The Cost of Mismanagement (GAO/AIMD-98- 
265R, Sept. 14, 1998).
    Nursing Homes: Too Early to Assess New Efforts to Control Fraud and 
Abuse (GAO/T-HEHS-97-114, Apr. 16, 1997).
    Medicaid Fraud and Abuse: Stronger Action Needed to Remove Excluded 
Providers From Federal Health Programs (GAO/HEHS-97-63, Mar. 31, 1997).
    Fraud and Abuse: Providers Excluded From Medicaid Continue to 
Participate in Federal Health Programs (GAO/T-HEHS-96-205, Sept. 5, 
1996).
    Medicare and Medicaid: Opportunities to Save Program Dollars by 
Reducing Fraud and Abuse (GAO/T-HEHS-95-110, Mar. 22, 1995).
    Prescription Drugs: Automated Prospective Review Systems Offer 
Significant Potential Benefits for Medicaid (GAO/AIMD-94-130, Aug. 5, 
1994).
    Medicaid: A Program Highly Vulnerable to Fraud (GAO/T-HEHS-94-106, 
Feb. 25, 1994).
    Medicaid Drug Fraud: Federal Leadership Needed to Reduce Program 
Vulnerabilities (GAO/HRD-93-118, Aug. 2, 1993).

    Mr. Upton. Thank you very much.
    Mr. Hartwig.

                  TESTIMONY OF JOHN E. HARTWIG

    Mr. Hartwig. Good morning, and thank you for the 
opportunity to testify on the subject of Medicaid fraud and 
abuse and what is being done to address it.
    While the vast majority of health care providers are 
honest, all large health care programs are vulnerable to 
exploitation, and Medicaid is no exception. Over the years, we 
have seen abuses in many forms.
    The responsibility for detecting, investigating and 
prosecuting fraud and abuse in the Medicaid program is a shared 
responsibility between the State and Federal Governments. Each 
State is required to have a program integrity unit dedicated to 
detecting and investigating suspected cases of Medicaid fraud; 
and, as you have just heard, most States fulfill this 
requirement by establishing Medicaid Fraud Control Units.
    The Office of Inspector General has oversight 
responsibilities for the fraud control unit, and those 
responsibilities include the initial certification and the 
yearly recertification of the Medicaid Fraud Control Units. We, 
the Medicaid Fraud Control Units and other law enforcement 
agencies work together to coordinate our anti-fraud efforts, 
and these partnerships have greatly enhanced our ability to 
carry out our mission.
    Ten years ago, the OIG helped establish the National Health 
Care anti-fraud Association, representing both governmental and 
private third-party payers and law enforcement agencies, to 
coordinate government and private health care fraud enforcement 
activities. More recently, a National Health Care Fraud Task 
Force has been established to better coordinate State and local 
and Federal health care enforcement operations. In addition, 
the OIG and the Medicaid Fraud Control Units have joined 
together with other Federal and State law enforcement agencies 
to organize local health care fraud task forces throughout the 
country.
    We have worked together on joint training exercises. As an 
example, the Office of Inspector General has sponsored a 
program to provide a 5-day session to Medicaid Fraud Control 
Unit investigators, and that program was held at the Federal 
law enforcement training center in Glynco, Georgia.
    The Office of Inspector General has also sponsored training 
sessions regarding Federal grant regulations for the Medicaid 
Fraud Control Unit employees and other State administrative and 
financial staff.
    I would also like to highlight an OIG cooperative effort 
with State Medicaid audit partners. Five years ago, we began an 
initiative to work more closely with State auditors in 
reviewing the Medicaid program. The partnership plan was 
created as an effort to provide broader coverage of the 
Medicaid program by partnering with State auditors, State 
Medicaid agencies and State internal audit groups. Sixteen 
State auditor reports have been issued under this partnership 
with a financial impact of $163 million.
    The audit partnerships provide broader coverage of the 
Medicaid program and provide a more effective and efficient use 
of scarce audit resources by both the Federal and State audit 
sectors. We plan additional audit partnerships with the States 
to strengthen that capability.
    In our oversight role, we are in the process of conducting 
a study that will assess the Medicaid program safeguards used 
in a sample of States and will provide information on States 
developing provider enrollment safeguards to assess keeping bad 
providers out of the program. We will also look at prepayment 
and claims processing and postpayment review at the States.
    I appreciate the opportunity to come before you today to 
review the fight against fraud and abuse in the Medicaid 
program. I thank you and the committee for highlighting this 
important issue and allowing us to share with you our 
observations.
    [The prepared statement of John E. Hartwig follows:]
      Prepared Statement of John E. Hartwig, Deputy Inspector for 
            Investigations, HHS Office of Inspector General
    Good Morning, I am John E. Hartwig, Deputy Inspector General for 
Investigations in the Office of Inspector General. Thank you for the 
opportunity to testify on the subject of Medicaid fraud and abuse and 
what is being done to address it. While the vast majority of health 
care providers are honest, all large health care programs are 
vulnerable to exploitation, and Medicaid is no exception. Over the 
years, we have seen abuses take many forms. Fraud, waste and abuse 
continue today, depriving taxpayers and consumers of the value of their 
contributions. Our sense, however, is that the States are steadily 
becoming more effective in limiting abuses through continuous 
improvements in their systems and processes.
    With my time today, I will review some of the challenges that the 
States face in guarding the fiscal soundness of their Medicaid programs 
and share with you some recent examples of fraud perpetrated against 
the program. I want to describe how the States are partnering with our 
office, the Health Care Financing Administration and other Federal and 
State law enforcement offices to leverage their effectiveness. Finally, 
I want to describe some of the areas we have observed that provide 
opportunities for continued improvement.
                               background
The Office of Inspector General
    The Office of Inspector General (OIG) was created in 1976 and is 
statutorily charged with protecting the integrity of Departmental 
programs, as well as promoting their economy, efficiency and 
effectiveness. The OIG meets this statutory mandate through a 
comprehensive program of audits, program evaluations, and 
investigations designed to improve the management of the Department and 
to protect its programs and beneficiaries from fraud, waste and abuse. 
Our role is to detect and prevent fraud and abuse, and to ensure that 
beneficiaries receive high quality, necessary services, at appropriate 
payment levels.
Medicaid Program
    The Health Care Financing Administration (HCFA) administers the 
Medicaid program. Authorized under Title XIX of the Social Security 
Act, Medicaid is a means-tested health care entitlement program 
financed by States and the Federal Government--approximately 43 percent 
from the States and 57 percent from the Federal Government in FY 1998. 
To date, all 50 States, the District of Columbia, and the five 
territories have elected to establish Medicaid programs.
    Within the broad national guidelines that the Federal Government 
provides, each of the States establishes its own eligibility criteria. 
While there are specific Medicaid requirements, States have 
considerable flexibility in structuring their Medicaid programs, 
including provider payment rates, certification standards and 
development of alternative health care delivery programs. States are 
required to provide a core of mandatory Medicaid services to all 
eligible recipients. In addition, States have restructured eligibility 
coverage through ``program'' and ``research and demonstration'' 
waivers. These waivers allow States some flexibility to reform health 
care by expanding coverage, to create alternatives, and to allow 
beneficiaries to select their own Medicaid providers.
                          fraud investigations
    The responsibility for detecting, investigating and prosecuting 
fraud and abuse in the Medicaid program is shared between the Federal 
and State Governments. Each State is required to have a program 
integrity unit dedicated to detecting and investigating suspected cases 
of Medicaid fraud. Most States fulfill this requirement by establishing 
a Medicaid Fraud Control Unit (MFCU). Each Medicaid State agency also 
has a Medicaid Management Information System. A subpart of this data 
system is the Surveillance and Utilization Review Subsystems Units 
(SURS). The SURS units are charged with ferreting out fraud by 
conducting preliminary reviews of providers and beneficiaries with 
aberrant claims or billing patterns that possibly indicate criminal 
fraud. When potential fraud cases are detected, the SURS refer the 
cases to the MFCUs. Regulations require the Medicaid State agencies and 
the MFCUs to enter into a Memorandum of Understanding in which the 
agencies agree to refer all cases of suspected provider fraud to the 
units.
Medicaid Fraud Control Units
    In 1977, Congress enacted Public Law 95-142 which authorized 
Federal matching funds for States to voluntarily establish a Medicaid 
Fraud Control Unit. The Omnibus Budget Reconciliation Act of 1993 
required the establishment of MFCUs unless a waiver is requested from 
the Secretary of the Department of Health and Human Services (HHS). 
These fraud units are part of the State Attorney General's office or 
other State agency that is separate and distinct from the Medicaid 
State agency. The purpose of the MFCUs is to investigate and prosecute 
Medicaid provider fraud, patient abuse and fraud in administration of 
the program.
    The MFCUs are integrated law enforcement units composed of 
investigators, attorneys, auditors and analysts. At present, 47 States 
have fraud control units established and operating, while three States 
(Nebraska, North Dakota and Idaho) have received waivers from the 
Secretary. These waivers relieve these three States from the 
requirement to establish a Medicaid fraud control unit in the manner 
specified by the current Federal regulations.
    The MFCUs investigate and prosecute allegations of Medicaid fraud 
and patient abuse or neglect. Specifically, they:

 Investigate and prosecute suspected cases of Medicaid fraud in 
        connection with any aspect of the provision of medical 
        assistance.
 Review and investigate complaints of abuse and neglect of 
        patients in health care facilities that received payment under 
        the State plan.
 Investigate suspected cases of fraud that occur within the 
        Medicaid State agency.
 Provide for the collection, or referral for collection to the 
        single State Medicaid agency, of overpayments that are made by 
        health care facilities.
 Safeguard the privacy rights of all individuals and provide 
        safeguards to prevent the misuse of information under the 
        unit's control.
 Submit an annual report to the Secretary of HHS detailing the 
        accomplishments and activities of the unit.
    Where State law permits, fraud control units both investigate and 
prosecute cases statewide. In eight of the 47 States, the units do not 
prosecute their own cases but instead refer them to a Federal, State or 
County prosecutor. Cases are generated by the units themselves and also 
come from a variety of sources including the Office of Inspector 
General, the Medicaid agency (including the Surveillance and 
Utilization Review Subsystem units), other Federal and State agencies 
(such as Survey and Certification Units) and the media. In States with 
fraud control units, the Medicaid agency agrees to report all suspected 
cases of provider fraud to the unit. To ensure that Medicaid 
overpayments identified by the units through their investigations are 
recovered, the units are required to either undertake administrative 
recovery actions or have procedures to refer them for collection to 
other appropriate State agencies.
    Although originally managed within HCFA, the oversight 
responsibilities for the fraud control units were transferred to the 
Office of Inspector General in 1979 since the Units' activities were 
determined to be more closely related to the OIG investigative 
function. Federal funds for the Medicaid fraud control program are 
included in the Health Care Financing Administration appropriation. The 
program reimburses the States for the cost of operating a unit at a 
rate of 90 percent for the first three years and 75 percent thereafter. 
Currently, all 47 MFCUs are receiving the 75 percent rate.
Medicaid Fraud Control Unit Accomplishments
    Since the inception of the Medicaid fraud control program, the 
units have recovered hundreds of millions of program dollars. The 
following chart represents recoveries to the Medicaid program for the 
past five fiscal years for which data are available:

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

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

 Billing for Services Not Provided. This is one of the most 
        common types of fraud. Examples include a provider who bills 
        Medicaid for a treatment or procedure that was not actually 
        performed, such as blood tests when no samples were drawn or x-
        rays that were not taken.
 False Cost Reports. A nursing home owner or hospital 
        administrator may intentionally include inappropriate expenses 
        not related to patient care on costs reports submitted to 
        Medicaid.
 Illegal Remunerations. A provider (i.e., nursing home 
        operator) may conspire with another health care provider (i.e., 
        physician, ambulance company) to share a certain portion of the 
        monetary reimbursement the health care provider receives 
        (kickbacks) for services rendered to patients. Kickbacks 
        include not only cash, but vacation trips, automobiles or other 
        items. The practice results in unnecessary tests and services 
        being performed for the purpose of generating additional income 
        to both the referring source and the provider of the service.
Medicaid Fraud Control Units Case Examples
    Some recent cases investigated by the MFCUs include the following:

 A radiologist collected $1.7 million from Medicaid over a 26-
        month period by engaging in improper billing practices. Two-
        thirds of the services went to pay kickbacks to the clinic 
        operators who supplied him a staggering total of 24,000 
        unnecessary, duplicate or phony tests to ``review.'' Most of 
        these tests, provided by representatives of local clinics, were 
        of the same people, but they had been given different names and 
        Medicaid identification numbers. The radiologist was convicted 
        of grand larceny and sent to prison.
 In New Jersey, the owner of two medical clinics was indicted 
        in 1997 for bilking Medicaid of more than $6 million. He 
        claimed to have performed colonoscopies and other expensive 
        procedures, even though he had no equipment for doing them.
 Two Atlanta businessmen pled guilty to felony charges for 
        submitting fraudulent nursing home cost reports to the Georgia 
        Medicaid program. The businessmen operated a ``shell 
        corporation'' established primarily for creating inflated 
        contracts with nursing homes. The nursing homes received an 
        artificially inflated Medicaid per diem reimbursement rate. 
        Between 1991 and 1996, the businessmen obtained nearly $10 
        million in excess Medicaid reimbursements. A State auditor 
        uncovered the scheme in 1996 when he performed a routine audit 
        and became suspicious of the high payments. The businessmen 
        were indicted and were found guilty on eight counts of false 
        documents. They were sentenced to 50 months in prison, required 
        to pay restitution of approximately $6 million to the Medicaid 
        program and to forfeit an additional $2.1 million in assets.
 A Maryland woman was convicted of felony theft for defrauding 
        more than $19,000 from mentally disabled adults during a 6-
        month period in 1996. The woman stole social security checks 
        from them and drained the savings accounts of disabled adults 
        who were in her care. In one case, money was withdrawn from an 
        existing account but never deposited into the patient's other 
        account. Similarly, this woman stole from at least three other 
        Medicaid recipients, depleting their accounts to the extent 
        that they were unable to pay their rental expenses and were 
        deprived of clothes and other essentials. She was sentenced to 
        home detention and ordered to repay the victims.
OIG Oversight of MFCUs
    The OIG has responsibility for oversight of the funding and 
operating standards of the 47 MFCUs, including coordinating part of 
their investigative training. During FY 1998, we provided oversight and 
administered approximately $85.8 million in funds granted by HCFA to 
the MFCUs to facilitate their mission. In FY 1999, HCFA's funding 
allocation amounted to $92.2 million. For FY 2000, $97.7 million has 
been allocated.
    The OIG's oversight duties include the initial certification and 
yearly recertification of the MFCUs. Regulations require the MFCUs to 
submit an application to the OIG with an annual report and a budget 
request. The MFCU application, annual report, budget and quarterly 
statistical reports are reviewed by the OIG to determine if the MFCUs 
are in conformance with standards issued by the OIG. The OIG also 
reviews questionnaire responses from the Medicaid Agency and OIG Field 
Offices. On-site inspections and reviews of the MFCUs are conducted by 
the OIG on an as needed basis. The OIG maintains ongoing communication 
with individual State units and the National Association of Medicaid 
Fraud Control Units related to the interpretation of program 
regulations and other policy issues.
                     federal and state partnerships
    The OIG has aggressively sought new and innovative ways to stretch 
our resources and thus maximize the effectiveness of our anti-fraud 
efforts. Over the years, we have forged new and stronger links with 
other Federal agencies, State governments and the private sector. A 
major component of the Health Insurance Portability and Accountability 
Act of 1996 was the establishment of a program to coordinate health 
care anti-fraud efforts. The OIG, MFCUs, and other law enforcement 
agencies work together to coordinate anti-fraud efforts. These 
partnerships have greatly enhanced our ability to carry out our 
mission.
    Ten years ago, the OIG helped establish the National Health Care 
Anti-Fraud Association, representing both governmental and private 
third party payers and law enforcement agencies, to coordinate 
governmental and private health care fraud enforcement activities. Over 
the years, this governmental/private partnership group has been 
extremely successful in fostering our collaborative efforts. More 
recently, the OIG has established with the Department of Justice and 
other enforcement agencies an Executive Level Working Group to focus on 
health care fraud. In addition, the OIG and MFCUs have joined with 
other State and Federal law enforcement agencies to organize health 
care fraud task forces throughout the country.
    We have taken steps to develop partnerships and build a team to 
combat health care fraud and abuse. Listed below are examples of cases 
involving both the OIG and MFCUs:

 In Florida, a hospital health care corporation agreed to pay 
        the Government $469,000 to resolve its liability under the 
        False Claims Act and entered into a corporate integrity 
        agreement with OIG. This agreement settles allegations 
        concerning Medicaid claims submitted by one of its component 
        facilities between 1995 and 1997. The claims at issue were 
        submitted to the Florida Medicaid program, by one of the 
        corporation's hospitals, for services rendered to patients in 
        the adolescent psychiatric unit. Allegedly, the hospital billed 
        for services not rendered or not provided in accordance with 
        Medicaid requirements; and, the defendants failed to adequately 
        document the length and nature of the services provided.
 A psychologist in Georgia is serving a 2-year prison sentence 
        for defrauding the Medicaid program of approximately $209,000. 
        The psychologist submitted false billings to Medicaid for 
        services that were not medically necessary and services in 
        excess of the number actually provided. In addition to 
        imprisonment, the doctor was ordered to pay restitution in the 
        amount of $209,000 and was excluded from the program for 15 
        years.
 An alcoholism clinic in New York was excluded for a period of 
        10 years for felony larceny. The two owner/operators of the 
        clinic were involved in a scheme to defraud Medicaid, which 
        lasted over five years. They submitted false claims that 
        resulted in overpayments totaling approximately $113,000. Both 
        owners were ordered to pay restitution in the aforementioned 
        amount and were each excluded for 10 years.
 The OIG excluded a dentist because he was required to 
        surrender his license to practice dentistry in California while 
        a formal disciplinary hearing regarding his professional 
        competency was taking place. After surrendering his license and 
        being excluded from the Medicaid program by the OIG, the 
        dentist moved to Oregon. While in Oregon, he applied for a 
        license to practice dentistry with the appropriate licensing 
        board and then for a provider number to bill Oregon's Medicaid 
        program. In researching the dentist's current practices, the 
        OIG determined that he had not been truthful about his 
        exclusion status and that the Medicaid agency had an 
        investigation in progress regarding his current billing 
        practices. The dentist was subsequently convicted of Medicaid 
        fraud and falsifying business records. He has been excluded 
        again for an additional 10 years.
Federal and State Audit Partnerships
    Other cooperative efforts include State Medicaid Audit 
Partnerships. Five years ago, we began an initiative to work more 
closely with State auditors in reviewing the Medicaid program. The 
Partnership Plan was created as an effort to provide broader coverage 
of the Medicaid program by partnering with State auditors, 11 State 
Medicaid agencies and two State internal audit groups. Sixteen State 
auditor reports have been issued with a financial impact of $163 
million.
    As health care fraud has become increasingly complex, we have found 
a greater need to coordinate with other law enforcement entities, as 
well as others, with a vested interest in fighting fraud and abuse. For 
example, our auditors partner with State auditors, other State groups 
including departmental internal auditors, departmental inspectors 
general, Medicaid agencies, and the Health Care Financing 
Administration's financial managers, to conduct joint reviews. The 
level of involvement of each partner is flexible and can vary depending 
upon specific situations and available resources.
    The goal of our Federal and State partnership is not just to 
identify and recommend recovery of unallowable costs from State 
agencies. Rather, it is designed to focus on issues that will result in 
program improvements and reduce the cost of providing necessary 
services to Medicaid recipients. The Plan provides broader coverage of 
the Medicaid program and provides a more effective and efficient use of 
scarce audit resources by both the Federal and State audit sectors.
    Since its inception in 1994, active partnerships have been 
developed in 22 States on such diverse issues as:

 Program issues related to Medicaid outpatient prescription 
        drugs.
 Unbundling of clinical laboratory services.
 Outpatient non-physician services already included as an 
        inpatient charge.
 Excessive costs related to hospital transfers.
 Excessive payments for durable medical equipment.
 Acquisition costs for Medicaid drugs.
 Program issues related to managed care.
    Joint projects have also identified areas where improvements in 
program operations could be achieved, unallowable program expenditures 
could be recovered and future cost savings could be recognized.
    Clinical Laboratory Services. One Partnership Project was 
undertaken to review Medicaid payments for clinical laboratory 
services. The objective of this review was to determine the adequacy of 
State agency procedures and controls over the payment of Medicaid 
claims for clinical laboratory services. Audits in 22 States examined 
pricing of lab tests and system edits and controls to detect and 
prevent duplicate payments and identified $33.9 million in Federal and 
State overpayments. The review also found that State Medicaid agencies 
did not have adequate controls to ensure that the Medicaid program did 
not pay more than Medicare would have paid for the same clinical 
laboratory tests.
    Dual Eligibles. A unique example of OIG auditors, State Auditors, 
and Medicaid Fraud Control Units working together is an ongoing managed 
care initiative involving dual eligible Medicare/Medicaid 
beneficiaries. The objective of this review is to determine the extent 
of inappropriate Medicaid fee-for-service payments made on behalf of 
dually eligible beneficiaries while enrolled in a Medicare risk HMO. 
The review began with State Auditor work conducted in two States, Texas 
and Florida. The Texas State Auditors found that the State Medicaid 
claims on behalf of beneficiaries for prescription drug services should 
have been covered by the Medicare HMO. The Florida State Auditor's 
Office found that the Medicaid fee-for-service program improperly paid 
for medical services and drugs that should have been provided by the 
Medicare HMOs. The questioned payments amounted to over $15.8 million 
in Calendar Year 1996. As a result of the findings for 1996, the review 
was referred to the Florida Medicaid Fraud Control Unit which is 
continuing the review for 1994, 1995, 1997 and 1998.
                opportunities for continued improvement
    I want to describe some recent and continuing activities that 
relate to improving anti-fraud and abuse efforts in the Medicaid 
program.
Training
    The OIG sponsored a program to provide five-day training sessions 
for MFCU investigators at the Federal Law Enforcement Training Center 
(FLETC) in Glynco, Geogia. The training is administered by the 
Inspector General Academy in cooperation with the National Association 
of Medicaid Fraud Control Units and is intended to improve the 
effectiveness of the MFCUs in investigating and prosecuting Medicaid 
provider fraud and patient abuse and neglect.
    The Office of Investigations also sponsors and coordinates training 
conferences regarding the Federal grant regulations for MFCU employees 
and other State administrative and financial staff. Additional training 
for MFCU investigators is available through the Health Care Fraud 
Investigations Training Program provided at the FLETC. The OIG, in 
cooperation with the Financial Fraud Institute at the FLETC, developed 
this two week training program. Course topics include health care fraud 
schemes, interviewing techniques, evidence gathering, case preparation 
and financial investigative techniques.
Increased Auditing Partnerships
    Additional Federal and State partnerships will be developed with 
the States to strengthen the capability to detect, prosecute and punish 
fraudulent or abusive reimbursement activities. Potential audits and 
developing issue areas include:

 Medicaid denials of inpatient acute hospital stays.
 Physician clinical billing practices.
 Medical equipment, supplies, and related items.
 Medicaid prescription drugs--average wholesale price.
 Medicaid prescription drugs--dispensing fees.
 Hospice care--eligibility.
 Home health care--eligibility.
 Managed Care--payment of enhanced rates.
 Multi-state audit of long-term care to include licensing, 
        inspections, violations, and reimbursement systems.
 Mental health services.
Surveillance and Utilization Review Subsystem (SURS)
    In 1972, Congress enacted Public Law 92-603 that provided funding 
to States to foster development and implementation of the Medicaid 
Management Information System (MMIS). One of the subcomponents of the 
MMIS is the Surveillance and Utilization Review Subsystem (SURS). These 
units were designed to serve as major contacts and analysis points for 
detection and referral of potential fraud and provider abuse cases to 
assigned components within the States that pursue investigation of 
alleged criminal fraud within the Medicaid Program, usually the 
Medicaid Fraud Control Units.
    As part of the Medicaid Management Information System, the SURS 
applies automated post-payment screens to Medicaid claims adjudication 
to identify aberrant billing patterns that may indicate fraud or 
provider abuse. The SURS staff reviews systems output and conducts 
preliminary reviews of providers to determine whether they can 
substantiate a pattern of fraud. In such cases, they must refer the 
matter to the States' fraud control unit for investigation.
    Based on a review we conducted in November 1996, we determined that 
the number and percentage of suspected fraud referrals from SURS had 
declined in the previous 10 years. Officials at the State fraud control 
units were divided in their opinions as to the extent and quality of 
SURS development of fraud allegations and edits. Based, in part, on our 
recommendation, HCFA established a Program Integrity Group to address 
fraud and abuse issues within the Medicaid and Medicare programs. This 
group was charged with monitoring many projects that would increase the 
effectiveness of fraud unit activities.
Managed Care Fraud
    Last summer, we released a report describing the manner in which 
Medicaid Section 1115 Waiver States detect, review, and refer for 
investigation fraud and abuse cases in managed care programs. This 
emerging area is of great importance as an increasing number of 
Medicaid beneficiaries receive health care services under managed care. 
In our review of 10 States we found variation in the intensity and 
nature of States' oversight activities for managed care fraud and that 
there is no general agreement about specific roles and responsibilities 
for fraud detection and referral in managed care. We recommended a 
series of actions for HCFA to undertake and work with us 
collaboratively, including establishing guidelines for States and 
managed care organizations to follow in developing and carrying out 
fraud and abuse detection and referral activities. Also, we recommended 
that HCFA ensure that States monitor managed care organizations' fraud 
and abuse programs for compliance with its guidelines. Finally, we 
encouraged HCFA to continue in developing and sponsoring training in 
managed care fraud and abuse referral and detection techniques for the 
States and Medicaid managed care organizations.
Medicaid Payment Safeguard Activities
    We are in the process of conducting a study that will assess 
Medicaid program safeguards used in a sample of States and will provide 
information on the state of developing safeguards in the areas of 
provider enrollment, prepayment and claims processing and post payment 
review. We are finding several States are employing new safeguards in 
provider enrollment that show promising results in reducing the number 
of abusive providers within the program. States are now beginning to 
employ claims processing edits and other systems improvements similar 
to those used by Medicare that should reduce program vulnerabilities. 
Finally, we are seeing States begin to target their post payment 
activities to more accurately target fraud and abuse activities. All of 
these developments and new strategies suggest promising approaches that 
may be adopted by all of the State agencies and further strengthen the 
Medicaid program.
                               conclusion
    We appreciate the opportunity to come before you today and share 
with you the continuing improvements that we are witnessing in the 
ongoing fight against fraud and abuse in the Medicaid program. We will 
continue to work for further improvements that will strengthen the 
program through our investigations, financial audits and evaluations of 
program effectiveness. Perhaps most importantly, we look forward to 
continuing our active partnerships with other Federal and State 
agencies and to providing oversight and guidance in investigating fraud 
and abuse in health care. My thanks to you and the committee for 
highlighting this important issue and allowing us to share our 
continuing efforts. This concludes my testimony. I welcome your 
questions.

    Mr. Upton. Thank you very much.
    Mr. Krayniak.

