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





 MEDICAID PROVIDER ENROLLMENT: ASSESSING STATE EFFORTS TO PREVENT FRAUD

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 18, 2000

                               __________

                           Serial No. 106-120

                               __________

            Printed for the use of the Committee on Commerce



                    U.S. GOVERNMENT PRINTING OFFICE
65-912CC                    WASHINGTON : 2000




                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

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

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

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

                                 ______

              Subcommittee on Oversight and Investigations

                     FRED UPTON, Michigan, Chairman

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

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Aronovitz, Leslie G., Associate Director, Health Financing 
      and Public Health, General Accounting Office...............    21
    Assatourian, Ruben, President, Apical Corporation; 
      accompanied by Stephen H. Turner, Attorney, Carlson, Messer 
      & Turner L.L.P.............................................     4
    Cates, J. Alan, Chief, California Medicaid Fraud Bureau......    39
    Connell, Kathleen, Controller, Office of the California State 
      Controller.................................................    35
    King-Shaw, Ruben J., Jr., Executive Director, Florida Agency 
      for Health Care Administration.............................    43
    Kubic, Thomas T., Deputy Assistant Director, Criminal 
      Investigations Division, Federal Bureau of Investigation...    31
    Wagoner, Doug, Vice President, Public Sector, Choicepoint....    47
Material submitted for the record by:
    Bliley, Hon. Tom, Chairman, Committee on Commerce:
        Letter dated June 22, 2000, to Gary Crayton, Director of 
          Medicaid, State of Florida, enclosing questions for the 
          record, and responses to same..........................    70
        Letter dated June 22, 2000, to Jacqueline Romer-Sensky, 
          Director, Ohio Department of Human Services, enclosing 
          questions for the record, and responses to same........    91

                                 (iii)

  

 
 MEDICAID PROVIDER ENROLLMENT: ASSESSING STATE EFFORTS TO PREVENT FRAUD

                              ----------                              


                         TUESDAY, JULY 18, 2000

                  House of Representatives,
                             Committee on Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2322, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Cox, Burr, Bilbray, 
Bryant, Stupak, and DeGette.
    Staff present: Chuck Clapton, majority counsel; Jason 
Scism, legislative clerk; and Chris Knauer, minority 
investigator.
    Mr. Upton. Good morning, everybody. Thanks for coming on 
time.
    For my colleagues, I'll make unanimous consent that I guess 
no one can object to that their opening remarks will be made 
part of the record. And if they get here before I finish, which 
will not be too long, obviously they will be able to deliver 
that. For those of you in the audience, we do have a number of 
subcommittee meetings this morning; and the House is in 
session, though we're not expecting votes for a couple of 
hours; but we'll see.
    Let me begin by thanking all of the witnesses who are 
testifying today. Many of them are currently serving on the 
front lines of our national efforts to combat health care 
fraud. They have unique insights into what we can do to win the 
battle to eliminate fraud from important programs like Medicare 
and Medicaid, and I appreciate their agreeing to appear today 
to share that information with us.
    Today we'll hear very disturbing testimony about how the 
California Medicaid program may have lost $1 billion--``b'' as 
in big--dollars due to medical equipment fraud. One of the 
witnesses will tell us how he saw firsthand how easy it was to 
become a California Medicaid provider and make tens and 
sometimes hundreds of thousands of dollars a month by 
submitting false claims. He'll also tell us how honest 
equipment companies were unable to compete with these criminals 
and were forced out of business or persuaded to join in the 
criminal activities.
    What is even more disturbing is the fact that much of this 
fraud could have been prevented with simple, inexpensive 
techniques to evaluate the applicants before they're able to 
enroll as Medicaid providers.
    It seems to me that a State has already won half of the 
battle if they can keep criminals out of the Medicaid program 
before they can submit any false claims. This is especially 
true when you consider that the cost of these techniques can be 
sometimes between $100 and $200 per provider, while denying 
just one criminal access to a Medicaid program can prevent them 
from submitting hundreds of thousands of dollars worth of false 
claims.
    Both California and Florida have shown how common-sense 
techniques like criminal background checks and site visits to a 
provider's place of business can be very successful methods of 
preventing Medicaid fraud before it gets started. The rigorous 
controls that Florida has put into place have contributed to 
the dramatic decrease in fraud that has recently allowed them 
to save $100 million over 2 years. California is now also 
putting into place similar provider enrollment controls that 
should dramatically decrease the size and scope of their fraud 
problem.
    I hope that the representatives from both of these States 
as well as other witnesses share with us their recommendations 
on how such provider enrollment controls can best be used to 
prevent Medicaid fraud across the country. The most important 
question that I hope can be answered today is what more should 
be done to encourage all State Medicaid programs to adopt 
similar provider enrollment techniques.
    One lesson that I've seen from the committee's prior work 
on health care fraud issues is that criminals are always going 
to try to find ways to make money by ripping off government-run 
health programs. They know which programs have tough safeguards 
in place and which ones are vulnerable to fraud. Sometimes, 
like roaches scurrying from the bright light of public 
attention, these criminals will inevitably seek out the dark 
cracks and crevices provided by States that lack adequate anti-
fraud safeguards.
    What I hope we can learn today is how we can stop these 
criminals in their tracks and to ensure that we will never 
again have to hear about another State losing a billion dollars 
to a similar Medicaid fraud scheme.
    I welcome all of our witnesses, and I ask the vice chairman 
of the subcommittee if he'd like to make an opening statement. 
Mr. Burr.
    Mr. Burr. I thank the chairman and apologize for my 
tardiness this morning.
    Let me just say, very briefly, that every time this 
committee takes up medical fraud, I think it's really easy for 
us to see the human face behind it. It's a billion dollars in 
California that doesn't end up serving the population that it 
was intended for.
    Mr. Chairman, we have talked many times about the fact that 
one of the most important things we can do federally is to do 
no damage. In this particular case, I think that this is a 
California problem. It may be a problem in other States, but I 
think it's important for every Member of Congress to realize, 
as we go through and set up the Federal guidelines and in some 
cases expand what we cover, that it's sometimes this 
institution that creates the incentive for new criminals in the 
Medicaid system and for fraud to, in fact, flourish. We've got 
to make sure that every dollar that's devoted to health care 
goes to the beneficiaries and not to those that are in the 
system only to gain from it.
    I'm hopeful that California and others will use this 
committee to tighten, strengthen and secure their systems. And 
if there is anything that we can do--I know that I speak for 
all the members on this side and many of which can't be with us 
today--our hope is that the Medicaid systems truly are there to 
fill the needs of those who most need it; and if there's a way 
for us to set guidelines that tightens it, to help the States, 
then this member and I think this side is certainly willing to 
do that.
    With that, I yield back.
    Mr. Upton. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. I apologize for 
arriving late. I was downtown doing my duty and whatever that 
might be----
    Mr. Upton. Giving blood?
    Mr. Bryant. Giving blood.
    Mr. Upton. Good.
    Mr. Bryant. [continuing] and I appreciate you having this 
hearing. I have confidence in how you stand on this issue as 
well as my colleague from North Carolina, and I would associate 
myself with your remarks without even hearing either one of 
them. I have great confidence in both of you, and I will yield 
back my time.
    Mr. Upton. Thank you.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Let me begin by thanking Chairman Upton for holding this hearing 
this morning, and welcoming all of our witnesses. I believe that 
hearings like this one, and oversight generally, are among the most 
important functions that the Committee performs. This is especially 
true of activities relating to Federal health care programs, which 
prevent scarce Medicare and Medicaid dollars from being lost to fraud 
and abuse. Whether it was the hearings that exposed Medicare contractor 
fraud or the investigations that uncovered billing companies submitting 
false claims, the Committee on Commerce has taken the lead in 
protecting both the American taxpayers and the beneficiaries who depend 
on Medicare and Medicaid to pay for their health care services.
    Unfortunately, today's testimony clearly indicates how much more 
needs to be done to eliminate fraud and abuse from these important 
health care programs. The amount of money lost to the fraud schemes 
that we will hear about today is staggering--California's Medicaid 
program over the past few years may have lost almost ONE BILLION 
dollars to fraud involving durable medical equipment. These losses are 
all the more disturbing because many could have been prevented by 
simple and inexpensive techniques for reviewing providers before they 
are allowed to participate in Medicaid programs.
     One might think that common sense would prompt all States to use 
techniques like criminal background checks and site visits to a 
provider's place of business before allowing an individual to begin 
submitting Medicaid claims. For as little as fifty dollars per 
provider, such techniques can be used to identify and screen out 
individuals who otherwise are able to commit hundreds of thousands of 
dollars of fraud in a single month.
    Governor Jeb Bush, the State of Florida and Mr. King-Shaw's office 
should all be commended for the excellent programs they have put in 
place to review providers before they are allowed to enroll in 
Florida's Medicaid program. These efforts have contributed to the one 
hundred million dollars in savings that they have recently been able to 
achieve through fraud reduction and prevention. In response to their 
recent problems, California also has begun to adopt some of these very 
rigorous new provider enrollment controls.
    Unfortunately, the General Accounting Office will tell us that not 
all States are in step with Florida and California's efforts to root 
out fraud. The criminals who commit health care fraud are clever. As 
Florida and California tighten up their controls, we can expect to see 
these fraud schemes migrate to States with less rigorous controls.
    To insure that the types of fraud described by today's witnesses 
will not be repeated in other States, all States should adopt basic, 
common-sense safeguards. This hearing will hopefully identify means to 
encourage such activities. I also believe that Congressional oversight 
should be used to hold States that are not using these techniques 
accountable for their lapses.
    I will also assure all of you that today's hearing will not be end 
of the Committee's inquiries into these matters. This Committee will 
continue to do its part to eliminate Medicare and Medicaid fraud. I 
believe that America's taxpayers and Medicaid's beneficiaries should 
expect no less from us.
    Thank you again Chairman Upton, and I will now look forward to 
hearing from our witnesses.

    Mr. Upton. We have two panels today. The first panel is Mr. 
Ruben Assatourian. Mr. Assastourian, if you will come to the 
table. Mr. Assatourian, we have long-standing committee rules 
that in this subcommittee we take testimony under oath. Do you 
have any objection to that?
    Mr. Assatourian. No.
    Mr. Upton. And, second, under committee rules, you're 
allowed to have counsel also represent you. Do you wish to do 
that?
    Mr. Assatourian. Yes.
    Mr. Upton. And if he could state his name for the record.
    Mr. Turner. Mr. Chairman, my name is Stephen Turner, 
counsel for Mr. Assatourian.
    Mr. Upton. If you would both raise your right hand.
    [Witnesses sworn.]
    Mr. Upton. You're now under oath.
    Mr. Assatourian, please have a seat. Your statement, which 
I was able to read in its entirety, will be made part of the 
record in its entirety. If you could limit your opening 
statement to about 5 minutes, that would be terrific.
    We'll start--and you might need to push the mike a little 
bit closer to you so that people in the back can hear.
    Mr. Assatourian. I will limit the statement. I will make it 
as short as possible.
    Mr. Upton. Okay.

TESTIMONY OF RUBEN ASSATOURIAN, PRESIDENT, APICAL CORPORATION; 
 ACCOMPANIED BY STEPHEN H. TURNER, ATTORNEY, CARLSON, MESSER & 
                         TURNER L.L.P.

