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

        OVERSIGHT OF FINANCIAL MANAGEMENT PRACTICES AT THE HEALTH CARE
                            FINANCING ADMINISTRATION

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

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                          INFORMATION, AND TECHNOLOGY

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 26, 1999

                                   __________

                               Serial No. 106-78

                                   __________

           Printed for the use of the Committee on Government Reform

         Available via the World Wide Web: http://www.house.gov/reform

                                     ______

                        U.S. GOVERNMENT PRINTING OFFICE
    62-373 CC                   WASHINGTON : 2000

                         COMMITTEE ON GOVERNMENT REFORM

                         DAN BURTON, Indiana, Chairman
    BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
    CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
    CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
    JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
    THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
    DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington,
    MARK E. SOUDER, Indiana                  DC
    JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
    STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
    MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
        Carolina                         ROD R. BLAGOJEVICH, Illinois
    BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
    DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
    ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
    LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
    JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
    GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
    DOUG OSE, California                             ------
    PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont
    JOHN T. DOOLITTLE, California            (Independent)
    HELEN CHENOWETH, Idaho

                          Kevin Binger, Staff Director
                     Daniel R. Moll, Deputy Staff Director
               David A. Kass, Deputy Counsel and Parliamentarian
                          Carla J. Martin, Chief Clerk
                     Phil Schiliro, Minority Staff Director
                                     ------

       Subcommittee on Government Management, Information, and Technology

                       STEPHEN HORN, California, Chairman
    JUDY BIGGERT, Illinois               JIM TURNER, Texas
    THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
    GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
    DOUG OSE, California                 PATSY T. MINK, Hawaii
    PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                                   Ex Officio

    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
              J. Russell George, Staff Director and Chief Counsel
       Bonnie Heald, Director of Communications/Professional Staff Member
                              Mason Alinger, Clerk
                         Faith Weiss, Minority Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on March 26, 1999...................................     1
    Statement of:
        Brown, June Gibbs, Inspector General, Department of Health
          and Human Services, accompanied by Joseph E. Vengrin,
          Assistant Inspector General for Audit Operations and
          Financial Statement Activity...............................     9
        Hash, Michael M., Deputy Administrator, Health Care Financing
          Administration, Department of Health and Human Services....    26
    Letters, statements, et cetera, submitted for the record by:
        Brown, June Gibbs, Inspector General, Department of Health
          and Human Services:
            American Hospital Association Compliance Program Survey..    66
            Information concerning Medicaid contracts................    54
            Information concerning voluntary compliance program......    77
            Prepared statement of....................................    12
        Hash, Michael M., Deputy Administrator, Health Care Financing
          Administration, Department of Health and Human Services:
            Information concerning policy............................    82
            Information concerning reconstructive surgery............    61
            Information concerning reforms...........................    91
            Information concerning security of data systems..........    63
            Prepared statement of....................................    28
        Horn, Hon. Stephen, a Representative in Congress from the
          State of California, prepared statement of.................     3
        Turner, Hon. Jim, a Representative in Congress from the State
          of Texas, prepared statement of............................     6

        OVERSIGHT OF FINANCIAL MANAGEMENT PRACTICES AT THE HEALTH CARE
                            FINANCING ADMINISTRATION

                                  ----------

                             FRIDAY, MARCH 26, 1999

                      House of Representatives,
    Subcommittee on Government Management, Information,
                                        and Technology,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10 a.m., in
    room 2154, Rayburn House Office Building, Hon. Stephen Horn
    (chairman of the subcommittee) presiding.
        Present: Representatives Horn, Biggert, Ose, and Turner.
        Staff present: J. Russell George, staff director and chief
    counsel; Bonnie Heald, director of communications; Mason
    Alinger, clerk; Paul Wicker and Kacey Baker, interns; Faith
    Weiss, minority counsel; and Earley Green, minority staff
    assistant.
        Mr. Horn. The quorum being present, the Subcommittee on
    Government Management, Information, and Technology will come to
    order. Today's hearing is the third in a series of hearings to
    examine the results of financial statement audits of selected
    Federal agencies.
        On March 1, we heard from the Internal Revenue Service.
    Unfortunately, that agency was unable to sustain the progress
    it had made in 1998. Last Thursday, we discussed the serious
    problems confronting the Department of Justice and the Federal
    Aviation Administration. Today we'll hear testimony focusing on
    the financial management practices of the Health Care Financing
    Administration [HCFA], part of the Department of Health and
    Human Services.
        The Health Care Financing Administration is responsible for
    funding Medicare and Medicaid, the two most extremely important
    Federal programs for millions of our citizens. In 1998 these
    programs provided over $290 billion worth in health care to our
    most vulnerable citizens, the elderly and the poor. $298
    billion represents nearly 18 percent of all Federal spending
    last year. It's an enormous cost and one that analysts predict
    will skyrocket during the next decade. The Congressional Budget
    Office projects that by the year 2009 the cost of these two
    entitlement programs will more than double to a soaring and
    sobering $689 billion. We cannot allow any portion of that
    money to be wasted.
        Two previous financial audits of the Health Care Financing
    Administration identified serious problems at the agency,
    including an estimated $40 billion worth of improper payments
    in the Medicare program during 1996 and 1997. Problems were
    also found with the Health Care Financing Administration's
    ability to collect money that is owed to the agency and with
    its inability to provide adequate security for its computer
    systems.
        Medicare is critical to the health and well-being of
    millions of elderly Americans. Likewise, Medicaid is the
    lifeline for America's low income and chronically ill. I
    understand that we will hear today that the Health Care
    Financing Administration has made some progress in improving
    its financial management. I sincerely hope that is true because
    we need dramatic improvement in the way these programs are
    managed.
        [The prepared statement of Hon. Stephen Horn follows:]
        [GRAPHIC] [TIFF OMITTED] T2373.001

        Mr. Horn. I welcome our witnesses today and look forward to
    their testimony, but first I'd like to yield to my colleague,
    Mr. Turner of Texas, who is the ranking member on this
    committee. Mr. Turner.
        Mr. Turner. Thank you, Mr. Chairman. It's a pleasure to
    participate in this ongoing series of oversight hearings on
    Federal financial management. I want to thank you, Mr.
    Chairman, for your leadership in this area and for the
    bipartisan way in which you proceed to examine the agencies of
    the Federal Government.
        Congress recognized as early as 1990, with the passage of
    the Chief Financial Officers Act, that the Federal Government
    should maintain reliable financial information that could be
    audited. The Chief Financial Officers Act directed 10 Federal
    agencies to conduct independent financial audits, and in 1994
    Congress expanded the requirement to all 24 major Federal
    agencies. Today we are going to have the opportunity to discuss
    some of the tangible results of this process and the third
    consecutive audit of the Health Care Financing Administration's
    financial statements.
        I want to welcome the Inspector General of Health and Human
    Services and the Deputy Administrator of HCFA, who are here to
    discuss the results of the fiscal year 1998 audit.
        In the first HCFA audit, fiscal year 1996, the Inspector
    found that HCFA's financial information was so unreliable that
    the Inspector General could not finish the audit nor draw any
    conclusions about the agency's financial statements. In the
    audit conducted last year, HCFA received a qualified opinion
    which, as I understand, means that while the financial
    statements were generally reliable, inadequate documentation
    existed for certain amounts.
        This year the audit again resulted in a qualified opinion.
    Although HCFA has made progress in resolving its financial
    management weaknesses, the Health and Human Services Inspector
    General raises serious concerns which we will hear about today.
        As we all know, Medicare is a very important Federal
    program. It provides health insurance for over 39 million
    elderly or disabled citizens. Without Medicare, many of these
    Americans would be deprived of adequate medical care. Medicare
    provides Americans with the security that, as they grow older
    and increasingly more vulnerable, they will have access to
    sound health care without bankrupting them or their families.
        It is surprising to note that the Medicare program
    processed over 900 billion Medicare claims last year and paid
    out more than $210 billion in benefits. We can see Medicare's
    importance. That's why we must ensure that it runs well.
        Clearly the program is susceptible to fraud, abuse, and
    overpayments. Over this last year, however, HCFA demonstrated a
    significant reduction in the total amount of estimated Medicare
    overpayments. In fact, HCFA has reduced the error rate by 50
    percent and has been actively trying to reduce the amount of
    improper or inappropriate payments made by the Medicare
    program. The results of these efforts are beginning to show,
    and HCFA must continue to reduce these overpayments as
    aggressively as possible.
        In closing, I would like to commend the Health and Human
    Services Inspector General and HCFA's leadership in working to
    combat fraud and abuse in the Medicare program, and I look
    forward to the hearing and to hearing from each of our
    witnesses.
        Thank you, Mr. Chairman.
        [The prepared statement of Hon. Jim Turner follows:]
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        [GRAPHIC] [TIFF OMITTED] T2373.003

        [GRAPHIC] [TIFF OMITTED] T2373.004

        Mr. Horn. Thank you very much for that thoughtful
    statement.
        Let me note the procedures here for some who are not
    familiar with it. Once we introduce the witnesses, your
    statement is fully put in the record--by your leave or without
    objection, et cetera.
        No. 2, this committee is part of the full Committee on
    Government Reform, and all of our witnesses are sworn in on the
    oath. So, if the three witnesses this morning would stand and
    raise your right hands, just affirm the testimony you're about
    to give this subcommittee is the truth, the whole truth, and
    nothing but the truth.
        [Witnesses sworn.]
        Mr. Horn. We will note for the record that all three
    witnesses have affirmed, and we will start with the Honorable
    June Gibbs Brown, Inspector General of the Department of Health
    and Human Services. She has a very rich background, as we all
    know, having been Inspector General of the Department of
    Defense from 1987 to 1989, and she's held numerous other
    positions. She's won probably every award that can be given to
    a career civil servant.
        And it's always good to see you. We know you run a tight
    shop. I've never asked you, is Defense easier than HHS or is
    HHS easier than Defense? You're not about to tell, right?
    Remember, you're under oath.
        Anyhow, go ahead. Obviously if you want to summarize, fine.
    If you want to go into exhaustive detail, we're all with you
    because we've got the whole morning.

    STATEMENT OF JUNE GIBBS BROWN, INSPECTOR GENERAL, DEPARTMENT OF
     HEALTH AND HUMAN SERVICES, ACCOMPANIED BY JOSEPH E. VENGRIN,
    ASSISTANT INSPECTOR GENERAL FOR AUDIT OPERATIONS AND FINANCIAL
                           STATEMENT ACTIVITY

        Ms. Brown. Thank you, Mr. Chairman. I'll summarize. I'm
    pleased to report to you on our fiscal year 1998 audits of the
    Medicare fee-for-service payments and the Health Care Financing
    Administration's [HCFA] financial statements.
        With me today is Joseph E. Vengrin, Assistant Inspector
    General for Audit Operations and Financial Statement
    Activities.
        I'd like to begin by acknowledging the cooperation and
    support we receive from the Department, from HCFA, and from the
    General Accounting Office. HCFA's assistance in making
    available medical review staff and the Medicare--at the
    Medicare contractors and the peer review organizations was
    invaluable. We also work closely with GAO, which is responsible
    for auditing the consolidated financial statements of the
    Federal Government.
        My statement today will focus first on the notable
    reduction in Medicare payment errors this year and then on
    HCFA's financial reporting. Our review included a statistical
    selection of 5,540 medical Medicare claims from a population of
    $176.1 billion in fiscal year 1998 fee-for-service claims
    expenditures. Payments to providers for 915 of these claims did
    not comply with Medicare laws and regulations.
        By projecting these sample results, we estimated that
    fiscal year 1998 net improper payments totaled about $12.6
    billion nationwide or about 7.1 percent of the total Medicare
    fee-for-service benefit payments. This is the midpoint at the
    95 percent confidence level of the estimated range of $7.8
    billion to $17.4 billion, or 4.4 to 9.9 percent.
        As in the past years, the improper payments could range
    from inadvertent mistakes to outright fraud and abuse. It
    should be noted that medical personnel detected almost all of
    the improper payments in our sample. When these claims had been
    submitted for payment to Medicare contractors, they contained
    no visible errors.
        We are very encouraged by the reduction in payment errors
    this year. This year's estimate is $7.7 billion less than last
    year's estimate of $20.3 billion and $10.6 billion less than
    the previous year's estimate of $23.2 billion, a 45 percent
    drop. We attribute this improvement to several actions on the
    part of the administration, the Congress, and the health care
    provider community.
        To provide just two examples, the Medicare Integrity
    Program, under HCFA's direction, provides resources to expand
    contractor safeguard activities, while the Health Insurance
    Portability and Accountability Act has provided both HCFA and
    my office with a stable funding source for Medicare payment
    safeguards and fraud and abuse prevention activities for the
    next several years. That is fraud and abuse prevention
    activities.
        Chart one, which is to the side here and is also attached
    to my written testimony, demonstrates the reduction in improper
    payments by the major type of errors found over the last 3
    years. The red error indicates documentation errors where we
    saw the most dramatic reduction. The blue indicates errors due
    to a lack of medical necessity, a continuing problem. The
    yellow, incorrect coding, which is also a concern. The green,
    errors due to noncovered services. And finally, the purple,
    which is all other types of errors.
        Documentation errors dropped from $10.8 billion in fiscal
    year 1996 to $2.1 billion this year. These errors had
    represented the most pervasive problems in 1996 and 1997, even
    though Medicare regulations specifically require providers to
    maintain sufficient documentation to justify diagnosis,
    admissions, and other services.
        As shown in chart 2, the overall category of documentation
    includes two components this year: insufficient documentation
    for medical experts to determine the patient's overall
    condition, diagnosis, and extent of services performed; and no
    documentation to support the services provided.
        Last year we included an additional component to identify
    situations in which providers were under investigation and the
    OI could not obtain medical records to support billed services.
        This year, in contrast, we obtained all medical records on
    claims under investigation. A lack of medical necessity was the
    highest error category this year, and the second highest for
    both 1996 and 1997.
        As noted in chart 3, these types of errors in inpatient
    prospective payment system [PPS] hospital claims, shown in red,
    have been consistently significant in all 3 years. Decisions on
    medical necessity were made by medical staff who followed their
    normal claim review procedures to determine whether the medical
    records supported the claims.
        Incorrect coding is the second highest error category this
    year, as illustrated in chart 4. Physician and inpatient PPS
    claims accounted for over 80 percent of the coding errors in
    fiscal years 1996, 1997, and in 1998. For most of the coding
    errors, medical reviewers determined that the documentation
    submitted by providers supported a lower reimbursement code.
        Clearly, Mr. Chairman, progress has been made in reducing
    payment errors, and we are heartened that providers are doing a
    better job in documenting their services, but we caution that
    diligence is needed to sustain the apparent downward trend. In
    short, our audit results from the 3-year period demonstrate
    that the Medicare program remains inherently vulnerable to
    improper and unnecessary benefit payments.
        To ensure continued progress while keeping abreast of
    continuing changes in the health care area and adequately
    safeguarding the Medicare trust fund, we've made a number of
    recommendations to HCFA.
        Turning to our audit of the fiscal year 1998 financial
    statements, we're pleased to report that HCFA has continued to
    successfully resolve many previously identified financial
    accounting problems. For example, substantial progress has been
    made in improving Medicare and Medicaid accounts payable
    estimates, as well as estimates of improper payments included
    in cost reports of institutional providers.
        However, our opinion on the 1998 financial statement, as
    mentioned by Mr. Turner, remains qualified because of
    continuing documentation problems. Most significantly, we could
    not determine if the report of $3.3 billion Medicare accounts
    receivable balance, that is, what Medicare providers owed to
    HCFA, was fairly presented because contractors did not maintain
    sufficient documentation to support the reported activity.
        Our report also discusses our concern that contractors do
    not have uniform accounting systems to record, classify, and
    summarize financial information, or adequate controls over the
    electronic data processing environment.
        To briefly summarize, I'm pleased that HCFA is
    progressively pursuing a corrective action plan to address our
    concerns. As part of that plan, we're working closely with HCFA
    to establish an adequate internal control structure for
    Medicare accounts receivable.
        I appreciate the opportunity to appear before you today and
    welcome your questions.
        [The prepared statement of Ms. Brown follows:]
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        Mr. Horn. Thank you very much for that very helpful
    statement.
        Before we open to questions, we will call on the Deputy
    Administrator of HCFA, Mr. Michael Hash. He has a very rich
    experience in health care problems, including several years on
    the House Committee on Commerce dealing with the health issues
    that come before the Congress. So, we look upon you as suitably
    initiated, having worked on the Hill, and we obviously wish you
    well. That's one of the toughest jobs in this city. So please
    proceed.

