[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:]
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    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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    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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    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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    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.
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    [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.
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    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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