    Mr. Assatourian. My name is Ruben Assatourian. I would like 
to thank you for giving me the opportunity to testify before 
this committee.
    Currently, I am the President of Apical Corporation, a 
medical import and distribution company which I started several 
years ago. The company does not have any Federal or State 
contracts and is not involved in Medicare, Medi-Cal or any type 
of government medical billing. We import high-quality medical 
products from some of the most reputable European manufacturers 
in Germany, Spain, France and Italy, in most cases as the 
exclusive national distributor. The products range from 
orthopedic bracing, sports medicine products and compression 
stockings. In addition, we do purchase and distribute the 
products from several reputable American manufacturers.
    In 1997, while my business was growing, I was also a 
territory manager for a few American medical manufacturers. At 
their request, I was asked to start selling their products to 
retail medical supply stores, also known as DMEs, and 
providers. While, for the most part, the great majority of 
providers are honest and legitimate individuals and businesses, 
American-owned and also from different ethnic backgrounds, 
serving their communities, I realized that the Medi-Cal program 
in California, with its loopholes and defunct oversight system, 
has offered criminals a business opportunity more lucrative 
than the software and the dot-com industry.
    The California Medi-Cal system is a broken down ATM 
machine, which is spitting out cash uncontrollably without the 
need for even an ATM card. Armani suits have been charged to 
Medi-Cal, round-trip tickets overseas and silverware for 
patients have been charged to the Medi-Cal system.
    An enormous amount of fraud in the Medi-Cal system has been 
committed involving adult diapers. In fact, more adult diapers 
are shipped to Southern California than the entire country 
combined; and, contrary to popular belief, Southern California 
does not have a big bladder control problem.
    From the bidding process, where manufacturers bid to put 
their products on the Medi-Cal formulary, to the State 
employees who were caught selling Medi-Cal provider numbers and 
the criminal providers who make hundreds of thousands of 
dollars a year in pure profit, the whole system has become a 
magnet for criminals. The State Treasury has been looted to the 
tune of hundreds of millions of dollars.
    The fraud is perpetrated in four ways. The first one is 
getting a provider number. Until 1997, the standard procedure 
for a provider was a waiting period of 3 to 6 months to obtain 
a Medi-Cal provider card. As a result of the publicity that 
Medi-Cal was easy money, many immigrants from the former Soviet 
republics, with the dream of making easy money, rushed to this 
business. In many cases, the applicants did not have the basic 
education of reading and writing English.
    From early 1998, the problem got out of control when 
corrupt State employees within the Health Department started 
selling Medi-Cal provider numbers from anywhere between $10,000 
to $20,000, thus luring people, mostly immigrants, into the 
business. One client informed me he was able to obtain a 
provider number within 48 hours for $15,000 before he had even 
signed a lease for a store.
    No. 2, billing Medi-Cal. Once the provider number is 
obtained, to give the appearance of a legitimate business the 
provider would make a one-time purchase of approximately $5,000 
in inventory. Prior to getting the provider number, a State 
employee would have to visit the store to verify the legitimacy 
of the business by looking at the store operation and purchase 
invoices for the merchandise the provider had purchased. In 
some cases, the signature would be obtained without any 
official visits to the store; and in cases where a visit would 
be made it would serve no purpose, the reason being that, while 
I am convinced that the State employees who were making such 
visits did have the right intention to detect fraud, the 
problem is that they were unqualified to detect fraud in this 
area.
    For example, auditors from the State Controller's Office 
who had the primary responsibility of detecting fraud are 
trained accountants, and I am sure they are qualified to detect 
fraud in accounting matters. Unfortunately, they have been 
given the responsibility of detecting fraud in medical 
products, and fraud does not always happen in the accounting 
figures. For example, it can happen in the combination of 
products billed.
    In some instances, I have been contacted by State 
Controller's auditors asking me if it is normal for a small 
medical supply company to bill Medi-Cal for a hundred pairs of 
high-compression pantyhose a month. The answer is, no, it is 
not normal unless the provider has multiple contracts with 
hospitals and vein specialists.
    Mr. Upton. You can finish up. We'll give you a minute or 2.
    Mr. Assatourian. Passing an audit. A fraudulent provider 
can pass an audit or could pass an audit by purchasing phony 
invoices for the supplies the provider billed Medi-Cal from a 
phony distributor. A fraudulent distributor has very low 
overhead because they are not in the business of selling 
products but rather invoices. Consequently, they do not have 
the expenses of a legitimate business, such as inventory, 
insurance, payroll, delivery vehicles and warehousing expenses. 
On those occasions where products were actually sold to a 
fraudulent provider, the provider would dump the products on 
the market.
    I am aware of situations in which my clients could purchase 
products for which my company was the sole national distributor 
for 20 percent of the cost my company was required to pay the 
manufacturer. Obviously, a legitimate distributor cannot 
compete in this environment.
    The way it works is this: A provider would purchase an 
invoice for a hundred thousand dollars worth of nonexistent 
merchandise and pay the phony distributor the full value of the 
invoice, and the distributor would keep 20 percent for himself 
and reimburse the provider with $75,000 in cash. Under these 
choking circumstances it has become absolutely impossible to 
conduct normal business, and any provider who would get caught 
with unacceptable practices would get a penalty and be allowed 
to continue doing business. Had it not been for the FBI coming 
into the picture with a sledgehammer and an industrial grade 
vacuum cleaner, every legitimate distributor and provider would 
end up bankrupt, leaving the medical business to criminal 
organizations.
    I will stop. The rest of the statement is already on the 
record, and if you have any questions----
    Mr. Upton. We do. And how we're going to proceed here is 
that each of us will take about 5 minutes and ask you some 
questions and see how long it goes.
    [The prepared statement of Ruben Assatourian follows:]
      Prepared Statement of Ruben Assatourian, Apical Corporation
    Chairman Upton, distinguished members, my name is Ruben 
Assatourian, and I would like to thank you for giving me the 
opportunity to testify before this committee.
    I am an American citizen. I was born in Iran, where my father had a 
successful business during the Shah, because of our Armenian heritage, 
and our being Christian, and the political instability in Iran, my 
father had sent the whole family to Switzerland, where we lived, and 
went to school, with my father spending 2 weeks of every month, with us 
in Switzerland, and the other 2 weeks attending to his business in 
Iran. After the revolution in Iran, we moved to the United States.
    In 1980, we started a family business, and on the advice of my 
father, I started learning about medical products and the business. 
With no experience whatsoever, I went through the process of educating 
myself about the medical products, and started selling medical products 
to countries such as Kuwait and Qatar, where American made products are 
considered to be the best. The learning process was extremely difficult 
and costly. In many cases, the result was a financial disaster for me. 
However, never in my entire life have I received any welfare, financial 
assistance, medical aid or even unemployment from any branch of the 
federal or the state government.
    Currently, I am the president of Apical Corporation, a medical 
import and distribution company, which I started several years ago. The 
company does not have any Federal or State contracts, and is not 
involved in Medicare, Medi-Cal or any other type of government medical 
billing. We import high quality medical products from some of the most 
reputable European manufacturers in Germany, Spain, France and Italy, 
in most cases, as the exclusive national distributor. The products 
range from orthopedic bracing, to sports medicine products and 
compression stocking. In addition, we do purchase and distribute 
products from several reputable American manufacturers.
    Sales have been the primary part of my responsibility, where I 
demonstrate medical products to potential customers. I was not 
introduced to ``Medi-Cal'', which is the medical assistance program for 
the poor in California, until 1997. Prior to that, my sales activity 
was mostly in the hospital and the doctor's market, where I would go to 
hospitals such as the Children's Hospital in Los Angeles, the V.A., 
Kaiser Permanente, among others, for demonstration and in-service of 
orthopedic casting products.
    The story I am telling you, is not a plot out of the popular TV 
show the ``Sopranos'', this story is called Medi-Cal, and the hellish 
environment under which businesses have to survive. It involves fraud, 
corruption, criminals, scams and a splash of ethnic discrimination.
    In 1997, while my business was growing, I was also territory 
manager for a few American medical manufacturers, and at their request, 
I was asked to start selling their products to the retail medical 
supply stores, also known as ``DME's'' and ``Providers''. While for the 
most part, a great majority of the providers are honest and legitimate 
individuals and businesses, American owned, and also, from different 
ethnic backgrounds serving their communities, I realized that the 
``Medi-Cal'' program in California, with it's loopholes and defunct 
oversight system, has offered criminals, a business opportunity, more 
lucrative than the software and the dot.com industry. The California 
``Medi-Cal'' system, is a broken down ``ATM'' machine, which is 
spitting out cash uncontrollably without the need for even an ``ATM'' 
card. Armani suits have been charged to Medi-Cal cards, round-trip 
tickets overseas, and silverware for patients have been charged to 
Medi-Cal.
    Currently the joke is that a car salesman asked a potential 
customer, why don't you get a brand new Lexus with your Medi-Cal card, 
and the man asks, what about the monthly payments? And the car salesman 
says, monthly payments are no problem, we accept food stamps. Medi-cal 
should have a new marketing logo: DON'T LEAVE HOME WITHOUT IT!
    Unfortunately, there is no humor in this situation. This mess and 
corruption has made life a living miserable hell for distributors such 
as me, and providers, who are trying to conduct legitimate business and 
grow. Instead, we are now paying the price and the penalty for the 
actions of others.1An enormous amount of fraud in the Medi-Cal system 
has been committed involving adult diapers, in fact, more Adult diapers 
are shipped to Southern California, than the entire country combined. 
And contrary to popular belief, Southern California does not have a big 
bladder control problem! From the bidding process, where manufacturers 
bid to put their products on the Medi-Cal formulary, to the state 
employees who were caught selling Medi-Cal provider numbers, and the 
criminal providers who make Hundreds of Thousands of Dollars a year in 
pure profit. The whole system has become a magnet for criminals. The 
State treasury has been looted to the tune of Hundreds of Millions of 
Dollars.
    A medical supply store opens up, and starts billing Medi-Cal for 
medical products never purchased. The products are billed to patient's 
Medi-Cal cards, which in many cases are stolen. In one extreme case 
which I have heard, the provider was actually dating a nurse in a 
doctor's office and promising her marriage, in exchange for patient 
Medi-Cal card numbers. In cases where the patient knows his or her 
number is being used illegally, the patient receives compensation, 
either in the form of cash, or presents. In either case, depending on 
the appetite or sophistication of the provider, they can net anywhere 
from $5,000 to $100,000 per month in pure profit, for single store 
operators, and several hundred thousand Dollars a month in profit, for 
providers who are fronts for groups who own and control several stores. 
As a result, the taxpayers, finance the lavish life style, expensive 
cars, houses, and the commercial properties that these criminals 
purchase.
    The fraud is perpetrated in 4 ways:
1) Getting a provider number:
    Until 1997, the standard procedure for a provider was a waiting 
period of 3 to 6 months to obtain a Medi-Cal provider number. As a 
result of the publicity that Medi-Cal was easy money, many immigrants 
from the former Soviet Republics, with the dream of making easy money, 
rushed to this business. In many cases, the applicants did not have the 
basic education of reading and writing English. From early 1998, the 
problem got out of control, when corrupt State employees within the 
Health Department started selling Medi-Cal provider numbers from 
anywhere between $10,000 to $20,000 thus luring people, mostly 
immigrants into the business. One client informed me, he was able to 
obtain a provider number within 48 hours, for $15,000 before he had 
even signed a lease for a store.
2) Billing Medi-Cal
    Once the provider number is obtained, to give the appearance of a 
legitimate business, the provider would make a one-time purchase of 
approximately $5,000 in inventory. Prior to getting the provider 
number, a State employee would have to visit the store to verify the 
legitimacy of the business, by looking at the store operation, and 
purchase invoices for the merchandise the provider had purchased. In 
some cases, the signature would be obtained without any official visits 
to the store, and in cases where a visit would be made, it would serve 
no purpose. The reason being that while I am convinced that the state 
employees who were making such visits did have the right intention to 
detect fraud, the problem is that they were unqualified to detect fraud 
in this area. For example, auditors from the State Controller's office, 
who had the primary responsibility of detecting fraud, are trained 
accountants in accounting, and I am sure they are qualified to detect 
fraud in accounting matters, unfortunately, they have been given the 
responsibility of detecting fraud in medical products, and fraud does 
not always happen in the accounting figures. For example, it can happen 
in the combination of products billed. In some instances, I have been 
contacted by State Controller's auditors, asking me if it is normal for 
a small medical supply company, to bill Medi-Cal for 100 pairs of high 
compression pantyhose a month. The answer is no, it is not normal, 
unless the provider has multiple contracts with hospitals and vein 
specialists.
3) Passing an audit
    A fraudulent provider could pass an audit by purchasing phony 
invoices for the supplies the provider billed Medi-Cal, from a phony 
distributor. A fraudulent distributor, has very low overhead, because 
they are not in the business of selling products, but rather invoices. 
Consequently, they do not have the expenses of a legitimate business, 
such as inventory, insurance, payroll, delivery vehicles, and 
warehousing expenses. On those occasions where products were actually 
sold to a fraudulent provider, the provider would dump the product on 
the market. I am aware of situations, in which, my clients could 
purchase products for which my company was the sole national 
distributor, for 20% of the cost my company was required to pay the 
manufacturer. Obviously, a legitimate distributor cannot compete in 
this environment.
    In 1998, in addition to it's main distribution center, and it's 
office, my company had 8 storage facilities, filled with merchandise we 
could not sell, because providers were interested in purchasing fake 
invoices from phony distributors, at a cost of approximately 25% The 
way this works is that a provider would purchase an invoice for 
$100,000 worth of non-existent merchandise, and pay the distributor the 
full value of the invoice, and the distributor would keep 25% for 
himself and reimburse the provider with $75,000 in cash. Under these 
choking circumstances, it had become absolutely impossible to conduct 
normal business. And any provider who would get caught with 
unacceptable practices, would get a penalty, and be allowed to continue 
doing business. Had it not been for the F.B.I. coming into the picture 
with a sledgehammer and an industrial grade vacuum cleaner, every 
legitimate distributor and provider would end up bankrupt, leaving the 
medical business to criminal organizations.
4) Products on the Medi-Cal formulary
    Unlike Medicare, which reimburses providers, based on product 
specifications, and not product brand names, therefore, increasing 
competition, and lowering prices, Medi-Cal reimbursements are based on 
product brand names, which contrary to the Medicare system, stifles 
competition, and raises prices and cost to the State of California. For 
example, Medicare reimburses providers approximately $200 for a double 
hinged range of motion knee brace The provider may purchase this 
product at the lowest possible price, and bill Medicare, as long as the 
product meets the specification. In this situation the provider has a 
choice of shopping around all over the country, and buying at the 
lowest possible price. This practice is fair and generates healthy 
competition. Unlike the Medicare system, Medi-Cal has a bidding 
process, which is so rigged and flawed, that Fortune 100 companies such 
as Kimberly-Clark and Proctor & Gamble, which happen to be among the 
largest diaper manufacturers in the world have no chance of selling in 
the Medi-Cal system, whereas Donald Duck the entertainer, who has never 
manufactured a diaper in his entire career could be awarded a lucrative 
5 year contract. The entire Medi-Cal incontinence system is a joke, 
full of lawsuits, threats, cozy relationships and non-existent product 
categories, unheard of, in the industry. And this is the way it works. 
Medi-Cal puts out a bid for incontinence products, which is usually 
awarded to somewhere between 5 and 10 suppliers for a period of 5 
years. This means that any provider who bills incontinence products to 
Medi-Cal should purchase the products of one of these 10 suppliers, 
either direct or through the distributors. Every step of this bid is a 
comedy, the new formulary for incontinence which is supposed to go into 
effect in about three months, has already been cancelled and put to a 
new bid 3 times already, and this has dragged on since 1998. The 
original contract award was issued in 1998, and because of legal 
threats by suppliers who were not awarded major portions of the 
contract, the bid was cancelled, rightly so. For example, portions of 
the contract, which could mean Millions of Dollars in revenue, had gone 
to a sales representative working out of his home, who somehow, had 
qualified himself as an incontinence supplier to the State, under one 
brand. The other portion of the contract had gone to the manufacturer 
who employed the sales representative, under a different brand. Another 
portion of the contract, had gone to the same manufacturer's 
distributor, who had introduced the same products under a different 
brand. Funny enough, another portion of the contract had gone to a 
distributor which private labels products, and the leftover and crumbs 
of the contract was left to the actual manufacturers. By the way, in 
this entire process, the bidders had managed to convince the bidding 
committee to allow them to bid on ridiculous products which did not 
make any sense, with high reimbursements. This cozy and unhealthy 
relationship costs the State of California, and the taxpayers Millions 
of Dollars. Medi-Cal should follow Medicare's lead, and start 
reimbursing based on product specifications, and not brand names. To 
give you an example, a trimfit diaper, which is a terminology in the 
industry for low cost diapers, costs me $20, the very same diaper from 
a manufacturer which is on the Medi-Cal formulary would cost me $24, a 
20% price difference. If distributors and providers are given the 
opportunity to purchase from the lowest possible source, as long as the 
product meets the specifications, the millions of dollars saved by the 
State of California, could be put into a much better use, like fighting 
crime in the State, or improving the public school system.
    In conclusion, if I may, as a distributor, who gut sucked into this 
mess, and has seen first hand what has happened in the Medi-Cal system, 
I would like to offer the following brief points.
    Everyone involved shares a part of the blame, and there is plenty 
to go around. When I was offered the opportunity to testify before this 
committee, before my attorney finished his sentence, I immediately 
accepted the invitation, I was grateful for being given the opportunity 
to testify behind a screen, to hide my identity, which I refused. I am 
not, and never have been an F.B.I. informant, but rather, a witness. It 
is my understanding, that as a result of my testimony, 20 or 30 
convictions have been made. Obviously, the F.B.I. would have the 
accurate figure. In personal terms, the last 2 years have had a 
devastating effect on my personal and business life. As a married man, 
and father of a 5 year old son, and a nine month old son, I have 
received death threats, at one point, I was forced to hire armed 
bodyguards. For the first time in my life, I have purchased a hand gun, 
that I keep at one of my offices. No one can blame the law enforcement 
for cleaning up this mess. However, because of a few criminals with 
Armenian backgrounds, the entire Armenian community has received a 
black eye. Individuals with access to the media have publicized this 
fact. As an American, I am outraged at the fact that this much money 
has disappeared because of fraud, and as an Armenian, I am wounded that 
the Armenian names are immediately released and distributed to the 
media and the industry, while, the names of the corrupt officials 
within the health department who were luring and selling provider 
numbers to providers, who are equally guilty, have been swept under the 
rug. The very same corrupts, employees have been transferred to other 
jobs with pay, pending investigation, while, any provider caught with 
irregularities is immediately looked at, as a criminal. Because of the 
bad publicity that the Armenians have received, my competitors now 
openly tell my customers not to do business with me, and as a salesman, 
I have to spend half my time with my customers defending my ethnic 
background. American providers can easily purchase products on credit, 
and Armenians have to purchase on a C.O.D. basis, because of their last 
name. Several loose, and out of control employees within the State, 
assure providers that purchasing from non Armenian distributors would 
be a safer strategy. Today, in Los Angeles, if you are an Armenian, and 
you are in the Medical business, life looks very grim.
    Obviously, fraud cannot be eliminated completely, it is widely 
suspected that criminals are migrating from the healthcare field, into 
the Adult Daycare business. Additional regulation only chases the 
criminals into a new field of fraud, while it paralyses honest business 
people trying to make a living in the healthcare field, and in some 
case forcing small mom and pop operations, out of business. New 
regulations, leaves the rest of us holding the bag, while it does 
nothing to stop the criminals. Basic, simple, common sense steps could 
immediately reduce the level of corruption:
1) Providers should purchase from authorized distributors, therefore, 
        eliminating phony distributors out of the business.
2) The brand name reimbursement process should end. Any product that 
        meets the specification of a specific category, should be 
        billable. This will open up the playing field, increase healthy 
        competition, and save the State of California Millions of 
        Dollars.
3) Obtaining a driver's license in California, is not a right, it is a 
        privilege. The same rule should apply to anyone who wishes to 
        become a provider and bill Medi-Cal. Anyone wishing to become a 
        provider should pass a basic test, ensuring, at least the 
        provider has basic knowledge of the industry.
4) Providers should be bonded.
    This concludes my opening statement, I wish to thank you for your 
patience, and I will gladly answer any questions you may have.