    STATEMENT OF MICHAEL M. HASH, DEPUTY ADMINISTRATOR, HEALTH CARE
       FINANCING ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN
                                SERVICES

        Mr. Hash. Thank you, Mr. Chairman.
        Chairman Horn, Mr. Turner, Mrs. Biggert, we're very pleased
    to have this opportunity to discuss the fiscal year 1998 Chief
    Financial Officer's audit of HCFA. As the Inspector General
    just mentioned, this is the third such comprehensive audit by
    her office. We are grateful for the valuable insights which
    this audit process has provided to us, and we believe that we
    are making substantial progress and improvements because of
    them.
        In just 2 years we have been able to cut the error rate in
    half, from 14 percent to 7 percent. However, this year's audit
    shows that the Medicare payment error rate is still too high.
    We want to especially thank, for progress that we have made,
    physicians and other providers, because they have made efforts
    by improving their claims processing submissions and their
    documentation. They have greatly helped in reducing the error
    rate, and we have new provider education initiatives under way
    to build on this success.
        The 7 percent error rate represents about $12.6 billion in
    taxpayer funds, which we all agree is simply unacceptable. We
    must be diligent in sustaining and increasing the improvements
    that we've made. To do that we have a number of initiatives
    under way, and we have developed a comprehensive program
    integrity plan to make sure that in fact we pay right the first
    time.
        Thanks to the work of this committee and the Congress, we
    now have more tools to continue this improvement. The Health
    Insurance Portability and Accountability Act [HIPAAA], for the
    first time created a stable source of funding for program
    integrity activities. In the current fiscal year we have about
    $560 million available for our program integrity initiatives.
    And the Balanced Budget Act helped close some important,
    significant loopholes, and tightened controls on problem
    providers.
        President Clinton's fiscal year 2000 budget also includes
    several new proposals to build on our success in fighting
    health care fraud, waste and abuse. These measures would save
    an additional $2 billion in Medicare expenditures over the next
    5 years and, we believe, help to extend the life of the
    Medicare trust funds. We look forward to working with you to
    secure passage of these important proposals.
        Through additional tools that were provided by HIPAA and
    the BBA, our comprehensive program integrity plan, plus the
    President's new proposals and your continued support, I'm
    confident that we will continue to reduce the payment error
    rate.
        We are also pleased that this year's audit found that only
    one remaining area, contractor accounts receivable, prevents us
    from receiving an unqualified opinion, which is our goal. We
    are working with the Inspector General to develop a short-term
    solution to the accounts receivable documentation problem.
    However, a full remedy of this problem involves systems changes
    that must be delayed until we have cleared the year 2000
    computer challenge.
        These audits provide a valuable road map directing us to
    areas that need attention. The findings in previous audits
    helped us correct problems with our accounts payable, with our
    Social Security Administration receivables, and other problems
    that the audits have identified and the Inspector General
    referred to. They have also helped us in our aggressive efforts
    to improve our computer systems security. While we have a lot
    of work that needs to be done to improve the results of the CFO
    audit, we are pleased with the pace of our progress.
        With your continuing help and support, we will continue to
    do everything in our power to fight waste, fraud, and abuse,
    and to ensure that the Medicare program pays it right. We will
    also continue to improve our financial reporting and management
    of the Medicare trust funds.
        I want to thank you again for holding this hearing today,
    and I'd be happy also to respond to any questions that you or
    other members of the subcommittee may have. Thank you, Mr.
    Chairman.
        [The prepared statement of Mr. Hash follows:]
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        Mr. Horn. Well, we thank you, and enjoyed reading your
    statement. The way we're going to operate on the Q and A is
    each of us will rotate in 5 minutes. I'm going to ask Mrs.
    Biggert, the gentlewoman from Illinois, to take my first 5
    minutes and question the witnesses, and then it will be Mr.
    Turner, and then it will get to me, and we'll just go around
    until either we're worn out or you're worn out, one or the
    other.
        I yield my 5 minutes for the purpose of questioning to the
    gentlewoman from Illinois and vice chairman of this committee.
    And by the way, if you had an opening statement, we'll put that
    at the beginning, without objection.
        Mrs. Biggert. Thank you, Mr. Chairman.
        You have the work done in managed care or Medicaid. HCFA
    had total program expenses of $308 billion in 1998 and these
    expenses were broken down to Medicare fee-for-service payments
    which was 57 percent, $177 billion; Medicare managed care
    payments, $33 billion, 11 percent; and Medicaid payments of $98
    billion for 32 percent.
        It's my understanding that the testing is done to arrive at
    the estimate for improper payments of $12.6 billion solely on--
    is done solely on the $177 billion Medicare fee-for-service
    payments. Is my understanding correct? I'm sorry, I'm
    addressing this to the Honorable Ms. Brown.
        Ms. Brown. Yes, that's true. This is the fee-for-service
    area where we're making this estimate.
        Mrs. Biggert. Then what level of testing is done on the
    remaining $131 billion?
        Mr. Vengrin. We, in conjunction with the General Accounting
    Office, in all three fiscal years have examined the managed
    care area. We attempted to project it back but we have no
    material findings at this time to really report on the managed
    care. With respect to the $90 billion or so for Medicaid, we
    are relying on the work of the single audit. That is at the
    State level, and we certainly do not want to duplicate that
    effort.
        We are aggressively working with three or four States to
    develop an error rate comparable to what we're doing here in
    Medicare, but because it's not mandated, it's a very difficult
    process. The States complain that they do not have the money to
    do this, but we're confident that an error rate does exist in
    Medicaid and we're working very diligently with them to develop
    that.
        Mrs. Biggert. How many States? Is that all States?
        Mr. Vengrin. We're working--again because it's not a
    requirement either by Medicaid or the OMB through the
    compliance supplement on the single audit, it's on a voluntary
    basis. Currently we're working through the national
    intergovernmental audit forum with the State auditors to
    develop this.
        Mrs. Biggert. And about how many States----
        Mr. Vengrin. We're aggressively working in four States.
        Mrs. Biggert. Four States?
        Mr. Vengrin. Yes, ma'am.
        Mrs. Biggert. Is there any evidence of improper statements
    in these areas?
        Mr. Vengrin. Yes, ma'am, there is. Again, we did meet with
    a State auditor. They did make a first attempt at this process.
    We went out and visited those particular States and found some
    need for improvement in the thoroughness of the medical review,
    plus the statistical sampling had some concerns. We're working
    again with these States to develop a plan, a methodology, so it
    can be replicated in other States.
        Mrs. Biggert. Does this involve the Medicare Plus Choice
    issue at all?
        Mr. Vengrin. No. Basically this again would involve the
    fee-for-service at the State level.
        Mrs. Biggert. Thank you. Then to Mr. Hash, it sounds like
    you're having success in reducing the amount of improper
    payments, from the testimony, but that there still is a great
    deal of work that remains. Can you explain a little bit more
    about the area ``lack of medical necessity'' in your chart?
        Mr. Hash. Yes, I'd be glad to. Also perhaps my colleagues
    here would want to elaborate too, who conducted the audit. This
    refers to a determination of the appropriateness of a covered
    service for a given individual with a given condition or
    diagnosis. What the audit does is evaluate the documentation,
    generally in the form of the medical record of the patient, to
    see that it appropriately supports the need, the appropriate
    need of the patient for the service that's being paid for. This
    is an area where we have been stepping up our efforts very
    dramatically to improve and strengthen medical review by our
    contractors.
        Mrs. Biggert. It seems that the amount in the area has
    stayed very constant. Is this an area where it's harder to
    achieve progress? If you look at the area of documentation
    error, it seems like this is harder to achieve any change for
    the lack of medical necessity. Is there any reason for that, or
    what actions have been taken in that area to try and change
    them?
        Mr. Hash. Medical review is a difficult area but I'm happy
    to report that the audit does show, I believe, that we've
    actually reduced by 20 percent the amount of error since 1996
    that's attributable to medical necessity problems. So we are
    actually making steady progress, I think, at reducing it, but
    it remains a significant portion. In fact, about half of the
    errors are attributed to medical necessity problems.
        What we've done by way of strengthening medical review is
    that we have hired an outside contractor that is actually
    working with the carrier medical directors, the physicians, and
    their staff who are charged with the responsibility of
    reviewing claims for medical necessity, and we are giving them
    assistance in overseeing their work much more closely. And
    second, we are working with the peer review organizations
    [PRO], who are composed of locally based physicians, to assist
    also in the review of medical necessity activities. And we have
    stepped up our prepayment review; that is, before we actually
    pay, we're doing medical necessity reviews of services in a
    more intensified manner.
        Mrs. Biggert. Thank you.
        Mr. Horn. I thank the gentlewoman from Illinois.
        I now yield to the ranking member, Mr. Turner of Texas, for
    the purposes of questioning, 5 minutes.
        Mr. Turner. Thank you, Mr. Chairman.
        Let me make sure I understand. You have to bring me up to
    speed here, but as I understand it, all of the Medicare
    payments that we make are actually handled by private
    contractors; is that correct?
        Mr. Hash. Not quite, Mr. Turner. The fee-for-service
    payments are made by contractors, 40 of them around the
    country, which are private organizations. But the managed care
    payments, the capitated payments that are made to managed care
    plans, are made by the Health Care Financing Administration.
        Mr. Turner. What's the trend in terms of the percentage of
    your funds that are paid through managed care? I assume that
    has been on the rise?
        Mr. Hash. It's rising. I think the Inspector General just
    indicated that about $210 billion of our total expenditures are
    related to fee-for-service payments and an additional--I don't
    have the figure in front of me--about $33 billion for managed
    care payments, and that number is rising.
        Mr. Turner. This audit seems to be, and the sampling--I'm
    glad to see you sampling here, Mr. Chairman--sampling seems
    to----
        Mr. Horn. Touche.
        Mr. Turner [continuing]. To be directed solely at the fee-
    for-service side. Doesn't there need to be some kind of audit
    work done on the managed care side, even though those payments
    obviously are set and the managed care company has got to make
    do with what they get, but isn't there some necessity for
    looking at that side as well?
        Mr. Vengrin. We are, Mr. Turner. As I mentioned, we did
    sample those and we did not come up with any deficiencies to
    project back that would be material to the financial statements
    this year.
        Mr. Turner. When we're talking about managed care, what are
    we looking for? What's your objective when you take a look at
    the managed care side?
        Mr. Vengrin. Whether we have an eligible beneficiary,
    whether we have a correct payment. There are localities that
    adjust the payments. We want to make sure the beneficiary is in
    fact in that particular area that is used to compute the rate.
    So we are looking at all factors there for the computation of
    these payments.
        Ms. Brown. The incentives are much different in the managed
    care area. So, separately from the financial statement audits,
    we're doing a lot of other work there to see whether or not
    services are being identified; whether there's some form of
    preselection, where that's possible because it is 100 percent
    managed care to get healthier patients in; whether they're
    driving out patients that have chronic conditions that would
    make it difficult for them. We're looking at all those kinds of
    things. We can't project an error rate at this point, but we
    are looking at those situations and investigat-
    ing where we have indicators that there is unfair influence
    there.
        Mr. Hash. If I might add a footnote, Mr. Turner, we also
    have concerns about integrity of our managed care contractors
    as well. And as a part of our Medicare integrity program, we
    are going to be contracting with, again, an outside contractor
    for the purpose of reviewing the appropriateness of the
    submissions that the managed care plans make to us that are
    used for purposes of determining payments to them. So we think
    an oversight from an integrity point of view is also an
    appropriate component of our overall comprehensive fraud and
    abuse plan.
        Mr. Turner. We have heard a lot recently about managed care
    companies dropping their patients. What basically has been,
    from your perspective, the cause of that disruption?
        Mr. Hash. I think the answer to that is a complicated one.
    For the most part I think managed care plans that withdrew from
    Medicare did so because of business decisions that pertained to
    the markets that they were in.
        A closer look at what happened and in the withdrawals last
    fall would suggest in some of the markets where plans left they
    had very small penetration. They were otherwise very
    competitive marketplaces. Clearly some of the factors that
    influenced their withdrawal had to do with an expectation or
    projection of what the Medicare payment rates would be in the
    future. But altogether, I think the withdrawals had more to do
    with business and market conditions than any single factor.
        Mr. Turner. Is there anything that we should be doing to
    try to create more stability? I mean, I think most of us agree
    that managed care is here to stay and is probably here to stay
    in the Medicare field, but it doesn't seem that we can endure
    the disruptions that we've been seeing in the last several
    months.
        Mr. Hash. I think there are some things that are under way
    now, that we started, that will bring a greater stability to
    this marketplace. For one thing, the rates that are being
    forecast for next year are going to be significantly raised
    from what they have been in the past 2 years, so I think that
    will go a long way toward stabilizing the market for
    contracting by these plans.
        I think also we're trying to take account of suggestions
    and recommendations from the health plan community about ways
    that we can streamline our program and make it less burdensome
    from their point of view. So we are trying to work with the
    managed care community to in fact stabilize participation in
    the Medicare program.
        Mr. Turner. Are there audit tools available that can allow
    one to verify that managed care is saving money over fee-for-
    service?
        Mr. Hash. That's a tough question, Mr. Turner. I think
    there is some evidence--first of all, the Medicare payments
    themselves, as you may know, are roughly based on the average
    cost for Medicare beneficiaries in fee-for-service discounted
    by 5 percent. In other words, we figure out what the average is
    and pay the plan roughly, on average, 95 percent of the cost of
    fee-for-service. So there is an expectation that there is
    saving right off the top from the payment system.
        On the other hand, as you look at the characteristics of
    individuals who have enrolled in managed care plans, there's
    considerable evidence that they have less than average health
    care costs. In other words, while we pay on an average basis,
    their actual experience is that the enrollees tend to be
    healthier and younger and therefore there is potential--not
    only a potential but I think substantial evidence that
    confirms--that we have overpaid managed care plans.
        The BBA and other steps we've taken I think are bringing