                   TESTIMONY OF JOHN KRAYNIAK

    Mr. Krayniak. Thank you.
    My name is John Krayniak. I'm a Deputy Attorney General and 
the Director of the New Jersey Medicaid Fraud Control Unit. I 
appear today as a representative of the National Association of 
Medicaid Fraud Control Units.
    In line with the Chairman's earlier statement, I would note 
that in 1965 the Medicaid program was $1.5 billion, and we've 
now gone to approximately $176 billion.
    Mr. Upton. Our population is getting older.
    Mr. Krayniak. Yes. For the first 10 years of the Medicaid 
program, Medicaid providers operated and billed with little or 
no oversight. In 1977, Congress, recognizing a need for an 
enforcement mechanism, passed the Medicare-Medicaid Anti-Fraud 
and Abuse Amendments which created the State-based Medicaid 
Fraud Control Unit program. States receive 90 percent of the 
startup costs for this program for 3 years, and thereafter the 
States receive 75 percent of the costs of running the Medicaid 
Fraud Control Unit.
    The mission of the units is to investigate and prosecute 
provider fraud. It's also to investigate and prosecute abuse or 
neglect of patients in any facility that receives Medicaid 
dollars and also to investigate and, if necessary, prosecute 
fraud in the administration of the Medicaid program at the 
State level.
    The Medicaid Fraud Control Units investigate and prosecute 
cases that range from street-level, drug diversion schemes to 
sophisticated white collar crimes. From one-defendant provider 
fraud cases to multi-defendant, multi-crime, multi-State 
conspiracies, the oversight is with the HHS OIG. Each unit must 
be initially certified, and each year the MFCU applies for a 
recertification.
    There are currently 47 certified Medicaid Fraud Control 
Units. They comprise approximately 1,275 professionals, that is 
attorneys, auditors and investigators, that are organized into 
a strike-force-type investigative and prosectorial agency. 
Forty of us are in the State Attorney General's Offices.
    Most of the units belong to their local, Federal and State 
Health Care Fraud Task Force and meet regularly with the U.S. 
Attorney's Office and other Federal agencies involved. To date, 
the units have achieved an enviable record, I believe, of over 
9,000 criminal convictions.
    Additionally, the units serve as a focal point for the 
Department of Justice in dealing with multi-State case 
settlements concerning providers that operate on a national 
basis. The units have participated in a number of these 
settlements that have resulted in a return to the Medicaid 
program of approximately $145 million.
    I would like to speak for a moment about my association, 
the National Association of Medicaid Fraud Control Units. As I 
said, all 47 units belong. Our primary mission is for training. 
We conduct four training sessions each year to train and 
retrain auditors, investigators and attorneys, of course. 
Additionally, each unit provides in-service training, many of 
them going out to local and county police academies and giving 
instructions on investigation and prosecution of patient abuse.
    We currently have 11 negotiating teams working with the 
Department of Justice on what we call global settlement cases, 
cases involving national providers that are ongoing right now.
    That concludes my remarks, and I thank the committee for 
inviting me.
    [The prepared statement of John Krayniak follows:]
  Prepared Statement of John Krayniak, Director, New Jersey Medicaid 
                           Fraud Control Unit
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to appear before you today to discuss the role of the 
states in investigating and prosecuting Medicaid fraud. I am John 
Krayniak, Director, of the New Jersey Medicaid Fraud Control Unit. I am 
very pleased to appear before you as the representative of the National 
Association of Medicaid Fraud Control Units of which I currently serve 
on the Executive Committee.
    The skyrocketing costs associated with health care delivery and the 
continued ``graying'' of our population have resulted in an increased 
reliance upon government-sponsored programs such as Medicare and 
Medicaid to provide much needed health insurance to those who would 
otherwise go without medical care.
    The Medicaid program, which was established to provide health care 
to indigent patients, has seen its enrollment explode. When the Program 
started, in 1965, Medicaid expenditures were $1.5 billion. Nationwide, 
the Health Care Financing Administration expected to spend more than 
$176.5 billion in FY 1998 to sustain the Medicaid Program. Medicaid 
recipients increased from about 10 million in 1967 to a projected 36.7 
million in FY 98, an increase of 267 percent. States are responsible 
for up to 50% of the cost of the Medicaid programs and some states now 
spend between 15 to 20% of their total budget to sustain the program.
    This nation is expected to spend more than $1 trillion on health 
care or 15% of our gross national product this year. Given these 
figures, it is not surprising that our health care delivery system has 
proven ripe for fraudulent activity.
    The General Accounting Office (GAO) has estimated that fraud and 
abuse accounts for 10% of health care costs and while there may not be 
a way to establish a precise figure, we are certainly talking about 
many hundreds of millions of dollars of fraud and abuse in the Medicaid 
program alone. In Congressional testimony, GAO has stated that only a 
fraction of health care fraud is identified and prosecuted. More than 
20 years after the creation of the Medicaid Fraud Control Unit program, 
new fraud schemes continue to be uncovered as providers become more 
sophisticated and are able to detect new weaknesses in the system.
    During the past decade, in particular, we have literally seen a 
feeding frenzy on the Medicaid Program, an unprecedented period in 
which wave after wave of multimillion dollar frauds have swept through 
nursing homes and hospitals, to clinics and pharmacies, durable medical 
equipment (DME), radiology and labs, and more recently, home health 
care. Although we do the best we can to put an end to program 
vulnerabilities, we still have profiteers who search and succeed in 
finding the next great loophole in the Medicaid system.
                   state medicaid fraud control units
    While the investigation and prosecution of health care fraud has 
only recently become a top national law enforcement priority, the 
states have been combating Medicaid fraud for more than 20 years and 
are viewed as leaders in the detection and prosecution of fraud in the 
health care industry. Medicaid, established by Congress in 1965 is of 
course, the primary government health care program for approximately 
36.7 million of America's poorest and oldest citizens. For the first 
decade after Medicaid was created, the system operated with few 
controls against fraud. Inadequate safeguards combined with multi-
billion dollar expenditure levels made a substantial amount of fraud 
inevitable. The result was an unprecedented theft of government dollars 
as local prosecutors struggled with the difficult task of prosecuting 
these highly sophisticated crimes. Congress came to recognize an urgent 
need to address this loss after much media attention and Congressional 
hearings highlighted the theft of taxpayer dollars and the harm 
suffered by Medicaid patients who were deprived of basic medical care. 
The result was legislation to establish specialized state-based strike 
forces to police the Medicaid program.
    In 1977, Congress enacted legislation, the Medicare-Medicaid Anti-
Fraud and Abuse Amendments, P.L. 95-142 which established the state 
Medicaid Fraud Control Unit Program and provided the states with 
incentive funding to investigate and prosecute Medicaid provider fraud 
and to prosecute the abuse or neglect of patients in all residential 
health care facilities which receive Medicaid funds. Federal financial 
participation (FFP) for the first three years of a Unit's existence is 
90 percent of the costs incurred by a certified Unit in carrying out 
its responsibilities. Thereafter, the federal government continues to 
provide 75% of each Unit's costs after the three year start-up period 
with the proviso that the FFP for any one quarter may not exceed the 
higher of $125,000 or \1/4\ of the sums expended by the federal, state 
and local governments during the previous quarter in carrying out the 
state Medicaid program. All states are now at 75% FFP.
    This funding formula allows the federal government to insure that 
each Unit's activities are directed exclusively at provider fraud, 
fraud in the administration of the Medicaid program and patient abuse, 
and not at crimes lacking an appropriate Medicaid nexus.
    Although the federal regulations require the MFCUs to be annually 
certified by the Secretary of the Department of Health and Human 
Services (HHS), the Office of the Inspector General of HHS has been 
delegated the administrative oversight responsibilities for the Units. 
The Health Care Financing Administration (HFCA) was originally assigned 
the certification, recertification and general oversight responsibility 
of the MFCU program. However, it was soon recognized that the Units' 
activities were more closely related to the OIG investigative function. 
This transfer took place in 1979.
     The enabling federal legislation emphasizes the necessity of 
having an integrated multi-disciplinary team of attorneys, 
investigators, and auditors in one office in order to successfully 
prosecute these complex financial crimes. The Units are required to be 
separate and distinct from the state Medicaid programs to avoid 
institutional conflicts of interest, and are usually located in the 
state Attorney General's office, although some Units are located in 
other state agencies with law enforcement responsibilities such as the 
state police or the state Bureau of Investigation. The Omnibus 
Reconciliation Act of 1993 required all states to have a Medicaid Fraud 
Control Unit by January, 1995, unless a state can demonstrate to the 
Secretary of the Department of Health and Human Services, (HHS) that it 
has a minimum amount of Medicaid fraud and that residents of health 
care facilities that receive Medicaid funding will be protected from 
abuse and/or neglect. Idaho, Nebraska and North Dakota do not have 
federally certified MFCUs. The District of Columbia is in the process 
of establishing its MFCU.
    Since the inception of this pioneering program, 47 federally 
certified state Units have successfully prosecuted over 9,000 corrupt 
medical providers and vendors and elder abusers--convictions that would 
not have occurred without this vital piece of legislation. These 47 
Units police most of the nation's Medicaid expenditures with combined 
staff of approximately 1,275 and a total federal budget of 95 million 
dollars. This amount represents a small fraction of the total Medicaid 
budget that the Units are responsible for policing. Unit size varies 
state-by-state and is dictated to some extent by the size of state's 
Medicaid program. In New Jersey, for example, our Medicaid budget is 6 
billion dollars and the Unit employs 36 staff. New York is the largest 
Unit with approximately 280 staff and Wyoming is the smallest with 
four.
    In addition to the criminal consequences of MFCU cases (repayment 
of restitution, overpayments, state exclusions, incarceration, and 
often the loss of certifications, the ability to conduct business and 
professional licenses), the criminal convictions of the Units become 
the basis for further federal actions. The federal actions that are 
reported by the Office of Inspector General (OIG) of the Department of 
Health and Human Services (HHS) include the underlying state 
convictions, judgments, forfeitures, civil settlements, federal program 
exclusions, and civil monetary penalties. In fact, the majority of 
health care fraud convictions, penalties, and exclusions reported to 
you are based upon MFCU convictions. The MFCUs are the most efficient 
and effective law enforcement agencies in the battle against health 
care fraud and patient abuse.
                       patient abuse and neglect
    The MFCUs success in detecting and prosecuting Medicaid provider 
fraud is widely recognized, it is perhaps less well known that the 
Units are the only law enforcement agencies in the country specifically 
charged with investigating patient abuse and neglect.
     In the mid-1970's, allegations of nursing home patient abuse 
shocked the country, causing universal outrage and a demand for 
effective redress. Implicitly acknowledging that patient abuse matters 
were the ``orphans'' of local prosecutors' caseloads--they having 
neither the time nor the expertise required to consistently prosecute 
such matters successfully--Congress conditioned each state's 
participation in the MFCU program upon its formulating ``procedures for 
reviewing complaints of the abuse and neglect of patients of healthcare 
facilities which receive payments under the State [Medicaid] plan'' 
and, where appropriate, prosecuting such cases or referring them to 
other state agencies for prosecution (42 U.S.C. Sec. 1396b(q) [4]; 42 
CFR Sec. 1007.11[b]). In accordance with that mandate, today each of 
the 47 currently enrolled MFCUs devotes a substantial portion of its 
caseload to patient abuse investigations. State Medicaid Fraud Control 
Units review thousands of referrals alleging patient abuse, neglect and 
the misappropriation of patient funds.
     Patient abuse can be classified into several categories. For 
example, providing inadequate medical or custodial care or creating 
other health care risks may constitute patient neglect. Physical abuse 
includes acts of violence such as slapping, kicking, hitting or 
punching a patient and sexual abuse. Financial abuse includes the 
misappropriation of patients' personal funds such as commingling 
patient and facility funds or using patient funds to pay for facility 
operations.
    Scores of investigations and years of cumulative experience have 
made it clear that the abuse, neglect, mistreatment, and economic 
exploitation of nursing home residents is a problem of far greater 
magnitude than previously thought. Eleven years ago, our national 
association, in collaboration with the National Association of 
Attorneys General (NAAG), responded to the growing national concern 
about patient abuse by adopting Guidelines and Commentary for 
Legislation to Prohibit Patient and Resident Abuse. These Guidelines 
are designed to encourage states to enact patient abuse statutes that 
would not only provide the necessary prosecutorial tools and enhanced 
penal sanctions for combating this type of shocking misconduct, but 
would also serve as a powerful deterrent to potential patient abusers.
    It is difficult to conceive of a more vulnerable, less threatening 
group than residents of long-term care facilities. Yet, too often, they 
are the target of cruel and, at times, sadistic violence and 
mistreatment. Most reprehensibly, in long-term care facilities, 
perpetrators of physical abuse are usually those charged with care and 
well-being of patients. For example:
          A New York physician was criminally prosecuted for willful 
        neglect and reckless endangerment of a nursing home patient in 
        his care. He mistook a peritoneal dialysis catheter in the 
        patient's abdomen for a feeding tube, and ordered that she be 
        fed through the catheter. When this error was discovered two 
        days later, he made a conscious decision to do nothing to help 
        the patient despite expert advice that the patient required 
        hospitalization for treatment. Finally, ten hours later, the 
        physician agreed to transfer the patient to the nearby hospital 
        for care.
          In Louisiana, a former certified nursing assistant trainee 
        was arrested for raping a mentally ill woman in a nursing home 
        and lying about his criminal record to get a job.
          In Arizona, a residential care home owner was sentenced to 
        serve 21 years--the longest sentence for elder abuse in the 
        state's history--for neglecting and abusing his aged patients. 
        To induce families to place their relatives in his facility, 
        the defendant had lied to them about his licensure status.
          Six physicians who worked at a facility for mentally retarded 
        patients in Pennsylvania were arrested for allegedly abusing 
        their patients and five were charged with the simple assault 
        and neglect of a care-dependent person for allegedly using 
        staples and sutures to seal wounds without the use of 
        anesthesia.
          Beverly Enterprises, Inc., the largest nursing home chain in 
        the nation, agreed to pay $600,000 to improve care at their 17 
        facilities in the state of Oregon, after an MFCU investigation 
        of a Beverly home found evidence of inadequate staff training 
        and supervision, and other conditions constituting an immediate 
        threat to resident health and safety.
          71 felony charges were filed against nine individuals and 
        three corporations involved with four Michigan nursing home 
        facilities for criminal patient abuse and neglect and 
        falsification of records at the facilities. A Michigan nursing 
        home and its owner/administrator were charged with one count of 
        involuntary manslaughter for the drowning death of an elderly 
        patient who drowned in scalding hot water.
    And beyond these egregious cases, the Units have also uncovered 
thousands of incidents of individual nurses, aides, and orderlies, 
raping, sodomizing, beating, kicking, and force-feeding the helpless, 
often incompetent patients in their charge.
    Congress enacted P.L. 95-142, not only because of the widespread 
evidence of fraud in the Medicaid Program, but also because of the 
horrendous tales of nursing home patient abuse and resident 
victimization--and the Units are justly proud of their record in 
protecting the frail and vulnerable institutionalized elderly.
                         provider fraud schemes
    In the past decade, the MFCUs have seen a rapid increase both in 
the number of fraudulent schemes and the degree of sophistication with 
which they are committed. Although the typical fraud schemes such as 
billing for services never rendered, double billing, misrepresenting 
the nature of services provided, providing unnecessary services, false 
cost reports and kickbacks still regularly occur, new and often 
innovative methods of thievery have consistently occurred and are even 
just beginning to appear.
    Medicaid fraud cases run the gamut from a solo practitioner who 
submits claims for services never rendered to large institutions which 
exaggerate the level of care provided to their patients and then alters 
patient records in order to conceal that lack of care. MFCUs have 
prosecuted psychiatrists who have demanded sexual favors from their 
patients in exchange for prescription drugs, nursing home owners who 
steal money from residents, and even funeral directors who bill the 
estates of Medicaid patients for funerals they did not perform.
    The following are typical schemes corrupt providers may use to 
defraud the Medicaid program.

1. Billing for services not rendered--A provider bills for services not 
        rendered, x-rays not taken, a nursing home or hospital 
        continues to bill for services for a patient who is no longer 
        at the facility either due to death or transfer, and 
        psychiatrists bill for SSI qualifying exams which do not occur.
2. Double-billing--A provider bills both the Medicaid program and a 
        private insurance company (or the recipient) for treatment, or 
        two providers request payment on the same recipient for the 
        same procedure on the same date.
3. Substitution of generic drugs--A pharmacy bills the Medicaid program 
        for a brand name prescription drug, when a low cost generic 
        substitute was supplied to the recipient at a substantially 
        lower cost to the pharmacy.
4. Failure to refund unit dose prescriptions--Many nursing home 
        pharmacies dispense drugs using the ``unit dose'' method, where 
        a month's supply of pills are dispensed in sanitary bubble 
        packs holding individual doses. The prescriptions are billed to 
        Medicaid when dispensed, usually at a premium because of the 
        extra effort involved in the unit dose packaging. Those 
        medications which are not used should be, but often are not, 
        credited to Medicaid. The percentage of returned medication is 
        high in a nursing home because of the large number of mid-month 
        medication changes, hospitalizations, and ``use as needed'' 
        medications in the nursing home industry.
5. Unnecessary services--A physician performs numerous tests which are 
        medically unnecessary and result in great expense to the 
        insurer. Extreme examples noted in many states include ``gang 
        banging,'' where a single optometrist, podiatrist or other 
        specialist will be allowed to treat the entire nursing home 
        population in a day, regardless of whether the service is 
        medically necessary for the particular patient being seen.
6. Upcoding--A physician bills for more expensive procedures than were 
        performed, such as a comprehensive procedure when only a 
        limited one was administered, a psychiatrist bills for 
        individual therapy when group therapy was given.
7. Kickbacks--A nursing home owner requires another provider, such as a 
        laboratory, ambulance company or pharmacy, to pay the owner a 
        certain portion of the money the second provider receives from 
        rendering services to patients in a nursing home. This practice 
        is particularly costly because we find that it encourages the 
        nursing homes, which act as gatekeepers for the ordered 
        ancillary services, to subscribe to unnecessary ancillary 
        services which are reimbursed by Part B Medicare and Medicaid.
8. False Cost Reports--A nursing home owner or operator includes 
        inappropriate expenses for Medicaid reimbursement.
                         new schemes and trends
    Over the past few years, these so-called ``typical'' schemes have 
given way to more innovative ones. Recently, the Units have identified 
serious fraud problems in several industries including laboratories, 
home health care, medical transportation, durable medical equipment and 
pharmacies. The incidence of illegal drug diversion has risen sharply 
over the years, carrying with it a dramatic financial impact on the 
Medicaid program.
    More and more states are enrolling their Medicaid population into 
managed care plans. While proponents of the managed care system believe 
that it is the best method for providing low cost high quality health 
care to more people, the experience of the fraud Units reveal that no 
health care plan is immune from fraud and indeed fraud does occur in 
managed care plans.
    Recent global settlements of cases involving multiple state and 
federal entities have encouraged cooperative federal/state efforts to 
protect the Medicare/Medicaid programs from health care providers or 
vendors whose activities know no borders.
                         fraud in nursing homes
    The Medicaid program still continues to finance the largest 
percentage of total costs for nursing homes. In 1997, total Medicaid 
vendor payments were approximately $123 billion dollars. Approximately 
30.5 billion of this amount went to nursing facility services which 
includes skilled nursing facilities (SNFs) and all other categories for 
Intermediate Care Facilities (ICF), other than mentally retarded (MR) 
services. The number of skilled nursing facilities has been increasing 
since the 1970's and by the beginning of 1998 reached 14,860, an 
increase of 4.8 percent since 1997.
    Traditionally, nursing home prosecutions involve the filing of 
false cost reports, which were proven false because they claimed 
reimbursement for expenses which were not properly attributed to 
patient care. The following are examples of nursing home fraud:
          The Maryland MFCU has criminally prosecuted owners and 
        administrators for including in their nursing home cost reports 
        the following; the cost of renovating their personal 
        residences, buying shrimp and tenderloin for holiday 
        entertaining, including personal maid service and opera tickets 
        on a cost report; fixing up rental properties for the benefit 
        of the owners and paying a salary to a son who was in prison in 
        Texas at the time he was drawing the salary.
          Two Atlanta businessmen entered guilty pleas in federal 
        district court to felony charges related to a complex scheme of 
        submitting fraudulent nursing home cost reports to the Georgia 
        Medicaid program. As a part of their guilty pleas, the pair 
        agreed to pay restitution of approximately $6 million to the 
        Georgia Medicaid program and also agreed to the forfeiture of 
        an additional $2.155 million in assets.
          South Carolina's first criminal conviction following the 
        Unit's creation in 1995, was a management company that operated 
        a nursing home. The company illegally received almost $50,000 
        in Medicaid funds for a patient who had already been 
        discharged.
          The former administrator of a nursing home in Nevada pleaded 
        guilty after the Unit charged him with falsifying reports to 
        the state by reporting nurse staffing hours in excess of the 
        Medicaid regulations minimum requirements, when in fact, the 
        actual hours of direct care were below the minimum levels.
          In Pennsylvania, a nursing home owner and his corporation 
        pleaded guilty to Medicaid fraud for illegally collecting over 
        $120,000 by claiming reimbursement for personal, family and 
        non-reimbursable business expenses. These expenses included 
        vacation trips, entertainment costs, maintenance and home-
        improvement expenses for his personal residence and health and 
        life insurance for his family. In addition, the owner 
        fraudulently inflated reimbursement expenses for the nursing 
        home by submitting in his cost reports operating expenses of 
        two separate personal care boarding homes that he also owns.
          In Washington State, a nursing home owner and administrator 
        were convicted for billing the Medicaid program for hundreds of 
        thousands of dollars for the full cost of patients who were 
        concurrently being billed to Medicare.
          For the first time in Ohio, the owner/operator of a group of 
        nursing homes was convicted of money laundering after a 3\1/2\ 
        year investigation for receiving $23,000 more than he was 
        entitled to from the Medicaid program.
                              laboratories
    Aggressive marketing techniques, not traditionally associated with 
the health care industry, have increased costs by adding marginally 
necessary or totally unnecessary tests to health care bills. One such 
example are the recent Labscam cases where physicians were misled into 
ordering a rare, but expensive, diagnostic tests when they needed only 
an inexpensive and basic blood chemistry. Investigators found that 
several independent clinical laboratories induced doctors to order 
laboratory tests which were medically unnecessary by assuring that the 
additional tests would be free or of minimal cost. In fact, the 
laboratories were billing government insurers for these tests without 
the referring physician's knowledge. As a result of this three-year 
task force effort targeting unbundling schemes, federal and state 
governments were paid a total of $642 million to settle potential civil 
and criminal liability.
    Billing for useless laboratory tests and cheating both government 
and private insurers is still occurring. In Maryland, a laboratory and 
its owner were found guilty of numerous counts fraud and theft. The 
defendants were charged with billing government and private insurers 
for performing more than 8,000 unauthorized and useless diagnostic 
tests totaling nearly $150,000. The owner was also convicted of 
representing a laboratory which was in violation of the state's quality 
assurance laws. He was sentenced to serve five years in and ordered to 
pay $161,000 to Medicaid, Medicare and several commercial health 
insurance companies.
    The Illinois MFCU charged several defendants with allegedly 
establishing a phony lab and billing Medicaid and private insurance 
companies for lab tests that allegedly were never performed by the lab. 
During a search of one of the defendants' home, tubes of what appeared 
to be human blood were found in the garbage can. Before the scheme was 
exposed, over $300,000 in payments from Medicaid and insurance 
companies passed through the corporate bank account.
    Laboratories that provide drug testing for substance abuse programs 
have also been the subject of MFCU investigations. The Massachusetts 
MFCU indicted a drug testing laboratory and its president for allegedly 
overcharging Medicaid for tests it performed and then used in a series 
of fraudulent billing schemes to increase their billings even more. In 
Pennsylvania, a laboratory agreed to pay $750,000 to settle allegations 
that it overcharged the state for testing done for drug and alcohol 
facilities and hospitals in the Pittsburgh area.
    Defendants across the country have found a way to turn blood into 
money. Clinic owners purchase human blood from ``blood brokers.'' These 
brokers draw many vials of blood from people willing to sell it. These 
are often drug addicted individuals. The clinic owners pair these 
samples with fictitious laboratory requisition forms, using Medicaid 
recipient numbers drawn from their files. They order an expensive panel 
of tests which the laboratory performs. The laboratory then kicks back 
a portion of the Medicaid payment to the clinic owner.
    In a New Jersey case exemplifying this scheme, a laboratory's 
Medicaid billings increased to $5.5 million from $500,000 in the 
previous year. During this investigation one defendant purchased vials 
of human blood from a cooperating witness. This was a ``controlled 
sale'' and the blood was drawn from state investigators who 
volunteered. Another defendant walked into an office where police were 
conducting an unrelated investigation with a bag containing vials of 
human blood.
    Four defendants pleaded guilty and were sentenced to prison terms 
ranging from six to ten years. After a three week jury trial, another 
defendant was convicted and sentenced to one year in county jail.
    Similar schemes have been detected in several other states. In 
California, a variation has emerged. It is called ``dry labing.'' 
Instead of purchasing bogus samples from clinic owners lab operators 
merely submit electronic claims repeatedly. Trafficking in Medicaid 
identifiers is on the upswing.
                            home health care
    Already the fastest growing part of the Medicaid-funded health care 
system, state and federal outlays in the home health industry have 
ballooned in the last five years. The Medicaid federal share for home 
health care is expected to reach $18.4 billion by the year 2000. This 
increase is due to an aging population, shorter hospital stays, 
increasing cost of nursing home care and an increase in technology. 
Since the 1970s, technology has advanced to the point of allowing more 
and more patients to remain in their homes and receive treatment. The 
profile of a typical home health care recipient is one who is elderly, 
disabled, has AIDS, heart disease, diabetes or has been discharged from 
the hospital and needs more care.
    Not only are home health care agencies charged with grossly 
inflating the number of hours their employees worked, but, more 
importantly, in some cases with recklessly sending untrained, 
unqualified, and unlicenced aides into private homes of thousands of 
critically ill and care-dependent patients. It is an industry that 
contains all of the components for disaster. It is unregulated in the 
traditional medical sense, multiple agencies are involved with large 
amounts of government money and it is attractive to the consumer.
    Let me highlight a few examples of the Units' work in this area:
          In California, an elderly man who died by starving and in his 
        own filth, was locked in a room by his sons and daughter while 
        they enjoyed Thanksgiving dinner in another room. They were his 
        government paid home health caregivers.
          Five individuals in Massachusetts were charged on a variety 
        of Medicaid fraud charges as a result of the MFCU's 
        investigation into Medicaid's personal care attendant program 
        which allows disabled individuals to remain in a community 
        setting with the aid of personal care attendants. Each of the 
        defendants charged the stated for services which were not 
        provided and/or inflated billings made to the agencies.
          In Pennsylvania, after a four week trial, a home health care 
        agency owner and her corporation were found guilty for engaging 
        in a 5\1/2\ year scheme to defraud Medicare and Medicaid of 
        over $1 million. Evidence presented at trial revealed that the 
        owner falsified records regarding patient homebound status.
          Two home health care providers continued to bill the 
        Washington State Medicaid program after the patients had died. 
        In one of these cases, the defendant continued to bill the 
        state while living with the victim's ex-wife.
          A certified nurse's aide in Maine was sentenced to three 
        years in jail, with all but 30 days suspended, and to four 
        years probation for adding her name to a number of credit cards 
        that belonged to the patient and making purchases on those 
        cards totaling $7,196.13.
          A major home health care agency settled with New York for 
        1.75 million dollars for submitting tens of thousands of 
        inflated bills to Medicaid covering 1.2 million hours of 
        services from 1994 to 1997.
    Among the most rapidly growing segments within the home health care 
industry is home infusion treatments. Home infusion treatments include 
more than the actual medication. In addition to drugs and nutritional 
formulas, supplies such as tubing, syringes, alcohol swabs, bottles, 
gloves and needles, and expensive equipment such as pumps, nebulizers, 
glucose monitors and blood pressure kits that are regularly utilized by 
the victims of these serious illnesses, all of which are billed on a 
regular basis.
    A large amount of the funds, too, are spent in the area of home 
care services. Regular visits, frequently more than once a day, by an 
R.N., nurse practitioner, home health aide, a physicians's assistant or 
even a physician, are required and reimbursed. Further, regular visits 
to a physician for certification of continued need and dosage 
adjustment are necessary. Again, a classic recipe for fraud with 
fragmented billings; drugs are billed by the pharmacies; the supplies 
used to assist in administering the drugs are billed by the DME 
provider; professional services are billed by the home health service 
company or individual providers; and personal services may be billed to 
various agencies.
    The potential for fraud in this rapidly-expanding and highly 
expensive industry is clear. Kickbacks to doctors to authorize 
medically-unnecessary treatment, services or supplies, whether provided 
or not, is cause for MFCU concern.
                         medical transportation
    Virtually every state MFCU has found egregious examples of fraud by 
non-emergency medical transportation companies. Medicaid will generally 
pay for a patient's transportation to a medical provider either when 
mass transit is unavailable in the recipient's area or when the 
patient, because of a debilitating physical or mental condition, cannot 
use this method of transportation. Examples of medical transportation 
fraud include; billing for an excessive number of miles per trip for 
services actually provided, billing for recipients who drove 
themselves, paying kickbacks to recipients who used the medical 
transportation services, allowing non-eligible persons to use another 
recipient's card, submitting falsified appointment dates for round-trip 
transportation services to a provider's offices, charging billing for 
emergency transportation for non-emergency situations, billing for 
fictitious services not covered by the Medicaid program or for 
transportation that was not provided, creation of phoney certificates 
of need ostensibly by doctors, and kickbacks to doctors for improperly 
certifying the need.
    Transportation fraud is also committed by ambulance providers as 
well. For example, in Pennsylvania claims were filed to the state 
requesting reimbursement for ambulance trips that were not medically 
necessary. Many of these trips were to doctors' offices, which are not 
reimbursable under Medicaid regulations, but were misrepresented as 
being trips to hospitals. A Minnesota company that provided ambulance 
and medical transportation reached a $3 million dollar settlement with 
state and federal authorities for falsely billing the Medicaid and 
Medicare programs. The company billed these programs for basic life 
support ambulance transportation, claiming that the rides were 
medically necessary, when a lesser form of transportation would have 
been adequate.
    A Florida task force investigation into false billings for the 
transportation of Medicaid patients resulted in 31 convictions of 
company executives, dispatchers and drivers. Due to lack of program 
oversight, companies with only one or two old vehicles were able to 
generate millions of dollars in false billings to the Medicaid program. 
It is estimated that over 18 million dollars was stolen from the 
program in South Florida alone.
    The general transportation program in Maryland virtually collapsed 
under the weight of fraud and abuse. In 1988, the program cost 
taxpayers $4.5 million per year. Fraud, abuse and aggressive marketing 
caused the demand for program services to increase four fold in four 
years, for a cost of $16.2 million in 1992, at which time it was 
abolished.
    In California, a state that pays for almost no transport services, 
nearly $1 million was recovered from bank accounts hours before the 
money was to be transferred out of the country. The defendants had 
already fled. They had used a combination of phoney certificates of 
need, lying about the mileage and kickbacks to board and care operators 
for access to Medi-Cal patients.
    In Arkansas, as a result of a search warrant of one cab company, 16 
former drivers of the company, nine Medicaid recipients and three 
others were convicted and were ordered to pay over $2 million in 
restitution to the Medicaid program.
                             drug diversion
    Drug diversion or more properly the diversion of legal drugs for 
illegal purposes in the Medicaid program, has generated a supply of 
dishonest health care providers who both abuse their prescribing 
privileges and incur great costs to prescription plans, such as 
Medicaid. In large urban centers, it is not uncommon to find a so-
called ``pill mill'' which has as its primary purpose the issuance of 
prescriptions for controlled drugs in exchange for cash or, in some 
cases, sexual favors. These drugs may then be resold ``on the street'' 
or sent abroad for black and gray markets for several times their cost, 
sustaining the continued addiction of countless individuals. In some 
instances, we have found that the street addicts resold the 
prescription drugs to other pharmacies at a fraction of their original 
cost and at some risk to the unsuspecting customers of the second 
pharmacy.
    However, while drug diversion is often used in the context of pill 
mills and script selling doctors, the definition should include such 
cases as nurses who work in nursing homes who order prescriptions from 
pharmacies without a physician's order and then obtain the prescription 
from the pharmacy delivery person and either sell the drugs or use the 
drugs for themselves.
    The larger point-of-entry cities of the United States have noted 
so-called ``hit and run'' schemes in which foreign nationals 
fraudulently obtain a Medicaid provider number and then submit invoices 
for services not rendered. In larger cities, these fake providers often 
are able to obtain hundreds of thousands of Medicaid dollars before 
their detection, at which time they flee to their homeland. In one such 
case in New York, the perpetrators went so far as to establish a 
medical laboratory and then offer to buy the blood of Medicaid patients 
for $10 a pint. Once the owners of the laboratory obtained the blood 
and the Medicaid eligibility numbers of the patients, they would submit 
astronomical bills to Medicaid, representing that they had performed an 
extensive and costly blood work-up, the results of which the patients 
would not receive. The laboratory owners were discovered only when 
numerous ``patients'' began appearing at hospital emergency rooms after 
selling excess amounts of blood and rendering themselves gravely ill.
    In many of the nation's larger urban centers, it is not uncommon to 
find so-called ``pill mills''--medical centers whose primary purpose is 
the issuance of prescriptions for controlled drugs in exchange for 
cash. In a typical scenario, a ``patient'' will visit an unscrupulous 
doctor and buy, for instance, a prescription for 90 Valium (10 mg) 
tablets at a price of about $1 a pill. After ``busting'' the 'scrip 
(having it filled) at an accommodating pharmacy, the patient will 
resell the pills to individuals at $5 a pop and thereby net a profit of 
$360. Not factored into this economic equation, however, is that each 
participant in the scheme is sustaining the continued addiction of 
countless individuals.
                         fraud in managed care
    Both the Medicaid and Medicare programs are utilizing managed care 
delivery systems. In some states, managed care has been in existence 
since the early 1980s. Currently, more and more states are requiring 
greater numbers of their Medicaid population to participate in their 
managed care programs.
    Proponents of the managed care system believe that it is the best 
method for providing low cost, high quality health care to more people. 
Managed care is supposed to save money not only in the delivery of 
services but by cutting down on the amount of paperwork. While many 
observers point out that the very nature of managed care prevents 
fraud, the experience of the Medicaid Fraud Control Units, demonstrates 
otherwise. Rather, fraud simply takes different forms, in response to 
the way the program is structured.
    In the traditional fee-for-service fraud, the healthcare provider 
is generally the one who commits the fraud. However, in managed care, 
fraud can be committed by a managed care organization (MCO), a 
contractor, subcontractor, provider, state employee, or beneficiary.
    Managed care fraud includes the following:

Fraud in the procurement of the contract with the state Medicaid agency 
        by the MCO;
Fraud committed in procuring provider subcontracts;
Falsification of financial solvency by the MCO;
Marketing and enrollment fraud, such as, enrolling ineligible or non-
        existent individuals;
Kickbacks for referrals to specialty physicians; and
Underutilization or the failure to provide adequate or timely 
        reasonably accessible medical services to a patient for whom 
        the provider has accepted a duty of care.
    Marketing abuses are among the most prevalent type of managed care 
fraud. In almost all instances, this type of fraud occurs in the 
Medicaid HMO setting. Marketing agents fraudulently enroll Medicaid 
recipients by giving them false information, often without the 
recipients' knowledge. In many instances, persons are enrolled who are 
not Medicaid-eligible, such as prisoners. Many states have taken active 
measures to prevent, or at least reduce, this type of fraud, such as 
forbidding the direct solicitation of recipients by the HMO.
    One of the first managed care fraud cases involving marketing 
schemes occurred in Tennessee. OmniCare, Tennessee's fourth-largest 
TennCare provider, employed marketing representatives who were paid a 
fee to enroll individuals in the health plan. Approximately 4,500 
fictitious applications were submitted to TennCare and TennCare paid 
approximately $1.8 million to OmniCare for these enrollees. This money 
was subsequently recouped. Four marketing representatives were charged 
in a 28 count indictment for mail fraud, false statements, social 
security violations and conspiracy. Two of the defendants pleaded 
guilty. One was sentenced to 12 months and one day incarceration, three 
years supervised release and ordered to pay restitution of $5,000 to 
OmniCare. The other defendant was sentenced to three years probation 
and restitution of $246,400 to OmniCare. The remaining two defendants 
went to trial and were found guilty on all counts. One defendant was 
sentenced to 27 months incarceration, three years supervised release 
and restitution of $126,800. The other defendant was sentenced to 68 
months incarceration and ordered to pay $1.4 million in restitution to 
OmniCare.
    In Florida, Care Florida Health Plan, a health maintenance 
organization, paid the state $1.75 million dollars to settle 
allegations that it improperly enrolled Medicaid patients in the plan. 
California, Illinois, Maryland and Pennsylvania have also had cases 
involving marketing abuses.
    The Maryland MFCU obtained convictions of 24 individuals for crimes 
related to the marketing of HMO plans to Medicaid recipients. The 
investigation resulted in charges against 14 HMO marketing 
representatives representing four of the five HMOs doing business in 
Maryland's Medicaid market, two HMO supervisors and eight Department of 
Social Service (DSS) employees. The crimes were based on bribing 
program employees in order to induce disclosure of Medicaid recipient 
information and forged or fraudulent enrollments, often made possible 
through use of the improperly disclosed information. These convictions 
resulted in the stronger regulations for HMOs doing business in 
Maryland and prohibition of HMO marketing at DSS offices and allowing 
the state to impose fines of up to $10,000 for fraudulent marketing 
practices.
    For the first time, an MFCU has convicted a managed care 
organization and its top executive for stealing hundreds of thousands 
of taxpayer dollars from patients and participating doctors. The New 
York Medicaid Fraud Control Unit charged the owner and CEO with 
stealing more than $300,000 and defrauding 79 of the plan's 
participating doctors by engaging in an elaborate ``bust out'' scheme 
that improperly removed thousands of patients from these physicians' 
rosters. The CEO, who paid physicians based on the number of members 
assigned to them, instructed his staff to illegally remove 
approximately 6,700 patients from physicians' rosters during a two 
month period enabling him to reduce his expenditures and divert the 
savings to his company. He entered into a plea bargain which provides 
for the repayment of $375,000 to the Medicaid program.
    The National Association of Medicaid Fraud Control Units (NAMFCU), 
which represents the 47 state MFCUs, adopted Model Criminal Enforcement 
Statutes for Managed Care in October 1996. This model criminal 
legislation is designed to provide a framework for the states to 
redress fraud in a managed care environment by criminal prosecution. In 
considering the adoption of any or all of the proposed model, states 
should examine their respective existing laws with regard to false 
claims, false statements, unfair competition, unfair business and 
deceptive marketing and antitrust to determine whether new laws are 
needed.
    Managed care fraud is more difficult to detect, investigate and 
prosecute than the traditional fee-for-service Medicaid provider fraud. 
There are a number of reasons that make managed care fraud cases more 
difficult. These include the complexity of the contractual agreements, 
the lack of referrals from the Medicaid agency and of reporting 
requirements, and the failure many times by the Medicaid agency to 
recognize that fraud does occur in managed care.
                multi-state/federal cooperative efforts
    Cooperative efforts between state and federal authorities have 
proven very effective in protecting Medicaid and Medicare from health 
care providers or vendors whose activities involve both programs and 
cross state lines. Joint federal and state task forces have been 
established in states throughout the nation, and agents increasingly 
are working together to detect fraud against government insurers. One 
side effect of these efforts has been the recognition by seasoned 
practitioners that all parties must be at the table when any case 
resolution is discussed. A settlement reached with a state Medicaid 
Fraud Control Unit in which all Medicaid claims are resolved, for 
example, does not necessarily resolve those in other states or any 
outstanding Medicare claims or their attendant sanctions. The result 
has been an unprecedented willingness on the part of state and federal 
authorities to reach ``global'' settlements in which all outstanding 
claims by government insurers can be resolved, and in which all 
administrative sanctions can be addressed. Unlike state consumer 
protection or antitrust multistate settlements, where the states 
determine that a market problem exists and appoint a lead Attorney 
General as negotiator, MFCU global settlements are generally based upon 
a federal Medicare investigation and prosecution. The federal 
government realizes that the states must be included in these cases 
because they would be unable to settle the Medicaid portion without 
them.
    The federal government also understands that defense attorneys are 
unlikely to settle a case without the effected state settlement 
agreements. Most states, like the federal government, have the 
authority to exclude a convicted provider from their health care 
programs. It would make the settlement of these cases impossible if 
defense attorneys had to obtain settlement agreements from individual 
states and had to negotiate separate terms with each state.
    In 1992, for the first time the state MFCUs participated in a 
global settlement, U.S. v. National Health Laboratories, Inc. (NHL). 
Since that time, the MFCUs have participated in the successful 
conclusion of ten global settlement cases with a total Medicaid 
recovery of almost $145 million dollars.
                   relationship with the s/urs units
    Federal regulations require state Medicaid agencies and MFCUs to 
enter into a Memorandum of Understanding (MOU) in which the agencies 
agree to refer all cases of suspected fraud to the Unit. In addition, 
the agency must afford the Unit access to their records. The 
Surveillance and Utilization Review Subsystem (S/URS), a subsystem of 
the Medicaid Management Information System (MMIS) which applies 
automated post-payment screens to Medicaid claims to identify aberrant 
billing matters, is the entity within the state Medicaid agency that 
refers suspected fraud cases to the MFCU. Established procedures for 
sharing Medicaid information between state officials, not only ensures 
referral of appropriate cases but also helps protect program integrity.
    A number of reports have been issued assessing the effectiveness of 
the process used by Medicaid agencies to refer possible fraud cases to 
the Units and have offered suggestions for improvements. The most 
recent report, Surveillance and Utilization Review Subsystems' Case 
Referrals to Medicaid Fraud Control Units, was published by the Office 
of Inspector General in November 1996. This report concluded that the 
number and percentage of suspected fraud referrals from S/URS to MFCUs 
had declined during the past ten years, S/URS employees do not have 
sufficient training to assure that they develop and refer suspected 
fraud allegations in a consistent and appropriate manner, and HCFA does 
not routinely monitor S/URS development to establish whether potential 
fraud issues are being appropriately and consistently analyzed and 
referred.
    The report recommended several solutions that HCFA, in consultation 
with OIG, should consider, including the convening of a Medicare and 
Medicaid fraud and abuse task force to plan and implement improvements 
in fraud operations and the development and implementation of a 
comprehensive evaluation system for S/URS case identification, 
development and referral activities.
    HCFA convened a Medicaid Fraud and Abuse Technical Advisory Group 
(TAG) in 1998 as a forum for the sharing of issues, resources, and 
experiences among the states to develop best practices and to advise 
HCFA on policies, procedures, and program development. Twelve states 
are represented on the TAG as well as representatives from the National 
Association of S/URS officials and Medicare. I was recently appointed 
the TAG representative of the National Association of Medicaid Fraud 
Control Units.
     I would like to describe to the Committee the relationship between 
the New Jersey Office of Program Integrity (OPIA) which is part of the 
state Medicaid agency and is responsible for referring appropriate 
cases to the Medicaid Fraud Control Unit and the MFCU.
    Regular meetings between the MFCU and OPIA managers and staff 
members have reduced the mistrust and have allowed the two Units to 
work more closely together. The two Units have established a series of 
regularly scheduled monthly meetings with more frequent meetings and 
telephone conversations as needed.
    Monthly screening meetings are supplemented with meetings on 
specific cases or topics. In addition the MFCU Director updates to OPIA 
Assistant Director on all significant case activities by letter. In 
cases where an indictment is returned, an accusation is filed, or a 
civil settlement entered into, the MFCU Director writes and includes a 
copy of all appropriate documents.
    One of the major sources of friction between Medicaid S/URS Units 
and MFCUs has been the inability of many S/URS Units to take action to 
stop incorrect payments to providers who were the subjects of MFCU 
investigations. The MFCU often requests that the S/URS take no further 
action while the criminal investigation is pending in order to assure 
that the actions of the S/URS do no interfere with or compromise the 
criminal investigation. Furthermore, the MFCU is often unable to share 
evidence gathered during the course of its criminal investigation with 
the S/URS because of rules or laws protecting the secrecy of grand jury 
proceedings. As a result, protecting the integrity of a MFCU 
investigation often means adversely affecting the financial integrity 
of the Medicaid program, at least on a temporary basis.
    New Jersey resolved this dilemma several years ago when the MFCU 
and OPIA developed a unique procedure for striking a balance between 
the needs of the MFCU and those of the state Medicaid Agency. Under 
this procedure, the MFCU agreed in many cases to permit the Department 
to take whatever administrative action was necessary to protect the 
financial integrity of the New Jersey Medicaid program, including 
prepayment monitoring, withholding payments pending conclusion of the 
criminal investigation in accordance with 42 CFR 455.23, and/or 
exclusion from the Medicaid program. Moreover, in cases where the MFCU 
is able to establish probable cause, search warrants are used in 
addition to or instead of grand jury subpoenas to gather evidence. The 
MFCU is therefore often able to share with OPIA the fruits of its 
criminal investigation while that investigation is in progress. In 
addition, the aggressive use of undercover operations has produced 
evidence that the MFCU is able to share with OPIA. This provides OPIA 
with the evidence and witnesses necessary to permit DMAHS to take 
summary administrative action to stop incorrect payments from being 
made to a provider while that provider is under criminal investigation 
without compromising the criminal investigation or violating grand jury 
secrecy. By resolving this dilemma, the MFCU and OPIA have eliminated a 
major source of controversy that has adversely affected the 
relationship between other MFCUs and S/URS throughout the country.
    Additionally, the MFCU attempts to lessen the workload of OPIA when 
possible. Whenever a defendant pleads guilty to a criminal charge, the 
MFCU insists that the defendant sign a Consent Order of Debarment of 
Disqualification from the Medicaid program. The Consent Order specifies 
that the defendant has been advised of his right to a hearing on the 
subject of debarment or disqualification, understands it, and waives it 
by agreeing to be debarred for a minimum period of five years or 
disqualified for a minimum period of eight years. This Consent Order is 
placed on the record in open court, and the judge handling the matter 
also signs it. The Consent Order also provides that the defendant agree 
to the same period of disqualification from Medicare and any other 
state or federally funded health care program as agreed to regarding 
the Medicaid program. This Consent Order is immediately forwarded to 
OPIA. As a result, instead of securing approval from the Attorney 
General's Office for a pre-hearing suspension, issuing a Notice of 
Suspension, preparing for a hearing involving civil attorneys from the 
Division of Law within the Department of Law and Public Safety, and 
actually going through the hearing process with its inevitable delays 
and problems, OPIA simply prepares a Notice of Debarment or 
Disqualification, sends it to the provider, and notifies the agency's 
fiscal agent. The Consent Order and exclusion notice are also forwarded 
directly to the Office of the Inspector General within the U.S. 
Department of Health and Human Services for appropriate federal action. 
Consequently, the resources OPIA would have expended on 
administratively prosecuting this suspension can be put to more 
productive use in other cases.
    Finally, since OPIA was established in 1975, it has had two 
supervisors, both of whom were attorneys. One of the reasons for this 
was the belief by top management within the Medicaid agency that an 
attorney would be best suited by training and experience to understand 
and resolve the problems and issues that arise between a MFCU and a S/
URS Unit. Conversely, it was felt that the MFCU chief would feel more 
comfortable in discussing legal problems and issues with another 
attorney. Furthermore, since 1979, OPIA has been headed by an attorney 
who was formerly a civil Deputy Attorney General (DAG) in the same 
department as the MFCU. This individual not only provided legal 
representation to the Medicaid agency and OPIA, but also worked closely 
with the MFCU while a DAG. Since 1979, he has made a close and 
productive working relationship between OPIA and the MFCU a top 
priority.
    For all of these reasons, New Jersey's S/URS Unit and MFCU have 
developed a working relationship characterized by cooperation and 
mutual respect and as a result have enhanced New Jersey's Medicaid 
anti-fraud and abuse efforts.
     national association of medicaid fraud control units (namfcu)
    The National Association of Medicaid Fraud Control Units (NAMFCU) 
was established in 1978 to provide a forum for the nationwide sharing 
of information concerning the problems of Medicaid fraud control, to 
foster interstate cooperation on law enforcement and federal issues 
affecting the MFCUs, to improve the quality of Medicaid fraud 
investigations and prosecutions by conducting training programs and 
providing technical assistance for Association members, and to provide 
the public with information on the MFCU program. All forty-seven MFCUs 
comprise the Association. Forty of the Units are located in the Office 
of the Attorney General and seven are located in other state agencies.
    The Association employs a Counsel, located at the National 
Association of Attorneys General in Washington, D.C. The Association 
coordinates and disseminates information to the various Units, 
maintains a library of resource materials, and provides informal advice 
and assistance to its member Units and to those states considering 
establishing a Unit. NAMFCU has provided extensive training for MFCU 
staff over the years and is called upon regularly to supply speakers 
for numerous health care fraud seminars. It has also co-sponsored 
training programs with the F.B.I. and the American Bar Association and 
conducts a specialized academy at the Federal Law Enforcement Training 
Center. Most Medicaid Fraud Control Units provide training regularly 
within their own states at police academies on elder/patient abuse and 
for social service employees, community and provider groups on billing 
fraud issues as well as patient abuse. The Medicaid Fraud Report, 
published ten times a year, is the Association's newsletter. The 
newsletter contains information concerning prosecutions by various 
states, reports of legal decisions affecting fraud control prosecution, 
and analyses of legislation affecting the Medicaid program and MFCUs. 
NAMFCU also serves as a clearinghouse for state/federal cooperative 
efforts and provides a responsive voice to Congressional inquiries.
    In closing, I want to emphasize that the Medicaid Fraud Control 
Units are viewed as having a national leadership role in detecting and 
prosecuting fraud and abuse in government funded health care programs. 
The Units have been successful in serving as a deterrent to health care 
fraud, in identifying program savings, removing incompetent 
practitioners from the health care system, and in preventing physical 
and financial abuse of patients in health care facilities.
    Thank you again for the opportunity to testify today.

    Mr. Upton. Thank you very much.
    Ms. Williams.

               TESTIMONY OF GWENDOLYN H. WILLIAMS

    Ms. Williams. My name is Gwen Williams. I recently retired 
from the State of Alabama, having served 22 of my 25 years with 
the Alabama Medicaid agency. For the last 4 years, I served as 
commissioner of that agency and in that role served on the 
Executive Committee of the National Association of State 
Medicaid Directors. I participated with that organization in 
partnership with the Health Care Financing Administration in 
the creation of a National Technical Advisory Group for 
Medicaid Fraud and Abuse.
    I served initially as the liaison between the Executive 
Committee of the National Association of State Medicaid 
Directors and ultimately assumed the role as chair of the 
National Fraud and Abuse Technical Advisory Group.
    I want to share with you just for a few minutes about that 
group and what it has done in the last 1\1/2\ years of its 
operation.
    This group, which is a joint partnership between the State 
Medicaid directors and the Federal Government through HCFA, is 
chaired by a Medicaid Director. It is staffed by the American 
Public Human Services Association. So it is a joint partnership 
arrangement to provide an open forum for discussion of fraud 
and abuse issues.
    In the 1\1/2\ years since its operation, the Technical 
Advisory Group has focused on common issues between the 50 
States and the Medicaid programs. We have focused heavily on 
communication and have experienced some significant success in 
heads-up type information being shared between the States to 
alert sister States of fraudulent providers or fraudulent 
provider schemes before the other States are affected.
    A recent case in point is the case of Indiana, which 
received that type of alert from the State of Florida, 
considerable distance, but as that heads-up information was 
distributed around the country by the State of Florida, Indiana 
found that that provider had, in fact, opened operation in 
Indiana and prevented the payment of $26,000 in claims that 
were currently pending in that State.
    At another role that the TAG has played has been to 
identify emerging issues. As you have already discussed this 
morning, the Medicaid and health care environment is changing 
rapidly. It has become more and more complex, and as it has 
changed so has the type of problems with fraud and abuse in the 
program. The emerging issues that we have identified are things 
that have not really gained attention, such as personal care 
services in the home and the vulnerability of those patients 
for fraud and patient abuse in the home, for those unsupervised 
types of care.
    The Technical Advisory Group has taken an active role in 
not only identifying these new issues but also strategizing 
ways to identify them, prevent them and, in the appropriate 
cases, identify for prosecution.
    Another role that the Technical Advisory Group has been 
very successful in is developing best practices, as States have 
success in identifying fraudulent schemes, sharing that 
information with their sister States so that those States, too, 
can focus those best practices on their Medicaid programs.
    One of the primary roles of the Technical Advisory Group 
and one I want to spend a little more time on this morning with 
you is in the area of legislation and regulation. There are a 
number of issues that the Technical Advisory Group has 
identified in the area of legislation that we believe will 
significantly facilitate States in their efforts to identify 
and prevent fraud and abuse in the Medicaid program.
    The first such--there are three initiatives that the 
Technical Advisory Group presented last year and was endorsed 
by the National Association of State Medicaid Directors and the 
American Public Human Services Association as being appropriate 
legislative initiatives for Medicaid fraud.
    The first is what's commonly known as the 60-day rule. This 
is a requirement where every Medicaid program must refund to 
the Federal Government within 60 days any identified 
overpayment, whether or not that overpayment has been 
collected. Imagine, if you will, accepting a job paying, say, 
$100,000 a year, and you're notified immediately, even before 
your first paycheck, that you owe the full Federal income tax 
on that salary. This is the burden the States face when they 
identify overpayments for providers. This is a huge 
disincentive for States to actively pursue large, vulnerable 
prosecutions or identification of possible fraudulent schemes 
where the collection of that overpayment may be very risky.
    Another issue that was identified by the Technical Advisory 
Group is in the area of recipient suspensions. Under the 
current Federal law, Medicaid recipients cannot be suspended 
from the Medicaid program unless they are convicted in Federal 
court of Federal Medicaid fraud.
    Those of you that are familiar with the Federal courts know 
that Medicaid recipient fraud is not an issue, has never been 
an issue in law enforcement for Medicaid. Medicaid has focused 
exclusively on provider fraud. But I'm here to tell you the new 
and emerging schemes actively incorporate Medicaid recipients 
in those schemes, particularly in the area of pharmacy.
    I heard mention this morning the concept of Medicaid as a 
credit card. This is a mentality that Medicaid recipients have 
held since the beginning of the program. It is something that 
Medicaid recipients feel is their right, to use their Medicaid 
card to purchase drugs through the Medicaid program that they 
in turn sell in the street, to work in concert with fraudulent 
Medicaid providers to cheat the Medicaid program.
    I believe I'm out of time.
    The ability of a State to suspend or terminate Medicaid 
recipients' participation in the program is a huge deterrent 
when that recipient understands the risk that they bear. It is 
also a huge incentive to encourage recipient cooperation in 
fraud investigations.
    One solution that States believe is very appropriate is in 
the area of Federal matching funds. Currently, fraud and abuse 
activities at the State level are matched at 50/50.
    You heard earlier that the Medicaid Fraud Control Unit 
activities are matched at 75 percent. There seems to be a 
problem here when the investigators--the costs of investigation 
is at 75 percent, but the State must put up half the costs of 
the salaries and benefits of those employees used to identify 
the suspected fraud.
    I would encourage you to look at the CHIP model, the Child 
Health Insurance Program, as a model to encourage States to do 
more. The Congress identified a huge problem in the area of 
children's health insurance. They did two things--they gave 
States a financial incentive to address the problem through 
enhanced Federal matching. They also gave States broad 
flexibility on how to approach the problem within certain 
constraints and certain guidelines. I believe this is a model 
that will work in all areas of the Medicaid program and 
certainly in the area of fraud and abuse.
    I will say that no one is more sensitive to the problems of 
Medicaid fraud and abuse than Medicaid directors. Medicaid 
directors are those individuals struggling with their limited 
State matching funds. They are acutely aware that every dollar 
spent inappropriately in the Medicaid program is a dollar they 
cannot spend on needed services to their customers, their 
clients, their recipients.
    I appreciate the attention you're giving this issue. I 
appreciate the opportunity to come today and represent the 
Medicaid directors perspective, and I look forward to 
responding to your questions.
    [The prepared statement of Gwendolyn H. Williams follows:]
  Prepared Statement of Gwendolyn H. Williams, Renaissance Government 
                               Solutions
    Chairman Upton, distinguished members of the Subcommittee, and 
interested listeners, my name is Gwen Williams. I recently retired from 
the State of Alabama after twenty five years of service, twenty two of 
which were with the Alabama Medicaid Agency. During those years I 
served in many capacities, including that of Director of Program 
Integrity, and from January 1995 until January 1999 I served as 
Commissioner of that Agency. During my tenure as Medicaid Commissioner, 
I was honored to represent the Southeast as a member of the Executive 
Committee of the National Association of State Medicaid Directors 
(NASMD).
    Emerging issues and challenges facing state Medicaid programs in 
recent years have created a landscape resembling that of a rugged and 
inhospitable wilderness. Program expansions, service demands, and 
escalating costs have created mountains of adversity which often 
obscure from administrative view other perils and pitfalls which 
threaten the integrity of the program. Fraudulent billing schemes, 
abusive overutilization, and collusion among providers all drain 
precious resources away from the vulnerable populations dependent on 
the program for their health and safety. Unqualified providers, 
inappropriate services and denial of needed care all threaten the 
Medicaid patients' safety and their trust in the health care delivery 
system.
    State Medicaid Directors are not blind to these perils, and have 
consistently sought to respond to these threats in a timely and 
efficient manner. In the past few years, however, as more attention has 
been given to these concerns at the national as well as local level, a 
cooperative effort between state Medicaid programs and the Health Care 
Financing Administration (HCFA) has emerged. This effort will have the 
dual result in providing a forum for states to identify barriers to the 
prevention, detection and elimination of fraudulent and abusive 
practices within Medicaid and facilitating information available to the 
states about emerging fraud schemes and successful deterrent and 
detection methods employed by other states.
    In August, 1997, the Health Care Financing Administration convened 
a focus group to discuss fraud and abuse issues within the Medicaid 
program. One significant result of this meeting was the creation of a 
national Medicaid Fraud and Abuse Control Technical Advisory Group. 
This group, commonly referred to as the Fraud and Abuse TAG, brought 
together state program integrity representatives from across the 
country, along with representatives from HCFA. The TAG is chaired by a 
Medicaid Director and staffed by the American Public Human Services 
Association. A member of the Executive Committee of the National 
Association of State Medicaid Directors serves as liaison to all TAGs, 
and I was selected to be the liaison to the new Fraud and Abuse TAG. I 
later assumed the dual role as chairman of the TAG upon the resignation 
of the original chair.
    The mission of this TAG, as developed by its initial membership, is 
as follows:
        The TAG exists as a forum for the sharing of issues, solutions, 
        resources, and experiences among the states to develop best 
        practices; advise HCFA on policies, procedures, and program 
        development; and make recommendations to APHSA regarding fraud 
        and abuse policy and legislation changes in a coordinated 
        effort to reduce resources that are lost as a result of fraud 
        and abuse in the Medicaid program.
    Since its establishment in early 1998, this TAG has worked 
diligently to fulfill its stated mission. Through the use of topical 
workgroups, the TAG has already accomplished many of its initial goals. 
A list of legislative proposals, which will be addressed in greater 
depth later in this presentation, was developed in the summer of 1998 
and endorsed by both the National Association of State Medicaid 
Directors and the American Public Human Services Association. In 
addition, the Legislative and Regulation Workgroup has also reviewed 
and provided comment on several legislative and regulatory proposals 
dealing with Medicaid fraud and abuse.
    A Medicaid Fraud Statutes Web Site was developed by HCFA, in 
cooperation with state program integrity staff. This web site, located 
at http://fightfraud.hcfa.gov/mfs, contains a comprehensive listing of 
the best Medicaid fraud and abuse statutes among the states. The data 
base is indexed by subject matter, facilitating research into 
successful state legislative initiatives to combat fraud and abuse.
    In 1998, a TAG workgroup developed and conducted a survey of state 
Medicaid programs to identify the top fraud and abuse issues, both 
administrative and programmatic, facing Medicaid programs in today's 
marketplace. Included in the survey instrument were questions regarding 
methods employed by states to prevent and correct fraudulent and 
abusive billing practices. The results of this survey affirmed the 
commonality of issues between the states and demonstrated a need for 
improved communication between states on successful methods to address 
those issues. The TAG concluded that the survey provided an appropriate 
segue to begin consolidation of ``best practices'' identified by states 
and Medicaid Fraud Control Units, and the subcommittee has proceeded 
with this effort.
    Because of the significant fiscal impact of the pharmacy program to 
all states' budgets, the TAG established a Pharmacy Workgroup devoted 
to exploring fraud and abuse prevention methods and best practices in 
that program. While pharmacy specific legislation and policies vary 
greatly from state to state, the workgroup has identified a number of 
common concerns within that program. To expand on those common issues, 
the workgroup surveyed all states asking what successful actions each 
state has taken to address pharmacy fraud and abuse. The states were 
also questioned about actions they would take if given the authority. 
The workgroup is consolidating the findings of this survey into concise 
``best practices'' which will be distributed to all states.
    A critical component of the TAG's mission is to improve 
communication both between states and with HCFA. The TAG created a 
process of ``fraud alerts'' to disseminate emerging fraud schemes 
quickly among all states. The development of this process has already 
reaped significant dividends for the states. States are reporting 
successful intervention in preventing fraud by suspected providers and 
suspicious practices due to ``heads up'' information received through 
the TAG's communications network.
    This communication network has also been beneficial to the states 
in providing immediate response to HCFA on legislative or regulatory 
proposals. This improved communication flow insures that states are 
afforded the opportunity to identify potential barriers and unexpected 
consequences of such proposals before they are adopted.
    An important ongoing role for the TAG is the identification of 
emerging problems which impact the integrity of the Medicaid program 
and establishing dialog to address those problems. Currently, the TAG 
is actively addressing concerns with self-directed care services, such 
as home and community based services. Included in these concerns is the 
prevention and detection of fraud, qualifications of care providers, 
and reasonable standards and training on those standards for accurate 
documentation of services. Successfully addressing these concerns 
presents the added burden of balancing program integrity needs without 
undermining the self-directed care philosophy. Although the amount of 
fraud and abuse currently being detected in these services is small, 
the potential for loss to state Medicaid programs could be substantial, 
given that these programs can command up to 25 percent of the budget.
    As previously stated, the Legislation and Regulation Workgroup 
identified a number of legislative initiatives which would improve 
states' efforts to prevent and detect Medicaid fraud and abuse. Three 
specific proposals were developed in 1998 and presented to HCFA with 
the endorsement of both the National Association of State Medicaid 
Directors and the American Public Human Services Association. Those 
three proposals are as follows:

1. Increase Federal matching funds for fraud and abuse activities from 
        the current 50% to 75%. The increase in available matching 
        funds could provide a significant incentive to states to 
        increase resources devoted to fraud and abuse. Such costs would 
        include salary and benefit costs for investigators and fraud 
        auditors, travel costs, computer support (both hardware and 
        software), and any other costs directly related and clearly 
        identifiable with fraud activities.
2. Removal of the ``60 day rule'' for return of federal matching funds 
        on all identified overpayments. This rule, which requires a 
        state to refund the federal match on any identified overpayment 
        without regard to its actual collection, creates a significant 
        disincentive for states to identify overpayments of large 
        amounts unless collection is assured and imminent. The 
        collection process on fraud and abuse cases is long and often 
        volatile. States often negotiate repayment agreements that, 
        while delaying collection, facilitate both the resolution of 
        cases and removal or restriction of problem providers without 
        protracted legal battles. A far more reasonable approach would 
        be to require states to return FFP immediately upon collection, 
        thus removing this barrier while preserving the appropriate 
        return of federal funds.
3. Amend Title XIX to permit states to suspend recipient eligibility 
        for a reasonable period for fraud or abuse of the program. 
        Currently, Title XIX only cites conviction in federal court as 
        grounds for suspension of Medicaid eligibility. Federal law 
        enforcement officials have historically focused all attention 
        on provider activities, without regard for recipient 
        activities. As the Medicaid program has grown and become more 
        complex, so have the opportunities for recipient fraud and 
        abuse. Particularly in the pharmacy program, states are 
        discovering organized and often wholesale efforts by recipients 
        and groups of recipients to defraud the Medicaid program. Often 
        these efforts are in concert with fraudulent efforts on the 
        part of Medicaid providers. States desperately need the 
        authority to suspend participation in the program by those 
        recipients clearly found to have defrauded the program.
    In addition to the above, the Legislative and Regulation Workgroup 
continues to identify legislative initiatives that could significantly 
improve their ability to identify and correct fraudulent practices. A 
current proposal which has not yet been presented to NASMD and APHSA 
relates to facilitating the use of cash rewards to Medicaid recipients 
who report provider fraud which results in a conviction. Currently, any 
such cash payment is applied to the recipient's income, which adversely 
affects their eligibility for coverage and creates a disincentive to 
the recipient. Legislation to exempt such rewards from eligibility 
determination will enable states to offer a specific incentive to 
recipients to report suspected fraud.
    Another issue that would require legislative intervention is that 
of ``fleeing felons''. Welfare reform legislation specifically excluded 
Medicaid from provisions that make felons ineligible to receive 
government benefits. Not only are Medicaid benefits protected, but 
states are prohibited from performing data matches with Medicaid 
records to assist law enforcement in locating fleeing felons. Many 
states believe that this is contrary to maintaining the integrity of 
the program and should be amended.
    In recent years, there has been a growing involvement by the Office 
of the Inspector General (OIG) in evaluation of states' and HCFA's 
efforts in the fraud and abuse arena. While the intent of these efforts 
is admirable and appropriate, they have themselves caused disruptions 
and difficulties to the states. Staff performing these reviews usually 
have no background in Medicaid and require extensive efforts by state 
program integrity staff to assist in them. In addition, demands for 
extensive technical and system support for their efforts further 
disrupt program integrity staff from their duties. Often, the 
methodology applied to the reviews is seriously flawed, and does not 
effectively address fraud and abuse.
    For example, in the Single State Audit, in which the OIG enlists 
individual states' auditors to perform payment accuracy studies, the 
state is examined in four areas: medical necessity, proper 
documentation, incorrect coding, and non-covered services. States are 
being held accountable for the medical necessity and proper 
documentation of all services reviewed; however, without 100% 
prepayment review of all claims and removal of all timeliness 
requirements for claims payment, states cannot ensure that each and 
every service rendered is medically necessary and that the providers' 
supporting documentation is complete, correct, and legible. The result 
is a ``double-whammy'' to states-audit citation for issues not 
necessarily related to either fraud or abuse and significant disruption 
to program integrity efforts to truly address fraud and abuse.
    It should be readily apparent why states are reluctant to eagerly 
support such efforts. It should likewise be apparent why there is 
little confidence by states in OIG's findings when the subject of such 
reviews.
    It is often said that if you've seen one Medicaid program, you've 
seen one Medicaid program due to the varied approaches states take in 
operating their programs. This is also true in examining relationships 
between state Medicaid agencies and Medicaid Fraud Control Units, which 
range from a sense of shared purpose to raging animosity. In Alabama 
for example, the relationship has moderated somewhere between the two 
extremes, with periodic leanings in either direction. The success of a 
Medicaid Fraud Control Unit (or MFCU) is often perceived as directly 
linked to the effectiveness of the state's program integrity unit. 
While there is a great deal of truth in this assumption, there are many 
other factors that affect a unit's success.
    The MFCUs have the dual responsibility of prosecuting Medicaid 
provider fraud and prosecuting patient abuse in nursing facilities. 
There are strong feelings on the part of states that the added 
responsibility of patient abuse dilutes attention to Medicaid fraud. 
States often experience great frustration as MFCUs expend time 
consuming efforts in patient abuse cases, while the more difficult 
provider fraud cases languish, often past the statute of limitations 
for prosecution. There is a shared perception among state Medicaid 
agencies that local law enforcement agencies are more than capable of 
investigating and prosecuting patient abuse, and that those same local 
agencies resent the outside interference of the MFCUs. Provider fraud 
is far more difficult to investigate, and even harder to successfully 
prosecute. With pressure both from within the state and from the OIG to 
``produce'', it is not surprising that MFCUs would look to patient 
abuse cases to demonstrate their effectiveness.
    Another issue adversely affecting the relationship between state 
Medicaid agencies and MFCUs has always been the nature of referrals. 
States often feel caught in a ``catch 22'' with regard to when a case 
should be appropriately referred. They hear from their MFCU that they 
should refer any and all instances where fraud is suspected, but then 
complain that not enough verification was done to ensure a quality 
referral, thus wasting their investigative time. On the other hand, 
when states attempt preliminary verification on the existence of 
suspected fraud, they encounter sharp criticism from the MFCUs for 
potentially compromising the investigation.
    The primary argument in the initial establishment of the MFCUs as 
separate and apart from state Medicaid agencies, was their ability to 
be ``independent'' of the program and its concerns. While this is 
certainly a noble motive, it has contributed greatly to the strained 
relationship between the two organizations. As state Medicaid agencies 
have come repeatedly under the gun for ensuring patient access to care, 
MFCUs are not so encumbered. Particularly in rural areas, where access 
to Medicaid providers has been a constant struggle for states, 
aggressive actions by MFCUs in performing sweeping reviews of specific 
providers (usually physicians) has created serious distrust in the 
program by providers, resulting in their withdrawal from the program. 
These ``search and destroy'' missions rarely uncover genuine fraud or 
billing abuse, but create havoc in provider practices. State Medicaid 
agencies are then left to pacify outraged provider groups and 
associations and try to avoid mass exodus of these providers from the 
program.
    While Medicaid Fraud Control Units and state Medicaid agencies have 
a shared responsibility to attack fraud and abuse within the Medicaid 
program, the current statutory and regulatory relationship is seriously 
flawed. There has to be a better solution to enabling and empowering 
states in better investigation and prosecution of Medicaid fraud.
    In conclusion, contrary to what you may think or hear, state 
Medicaid agencies are very concerned about the integrity of their 
program and committed to actions to prevent, detect, and eliminate 
fraud and abuse within the Medicaid program. Thank you for allowing me 
the opportunity to share the perspective of one Medicaid director.

    Mr. Upton. Thank you very much.
    Mr. Fecteau.

                  TESTIMONY OF MARC P. FECTEAU

    Mr. Fecteau. Chairman Upton, distinguished committee 
members, I'm here representing the National Association of SURS 
Officials, the State agencies who address fraud and abuse and 
waste. While others tend to concentrate on the fraud issues, 
our units are involved in all three areas. For example, a 
mental health agency that charges $300 for a 4-hour group 
therapy session and their supporting documentation states 
``they were here, I saw them,'' that's not fraudulent, but yet 
the State identified and recovered over half a million dollars 
in a case with this type of documentation in the charts.
    The integrity units or SURS units recover millions of 
dollars over the years, but they also identify the fraudulent 
activities that come through. A psychological examiner that 
obtained the Medicaid ID numbers for entire families while 
serving as a school counselor and billed over $150,000 of 
services on behalf of members, family members he had never 
seen.
    The case reviews are time consuming. They involve medical 
records and so forth. Yet State integrity units remain 
understaffed. Some are still staffed at their 1985 levels. 
Since then, our provider base has tripled, our Medicaid 
expenditures are quadrupled. A few States have even experienced 
reductions in staffing, and one State had its entire 
understaffed unit replaced by a single individual with no 
experience in Medicaid fraud and abuse.
    In addition to being understaffed, the units or most units 
are limited to 20-year-old technology, 1970's design. In an age 
where technological obsolescence is measured in days, then 
surely these systems are considered the dinosaurs of 
technology.
    Even with these limitations, in a current survey going on 
right now, 20 States have responded they have identified over 
$240 million of fraud, abuse and waste in the last 2 years; and 
these involve a wide range of discrepancies, from the provider 
that billed the Medicaid program for lab cultures that he 
performed with a cardboard box and a light bulb to the 
multimillion dollar scams involving providers and clients 
buying and selling Medicaid ID numbers for the sole purpose of 
defrauding the Medicaid program.
    The units also address recipient abuse of health care 
services. Through the lock-in program or restriction program, 
they can limit a client to one physician, one pharmacy and one 
hospital. The program attempts to curb the abuse related to 
prescription drugs, overuse of emergency room services--one 
client had 160 in 1 year. Calculating this cost savings is 
difficult, but one State did do that in 1990 when its two-
person recipient unit was disbanded for cost savings purposes. 
But the study concluded that this program was saving nearly $1 
million per year in this one State.
    Unfortunately, the restriction program is not effective if 
a client is also on Medicare. Medicare does not have a 
comparable program. Therefore, a dual-eligible client can 
continue to abuse health care services. Medicare covers the 
physicians and the emergency room visits, but Medicaid pays the 
coinsurance, the transportation to each service, and the 
narcotics. This is an area in which we believe that HCFA could 
provide needed assistance and guidance.
    It's important to state that the relationship between HCFA 
and the SURS units has made tremendous advances. The 
adversarial type relationship of only 5 to 6 years ago has been 
replaced with a partnership to address Medicaid fraud and 
abuse. But in the course of partnering toward a united goal, 
the basic SURS requirements needed for a State to be in 
compliance have been either eliminated or not enforced. 
Unfortunately, HCFA's good-faith effort to work with the States 
has been interpreted by some to mean that they can reduce their 
SURS administrative expenses and remain in total compliance.
    Congress has made a commitment to address Medicare fraud. 
Now we ask that it make that same commitment to the Medicaid 
program. The commitment can be demonstrated in several ways.
    First, Federal guidelines and requirements need to address 
the minimum standards for a compliant fraud and abuse function 
that indicates minimal staffing requirements. These minimal 
requirements could be based on a State's Medicaid expenditures, 
for example. The guidelines should also establish on what 
constitutes sound technological tools, not 1970's mainframe 
computer systems.
    The States could also receive an incentive for expanding 
their commitments by offering Federal funding at a 75 percent 
match for all State positions whose primary duties are related 
to Medicaid fraud and abuse.
    Second, creative methods of funding the acquisition of 
technological tools could further enhance this commitment to 
the States. The Federal Government could offer to initially 
fund 100 percent of replacement fraud and abuse technology and 
allow the State to repay its share through its recoveries from 
fraud and abuse.
    Third, a cooperative recipient utilization program needs to 
be established between Medicaid and Medicare. Millions of 
Medicaid and Medicare dollars are lost each year through abuse 
of health care services.
    And, finally, the statute requiring States to reimburse the 
Federal financial participation portion within 60 days of 
notifying a provider of an overpayment needs to be eliminated. 
This statute basically penalizes States that actively pursue 
the waste found in their programs. Since both the State and 
Federal Government share in the cost of Medicaid, should they 
not also both share in the costs of reducing waste in a 
program?
    The SURS units stand committed in the fight against 
Medicaid fraud, abuse and waste. We believe that we provide a 
solid foundation from which your commitment to effectively 
address these issues can become a reality.
    Thank you for this opportunity to express our concerns. I 
will be happy to answer any questions.
    [The prepared statement of Marc P. Fecteau follows:]
Prepared Statement of Marc P. Fecteau, President, National Association 
                       of Surveillance Officials
    Chairman Upton, Ranking member Klink, distinguished Committee 
members, I wish to thank you for this opportunity to share the Medicaid 
fraud and abuse activities of the State agencies' Surveillance and 
Utilization Review Units (SURS) and Program Integrity Units.
    The SURS and Program Integrity units monitor the Medicaid Program 
for fraud, abuse, and waste by conducting reviews or audits of health 
care providers and beneficiaries. From these case reviews the units 
often identify potential fraudulent activities and, as required by 
federal statute, refer these cases to the Medicaid Fraud Control Units. 
In most states, the SURS or Program Integrity Units remain actively 
involved during the fraud investigation.
    Although fraud cases receive more publicity, abuse and waste in the 
Medicaid Program is certainly more prevalent. The states' integrity 
units are at the forefront of these case reviews. They routinely 
monitor, through actual medical record reviews, the services that are 
billed to Medicaid. Computer reports can assist in identifying the 
areas to be reviewed, but cannot replace the value and necessity of 
actually reviewing the record of service. What is Medicaid paying for? 
Should it pay $300 for a four hour group therapy session when the only 
documentation in the chart is ``They were here, I saw them?'' Or should 
Medicaid reimburse at $60 per session the substance abuse counselor 
that bills dozens of individual therapies that focus solely on finding 
a girlfriend for a client?
    It is from these routine reviews that recoveries are made for abuse 
and waste, and where many fraudulent activities are discovered. For 
example, a routine review of another substance abuse counselor 
discovered that nearly every individual therapy session that was billed 
to Medicaid was in fact group services. Another routine review 
discovered a psychological examiner that had no documentation for any 
of the services billed to Medicaid. The SURS unit expanded its review 
and learned that the provider was the school district counselor and had 
obtained Medicaid ID numbers from the children's Medicaid cards. 
Subsequently, the SURS unit calculated that up to 90% of the services 
billed had never been provided and over $150,000 of fraudulent billings 
were identified.
    These units are the front line troops in combating fraud, abuse, 
and waste. In the mid to late 1970's, states implemented a computerized 
system that was initially designed to monitor the utilization of health 
care services paid for by Medicaid. The system soon became the primary 
tool for identifying potential fraud and abuse in the Medicaid Program. 
Unfortunately, 20 years later, this mainframe computer system continues 
to be the mainstay fraud and abuse tool for most states. In an age 
where technological obsolescence is measured in days, our 20-year old 
systems are definitely the dinosaurs of technology. But then, as some 
states have reported, enhancing software technology to identify more 
cases without addressing proper staffing requirements simply results in 
more cases pending review.
    Yet, despite the fact that most of the units have not grown in 
proportion to the Medicaid Program and are limited to 1970's computer 
technology, they continue to be successful. In a current survey, 20 
states have reported identifying over $200M of provider fraud, abuse, 
and waste in their respective Medicaid Program's in the last two years. 
Recipient cases have amounted to an additional $47M of saved or 
recovered funds. These cases cover a wide range of discrepancies from 
simple billing errors to major fraud schemes. Cases vary from the 
provider that billed Medicaid for lab cultures performed by using a 
cardboard box and a light bulb, to the multi-million dollar scams 
involving providers and clients buying and selling Medicaid ID numbers 
for the sole purpose of defrauding the Medicaid Program.
    SURS Units are also involved in addressing recipient abuse of 
health care services and administer the Restriction or Lock-in Program 
which limits a client to one physician, one pharmacy, and one hospital. 
An abusive pattern may for example include visits to 15-20 physicians 
to get prescriptions that are filled at an equal number of pharmacies. 
One State reported a client that had 160 emergency room visits in one 
year. The client abused services to the point that she would call an 
ambulance from the harness racing track to get transported to the 
hospital. The hospital subsequently provided her with her taxi fare to 
her home. The restriction program has been successful in curbing 
recipient abuse, however, for clients under both Medicaid and Medicare 
the abuse cannot be addressed. Since Medicare has no comparable program 
these dual eligible clients continue to abuse health care services. One 
such client has approximately 10 physicians and is seen in emergency 
rooms from which she receives narcotic prescriptions that she 
eventually sells at high stakes bingo games. Medicare covers her 
physician and emergency room visits, but Medicaid pays the co-
insurance, the transportation to the services, and the narcotics if 
they are not early re-fills (otherwise she pays for those out of 
pocket). A cooperative recipient utilization control program needs to 
be established between Medicaid and Medicare. This is an area in which 
we believe HCFA could provide needed assistance and guidance.
    It is important to note that in the last several years, the 
relationship between HCFA and the SURS units has made tremendous 
advances. The adversarial relationship of only 5 to 6 years ago has 
been replaced with a partnership to address Medicaid fraud and abuse. 
But in the course of partnering towards a united goal, the basic SURS 
requirements that States need to comply with have been eliminated. 
Instead, the requirement now indicates that States need only perform 
the SURS function. This can be met by simply assigning to an employee 
the additional duty of reporting any suspicious claims to their 
supervisor. In effect the fraud and abuse activity becomes another task 
for the employee and the supervisor. A proper case review by qualified 
and dedicated staff is not necessary to meet the current guidelines.
    The SURS and Program Integrity Units have been tremendously 
successful. But, if our success is to continue, the individual States 
need to make the same commitment to fighting fraud, abuse, and waste in 
the Medicaid Program as Congress did when it funded additional staffing 
for the Office of Inspector General and the Federal Bureau of 
Investigation. Many States continue to operate with under-staffed SURS 
and Program Integrity Units and most do not possess the technological 
tools to identify the sophisticated fraud schemes that are occurring 
throughout our healthcare system. Why are States reluctant to increase 
their participation in this area? I believe that the current federal 
guidelines specifying the minimal requirements fail to convey Congress' 
commitment on this issue.
    The federal government has clearly indicated its commitment to 
fighting health care fraud, abuse, and waste in the Medicare Program 
and now it needs to make the same commitment to the Medicaid Program.
    One of the first issues that needs to be addressed is the statute 
requiring States to reimburse the Federal Financial Participation (FFP) 
portion within 60 days of notifying a provider of an overpayment. This 
requirement basically penalizes states that actively pursue the waste 
found in their programs. Since both the State and the Federal 
government share in the cost of the Medicaid program, should they not 
also share equally in the cost of reducing waste in the Program?
    The second way to insure that fraud, abuse, and waste do not go 
undetected is to institute guidelines and requirements that 
specifically address the minimum standards for a compliant SURS 
function. These guidelines should address minimum staffing 
requirements, which could be based on Medicaid expenditures, and 
require sound technological tools. These new guidelines could also 
provide an incentive for States to expand their commitment by funding 
at a 75% match all state positions whose primary duties are directly 
associated with Medicaid fraud and abuse. In addition, creative methods 
of funding the acquisition of technological tools could further enhance 
the federal government's commitment to the States. As an example, the 
federal government could offer to initially fund 100% of new technology 
and allow states to repay their share through the recoveries from fraud 
and abuse.
    The Surveillance and Utilization Review Units and Program Integrity 
Units share Congress' commitment in the fight against health care 
fraud, abuse, and waste. We believe that our units provide a solid 
foundation from which your commitment to effectively address these 
issues can become a reality. Again, thank you for this opportunity and 
I will be happy to answer any questions you may have.

    Mr. Upton. Thank you again very much.
    Ms. Thompson.

                   TESTIMONY OF PENNY THOMPSON

    Ms. Thompson. Mr. Chairman, distinguished subcommittee 
members, thank you for the opportunity to discuss our efforts 
to fight fraud, waste and abuse in Medicaid.
    I'm accompanied by Rhonda Hall, who is the National 
Coordinator of our fight against fraud and abuse in Medicaid, 
leading the HCFA team which works day to day with our Technical 
Advisory Group on this issue.
    We share your concern for protecting taxpayer dollars and 
Medicaid program integrity, and we appreciate the evaluations 
and advice provided by the HHS Inspector General and the 
General Accounting Office on these efforts.
    We fight fraud, waste and abuse in Medicaid in partnership 
with States, beneficiaries, providers, contractors and other 
Federal agencies. States are primarily responsible for finding, 
prosecuting and preventing Medicaid fraud. We provide funding, 
technical assistance, and oversight. Ms. Williams, in 
particular, talked about some of our activities in regard to 
this in her testimony.
    Some States are making good progress in making sure their 
Medicaid programs protect taxpayer dollars. However, we all 
agree that more needs to be done.
    To further our efforts, we hired an expert outside 
contractor, Dr. Malcolm Sparrow, to lead four seminars with 
State agencies and produce a report on how to better fight 
Medicaid fraud. His report has three key findings for us.
    First, we need to do more to address problems in managed 
care. States want more guidance and more help in identifying 
and pursuing fraud in the managed care environment.
    Second, we need to help States develop better data systems 
for finding fraud. States are looking for more assistance and 
more guidance and more support in pursuing technological 
solutions in addressing fraud.
    And, finally, we need to make sure that all the States are 
taking the issue seriously.
    And I have to say about this, if you had asked me to 
predict before we began these seminars what the key findings 
would be, I would have predicted that States would be looking 
for assistance with technology, and I would have predicted that 
States would have been looking for assistance with pursuing 
fraud in managed care environments.
    I would not have predicted that States would have reported 
that they still had a problem in getting their leadership, 
legislative and executive, to take this issue seriously. After 
all, the President has led us in an effort against fraud, waste 
and abuse in our health care programs. The Secretary of Health 
and Human Services has established this as a top priority. The 
Attorney General has established health care fraud as a top 
priority. The Congress has been active in holding hearings and 
pursuing legislation on health care fraud. I would have thought 
that we were past the point of needing to ensure that people 
were taking this issue seriously.
    We are taking several steps to help States. We are 
providing guidance on how to address the unique program 
integrity issues related to managed care and are finishing up 
work on a document to be released to States to make suggestions 
to them about what to look for in managed care environments and 
how to pursue those kinds of issues. We are helping States to 
develop better data systems and other technological tools. Our 
technology conference being planned for next year will build on 
a comprehensive catalog we are developing of anti-fraud 
technology solutions. We are providing guidance and technical 
assistance so States can strengthen efforts to prevent improper 
payments, rather than trying to recoup them after the fact. And 
we are helping States share best practices and legislative 
strategies for fighting fraud.
    These actions are helping to build a foundation upon which 
we, together with the States, establish measurable goals for 
improvement and greater accountability. This is essential, 
because clearly each State must be held accountable for 
protecting taxpayer dollars and in making measurable 
improvement in fighting fraud, waste and abuse.
    In the coming months, we will begin working with States to 
develop systems to measure their progress in fighting fraud. 
Early next year, we will be sending a national review team out 
to a targeted selection of States to look at their anti-fraud 
efforts. We will test a new review protocol, and we will hold a 
commitment conference composed of senior State and Federal 
officials to obtain agreements about goals, expectations, 
resources, measures and accountability.
    We welcome your assistance and appreciate your continued 
interests in these efforts. Thank you for holding this hearing, 
and I'm happy to answer any questions.
    [The prepared statement of Penny Thompson follows:]
 Prepared Statement of Penny Thompson, Program Integrity Director and 
 Rhonda Hall, Medicaid Fraud & Abuse National Coordinator, Health Care 
                        Financing Administration
    Chairman Bliley, Chairman Upton, Representative Klink, 
distinguished Subcommittee members, thank you for the opportunity to 
discuss our efforts to fight fraud, waste, and abuse in Medicaid. We 
share your concern for protecting taxpayer dollars and Medicaid program 
integrity. And we appreciate the evaluations and advice provided by the 
HHS Inspector General and the General Accounting Office on these 
efforts.
    We fight fraud, waste, and abuse in Medicaid in partnership with 
States, beneficiaries, providers, contractors, and federal agencies. 
States are primarily responsible for detecting, prosecuting, and 
preventing Medicaid fraud, waste, and abuse. We provide funding and 
technical assistance and oversee States in their efforts to ensure that 
taxpayer dollars are spent appropriately.
    Some States are making good progress in making sure that their 
Medicaid programs protect taxpayer dollars. However, we all agree that 
more needs to be done, and we are committed to repeating and building 
upon this success across the country.
    To further these efforts, we hired an expert outside contractor, 
Dr. Malcolm Sparrow, to conduct seminars and produce a report on how to 
better fight Medicaid fraud, waste, and abuse.
    We are providing States with comprehensive guidance and technical 
assistance so they can build strengthen efforts to prevent improper 
payments, rather than try to recoup them after the fact.
    We also are working with States to help them develop better data 
systems and other technological tools for ferreting out fraud, waste, 
and abuse. And we are modifying our National Fraud Investigation 
Database to include Medicaid cases, which will further help in tracking 
down and stopping unscrupulous providers across the country.
    These actions are helping to build a foundation upon which we can, 
together with States, establish measurable goals for improvement and 
greater accountability. In the coming months, we will begin working 
with States to develop systems to measure their progress in fighting 
fraud, waste, and abuse. Two states have already begun developing 
claims error rates to accurately determine the extent of improper 
payments. Concrete goals and accountability measures will provide a 
clearer picture of what we must do to eliminate fraud, waste, and abuse 
in Medicaid and ensure that taxpayer dollars are spent appropriately.
                               background
    Medicaid is a State/federal partnership. Each State runs its own 
program with federal financial support and oversight. Beyond a core set 
of mandatory covered services, Medicaid programs vary widely among 
States. Each State Medicaid program is required to have systems in 
place to protect program integrity but, again, these vary widely. Some 
states have independent Inspectors General, others have very active 
involvement from the Office of the Controller, and others rely heavily 
on the State Attorney General.
    Special federal matching funds are available for State Medicaid 
fraud control units. These fraud control units are usually located in 
the State Attorney General's office and generally perform both 
investigatory and prosecutorial functions. Congress specifically 
prohibited these units from being part of the designated Medicaid 
agency to assure investigative independence. Forty-seven States have 
established such units to investigate allegations. The HHS Inspector 
General administers the funding and activities of these State Medicaid 
fraud units. In States without fraud control units, the Medicaid agency 
is responsible for investigating allegations and referring cases to the 
appropriate authorities.
    Federal funding is also available to States for Medicaid management 
information systems. All States include review of claims before they 
are paid, as well as surveillance and utilization review to look for 
errors after claims are paid, in their management information systems. 
The prepayment reviews include verification that the recipient is an 
eligible beneficiary, the provider is authorized to furnish services, 
the services and visits are logically consistent, the payment does not 
exceed the reimbursement rate, and that no other party is legally 
liable for payment. The post-payment reviews identify abnormal billing 
patterns that may indicate fraud, waste, or abuse. The surveillance and 
utilization review units are required to refer suspected fraud to the 
fraud control units, if one exists, for further investigation and 
possible prosecution.
Federal Oversight
    In June 1997, our agency's Southern Consortium was given the lead 
for the national Medicaid fraud and abuse oversight efforts. The 
Southern Consortium, which consists of the Atlanta and Dallas regional 
offices, had already been very aggressive in tackling some of the most 
daunting program integrity challenges. The Consortium's leadership and 
this innovative arrangement allows our national office to get closer to 
the ``front lines'' of State activity in the fight against fraud, 
waste, and abuse.
    In August 1997, we convened a focus group of State Medicaid staff 
to assess States' efforts, needs, and challenges. This provided many 
valuable lessons that we have been able to act upon.
    For example, one of the major needs expressed by the States was for 
a national forum that States can use to share information and discuss 
issues. We therefore formed the Medicaid Fraud and Abuse Control 
Technical Advisory Group in which State and federal technical staff 
discuss how program integrity policy is carried out. This advisory 
group is divided into six workgroups, including:

 the Legislative and Regulatory Workgroup, which is charged 
        with developing State legislative proposals and policy 
        clarification on a number of issues;
 the Database Workgroup, which is developing an educational 
        packet that identifies various reporting requirements and 
        suggestions on how States can implement them;
 the Pharmacy Workgroup, which is formulating a Best Practices 
        guide for controlling fraud and abuse in the pharmacy area;
 the Inspector General's Issues Workgroup, which is identifying 
        various Inspector General activities that affect states and 
        collaborating with the Inspector General to allow State input 
        into the design and development of audits, studies, etc.;
 the Managed Care Workgroup, which is focusing on operational 
        issues related to the unique program integrity problems posed 
        by managed care; and
 the Data Sharing Workgroup, which is will disseminate 
        information to all States on Medicare-Medicaid data sharing 
        rules.
    The advisory group has also surveyed program integrity and fraud 
control unit officials across the country to gain a deeper 
understanding of their needs and concerns.
                        fraud and abuse seminars
    Because of the clear need to be more effective in fighting Medicaid 
fraud, waste, and abuse, we last year contracted with Dr. Malcolm 
Sparrow, a nationally recognized expert in health care fraud issues. He 
conducted a series of seminars across the country where State program 
integrity personnel came together to discuss their successes, 
challenges, and concerns. Three essential themes emerged:

 There are unique program integrity issues within managed care 
        that need to be addressed. Many States are still learning how 
        to address the unique program integrity challenges posed by 
        managed care, and some are fighting the misconception that 
        managed care somehow does away with program integrity issues.
 There are substantial technology issues, such as obtaining 
        access to claims databases, claims analysis, fraud & abuse 
        detection. Many States have inadequate technological 
        infrastructures and a basic inability to interrogate databases 
        efficiently to ferret out improper claims. They could benefit 
        from further guidance and technical assistance on acquiring new 
        data systems and other fraud and abuse detection tools.
 There is a need for building commitment, understanding, 
        support, and resources for fraud and abuse control efforts. 
        While some States are having success, the seminars made clear 
        that, in many States, the nature and magnitude of the Medicaid 
        fraud problem is still not properly understood. In some States 
        it may not even be treated as a serious or central issue in 
        program administration.
    We are taking several steps to help States address these concerns.
                              managed care
    For managed care, we have sponsored a series of workshops, dating 
back to 1997, to bring State managed care staff together with 
utilization and review directors and fraud control unit directors. They 
have been conducted in conjunction with George Washington University's 
Center for Health Policy Research and attended by Medicaid staff from 
49 States. These workshops focused on how fraud manifests differently 
within the managed care setting and how programs to address it should 
be structured. They also featured ``negotiating sessions'' among State 
delegations and resulted in written agreements on how to work more 
cooperatively and effectively together.
    To further address managed care program integrity issues, we worked 
with State Medicaid agencies and fraud control units to develop 
Guidelines for Addressing Fraud and Abuse in Medicaid Managed Care. The 
guidelines focus on:

 key components of an effective managed care fraud control 
        program ;
 data needed to detect and prosecute managed care fraud;
 how to report managed care fraud,
 suggested language for managed care contracts and waivers to 
        help fight and prevent program integrity problems; and
 the roles of the Health Care Financing Administration, State 
        Medicaid agencies, State fraud control units, managed care 
        organizations, and the HHS Inspector General.
    We hope to have these guidelines to the States by early next year.
                      technology and data systems
    Better data systems are key to improving efforts to fight Medicaid 
fraud, waste, and abuse. We are working diligently to help States make 
the most effective use of State and federal data systems and data 
collection efforts. As noted above, our technical advisory group is 
preparing an educational packet that identifies various reporting 
requirements and suggestions for how States can implement them. They 
are also compiling and will disseminate information to all States on 
Medicare-Medicaid data sharing rules.
    We recently developed a national fraud and abuse electronic 
bulletin board, co-sponsored by the American Public Human Services 
Association, to allow States to exchange and share information on fraud 
and abuse related issues.
    These efforts are particularly important because instances of fraud 
and abuse are often not limited to one State or even one program. For 
example, a special South Florida task force demonstration project had 
unprecedented success in fighting fraud, waste and abuse by getting 
Medicaid agencies, Medicaid fraud control units, Medicare claims 
processing contractors, and U.S. Attorneys to all work together to 
detect fraud and abuse in both Medicare and Medicaid. For example, the 
task force matched Medicare and Medicaid data to identify patterns of 
questionable billing practices. We have learned from this effort and 
are encouraging other States to replicate these types of efforts.
    And, as mentioned above, we are modifying our National Fraud 
Investigation Database to include Medicaid cases. Until now, this 
system has captured only Medicare information. This will play a key 
role in helping us to replicate the success seen in the South Florida 
task force demonstration project.
                          state accountability
    Because States have the primary responsibility for protecting 
Medicaid program integrity, we are taking several steps to help States 
meet this challenge and understand their obligation to ensure that 
taxpayer dollars are spent appropriately.
    For example, we have developed and posted on our www.hcfa.gov 
website a comprehensive listing of State statutes that target Medicaid 
fraud. This allows States to access and share innovative and effective 
program integrity legislation. For example, if a State is considering 
proposing legislation to regulate third party liability, a listing of 
State laws on this subject is readily available, along with links that 
allow direct viewing of statutory language. The website also includes 
detailed contact information for State program integrity personnel and 
individual State legislation web sites.
    And we are now working to clarify how States can ensure that 
payments are not made to providers who have been ``excluded'' from 
Medicare and Medicaid because of program integrity or other problems. 
We have worked closely with the HHS Office of the Inspector General on 
this, and expect to disseminate clear guidance on the process early 
next year. This guidance will address the specifics of what must be 
reported to whom, when and where, as well as how to enforce exclusions, 
and the consequences for States that fail to comply. We are also 
working to help States enhance their processes for identifying excluded 
providers.
    Still, it is clear that each State needs to be held accountable for 
protecting taxpayer dollars and meeting concrete goals and objectives 
for improvement in the fight against fraud, waste, and abuse. As 
mentioned above, we are going to work with States to develop systems to 
measure their progress. Two states have already begun developing claims 
error rates that are essential for accurately determining the extent of 
improper payments and any improvement in preventing them. With clear 
goals and concrete accountability measures we will have a clearer 
picture of what we must do to further to eliminate fraud, waste, and 
abuse from Medicaid.
    Internally, we have developed clear guidance for our own staff on 
how to review State agency program integrity efforts, both in fee-for-
service and managed care. This guidance mandates focus on:

 how States identify, receive, process and use information 
        regarding potential fraud and abuse by Medicaid providers;
 how entities outside the Medicaid agency participate in 
        preventing, identifying and reducing fraud and abuse;
 whether key program integrity components are included in State 
        contracts with managed care organizations; and
 whether State agencies are complying with appropriate laws and 
        regulations.
    To begin developing objective and measurable goals for improvement, 
we will in January 2000 send a national review team to conduct a 
targeted evaluation of anti-fraud efforts in eight States selected to 
represent a cross section of State Medicaid programs. This will help 
provide an accurate assessment of where States are, what barriers may 
hinder their progress, and what most needs to be done to ensure 
substantial, measurable improvement.
                               conclusion
    We have been working diligently to help States improve their 
efforts to fight Medicaid fraud, waste, and abuse. We are providing 
States with information, tools and training to build effective program 
integrity infrastructures. And we are building a basis for holding 
States accountable for measurable improvement in their program 
integrity efforts. We welcome your assistance and appreciate your 
continued interest. And I am happy to answer your questions.

    Mr. Upton. Thank you all very much.
    I just know, before my 5 minutes starts, you talk about 
MFCUs, I used to follow a running back from Michigan by the 
name of Tim Biakabutuka, he plays for Carolina now.
    Mr. Burr. North Carolina.
    Mr. Upton. Don't ask me to spell it.
    We're going to start with members asking 5 minutes of 
questions, and we will rotate.
    Ms. Aronovitz, as I read your testimony last night--and I 
want to thank all of the witnesses who provided their testimony 
last night. HCFA was close. I walked out the door at 6 to vote, 
and I think it showed up to 5 to 6, so I was able to take it 
with me.
    As I read this, particularly this specific instance in 
Tennessee where a managed care plan used a homeless shelter for 
the address of nearly 4,500 fictitious enrollees, how easy was 
it to find examples like that in the report that you found?
    Ms. Aronovitz. It's not that difficult at all. The States 
all do have their horror stories, and actually the flip side of 
that is their successes in being able to identify those 
situations. I think they would all say that they need to do 
more, invest in more technology, better technology, and have 
more resources.
    I think that was something that we've heard even in the 
little amount of work we've done since we started our study, 
that States really are looking for more resources and better 
technology and more sophisticated approaches to identifying 
those types of problems.
    Mr. Upton. Would you say--in my opening statement, I talked 
about 10 percent fraud and abuse, which is $17 billion. Is that 
about what you think? Is that a pretty accurate figure? Do you 
think it's more than that? Do you think it's less--if you had 
to say.
    Ms. Aronovitz. It's very--it's literally impossible to 
tell. But I do want to make a differentiation between improper 
payments and fraud. Fraud is the intentional wrongdoing, which 
needs to be proved. So when you talk about any number, any 
estimate, you're talking about payments that should not have 
been made for one reason or another. Until a case is actually 
taken through the system and prosecuted, you can't really say 
whether it was fraudulent or not. So, therefore, fraud is 
particularly hard to measure.
    Mr. Upton. Mr. Fecteau, yesterday I spent an hour with my 
local hospital board and a number of other providers and the 
last couple of weeks as well. We were hoping to take some 
legislation up tomorrow to remedy some of the Balanced Budget 
Act of 1997 reductions to providers, and we're looking at about 
a $13 billion package over 5 years, and we're trying to figure 
out the ways we can pay for it as well.
    As we think about the 10 percent--you know, sort of the lay 
of the land 10 percent fraud figure, $17 billion, I mean, does 
that come and fulfill the dream that a lot of our providers 
would wish for? And you talked about the $240 million in fraud 
and abuse that your organization has sort of looked at, but 
that's over 2 years. I mean, that's only scratching the surface 
of what might be out there.
    Mr. Fecteau. That's correct.
    Mr. Upton. I mean, that's pretty incredible that--I mean, 
even though we identified perhaps as much as $17 billion a 
year, $34 billion over 2 years, in fact, our collection efforts 
are pretty--identification methods are pretty miserable?
    Mr. Fecteau. Again, that's 20 States, and again the SURS 
units in some of the larger States, the units and program 
integrity units are broken into various subunits. And this does 
not--I know one State, Texas, the reports that I got in from 
them was not totally complete, based on what HCFA's figures 
were.
    But you are right. The methods in most States for 
identifying fraud, abuse and waste are antiquated systems at 
this time.
    Mr. Upton. Okay. Ms. Williams, I very much appreciated 
reading your testimony last night. And, in fact, I focused on I 
guess the--early on in your testimony you talk about the 
fleeing felons. Another issue that would require legislation is 
that of fleeing felons, welfare reform legislation specifically 
including Medicare provisions that make felons ineligible to 
receive government benefits.
    I actually had that amendment passed in this committee when 
we dealt with this subject about 2 years ago, and the Senate 
dropped it in conference. And I certainly--based on the hearing 
today and other hearings that we had, I also serve on the 
Health and Environment Subcommittee, and I would like to work 
with Chairman Bilirakis to develop legislation that will give 
everyone the tools to identify the abuses that are out there 
and to really go after the people that abuse the system in a 
major way.
    And I particularly appreciated your number of examples of 
what we can do. When you talked about the 60-day rule, do you 
have--and you made a very good point, for all of us that pay 
income taxes--do you think we ought to just discard that 
altogether? Should we have a day limit, 120 days, 180 days, or 
should we just say when the money is collected, that's when you 
pay it back?
    Ms. Williams. I think definitely when the money is 
collected it should be--the Federal financial participation 
should be immediately refunded. I think there can be standards 
set on a State for reasonable collection activities. I think 
that there is room for some constructive definition of what 
reasonable collection activities are, but to have to refund the 
Federal matching before a State has the opportunity to collect 
the funds, particularly if they're in a process of negotiating 
plea bargain agreements, that sort of thing, it's very, very 
punitive on the States.
    I think there's somewhere in between that we can go besides 
totally forgetting the money until it's collected. I think 
there's some reasonable standards of promptness that can be 
agreed upon that would be reasonable for the States to collect 
or pursue collection, but to have to refund the money in 
advance is extremely punitive.
    Mr. Upton. I know my time is expired. But I just wish to 
really thank you for your testimony, and we can work together.
    And maybe just a quick comment from Ms. Thompson. Do you 
all have any comments in terms--it would be nice to have the 
legislation--the administration onboard with a package like 
this and really make it bipartisan and save the taxpayers some 
money. I don't know if you've commented publicly in terms of 
some of the items that the States have offered up.
    Ms. Thompson. Let me comment specifically on the 60-day 
rule, because the administration has said that it does not 
support eliminating the 60-day rule. But I think the kinds of 
comments that Ms. Williams talked about in terms of finding 
some reasonable accommodation in the middle I think makes a lot 
of sense.
    What we don't want to do is find ourselves in a situation 
where we don't have any kind of standard or any kind of 
assurance that collections are going to be made. In fact, the 
large majority of overpayments are, in fact, administrative 
overpayments, and it's a debt collection matter, and we 
certainly want to encourage States to be expeditious in 
handling those kinds of matters. At the same time, I think 
we're well aware of the kinds of problems that Ms. Williams 
cites, and we would be happy to explore further what some 
possible legislative solutions might be in that regard.
    Mr. Upton. Just a last question, what about suspending the 
card of folks who abuse Medicaid services.
    Ms. Thompson. I have to say I'm not sure what the 
administration has said about that. But I think certainly one 
of the things that we would pursue is how to handle recipient 
collusion. I think that is a big issue, particularly in some of 
the organized crime and organized scams. Lock-in is also a 
potential available mechanism, for States to require 
beneficiaries to go to a particular pharmacy or a particular 
provider and control their utilization in this manner as well.
    Mr. Upton. Okay. Mr. Burr.
    Mr. Burr. Ms. Williams, I want to thank you on behalf of 
Mr. Bryant and I for being a witness that we could understand. 
It's not very often that we have the opportunity with this 
group in Washington to get Southerners up here, and I 
appreciate that.
    Ms. Aronovitz, let me ask you, can fraud control really 
exist without structural changes to the delivery system?
    Ms. Aronovitz. Are you talking about the managed care 
structure and the fee-for-service structure?
    Mr. Burr. Just talking about Medicaid as it's currently 
designed, whether it's the regulations that come from HCFA or 
what the States design. Without changes, can we have fraud 
control that we feel confident works?
    Ms. Aronovitz. That question is one that we haven't really 
looked into in any great depth. It's quite broad and very 
important.
    Mr. Burr. Isn't it important, though?
    Ms. Aronovitz. Absolutely. It's a policy, programmatic 
question that needs to be addressed; and one way to start would 
be to look at specific activities of the program integrity 
units in the State Medicaid agencies.
    Mr. Burr. With I think the exception of Ms. Williams, I 
heard everybody convince me and I think convince everybody in 
this room that waste, fraud and abuse exists in Medicaid. So 
let's not go back over that part. Let's start there and say, 
now how do we solve it?
    And I guess my question is very simple. Do you, as one who 
has looked at the problem, believe that you can solve the 
problem without structural changes?
    Ms. Aronovitz. I think that any large health care program 
will be vulnerable. There are a lot of reasons why Medicaid and 
Medicare, in particular, would be vulnerable in any structure. 
It has to do with the fact that in Medicaid, in particular, 
you're running 50 different programs where claims that are 
coming in are a very small value each, but it's the volume of 
the claims that ends up being a problem.
    Mr. Burr. Can we agree that there is going to continue to 
be, regardless of how creative we get and how vigilant we are 
with waste, fraud and abuse teams or reports or reviews, waste, 
fraud and abuse?
    Ms. Aronovitz. This program will always be vulnerable, yes, 
in my opinion.
    Mr. Burr. Mr. Hartwig, you've looked at waste, fraud and 
abuse before, haven't you?
    Mr. Hartwig. Yes.
    Mr. Burr. Tell me what has changed structurally since the 
last time you looked at it and this time you looked at it.
    Mr. Hartwig. Let me just make a general comment first. And 
you raised the issue about the health care system. The health 
care system is basically a voluntary payment system. It's a 
system based on trust, so I think you're always going to have 
some abuses of that system. To handle those abuses, health care 
is a chain, and the chain starts with the recipient and 
beneficiaries, and it goes up to law enforcement.
    Mr. Burr. Tell me what has changed in that since the last 
time you looked at it.
    Mr. Hartwig. I am getting to the change. There's certainly 
a lot more awareness today than in the past about fraud and 
abuse in the health care system. I think some work that our 
office did on the review of the financial statements of the 
Medicare program; I think Operation Restore Trust, an 
initiative that was started by the Department of Health and 
Human Services a number of years ago as a partnership effort 
involving both Federal, State and local law enforcement; and I 
think some of the recent initiatives of making health care 
fraud a priority have changed the system, because of how we 
looked at it.
    Mr. Burr. Tell me how the system differs, if you take law 
enforcement changes out of the mix.
    Mr. Hartwig. I think there's a greater awareness today than 
in the past of a system being abused. I don't know that there's 
been fundamental changes in the way that the system pays claims 
and the way the system has been abused or allows itself to be 
abused.
    Mr. Burr. Let me ask Mr. Krayniak. You said that we have 
caught--we have prosecuted Medicaid fraud and abuse. Why does 
it still exist?
    Mr. Krayniak. The Medicaid Fraud Control Units are really 
at the end of the chain Mr. Hartwig just described. We get the 
referrals from the single State agency or from whatever agency, 
and our response is limited. I mean, we are prosecutors, we can 
go into court, we can seek incarceration, fines and other 
appropriate penalties. That certainly serves the deterrent 
effect. But we are, as I said, at the end of that line, and the 
numbers of cases that we are able to bring to successful 
conclusion, while it does serve a deterrent effect, certainly 
cannot change the structure of the system.
    Mr. Burr. Do you think that people are aware of the waste, 
fraud and abuse that exists out there?
    Mr. Krayniak. I've been the director in our State for 6 
years; and I can say, in that time, the awareness, the 
attention and the resources that have been paid to it have 
increased very, very dramatically, so I would answer your 
question yes.
    Mr. Burr. Ms. Williams, let me commend you and the 
Technical Advisory Group, because I think you did mention some 
things that I hope people wrote down. You talked about S-CHIP, 
which is the children's program. And I want to ask you, how did 
we provide for flexibility in that that's not provided for in 
the normal Medicaid program where it makes it easier to make 
sure that there's less waste, fraud and abuse in the children's 
program than in the normal Medicaid?
    Ms. Williams. Please understand my reference to the S-CHIP 
program was not related directly to fraud and abuse. My 
reference to the S-CHIP program was how Congress identified an 
urgent need, wanted States to react quickly and effectively and 
provided two major incentives to make that happen, financial 
incentive and increased matching and flexibility and program 
design to let the States tailor the program to meet their 
needs.
    I know in Alabama, when S-CHIP was passed, it received huge 
attention by the Alabama legislature and the administration to 
act quickly to take advantage of this encouragement from 
Congress to address this problem, a problem that, a year 
before, I'm not sure the Alabama legislature really understood 
existed.
    Mr. Burr. But a plan can be designed in a way that creates 
less of an incentive for waste, fraud and abuse.
    Ms. Williams. Absolutely. What I believe was accomplished 
with the S-CHIP legislation in terms of a model is Congress 
decided and defined what it wanted out of the program in very 
clear terms. There were standards set that States had to comply 
with, and then money was put with that.
    There was flexibility on how States achieved that goal of 
ensuring children and how the programs were designed for their 
States, whether it was private insurance, expanded Medicaid, a 
variety of solutions, but the ultimate goal was defined very 
clearly by Congress, and then the money came with it.
    I believe that Congress could do the same with Medicaid 
fraud and abuse, define the end results that Congress wishes to 
see occur in State Medicaid programs and then incentivize 
States with the flexibility to meet that goal and enhance 
Federal matching funds above the current 50/50 match to do it.
    Mr. Burr. You just hit on a tremendous key, and I just want 
to make sure everybody heard you. You said incentivize our 
ability to make the system better. I think we work in a penalty 
system in most cases, and that does not achieve a better 
system, I can assure you.
    Let me move to Ms. Thompson just very quickly, because I 
know my time has run out, Mr. Chairman.
    Ms. Thompson, tell me what HCFA's success is with 
fraudulent Medicare recovered dollars. Is it 100 percent?
    Ms. Thompson. No.
    Mr. Burr. It's not, is it? It's a fairly low number, if I 
remember. I can't quote it right off the top of my head, but I 
think we looked at that before.
    My only point for raising that question is for you to take 
back to HCFA and to the administration that, we cannot expect 
the State recovery on fraudulent Medicaid to be 100 percent, 
yet we take an inflexible position as it relates to their 
reimbursement of us once they identify and report overpayment 
or fraudulent payments, and I think that that's something that 
this Congress and this administration needs to address.
    Let me just make one last statement as it relates to your 
testimony. And I hope that HCFA--and I feel confident that they 
will work with Congress to make sure that we provide whatever 
tools and allow whatever flexibility for States to change their 
programs to create incentives for the elimination of waste, 
fraud and abuse and to suggest to HCFA, in a number of places 
you refer to objectives under way, objectives to measure goals 
to assess the need for improvement and national review teams. 
We're passed that. We don't need to review it anymore. We know 
there's a problem. What we need to do is sit down and find the 
solution.
    And if the solution is third-party people being hired by 
States to come in and pay claims and--you know, I raise the 
question, because I know we're going to hear from some third-
party folk--then some States might have to adopt that, if they 
can't run the programs efficiently their own way.
    But I think we need to get past trying to determine whether 
there's a problem, admit there is a problem, and find the 
solution.
    I thank the chairman for his indulgence. I yield back.
    Mr. Upton. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman.
    Let me first say that I'm going to have to leave here very 
shortly and go to another very important meeting and will try 
to get back probably for the second panel, as soon as I can. 
But I have a number of points I wanted to make, and I wanted to 
thank this panel for being helpful in your testimony.
    I think the title of this hearing is Medicaid Fraud and 
Abuse. I think there's another element out there that we're not 
really discussing that we waste, and it's something that does 
not get into the element of fraud and something--a distinction 
I think we have to be careful--particularly I know we will hear 
from the second panel about differentiating between those three 
issues.
    I understand today's hearing mainly concerns fraud and 
particularly the organized--one part of today's hearing, the 
organized crime, criminal element of health care fraud. And 
that's the one that I'm particularly concerned about and think 
we ought to come down the hardest on, because typically I would 
think that's the largest amount that we're talking about.
    One nice thing about health care fraud from--a silver 
lining in a cloud, there's a lot of times there's money you can 
recover, unlike a lot of crime out there. You catch the crook 
and put him in jail, and that's about all you can do. In this, 
there's money that can be recovered.
    And I know several of you testified as to the amounts of 
money that you picked up and added back to Treasury, but I 
think--of course, that's a drop in the bucket, but we do have 
that opportunity. And if there's any way that we can as a 
Congress enhance that ability--and I think back to things like 
asset forfeiture that we use so appropriately in drug cases, at 
least I think it's appropriate, and that's sort of an issue of 
argument now in this Congress. But if we might look at that.
    And I will be honest with you. I don't know--it may take an 
expansion of the law to get into this type of area. Here again, 
distinguishing very carefully between the waste and maybe 
perhaps some abuse, some confusion, but highlighting those 
fraudulent cases, particularly the bigger cases out there that 
we could go out hopefully and not harass people who make honest 
and legitimate mistakes.
    One question I throw out, Ms. Williams--and again I'm doing 
a lot of talking. I've got, really, one question I want to ask 
Mr. Hartwig at the end. But, Ms. Williams, and maybe this is 
done, but in reviewing the GAO report, there are all kinds of 
scenarios where this type of crime is committed. Some of it has 
to do with the mailbox, drop box, that kind of stuff. Do we 
have the ability to administratively pay only--have a ruling 
that we're only going to pay people with addresses and we're 
not going to send checks to mailboxes and drop boxes and things 
like that? Can we do that? Is that a possibility?
    Ms. Williams. It is a possibility. It presents new issues. 
For example, out-of-State providers, how do they properly get 
certified? Do we send State enrollment, provider enrollment 
staff around the country verifying the out-of-State providers? 
Alabama for years prohibited out-of-State providers except for 
emergency situations; and, unfortunately, the courts decided 
that was inappropriate, that we had to let any provider that 
wanted to participate in Alabama, regardless of where they were 
from, participate. I think there are some issues like that.
    I know Florida has been very successful in certain provider 
types that seem to have a higher vulnerability to fraud, such 
as durable medical equipment providers that, prior to 
enrollment, they are making a physical site visit to make sure 
it's not a drop box, to make sure there is an actual business. 
So, yes, sir, there are things like that that States are 
already doing in their enrollment process to try to identify 
providers beforehand.
    Mr. Bryant. Okay. You know, sitting up here you think of 
all of these ideas and you realize this is not the first time, 
in all probability, that a light was going off, so there's a 
lot of smart people out there trying to think about this, too.
    Mr. Hartwig, let me ask you about the GAO report last week 
that was made to Senator Collins which described the influence 
of organized crime in committing Medicaid fraud. I know it is 
difficult to investigate and try these cases, but this is maybe 
something you can answer. And my time is running out, but if 
you can answer today and then maybe follow up with a more 
comprehensive written response to these questions.
    What steps is OIG taking to assist State Medicaid and law 
enforcement officials in their efforts to combat this problem 
of, again, organized crime involved in Medicaid fraud? And can 
you specifically detail what efforts OIG has made to identify 
these criminal groups that are targeting multiple State 
Medicaid programs? What efforts are being made to improve 
provider enrollment controls to keep fraudulent providers out? 
And what additional resources is OIG making available to the 
State investigators and prosecutors to assist them in their 
efforts to combat this problem?
    And given the serious nature of this and sort of the 
feeling that some of us have here, and I know you all are just 
as frustrated, but maybe to keep some accountability here, I 
would ask that you, OIG, keep this committee informed on its 
efforts to crack down on these criminal groups that I'm talking 
about, again organized type, larger groups, which are 
defrauding Medicaid. And with the Chairman's permission, I 
would like to ask that OIG submit reports maybe on a quarterly 
basis to this committee and keep us up on your efforts and help 
us maybe relieve some of the frustrations. Does that sound 
reasonable?
    Mr. Hartwig. It certainly sounds reasonable.
    I will tell you that one of the methods that we use is 
local task forces and national task forces as a way of 
identifying organized groups. And a second problem we have is 
certainly large providers that operate in 30 or 40 States, in 
identifying those. And Mr. Krayniak mentioned being a part of 
the negotiating team to negotiate some global settlements.
    I mentioned the National Health Care Task Force as a way of 
looking at State, local and Federal enforcement issues on these 
organized groups that not only target single States. They 
target multiple States; they target the Medicaid program; they 
target private insurance programs. And one of the things that 
we have found is they are very good at finding in which State, 
in which contractors on the Federal level, and in what State 
contractors, there's a weakness, then going through and 
targeting that.
    We also in the OIG have issued what we call fraud alerts. 
Those are items where we have found examples or groups that may 
be operating--targeting a single procedure code, or targeting 
single procedures, and looking at identifying that, letting 
people know, and educating other law enforcement agencies.
    One of the areas that we have partnership with the States a 
lot is our exclusion program. The Inspector General has the 
authority to exclude providers from participating in federally 
funded State programs.
    We currently have 15,000 providers on that exclusion list. 
The Medicaid Fraud Control Units supply about a quarter of the 
people that are on those lists through their convictions. State 
licensing boards supply about 40 percent. I think it's very 
important as we look to control Medicare fraud and Medicaid 
fraud not to let those individuals come into the program in the 
first place.
    We've heard about recipient fraud--and I will just speak 
briefly. You know, we have found that both recipients and 
beneficiaries can be the hub of a fraud program. We have a 
fairly substantial case involving Medicaid and Medicare clinics 
where we have identified beneficiaries and recipients who 
actually sell their cards or give their cards away. We had 
identified 3,000 of those beneficiaries in a single State. We 
looked at the top 10 beneficiaries, and in less than 2 years 
their numbers had been billed over $100,000 in durable medical 
equipment alone. We and the Health Care Financing 
Administration took steps to stop paying claims for those 
beneficiaries, and we didn't hear a single complaint.
    So we are working with State authorities in that area to 
expand where we have identified beneficiaries who allow their 
numbers to be used. Again, as I look at the chain, we not only 
look at the organized groups but we also look at the total 
chain that allows them to operate, starting with the recipients 
and beneficiaries.
    Mr. Bryant. Thank you. If you could just make that report 
to the directly to the committee staff.
    I will close by simply saying that you sound like you're 
doing an awful lot of things to identify ways to deter people. 
And I think if you look at the GAO report and you see the 
various ways that the system can be defrauded, which again 
they're just as ingenious as criminals can be and it always 
seems like one step ahead of us, but maybe get the major ways 
to do this and find the ways, whether it is through licensing 
or asset forfeiture of some sort or exclusion from the program, 
things that you are already doing that might affect people like 
insurance companies better, people like medical professionals 
better and somehow the victims and the recipients, I should 
say, who aren't victims, but the criminal recipients--I don't 
know how you best deter those folks, but that type of study.
    And it sounds like you're making good progress there. But I 
think I alluded to the fact that the system is just so big, and 
we're--you know, we put a lot of money in all of this, but 
we're just underfunded, our prosecutors, our courts our 
prisons, and all of these things come into play, and I 
understand it's a big problem. But we just need to keep working 
together as best as we can. And, again, to relieve some of our 
frustrations, I appreciate the willingness of OIG to come 
forward with this information at this level.
    I'm going to have to excuse myself, because I have to be 
there, but I will try and get back. Thank you.
    Mr. Upton. Thank you, Mr. Bryant.
    I've got a couple more questions before we move on, and I 
know Mr. Burr is going to be coming back as well.
    Mr. Krayniak, you are here for a number of reasons. One is, 
the New Jersey program has had a pretty good, nationally known 
reputation for your work exposing both managed care as well as 
pharmacy benefit problems. Tell us what are some of the things 
that New Jersey has done that maybe some other States haven't.
    Mr. Krayniak. One of the things we try to do is to work 
very closely with our single State agency. We meet with program 
integrity people on a monthly basis. It's a formal case 
screening meeting.
    Mr. Upton. You go out and you physically inspect some of 
the, as we've heard about, mail drop boxes--I mean, do you have 
a very aggressive unit going out to make sure they're 
physically located someplace and actually doing the things that 
they're saying they're doing?
    Mr. Krayniak. We perform triage. As problems develop in one 
area, we focus on that area. We experienced the same situation, 
shell corporations with post office boxes, mailbox rentals. We 
send our investigators out, and we determine which providers 
are there. We attempt to contact those providers, either in 
person or by letter, telling them we're going to suspend 
payments until you come in.
    We do that in conjunction with our single State agency. 
We've had no one come in as a result of those letters. No one 
has contested millions of dollars of claims that we've 
suspended because of work of my units done in identifying what 
we believe are fraudulent rings and referring it right back to 
the single State agency.
    Mr. Upton. Now, New Jersey, I have to believe is one of the 
members of the Technical Advisory Group that Ms. Williams 
serves; is that correct?
    Ms. Williams. Yes, sir.
    Mr. Upton. How many other States do what New Jersey has 
done, Ms. Williams?
    Ms. Williams. To----
    Mr. Upton. Or moving toward that end, I should say.
    Ms. Williams. To some degree, I would think most of them--
to some degree. What Mr. Krayniak described is a more 
formalized process. In Alabama we have a similar process where 
the Medicaid Fraud Control Unit and the State--single State 
agency's program integrity unit meet every month, go over 
pending cases, problems identified, how to expand on that. It 
varies from State to State.
    There is a wide range of different relationships between 
the States, between the State Medicaid agencies and the control 
units. Some are very strong and cooperative, such as in New 
Jersey. Some are very hostile and competitive. So it's very 
difficult for me to say that every State--there's 47 Medicaid 
Fraud Control Units, I would say probably 47 relationships, but 
many States do try to do the same type of thing of having 
regular scheduled meetings between program integrity staff and 
fraud control unit staff to identify suspicious providers 
individually and global practices to try to come up with 
solutions to address them.
    Mr. Upton. Now, how long has the Technical Advisory Group 
been in existence?
    Ms. Williams. The group had its first official 
organizational meeting in the spring of 1998, March, April. 
April, I believe, of 1998 was when it had its organizational 
meeting. So it's been in effect about 1\1/2\ years.
    Mr. Upton. Were you encouraged to do this by HCFA?
    Ms. Williams. Yes.
    Mr. Upton. Or was it a self deal?
    Ms. Williams. Yes, it was a cooperative decision between 
the National Association of State Medicaid Directors' Executive 
Committee, who meets with HCFA every quarter. It was brought 
to--I believe HCFA actually brought the suggestion to the 
meeting and suggested that this Technical Advisory Group--but 
it was a joint decision of the two organizations to work 
together to create this Technical Advisory Group.
    Mr. Upton. And like some organizations, say the National 
Governors Council or the National Association of Counties, I 
mean, do you take stands on issues? Do you take a formal 
meeting where you adopt resolutions and encourage legislators 
to take a certain path?
    Ms. Williams. The Technical Advisory Group, because it is 
an affiliate of the National Association of State Medicaid 
Directors, makes recommendations to that organization, as does 
the HCFA representatives to that Technical Advisory Group. The 
three pieces of legislation that I mentioned came from the TAG 
to the national association.
    As an individual organization, no, sir, they do not take a 
national stance. The membership of this Technical Advisory 
Group is generally program and integrity directors within the 
States, with some representation from the Medicaid directors 
themselves and chaired by the Medicaid directors. So most of 
those staff people on that group are not comfortable in that 
environment. However, they feel very strongly about their 
recommendations and pass them on through the Medicaid 
Directors' Association.
    Mr. Upton. Ms. Thompson, throughout I think your testimony 
and other comments have been made, you all believe that the 
States indeed are on the front line of both identifying and 
then going after fraud and abuse. And it just seems to be, 
listening to the testimony from all different fronts, that is, 
the States are asking us to move forward to giving them more 
tools in a number of ways. But you all are not exactly 100 
percent behind their efforts.
    I mean, as I think about the collection efforts as an 
example, I remember that Congress a number years ago passed the 
Prompt Pay Bill, which required that the Federal Government be 
paid I think 30 days after something. And it would seem as 
though, with regard to payments back to States that if, in 
fact, they receive the money on January 1, that there would be 
some--that there could be some rule where they would actually 
reimburse the Federal Government by January 30 or, you know, 30 
or 60 days versus the 60-day provision that is there now, which 
a very good example is used, it just is not working and it 
actually serves as a disincentive for the States to go after 
fraud and abuse, which in turn means something ought to be 
done.
    Ms. Thompson. Well, as I mentioned before, first of all, 
let me say we're 100 percent behind all of the efforts to 
attack fraud and abuse. That doesn't mean that we're in 100 
percent agreement on every particular on how to do that. And 
that's inevitable, and that's fine. As I mentioned, I think 
that we are certainly aware of some of the issues, for example, 
that Ms. Williams talks about in terms of the problems 
associated with the 60-day rule.
    But the primary purpose behind that rule was to ensure that 
States were taking prompt action on debt collection matters. 
And so I think, as usual, we have to figure out how to balance 
some competing demands and priorities in a way that makes sense 
to everyone. And we would be happy to continue to have those 
conversations. What we don't support is just the elimination of 
that requirement without some other kind of structure or 
standard in place to make sure that the Federal Government is 
made whole in a timely fashion and that the States, in fact, 
have proper debt collection processes in place.
    Mr. Upton. I would just like to say, as I yield to Mr. Burr 
if he has additional questions, that I am going to talk to 
Chairman Bilirakis this afternoon and urge him to proceed in 
some way so that we can strengthen the hand to go after fraud 
and abuse. It's always a good line in any audience, I'm against 
fraud and abuse. I've only found one Member of Congress to vote 
against it when we've had that opportunity. But I do believe 
that we do--we have to provide more tools so that, in 
particular, we can go after the participants that in fact 
defraud the taxpayer of lots of money, way too much.
    It's clearly a slippery slope that's only getting worse and 
not better, and we need to take advantage of some of the ideas, 
particularly from those on the front lines in terms of what 
they suggest that can strengthen their hand. And I know you 
will be a willing participant in that.
    Ms. Thompson. Absolutely.
    Mr. Upton. And I intend to ask Mr. Bilirakis to move some 
legislation.
    Mr. Burr, do you have any additional questions?
    Mr. Burr. Only one comment, Mr. Chairman.
    Ms. Thompson, please don't take this the wrong way. I don't 
think you hear Ms. Williams and some of the other State folks. 
What they're graciously offering is some good advice as to how 
more States would get committed to chasing waste, fraud and 
abuse, if there was not a punitive regulation on them to 
produce money prior to the collection of money. I would listen 
to her.
    I think it's very wise advice. And I think that it's so 
wise that I think you may see legislative language which 
suggests that that is something that HCFA should adopt if they 
don't suggest it on their own.
    I thank you. I yield back.
    Mr. Upton. Thank you very much for your testimony. We look 
forward to working with you in the days ahead, that's for sure. 
Have a terrific week.
    We will call the second panel.
    Mr. Mitchell Adams, who is the Chief Executive Officer of 
HealthWatch Technologies, Massachusetts; Mr. Greg Viola, Senior 
Manager of Deloitte and Touche, from New Jersey; Mr. Michael 
Glynn, CEO of the Codman Group, in Massachusetts; and Ms. Jean 
MacQuarrie from Medstat, from the great town of Ann Arbor, 
Michigan.
    We need to get started. I am getting a little worried about 
votes. So we will--as you all heard, we have a long tradition 
of taking testimony under oath. Do any of you have objection to 
that? And under both House and committee rules, we allow you to 
have counsel, if you so desire and--do you have any desire to 
have counsel? Good.
    If you would stand and raise your right hand.
    [Witnesses sworn.]
    Mr. Upton. They're all now under oath.
    Mr. Adams, if you're prepared, we will start with you.