    Mr. Upton. Now, as I understand it, you came forward 
about--what--2 years ago; is that right?
    Mr. Assatourian. I was subpoenaed by the FBI to testify 
before the grand jury as a witness; and it is my understanding; 
as a result of my testimony, I think 20 or 30 providers have 
been convicted.
    Mr. Upton. Right. And when did they actually subpoena you 
to--when were you aware that an investigation was ongoing, 
about?
    Mr. Assatourian. Two years ago.
    Mr. Upton. Two years ago. As you deal with your peers, now 
you're still involved in this, right? Are you still a provider?
    Mr. Assatourian. I am not a provider. I'm a distributor.
    Mr. Upton. I am sorry. But you're still a distributor, a 
wholesaler; is that right?
    Mr. Assatourian. Yes, sir.
    Mr. Upton. Since you appeared before the grand jury and 
your story has become fairly public, have you seen changes by 
the State of California, positive changes in terms of trying to 
weed this out?
    Mr. Assatourian. Yes, I have. Unfortunately, I think these 
changes will be temporary, because the whole system has to be 
fixed because it's like killing cockroaches. You kill the 
cockroaches for a couple of weeks, it's all clean. Eventually, 
they came back through another crack.
    Mr. Upton. The State of California and a number of other 
States have been talking about performing onsite visits. Have 
you seen that in a major way in the State of California?
    Mr. Assatourian. Yes, yes. Except, again, if I may, even 
though the people making the onsite visits have the right 
intention, they do want to stop fraud. The problem is that, in 
many cases, some of the people making the visits are just not 
qualified to detect the fraud. Fraud could be going on right in 
front of their eyes and they might not know it because the 
people who are making these onsite visits should be familiar 
with the business, first of all.
    Mr. Upton. As I've read some of the statements that we are 
going to hear from a second panel later on, in some of the 
other States as they have conducted their investigations, 
there's some examples such as an inspector going to a 
wholesaler or provider, that the address is on the 10th floor 
of a building, and the building only has nine stories. They 
have got empty lots, P.O. boxes, no equipment that is there. As 
they visit some of the businesses and actually look at some of 
the equipment on the shelf, it's dusty. It seems to be, in at 
least a number of cases, a fairly easy, routine job to figure 
out whether or not they're in the real business or whether 
they're not.
    Mr. Assatourian. As far as fraud is concerned in the area 
that you are talking about, it has stopped--like people getting 
Medi-Cal checks at a Laundromat, at a P.O. Box, that has 
stopped. However, pretty much what has happened, it has cleaned 
out the scam artists who are more primitive. Now there are more 
sophisticated people in the business. And it just--if I may, 
just like the drug problem, the DEA goes in with this high-tech 
equipment and the drug dealers always have the money to buy 
better equipment. The basic problem has been solved, yes.
    Mr. Upton. But you would urge that the States continue to 
do onsite visits. What is California visiting now? Is it once a 
year? Is it more than that? Do you know?
    Mr. Assatourian. I think there are providers who have been 
visited several times, and there are providers who haven't been 
visited in--with the exception of last year, there were 
providers who had never been visited in a matter of 2 or 3 
years.
    Mr. Upton. Tell us exactly how it is that you actually get 
an enrollment number, code. What is the process for someone new 
in the business trying to get an enrollment number?
    Mr. Assatourian. I am not a provider. We are just 
distributors. However, my understanding is there is a 
moratorium right now, but until--prior to the FBI stepping in, 
the process was, if somebody wanted to open up a store, it was 
just a matter of 1, 2, 3, that's it, let's do it. And there 
were people out of Sacramento who were selling provider numbers 
from anywhere between $10,000 to $20,000 and within 24 hours a 
provider could be set up to rape the system. Whereas it used to 
be 3 to 6 months, but in 1997 and 1998 it was out of control 
and out of date.
    Mr. Upton. Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman.
    You, in the conclusion of your opening statement, raised 
four points that you said were basic, simple, common-sense 
steps that could eliminate or immediately reduce the level of 
corruption. Let me go through some of those if I could.
    Providers should purchase from authorized distributors, 
therefore eliminating phony distributors out of the business. 
Is there some type of certification that distributors and 
medical equipment go through?
    Mr. Assatourian. No. What I'm referring to is that the 
provider should purchase from an authorized distributor--
authorized distributor meaning that the distributor purchases 
directly from the manufacturer, instead of going through like 
gray market distributors.
    Mr. Burr. Is there any type of certification that the State 
does for authorized distributors versus unauthorized 
distributors?
    Mr. Assatourian. Hmm.
    Mr. Burr. Then whose responsibility do you see it to 
determine whether the distributor is an authorized distributor? 
A provider doesn't know where you might purchase your product 
from or whether you purchase product at all.
    Mr. Assatourian. Well, the provider should call the 
manufacturer, and/or the State should verify that the 
distributors are authorized distributors for a specific number 
of manufacturers----
    Mr. Burr. So your suggestion is somebody has to verify the 
legitimacy of the distributor?
    Mr. Assatourian. Yes. The provider can either call the 
manufacturer and verify if, for example, Ruben Assatourian is 
authorized distributor.
    Mr. Burr. How many providers that you sell to would pick up 
the phone and call a manufacturer to determine whether you were 
an authorized distributor?
    Mr. Assatourian. Maybe 1 or 2.
    Mr. Burr. Not too many?
    Mr. Assatourian. Not too many. Until the FBI stepped in, 
these people didn't even know what an 800 number was.
    Mr. Burr. Let me get into the brand name reimbursement 
versus the product category reimbursement. How much of a 
problem do you perceive that to be?
    Mr. Assatourian. That is one of the biggest problems right 
now with the whole reimbursement system. Because, as I've 
said--as I've put in the opening statements, Medicare 
reimbursement is based on product specification.
    Mr. Burr. Medicare is also considering going to some areas 
where they're getting away from product categories and going 
into specifically named brand name products, and what would 
your suggestion be to Medicare?
    Mr. Assatourian. It would automatically start skyrocketing 
the prices both for Medicare and the provider. Because for as 
long as there's an enforcement or as long as there's a brand 
name requirement, that drives up the cost. Because then the 
manufacturers, the four or five or 10 manufacturers, know that 
their product can only be billed to Medi-Cal or Medicare or 
whatever. It becomes like a little cozy exclusive club, and 
they can charge whatever they want.
    Whereas, right now, under the Medicare guidelines, there's 
very strong, healthy competition for manufacturers to sell 
their products, unlike Medi-Cal where the whole reimbursement 
system has become a joke because the reimbursements are made 
based on specific brand names. The manufacturers who make those 
brand names control the pricing and, ultimately, the 
reimbursement by the State of California which, if stopped, 
could save the State millions of dollars a year.
    Mr. Burr. Are there currently new providers opening up in 
California that are not reputable providers who are obtaining 
whatever license or, I am not sure what Medi-Cal uses, a 
provider number? Is that process still going on?
    Mr. Assatourian. The fraud?
    Mr. Burr. Yes.
    Mr. Assatourian. Not to the extent that it was going on in 
1997 and 1998, but, yes, it is.
    Mr. Burr. There are new providers who have opened up who 
have no intentions of doing anything other than the shell game 
that's been happening?
    Mr. Assatourian. Absolutely.
    Mr. Burr. What has changed in the process in California 
that you've seen as it relates to what a provider must go 
through to get whatever numbers they need to from Medi-Cal?
    Mr. Assatourian. The only change I've seen is that they 
have to wait for a long time, which these people don't mind. 
And my understanding is that the State now does a criminal 
background check or a broader background check. But while 
they're going through the waiting period now they have migrated 
to a new, more lucrative area of fraud, which is the adult day 
care center business in California. Now, that's going to be the 
next jackpot for the criminals. There's a huge potential for 
profit in that area, and that's where the big problem is going 
to be.
    Mr. Burr. The last point you hit on is that providers 
should be bonded. How important do you feel about that and are 
there any requirements currently?
    Mr. Assatourian. I think currently--I am not sure if it's 
being enforced or maybe it's being considered, but I think it 
is extremely important. Because as long as the providers know 
they have to deal with the legal systems, somehow it will 
eliminate or minimize the fraud.
    Mr. Burr. We certainly have some other witnesses that will 
help to clarify some of it. I appreciate your testimony.
    I yield back, Mr. Chairman.
    Mr. Upton. Mr. Bryant.
    Mr. Bryant. Thank you. I thank the witness for being here. 
I have just a few questions.
    Regarding your cooperation with the authorities, I assume 
they were Federal. You mentioned the FBI. The case--the grand 
jury you testified before, was it a Federal grand jury?
    Mr. Assatourian. Yes.
    Mr. Bryant. So this investigation that you cooperated in 
primarily was done by the Federal authorities; and it is, to 
your knowledge--realizing you're not a lawyer, but you have a 
lawyer with you--it was handled--the people have been charged 
and I assume some convicted, that's been in Federal court?
    Mr. Assatourian. Yes, sir.
    Mr. Bryant. Are there Federal task forces out there--again, 
you might want to talk to your lawyer--in California that the 
U.S. attorneys have in place that go specifically after health 
care fraud and abuse?
    Mr. Turner. I'll answer that question.
    I am aware of such a task force, yes.
    Mr. Bryant. Are there similar or counterparts in the State 
system in terms of State prosecutors? Do they have such task--
medical health care task forces for fraud?
    Mr. Turner. Certainly it's my understanding that witnesses 
testifying later today can testify more knowledgeably. I 
believe they're participants in such a task force, but I've 
been told that the representatives of the State do participate 
in the task force of which I am aware.
    Mr. Bryant. I wanted to--Mr. Assatourian, I want to ask you 
about a couple of your other points that you make, and Mr. Burr 
touched on this. But you make a comment of item four about 
products at a Medi-Cal formulary. You mentioned that, unlike 
Medicare, Medi-Cal has a bidding process which is so rigged and 
flawed that Fortune 100 companies such as Kimberly Clark and 
Proctor & Gamble, which happen to be among the largest diaper 
manufacturers in the world, have no chance of selling in the 
Medi-Cal system. You mentioned, whereas Donald Duck, the 
entertainer, who has never manufactured a diaper in his entire 
career, could be awarded a contract.
    Now you touched on that. How do you--why do you 
characterize that system as so flawed and corrupt? What is it 
about the bidding process?
    Mr. Assatourian. Well, the whole process is done in a way 
to shut out new manufacturers; and it pretty much ensures 
companies that were on the formulary--it will offer them 
continuity. And there's pretty much--there's two ways of 
getting on the formulary, the right way and cheating the 
system. If you do it the right way, the way some of the 
manufacturers do, it's hell for them. Sometimes they put a lot 
of products on the formulary, sometimes they get unlucky and 1 
or 2 products--whereas the bidding process offers people who 
are absolutely unqualified to get on the formulary, and the 
formulary in general is a 5-year contract. So anybody who gets 
on the formulary is guaranteed of making millions of dollars in 
the 5 years, and as a result you have a lot of unqualified 
companies who just get on the formulary just for the ride.
    Mr. Bryant. Now where is the corruption--where is the--how 
does that take place? How do they get on that formulary when 
they're not qualified, so to speak?
    Mr. Assatourian. Well, the manufacturers have too much say 
in the process, and they also have too much say in the 
categories of products.
    Just to give you an example, in the last bid that was 
canceled it had one ridiculous product on the bid which even 
the manufacturers couldn't figure out, but a couple of the 
bidders had convinced the State to put that on the bid. A 
liner--I don't remember the exact details, but, for example, a 
bladder control liner with 2000 cc capacity, which is 
ridiculous. How much could an incontinent patient--I mean, 2000 
cc is not needed for an incontinent patient.
    Mr. Bryant. I understand that, but in terms of--where is 
the corruption? Who is responsible for that type of fraud 
existing in that environment? Is it the people in the 
California government who draw the specifications for these 
products or is it----
    Mr. Assatourian. The Department of Health and Human 
Services in California, which pretty much consults with the 
manufacturers and the bidders. There is just too much of a cozy 
relationship. It shuts out other qualified manufacturers and 
distributors out of the process.
    Mr. Bryant. The cases you worked for the Federal 
authorities involved, I assume, people in competition with you, 
other wholesalers who were corrupt, as well as people within 
the government, the State government, who were selling numbers 
and doing things. On both ends you have people again from 
within as well as providers I guess--so you have got people in 
the government, providers and others, wholesalers, that are a 
part of this corrupt process?
    Mr. Assatourian. Yes.
    Mr. Bryant. Okay. And I think the bottom line for you and 
probably the message we take out today, one is that we just 
simply need better enforcement of the existing laws.
    Mr. Assatourian. Better enforcement and some new laws. 
Because reasonable laws--because new laws--I mean, you can't 
just drive legitimate people out of the business. Because, the 
bottom line, the damage is done to the recipients, people who 
are supposed to receive these medical products; and they are 
the ones who get damaged because they get bounced back and 
forth. New laws and better enforcement, yes.
    Mr. Bryant. Mr. Chairman, I would yield back my time.
    Mr. Upton. Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman. I apologize for being 
late. I was at another matter.
    Mr. Assatourian, you make the statement in your testimony 
that the California Medi-Cal system is a broken-down ATM 
machine which is spitting out cash uncontrollably without the 
need for even an ATM card. Armani suits have been charged to 
Medi-Cal cards, round-trip tickets overseas and silverware for 
patients have been charged to Medi-Cal. Do you still stand by 
this statement or are you suggesting that the California 
Medicaid system is still totally out of control today?
    Mr. Assatourian. No. I was making reference to what the 
situation was like in 1997 and 1998. It's been--I think 75 or 
80 percent of the problem has been fixed.
    Mr. Stupak. Okay. What steps did they take to fix those 
problems? You said 75 to 80 percent of the problems have been 
fixed. What steps did California take to fix the problem?
    Mr. Assatourian. Pretty much the FBI came in with a 
sledgehammer and put all of them out of business, case closed.