    payments more in line to the expected costs of the enrollees. A
    significant part of that strategy is the implementation of a
    risk adjustment payment methodology which we announced just
    recently.
        Mr. Turner. Thank you.
        Thank you, Mr. Chairman.
        Mr. Horn. Thank you. I am going to use just a little bit of
    my time and yield 5 minutes to Mr. Ose.
        Let me just refer to your chart, Inspector General,
    documentation by error, to category dollars in billions. Down
    there on the blue schedule under fiscal year 1997, we're
    talking about $3 billion, documents not provided due to
    investigations. What happened to those investigations? How many
    did we win, in brief?
        Mr. Vengrin. There were roughly around 151 claims last
    year. When we went back to pursue and obtain the medical
    reports, because there was an active investigation by the
    Department of Justice or Office of Investigations, we were
    precluded from obtaining those medical records. We really did
    not go back and followup to determine the disposition of the
    particular claim.
        Mr. Horn. So, are we to say that $3 billion went down the
    drain?
        Mr. Vengrin. No, sir. Typically the investigation covered 2
    or 3 past years ago. We were auditing 1997. We really can't say
    that those claims were improper, sir.
        Mr. Horn. What's the length in the statutes as to how long
    you have to look at it, probably prosecute it? You'd have to
    turn it over to Justice, or the U.S. Attorney in each area? How
    does this system work in terms of any fraud and abuse you find?
        Ms. Brown. When there is fraud, there are different
    statutes depending upon the particular issue, and then there
    are some where there are continuing issues like the RICO
    statutes. If it's conspir-
    acy or something of that nature, there is a continuing problem;
    so you can go back much further. It varies in the individual
    cases, but certainly all of these cases were followed up. And I
    don't have the resolution of them with me, but they're either
    still in process or they are on an individual basis making the
    appropriate collections.
        That's a separate thing from our analysis of what the error
    rate is. Because the audit process of the error rates didn't
    delve into it further doesn't mean those cases weren't pursued.
    In fact those were the ones where there was a concentrated
    effort to find out exactly what happened and recover any
    losses.
        Mr. Horn. In whose jurisdiction are the documents? Are they
    under Medicare right now? Are they over in Justice? Are they in
    the Inspector General's office? Where are the documents that
    are reflected here under ``documents not provided due to
    investigations,'' $3 billion, fiscal year 1997?
        Ms. Brown. They were in more than one place. However, we
    have worked out an arrangement so that we were able to get
    information this year on documents, even though investigations
    might be in process, enough information anyway to consider in
    the error rate. So that wasn't a constraint, as it had been in
    the past, where we just couldn't work out the arrangement in
    time to do the audit.
        Mr. Horn. Now, do you have lawyers on your own staff that
    can take a look at these and say they conform to the law in
    terms of time as well as substance?
        Ms. Brown. Yes. In the Office of Counsel to the Inspector
    General, there are about 60 attorneys and support staff. Of
    course we work in prosecution closely with the Department of
    Justice. We work closely with U.S. Attorneys as well as the AGs
    from the various States when that's appropriate. So we work in
    combination with others on almost all of our work before it's
    concluded.
        Mr. Horn. I know this is a tough question for you to
    answer, but are there situations where the U.S. Attorney says,
    ``Hey, this doesn't matter to me, isn't significant enough
    either in dollars or anything else. I haven't got the time for
    it.'' How much of that goes on?
        Ms. Brown. I can't give you a percentage. There certainly
    are those situations. There are a few things we've done to
    resolve them. We have an executive level fraud group including
    the Deputy Attorney General and myself. We have someone from
    HCFA represented, someone from the FBI, someone who represents
    the U.S. Attorneys, and we talk over these cases and look at
    national projects. They can establish a national protocol so
    that there's more consistent enforcement throughout the United
    States on certain types of cases. That's helped a lot. They
    also can get in touch with U.S. Attorneys if any single
    decision seems to go against what the national prerogative
    might be.
        I might mention, too, there's a lot less turning down cases
    because there is additional money provided to the Department of
    Justice also out of the HIPAA legislation for enforcement
    efforts, and they've been very aggressive and quite successful
    in this. We've more than doubled our enforcement and our
    settlement activity.
        But even saying that, when they decline a case, we have,
    you might say, a third bite at the apple. Where criminal and
    then civil declination has occurred, we have civil monetary
    penalty authority, so we can still use that. Say something
    doesn't meet the dollar criteria, which would be the most
    typical, we could take selection actions based on that CMP
    authority. So there is a variety of tools available to us,
    where people aren't just slipping through the cracks once we
    have developed some material on them.
        Mr. Horn. Well, I'm going to ask both the minority and
    majority staff to look at this and ask some questions for the
    record, and without objection, the answers will be put in at
    this point.
        Ms. Brown. Be glad to do that.
        Mr. Horn. Mr. Ose, you have less than 10 seconds on my
    time, but you have your own 5 minutes.
        Mr. Ose. Thank you, Mr. Chairman.
        Mr. Horn. Do you have an opening statement?
        Mr. Ose. I do not have an opening statement. Just
    questions.
        Mr. Horn. OK, good.
        Mr. Ose. For the Inspector General, on page 8 of your
    submitted comments, the bottom paragraph talks about
    ``deficiencies in nearly all facets . . . of the 12 contractors
    in our sample.'' With great respect to my colleague, Mr.
    Turner, I don't care to debate the sampling question today but
    if that is the case, if there are gaps in the underlying data
    that the contractors are using to report to HCFA, how is it
    that we have any reliability in the numbers in the first place?
        Ms. Brown. On page--are you talking about the accounts
    receivable in particular?
        Mr. Ose. Yes, Medicare accounts receivable.
        Ms. Brown. Let me let Mr. Vengrin, who actually conducted
    the audit, go into a little more depth.
        Mr. Vengrin. We did find, sir, in all 3 years discrepancies
    in the various reporting systems that the contractors used.
    Typically there are multiple data bases tracking the same
    number. Since fiscal year 1996 we noted millions of dollars in
    discrepancies in these various data bases. Last year HCFA, in
    trying to streamline this process and get one set of records,
    issued instructions to their contractors to better maintain
    their receivable information and in one set of books, but
    unfortunately this year we went out there on a test basis and
    still found millions of dollars in discrepancies.
        There's a form called a 751 that tracks the accounts
    receivable. When the contract auditor went back to try to find
    support for that, on virtually every line from the beginning
    balance to the current receivable activity to collections, we
    found in one case $144 million was plugged to agree to the
    ending balance. Another one of the lines on claims transferred
    was plugged so it would balance. Right now the reported
    information is just unreliable.
        Mr. Ose. This gets to my basic question, and that is that
    the contractors who are providing the service to HCFA and
    perhaps the service providers themselves are unclear on the
    rules that govern how to classify and assign different
    services. I'm curious whether or not there is a clear
    understanding on behalf of the people actually doing the coding
    in the field, for instance, or the collections in the field as
    to how to deal with these situations.
        Mr. Vengrin. Sir, this is one where I would certainly have
    to side with Health Care Financing. Our office has participated
    in numerous training exercises with HCFA staff where they
    repeatedly told the contractors how to record this information.
    But I must tell you all, saying that information--as Mike Hash
    was saying, we have a claims processing system out there. It
    was kind of an afterthought to have a financial component to
    that, so where the contractor pays claims in an expedited,
    expeditious manner, tracking some of this accounting
    information is coming kind of late in the game. They processed
    860 million claims and millions of dollars of offsets.
        I don't want to leave you with the impression that they're
    losing $20 billion on this receivable. There are billions of
    dollars, as for example on the Part B side, if a doctor has
    been overpaid $100, the next time that physician submits a
    claim, that $100 is offset and grabbed so there's no
    outstanding amount. So the problem still is with the
    recordkeeping.
        Mr. Ose. I would appreciate if I could submit this
    particular question in writing and have some suggestions as to
    how we can more closely correlate this information. I don't
    know if it's possible but I also understand the closer we can
    correlate it time-wise, the better off and more accurate our
    numbers are.
        Mr. Vengrin. I believe we can correlate it. We're working
    with HCFA this year to go back in 1998 and do a reconstruction
    on that ending balance. The bulk of this overpayment is
    attributable to particular transactions: One, cost report
    settlements, and second, for periodic payment adjustments where
    HCFA has given a particular provider too much money in setting
    up accounts receivable.
        Well, these particular categories lend themselves to
    tracking even on a Lotus spreadsheet. I think we can track
    this, and I'm convinced that we can go back out there and find
    supporting information. So part of this is going to be a
    reconstruction effort, and explicitly telling the contractors
    yet again what type of information they need to maintain.
        Mr. Ose. I think the education process is probably going to
    have to be constant, just because those of us on this side of
    the dias probably issue too many rules and then we get
    regulations and they change constantly. I encourage that almost
    on a constant basis.
        I have one other question, Mr. Chairman. The HCFA statement
    shows amounts due of about $7.5 billion, of which about $3.8
    billon is estimated to be uncollectible. For the moment
    ignoring the $3.8 billion deemed to be uncollectible, what's
    the status of the other $3.7 billion? If it's not
    uncollectible, that means it is collectible. What are we doing
    to collect it?
        Mr. Hash. I believe this is in regard to the errors that
    have been identified in the audit process. We've actually been
    making progress in the collection of that. From the 1996 audit
    we've now collected, we believe, 100 percent of the identified
    overpayments. From the 1997 audit I'm told that we have
    collected about 53 percent of the identified overpayments. And
    obviously we just got the 1998 audit, and we're beginning to
    institute collection efforts for that money as well.
        Mr. Ose. May I ask the chairman's indulgence for one final
    question or observation?
        Mr. Horn. Is this followup?
        Mr. Ose. It is followup. The reason I ask that question is
    in my district we have a system that identified, through its
    own compliance effort, an overcollection on their part. In
    other words, they had been paid too much. They voluntarily
    reported it back to the contractor and returned the money. They
    refused to take it. And there have been subsequent legal
    inquiries as to the provider's veracity.
        This is a provider that has identified on its own that they
    have collected too much, they have proffered it back. They have
    been told no and then they have been in the initial steps of
    sanctions. I've got to tell you, that's why I ask these
    questions.
        Mr. Chairman, thank you.
        Mr. Horn. You also wanted, a portion of the previous
    question, to have the data brought in. And without objection,
    that would be put in where you raise the question, and I'd like
    to ask both the Inspector General and the Health Care Financing
    Administration to give the answers to the question. So if
    there's a policy question versus an audit question, we'd like
    to have it in the record.
        Let me just on nobody's time get on the record how the
    providers are designated by HCFA. A lot of people don't really
    know that. They think you're one vast bureaucracy and
    everything is operated out of Washington and all that. But when
    the law was written, there was an aim to not have that and so
    providers were chosen to sort of decentralize operations around
    America, and I know it poses some problems and the
    Administrator and I have chatted about those.
        So maybe just for the record, since you're Deputy
    Administrator, how do they get picked? What are the concerns
    that HCFA, Health Care Financing Administration, has here in
    Washington, if any, with regard to providers? I got into it
    because of the year 2000 problem. So why don't you just lay it
    out for the record?
        Mr. Hash. I would be happy to, Mr. Chairman. As you know,
    we have for the last, I think, 5 or 6 years submitted
    legislation to the Congress to consider reforming the methods
    that we use for contracting with private organizations to
    process claims and pay bills. The current arrangements for the
    contracting with private entities are to some degree different
    between whether we're talking about the fiscal intermediaries
    who are responsible for paying claims that are covered under
    Medicare and what we call the carriers----
        Mr. Horn. Just for the record, put ``Part A'' in. A lot of
    people don't know it unless they're aficionados of this.
        Mr. Hash. Part A refers to that part of the Medicare
    program that covers inpatient hospital services, the services
    of skilled nursing facilities and home health agencies, for the
    most part.
        Mr. Horn. Which was in the original law.
        Mr. Hash. That is correct, from 1965. And those contractors
    that we call fiscal intermediaries or FIs, their selection is
    actually governed by very specific statutory provisions that
    include the right of providers within the geographical area
    that may be served to nominate the actual entities with whom we
    can then contract. So there is, how shall I say, not a lot of
    discretion on the part of the program or the Health Care
    Financing Administration to actually engage in any sort of
    competitive competition for fiscal intermediaries because of
    the nomination process that is written into the statute.
        On the carrier side, which is the organizations that
    process claims for services covered under Part B of Medicare,
    which includes primarily physician services and other
    outpatient services covered under the program, we do contract.
    But there again, we are restricted by the statute to
    contracting with organizations that meet certain criteria,
    including being in the business of insurance, demonstrating
    that kind of experience, and we think there are a broader array
    of organizations out there who would be capable of and
    interested in contracting with us to process claims and to
    administer the Medicare program, and we would like to have
    greater flexibility and discretion in that area.
        Mr. Horn. That is very helpful. Do you want to add
    anything, Ms. Brown?
        Ms. Brown. Only that I heartily endorse HCFA's initiative
    in this area. Among those who we have had huge settlements with
    are many of the contractors, where they have misused their
    authorities and overcharged in some way or defrauded in some
    cases.
        Mr. Horn. On that point, when that happens, can you
    decertify them?
        Ms. Brown. Yes. They can be excluded, or HCFA can take an
    initiative and not contract with them any longer. However,
    there is such a limited number of people they can contract
    with, it puts HCFA in the dilemma of making sure that the
    services are still performed.
        So even when it might be appropriate to withdraw, there is
    a great dilemma as to how to get the job done. So, contractors
    who might not otherwise be chosen are still allowed to persist
    in the business or get back into the business or assume
    business in another area, because we just don't have others who
    are eligible to perform that service.
        Mr. Horn. Let's just put in the record for the last 2 years
    how many contractor providers have been decertified.
        [The information referred to follows:]
        [GRAPHIC] [TIFF OMITTED] T2373.035