     TESTIMONY OF MITCHELL ADAMS, CHIEF EXECUTIVE OFFICER, 
  HEALTHWATCH, TECHNOLOGIES, LLC, ACCOMPANIED BY JIM GORMAN, 
   PRESIDENT AND CHIEF OPERATING OFFICER; GREG VIOLA, SENIOR 
  MANAGER, DELOITTE AND TOUCHE; MICHAEL J. GLYNN, CEO, CODMAN 
GROUP, ACCOMPANIED BY PHILIP CAPER, FOUNDER AND CHAIRMAN OF THE 
    BOARD OF THE CODMAN GROUP; AND JEAN MACQUARRIE, MEDSTAT

    Mr. Adams. Good morning, Mr. Chairman and committee 
members. My name is Mitchell Adams. I'm Chief Executive Officer 
of HealthWatch Technologies, and HWT, LLC. Prior to my job, 
which I've had for about a year, I was for 8 years the 
Commissioner of Revenue of Massachusetts.
    I'm joined this morning in the room with Jim Gorman, who is 
the President and Chief Operating Officer of our companies; and 
before this Jim was the Director of the Medicaid program in the 
State of Maine.
    Our companies provide a unique and proven solution to the 
problem of Medicaid fraud and abuse, which combines proprietary 
systems, state-of-the-art information technologies, extensive 
Medicaid program experience and health care expertise. The team 
offers a full-spectrum service to States, including the 
specific identification of improper claims paid to providers 
and the collection of overpayments as an agent for the State.
    The service, which includes all hardware, software, and 
personnel services, is offered on a contingent fee basis, 
determined as a percentage of the funds actually collected so 
that there is no costs to the State until recoveries are 
actually received. This approach meets an important need for 
States which generally do not have the personnel, financial 
resources, or IT expertise to address the problem.
    The Commonwealth of Kentucky has demonstrated bold vision 
in undertaking what is believed to be the Nation's first full 
service identification and collection contract. The results 
have been extraordinary. Working closely with the Kentucky 
Department for Medicaid Services, the DMS, $30 million to $40 
million of specific overpayments have been identified. Of this, 
$14 million is slated for collection action in the coming 
weeks; and it is expected that the balance, between $15 million 
and $25 million, will be collected in the coming months after 
final review by the DMS.
    The project has resulted in the production of 160 results 
sets which include over 2 million lines of specific 
overpayments to providers. The hard copy printout comprises 
over 200,000 pages. Based on collection experience to date, it 
is estimated that approximately 80 percent of the overpayments 
identified will in fact be collected, returning up to $25 
million to Kentucky.
    While overpayments involve thousands of providers and 
include all categories of service providers, the data show that 
the abuse is concentrated among a very small percentage of 
providers, between 2 percent and 4 percent generally. The vast 
majority of Kentucky providers are honest, law-abiding 
citizens, playing by the rules. Overpayments identified 
represent only a fraction of 1 percent of the paid claims 
analyzed.
    Many studies assess the extent of overpayments in the 
system, as we've heard this morning, at about 10 percent. On 
the basis of these studies, it is estimated that the 
overpayments that could be identified in Kentucky, if this 
effort is continued, range between $600 million and $800 
million.
    Our team works closely with the Attorney General of 
Kentucky, the United States Attorneys for the Eastern and 
Western districts, Kentucky's Office of the Inspector General 
and representatives of the Federal Office of the OIG; and in 
the development of cases for criminal prosecution, these 
agencies have identified approximately 25 cases representing 
overpayments of over $1.5 million to review for possible 
criminal prosecution.
    This approach can benefit the Medicaid system in two ways 
other than the recovery of funds. First, the algorithms that 
reveal the abuse that we have found can be converted into 
prepayment edits so that overpayments are not made in the 
future. Second, the action of collection will have a chilling 
effect on providers who are abusing the system, thus reducing 
improper claims prospectively.
    We believe that the contingency recovery model described 
here and proven effective in Kentucky provides a workable 
solution to the problem of fraud and abuse in the Medicaid 
system and should be replicated in other States.
    Presently we are aware of four other States that are 
following Kentucky's bold lead and are in the process of 
implementing this approach. HCFA needs to encourage States to 
adopt these innovative approaches to curbing health care fraud 
and abuse in the federally funded health care programs and 
generally. State agencies, which are generally understaffed and 
overworked, should be encouraged to use outside consultants 
whose main focus is the detection and prevention of Medicaid 
overpayments.
    These consultants should not be involved with the payment 
of claims in the first instance and should be evaluated by HCFA 
and the States. HCFA should publish a list of approved 
consultants, as they have done with approved Medicare 
contractors. States should be encouraged by HCFA to pay these 
consultants on a contingent fee basis, as this method of 
payment provides the resources and incentive necessary to do 
the job.
    Finally, we would respectfully request and recommend that 
this subcommittee continue to hold oversight hearings in order 
to monitor the progress HCFA and the States are making toward 
detecting and preventing the enormous amounts of overpayments 
that currently characterizes the Medicaid program. Without this 
continuing oversight, little progress is likely to be made.
    Thank you very much for the privilege of presenting this 
testimony.
    [The prepared statement of Mitchell Adams follows:]
 Prepared Statement of Mitchell Adams, CEO, HealthWatch Technologies, 
                                  LLC
    Mr. Chairman and Members of the Committee, good morning, my name is 
Mitchell Adams. I am here today representing HealthWatch Technologies, 
LLC, and HWT, LLC. Our team has done pioneering work in harnessing the 
power of information technology to address the problem of fraud and 
abuse in the Medicaid System.1 I have worked as the Chief 
Executive Officer of these companies for the last year. For the 
preceding eight years, from 1991 through 1998, I served as the 
Commissioner of Revenue of Massachusetts. In this agency we did ground 
breaking work in the application of the newest information technologies 
to the collection of state revenues and modernization of the State's 
Child Support Enforcement Program, which became a model program for the 
nation. Prior to becoming Commissioner of Revenue, I had 15 years 
experience in health systems management, as Vice Chancellor for 
Administration and Finance at the University of Massachusetts Medical 
Center, as Dean for Finance and Business at the Harvard Medical School 
and as Budget Director for Boston's Beth Israel Hospital. I presently 
serve as a member of the Board of Trustees of Harvard Vanguard Medical 
Associates, which constitutes the health centers division of Harvard 
Pilgrim Health Care, New England's largest HMO.
---------------------------------------------------------------------------
    \1\ HealthWatch Technologies, LLC and HWT, LLC are affiliated with 
Sapient Corporation, an e-services consultancy that helped develop the 
technology used in the identification of overpayments. The contract for 
the identification and collection of overpayments in the Medicaid 
program in Kentucky described in this testimony was initially awarded 
to Sapient. However, since Sapient's core business does not include the 
identification and collection of overpayments in the healthcare system, 
that contract was undertaken with the understanding that it would be 
assigned to an affiliated organization. HealthWatch Technologies, LLC 
was formed for the sole purpose of providing these services in 
Kentucky. HWT, LLC was formed to provide program integrity services to 
public and private healthcare organizations nationally.
---------------------------------------------------------------------------
    I am joined this morning by my colleague, Mr. James Gorman, who 
works with me in this innovative and challenging endeavor to combat 
Medicaid fraud. Before joining our team, Mr. Gorman was the Director of 
the Maine Bureau of Medical Services for five years, where he built a 
state-of-the-art data warehouse and decision support system for the 
state's Medicaid Program. Prior to joining the Bureau of Medical 
services, Mr. Gorman was a management expert assigned to the Department 
of Safeguards within the United Nations' International Atomic Energy 
Agency, the program charged with tracking the world's nuclear material.
    First and foremost, I want to commend Commerce Committee Chairman 
Thomas J. Bliley for charging the General Accounting Office with the 
responsibility of conducting an in-depth survey to study and report on 
the current efforts to combat Medicaid fraud at various governmental 
levels. One of the specific charges to the GAO was to determine 
``innovative techniques and strategies'' developed at the state level 
to be applied to fraud control efforts in other health care programs. 
HealthWatch Technologies, LLC, and HWT, LLC emphatically support this 
charge for the following reasons.
    Multiple studies have demonstrated that the country's healthcare 
system is subject to extensive waste, fraud and abuse. Federal studies 
have shown that the extent of fraud and abuse in federally supported 
healthcare programs ranges from 10% to 14%. These studies show that the 
Medicaid program is undeniably a part of the problem. A comprehensive 
study in Texas recently found that a staggering 12.5% to 32.2% of 
Texas' Medicaid payments were questionable, depending on the type of 
service provided. Malcolm Sparrow, Professor of Practice at Harvard's 
Kennedy School of Government, and one of the nation's leading experts 
and researchers in the field of healthcare fraud and abuse, summarizes 
the situation this way; ``Fraud in the healthcare system has been, and 
remains, out of control.''2 Our experience in the field 
confirms Professor Sparrow's conclusion.
---------------------------------------------------------------------------
    \2\ Sparrow, Malcolm K., License to Steal, 1996, p.212.
---------------------------------------------------------------------------
    The problem exists in all the 50 states and efforts to address it 
have been essentially a failure nationwide. In 1995 and 1996, for 
instance, approximately $185 million in federal funds was provided to 
47 state Medicaid Fraud Control Units (MFCUs) to support their fraud 
and abuse detection and collection efforts, but only $71 million--or 
less than 40% of the amount spent on such detection and collection 
efforts--was recovered. In 1997 total expenditures in the Medicaid 
program amounted to approximately $200 billion nationwide, yet in that 
year the major government agencies charged with addressing fraud and 
abuse in the Medicaid program, the MFCUs and the Surveillance and 
Utilization Review Subsystems (SURS) units of the various states, 
recovered a total of only approximately $250 million. The amounts 
recovered, however, relate to claims paid over a multi-year period 
which we estimate totaled approximately $700 billion.
 the unique approach of healthwatch technologies and hwt in the use of 
             information technology to address the problem
    Our team offers state governments a unique program that has proven 
to be an effective part of the solution to the problem of fraud and 
abuse in the Medicaid system.
    There are a number of companies offering software products and 
systems which Medicaid departments can obtain that allow them to 
analyze their data to identify patterns of aberrant activity and 
behavior among recipients and providers. With further analysis and 
investigation of the data, the Medicaid department might then make a 
determination of overpayment amount as a basis for a recoupment action 
or an initial determination of possible fraudulent behavior that could 
be referred to prosecutorial authorities.
    The approach of our team is significantly different and offers a 
great deal more to a state's Medicaid department. We offer a full 
spectrum service including the provision of all information technology 
services and necessary hardware, analysis of data, the specific 
identification of fraudulent and abusive claims that have been paid, 
the presentation of the evidence to prosecutorial authorities and the 
recovery of the funds for the state. We operate on a contingency fee 
determined on the basis of repayments received by the state. We receive 
no compensation whatsoever, unless the state actually recovers 
overpayments. We believe that our business model is the first of its 
kind and that our approach addresses a very important need which to 
date has gone unfulfilled. Implementation of this innovative process 
requires substantial resources in information technology expertise, 
hardware, software, capital and staffing which are simply not available 
within state government under present circumstances. The contingent 
payment mechanism makes use of the recovered funds to supply the 
resources needed.
Outline of the Process
    Providers who use abusive or fraudulent billing practices know the 
claims processing systems as well as those who operate them. They also 
know that the present state of claims processing technology cannot 
check the thousands of potential variables and still process claims in 
a timely manner. Most states have some type of data warehouse to help 
in the identification of improper utilization, but very few have made 
material progress in solving the problem because, in addition to a 
shortage of resources, they lack the process experience, specific 
knowledge base and the information technologies required.
    Our companies employs its own SIEQ 
methodology to ensure that all available expertise and technologies are 
brought to bare on the problem. This methodology employs close 
examination of applicable policies and claims processing systems, 
exposing weaknesses that jeopardize fiscal integrity. It then develops 
algorithms tailored specifically to those areas revealed to be most 
vulnerable to waste, fraud and abuse. Then, processing of the raw data 
(paid claims, recipient and insurance data, vital statistics, etc.) 
against the algorithms produces detailed, line-by-line listings of 
overpayments by specific providers. These listings represent 
substantial and immediate recovery opportunities. They are actionable.
    Detailed listings of overpayments are then presented to the state's 
Medicaid staff for final verification. Prior to any overpayment 
collection activity, all detailed listings are presented to a review 
board consisting of the appropriate investigative and prosecutorial 
authorities, the state's Attorney General, the United States Attorneys, 
and the representatives of the federal Office of the Inspector General, 
to give these agencies the opportunity to make an assessment as to 
whether criminal investigation is appropriate. Cases which are selected 
for criminal review are set aside from the collection process to permit 
development of possible criminal prosecution by the appropriate agency.
    Overpayment collection is undertaken by our team as an agent of the 
state. Following the state's rules and regulations governing the 
collection of overpayments and due process with regard to providers' 
rights to appeal and review, we send providers letters, under signature 
of the appropriate state official and pre-approved by the state, 
requesting recovery of any overpayments made. Each letter includes 
detailed, line-by-line listings of each and every overpayment together 
with a clear explanation of the reason these payments are in violation 
of Medicaid regulations. Management of the dispute resolution process 
is supported by our team under the direction of the state's Medicaid 
department.
Proof of the Process: The Kentucky Project
    The Commonwealth of Kentucky is the first state to demonstrate the 
vision to implement the full-spectrum approach outlined here, and the 
results have been extraordinary.
    An enormous amount of Medicaid overpayments have been identified in 
Kentucky. Working closely with the staff of Kentucky's Department of 
Medicaid Services, our team 3 has identified specific 
overpayments in excess of $14 million, most of which we believe can be 
recouped by our team for the Commonwealth over the next several months. 
The findings consist of over 160 result sets, each of which details 
specific line items of paid claims which are part of a particular 
category of overpayment by service and provider type. Altogether over 2 
million line items of paid claims are involved. The hard copy print out 
of the detailed reports amounts to over 200,000 pages.
---------------------------------------------------------------------------
    \3\  See footnote 1.
---------------------------------------------------------------------------
    In addition to the $14 million in Medicaid overpayments which are 
proceeding to collection referred to above, we have identified 
overpayments in the range of $15 million and $25 million which are 
still undergoing analysis and review by the Kentucky Medicaid 
Department. We expect collection action to be initiated on this group 
of overpayments within the next several months, and the bulk of 
recovery of these overpayments to be made in the three months 
following.
    These findings do not target any one provider group but identify 
overpayments made to physicians, dentists, medical laboratories, 
hospitals, nursing homes, pharmacists, DME dealers, rural health 
centers, transportation providers, home health agencies and others. The 
overpayments identified in the reports cover a broad spectrum of abuse 
including duplicate services, upcoding, unbundling, impossible 
services, etc. By way of example, we have found:

 Excessive Services: A small percentage of physicians routinely 
        inflate the amount of time that they claim to be spending with 
        Medicaid clients. Approximately 500 physicians routinely claim 
        that they spend over 15 hours a day with Medicaid clients. Our 
        reports include evidence of numerous physicians routinely 
        charging Medicaid for seeing Medicaid patients for more than 24 
        hours per day.
 Excessive Quantities: Providers are routinely reimbursed for 
        providing services and supplies in quantities that are far in 
        excess of what would be reasonably necessary. This is 
        particularly true with regard to Durable Medical Equipment(DME) 
        providers and pharmacists. As an example certain providers 
        routinely claim to supply patients with over 200 inhalers per 
        month for a charge of over $4,000 each time. Maximum usage of 
        this product is 3-4 inhalers per month at a cost of about $150. 
        One provider routinely claims to provide 90 times the normal 
        supply of a particular pharmaceutical solution, resulting in a 
        per claim payment in excess of $1500 more than what would have 
        been paid if an appropriate quantity had been billed. As 
        another example, there are numerous physicians who routinely 
        charge for up to 5 urinalysis tests each time they perform one.
 Duplicate Billing: Several categories of providers routinely 
        submit claims for the same service provided to the same patient 
        on the same day. A typical case is one in which two dentists at 
        opposite ends of the state repeatedly submit claims for 
        extracting the same tooth, for the same patient, on the same 
        day.
 Inappropriate Services: Certain providers routinely submit 
        claims for services for which there is no apparent medical 
        necessity. Numerous transportation companies have submitted 
        claims for thousands of ambulance and taxi rides, costing over 
        $500,000 in the aggregate, when there is no record that any 
        medical services at all were provided on the day the 
        transportation service was rendered.
    While our results make it clear that fraud and abuse in the system 
are pervasive in that all provider and service types are involved, our 
analysis shows that the abuse is concentrated in a very small group of 
providers. Typically, the abusive behavior is confined to between 2% 
and 4% of each provider group. The vast majority of Kentucky providers 
are honest, law-abiding citizens, playing by the rules.
Work of the Review Board:
    The Review Board in the Kentucky project consists of the 
Commonwealth's Attorney General, represented by staff of the MFCU, the 
United States Attorneys for the Eastern and Western Districts of 
Kentucky, Kentucky's Office of the Inspector General, and 
representatives of the federal Office of the Inspector General. At the 
Review Board's meeting on November 2, 1999, representatives of the 
Federal Bureau of Investigation were present. The Review Board has met 
six times over the past several months and the United States Attorneys 
and the Attorney General's Office have identified the cases of 
approximately 25 particular providers of various types in which they 
have determined that the apparent abusive practices are so extreme as 
to warrant close investigation with a view towards possible criminal 
prosecution. The Medicaid overpayment amount represented by these cases 
is in excess of $1.5 million.
The Collection Phase:
    The first step in the collection phase was undertaken just over two 
months ago, and the results are extremely encouraging. On August 20, an 
initial and relatively small set of collection letters (275 letters 
representing approximately $300,000 in recoverable overpayments) was 
sent to dentists under the Department of Medicaid Services (DMS) 
Commissioner's signature. DMS regulations stipulate that providers may 
dispute its findings of overpayment by indicating in writing their 
intention to do so within a 30-day period. By September 20, the end of 
the 30 day period, only 55 of the 275 dentists, that is 20%, had 
indicated that they had any reservations about our findings. Thus, by 
regulation the balance of 220, representing about 80% of the providers 
involved, are obligated to repay the overpayments. We expect that this 
will result in repayment to the Commonwealth of approximately $250,000, 
most of which will have been received within the next sixty days.
    We believe that collection of the balance of the overpayments 
identified to date, the $14 million slated for immediate collection 
action and the $15 million to $25 million still undergoing final 
review, can be as successfully implemented as the first set has been, 
and that we can return to Kentucky about 80%, or between $20 million 
and $30 million over the coming months.
    We believe the Commonwealth of Kentucky's Cabinet for Health 
Services deserves enormous credit for having the wisdom and foresight 
to begin this effort and to support it as recoveries have been made. We 
think they represent a model for other states to emulate.
Future Identification and Recovery of Medicaid Overpayments:
    We are convinced that the overpayments we have identified and will 
be recovering in the coming months represent a small fraction of what 
can be developed with a continuation of this effort. The aggregate 
amount of claims in the Medicaid database we have been working with is 
approximately $8 billion (claims paid over a 3 + year period ending 
June 30, 1998). Thus our findings to date amount to less than , of 1% 
of that amount. Based on the numerous studies that have been undertaken 
to estimate the extent of overpayments in the Medicaid system 
nationally, it is reasonable to estimate that the overpayments in 
Kentucky that could be identified range between $600 and $800 million.
Significant Reduction in the Cost of Kentucky's Medicaid Program Going 
        Forward:
    Recovering overpayments made to providers in the past is only one 
of the significant financial improvements that can be made in the 
Medicaid program. Other substantial financial benefits can come about 
in two other ways, by preventing the abuse before it happens:

 The first way that abusive and fraudulent behaviors will be 
        reduced in the future is by the powerful ``chilling'' effect of 
        the collection effort itself. The small percentage of providers 
        abusing the system will understand very quickly that the system 
        will not tolerate their behavior and it will stop. The more 
        overpayments recovered, the greater and more effective the 
        ``chilling'' effect.
 The second way is that the logic behind many of the algorithms 
        which were used to identify overpayments can be converted into 
        prepayment edits in the program's payment system, thus assuring 
        that these particular abuses will be caught before payment is 
        made in the first place.
Recommendations for the Subcommittee's Consideration
    We believe that the contingency recovery model described herein and 
proven effective in Kentucky provides a workable solution to the 
problem of fraud and abuse in the Medicaid system and should be 
replicated in other states. Presently we are aware of four other states 
that are following Kentucky's bold lead and are in the process of 
implementing this approach.
    There is no need for new legislation. Rather, the Health Care 
Financing Administration needs to encourage states to adopt these 
innovative approaches to curbing healthcare fraud and abuse in the 
federally funded health care programs and generally. State agencies 
which are generally understaffed and overworked should be encouraged to 
use outside consultants whose main focus is the detection and 
prevention of Medicaid overpayments. These consultants should not be 
involved with the payment of claims in the first instance and should be 
evaluated by HCFA and the States. HCFA should publish a list of 
approved consultants as they have done so with approved Medicare 
contractors. States should be encouraged by HCFA to pay these 
consultants on a contingent fee basis as this method provides the 
resources and incentive necessary to do the job. At the same time, HCFA 
must reassure State Medicaid officials that vigorous yet warranted 
overpayment collection activities will be protected from provider 
backlash.
    In addition, we would respectfully request and recommend that this 
Subcommittee continue to hold oversight hearings in order to monitor 
the progress HCFA and the states are making towards detecting and 
preventing the enormous amount of overpayments that currently 
characterize the Medicaid program. Without this continuing oversight, 
little forward progress is likely to be made.
    In conclusion, HealthWatch Technologies, LLC and HWT, LLC would 
like to share responsibility for safeguarding Medicaid from fraud and 
abuse. Thank you for the privilege of presenting this testimony.

    Mr. Upton. Thank you very much.
    Mr. Viola.

                     TESTIMONY OF GREG VIOLA

    Mr. Viola. Mr. Chairman, members of the subcommittee, on 
behalf of the partners and employees of Deloitte and Touche and 
Deloitte Consulting, we would like to thank you for allowing us 
the opportunity to provide you with this testimony today.
    We would like to accomplish two goals: first, to summarize 
our impressions of the attitude problems and successes in the 
Medicaid community regarding fraud control; and, second, 
educate you to our approach as to solving the problem.
    First our impression. We have visited 17 Medicaid programs 
in the last 2 years attempting to market our fraud control 
solution. Some programs wish the problem would go away, some 
proclaim it's under control, but most are interested in 
fighting fraud, and they're often stymied by conflicts within 
and between departments by politics or by ignorance.
    Additionally, no Medicaid program has committed sufficient 
funding to solve the problem.
    And, finally, there need to be significant improvements in 
fraud detection tools, techniques, technologies and their 
implementation.
    The reasons for this somewhat gloomy situation has been 
recently documented in the report referenced in the first panel 
by Dr. Sparrow at HCFA, which we would recommend reading for 
further information.
    On our approach. Our approach to fraud control is both 
organizationally focused and process focused. I would ask that 
you follow along with the charts that we're going to try to 
appear on the screen.
    Our organizational focus is concerned with orchestrating 
cooperation between the various departments, the need to work 
together to fight fraud. We analyze budget staffing, 
technology, interactions with outside entities and other 
related areas. We assign staff experienced in health care 
reimbursement and claims analysis; in health care delivery, 
including doctors and nurses; in State governmental operations 
analysis; in systems and technology; and in investigations, 
including former Attorneys General staff and FBI investigators.
    The hopeful outcome of our organizational focus are changes 
to the departments to position them for success in fraud 
detection.
    The process focus has several goals: to identify claims 
improperly paid, whether due to waste, fraud and abuse or 
error; to determine the mechanisms that allow the claims to be 
placed in the first place; to implement claims payment 
safeguards so that losses are prospectively avoided; and to 
provide the State with requested information to support either 
retrospective recovery of revenue, recoupment of the claims 
against future billings or, where possible, to initiate 
prosecution.
    These goals are accomplished by loading Medicaid claims 
onto our systems and analyzing those claims with both computer 
technology and experienced staff analysis.
    We review results with the State, assist in interpreting 
the mechanisms that allow the claims to be paid, and design 
safeguards against future claims of the same nature. These 
analyses are applied repetitively as new claims are introduced, 
both to measure the progress and to identify new emerging scams 
as they develop.
    We would like to conclude our presentation with some 
graphical examples of the types of analyses we perform using 
automated tools and to show you what some of the results look 
like.
    This first graphic is the result of an analysis that we ran 
on a Medicaid program's claims to identify a pharmacy scam 
where prescriptions are shopped from pharmacy to pharmacy 
resulting in the prescription being billed and paid for 
multiple times. In the first panel, you heard about lock-in 
programs. Application of a good lock-in program will help to 
deter this kind of fraud from occurring.
    First, we processed several hundred millions of claims 
using technology from HOPS International to identify those 
claims using that scam. Those results themselves would be 
sufficient to identify problem transactions for action, and 
certainly one could pursue those providers solely on that 
basis. However, we went looking for other relationships between 
entities on those claims.
    This first graphic, using a link analysis tool from I-2, 
shows that each doctor-patient relationship--and in this chart 
the doctors fan out from each patient--notice that each patient 
has many prescribing physicians and, in fact, many more that 
would be necessary for any one patient.
    This second graphic zooms in to illustrate what may be a 
ring of collusive activities between prescribing physicians and 
patients. The numbers on each line, if you can see them, 
indicate how much prescriptions were billed for that patient-
doctor relationship. This ring prompted us to look for 
collusion using cluster analysis.
    This next graphic shows cluster analysis performed on the 
same data using a tool from SAS called Enterprise Miner. The 
two axis on this chart represent four pharmacies labelled A, B, 
C, D, and the circles at the intersections of the pharmacies 
show the probable strength of any interrelationship.
    The redder the circle, the more probable that there is a 
relationship between those pharmacies; the larger the circles, 
the more transactions would probably occur. If one examines the 
left-most column of red circles above pharmacy A from the 
bottom up for a moment, it shows that a patient shopping for 
prescriptions using pharmacy A has a very high probability of 
also shopping those prescriptions at pharmacies B, C and D. The 
volume of transactions, the size of the circle, would be 
largest with B and successfully smaller with C and D.
    A subsequent analysis using decision trees correlating this 
analysis with prescribing physicians showed that there was also 
a 99 percent chance that certain specific physicians would be 
involved in these transactions as well.
    While one might be inclined to label this a conspiracy, it 
could also be stolen IDs being used by a fourth party. What you 
can infer from this analysis is that the claims tractions shows 
these physicians, pharmacies and patients--or at least their 
respective Medicaid numbers--have an usually tight 
relationship. Only an investigation will tell the true story, 
however. This analysis allows the scope of an investigation to 
be narrowed to a few entities rather quickly and a decision 
made as to next steps.
    We thank you for the opportunity to testify.
    [The prepared statement of Greg Viola follows:]
 Prepared Statement of Greg Viola, Senior manager, Deloitte Consulting 
                                  LLC
                                summary
    We have been asked to testify before this Subcommittee to discuss 
our approaches to the detection and elimination of fraud in the 
Medicaid program.
    We have been supplying services and supporting products to identify 
Medicaid fraud since October, 1997. Since that time, we have been able 
to demonstrate the value, from a financial basis, of implementing a 
fraud control solution. In the pilots we have done, we have been able 
to quickly reveal (in a few weeks) tens of millions of dollars of 
opportunity in this area from analyses of Medicaid paid claims. 
However, the market has been slow to adapt these techniques, for 
reasons made clear by Dr. Malcolm Sparrow in his recent report to HCFA 
``Controlling Fraud and Abuse in Medicaid: Innovations and Obstacles'', 
dated September 24th, 1999 (copies available on request). We are hoping 
this situation changes in the near future.
    Our approach, called DETECTTM, is broader in scope than most other 
approaches. DETECTTM encompasses both an organizational focus (to 
enable the payer--Medicaid programs--to implement and support fraud 
control), and a process focus (to make available systems and methods to 
implement and institutionalize detection processes in payer 
organizations.
    Since we are a systems integrator and consulting firm, we can 
select or build software, and adapt our consulting approach, as the 
needs of the market change. Currently, in addition to our 17+ years of 
Medicaid consulting expertise and the use of Dr. Sparrow as an advisor, 
we use database and processing technology from HOPS International, data 
mining software from SAS Institute, and data visualization software 
from I2
                               testimony
    On behalf of the Partners and Employees of Deloitte & Touche and 
Deloitte Consulting, my colleagues and I would like to thank the 
subcommittee for allowing us the opportunity to be here with you today. 
We believe that more interaction like this will enable us all to play 
more effective roles in the fight against health care fraud.
    First of all, some background. Many of you know that we are one of 
the largest professional services firms in the world, serving the 
public sector, and most industries in the private sector, all over the 
globe. Those of us here with you today are concerned specifically with 
the healthcare payer industry and the impact that fraud has had on both 
the financial and medical health of the country.
    Our specific focus is positioning our clients to be effective in 
the fraud detection process, and enabling them to subsequently detect 
and eliminate fraudulent health care claims. We have spent the last two 
years in the marketplace, working with private and public payers, 
developing, refining, and delivering what we believe is now the most 
effective and comprehensive approach to fraud detection.
    We would like to accomplish two goals today. First, to summarize 
our impression of the attitude, problems, and successes in the payer 
community regarding fraud control. Second, we would like to educate you 
as to our approach to solving this problem. Let's begin.
    Our impressions: We have found that a wide variety of models exist 
in private and public payer organizations regarding the pursuit of 
health care fraud. Some simply wish the problem would go away. Some 
merely cite current efforts, and then proclaim that they have the 
problem under control. Some program approaches are mired in politics, 
or in ignorance, or both.
    Some programs are truly interested in eliminating the problem, and 
strive to rise above these issues to address fraud effectively. 
However, they are often stymied by problems within their own 
departments, and with other departments in the State. Aside from 
attitudes, though, not enough payers, public or private, are devoted to 
solving this problem effectively, and no Medicaid program appears 
willing to commit sufficient funding, time, and effort to solve the 
problem.
    There are many reasons for this current situation. We would suggest 
a review of Dr. Malcolm Sparrow's report to HFCA, dated September 24th, 
1999, for a detailed discussion of those reasons. This report documents 
the results of four regional seminars, sponsored by HFCA and conducted 
between December of 1998 and May of 1999, on the subject of Medicaid 
fraud and abuse control. These seminars were attended by 
representatives from 49 states. We include two quotes below from the 
report, both from page 12, to illustrate the problem:
        ``legislatures and senior management . . . appeared either not 
        to recognize the problem of Medicaid Fraud and Abuse; or if 
        they did, they did not seem to treat it as a serious or central 
        issue in program administration''

        ``the culture of social service agencies and claims processing 
        operations appears to be adverse, and in some cases openly 
        hostile, to the purposes and methods of effective fraud 
        control''
    Our approach: Our approach is both organizationally-focused and 
process-focused. The following chart summarizes our approach:
[GRAPHIC] [TIFF OMITTED] T1043.001

    The organizational focus is concerned with making sure the 
multiple departments in the State that need to cooperate to 
identify and pursue fraud are poised to work together 
effectively. This involves an analysis of their budgets, 
staffing & skill levels, degree of technology sophistication, 
available technology support, interactions with each other and 
outside entities, etc. To perform this analysis, we assign 
staff experienced in health care reimbursement and claims 
analysis, in health care delivery (including doctors and 
nurses), in state governmental operations analysis, in systems 
and technology, in data mining, in fraud detection, and in 
investigations (including former Attorneys General staff and 
FBI investigators). The outcome of the organizational focus are 
recommendations regarding changes to the departments within the 
organization to position it for success in the fraud detection 
environment.
The ultimate goals of the process focus are:

 To identify claims improperly paid, whether due to 
fraud, waste, abuse, or error;
 To determine the mechanisms that allowed the claims to 
be paid in the first place;
 To implement claims payment safeguards so that losses 
are prospectively avoided; and
 To provide the payer with requested information to 
support either retrospective recovery of the revenue or 
recoupment of the claim against future billings, where 
possible; and/or to initiate prosecution.
    These goals are accomplished by acquiring the claims from 
the payer, loading them onto our systems, and analyzing those 
claims with both computer technology and experienced analysis 
staff. We spend a great deal of time reviewing results with the 
State staff, assisting in interpreting the mechanisms that 
allowed the claim to be paid, and designing the safeguards 
against future claims of the same nature. These analyses need 
to be applied repetitively as new claims are introduced, both 
to measure progress, and to identify new emerging scams as they 
develop.
    Our greatest asset in this endeavor is our extensive 
knowledge of fraud scams. We have built this knowledge from our 
relationship with Dr. Sparrow, from our own experience, from 
our clients, and from available published reports. Since we are 
not a technology vendor, but a consulting firm and technology 
integrator, we can utilize whatever technology works the best 
to implement that knowledge. We have currently integrated 
software from HOPS International, SAS Institute, and I2. This 
supplies us with database management and claims processing, 
data mining (such as neural networks and decision trees), and 
data visualization, respectively.
    This combined focus allows to address most of the 
significant issues regarding implementation of a fraud control 
solution, as illustrated in the following chart.
[GRAPHIC] [TIFF OMITTED] T1043.002

    We would like to conclude our statement with some graphic 
examples of the types of analyses that we can perform using 
these techniques, and what the results look like.
    The first graphic is the result of an analysis we ran on a 
Medicaid program's claims to identify a pharmacy scam where 
prescriptions are shopped from pharmacy to pharmacy, resulting 
in the prescription being billed for multiple times.
    After processing several hundred million claims using the 
HOPS technology to identify those claims meeting that scam, we 
fed the suspect claims into the I2 link analysis tool. This 
first graphic shows the all each doctor that prescribed for 
each patient, connected by a line (the doctors ``fan out'' from 
each patient). Note that each patient has many prescribers, 
many more than would normally be necessary for any one patient. 
The second graphic zooms in to illustrate what may be a ring of 
collusive activities between prescribers and patients.
[GRAPHIC] [TIFF OMITTED] T1043.003

    The next graphic shows additional analysis performed by 
feeding this same data through the SAS Enterprise Miner tool. 
We ran a cluster analysis, which shows the probability that 
clusters of certain pharmacies will be shopped by any 
individual patient.
[GRAPHIC] [TIFF OMITTED] T1043.004

    If one examines the red (dark) circles, a patient shopping 
prescriptions using pharmacy A has a very high probability 
(98%) of also filling prescriptions at pharmacies B, C, and D. 
The volume of the occurrence is predicted by the size of the 
circle. A subsequent analysis shows that there is also a 99% 
chance that certain physicians will be involved in the 
transactions as well. While one might be inclined to label this 
a conspiracy, it could also be stolen IDs being used by a 
fourth party. What you can infer from the analysis is that 
these physicians, pharmacies, and patients have an unusually 
tight relationship. Only an investigation will tell the true 
story, however, the scope of the investigation can be narrowed 
to a few entities rather quickly, and a decision made as to 
next steps.
    The payback from such an analysis can be immediate. In 
another instance, we identified a large number of discrepancies 
in a Medicaid program's billings after approximately one week 
of analysis. Selecting one provider, the State decided to go on 
site and ask a few questions (not conducting an actual 
investigation). The provider was a pediatrician who was 
continually billing the highest level of service available, 
which would only be reasonable if his patients were all 
severely ill all the time. Upon the arrival of the State's team 
at the doctor's office (in a storefront in a housing project), 
the provider immediately confessed. The value of his billings 
were over $1.0M/year, of which 25% conservatively was 
overstated, resulting in a minimum $250,000 per year of 
immediate savings from this one case
    We would be pleased to discuss these and other related 
topics at length, and you may arrange such a meeting by 
contacting Ed Ruzinsky at (732) 296-6280.

    Mr. Upton. Thank you.
    Mr. Glynn.

                  TESTIMONY OF MICHAEL J. GLYNN

    Mr. Glynn. Chairman Upton, distinguished subcommittee 
members, thank you very much for the opportunity to testify 
here this morning. Accompanying me is, on my left hand, is Dr. 
Philip Caper, who is the founder and chairman of the board of 
the Codman Group. I am pleased to have this opportunity to 
present the Codman Group's experience of working with State and 
Federal program managers in the assessment of provider 
integrity.
    Additionally, I wanted to discuss with you our 
understanding of the challenges and opportunities in fraud 
detection using today's most advanced technology.
    Fraudulent claim volume is a very small subset of a large 
universe of transactions and the corresponding number of 
fraudulent providers is relatively small. Therein lies the one 
major challenge, how to effectively identify the fraudulent 
transactions without imposing processes and barriers that 
interfere with the underlying mission of Medicaid.
    Adding to the challenge, the individuals and institutions 
committing the fraud are continually creating new schemes and 
seeking to camouflage themselves against the background of 
legitimate transactions. As a consequence, the detection of 
fraud is a dynamic and complex process. No single methodology 
and no static approach can adequately protect our public 
programs.
    Furthermore, fraud detection may interfere with the 
requirements to assure adequate access to care. Medicaid 
programs work diligently to create broad-based provider 
networks for eligibles in areas that are historically 
underserved. Chief are the inner city and rural areas. Program 
managers should not be forced to alienate scarce but honest 
providers as a by-product of the hype and surveillance needed 
to identify the fraudulent ones.
    Fraud detection systems which analyze claims data without 
considering the patient's age, gender and level of illness will 
erroneously target legitimate transactions, yet may ignore 
others that represent unnecessary expenditure. To avoid 
unfairly accusing honest providers and wasting investigative 
resources, an anti-fraud system must consider and adjust for 
patient level of illness.
    Adjusting for the complexity of a provider's patient 
population will dispel the concerns about higher than average 
yet legitimate bills charges. Advanced detection systems that 
comprehensively review claims and present well-documented, 
highly targeted lists of suspects can greatly aid investigators 
and limit intrusions on providers.
    Let's look at the nature of the environment facing these 
new systems.
    Medicaid claims data are messy. Data originates from 
multiple systems, making it difficult to weave together the 
claim history of providers and eligibles. Additionally, many 
investigators lack the training required to effectively analyze 
the data. To address this issue, new detection systems support 
the investigator's judgment without requiring the investigator 
to develop technical expertise.
    A single claim record may not by itself look unusual. Many 
forms of fraud can only be effectively identified when multiple 
related claims are linked together. Linking claims illuminates 
relationships amongst collusive providers.
    I would now like to present some examples of the findings 
that represent our experience using a combination of fraud 
detection tools.
    If you can draw your attention to the first slide that's on 
the screen, this is a project with Texas Medicaid that 
commenced in 1998, is ongoing. Up to this point, over $70 
million of potential overpayments have been identified, 
approximately 5,000 potential suspects have been identified as 
a result of the case investigations that are ongoing. To this 
point, a total of $5.5 million have been deemed collectible, 
and so far a total of $3 million has been recovered as a direct 
result of the project, meaning that the project has more than 
paid for itself already with lots of opportunity left to go 
forward.
    The second example is a Medicare Part B fraud project in 
California. I know it's Medicare and this is Medicaid, but the 
application of the technology is the same. What happened was 
that providers in an eight county region of California were 
profiled, claims from approximately half a million 
beneficiaries were processed.
    The system, our project, identified over $10 million in 
potential overpayments. It strengthened the case against 28 
providers who were already on alert as a result of the existing 
systems that Medicare had in use, which put another $5.5 
million in question, and it identified a potential $2.4 million 
in questionable service that had not been picked up by the 
existing systems, and through the adjusting for the illness 
part of the patient population eliminated $2 million in false 
positive activity that had been picked up by the system. All of 
this was achieved for a direct cost of less than half a million 
dollars.
    Let's look at an example of one provider from this most 
recent project, the California project that was identified as 
having suspect billing activity. As you see in the slide, of 
the providers total billing, 60 percent of the charges were 
driven by three questionable--to put it mildly--procedures. A 
total of over half a million dollars is billed--and going 
through the first four bullet points, comparing them with the 
peers, obviously far in excess of what his peer groups were 
performing.
    In addition, it's interesting to note that almost 100 
percent of the services were performed on dual eligibles, both 
Medicare and Medicaid eligibles.
    Looking further into the provider profile, there's a 
preponderance of referrals coming from a single referring 
physician, $237,000 of the $584,000 billed came from a single 
physician. And looking at this physician, the referring 
provider has an unexplained concentration of referrals in two 
areas, neurology and podiatry. This is a clear example of 
collusive patterns that are too prevalent in the health care 
system and can be detected using modern detection fraud and 
detection tools.
    In conclusion, I want to stress that technology exists 
today to better identify fraudulent activity, abusive practices 
and wasteful spending in health care and to do so in a 
clinically sensitive matter. We must invest in the newer 
technology that implies multiple fraud detection methods 
simultaneously and does so in a clinically responsible manner 
that supports the goals of the legitimate provider community. 
Achieving this is critical if we're to protect and preserve the 
care and quality of care in Medicaid.
    Thank you very much for the opportunity.
    [The prepared statement of Michael J. Glynn follows:]
 Prepared Statement of Michael J. Glynn, President and Chief Executive 
                         Officer, Codman Group
    Chairman Upton and distinguished Subcommittee members, I am pleased 
to have this opportunity to present the Codman Group's experience of 
working with state and federal program managers in the assessment of 
provider integrity. Additionally, I want to discuss with you our 
understanding of the challenges and opportunities in fraud detection 
using today's most advanced technology.
    One needs to look no further than the most recent headlines to 
confirm the magnitude and complexity of fraud in Medicaid. The most 
recent estimates suggest that 10 to 20 percent of our national health 
care spending is fraudulent with the dollar value loss estimated to be 
$20 Billion annually. However, the fraudulent claim volume is a very 
small subset of a large universe of transactions and the corresponding 
number of fraudulent providers is relatively small. Therein lies the 
one major challenge . . . How to effectively identify the fraudulent 
transactions without imposing processes and barriers that interfere 
with the underlying mission of Medicaid, providing needed care to the 
legitimate beneficiary.
    Adding to the challenge, the individuals and institutions 
committing the fraud are continually creating new schemes and seeking 
to camouflage themselves against the background of legitimate 
transactions. As a consequence, the detection of fraud is a dynamic and 
complex process. No single methodology and no static approach can 
adequately protect our public programs. Clearly the current Medicaid 
Surveillance Utilization Review or SURS subsystem is not adequate. 
Emerging effective fraud detection systems are characterized by the 
integration of multiple and diverse analytical approaches ranging from 
statistical methods to data mining and data modeling.
    Furthermore, fraud detection may interfere with the requirement to 
assure adequate access to care. Medicaid programs work diligently to 
create broad based provider networks for eligibles. In areas that are 
historically under-served, chiefly the inner city and rural areas, 
program managers should not be forced to alienate scarce, but honest 
providers as a by-product of the heightened surveillance needed to 
identify the fraudulent entities. The American Medical Association 
newsletter, AMA News, recently headlined the outcry of providers in 
Utah who were incensed by unjustified surveillance and intrusive 
activity of fraud investigators.
    The fraud detection process is further complicated by the diversity 
of the patient population that presents itself to the medical 
community. Medicaid eligibles include the young and the old, the mostly 
healthy and the seriously ill. The proper and needed degree of medical 
intervention, with its associated cost, hinges greatly upon the 
patient's multiple conditions. Therefore, fraud detection systems which 
analyze claims data without considering the patient's age, gender, and 
level of illness, will erroneously target legitimate transactions, yet 
may ignore others that represent unnecessary expenditure. To avoid 
unfairly accusing honest providers and wasting investigative resources, 
an anti-fraud system must consider and adjust for patient level of 
illness. Adjusting for the complexity of a provider's patient 
population will dispel concerns about higher than average, yet 
legitimate, billed charges. Clinical sensitivity is paramount.
    The standard approaches used to detect potential fraud and abuse 
can exacerbate the frustration felt by legitimate providers. For 
example, providers whose practices are reviewed as a result of random 
sample audits may feel singled out. Instead, advanced detection systems 
that comprehensively review claims and present well documented, highly 
targeted lists of suspects can greatly aid investigators and limit 
intrusions on providers.
    Fraud detection results must be substantiated through sound 
statistical methods. Often, these methods will sufficiently strengthen 
the case for fraud and incent the provider to return funds. Failing 
that, a strong statistical foundation will support successful 
prosecution.
    There are other reasons why Medicaid programs are slow to respond 
to the expanding fraud. First, there are significant disincentives to 
increase suspect identification rates because the increased prevalence 
may call into question the competence of program management. Second, 
money recovered by program or related agency investigators is not 
likely to accrue to the Medicaid program. In fact, money identified as 
overpayment may serve to justify program budget reductions.
    But even if we overcome these hurdles by properly incenting the 
program to increase surveillance and recovery, the task is large. Let's 
look at the nature of the environment facing these new systems.
    Medicaid claim data is messy. Data originates from multiple 
systems, making it difficult to weave together the claim history of 
providers and eligibles. Fraud investigations involve diverse 
organizations which may lack shared access to the report systems needed 
to identify and build the case against a provider. Additionally, many 
investigators lack the training required to effectively analyze the 
data. To address this issue, new detection systems must support the 
investigator's judgement without requiring the investigator to develop 
technical expertise.
    A single claim record may not, by itself, look unusual. Many forms 
of fraud can only be effectively identified when multiple related 
claims are linked together. Linking claims illuminates relationships 
among collusive providers. It highlights improbable rates of service 
intensity and points out practice patterns that deviate from peer group 
norms. Effective detection systems must take into account the linkages 
and interrelationships among claims, eligibles and providers.
    Another pivotal change in our approach to improved fraud detection 
will be the ability to examine claims and data across borders. One 
example is HCFA's current initiative to apply advanced detection tools 
to national-scale Medicare data. Why is this important? Consider the 
following quote from an article in the November 4, 1999 issue of the 
New York Times:
        The (General) Accounting Office said these ``organized criminal 
        groups tend to be quite transient,'' and should not be confused 
        with traditional organized crime groups like the Mafia . . . In 
        one case, it said, suspects fled from New Jersey to California 
        and started new operations on the West Coast before they could 
        be arrested for violations that had occurred in New Jersey. In 
        other cases, it said, New Jersey shut down several clinics but 
        later found that ``the New York Medicaid fraud control unit was 
        investigating the same individuals for different schemes.''
    By examining claims on a national basis, these transient scammers 
can be better identified and intercepted.
    Fraud that spans multiple states presents a particular problem for 
Medicaid programs, where program integrity efforts end at the state's 
borders. In these cases, a focused national effort to create cross 
border analytic programs could identify problems that only become 
evident when their multi-state scope is exposed. Even more powerful 
would be an effort to coordinate Medicaid and Medicare analysis, since 
undoubtedly many of the same illegitimate actors are submitting claims 
to both. Fraudulent providers prey on our most vulnerable populations, 
specifically the poor, frail and elderly. New approaches must be put in 
place to improve the coordination of care to the Medicaid-Medicare 
eligible population.
    I would like to present a sample of the findings that represent our 
experience using a combination of fraud detection tools.
Medicare Fraud, Waste and Abuse Pilot Project Supported by HCFA through 
        the Program Integrity Contractor National Heritage Insurance 
        Company (NHIC)
 Profiled providers in an eight county region in California
 Reviewed claims of nearly 500,000 Medicare beneficiaries
 Identified $10 Million in potential inappropriate payments to 
        providers
 Strengthened the case against 28 providers who were already on 
        alert--$5.5 Million in question
 Identified $2.4 Million in questionable service by providers 
        not previously under surveillance
 Eliminated $2 Million in false positive activity
Texas Medicaid Fraud Detection Project 1998-99
 More than $70 Million has been identified as potential 
        overpayment
 Produced 4,953 new suspects
 Total of $5.4 Million deemed collectible as a result of case 
        investigations
 Total of $3 Million recovered to date as a direct result of 
        the project
    In conclusion, I want to stress that technology exists today to 
better identify fraudulent activity, abusive practices, and wasteful 
spending in health care, and to do so with clinical sensitivity. The 
fraud problem is too big to ignore. Current system design for fraud 
detection in the Medicaid Management Information System or MMIS is only 
marginally useful. We must invest in newer technology that employs 
multiple fraud detection methods simultaneously and does so in a 
clinically-responsible manner that supports the goals of the legitimate 
provider community. Achieving this is critical if we are to protect and 
preserve the quality of care in Medicaid.