    Mr. Stupak. Okay. Do you believe they're doing a good job 
now in addressing fraud in California in the Medi-Cal system?
    Mr. Assatourian. Yes, yes, they are. Except, usually, in 
cases like this, there are always victims, innocent victims. 
Even though they're doing a good job, there's also a lot of 
innocent victims who are being stepped on.
    Mr. Stupak. How about from a policy point of view? Do you 
think that policies have been changed so that we do not go back 
to this uncontrollable ATM machine spitting out cash?
    Mr. Assatourian. I think policies have been changed, but, 
unfortunately, I truly do believe corruption will not end, the 
fraud will not end. The best they can hope for or the best this 
country can hope for is to bring the level of fraud to an 
acceptable level. Because, right now, it's gone back to normal; 
and my guess is within another 12 months the whole circus will 
start all over again except not in that level, in a more--in a 
lower level.
    Mr. Stupak. But if the policies have been changed, you 
still believe it's going to continue in the next 12 months, it 
will go back to like it was?
    Mr. Assatourian. I think so. Because it's the U.S. health 
care system. It's the most----
    Mr. Stupak. So even if you change the policy, it's still 
going to continue?
    Mr. Assatourian. What I'm saying is it will continue but 
not as bad as it the way it was in 1997 and 1998. Again, as I'm 
saying, nobody will be ever--nobody will be able to stop fraud 
100 percent. The fraud will always be there, regardless. It 
just will be at an acceptable level.
    Mr. Stupak. What is an acceptable level, in your mind?
    Mr. Assatourian. This is just a guesstimate.
    Mr. Stupak. Sure.
    Mr. Assatourian. I would say--I don't know. I would say 
maybe 2 or 3 or even 5 percent, even though I think that's 
high.
    Mr. Burr. Would the gentleman from Michigan yield for a 
second?
    Mr. Stupak. Sure.
    Mr. Burr. I just want you to finish the sentence that you 
started. You said it's the U.S. health system.
    Mr. Assatourian. The most lucrative business in the world. 
The U.S. health care system is more lucrative than the computer 
industry, the software industry or any industry. It's pretty 
much recession proof. It has nothing to do with retail sales. 
It has nothing to do with--it is not directly linked to the 
economy. It just--it's a recession-proof, lucrative business.
    Mr. Bilbray. Guaranteed market.
    Mr. Assatourian. Guaranteed market.
    Mr. Stupak. Reclaiming my time, what steps do you think 
should be taken then to prevent this? What steps would you do 
if you were head of Medi-Cal in California?
    Mr. Assatourian. As I have put in my opening statement, I 
mean, there's just--this is not brain surgery. Just four or 
five very simple steps would cut the fraud dramatically.
    Mr. Stupak. What are those four or five different steps?
    Mr. Assatourian. The first step in my mind is that the 
provider should purchase from authorized distributors to 
control the quality of the product and to control the cost.
    And then the brand name reimbursement system which is 
currently in place in California should end. I mean, California 
is bleeding the money because of the way they are making these 
reimbursements. It should be copied--it should use the same 
format Medicare does. The reimbursement should be based--should 
be made based on the product specification, not the brand name. 
Every time there's a brand name requirement it drives up the 
cost, it kills competition, and it costs taxpayers and the 
State of California millions of dollars a year.
    Mr. Stupak. Okay. You have your five points there. Is there 
anything else that you believe they should be doing that they 
are not doing?
    Mr. Assatourian. Better people who are supposed to be 
enforcing these laws should be better trained in the medical 
field. Again, I respect their intentions. Their intentions are 
very well--in many cases, they're not trained for that area.
    Mr. Stupak. You mentioned bonding. Explain that a little 
bit more. Would you elaborate on this? What amount should be 
provided by the bond--by those who have to be bonded?
    Mr. Assatourian. I don't know. I would say it should be 
reasonable so legitimate businesses don't go bankrupt. I mean, 
a bond maybe in the amount of 50,000 or 100,000, in a level 
that will not destroy and drive people out of the business. 
After all, people who are in the business, they are serving a 
purpose.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Upton. Mr. Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Let me ask you--and if you don't understand it, I 
understand--but I would like to know, in your professional 
opinion, why would the State of California be using the brand 
naming approach?
    Mr. Assatourian. I don't know. I would like to find out 
myself.
    Mr. Bilbray. Do you think it's a concept of quality or 
something?
    Mr. Assatourian. No, it has nothing to do with quality. I 
do not know the reason, but I do know it is costing a 
tremendous amount of money.
    Mr. Bilbray. In all your imagination you can't figure out 
why they would do that?
    Mr. Assatourian. No. I think it's an old system that's been 
there, and nobody's really paid attention to it.
    Mr. Bilbray. Is it possible this was part of the good old 
boy system that was developed because of political influence in 
the past?
    Mr. Assatourian. Could be.
    Mr. Bilbray. Okay. Why would the FBI need to go into a 
State like California? Why couldn't the State of California 
have handled this themselves? Let's face it, California is not 
exactly what you call a Podunk little political subdivision----
    Mr. Assatourian. No.
    Mr. Bilbray. [continuing] small, little, intimate group of 
32 million people. Why would the FBI need to intervene on that 
and why couldn't the State of California handle that 
themselves?
    Mr. Assatourian. I wouldn't know. I think some of the next 
witnesses would have a better answer to that.
    Mr. Bilbray. Okay. I was just hoping you would use your 
imagination. I'll try to get the--ask the State and see if they 
can go over--I just thought you might have an opinion about 
that.
    Mr. Assatourian. I do have an opinion, but I don't think 
it's appropriate for me to----
    Mr. Bilbray. Well, let me be more blunt then. Do you think 
the State of California basically didn't focus on this, looked 
the other way, or they were negligent in oversight?
    Mr. Assatourian. Yes.
    Mr. Bilbray. Okay. I'm only asking your opinion.
    Mr. Assatourian. That's part of the problem. When provider 
numbers were being sold within the State--I mean, within the 
Health Department, that pretty much explains the level of 
indifference. I mean, when a government employee is selling a 
Medi-Cal provider number for anywhere from between $10,000 to 
$20,000, that pretty much speaks for itself. And the way I see 
it you are right. I could be wrong, but I think the State of 
California is one of the wealthiest States in the union, and 
it's being robbed blindly, and the State of California has a 
lot to answer for.
    Mr. Bilbray. But you used a word that would indicate you do 
not believe it was a conscious effort or action but it was 
negligence. You used the word indifference.
    Mr. Assatourian. Yes.
    Mr. Bilbray. Which is a fancy word for they didn't give a 
damn.
    Mr. Assatourian. The way I would put it is that I don't 
think they intentionally ignored it. I think they were maybe 
preoccupied with something else.
    Mr. Bilbray. I appreciate that; and that was a very fair 
testimony, Mr. Chairman. I will yield back my time.
    Mr. Upton. Thank you.
    I just want to say, closing comment from me, we do 
appreciate your testimony today. That's for sure. We have had a 
number of hearings along this line, trying to provide not only 
the States but the Federal Government better tools to go after 
fraud and abuse in the Medicaid program, so your testimony is 
particularly enlightening.
    I don't know if other members have further questions. Mr. 
Stupak, do you have further question or comment?
    Mr. Stupak. Mr. Chairman, just if I could, I am still a 
little unclear here. I know I got in here late and didn't get a 
chance to hear all this. But the system obviously broke down in 
California. So from where we sit how do you rectify that from 
happening again? Where were California individuals then to let 
this thing get so out of control? You said somewhere between 
1997, 1998 about 75, 80 percent of the fraud was going on; and 
you said there's probably always going to be some, some small 
acceptable level, 2, 3, maybe 5 percent. How did a system like 
this get so out of control and where were the California 
officials?
    Mr. Assatourian. I think the State officials got caught by 
surprise. Again, I am not saying they intentionally ignored it. 
I think they just--they were caught by surprise. I mean, when 
you have more providers in the city, when you have more of them 
than 7-Elevens and gas stations put together, it should say 
something. They just got caught by surprise. When they realized 
what the problem is, I don't think they knew how to deal with 
it.
    Mr. Stupak. I ran for Congress in 1992. I mean, fraud and 
Medicare and Medicaid was a big issue, even back in 1992. It 
has every year since then. It's one of the reasons I am on this 
Subcommittee on Oversight and Investigations. I guess I find it 
hard to believe they get caught by surprise, sleeping at the 
switch or something, obviously.
    All right. Thank you, Mr. Chairman.
    Mr. Bryant. Mr. Chairman.
    Mr. Upton. Yes.
    Mr. Bryant. Could I have a follow-up question?
    Mr. Upton. Yes.
    Mr. Bryant. Given the reputation California has for being 
on the cutting edge of everything, you've mentioned, and I 
meant to ask you in my first round, a new idea or concept 
that's going to be the crime wave of the future, and did you 
say adult day care?
    Mr. Assatourian. Centers, yes.
    Mr. Bryant. Explain to us who are uninformed, outside of 
California, what that involves and where that's going. Maybe we 
can be alert for that.
    Mr. Assatourian. I think in general it's a program that the 
State reimburses providers. The business is called adult day 
care centers.
    The way it works, if I am not mistaken, is that the elderly 
people, instead of their children sending them to retirement 
homes, what they do is they take them to this very nice 
equipped day care center where their parents or the elderly are 
entertained. There's physical therapy, food, entertainment, 
everything. And they check them in around--let's say in the 
morning, and then they pick them up at night. And if the adult 
day care center also has pick up and delivery accommodations, I 
think the State pays a couple of extra dollars.
    So in general, if I'm not mistaken, I think for each guest 
the State pays somewhere from $60 to $70 per day, if I'm not 
mistaken; and that translates--with a hundred guests, that 
translates to about, if I'm not mistaken, $30,000 to $40,000 
net profit per month for the day care center after taking out 
the overhead. And that's where the gold rush is now. Fraud, 
that's where the next wave of fraud is going to be. It has 
already started, but it's getting there.
    Mr. Bilbray. Would the gentleman yield?
    Mr. Bryant. I'm happy to yield.
    Mr. Bilbray. Let me say, as a parent and also a son of a 
senior citizen, the number 60 to 70 does seem high. When is the 
last time anybody in this room sent their kids to camp for--$60 
or $70 a day is basically what healthy young people are charged 
to be able to go to a summer camp. You get into that. I just 
want to say it to be fair about this.
    And the other issue that I would ask, California has been 
on the cutting edge about a lot of things, and we've had some 
great successes, and we've tried to warn the rest of the 
country of some of our failures. I would just like to remind my 
colleagues that, as I made the statement about it not being a 
small State, one of the things we may run into here is that the 
unit is so large, the big bureaucracies, big systems have the 
potential for making big mistakes; and the administrative size 
of the State may be part of the situation we want to look at, 
too, as we look at implementing national programs.
    And I'd yield back to the gentleman.
    Mr. Burr. Mr. Chairman, let me get into the adult day care 
just a little bit more if we can. Are you suggesting that 
California has an open policy for all seniors or is there an 
income level cutoff?
    Mr. Assatourian. I am not familiar with the details. What I 
just said was pretty much vague information I have heard in the 
business, I guess.
    Mr. Burr. What you're telling us is those criminal elements 
are now eyeing this area?
    Mr. Assatourian. They're already in there.
    Mr. Burr. They're already in there. The $60 or $70, 
regardless of what it is, that's $60 or $70 for them just being 
there. That's not for service provided other than the facility 
that they go to?
    Mr. Assatourian. That is my understanding. Except one of 
the next witnesses, Mr. Cates, he will be in a better position 
to answer the question. Because really what I've heard is that 
is very general information. What I know is based on what I 
hear. The fraud is already there. They're at it.
    Mr. Burr. But the fact that individuals might claim for $60 
for somebody that's in the facility is not fraud.
    Mr. Assatourian. No, that's not fraud. The problem is----
    Mr. Burr. Tell us where the fraud is going to be.
    Mr. Assatourian. The fraud is, after 1 or 2 visits--they're 
supposed to be there every day. The fraud--after the first 
visit, those people don't want to go there every day. They have 
their own homes. They want to stay home and watch TV on their 
couch. So after the first visit they just starting getting--the 
facilities start getting reimbursement for nonvisiting guests. 
That's where the fraud comes in.
    Mr. Burr. I appreciate you clarifying that. Thank you.
    Yield back.
    Mr. Upton. Mr. Stupak.
    Mr. Stupak. Just if the committee jointly could ask the 
GAO--I know they have done a general survey of the States as to 
what went on in the States' enforcement, but maybe they could 
do a more in-depth, detailed postmortem, if you will, on 
California so we can understand what happened, what lessons 
learned and where were the policy breakdowns. Because, as the 
witness indicated, the next area is adult day care center 
fraud. And I know, like I said, they have done a general 
survey, but I would like to see in detail, if GAO could put 
that together for us, where it really happened in California. 
Maybe we can learn a few things from it and make sure it 
doesn't happen again.
    Mr. Upton. No one has further questions, so, Mr. 
Assatourian, thank you very much for being with us this 
morning.
    Our second panel includes the following: Ms. Kathleen 
Connell, Controller of the Office of the California State 
Controller; Mr. Alan Cates, Chief of the California Medicaid 
Fraud Bureau; Mr. Thomas Kubic, Deputy Assistant Director of 
the Criminal Investigations Division, Federal Bureau of 
Investigation; Mr. Ruben King-Shaw, Secretary of the Florida 
Agency for Health Care Administration; Mr. Doug Wagoner, Vice 
President of the Public Sector, ChoicePoint; and Leslie 
Aronovitz from the General Accounting Office.
    Witnesses, if you would come and find the right spot--let's 
see, sit down; and then we'll get the name tags in front of 
you.
    You heard the first panel when we swore them in. Do any of 
you object to having your testimony being taken under oath? The 
committee rules are in front of you.
    You should also know you're able to have legal counsel with 
you. Do any of you wish legal counsel?
    If you would stand and raise your right hand.
    [Witnesses sworn.]
    Mr. Upton. You are now under oath.
    Ms. Aronovitz, we'll start with you. If you would use that 
mike a little closer as well. Again, thank you for your 
testimony in advance. It is made part of the record in its 
entirety, and if you could keep it to 5 minutes, that'd be 
terrific.