        Mr. Hash. I will be happy to do that.
        The Inspector General is correct. We are faced often with a
    very challenging set of circumstances about transitioning work
    to another contractor, which can in the best of circumstances
    still be disruptive from the point of view of both the
    beneficiaries and the providers who are affected by those
    transitions. On the other hand, with help from our law
    enforcement colleagues in the Federal Government, we have made
    important strides on cracking down on behavior that is criminal
    and unacceptable and we have excluded those contractors.
        Mr. Horn. We are now going to start the next round again
    with Mr. Turner.
        Mr. Turner. Just to followup, are the States under the same
    restrictions that HCFA is under with regard to the selection of
    their contractors for the Medicaid program?
        Mr. Hash. Mr. Turner, I am not familiar with their
    contracting laws under the Medicaid program, but I would assume
    that they have more flexibility than we do. But my presumption
    is that each and every State has contracting laws that are
    comparable to what we have in the Federal Government, the so-
    called FAR regulations for contracting, and I think States have
    comparable laws. But I am not aware that they have in their
    State statutes very narrow prescriptive language about the
    selection of contractors to administer the Medicaid program,
    and some States administer their Medicaid programs directly,
    with State employees.
        Mr. Turner. What was the political motivation for the
    restrictions that you have been discussing when they were put
    into the law initially?
        Mr. Hash. I confess that I was not around in 1965, but from
    reading about the debates that took place at that time, the
    philosophy was, as Medicare was being launched, to select a
    process that would not create a Federal, as you will,
    bureaucracy for the purpose of processing claims; but rather to
    use the claims processing expertise in the private sector.
    There was experience in the insurance world of processing
    claims and paying bills.
        In the early years of the program the majority of the
    contractors were Blue Cross and Blue Shield plans around the
    country, and many continue to serve the program to this day.
    But essentially the philosophy at that time, in order to launch
    the program quickly, was to use the expertise on this area that
    existed in the private insurance company world.
        Mr. Turner. And so the decision, in part, on selection of
    contractors is left in the hands of the providers because they
    have the option?
        Mr. Hash. In part. On the Part A side, correct.
        Mr. Turner. One of the recommendations in the President's
    budget for fiscal year 2000 is a request for new authority to
    enhance contractor performance. What is encompassed in that
    recommendation, and are those the matters that you've been
    discussing?
        Mr. Hash. It does refer to the increased flexibility in
    terms of contracting with private organizations, enlarging the
    pool of potential contractors to include organizations that
    have the capability, the resources, the electronic data
    processing capabilities to actually take on these
    responsibilities.
        Mr. Turner. So the problem that you were discussing, at
    least there would be more flexibility if the President's
    recommendations were adopted?
        Mr. Hash. That is correct, Mr. Turner.
        Mr. Turner. A moment ago we were talking about the accounts
    receivable. Are we approaching a situation with home health
    care agencies, many of which are going out of business, where
    we are going to have a large number of accounts receivables
    that are uncollected from home health agencies that have
    failed?
        Mr. Hash. That is a factor in what the audit shows, an
    increase in the cumulative net amount of receivables. I think
    the figure is now $3.6 billion, rising from last year I think
    $2.6 billion. And a good part of that increase in receivables
    we think is attributable to an increased auditing function that
    is associated with launching the new payment systems for home
    health agencies, so we had to establish a base year and more
    thoroughly audit the cost reports for agencies of that year.
        Second, in that process, now that we have new limits in the
    home health payment system, we have identified a number of
    overpayments. Those add to the accounts receivable.
        And then last I would say, in terms of the accounts
    receivable number, we are experiencing an increase in the
    number of bankruptcies in providers in general, and that also
    contributes to the accounts receivable number.
        Mr. Turner. Many of our home health agencies experienced a
    great deal of financial difficulty adjusting to some of the
    recent changes in their reimbursement rates. I somehow wonder,
    and I don't know if you would comment or have an opinion on it,
    but I wonder if we have not made adjustments so rapidly and
    harshly for the home health agencies, our home health agencies,
    that many of them are going to be forced to go out of business,
    which is going to result in a lot of uncollectible accounts
    receivable from those agencies. Have we been too harsh?
        Mr. Hash. We have been very concerned about what is
    happening with the home health agencies in light of the changes
    in the payment system that were put into motion by the Balanced
    Budget Act. I think it is fair to say that at this point we are
    still trying to analyze the data and get better information
    about the financial status of organizations. We are trying to
    determine whether or not there is developing any sort of access
    problem. That is to say, are Medicare beneficiaries having
    difficulty being referred appropriately to a qualified home
    health agency?
        As of now we don't have any evidence that is a systematic
    problem, but there is no question that there are many home
    health agencies who have demonstrated that financially they are
    having a very difficult time. I think that has to do with the
    fact that the new limits in effect require home health agencies
    to manage their delivery of services in a more efficient
    manner, and that is a transition that is difficult to make.
        I think many of them are making it. I have seen some
    reports that some of the chain organizations in home health
    have actually adjusted to the new payment system, while others
    are still struggling with it. We need to carefully monitor the
    impact of these payment changes, because in the end we are
    responsible for assuring that our beneficiaries do have access
    to appropriate home care providers, and it is something that we
    are monitoring very closely.
        Mr. Turner. Thank you.
        Thank you, Mr. Chairman.
        Mr. Horn. Let me just pursue the home health care bit for a
    minute. In 1965, when this was all being patched together, I
    happened to be a big advocate at the staff level for my mentor
    on home health care, and we only knew of Detroit at that time
    as having a very good operation.
        One thing that has intrigued me in the last few years, is
    that home health care providers come to the houses, make a
    phone call when they arrive or when they leave so that the
    record would show that they made that visit of 1 hour's length.
    I gather that is where some of the abuse was, in terms of what
    are they putting in for hours when they might have just given
    the person 5 minutes or something.
        So, could you explain a little bit how you are working on
    that, because as I look on the ``Errors Due to Lack of Medical
    Necessity by Provider Types,'' dollars in billions, we can see
    that the outpatient situation has really been much greater in
    terms of the $7 billion there, versus the very small amount
    under $7.5 billion the preceding fiscal year, and the fairly
    small amount of the outpatient area at the $8.5 billion. So, it
    would look like, just looking at that chart, that the home
    health care agencies have been squeezed a little in terms of
    the medical necessity, and the outpatient area seems to be
    maybe a similar problem to what home health care was at one
    time. Is that just chance in the money trail here, or what is
    your feeling on that?
        Mr. Hash. Well, I think that--I am not certain that the
    sample for the audit, although I would defer to my colleagues
    here, is looking at an individual provider category that we
    have necessarily a representative sample, at least on an
    individual provider basis. But I think it is fair to say that
    we have been taking a much more close look at the compliance of
    home health agencies with our coverage requirements.
        As you know, Mr. Chairman, home health under Medicare is
    only covered if a patient meets all of three conditions. They
    must be home-bound, they must require a skilled level of
    service, and they must be referred to home health by a
    physician.
        In terms of the actual visit by a skilled professional or
    by a home health aide, which is actually the largest number of
    visits, they are made by home health aides as opposed to
    registered nurses, physical or occupational therapists or the
    skilled health care professionals. In the case of visits, we
    pay now on the basis of a visit. And of course the issue for us
    is if the visit is very long, then in fact the cost of the
    visit can rise very dramatically as opposed to a briefer visit.
    So since the duration of the visit is largely determined by the
    health care professional, we are trying to track more closely
    the timeframes associated with visits to make sure that the
    costs for that period of time are reasonable.
        Mr. Horn. Does the Inspector General want to add something
    to that?
        Ms. Brown. Yes. This particular benefit grew astronomically
    and far faster than any projections in a very short period of
    time. We found it was one of the most abused areas in health
    care provisions. I literally can show you pictures of rooms as
    large as this full of boxes of documentation that was created
    in a very specific manner, with people being paid so much a
    page of documentation, created for patients who were never seen
    by anybody and yet they were being charged for regular home
    health visits, with literally millions of dollars going out.
        There are others where tens of millions of dollars were
    paid monthly by HCFA, where the companies went bankrupt
    immediately and never paid the money back because they were
    protected under bankruptcy laws. They were being paid for home
    health visits, most all of which, virtually all of them, were
    never even performed. So, along with wanting to provide this
    service, we must recognize that this was an extremely
    vulnerable area.
        Mr. Horn. I agree with you completely on that, even though
    it should be a worthwhile service.
        In the room full of documentation that you are referring
    to, does this mean that the--I'm trying to get at the
    documentation there. Does this really mean that when these
    persons that ran that particular home care firm, when they were
    caught, for want of a better word, and then took bankruptcy,
    have we followed them to see if they have reopened this kind of
    an operation somewhere else? And do you really have to accept
    them if they have taken bankruptcy, or are we stuck there?
        Ms. Brown. We have a number of convictions that have
    already taken place and a number of indictments. There are more
    pending. We are going after both the individuals and the
    organizations. If there is a conviction, there is a mandatory
    exclusion where they cannot come back into the business.
        There are some refinements we are concerned about, like
    whether they have relatives that they put in as a front and so
    on. We are trying to propose some things to HCFA, and they have
    done a great deal, particularly in excluding some of these
    people who have not really got any qualifications for getting
    into the business in the first place.
        Mr. Horn. Can you exclude them forever?
        Mr. Hash. If I may, Mr. Chairman, I want to make two points
    about this.
        One is, with regard to the enrolling of new providers into
    the Medicare program, including home health agencies, we now
    have in place a series of requirements that must be satisfied
    that are considerably more rigorous than they were in the past.
        For example, a home health agency now who wants to come
    into the Medicare program must demonstrate a certain minimal
    level of capitalization. They must demonstrate a certain
    patient load indicating, before they start serving our
    patients, they have actually demonstrated the capability of
    providing home health services. And so we have really been
    tightening up on the process for getting into the Medicare
    program as a home health agency and being able to bill.
        The other point I should have made about the visit issue
    which I think is important, when the Congress designed the new
    payment system, the interim payment system under the Balanced
    Budget Act, they inserted into that payment system a new
    payment limit that is an aggregate limit for each individual
    who has served--it is actually an average limit for the patient
    served. And what that means is that now under that limit
    agencies have an incentive to be very economical and proficient
    in the provision of visits, because otherwise they will run
    afoul of this per-beneficiary limit that is imposed by the BBA.
    So we now have a kind of payment system that creates incentives
    to reduce inappropriate visits or visit lengths.
        Mr. Horn. As I look at this chart, ``Errors Due to the Lack
    of Medical Necessity,'' the big money still out there is the
    ``other'' category. As we look at that ``other'' category, are
    there any particular types of real abuse within that that maybe
    ought to be put into another category? Mr. Vengrin, do you have
    any thoughts on that?
        Mr. Vengrin. Mr. Chairman, it goes to all of the other
    types of providers, and we really don't have statistical
    information that we can say one is more aberrant than the
    other. Right now it is still the big provider groups, the
    inpatient services, and I think home health agencies have in
    fact made tremendous progress in billing more correctly. I
    believe statistically there is about $2 billion less in
    expenditures this year. So I think there has been improvement
    there, but the biggest story is the inpatient side.
        Mr. Horn. It is clear on your chart that the home health
    agency category seems to be really dwindling compared to the
    other 2 fiscal years. What is getting out of control is the
    outpatient as well as the inpatient, and that is where it looks
    like the big billions are to collect in some way.
        Mr. Vengrin. One of the biggest factors in the outpatient
    area was partial hospitalization. There were substantial
    dollars questioned because of the improper nature of those
    particular claims.
        Mr. Horn. On that, let me bring up what was quite a
    hullabaloo around here 2 years ago. Under the Medicare law, one
    goes into the hospital and is in a ward and says, ``Wait a
    minute, I have some money in my banking account which I have
    been saving for my health, I would like to move to a single
    room.'' As we all know, apparently some language was put in at
    the end of the session. A lot of that end-of-the-session
    language does lead to trouble, and presumably it was going to
    be repealed and I don't think it was ever repealed. What is the
    philosophy of Medicare on the patient upgrading their place in
    the hospital? I think it was in the original act, wasn't it?
        Mr. Hash. Yes, sir. I am not completely familiar with this,
    I confess, and I would be happy to supply for the record----
        Mr. Horn. Let me give you another example. Let us say a
    dermatologist is allowed certain reimbursement under Medicare
    for certain types of surgery and the patient says, ``Wait a
    minute, I have this other thing that is bothering me.''
        And the doctor says, ``I'm sorry, Medicare doesn't cover
    that.''
        ``That's OK, I am willing to pay you.''
        Apparently that is a violation of Medicare regulations?
        Mr. Hash. I do know what you are referring to now, Mr.
    Chairman, and the matter is as follows, as I understand it: If
    a Medicare patient, a beneficiary, is asking for a service that
    is a noncovered service under Medicare, that is excluded, an
    annual physical or plastic surgery or a hearing aid or
    eyeglasses or any number of items that are not covered under
    Medicare, there is no limitation on that beneficiary's ability
    to purchase that service or those items with their own funds at
    whatever cost the transaction results in. So there is no
    imposition of a Medicare requirement in that circumstance.
        The issue that you are referring to is a service which is
    an otherwise covered service, but for the case of the
    individual who is seeking it there is a question about whether
    it is medically appropriate or medically necessary for that
    individual, that in fact in those circumstances Medicare
    provides special rules which require that a claim be submitted
    to make a determination about the medical necessity; and that
    if in fact a claim is denied because it is not medically
    necessary, then it becomes a noncovered service and the
    individual may purchase that service out of their own funds if
    they so desire.
        Mr. Horn. There is no inhibition against that. Well, let us
    take some of the plastic surgery. Obviously there is a national
    epidemic on breast cancer and there are also those people
    marred in the face and whatnot, and I would think part of the
    healing there psychologically for that person would be to have
    plastic surgery. What are the ground rules on that?
        Mr. Hash. There is a new provision in law that deals with
    the Health Insurance Portability and Accountability Act
    [HIPAA], which I believe requires coverage for reconstructive
    surgery following a mastectomy. So I believe that now is a
    covered service.
        Mr. Horn. So that is no longer a problem?
        Mr. Hash. I want to qualify it only because I would like to
    check to make sure that I am absolutely correct.
        Mr. Horn. Fine.
        Mr. Hash. But I believe it is.
        Mr. Horn. Without objection, we will have the answer from
    the Health Care Financing Administration.
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        [GRAPHIC] [TIFF OMITTED] T2373.036