    Mr. Upton. Thank you.
    Ms. MacQuarrie. Am I saying that right?
    Ms. MacQuarrie. It's MacQuarrie, it's Scottish.
    Mr. Upton. I'm sorry.

                  TESTIMONY OF JEAN MACQUARRIE

    Ms. MacQuarrie. Mr. Chairman, members of the subcommittee, 
my name is Jean MacQuarrie. I'm a vice president and the fraud 
and abuse practice leader for the Medstat Group, which is based 
in Ann Arbor, Michigan.
    For the past 18 years, the Medstat Group has specialized in 
providing health care decision support systems. These systems 
consist of customized data bases and analytic software that is 
specifically designed to help health care programs manage the 
costs and quality of health care services.
    In addition, we provide analytic consulting services that 
help our customers use these applications effectively. Today we 
are working with over 1,000 health care purchasers, payers, 
providers and researchers. Our clients include companies like 
General Electric, the Ford Motor Company, Federal Express, 
managed care organizations like Humana, Prudential and Cigna 
and the Mayo Clinic, and we work today with over 17 State 
Medicaid programs.
    We get input for the design and development of our 
applications from those customers that we work with. Fraud 
detection and investigation is a major way in which many of our 
Medicaid clients use our systems.
    I have worked in the field of health care fraud 
investigation for 8 years, and I agree with the testimony that 
has been presented today, both in Panel I and from my 
cotestifiers here today.
    The sheer volume of Medicaid claims data makes searching 
for fraud like looking for needles in a haystack. It really 
requires the implementation of advanced computer technology 
that is designed specifically to ferret out the kinds of 
problems that were perpetrated by organized crimes and others 
that would defraud the Medicaid program.
    We discussed earlier that most States today use fairly 
outdated application software in their fight against fraud and 
abuse, and we would encourage this committee to encourage their 
State counterparts to acquire this advanced technology to help 
in the fight against fraud and abuse. To address fraud more 
effectively, these computer systems can be used both 
prospectively and retrospectively. By prospectively, I mean 
that some claims as submitted can be detected as being 
fraudulent and should be stopped before they were paid, and 
that is where the major focus of health care fraud and abuse 
detection should be.
    However, there are certain types of claims that were 
submitted that will never be detected prospectively and can't 
be stopped. So retrospective data analysis is critical to 
identify the kinds of problems that are being perpetrated 
within these State organizations and then to document the 
algorithms used to find those kinds of fraud and to put them 
into the payment systems to stop the outlay.
    An example, an ambulance provider submits a claim for 
transporting a patient, administering advanced life support 
from location 1 to location 2. That claim will edit 
appropriately and be paid by most claim payment systems that 
were used in the Medicaid program today.
    However, when you combine all of the experience, not only 
of the ambulance company in terms of the patients who were 
being transported but also the providers in that same community 
who provide emergency room services, who provide dialysis 
services to those recipients, it can easily be determined when 
an ambulance company is defrauding the State organization, 
perhaps by billing for advanced life support for virtually 100 
percent of the patients that they transport. And we know that 
that is not a likely scenario.
    These data mining tools can be deployed in many different 
fashions, neural-based tools, rules-based algorithms. One of 
the major benefits or one of the significant attributes of a 
rules-based system is that it takes health care experts in the 
field who have been dealing with health care transactional data 
for many, many years and imbeds that logic into these 
sophisticated computer applications so that they can look for 
differences from the norm.
    I would like to review for you a few examples about how 
some of our customers are using this advanced technology in the 
fight against fraud and abuse. The first example is an actual 
case for one of our Medicaid customers that serves over 600,000 
recipients at a cost of approximately $2.3 billion per year. 
Using the Medstat system, this State identified many 
pharmacists who are billing for a higher pill count per 
prescription than was ordered by the provider.
    This problem was detected using normative algorithms and 
looking at frequency of distribution and comparing providers 
against peer groups based on diagnosis and other kinds of 
health care information. The Medstat system helped the State 
Attorney General's office develop their case and this State is 
hopeful that it will recoup millions of dollars in this single 
case alone.
    This same State used the Medstat system to identify abuse 
of home health care billing services. The State found that 
there are some home health agencies who are providing services 
to patients who had been designated to be in a nursing home. 
The State estimates that it will recover $25 to $50 million 
from this single case of health care fraud as detected with 
these computer systems that we're up here talking about today.
    For another system, for another customer, our State 
identified a chiropractor who was enticing patients into the 
practice, offering free initial consultations and then in fact 
billing for the maximum limit of chiropractic benefit as 
offered by the program in that State. At the time that each of 
these patients reached their maximum allowed benefit, the 
chiropractor moved the patient into physical therapy and 
continued to bill for that patient. This chiropractor was 
successfully prosecuted, was sentenced to 8 months in jail and 
was ordered to pay restitution.
    I have actually brought a demo of how this system works 
with me today. But I also am out of time. I would invite any of 
the committee members at the break of the question and answer 
session to perhaps step forward and I can show you how these 
technological tools are working.
    I would like to thank you very much for inviting me and the 
Medstat Group to present to you today. Thank you.
    [The prepared statement of Jean MacQuarrie follows:]
  Prepared Statement of Jean MacQuarrie, Vice President for Business 
   Development and Fraud and Abuse Practice Leader, The MEDSTAT Group
    My name is Jean MacQuarrie, Vice President at The MEDSTAT Group, 
headquartered in Ann Arbor, Michigan. For the past 18 years MEDSTAT has 
provided information systems to the health care industry. Our software 
applications analyze health care utilization, cost, access, quality, 
eligibility and clinical outcomes. Fraud and abuse detection and 
investigation is a core component of our product line. I am the Fraud 
and Abuse Practice Leader at MEDSTAT. For the past eight (8) years I 
have worked in the development and utilization of information 
technology to help mitigate the impacts of health care fraud.
    Much like Medicare, because of the sheer size of the Medicaid 
Program, health care fraud is very difficult to detect and to prove. 
The majority of all Medicaid physicians and other health care providers 
are legitimate. These tens of thousands of honest providers submit 
hundreds of millions of claims each year for services provided to the 
Medicaid population. Hidden among these legitimate claims are millions 
of fraudulent claims. One of the great difficulties in identifying 
false claims is that the volume of legitimate claims camouflages them. 
It is literally like looking for needles in a haystack. However, as 
experts who will testify here today will state, these needles amount to 
billions of dollars of inappropriate payments made each year in the 
Medicaid program.
    I am going to discuss how new and advanced health care analytic 
information systems can be deployed to significantly improve fraud and 
abuse detection and investigation results over the methods that are 
used by most state agencies today. There are a few State Medicaid 
programs that have recognized that these advanced technologies can 
improve their fraud mitigation programs and they have implemented new 
solutions or are in the process of procuring new systems.
    The vast majority of states, however, continue to review provider 
billing using an information technology infrastructure that was 
developed in the 60's and 70's. The Medicaid Management Information 
Systems (MMIS) provide the software and data files that enroll 
providers, enroll beneficiaries, pay claims, provide management 
reporting and audit processed claims using an application called the 
Surveillance and Utilization Review System (SURS). The SURS systems are 
used by many states as their entire fraud detection solution. These 
systems produce large stacks of quarterly reports that rank providers 
and suppliers on various dimensions of utilization of health care 
procedures. These systems were designed to look for billing 
irregularities, not fraud, and the reports they generate are labor 
intensive to review. It is not cost effective or timely to use state 
personnel to try and detect fraud by reviewing claims reports from 
conventional SURS technology. Our recommendation is that state Medicaid 
programs move swiftly to replace or augment their SURS applications 
with advanced health care analytic systems that provide comprehensive 
methods for detecting and investigating fraud, waste and abuse.
    In the last ten years, hardware and software technologies have both 
improved dramatically. Advanced and intelligent health care analytic 
methods have also been developed. These methods are being used today to 
measure the effectiveness of the health care delivery system. With 
these methods and technologies companies are performing tele-medicine, 
measuring the effectiveness of drugs on specific illnesses, evaluating 
the outcomes of different treatment protocols and making a real 
improvement in the way health care services are provided. We can use 
these same information technologies and health care analytic methods to 
help in the fight against health care fraud and abuse. The MEDSTAT 
Group, the company that I represent, provides this type of technology 
to state Medicaid programs as well as large employers, insurers and 
managed care plans across the country.
    There is no ``one silver bullet'' technology that will eliminate 
all fraud, so it is important to apply these technologies and methods 
both prospectively and retrospectively. Some submitted claims can be 
identified as being fraudulent at the time the claim is submitted, 
before it is paid. For instance, if a provider submits a claim for a 
wheel chair for a deceased person, or for speech therapy for a nursing 
home comatose patient, the claim should be rejected, and not be paid. 
These types of claims, however, get paid every day. The reason is that 
many claims payment systems do not have access to death records and 
many claims payment systems do not store the cognitive status of 
patients in nursing homes.
    In addition to ``pre-payment fraud edits'', it is also critically 
important to analyze data ``retrospectively''. It is generally 
understood that most health care billing fraud is not conducted by 
physicians, but is perpetrated by suppliers and ancillary individuals 
who set out to make money from the vulnerabilities in the health care 
delivery system. Truly fraudulent providers and suppliers are very 
creative in the way that they steal money from the Medicaid program. 
They study the payment manuals; they submit bills for seemingly 
legitimate services that will pass pre-payment edits. It is only by 
looking at all services collectively that the fraudulent pattern 
emerges. For instance, if an ambulance transport provider submits a 
bill for a transport to the emergency room, along with the 
administration of advanced life support, the submitted claim will pass 
all edits and the transport company will be paid. However, by looking 
at all bills submitted by that same transport provider, over time, it 
may be detected that 1) 100% of all their transports required advanced 
life support--and that's not very likely--or 2) an inordinate number of 
their patients were not from the same geographical location as the 
transport company, or 3) that many of the patients that they 
transported didn't receive any other services on the same day as the 
transport. These types of frauds can be detected using retrospective 
data analysis.
    Retrospective data analysis, ``data mining'', can be deployed in 
several ways. Each of the following can and should be applied, as they 
find different kinds of frauds:

 Rules-based algorithms--that are based on having health care 
        experts define legitimate and non-legitimate ``rules'' of 
        billing and having the application software ``mine'' the data 
        looking for exceptions to the rules. A rule might identify any 
        provider who bills for more than 20 or 24 hours in a work day, 
        frequently.
 Anomaly-based detection--that combines expert-based rules with 
        advanced health care methodologies and/or computer-based 
        statistical methods to ``mine'' the data looking for anomalies 
        in the data. This method might identify providers who are 
        significantly different in their billing pattern that their 
        peers, resulting in their pattern falling inside or outside of 
        a cluster.
 Neural-based detection--that results in the computer 
        application ``learning'' through advanced technological 
        processes intended to mirror the non-linear thinking of the 
        human brain. Neural-based detection technology learns from its 
        own processing of the data to understand complex patterns 
        within a particular data set. Thus, ``normal'' and ``abnormal'' 
        patterns of behavior can be automatically established to aid in 
        the detection of fraudulent activity.
    One major advantage of deploying retrospective data analysis is 
that as fraud scams are identified, they can be documented and the 
algorithms that were used to detect them can be ``programmed'' into the 
payment system, stopping the scam and preventing further payout for the 
same fraudulent scheme. Another benefit is in identifying the most 
suspicious of the providers. Most states have a limited budget to 
ferret out fraud in the Medicaid program. It is important that the 
state staff focus on the most egregious providers. With advanced 
analytic software, fraudulent providers can be pinpointed more quickly 
and with greater likelihood of identifying ``real'' fraud, thus 
focusing investigative resources on the tasks that will produce the 
highest return on the government's investment of time and money.
    Let me show you a few examples of how rules-based data mining can 
bring data to life, identifying patterns in the data that would be very 
difficult to detect if it weren't for the power of the technology and 
the imbedded health care knowledge.
Scenario 1
    One of our customers is a large Medicaid program that oversees the 
healthcare services for 600,000 recipients at a cost of approximately 
$2.3 billion per year. Using the MEDSTAT system, state officials were 
able to identify pharmacy providers who were overbilling Medicaid by 
dispensing and billing for a higher pill count than were ordered by the 
providers. The MEDSTAT system was used to investigate these providers 
and develop evidence for use by the state Attorney General office, 
which is pursuing a class action suit to recoup these overbillings. If 
successful, the suit is expected to recoup millions of state dollars 
paid to these pharmacies.
Scenario 2
    Additionally, this same State used the MEDSTAT system to identify 
and investigate abuse and waste in home health services. The State 
found that some home health agencies were continuing to provide 
services to patients that should have been in a nursing home. The State 
is seeking to move these patients into nursing homes, where 
appropriate, and will prosecute those cases that involve abusive 
billing practices. Based on initial assessment, the State expects to 
recoup $25 to $50 million in savings from this one case alone.
Scenario 3
    For another customer, our system identified a chiropractor that was 
offering a ``free'' initial consultation and then charging for the 
second visit as if it was the first. In addition, this chiropractor was 
charging the maximum allowed ($1000 annually) for chiropractic service 
and then was switching the patient to ``physical therapy'' so that 
additional treatment would be covered by insurance. The MEDSTAT system 
was also used to identify all patients of this chiropractor, who was 
billing under multiple provider names and identification numbers. This 
chiropractor was successfully prosecuted and was sentenced to 8 months 
in jail plus restitution.
Demo Scenario 4
    A fourth situation is exemplified in the system demonstration I am 
about to show you. [System is demonstrated, time permitting]. In this 
instance, the system is highlighting a potential abuse for further 
investigation. The system in this case is helping us discern the 
providers who are ordering an inordinate number of prescriptions for 
their patients.
Demo Scenario 5
    Another situation also is exemplified in the system. [System is 
demonstrated, time permitting]. In this case, a podiatrist is 
identified who should be investigated based on his/her billing patterns 
in terms of 1) the number of services billed per patient, 2) the 
utilization of procedures that no other podiatrist uses, and 3) using 
the same unusual services on each patient, at the same frequency.
    In addition to the application of health care analytic systems and 
technologies to improve State Medicaid program results in fraud and 
abuse detection, there is an administrative approach used by many 
states that could be improved upon. In many states, the same fiscal 
agent and/or computer application (MMIS) that edits claims for 
legitimacy and payment is also used to audit those same claims for 
legitimacy (SURS). This is somewhat like the fox watching the hen 
house. HCFA has recognized a similar problem in the Medicare program 
and has moved to address it. Through the Medicare Integrity Program 
(MIP) Program Safeguard Contractor (PSC) program, Medicare has stepped 
out to aggressively contract with different vendors to provide fraud 
and abuse detection services from those that provide the claims payment 
function. The MEDSTAT Group is part of a HCFA-qualified MIP/PSC team.
    HCFA has recently stated its interest in allowing state Medicaid 
programs to also separate the MMIS payment function and the SURS audit 
function. Some states, like New Hampshire, are implementing this 
separation of functions now. Other states find it difficult to separate 
these functions and are contracting with the same vendor to provide the 
payment and the audit software. We encourage Congress to support the 
position that each state should contract separately for these important 
applications.
    In summary, we believe that Congress can help states in this most 
important battle against fraud and abuse. Congress can encourage state 
Medicaid programs to incorporate advanced information technology 
solutions to help them in their fraud and abuse mitigation efforts. As 
is clearly shown with the few examples that I have presented, the 
investments made by State Medicaid programs for these applications will 
more than pay for themselves while at the same time, identify 
fraudulent and abusive providers and conserve funds for the true 
service mission of the Medicaid program.
    The MEDSTAT Group appreciated this opportunity to share our 
suggestions with you today.

    Mr. Upton. Thank you.
    I know we're sort of running out of time. I'm going to 
yield first to Mr. Burr.
    Mr. Burr. Mr. Chairman, I thank you for yielding.
    I apologize to these witnesses because I'm already 35 
minutes late for a lunch that is my lunch, and I need to go to 
it. But I wanted to hear your testimony.
    Let me take this opportunity to ask, is there still anybody 
in the room from HCFA?
    Mr. Chairman, I would make a note there is no one here from 
HCFA and----
    Mr. Upton. We have one hand in the back, a late entry.
    Mr. Burr. I would only make this note.
    Mr. Upton. A graduate of Wake Forest, I'm glad he does his 
homework.
    Mr. Burr. This issue is important enough that we're holding 
a hearing, this is taxpayer money we're trying to account for, 
we've got some of the companies here who have developed 
software and hardware to help us detect what has become a very 
complicated and sophisticated scam project across the country 
of Medicaid moneys, both State and Federal taxpayer money.
    I think that this committee would be smart to recommend in 
the future that any time we hold a hearing that the agencies, 
if they're allowed to testify, are required to stay and listen 
to what the individuals that we've pulled together who we 
perceive to have something to pertinent to tell the committee 
members, that the agencies would be nice enough to stay and 
have the information shared with them, so we don't have to rely 
on them going back and reading it.
    And again I thank these witnesses and yield back my time.
    Mr. Upton. Thank you, Mr. Burr; and we appreciate your 
assistance in this hearing today.
    I, too, have an event that started 35 minutes ago, so I 
will be a little bit short.
    I would say that we are going to keep the record open. We 
have a number of different subcommittees that are meeting 
today, full committees as well. There may be a number of 
members that have additional questions, and we will ask--I will 
can ask unanimous consent that any of us may submit questions 
to you, and if you can respond in a prompt fashion, that would 
be good.
    We want all of the States to have the tools, and from the 
first panel, we heard that a number of States are using 
technology that is 10, even 20 years old. How difficult--how 
easy has it been for you all who have marketed some of this 
technology and obviously have a self interest to make sure that 
it proceeds well, but at the same time you also have an 
interest for the taxpayer money as well--I would have to think 
that in virtually every case you're going to save the 
taxpayers' money, you know, by the sale of your technology. How 
easy has it been to open up some of the doors and actually get 
your technology accepted within the States thus far?
    Mr. Adams, we will start--maybe we will just go down the 
panel.
    Mr. Adams. Well, the technology we used, based on the 
business model that we employ, is our own technology, so 
basically what we take from the State is the raw data, and we 
have to then process it.
    Mr. Upton. Did you--I think Kentucky was the main example 
that you cited.
    Mr. Adams. Right.
    Mr. Upton. Did Kentucky come to you? Or did you make the 
sales pitch to them?
    Mr. Adams. There are people in Kentucky that are aware of 
the capability that had been developed in Maine, and that is 
how the nexus was made, essentially.
    Mr. Upton. And what would be the--do you have a guess in 
terms of the savings? You talked quite a bit about you're able 
to provide a full spectrum, particularly going after 
overpayments to providers. Would you have some idea in terms of 
the States how much money you have been able to save the 
States? Can you calculate it?
    Mr. Adams. We expect we can return to Kentucky in the near 
term--that means, measured in months, maybe 6, something like 
that--in the neighborhood of $25 million, which is a lot of 
money. But while it's a lot of money, we are absolutely 
convinced that it's the tip of the iceberg and that there's an 
enormous amount more there. From all we've seen, the 10 percent 
figure is not wrong.
    Mr. Upton. Mr. Viola.
    Mr. Viola. Yes. We also do work on a service basis like Mr. 
Adams does, so we take the claims from the client and load it 
onto our systems and process the data.
    In terms of getting involved with the individual States, 
we've been pretty aggressive in pursuing meetings with as many 
of them as possible. And in the 17 I think I alluded to in my 
testimony they all have an enthusiastic embrace of the 
possibilities of what could occur but tend to be stymied 
somewhat by either the internal workings that slow down the 
process or some of the funding issues that would allow them to 
acquire and use the technology properly.
    We tend to also focus, as I mentioned, on the 
organizational issues. Because to simply apply technology and 
not consider how the end results will be used in the 
organization and making sure you get cooperation from all the 
parties probably won't optimize the way that technology would 
be used. So we do spend some time trying to do that as well.
    I should add that so far there have been very few takers on 
that part of our service.
    Mr. Upton. Now, the cluster that you showed on the TV 
screen, is that in practice now? I mean, was that just--I think 
it was Texas you talked about.
    Mr. Viola. Actually, we didn't run into any States in 
particular in the presentation. Some--we've done work for Ohio, 
for New Jersey, some pilots for Georgia and a pilot for New 
York. And some--that's a conglomeration of some of the data 
from those particular pilots.
    So the data--the processing is done now with that 
technology. As a consulting firm, we typically don't build our 
technology. We tend to look at who has good products out in the 
marketplace, and we try to work together. The IT tool that we 
showed that on is a pretty good example of link analysis, and 
this is a pretty good example of data mining.
    We also used the HOPS Technology from HOPS in Miami. The 
reason we use that is it an extraordinary fast processor and, 
as many of us have described, there's a large number of claims 
and to do the processing effectively we need some good 
horsepower to do it.
    Mr. Upton. Mr. Glynn, you talked about nearly 5,000 
suspects in Texas. I think that would have to be pretty good to 
open up the door for you.
    Mr. Glynn. We're finding it a very good selling point.
    And to answer your first point on the level of activity, we 
are finding that in recent, you know, months literally--
certainly in the last 12 months--there's a distinct increase in 
activity. There are numerous States that are currently looking 
at fraud and abuse. And obviously the evidence that we can show 
of success in Texas and in California helps to make the 
purchasing process easier and justify and support the 
opportunity.
    Mr. Upton. Ms. MacQuarrie, you admitted that the States are 
fairly outdated in terms of their equipment. Do you see a trend 
toward using what you all can provide? And what incentives are 
there for the States to upgrade their equipment?
    Ms. MacQuarrie. We have seen also a great increase in the 
interest in acquiring new technologies within the States. We 
have been out there and talked to many, many of them. And HCFA 
is trying to pave the way for States to acquire these new 
technologies.
    However, there's a procurement process within each State 
where the actual SURS system that you heard a lot of testimony 
about today has traditionally, over the course of the past 20 
years, been a part of the greater Medicaid processing system 
called the MMIS. So most States buy their SURS systems from the 
fiscal agents, whose main line of business is paying claims, 
not finding fraud. And when we're out there dealing with the 
States we find that they are struggling in some cases to be 
able to buy these kinds of technologies from nonMedicaid claims 
systems vendors, which I don't think any of the panelists here 
today are. Our business is finding fraud, not paying claims.
    So HCFA came out just about a year ago with some direction 
to States that it was all right to start to begin to break 
these two systems apart and acquire fraud systems from fraud-
knowledgeable and expert companies, but it's been rather slow 
in coming and not all entities are comfortable in doing that 
yet. So that has been one obstacle, but we do find the interest 
has gotten, you know, much more acute and that States are 
moving forward and looking forward to these kinds of advanced 
technologies.
    Mr. Upton. Well, I appreciate that comment. And as we 
pursue some legislative remedies to try and strengthen the hand 
of HCFA, that will serve as a good reminder for us to try and 
provide that type of incentive for all States, particularly as 
we try to keep up with these thieves that we all want to catch.
    Ms. MacQuarrie. Yes. And I think in your opening remarks 
you made a comment about the great advancement in technology 
year to year. The PCs that we bought last year, you know, are 
out of date this year.
    I think the same holds true in acquiring these kinds of 
systems in that HCFA requires that their SURS system be 
certified. The certification process alone takes more than 6 
months. And by the time the systems that vendors like those who 
are sitting before you today are deploying new and advanced 
technologies, the certification process can slow down the 
States.
    So although many States are moving in this direction, for 
every month and every year it takes for them to acquire these 
technologies it's that many more hundreds of thousands or 
millions or billions of dollars that are going, you know, to 
the fraudulent problem out there.
    Mr. Upton. Well, again, we appreciate your testimony. We 
look forward for additional input.
    I'm told Mr. Bryant has no additional questions at this 
point. But we are all going to submit in likelihood questions 
from both sides and look forward to your responses back. And we 
will now excuse all of you. Thank you very much.
    Ms. MacQuarrie. Thank you.
    [Whereupon, at 12:45 p.m., the subcommittee was adjourned.]