  TESTIMONY OF LESLIE G. ARONOVITZ, ASSOCIATE DIRECTOR, HEALTH 
FINANCING AND PUBLIC HEALTH, GENERAL ACCOUNTING OFFICE; THOMAS 
 T. KUBIC, DEPUTY ASSISTANT DIRECTOR, CRIMINAL INVESTIGATIONS 
 DIVISION, FEDERAL BUREAU OF INVESTIGATIONS; KATHLEEN CONNELL, 
CONTROLLER, OFFICE OF THE CALIFORNIA STATE CONTROLLER; J. ALAN 
 CATES, CHIEF, CALIFORNIA MEDICAID FRAUD BUREAU; RUBEN J. KING-
SHAW, SECRETARY, FLORIDA AGENCY FOR HEALTH CARE ADMINISTRATION; 
  AND DOUG WAGONER, VICE PRESIDENT, PUBLIC SECTOR, CHOICEPOINT

    Ms. Aronovitz. We sure will. Mr. Chairman and members of 
the subcommittee, we are pleased to be here as you discuss 
efforts to better assure the integrity of providers who bill 
the Medicaid program. With hundreds of millions of claims being 
processed each year, Federal health programs need to rely on 
the integrity of their health care providers, since it would be 
impossible to perform detailed checks on every claim. But as 
you will hear, and as you have heard from the first panel, 
there is much work to be done to ensure the legitimacy of all 
providers.
    Since States have wide latitude in how they structure their 
Medicaid provider enrollment processes, some States are much 
more aggressive than others. While we found through a survey 
that few States have taken comprehensive measures to prevent 
problem providers from participating in their Medicaid 
programs, the more aggressive States are employing variations 
of several key provider enrollment activities. For example, 
some States are beefing up their provider enrollment 
application and more stringently reviewing the submitted 
information. Some are now requiring Medicaid provider 
applicants to disclose information on their criminal 
background, financial status and health care program exclusions 
and sanctions as well as information about their business's 
owners. In Florida, applicants are required to submit 
fingerprints, which are checked with both State law enforcement 
authorities and the FBI.
    Some States are also strengthening their provider 
agreements. Several now have a clause allowing either party to 
terminate the agreement without cause after giving advance 
notice. Some State Medicaid officials say this allows them to 
get problem providers out of the program more expeditiously 
than they could otherwise. Some States, which tighten standards 
for newly enrolling providers, have also required existing 
Medicaid providers to reenroll in the program under the new 
standards, such as the enhanced disclosure requirements.
    Taking a lesson from Medicare, several States have found 
that visiting the sites of provider applicants is useful in 
verifying if applicants have bona fide businesses. Last year, 
when one State began conducting site visits of all newly 
enrolling noninstitutional providers, it found numerous 
applicants with nonexistent addresses or mailbox-only 
operations. Now, officials report that such a finding is a rare 
occurrence. I should note that not all States believe that site 
visits are cost effective, and we believe that a risk-based 
approach may prove the most useful.
    One last key activity is better controlling billing 
numbers. As you have heard, because some individuals or groups 
intent on defrauding the program use the billing numbers of 
deceased or retired providers, many States are now canceling 
the numbers of inactive providers to prevent those numbers from 
being used fraudulently to bill the program.
    Up until now, we have been discussing Medicaid, but 
Medicare shares many of the same providers, and it also has 
been the victim of improper billing and outright fraud. As the 
result of the experiences with fraudulent providers, 
strengthening Medicare provider enrollment procedures became 
part of the Health Care Financing Administration's 
comprehensive plan for program integrity.
    Last year, HCFA began to develop a standardized and 
strengthened Medicare provider enrollment process, but its plan 
does not include similar actions for Medicaid. Dealing with 
such issues in Medicaid is complicated by the fact that 
Medicaid enrollment policies are shaped by individual State 
actions. Despite its singular approach, we believe that the 
current revamping of Medicare's provider enrollment process 
provides an added opportunity for HCFA to help States 
strengthen their Medicaid process as well. By combining their 
efforts to validate enrollment application information, perform 
site visits on select providers, and to share the results of 
potential providers in HCFA's new provider data base, both 
Medicare and Medicaid might realize efficiencies that could 
benefit both programs.
    Although HCFA officials agree in concept, many logistics 
would still need to be worked out.
    Mr. Chairman, this concludes my remarks and I'll be happy 
to answer any questions you and the other subcommittee members 
have.
    [The prepared statement of Leslie G. Aronovitz follows:]
 Prepared Statement of Leslie G. Aronovitz, Associate Director, Health 
   Financing and Public Health Issues, Health, Education, and Human 
                         Services Division, GAO
    Mr. Chairman and Members of the Subcommittee: We are pleased to be 
here as you discuss efforts to better ensure the integrity of providers 
who bill the Medicaid program. In the past, we have reported to the 
Congress that scrutinizing providers more rigorously before they begin 
billing the federal government's two major health care programs, 
Medicare and Medicaid, is an extremely important means of protecting 
program funds and beneficiaries.1 In fiscal year 2001, 
federal funding of Medicare and Medicaid is projected to reach about 
$342 billion.
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    \1\ Fraud and Abuse: Medicare Continues to Be Vulnerable to 
Exploitation by Unscrupulous Providers (GAO/T-HEHS-96-7, Nov. 2, 1995); 
Fraud and Abuse: Providers Excluded from Medicaid Continue to 
Participate in Federal Health Programs (GAO/T-HEHS-96-205, Sept. 5, 
1996); Medicare Home Health Agencies: Certification Process Ineffective 
in Excluding Problem Agencies (GAO/HEHS-98-29, Dec.16,1997.)
---------------------------------------------------------------------------
    My remarks today will focus on (1) why it is important to take 
steps to ensure that only honest providers bill federal health care 
programs, (2) what Medicare is doing to strengthen its provider 
enrollment process, (3) what states are doing to ensure provider 
integrity in the Medicaid program, and (4) what additional 
opportunities exist to improve these efforts. My comments are based on 
our past work and work we are now conducting for the Commerce Committee 
on state fraud and abuse control efforts in the Medicaid program.
    In brief, with hundreds of millions of claims to process each year, 
Medicare and Medicaid must rely in part on provider honesty in billing. 
As a result, it is critical to protect program funds by making efforts 
to ensure that only legitimate providers bill these programs. Recent 
incidents of Medicaid fraud perpetrated by dishonest medical equipment 
suppliers in California and other cases of Medicare and Medicaid fraud 
underscore these programs' vulnerability. Although the Health Care 
Financing Administration (HCFA) has made revamping its provider 
enrollment process a priority for Medicare, it has not sought similar 
efforts in state Medicaid programs. Medicaid state agencies report 
differing practices to ensure provider integrity, with only nine states 
reporting that they perform comprehensive provider enrollment 
activities. Because HCFA is redesigning its Medicare provider 
enrollment process, the HCFA Administrator has suggested that 
developing a joint Medicare/Medicaid provider enrollment process might 
be beneficial for both programs. Thus, HCFA and the states have an 
additional opportunity to work together to develop new procedures for 
Medicaid that could better ensure provider integrity for both programs 
while minimizing the administrative burden and cost.
                               background
    Medicare is a federal health insurance program for certain disabled 
persons and those 65 years and older. It is administered by HCFA, 
within the Department of Health and Human Services (HHS), through about 
50 claims administration contractors. Medicaid is a jointly funded 
federal-state health insurance program for eligible low-income and 
medically needy people. HCFA oversees the Medicaid program at the 
federal level, but at the state level, the program actually consists of 
56 separate state-operated programs (including the District of 
Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, and 
the Northern Marianas--hereafter referred to collectively as 
``states''). The federal government matches state Medicaid spending 
according to a formula that is based on each state's per capita income. 
Within broad federal guidelines, each state establishes its own 
eligibility standards; determines the type, amount, duration, and scope 
of services; sets its payment rates; and administers its program--
including the enrollment of its providers.
    Although Medicare and Medicaid have different structures and 
governance, and serve different populations, many providers bill both 
programs and must separately enroll in each. Enrollment refers to all 
of the application and verification activities that occur before a 
provider is issued a provider number and approved to bill a federal 
health care program.
    My comments today are based on our past and on-going work for the 
Commerce Committee on controlling fraud and abuse in the Medicaid 
program. This statement focuses on enrollment processes for 
noninstitutional providers, because there are some specific 
requirements for institutions such as hospitals and nursing homes. 
Noninstitutional providers include durable medical equipment suppliers, 
physicians or physician groups, home health agencies, transportation 
companies, and laboratories--in effect, any providers who do not 
provide care in an institutional setting such as a hospital or nursing 
home. To gain more information on state efforts, we surveyed the 56 
state Medicaid programs.2 Several survey questions focused 
on states' provider enrollment activities. For this statement, we 
supplemented the states' self-reported survey data with on-site or 
telephone interviews of Medicaid officials from several states, 
including Connecticut, Florida, Georgia, New Jersey, and Texas, that 
reported taking actions to tighten their provider enrollment processes.
---------------------------------------------------------------------------
    \2\ Fifty-three of the 56 state Medicaid programs responded to the 
survey.
---------------------------------------------------------------------------
  problems with fraudulent providers underscore the value of ensuring 
                           provider integrity
    With hundreds of millions of claims being processed each year, 
federal health care programs need to rely to an extent on the integrity 
of their providers. Medicare and Medicaid receive claims for services, 
equipment, and supplies, and use automated computer edits as a check 
before payment to help ensure the claims are legitimate and billed by 
an enrolled provider. While some of the claims are also reviewed after 
payment is made, with such a massive number of claims, it is impossible 
to perform detailed checks on a significant share of them.
    Most providers bill appropriately, reducing the risks from not 
being able to scrutinize claims more comprehensively. However, both 
programs have been victims of improper billing and outright fraud. For 
example, we recently reported on seven criminal health care fraud 
investigations, four of which involved both the Medicare and Medicaid 
programs.3 In one of these cases, providers filed more than 
$120 million in fraudulent Medicare claims and $1.5 million in 
fraudulent Medicaid claims before being caught.
---------------------------------------------------------------------------
    \3\ Health Care: Fraud Schemes Committed by Career Criminals and 
Organized Criminal Groups and Impact on Consumers and Legitimate Health 
Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).
---------------------------------------------------------------------------
    Recent fraud cases in California underscore Medicaid's 
vulnerability to providers who are eager to defraud the program. As you 
have heard from other witnesses today in more detail, since July 1999, 
a state-federal task force targeting questionable pharmaceutical and 
durable medical equipment providers has found large-scale fraud in 
California's Medicaid program--Medi-Cal. More than 100 Medicaid 
providers, wholesalers, and suppliers have been charged with more than 
$50 million in fraud since July 1999. At least 61 of these individuals 
have already been convicted and paid about $15 million in restitution. 
An additional 250 providers, wholesalers, and suppliers are being 
investigated for possible fraud that could exceed $250 million. In some 
cases, investigators found that providers set up shop for 4 or 5 months 
to bill Medi-Cal and collect payments for services not rendered and 
then closed down before the fraud was detected. These so-called ``bump 
and run providers'' often made off with hundreds of thousands of 
dollars before they disappeared.
    These cases follow a pattern that has been seen in federal health 
care programs since at least the early 1990s. Investigations, some 
conducted as part of Operation Restore Trust, 4 pinpointed 
weaknesses in provider enrollment procedures that have allowed 
questionable providers easy entry into the Medicare and Medicaid 
programs. Examples follow:
---------------------------------------------------------------------------
    \4\ Operation Restore Trust was a 2-year demonstration to target 
Medicare and Medicaid fraud in five states conducted by HHS and federal 
law enforcement agencies.