        Mr. Horn. Mrs. Biggert.
        Mrs. Biggert. Thank you. Within the audit report there have
    been disclosures across all aspects of computer security, and
    one particular section of the report is very alarming to me.
    The report reads that ``We were able to penetrate the security
    and obtain access to sensitive Medicare data at 5 out of a
    sample of 12 contractor locations.'' Simply stated, auditors
    acting as computer hackers were able to easily access
    confidential medical data.
        My question to you, Mr. Hash, is why can't HCFA guarantee
    the confidentiality of this medical data, and what steps are
    being taken to secure these systems?
        Mr. Hash. You are absolutely correct that the protection of
    this information is critical, and it is our responsibility
    because the privacy of the American public is certainly the
    highest priority, and we take our responsibilities very
    seriously in this regard. In addition to what is in the
    Inspector General's audit report, our own Chief Information
    Officer has been conducting similar tests of vulnerability of
    contractor data systems, and we as a result of that have also
    identified vulnerabilities.
        We have taken a series of steps that involve new technology
    that is now in place with our contractors, training of
    contractor personnel and our own personnel as well, to ensure
    that we have in place enhanced procedures, passwords,
    validation systems, and transmission security through the lines
    that we lease to transmit electronic data.
        So you are correct, we must be vigilant about this. Our
    intention is to continue working in this area of system
    security, particularly once we are past the Y2K window of the
    remaining part of this year, because we definitely feel like
    security must be at the highest, and our intention is to work
    with the IG as well as our own staff to make sure that any
    vulnerabilities are corrected.
        Mrs. Biggert. But it sounds like you are saying once we
    have finished with the Y2K dilemma----
        Mr. Hash. No, I think we have taken a series of specific
    steps in terms of new technology, training programs that we
    have undertaken that have greatly strengthened the security of
    our data systems, but we need to do more. We are on hold in
    terms of doing more until we pass the Y2K window.
        Mrs. Biggert. Can you be a little more specific what these
    steps are?
        Mr. Hash. I would be happy to supply for the record, if
    that is an acceptable statement, all of the steps that we are
    taking.
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        [GRAPHIC] [TIFF OMITTED] T2373.037

        Mrs. Biggert. We appreciate that.
        What other risks do the identified computer security
    weaknesses present?
        Mr. Vengrin. We also found problems with the shared system
    where they were able to maintain and have full access to the
    code. In many cases we found that they had the opportunity to
    shut off edits such as a duplicate payment. During one of the
    conference calls that I personally participated in, the person
    in the computer environment said yes, they had full
    capabilities to turn those edits off. So we advised Health Care
    Financing Administration that type of control should not be at
    the contractor level, and I believe they are in the process of
    trying to get that back.
        Mrs. Biggert. So a contractor really could just change the
    amount?
        Mr. Vengrin. They could do that anyhow, but they should not
    be able to change mandated edits that the Health Care Financing
    Administration imposes on them. Right now they can.
        Mrs. Biggert. What would those be?
        Mr. Vengrin. Duplicate payments. There is no reason that
    they should have the capability of turning that edit off.
        Mrs. Biggert. Any other risks?
        Mr. Vengrin. We found a vulnerability, if a provider
    submitted a duplicate payment on the same day, they did not
    update their history file to capture that. Hence, we found a
    couple of duplicate payments that did occur on the same day,
    and I believe they moved aggressively to fix that particular
    vulnerability.
        Mrs. Biggert. Why wouldn't the computer be able to catch
    that?
        Mr. Vengrin. Because it didn't update the history file for
    the activity of that particular day. It was a vulnerability in
    the process.
        Mrs. Biggert. Is that an environment where an individual so
    inclined could make improper payments and cause unlimited
    damage if they have access?
        Mr. Vengrin. Yes, ma'am.
        Mrs. Biggert. Do you have any suggestions or have you given
    suggestions to HCFA on how to correct this?
        Mr. Vengrin. We did. One of the recommendations that we
    made is that the contractor should not have total access to the
    code. They are agreeing in part with that, but again it has Y2K
    implications. As they do code renovations, they tell us if they
    don't have access to the code and there are problems in the
    renovations, they couldn't fix the claims processing and
    process claims. They are fixing things, but there are still
    problems is what they are saying.
        Mrs. Biggert. It seems like this is such an issue, and I
    think probably on all of the committees that I serve on in this
    House that privacy and confidentiality is such an issue, and
    particularly even in subcommittees that I wouldn't expect, the
    medical records confidentiality comes up, in the Banking
    Committee and everything. It is such an issue and it is so
    important and it is something that has to be guaranteed to
    everybody. I hope that you will find a solution quickly.
        Thank you, Mr. Chairman.
        Mr. Horn. The gentleman from California, Mr. Ose.
        Mr. Ose. Thank you, Mr. Chairman. I am aware that the
    gentlewoman from Illinois has additional questions, and while I
    have some, I would be willing to yield my time if she wishes to
    use it.
        Mr. Horn. Do you want to finish up on a round of questions?
        Mr. Ose. We are going to have another round, Mr. Chairman.
        Mr. Horn. Go ahead.
        Mr. Ose. When we do these audits, the providers have in
    some cases compliance systems and in some cases not. How many
    or how often did you find that the providers had compliance
    systems voluntarily imposed on their HCFA relationships?
        Ms. Brown. I don't have a percentage of the providers who
    have compliance systems. We have developed voluntary generic
    compliance plans for certain segments of the industry and we
    are doing others. For instance, we have done laboratories, we
    have done hospitals and so on. These are very comprehensive
    internal control plans, you might say.
        The reason that we are making them voluntary is they have
    to accommodate the smallest institution and the largest. What I
    say in many speeches around the country is that we want them to
    have the flexibility to look at these internal controls that we
    suggest and pick and choose those that would apply to their
    institution. The carrot that we give them for putting in
    compliance plans is saying that should there be a problem in
    their organization, that both the Justice Department and my
    office make determinations on whether or not they should be
    allowed to continue in business because we have exclusion
    authority. The Department of Justice also has the decision
    whether or not to go forward with a criminal or a civil charge
    against them. In looking at the overall intent, their efforts
    to have compliance with the laws and regulations would be very
    influential in that. So, it could serve them well to have these
    compliance plans. We know that they are adopting them.
        Mr. Ose. Have you found a correlation between the existence
    of a voluntary compliance plan and the accuracy on our audits?
        Ms. Brown. We don't actually audit the provider themselves,
    in other words, at least not in the financial system audit. We
    do other audits based on evidence of wrongdoing or high error
    rates or something like that.
        Mr. Ose. When you do those audits, are they likely to have
    a compliance system or unlikely to have a compliance system?
        Ms. Brown. It is a growing thing. There were not many
    compliance systems 3 years ago or 6 years ago when I came to
    this job. But now a high percentage of them are, and I think
    the American Hospital Association just did a study that showed
    a very high percentage of hospitals either had them or planned
    to have them in the next year, and I will get you the
    percentage.
        Mr. Ose. Do you have a copy of that study?
        Ms. Brown. Yes.
        Mr. Ose. Mr. Chairman, I would be interested in reviewing
    that, and if we can add that to the record, I would appreciate
    that.
        Mr. Horn. Without objection, it will be inserted into the
    record at this point.
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        Mr. Ose. The other question is with respect to the
    compliance systems that are in existence right now, how do they
    break out in terms of frequency of implementation relative to
    private, public, nonprofit, for-profit, nongovernmental, and
    governmental? It would seem to me very important, because if
    you find private providers without compliance systems with a
    high degree of errors, that is an ``Over here, look here,''
    kind of thing. So I want to make sure that we are ultimately
    using our resources in this manner effectively, rather than
    focusing them on areas where we already have a high degree of
    compliance and a relatively low level of errors.
        Ms. Brown. I would like to make a couple of points about
    them that I think you would find interesting. First of all, we
    started to develop these plans because there were many
    consultants in the business who were charging over $100,000 to
    help an institution put in a compliance plan, and it wasn't an
    effective one or one that we felt would do them any good or
    that we would consider as a good preventive measure. So we
    started to develop this as part of our prevention efforts, and
    the industry has adopted these. We are not far along enough
    that I can give you percentages of all of the nonprofit/profit
    and so on organizations who have adopted them, but there is a
    great deal of interest.
        The other point that I want to make is when we have
    convicted somebody or an institution, we impose a nonvoluntary
    integrity plan. We have, as part of the settlement of that
    case, an integrity plan that is imposed on them and it is
    usually 5 years. They have to report back to us on the status
    of their business, the results of--how many complaints they
    have received, what they have done about them, and a variety of
    other things, and we monitor those plans. We are monitoring
    several hundred of them right now. We will continue to impose
    those integrity plans where we have found significant errors to
    have taken place.
        Mr. Ose. My time has expired, Mr. Chairman.
        Mr. Horn. Do you want to pursue that?
        Mr. Ose. For the record, I will submit this in writing. How
    do you determine whether a voluntary compliance plan is
    satisfactory? You can respond subsequently.
        Mr. Horn. Without objection, there will be space left here
    for your response and the Health Care Financing
    Administration's response.
        [The information referred to follows:]
        [GRAPHIC] [TIFF OMITTED] T2373.048

        Mr. Horn. I now yield 6 minutes to Mr. Turner of Texas.
        Mr. Turner. Mr. Hash, several months ago the President
    directed that all managed care providers under Medicare
    subscribe to certain patient protections. As you know, we are
    debating in the Congress patient protection legislation that
    would affect the private sector managed care companies. Has the
    President's order been implemented successfully by HCFA?
        Mr. Hash. Yes, it has, Mr. Turner. We have put into place
    what we think are the toughest beneficiary or patient
    protection requirements in our standards for managed care plans
    of any managed care plan around the country. So the President
    issued an Executive order requiring that health care providers
    who do business with Federal programs, including our program,
    meet these patients' bill of rights protections as set forth
    from the President's commission on quality and patient
    protections.
        Mr. Turner. How long have those protections been in place?
        Mr. Hash. We published a regulation in June of last year
    which implemented Medicare patient protections as a part of
    implementing something called the Medicare Plus Choice program,
    which is the Balanced Budget Act part dealing with managed care
    improvements, and the Medicaid improvements to patient
    protections are a part of a rule that we now have under
    consideration for Medicaid managed care. The proposed rule was
    issued at the end of September, and we expect later this spring
    to be publishing a final rule for the Medicaid managed care
    programs.
        Mr. Turner. So Medicare patient protections have been in
    effect since last June?
        Mr. Hash. Yes, that is correct, Mr. Turner.
        Mr. Turner. One of the issues that comes up in patient
    protections is whether or not they are going to result in
    additional costs for health care. In the instance of patient
    protections in the area of Medicare, I think it would be
    interesting if you could comment on whether or not there has
    been a cost impact on the Federal Government as a result of
    implementation of the patient protections for Medicare?
        Mr. Hash. We don't think so, Mr. Turner. Our experience and
    also in working with the associations which represent managed
    care plans, that many of them--many of the best plans--already
    had these protections in place for the most part. We believe
    that they have been endorsed by the associations representing
    managed care plans. So we think that there is a great deal of
    agreement on these protections that are now in place for
    Medicare Plus Choice.
        Mr. Turner. How are you able to determine whether or not a
    managed care company is making a reasonable profit with regard
    to the reimbursement rates that you provide?
        Mr. Hash. Each year for a managed care company that wishes
    to contract with Medicare, we require them to file with us a
    statement in which they detail some of their financial
    information, including an estimate on their part of what it
    costs them to provide the Medicare benefit package to their
    Medicare enrollees. And that calculation is important because
    we compare what it costs them to what we pay them, and in those
    cases where their costs are lower than the Medicare payment
    rate, we require them to make up that difference through either
    reducing cost-sharing for their enrollees or by increasing
    benefits.
        So we actually have some window at least on the portion of
    their business that relates to the Medicare program. Overall,
    of course, almost all managed care plans have other lines of
    business besides Medicare, and we do not have access to their
    financial information across the board.
        Mr. Turner. Would it be important or appropriate that you
    have access to that information? Is there some overlap between
    their other activities that would be important to know about in
    assessing whether or not the Federal Government and the
    taxpayers are getting a fair deal from the managed care
    companies?
        Mr. Hash. I think what we have concentrated on is this
    filing of their estimate of their costs to provide the benefits
    that are required under Medicare, that is the critical piece to
    ensure that what we pay is in relation to what their costs are,
    and if they are not, that the beneficiaries get the benefit of
    the difference between their costs and what we pay. We have
    recently completely revamped the system, the reporting system
    for those estimates from plans, and we think now it is a much
    stronger and more representative set of data about the costs of
    health plans to provide the Medicare benefit package.
        Mr. Turner. But what you base this on is the managed care
    companies' estimate of their costs?
        Mr. Hash. That is true, but through our reporting system we
    are able to audit that more carefully because we have put into
    place more systematic requirements about how they go about
    doing that estimation. It is subject to requirements and
    standards that we put forth in a protocol that they must use to
    report to us their costs.
        Mr. Turner. Ms. Brown, do you have authority to audit the
    activities of these managed care companies?
        Ms. Brown. We can. We don't as a rule go into the private
    aspects of their business. However, there may be some occasions
    where we would be looking at the cost distribution, for
    instance, of their overhead, because they may be shifting costs
    so that it appears that it is all Medicare costs. Sometimes
    they are actually taking some of their private costs and
    putting it on the Medicare side.
        Mr. Hash. Mr. Turner, in fact the General Accounting Office
    released a study within the last couple of years indicating
    that in their reporting to us of their costs, that there were
    some inappropriate allocations, particularly in the area of
    administrative overhead, where in fact the costs of the plans's
    overhead was being inappropriately allocated to the Medicare
    side, therefore affecting--raising inappropriately their costs.
        And so this new reporting protocol that I referred to no
    longer allows plans to allocate their overhead in the same
    manner that some of them were doing in the past, and we believe
    now we have a much tighter system with respect to what it is
    they are reporting to us and whether or not it represents a
    fair allocation to the Medicare side from the business they are
    otherwise doing.
        Mr. Turner. How often are the rates readjusted for the
    managed care companies?
        Mr. Hash. Once a year.
        Mr. Turner. Once a year, and does it occur at the same time
    for all of the companies?
        Mr. Hash. January 1, the calendar year.
        Mr. Turner. Thank you, Mr. Chairman.
        Mr. Horn. Let me pursue a couple of inserts that relate to
    policy matters, and we would appreciate the aspects of the
    Inspector General also on this.
        I sent a letter to the Administrator with reference to a
    series of administrative law decisions on behalf of a
    particular surgeon that has had a brilliant record, and some of
    his things go against the pattern of other surgeons. The letter
    from the Administrator is dated February 8, 1999.

        Thank you for your letter on behalf of your constituent,
    Robert A. Nagourney, M.D., regarding the distinction between
    the types of clinical resistance and sensitivity assay tests to
    determine the effective treatments for cancer patients. I
    regret the delay in response.
        In the absence of a national coverage determination,
    coverage and reimbursement of all assay tests are left to the
    discretion of the local Medicare carriers. Dr. Nagourney is
    correct. The two recent cases by administrative law judges did
    permit the coverage of two cancer tests, extreme drug
    resistance assays and cell culture drug resistance assays, for
    individual patients. However, at this time the decisions of the
    administrative law judges are limited only to those individual
    cases and does not establish precedential coverage policy for
    the Health Care Financing Administration or our Medicare
    carriers.

        I guess I would ask the question, if an administrative law
    judge rules a certain way and you have another case that rules
    another way, what does it take to get a policy changed?
        Mr. Hash. Mr. Chairman, I think that is a very important
    set of questions because, as you may know, we were in the
    process of completely redesigning our coverage process at the
    national level. And what that means is we are putting into
    place a process that is much more open and transparent, that
    involves a federally qualified advisory committee to assist in
    making decisions about advancements in medical care that ought
    to be covered under the program.
        You are correct in saying that when information--or at
    least I think you are implying, and I think it is a correct
    inference--that if we get information about a new test or a new
    procedure that holds some promise, and then we see that there
    are conflicts in the handling of that at the local contractor
    level, that it does behoove us to put that up into our system
    of review to first bring some consistency where we can to these
    kinds of issues.
        I will say to you that one of the reasons that local
    medical review policies are in place is that over the years we
    have found that an effective way of dealing with new
    technology, because we need to have information about what
    kinds of patients benefit from a particular new procedure or
    new service, we need to know something about the costs in
    different settings, all of this information is initially
    gathered through local medical review policies which then feed
    into a decisionmaking policy for national coverage. But without
    that sort of opportunity to get experience with advancements in
    health care, it would be difficult to make appropriate national
    decisions.
        But in this particular case, where there has been conflict,
    it should be something that we are reviewing through our
    coverage process, and I would be happy to get back to you with
    what might be the status of our look at that question.
        [The information referred to follows:]
        [GRAPHIC] [TIFF OMITTED] T2373.049

        Mr. Horn. I would appreciate that. The Administrator goes
    on to say,

        We agree with Dr. Nagourney, there is a distinction between
    the types of in vitro chemosensitivity technologies. As Dr.
    Nagourney's letter indicates, these technologies are new, and
    despite the recent rulings by the administrative law judges,
    Medicare still considers these tests as investigative. I
    believe the type of research being performed by Dr. Nagourney
    is very important. Please be assured that when Dr. Nagourney's
    work reaches a stage where a national and/or local coverage
    decision is considered, we will carefully examine the
    scientific and methodological differences in the application of
    these cancer tests in the consideration of coverage and
    reimbursement policies, including the development of CPT codes.