 A man convicted of health care fraud in 1989 and excluded from 
        participating in Medicaid and Medicare was arrested in 2000 on 
        new charges that he secretly ran several companies that 
        received $40 million in Medicare reimbursements for fraudulent 
        ambulance transportation claims. His involvement in the 
        companies was hidden when these companies enrolled as Medicare 
        providers. Employees of the companies routinely falsified 
        paperwork for ambulance transports for patients who did not 
        need this service. For example, patients, typically people 
        being taken for radiation and dialysis treatment, would be 
        described as ``bed-confined,'' even though covert videotaping 
        by federal investigators showed them walking to the ambulances.
 A provider opened two ``storefront clinics'' in New Jersey and 
        began billing the Medicaid and Medicare programs for such 
        invasive procedures as colonoscopies and upper gastrointestinal 
        endoscopies. An investigation revealed that the clinic owner 
        was not licensed to practice medicine in New Jersey and, in 
        fact, did not have any medical license. Before the scheme was 
        detected, the clinic owner had billed the Medicaid program for 
        over $6 million and had defrauded the Medicare program of over 
        $166,000.
 The owner of a medical supply company in New York pleaded 
        guilty to billing Medicaid for more than $1.2 million for 
        supplies that were never provided. The company, operated out of 
        the owner's home, filed claims for medical items for several 
        patients authorized by a physician who had been dead for more 
        than 10 years.
    Checking the credentials and qualifications of such providers more 
thoroughly might have raised questions about their integrity. 
Periodically requiring providers to re-enroll would allow regular 
scrutiny and updating of their information. As a result, federal health 
programs could keep tighter control over the current validity of 
billing numbers. Failure to do so leaves federal health programs 
vulnerable to questionable providers who either may not be providing 
services to beneficiaries as billed or be providing poor quality 
services. For example, in 1996, HCFA reported that of 36 new applicants 
to provide durable medical equipment to Medicare beneficiaries in 
Miami, 32 were not bona fide businesses. Some of these entities did not 
have a physical address or an inventory of durable medical equipment. 
To determine whether this was only a problem in Florida, the HHS Office 
of Inspector General (OIG) conducted on-site inspections of 420 
suppliers with Medicare billing numbers issued between January and June 
1996 and 35 applicants who had applied but had not yet been 
enrolled.5 The OIG found that 31 of the 420 enrolled 
suppliers and 4 of the 35 new applicants did not have the required 
physical business address, or their addresses were suspect. Some had 
closed suddenly, leaving no forwarding address. Some operated out of 
homes, while others lacked inventory, making their suppliers' status 
suspect. Other enrolled suppliers did not provide the level of service 
expected, because they did not make repairs on items supplied to 
beneficiaries that were still under warranty or allow beneficiaries to 
return unsuitable items.6
---------------------------------------------------------------------------
    \5\ These suppliers were located in 12 large metropolitan areas in 
New York, Florida, Texas, Illinois, and California.
    \6\ HHS OIG, Medical Equipment Suppliers: Assuring Legitimacy, OEI-
04-96-00240 (Washington, D.C.: HHS, Dec. 1997).
---------------------------------------------------------------------------
    As one convicted Medicaid fraud felon whose previous experience was 
owning a nightclub in Miami, Florida, remarked,
          ``I had no experience or training in health care services . . 
        . Without this experience and with no knowledge of the Medicare 
        program, I purchased a business and started billing Medicare. 
        It was very easy for me to get approval from Medicare to become 
        a provider . . . They gave me a provider number over the phone. 
        No one from the government or anywhere else ever came to me or 
        my place of business to check any information on the 
        application. No one ever checked my credentials or asked if I 
        was qualified to operate a medical supply business.''
    By the time this man was arrested in 1994, he owned seven medical 
supply companies, using the different billing numbers to hide the 
number of claims he was submitting. All of his businesses were at the 
same location, and he used the same staff and computers to bill under 
different numbers. He estimated that he billed about $32 million to 
Medicare in total, most for services not rendered.7
---------------------------------------------------------------------------
    \7\ Medicare Fraud Prevention: The Medicare Enrollment Process, 
(Appendix--Statement of Convicted Medicare Fraud Felon, hearings before 
the Permanent Subcommittee on Investigations, Committee on Governmental 
Affairs, U.S. Senate, 105th Congress, 2nd Sess. (Jan. 29, 1998).
---------------------------------------------------------------------------
    Some states and the federal government have realized that their 
programs do not have all the tools needed to address the problem of 
providers entering their programs intent on committing fraud. One state 
audit pointed out that the state's Medicaid program could not terminate 
a problem provider quickly and that providers could potentially sell 
their businesses, including their billing numbers, to others. In this 
state, once a provider was accepted into the program, there was no 
mechanism to ensure that Medicaid had up-to-date information about the 
provider, thus allowing billing numbers to be potentially misused by 
others. Furthermore, no efforts were made to verify information on the 
enrollment form. Because the state program accepted copies of out-of-
state licenses rather than verifying them, a provider could produce a 
fraudulent out-of-state license and thereby be enrolled to treat 
Medicaid patients.
      efforts to strengthen medicare provider enrollment under way
    As a result of repeated experiences with fraudulent and abusive 
providers, strengthening Medicare provider enrollment procedures became 
part of HCFA's Comprehensive Plan for Program Integrity issued in 
1999.8 Medicare had delegated provider enrollment to its 
claims administration contractors, which resulted in somewhat different 
processes at every contractor, with no clearly enunciated national 
enrollment requirements. HCFA is developing a standardized and 
strengthened provider enrollment process, which would hold providers to 
financial and performance standards before they could enroll in the 
Medicare program. HCFA has taken, or is planning, a number of other 
steps, including
---------------------------------------------------------------------------
    \8\ The Comprehensive Plan, published in Feb. 1999, outlined HCFA's 
key program integrity initiatives for the next 6 to 18 months. It 
addresses five management areas, including provider integrity.