        Do you want to translate CPT codes for me?
        Mr. Hash. Current procedural terminology. It is actually a
    manual of about 7,000 codes that describe various services and
    visits that physicians and others provide. It is compiled on an
    annual basis by the American Medical Association, and the
    Medicare program actually uses that coding system in its claims
    processing in order to communicate the type of services that
    have been provided.
        What that letter actually did, as you read on, Mr.
    Chairman, is answer the status of this question in a way that I
    think--I would be getting back to you on. What happens here is
    we go through an evidence-based analysis of these kinds of new
    things. And when we cover something, it needs to have moved
    from the investigational phase to a point at which, in refereed
    journals and among practitioners of whom we consult, that it
    has been vetted and subjected to full scientific validation
    before we want to make a national coverage decision.
        But I think what often is the difficulty here is the speed,
    or in some cases the lack that may surround new developments,
    and people who think that they have an advancement that is
    benefiting people are understandably interested in making sure
    that all people who suffer from a condition that could be
    helped by it will be able to access this new advancement. And
    that is why we are committed to a much more time-sensitive,
    transparent, and evidence-based coverage process.
        Mr. Horn. Well, let me finish with the last few words of
    the Administrator: ``In that regard, our coverage and analysis
    group in the Health Care Financing Administration's Office of
    Clinical Standards and Quality would be most interested in Dr.
    Nagourney's research. Dr. Nagourney can send his materials
    directly to the attention of Dr. Grant Bagley,'' and the
    address, Baltimore, MD.
        The reason that I am so wound up on this is I have known so
    many lives that he has saved. Chemotherapy often is just the
    wrong thing, and he has been able to match what actual therapy
    is needed in relation to that particular cancer. You see that
    proof and they are walking today, when others were dying, I
    want a little progress being made here. So that would help.
        In another letter that I sent to the Administrator on
    September 25, 1998, I said: ``This letter is in reference to
    the Health Care Financing Administration's policies on
    outpatient psychiatric services. Specifically, we are concerned
    with the lack of a national medical review policy for
    outpatient psychiatric services.''
        I noted that I am interested in reviewing Medicare's
    current national medical review policy for all medical
    treatments. I am also interested in the number of claims which
    are processed by each carrier and with contracts with the
    Health Care Financing Administration. I would like to know the
    number of these claims that are accepted, the number rejected
    for each type of medical procedure.
        I would also like to know at what level in the process,
    initial review, hearing, an administrative law judge hearing,
    each type of treatment that was accepted for payment. Further,
    I am interested in knowing which carriers are using the
    national model policy developed by the career medical directors
    for outpatient psychiatric services and which are not.
        In the reply of the Administrator on February 26, 1999,
    this was turned over to Dr. Robert A. Berenson, director of
    health plans and providers, and the usual answer here: ``The
    Administrator asked me to thank you for the Medicare policy for
    outpatient psychiatric services. I regret the delay'' and so
    forth. ``Staff members in our regional offices are often in the
    best position to be of assistance to the people in their
    area.''
        Well, we have written now with detailed requests for
    information to your San Francisco office, Health Care Financing
    Administration, Health Plans and Providers Branch, and I would
    like at this point in the record, without objection, to lay the
    correspondence down plus some of the future answers so we can
    get this one restored.
        Just on the general point of Medicare policy for outpatient
    psychiatric services, what can you tell me, Mr. Hash, in
    relation to that, where are we?
        Mr. Hash. The area that we have been concentrating on, and
    it actually came up in the audits by the Inspector General. It
    has to do with the coverage of the partial hospitalization
    benefit under Medicare which, as you may know, is being
    provided both by hospital outpatient mental health clinics as
    well as freestanding community mental health centers. The IG
    identified, as well as our own regional office staff, a
    significant number of providers who were enrolled as qualified
    to provide the partial hospitalization benefit, who upon site
    visit and further inspection did not meet our requirements, and
    furthermore that the kinds of claims they were submitting were
    not being properly documented and they were being submitted for
    services that were not covered, and so forth. In fact there is
    quite an extensive report about this.
        What we have been doing is to first visit a large--not all,
    but a very large number of the outpatient mental health centers
    to ascertain whether or not they are in compliance. For those
    that are not in compliance, we have sent letters indicating
    they need to supply us additional information about that. With
    respect to medical review, we have enhanced the medical review
    of claims that are coming into our contractors for partial
    hospitalization programs.
        Last, we have recommended to the Congress in the
    President's legislation for the year 2000 that there be a
    change in the law that makes it clear that partial
    hospitalization services cannot be provided in a patient's home
    or in a place that is not an appropriate clinical setting for
    such services, because we have found widespread abuse in this
    area, and that is where we have been concentrating our efforts
    on outpatient psychiatric services.
        Mr. Horn. Is there a limit to the number of sessions that
    they can have with outpatient services?
        Mr. Hash. There isn't.
        Ms. Brown. No, sir, but the requirement is that these
    services are something provided to somebody who would otherwise
    have to be a full-time patient in a psychiatric hospital.
        I am sorry to say that this was the most appalling abuse
    area that I have seen in the 20 years that I have been serving
    as Inspector General in various agencies. Over 90 percent of
    the payments should not have been made that were being made in
    this program. Fortunately, it wasn't that large a program.
        HCFA has taken aggressive action to make sure that the
    places providing the service are qualified and that the people
    are qualified and that there is something other than just baby-
    sitting type services that are being provided. Many of them
    were providing just simple crafts and things like that rather
    than true psychiatric services. This was one of those things
    caught at an early stage, and I think corrective actions are
    being taken.
        Mr. Horn. Was there an actual certified psychiatrist behind
    this, and they simply were training people to do a few things
    that we would call what graduate students do when they try to
    help people?
        Ms. Brown. It was a range of services. Some of the services
    might have been helpful but they didn't qualify for this
    particular benefit. There may be other types of things that
    would cover services in the line of giving people care, but----
        Mr. Horn. You gave me one example of somebody going astray.
    Can you give me a few more for the record on the outpatient
    psychiatric situation? What is another typical thing that
    happened that you had to do something about?
        Ms. Brown. The people may not have been qualified to
    receive the benefit. They may not have had a condition where
    they otherwise would have had to be an inpatient. They might
    have had some need for psychiatric sessions of some kind, but
    they would have to be covered under some different benefit, not
    the partial hospitalization. And of course there were many
    places who really weren't qualified to provide the service
    under the provisions of the legislation.
        Some of them voluntarily withdrew, once challenged as to
    whether or not they met the qualifications. So it was one of
    those things where payments started to be made immediately, and
    people were sort of jumping in to collect without a careful
    screening of both the beneficiary's eligibility and the
    provider of services' eligibility.
        Mr. Vengrin. Some of the patients had no history of
    psychiatric illness whatsoever, and these services were of a
    recreational nature--dancing, social events, arts and crafts,
    as the Inspector General mentioned.
        Mr. Hash. And in fact from a coverage point of view,
    Medicare does not cover adult day care. What some of these
    providers were running were adult day care centers.
        Mr. Horn. Interesting. I yield to the gentlewoman from
    Illinois, Vice Chairman Biggert.
        Mrs. Biggert. Thank you. In regards to Mr. Turner's
    comments, I think it is important to note that in counties
    surrounding my district many managed care plans have elected
    not to participate in the Medicare Plus Choice program because
    their costs are not covered. I met with one recently who stated
    that although they are willing to break even under Medicare,
    they simply will not go into the red for Medicare. So as I
    think we discussed the relationship of managed care to
    Medicare, it is important to note that many Medicare
    beneficiaries are counting on HCFA and Congress to ensure that
    Medicare Plus Choice remains a beneficiary choice.
        Second, as far as home health care, in one of my former
    lives I was on the board of directors of a home health care
    agency and I served as chairman of that group celebrating its
    100 year anniversary, and so this was in existence long before
    all of us were here. And we went out of business because
    although we had a huge endowment, we were serving preservice,
    those patients who had no access to Medicaid, no access to
    Medicare, and also those that were the Medicare/Medicaid
    patients. We ended up subsidizing Medicare and Medicaid to the
    tune of $2 million a year, and we could have continued this for
    a number of years and then that huge endowment would have been
    gone.
        We chose to become a foundation, to be able to help in the
    health care field rather than to continue that, because our
    nurses would not work when they were seeing acute care patients
    who were exiting the hospital earlier and earlier, and they
    were only able to provide that skilled nursing care for a very
    short period of time within the scope of the rules and
    regulations, and so it did end up as a subsidy.
        And I just want to note that for the record that there are
    a lot of agencies that really are very committed, not-for-
    profit agencies and those for-profit which are very committed
    to providing that health care. I know that we are addressing
    the fraud and abuse today, but I think it is important to note
    that there are agencies that work very hard for us and are
    great providers.
        Ms. Brown. If I could just mention that one of the things
    that got us involved in this were complaints from long-term
    organizations who had been providing true health care services
    that were needed in the home, and they were saying they
    couldn't compete with these others who were providing cleaning
    services and other things to patients, who in many cases
    weren't qualified and were collecting the funding that was
    available. And those who were truly trying to provide services
    to patients were driven out of the business by the constraints
    necessitated by these other illegitimate services.
        Mrs. Biggert. I have one other question. Ms. Brown, you
    stated in your testimony that the substantial year 2000
    initiatives could negatively affect future error rates, and if
    the collection and processing of the electronic data poses
    challenges and risks, particularly in the year 2000, how does
    HCFA propose to collect the volumes of data that will be
    required in order to implement the risk adjuster it proposes? I
    guess that would be to Mr. Hash.
        Mr. Hash. I think that is to me. We actually began
    collecting the data on hospital admissions with respect to
    managed care enrollees. It began on January 1, 1998. We have
    something in the neighborhood, I believe, of about a million
    discharges that have been reported to our data system. That
    formed the basis of the proposed risk adjustment which we
    released at the beginning of March to the health plans who were
    contracting with us. We are in the process of putting together
    a plan to begin collecting outpatient data, physician services,
    and clinical encounter data to support a more comprehensive
    risk adjuster which is scheduled to come on-line in the year
    2004.
        Mrs. Biggert. I've heard that the systems have had
    difficulty processing the data where beneficiaries move from
    one county to another or one plan to another. How are you going
    to verify the accuracy?
        Mr. Hash. We have been working with individual plans. We
    have about 300 health plans that contract with Medicare
    currently, and since we began collecting the data, we have been
    trying to work through any issues or questions about the
    validity or representativeness of the data, having the data
    coming from our contractors compared to what the health plans
    believe they sent in, and either finding where the
    discrepancies are, if there were, and correcting them and
    getting to a point where both us and the health plan are
    satisfied that the hospital admission data that they have
    submitted to us is in fact accurate, because we don't want to
    proceed on the basis of a risk adjustment that's based on
    faulty data.
        Mrs. Biggert. And then you'll have a means to verify? What
    would be your accuracy level, do you think?
        Mr. Hash. We've presented to each plan the information on
    the admissions that we have that have been reported to us, for
    them to in turn verify with their own internal records just to
    make sure that the data we have is consistent with what they
    think their records reflect in terms of hospital activity for
    their enrollees.
        Mrs. Biggert. I've seen no detailed accounting of how money
    was spent, quite a good number of dollars to the beneficiary
    education program, and how effective your efforts have been in
    providing Medicare beneficiaries with the information they need
    to make the right decision for plans.
        Mr. Hash. We have a full accounting which we'd be happy to
    share with you. We are very proud of the efforts we have
    undertaken. As Secretary Shalala is fond of saying, the
    Medicare education program is the largest peacetime program
    ever undertaken in this country.
        We have set up a multifaceted approach which involves the
    submission of a handbook to each beneficiary, the creation of a
    1-800 toll-free number, 1-800-Medicare, that actually connects
    individual beneficiaries with customer service representatives
    who are trained to answer commonly asked questions.
        We also have an Internet site, Medicare.gov, which provides
    comparative information about the health plans in their areas
    as well as information about health plan performance, so-called
    HEDIS data, which is health employment survey data about the
    performance of plans and satisfaction data about the enrollees.
    All of this is being made available to beneficiaries.
        And last, we've been working with a partnership group of
    private organizations who interface with our beneficiaries,
    such as State health insurance counselors and other
    organizations, unions, employers, to make sure that they can
    also provide counseling and one-on-one information to
    beneficiaries. This has been a very comprehensive undertaking.
    It is, as you alluded to, financed by an assessment that is
    made on the plans that participate in the Medicare program,
    which was how the Balanced Budget Act established the funding
    mechanism for these efforts.
        Mrs. Biggert. I would appreciate the accounting.
        Mr. Hash. I would be happy to supply that.
        Mrs. Biggert. You have done an internal audit of that
    program?
        Mr. Hash. We have. In fact, last year--you may have read
    about this--we decided not to provide the full array of our
    information services nationwide but to target five States. We
    did target five States, and in that process we went in advance
    of our efforts and did a baseline assessment of information
    needs, and then since the fall campaigns of November we have
    gone back and collected, after the fact, information so we
    could evaluate whether the materials were useful to people,
    whether they actually were intelligible to them, whether the
    toll-free number worked, and what sort of suggestions and
    recommendations that people had to strengthen the information
    program.
        Mrs. Biggert. Did you share the results of that audit?
        Mr. Hash. We're not completely through with the evaluation
    but as soon as we have it done, we would be happy to share it
    with you.
        Mrs. Biggert. Thank you very much.
        Thank you, Mr. Chairman.
        Mr. Horn. Thank you.
        The gentleman from California, Mr. Ose.
        Mr. Ose. Thank you, Mr. Chairman.
        Following up on the gentlelady's question, the five States
    that were targeted, Mr. Hash, which were they?
        Mr. Hash. Which were they? They were Washington, Oregon,
    Florida, Ohio, and Arizona.
        Mr. Ose. Let me jump ship for a little bit, back to my
    question on compliance itself. Asking a large multifacility
    system to engage in a compliance system is far different from
    asking a single facility rural clinic to engage in a compliance
    program. I'm curious if you have, on either side, any
    information about the impact on those two relative classes.
        My district is largely rural, and we have a significant
    declination in the availability of Medicare in the rural areas,
    and I'm trying to figure out what it is that is causing that.
    Is it the reimbursement rates? Is it the cost of compliance?
    What is it? I'm wondering if you have any information about
    that, as to the impact of the compliance issue on a relative
    scale between large multifacility systems in urban areas and
    single site facilities in rural areas?
        Ms. Brown. I can tell you that we have a concern about this
    and, as I mentioned, we started putting out these generic
    compliance plans because we found that contractors were
    charging a huge amount of money and in some cases not adapting
    compliance plans to the needs of the organization. We have
    encouraged every organization to look at these generic
    compliance plans and look at everything, including is it cost-
    effective to implement a certain suggestion since it's made for
    the entire range of that type of provider. I always told them
    that they should then document why they made their choices,
    including whether or not something would be cost-effective
    within the size organization we're talking about.
        So, to have a tracking system of some kind, you know, a
    compliance manual might be much more effective for a small
    organization than a large one having a compliance officer;
    whether that individual is full-time or part-time; whether
    there's a whole team of people; or whether to have a hotline
    for reporting misdeeds should they occur. You know how
    elaborate that system would be. We have tried to consider the
    fact that there are a great many small providers where an
    elaborate system would be impractical and financially
    burdensome. They could adapt these compliance plans, a system
    of internal controls and procedures for making sure that top
    management gets the information and is aware of what's
    happening in their organization, that there's a reporting flow
    of information and so on, and that through plan ignorance they
    were not denied information about misdeeds that are going on
    within the entity itself. So, we have tried to consider that. I
    don't have statistics as to what the cost is per organization
    or anything like that.
        Mr. Ose. Does HCFA have any information as to the
    declination and available care in rural areas as a result of
    the cost of compliance?
        Mr. Hash. I don't have any information to quantify that,
    but what I would say is what we've been trying to do is invest
    in provider education initiatives, because we recognize that we
    have a responsibility to make sure that our rules and
    regulations are fully understood, that people have an
    opportunity to get clear answers to their questions. We have
    been working with educational programs through our contractors
    to in fact install around the country an effort to educate
    billing clerks of hospitals or of small physician practices so
    that they can get assistance in understanding how to complete
    an appropriate claim for the Medicare program.
        We have targeted an educational effort at the beginning of
    physician's careers, that is to say, with over 6,000 residents
    who have participated in a training module for how to
    appropriately comply with and bill the Medicare program. And we
    have supported another Internet learning site that a very large
    number of physicians can sign onto, go through a training
    course, and not only physicians but their billing and business
    managers and other folk, in order to keep up with the changes
    in requirements and so forth, because again we recognize that
    we have an enormous responsibil-
    ity to make sure people understand what our expectations are
    and what our requirements are.
        Mr. Ose. I appreciate what you're telling me. The issue
    that comes up is, if there is no doctor there, it doesn't
    matter what the compliance requirement is. That just creates
    enormous problems in my district, because doctors are naturally
    aggregating or congregat-
    ing in the urban areas and it's an enormous problem in my
    district.
        Mr. Hash. One thing that has happened, I think, and it was
    a result again of the BBA, was the Medicare care program has
    been able to expand the types of practitioners who are eligible
    to actually participate and take care of patients and bill the
    program, most notably, advanced practice nurses, nurse
    practitioners, certified nurse anesthetists. These
    practitioners are not necessarily a substitute certainly for
    someone who needs a physician service, but there is a great
    deal of work I think that can be done in reaching people who
    need primary care services through advanced prepared health
    professionals.
        Mr. Ose. We have some facilities like that and I appreciate
    that flexibility. I do want to ask something, and I would
    appreciate visiting with you privately about, that is the
    definition of fair or adequate reimbursement for services
    within the system.
        Again, going back to my district, if there's no medical
    service available, what is a fair reimbursement level? There's
    no doctor there. What's a fair reimbursement level? I don't
    know how to reconcile that. Rather than spending the time of
    the committee on that in discussion, I would rather visit with
    you privately, but it's an enormous problem. It doesn't matter
    what the reimbursement is if there's no doctor there.
        Mr. Hash. I'd be happy to do that. There are some
    strategies that some communities have tried to put into place
    that would attract appropriate cadres of health professionals,
    but we should talk about this, because access for our
    beneficiaries who live not only in your district but in other
    medically underserved areas is something that we should be
    trying various strategies to get health care professionals an
    appropriate incentive to serve those individuals.
        Mr. Ose. I saw nothing in the material. Maybe I missed it
    about initiatives addressing that particular issue, whether
    they're on an audit trail or audit basis for analysis purposes
    or initiatives that would follow on.
        Thank you, Mr. Chairman.
        Mr. Horn. Well, I thank you. You've raised a significant
    issue. Mr. Turner and I have talked about it in his area and
    now you've mentioned it in your area, so I think what we'll do
    is hold a hearing in both districts. I know we're going to hold
    one in Sacramento on the Y2K bit, otherwise known as the year
    2000 computer glitch, and we might well work in this if you'd
    like to do that.
        Mr. Ose. Is this a double play?
        Mr. Horn. This is a double play, yes. This gets the staff
    in one place at one time and we can do two or three things. So
    we welcome your thoughts on it.
        Let me just ask a few closing questions, unless the
    gentlewoman from Illinois has some.
        Mrs. Biggert. No.
        Mr. Horn. Just for the record, we've talked about various
    reforms that the Health Care Financing Administration would
    like to have. Are those before the Committee on Ways and Means
    in the case of Medicare and before the Committee on Commerce in
    the case of Medicaid? Is that where they are?
        Mr. Hash. You're referring to the contracting flexibility?
        Mr. Horn. Yes, and different things which you've mentioned
    as reforms that you'd like to have.
        Mr. Hash. Right. They would--the President's
    recommendations for the year 2000 legislation, I'm not sure
    whether the actual legislation has been transmitted to the
    Congress. It certainly is included in the budget in descriptive
    terms, but I'd be happy to let you know exactly whether it has
    been transmitted formally to the Congress.
        [The information referred to follows:]

        The statutory language for this year's fraud and abuse
    proposals has not yet been submitted to Congress. The
    Administration's contracting reform proposal will be submitted
    to Congress this year.

        Mr. Horn. We did get into reorganization, but basically
    those are the authorizing committees.
        Mr. Hash. That is correct.
        Mr. Horn. They need to concur with the policy.
        Mr. Hash. That's my understanding.
        Mr. Horn. OK. I guess I would ask this question of the
    Inspector General, and it's probably outside of your
    jurisdiction, but do you ever have a chance to look at the
    revenue that flows into Medicare based on the withholding tax?
    Have we ever looked at how that's handled by the Internal
    Revenue Service?
        Ms. Brown. That was one of the areas, because we didn't
    have the jurisdiction to look at Social Security, we could not
    audit that as part of our financial statement review, and this
    year we have worked out arrangements.
        Joe, did you want to go into that?
        Mr. Vengrin. Yes. Mr. Chairman, we are contracting on a
    task with the General Accounting Office, which contracts for
    the Social Security audit, to get that coverage, but that's on
    the Part B premium side. We could not go over to Treasury to
    audit the trust fund accounting, so in effect we are precluded
    from auditing that, Treasury as well as Social Security. I'd
    love to. My plate is kind of full, though, with Medicare.
        Mr. Horn. Let me find out what's precluding you. Is it a
    law that's precluding you?
        Mr. Vengrin. We really could not go into another Federal
    agency.
        Mr. Horn. Even though your revenue is based on how it's
    handled by that agency?
        Ms. Brown. That's true.
        Mr. Horn. Well, we'll get at it some way. I have a memo I'm
    going to insert in the record, without objection, on how that
    revenue comes in for 14, 15 trust funds that are involved, one
    of which is related to Medicare, the area of which is related
    to Social Security, but there's a lot of others, the Aviation
    Trust Fund, the Interstate Highway, so forth.
        And it's my understanding, having reviewed the financial
    status statement of the Internal Revenue Service, what you have
    here is an Office of Estimates that sort of estimates what the
    revenue is. I don't understand why we can't just, when the
    check is made out by the employer, employee--and Social
    Security, Medicare, where Medicare was modeled on Social
    Security, it works generally the same way--and I just can't
    understand why if the check is made out for that match in the
    fund of employee and employer, I can't understand why that
    isn't immediately segregated into that trust fund.
        But what happens? It goes to one of the many banks that the
    Treasury anoints and that becomes the general revenue. So
    everybody is sort of a little murky about well, gee, did we
    lose 10 million? Did we lose $100 million in terms of the
    estimates? And we don't really have a good fix on that. Maybe
    the General Accounting Office does.
        We'll be pursuing that with them, but it's something that
    does interest me and it interests--I turned a copy of the memo
    in to Chairman Archer last night, and he's going to take a look
    at it and see what happens also. But I am sort of amazed that
    we can't connect the revenue bit with the expenditure bit, and
    that the Inspectors General are precluded from maybe working as
    a team. And wherever those trust funds are involved, either GAO
    ought to do it as part of it or Treasury ought to do it as part
    of it, as to just are we accurate in terms of our revenue.
        Ms. Brown. I would appreciate that, sir.
        Mr. Horn. OK. Let me close with a few detailed questions
    here that haven't been asked, to my knowledge.
        Medicare contractors, as we saw, collected over $7.5
    billion in 1998, and your report points out significant
    weaknesses in the area which we've been exploring. You reported
    that contractors do not maintain records to support cash
    collections. In addition, you reported that at some locations
    the same person that receives checks endorses the checks,
    prepares the deposit to the bank, performs the bank
    reconciliations. This situation puts this money at tremendous
    risk of being stolen.
        You're absolutely right. The first thing you learn to do in
    any organization is ``Look, we can't just let one person do it
    from end to end,'' as wonderful as Aunt Minnie might be, and
    you learned long ago when Aunt Minnie says, ``Oh, I've got a
    lot of work to do, I don't want to take a vacation this
    summer,'' and Uncle Louie does the same thing in the next
    organization, you've got a real problem.
        I'm a great believer in moving people around, making sure
    they take their vacations, especially when they're handling
    money, and let's see who sits at that desk and what they're
    going to do. And there have been great exposes, at least in the
    State of California we've had them, where somebody just took
    over for the summer, said, ``Gee, I wonder where this,'' in
    this case 800 bales of hay went to the ranch of a vice
    chancellor of one of the systems in California and not to the
    ranch that was being run to educate students.
        So I'm just curious what your recommendations are on that
    and if they're being followed, and can they be or is there some
    block to it with Medicare contractors, or can you just plain
    old mandate it?
        Mr. Vengrin. Again, Mr. Chairman, the Medicare contractors
    historically have done a great job on processing claims in an
    expeditious manner, but the financial controls are gradually
    catching on as a result of the CFO act. Believe it or not, in
    many cases they just didn't do bank reconciliations. We've made
    these recommendations and we have to see if they're following
    them. They're just not doing them currently.
        Mr. Horn. I think we would all agree when you combine a
    poor recordkeeping of accounts receivable, the weaknesses in
    collecting cash, the computer security problem which you
    mentioned, that you end up with absolutely no control over the
    money. So you're saying how can we solve that one in the next
    audit.
        Ms. Brown. Well, I think as Mr. Hash mentioned, having a
    wider selection base for getting contractors so that there is a
    great deal of incentive for them to live up to the expectation
    of reasonable control systems would be very helpful.
        Mr. Hash. If I might add a footnote, Mr. Chairman, we have
    incorporated into our system of evaluating contractors
    requirements with regard to financial reporting and
    documentation. And obviously now the job is, as the Inspector
    General has alluded to, that we are providing--that we need to
    make sure we're providing--sufficient oversight and evaluation
    of our contractors to make sure they're in compliance, because
    I think we have the standards now in place, the requirements
    for documentation and for financial reporting, and we are doing
    training sessions; in fact, this spring a whole series of
    training sessions on financial documentation and requirements.
    And as a result, we think we are beefing up through our
    regional offices the actual oversight of compliance with these
    requirements by our contractors, and that's certainly a
    responsibility that we have.
        Mr. Horn. Inspector General, on page 9 of your statement
    before us, point 2, you note financial reporting remains a
    material weakness because Medicare contractors have not
    adequately reconciled expenditures reported to the Health Care
    Financing Administration. Also, the process for preparing
    financial statements is manually intensive. Now, what can we do
    on that? There must be computer programs here, and what do we
    mean here by ``manually intensive?''
        Mr. Vengrin. Mr. Chairman, as a result of the preparation
    of the financial statements, they have to make hundreds of
    adjusting entries to ultimately produce the final statements.
    We've made recommendations that they pursue a software package
    to do this more expeditiously. They are exploring that. That
    way we can get the adjusting entries as part of this process.
        Mr. Horn. Now, this is the contractors that are exploring
    it?
        Mr. Vengrin. No, this is HCFA central office.
        Mr. Horn. Can they mandate that then along the line,
    whoever is inputting?
        Mr. Vengrin. Yes, they can do this work in central office.
    We're not talking about the contractors.
        Mr. Horn. Is that going to be done, Mr. Hash?
        Mr. Hash. I need to--I'm being instructed at the moment
    here.
        I think what we have done, as I'm told, is that we have
    hired a contractor, an outside contractor to help us install
    those kinds of protections and procedures within our own
    activities, and it's a part of our overall effort to make sure
    that our own systems are adequately maintained and documented.
    We are acting on the Inspector General's recommendation.
        Mr. Horn. So the contractor will relate to the contractors?
        Mr. Hash. Our outside contractor will relate to us as well
    as to the contractors.
        Mr. Horn. All along the line on the accounting side, then,
    we're going to use software and not have to worry about
    manually intensive things being done?
        Mr. Hash. I would say, as you can tell--what I'd like to
    say is that Mr. Vengrin is correct when you think about the
    history of what these contractors have been doing. This is not
    an excuse, but it's true that most of the emphasis has been on
    refining their claims processing systems and their audits and
    so forth as opposed to the area of financial documentation and
    reporting. And this is an area in recent years that we've been
    paying increased attention to, and we should, and we expect
    that's going to show dividends in the next audit because we are
    committed to removing the qualification to our accounts
    receivable documentation for the next audit.
        Mr. Horn. One last question relates to the year 2000
    situation and are you using your need to get into conformity
    for that to solve some of your other problems within the
    agency, either in terms of new computers, new software, off-
    the-shelf, whatever?
        Mr. Hash. One of the bright lights of the Y2K problem has
    been the opportunity that we've had to actually review
    something like 50 million lines of code in our claims
    processing systems and in other information systems that we
    maintain that are mission critical for the agency. And the
    result of that, I think, is at the end of the day we will not
    only have a Y2K compliant information system but we will have
    made improvements in that system that would otherwise probably
    have taken a longer time to get to. So I think one of the
    benefits of the intense scrutiny that has surrounded our
    efforts to become millennium compliant has been a very thorough
    renovation and testing of our information infrastructure and I
    think that will pay us and the taxpayers enormous dividends in
    the years ahead.
        Mr. Horn. When did Medicare start in on the year 2000
    conformity bit?
        Mr. Hash. Well, I believe--I don't have a specific date but
    intensively over the last 18 months--and we obviously, as you
    are quite familiar with, set a goal for ourselves of December
    31, 1998 to make sure that our internal mission-critical
    systems were renovated and certified. We made that deadline. We
    also set a similar deadline for our contractors. We did not
    fully make that deadline, as you know. We had 54 contractors
    who self-certified at the end of December of last year.
        The governmentwide deadline is next week for compliance and
    self-certification. We are cautiously optimistic that we're
    going to be there with the contractor community. There are--
    there is one standard system which has gotten a late start in
    the testing phase, and for the seven contractors who depend on
    that standard system, they may be a little late in the final
    self-certification process, but otherwise we believe we're
    going to cross the finish line together with our 40 contractors
    and 78 mission-critical systems.
        Mr. Horn. In 1989 both Medicare, Health Care Financing
    Administration and Social Security were in the same agency,
    namely Health and Human Services. Now, in 1989 the Social
    Security Administration realized they had to start moving on
    this, and the result is they've been given an A through our
    reporting process ever since, and they are the first agency to
    have year 2000 conformity and compliance.
        Why didn't Medicare--and I know you just came in the last
    year. We're not going to pillory you, but perhaps the Inspector
    General has a long institutional memory. Why didn't Medicare do
    what Social Security was doing? Where was the Secretary? Asleep
    in 1989 or what?
        Ms. Brown. I came a little later than that as well, in
    1993, but I think there's been several things. For one, in
    Medicare, worrying about all the contractors, there wasn't the
    funding to contract with them to do some of this work. That was
    one of the problems. And having worked in both Social Security
    and on the rest of HHS, I had the privilege of signing the
    first clean financial statement for Social Security. We had
    done their financial statement audits for several years.
        Although they're huge and it is a well-run agency, they
    don't have the number of systems, the number of different
    systems that we have in something like HCFA. So although the
    volume is tremendous and it's as large an organization as far
    as money being spent, it's a much less difficult one to both
    audit and to make changes in because they do have the uniform
    systems throughout the country. I think that's something that
    HCFA is striving for, and, in the future, will have.
        Mr. Hash. I would just say, Mr. Chairman, I think the
    honest answer is we got a late start. There's no question about
    that. We did in fact consider making some transitions into a
    single operating system which failed to be realized. I think
    that was part of the reason why we got a late start, but I
    think we have really redoubled our efforts.
        I think dealing with independent contractors has been a
    real challenge for us, but for the most part I think we would
    give them great credit for having cooperated with us, and the
    Congress great credit for having provided us significant
    additional resources with which to undertake the renovations
    and testing that are required to make sure we'll be in business
    on January 1, 2000. But it has been obviously a Herculean task,
    and a lot of credit is due not only to the work that HCFA has
    done but certainly the contractors themselves.
        And as you know, we're now concentrating our attention on
    making sure the provider community is in fact taking the proper
    steps and devoting an adequate amount of resources to make sure
    that they're ready for the year 2000, because if we're ready
    and they can't submit to us a claim for services that's Y2K
    compliant, it will be very difficult to make sure that they get
    that claim processed. So we are now spending a lot of effort on
    outreach to the provider community to make sure that they have
    the assistance and the tools and the information to take the
    steps that are necessary to review all of their mission-
    critical systems, not only their information and billing
    systems but, as you know, their clinical systems that may have
    year or date problem sensitive issues, because the health care
    quality of the country is at stake if providers are not clear
    that their equipment has been properly reviewed and corrected
    and tested.
        So I think there's lots of reasons for where we are, but
    we're quite proud of the accomplishments that we've made to
    date, and we think we're going to be ready at the end of the
    year.
        Mr. Horn. The President has set a mark as March 31. Will
    Medicare make that?
        Mr. Hash. As I said----
        Mr. Horn. The Health Care Financing Administration, will
    you as an organization make that?
        Mr. Hash. Yes, sir. We have actually at the end of December
    for our own internal mission-critical systems. They were
    renovated and certified as of December 31. So we believe our
    own internal systems are ready and millennium compliant.
        Mr. Horn. Unfortunately for you, they don't use the major
    groups within, they use the Cabinet department, so then you're
    in compliance but maybe a lot of parts of HHS are not
    compliant. And I guess I would ask the question, Congress
    removed Social Security from Health and Human Services; should
    we remove Medicare, Medicaid from Health and Human Services?
        Mr. Hash. I'd like to----
        Mr. Horn. Make you independent offices? Everybody would get
    a pay raise.
        Mr. Hash. I would like to defer an answer on that to
    Secretary Shalala. Speaking on our behalf, I think we have
    benefited greatly by the efforts of the Department of Health
    and Human Services to support our efforts on Y2K, and that's no
    small part of the credit for the progress that we've made as
    well.
        Mr. Horn. How about it, Inspector General? Looking at it
    from an independent view, would they be better off to be an
    independent agency?
        Ms. Brown. I do not believe so. I think the department adds
    a great deal of stability and assistance, and there's a great
    deal of overlap in the interests of the programs within the
    department, and that would only add another dimension of
    confusion.
        Mr. Horn. You mean the confusion dimensions that are
    already there?
        Ms. Brown. That's true, sir.
        Mr. Horn. OK. We'll let it go at that. Let me just mention
    in some closing remarks here, one, I thank all three of you for
    testifying. You're all very distinguished public servants.
        Obviously progress has been made in reducing the amount of
    improper payments in Medicare. However, we've got some serious
    problems, as you all admit. The Health Care Financing
    Administration is responsible for managing two of the most
    important programs in the Federal Government, Medicare and
    Medicaid. There's no room, obviously--and we all agree on both
    sides of the table, both sides of the aisle--there's no room
    for waste, fraud, inefficiency in these programs which by 2009
    will provide nearly $700 billion in health care for our
    Nation's elderly and poor.
        Next Wednesday the consolidated financial report on the
    Federal Government as a whole will be issued. We will hold a
    hearing at 10 a.m., in this room to hear testimony from
    representatives of the Office of Management and Budget, the
    Department of the Treasury, and the General Accounting Office.
    These witnesses will speak to the many different financial
    problems found throughout the Federal executive branch. At the
    same time, we will issue our second report card grading the 24
    largest Federal agencies on how they are handling more than $1
    trillion a year in taxpayer money.
        So my thanks are to you again. Sorry to prolong it so long.
    And let me now thank the staff who spent a lot of time putting
    this particular hearing together. J. Russell George is the
    staff director--and he's off working--as chief counsel for the
    Subcommittee on Government Management, Information, and
    Technology. Bonnie Heald is the director of communications,
    professional staff member. And to my left and your right is
    Larry Malenich, the General Accounting Office detailee to this
    subcommittee, and his help is invaluable. Mason Alinger is the
    clerk for the subcommittee. Our able interns are Paul Wicker
    and Casey Baker, and I don't know if any of them are here.
    Faith Weiss is counsel for the minority, and we thank you. And
    Earley Green, staff assistant for the minority, and our two
    court reporters are Laurie Harris and Doreen Dotzler.
        And with that, ladies and gentlemen, we thank you all for
    coming.
        [Whereupon, at 12:35 p.m., the subcommittee was adjourned.]

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