 publishing a notice of proposed rulemaking to set standards 
        for provider enrollment, specifying that HCFA can deny and 
        revoke billing privileges and periodically require providers to 
        reenroll;
 implementing a new centralized data system on enrolled 
        providers--the Provider Enrollment, Chain and Ownership System 
        (PECOS), which can be used to track ownership and relationships 
        between providers;
 developing a new standard enrollment form that will ask for 
        detailed information in many categories, such as ownership; and
 requiring provider Social Security numbers on the enrollment 
        form, which then will be verified through the Social Security 
        Administration.
    In addition to our ongoing Medicaid work on this issue, we are now 
reviewing the Medicare provider enrollment process and will be 
reporting about it later this year. In that study, we are primarily 
focusing on the activities Medicare contractors perform to enroll new 
providers and HCFA's plans to require providers to periodically 
reenroll.
    While HCFA has a number of actions planned or in process to help 
strengthen Medicare provider enrollment, its plan for program integrity 
does not include any actions to strengthen provider enrollment in 
Medicaid. Dealing with such issues at the federal level is more complex 
in Medicaid because of the differing program requirements and state 
approaches to ensuring program integrity. Because the Medicaid program 
is administered by the states under federal oversight, both federal 
requirements and state actions form a state's Medicaid provider 
enrollment program.
        federal requirements are minimal, but a few states have 
                 aggressiveprovider enrollment programs
    Because states design their own Medicaid provider enrollment 
processes, some are much more comprehensive than others. However, 
despite the importance of activities to ensure the integrity of 
Medicaid providers, HCFA does relatively little to oversee states' 
efforts. Responses to our survey revealed a handful of states that have 
developed aggressive actions through their enrollment processes to help 
ensure provider integrity. These efforts range from requiring and 
verifying comprehensive information on the enrollment form to 
performing site visits at potential providers' offices. We describe 
these practices later because we believe they can help other states 
that want to strengthen their provider enrollment processes.
Minimal Federal Requirements Exist to Ensure Medicaid Provider 
        Integrity
    There are few federal requirements for states to follow in 
enrolling Medicaid providers. All states must have an agreement between 
the state Medicaid agency and each provider or organization furnishing 
services to beneficiaries under the plan. However, there is no federal 
requirement that the provider certify the accuracy of information 
provided. Providers must also agree to minimum treatment record-keeping 
standards; give state and federal authorities access to treatment 
records; and disclose or supply upon request information concerning 
health care entity ownership and the identities of certain employees 
with criminal histories. In addition, the Balanced Budget Act of 1997 
(BBA) established additional enrollment safeguards regarding home 
health agencies and durable medical equipment suppliers.
    HCFA's guidance to states, incorporated in the State Medicaid 
Manual, indicates that states may only enroll providers that are 
qualified to provide the specified service and that have not been 
excluded from federal health care programs.9 A qualified 
provider is one that is licensed to practice in the state, if licensure 
is required, and that provides services within the scope of practice as 
defined by state law. States can impose additional qualifications on 
providers that they enroll in their Medicaid programs. Recently, the 
OIG found evidence that some state Medicaid programs have paid excluded 
providers for providing services to beneficiaries, and the OIG is thus 
concerned that some states may not be checking on whether a provider 
has been excluded.10
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    \9\ The HHS OIG excludes individuals and entities from 
participating in federal health care programs under various provisions 
of the Social Security Act including sections 1128, 1128A, 1156, and 
1892. When an exclusion is imposed, Medicare, Medicaid, and other 
federal health care program payments are prohibited for any items or 
services furnished, ordered, or prescribed by an excluded provider 
other than for emergency items or services not provided in a hospital 
emergency room. Reasons for the exclusion may bear on a provider's 
professional competence, professional performance, or financial 
integrity. Payment is also prohibited to any managed care organization 
that contracts with an excluded provider.
    \10\  We reviewed these processes, including the OIG's process to 
exclude providers, in 1996. See Fraud and Abuse: Providers Excluded 
From Medicaid Continue to Participate in Federal Health Programs (GAO/
T-HEHS-96-205, Sept. 5, 1996).
---------------------------------------------------------------------------
    Finally, the federal government provides states matching funds for 
automated claims processing and information retrieval systems, called 
Medicaid Management Information Systems (MMIS), provided that the 
states' systems meet certain specifications. States that receive 
federal funding for their MMIS must collect and enter into their 
systems certain types of provider information to help ensure that their 
providers are eligible. This information includes a unique Medicaid 
provider identification number, the provider's Social Security number, 
and, if applicable, the provider's Medicare number. In addition, state 
information systems need to be able to support certain functions, such 
as enrolling providers only after they agree to abide by the state 
Medicaid program's rules and helping to screen applicants by verifying 
their state license or certification, if applicable.
Limited Federal Oversight of State Enrollment Processes
    Although little attention has been given to state Medicaid provider 
enrollment processes, 11 HCFA is facilitating state Medicaid 
fraud and abuse control activities through the HCFA Medicaid Fraud and 
Abuse National Initiative. Of the 53 state Medicaid agencies that 
replied to our survey on efforts to control fraud and abuse, only 16 
reported that HCFA staff visited their agency to review their fraud and 
abuse control activities during their most recent fiscal year. In 
interviews with HCFA and state Medicaid agency officials during our 
five state site visits, officials generally reported that HCFA was not 
overseeing their provider enrollment activities.
---------------------------------------------------------------------------
    \11\ Before the Systems Performance Review (SPR), a triennial 
standards-based review to reapprove/approve a state's MMIS as well as 
any reduction in federal financial participation levels, was repealed 
by the BBA, HCFA performed indirect oversight of provider enrollment 
via the SPR. Part of the review included an evaluation of the provider 
enrollment subsystem within the state MMIS.
---------------------------------------------------------------------------
    However, HCFA is working with state Medicaid programs on 
strengthening their fraud and abuse control activities through its 
Medicaid Fraud and Abuse National Initiative. The goal of this 
initiative is to facilitate, not oversee or direct, state efforts. The 
initiative is led from HCFA's Atlanta regional office and has 
coordinators in each of its 10 regional offices. Although the 
initiative's plan does not list provider enrollment as one of its 
strategic goals, its national work group has a goal to work with states 
to help them avoid providers who have been excluded, suspended, 
debarred, or sanctioned from other federal health care programs. 
Recently, HCFA teams consisting of regional office Medicaid fraud and 
abuse coordinators reviewed eight states' Medicaid program integrity 
procedures. In those states, they checked two processes relevant to 
provider enrollment--providers' disclosure of ownership, significant 
business transactions, and employee criminal history information; and 
states' processes to ensure that excluded providers do not participate 
or receive payment for services. HCFA has not yet reported its findings 
on this eight-state review.
Wide Variation in State Efforts to Check Provider Integrity
    States have considerable latitude in how they structure their 
provider enrollment processes. While some states have begun to 
strengthen these processes, few have taken comprehensive measures to 
prevent problem providers from entering Medicaid. In our survey, while 
almost all states reported checking licensure and whether providers had 
been excluded from federal programs, less than half reported checking 
whether providers had criminal records or had a site to conduct 
business. About two-thirds of the states reported canceling inactive 
billing numbers, even though billing numbers are used to receive 
payment. Canceling billing numbers that have been inactive can help 
prevent unauthorized individuals from adopting and using those numbers. 
States were least likely to conduct checks of whether the provider is 
actually located at the address reported--21 states reported doing so. 
This may overstate the amount of checking that states are doing, 
because of the states that reported doing these checks, at least one 
had begun doing this within the last year, and one had done so on a 
trial basis in some parts of the state. Only nine states reported 
conducting all four of these checks--licensure, excluded provider, 
criminal record, and business location.
    HCFA has found site visits to be useful in verifying whether 
applicants for enrollment in Medicare have bona fide businesses. In our 
survey, 19 states reported that they conducted site visits when a 
provider initially applies to become enrolled. Most states that 
conducted site visits reported visiting only certain providers that 
they feel have a greater likelihood of abusing the program--for 
example, the Kansas Medicaid program reported visiting only durable 
medical equipment suppliers. Because these site visits cost money, such 
targeting is seen by those states as the best approach. Only New 
Hampshire, which reported enrolling about 5,000 providers in the last 3 
years, said that it checked the sites of all providers before 
enrollment.
    Once enrolled, many states allow providers to stay indefinitely in 
the program without having to update information about their status. As 
a result, while some providers may be reporting changes to the Medicaid 
program, such as selling a business and its associated billing number, 
others may not. Twenty-six states reported allowing providers to 
continue to bill indefinitely once enrolled. Others had an enrollment 
time limit, which often varied by provider type. Eighteen states 
reported conducting visits to help determine whether providers should 
remain in the program. These states generally reported visiting only 
certain providers, with 11 reporting that they visited such providers 
at least once a year.
    Because billing numbers allow claims to be processed, they are 
valuable and need to be guarded. Existing businesses may be sold to 
owners that intend to defraud Medicaid, and dead or retired providers' 
numbers can be used by unscrupulous individuals. Canceling inactive 
billing numbers can prevent questionable providers from deliberately 
obtaining multiple numbers to keep ``in reserve'' in the event that 
their practices result in suspension of claims under the primary 
number. Once again, a number of states reported doing nothing to 
control billing numbers. Only thirty-three states reported canceling 
inactive billing numbers. Of those, 16 reported canceling providers' 
numbers when they did not submit a bill for 2 years. Five states 
reported that they canceled a provider number if no bill had been 
submitted in more than 3 years.
States' Key Activities to Ensure the Integrity of Potential Providers
    Some states, including Connecticut, Florida, Georgia, New Jersey, 
and Texas, are engaged in a number of activities that make it more 
difficult for questionable providers to enter and remain in their 
Medicaid programs. These include more stringent review of information 
on the provider enrollment application; developing provider agreements 
that give the state more flexibility to terminate without delays; 
reenrolling existing providers under new, stricter standards; 
increasing scrutiny of applications from certain provider types and 
continued scrutiny after enrollment; conducting preenrollment site 
visits; and establishing better control over provider billing numbers. 
Examples follow.
    More Stringent Review of Provider Enrollment Applications. In late 
1998, Connecticut began using information from its fraud and abuse 
cases to help it determine what to require of new providers. Earlier 
audits had revealed that durable medical equipment providers operating 
in networks--many of which were family-based--were defrauding the 
program. As a result, representatives from Connecticut's Office of the 
Attorney General and Office of the Chief State's Attorney worked with 
Medicaid quality assurance and provider relations staff to revise the 
Medicaid enrollment process, starting with the provider enrollment 
application.
    Connecticut's new application requires providers to disclose 
business or personal relationships with other Medicaid providers. In 
addition, applicants must now state whether they have any 
administrative sanctions, civil judgments, criminal convictions, or 
bankruptcies, and whether they are enrolled in federal or other states' 
health care programs. Further, the Connecticut Medicaid application 
requires submission of the names and Social Security numbers of all 
owners, officers, and directors of the provider's business. A critical 
step in the state's enrollment process is verification of the 
enrollment application information. Connecticut has a contractor that 
uses various on-line databases to check applicants' personal, financial 
and criminal backgrounds. Similar to Connecticut, beginning July 1, 
2000, Georgia started using a revised provider enrollment application 
that requires the applicant to disclose criminal background, exclusions 
and sanctions, and ownership information on the application form.
    As a result of problems with provider fraud in South Florida, in 
December 1995, Florida began to implement several changes in provider 
enrollment procedures. Florida now requires noninstitutional providers 
to undergo fingerprinting and criminal history background screenings. 
For group providers, all officers, directors, managers, and owners of 5 
percent or more of the business must be screened. Applicants are 
required to submit fingerprints and to pay for the background checks. 
Fingerprints are checked with both state law enforcement authorities 
and the Federal Bureau of Investigation.
    Strengthened Provider Agreements. Several states now include 
provisions in their provider agreements that allow either the provider 
or the Medicaid program to terminate the agreement without cause after 
giving the other party advance notice. While the details vary, such a 
clause is now part of the Medicaid provider agreements required by 
Connecticut, Florida, Georgia, and Texas. New Jersey's provider 
agreement currently allows providers to terminate their agreement 
without cause after giving the program 30 days written notice. However, 
New Jersey Medicaid officials told us that a provision giving Medicaid 
the same termination rights is being developed. A Texas Medicaid 
official told us that the termination-without-cause provision was an 
important new tool to help protect the Texas Medicaid program by 
allowing officials to remove problem providers more expeditiously.
    Reenrollment Under Stricter Standards. Several states that 
tightened standards for newly enrolling providers also required 
existing Medicaid providers to reenroll under the new standards. For 
example, after strengthening the Texas Medicaid program's provider 
enrollment process for new applicants, the Texas legislature directed 
Medicaid officials, beginning September 1, 1997, to initiate a 2-year 
period during which all current providers would be required to reenroll 
in the Medicaid program. Texas Medicaid providers--both new applicants 
and existing providers--must now sign a provider agreement that 
includes stricter terms of participation and new anti-fraud-and-abuse 
language. When Texas providers were slow to reenroll, the legislature 
extended the deadline by a year to September 1, 2000, and reduced some 
requirements, such as filling out a provider information form, but not 
the requirement that providers sign the new agreement. Texas Medicaid 
officials reported that as of May 31, 2000, 68 percent of the providers 
had reenrolled. Similarly, starting in 1996, Florida required all 
noninstitutional Medicaid providers to reenroll on a staggered basis 
under stricter standards. When Florida began the reenrollment, there 
were approximately 80,000 Medicaid providers; when it ended, there were 
about 20,000 less. State program officials report that access to health 
care was not affected by the reduction in Medicaid providers.
    Special Scrutiny of Certain Provider Types. As several other states 
have done, New Jersey's Division of Medical Assistance and Health 
Services has instituted special Medicaid enrollment procedures for 
certain types of providers. The New Jersey Medicaid program's fiscal 
agent handles all aspects of the Medicaid provider enrollment process 
for most provider types. However, enrollment applications from 
pharmacies, independent laboratories, transportation companies, and 
durable medical equipment providers receive extra attention. Both the 
Medicaid Program Integrity staff and Medicaid Fraud Control Unit (MFCU) 
12 staff review pharmacy and independent laboratory 
enrollment applications. The review includes a criminal background 
check. Other New Jersey Medicaid program personnel review applications 
from durable medical equipment and transportation 
providers.13 Program consultants conduct preenrollment site 
visits to pharmacy and durable medical equipment applicants. In 
addition, physician group practices are visited on-site after they are 
enrolled. This type of approach can root out those individuals who set 
up a physical location only long enough to enroll in the program. For 
example, in an Illinois Medicaid fraud case involving a laboratory, an 
individual paid 1 month's rent on office space and state-of-the-art 
medical testing equipment to obtain the certification needed to bill 
Medicaid for complex laboratory tests. But after receiving 
certification, no patients were actually tested, although Medicaid was 
billed for laboratory services.
---------------------------------------------------------------------------
    \12\ Under the Social Security Act, Sec. 1902 (a)(61), states are 
required to have a MFCU or a waiver of this requirement from the 
Secretary of Health and Human Services. These units are to be separate 
from a state's Medicaid agency and are responsible for investigating 
and prosecuting Medicaid provider fraud, patient abuse, and program 
administration fraud. Forty-eight states have MFCUs.
    \13\ Since November 1998, a moratorium has been in effect on the 
enrollment of ``invalid coach'' providers by New Jersey's Medicaid 
program. Invalid coaches provide transportation services to 
beneficiaries who require assistance.
---------------------------------------------------------------------------
    Florida requires certain types of Medicaid providers, including 
home health agencies, durable medical equipment suppliers, nonemergency 
transportation providers, physician groups with more than 50 percent 
nonphysician ownership, and independent laboratories to obtain surety 
bonds. On May 25, 2000, legislation was enacted that increases the 
maximum surety bond the Medicaid agency can require a prospective or 
participating provider to obtain. Under the new law, Medicaid can 
require the current $50,000 flat rate or, if greater, the total amount 
billed by the provider during the current or most recent calendar year. 
Florida officials indicated that a primary reason for the surety bond 
requirement is that in underwriting a bond, surety companies check the 
capacity and financial ability of the providers to operate as a valid 
business. Florida officials consider such a review an effective 
screening tool to help keep less qualified providers out of the 
program. However, obtaining a surety bond does not reflect how well an 
applicant will perform as a health care provider, just that they are a 
business. In a previous report, we pointed out that these requirements 
may negatively affect the ability of small providers to serve 
beneficiaries. In addition, individuals with no history of criminal 
action but an intent to defraud the program could still obtain 
bonds.14
---------------------------------------------------------------------------
    \14\ Medicare Home Health Agencies: Role of Surety Bonds in 
Increasing Scrutiny and Reducing Overpayments (GAO/HEHS-99-23, Jan. 29, 
1999.)
---------------------------------------------------------------------------
    Preenrollment Site Visits. In 1999, after receiving new budget 
authority from the state, the recently reestablished Georgia Medicaid 
program's Provider Enrollment Unit began conducting site audits on all 
new noninstitutional provider applicants. Georgia's site audit 
requirements include verification of the provider's business location, 
a check of the provider's compliance with the Americans With 
Disabilities Act, and a check of the provider's business license. The 
audit also checks compliance with any additional criteria that are 
required for that category of provider as stipulated in the state's 
Medicaid provider manual. Georgia Medicaid officials reported that when 
they began the site audits they detected numerous applicants with 
nonexistent addresses or mailbox-only operations; now such a finding is 
rare.
    According to Texas Medicaid officials, that state had a less 
successful experiment with preenrollment site visits. In 1997, in part 
because of the experience of the Florida Medicaid program, the Texas 
legislature directed its Medicaid program to establish a pilot project 
aimed at reducing fraud by conducting random on-site reviews of 
prospective Medicaid providers in targeted counties. For the pilot, 
program officials selected the three urban counties that had the 
largest concentration of providers in the specialties designated by the 
legislation--durable medical equipment providers, home health care 
providers, therapists, and laboratories. At a minimum, Texas Medicaid 
investigators were required to inspect the providers' sites; review 
appropriate licenses or other authorities; interview the providers' 
representatives, staff, and patients; and review medical and business 
records. Only nine provider applications were received during this time 
period. The nine applicants reviewed during the 5-month pilot were 
found to be capable of delivering the specific services proposed in 
their applications and to have fully operational businesses. Program 
officials calculated that the reviews cost an average of $4,200 per 
provider--too high to be cost-effective--and they recommended against 
extending the pilot or implementing the preenrollment reviews 
statewide.
    Site visits are done before enrollment in the Florida Medicaid 
program for certain types of provider applicants, including pharmacies, 
durable medical equipment suppliers, physicians' group practices that 
are at least 50 percent owned by nonphysicians, independent 
laboratories, home health agencies, and some transportation companies. 
Florida officials plan to begin conducting checks on 100 percent of the 
pharmacies in two counties that historically have had a problem with 
fraud. In addition, the state or its contractor may conduct site visits 
on any existing providers if they are considered to be high risk, have 
exhibited aberrant billing practices, or are the subject of a complaint 
made to the Medicaid state agency.
    Better Control of Medicaid Billing Numbers. Because control of 
Medicaid billing numbers has been lax in some states, Medicaid has been 
billed by individuals using information from deceased or retired 
providers--either directly or as referring physicians. In an effort to 
better control Medicaid billing numbers, Texas Medicaid officials 
developed the Texas Provider Identification System, which they planned 
to institute in conjunction with their provider enrollment changes. At 
present, Texas providers can legitimately have and use several Medicaid 
provider numbers simultaneously. Under the new system, each provider 
would have one seven-digit base number to which locator code numbers 
could be added to indicate where a service was performed. Texas has had 
to delay implementing the new identification system because the start-
up of the state's new MMIS is behind schedule. The Georgia Medicaid 
program uses a billing number system similar to the one envisioned by 
Texas Medicaid officials. Medicaid providers in Georgia have a base 
number to which letters are added that indicate the location where the 
service was provided.
    As previously mentioned, many states now cancel the billing numbers 
of providers who have not submitted a bill to the Medicaid program 
during a certain period of time. Of the states whose Medicaid officials 
we interviewed, Florida, Georgia, and Texas currently cancel the 
billing numbers of inactive providers, while Connecticut and New Jersey 
do not.
    The state Medicaid officials reported that the strengthened 
provider enrollment measures they have adopted have given them 
important new tools to help ensure the integrity of their Medicaid 
programs. Despite the obstacles encountered in recent efforts to better 
ensure the integrity of their Medicaid providers, Texas Medicaid 
officials reported that they have sent a strong message to providers 
about the program's intolerance for fraudulent and abusive practices. 
Connecticut Medicaid officials said that while it is difficult to 
quantify the deterrent effect of their provider enrollment measures, 
preventing fraudulent providers from entering the Medicaid program is 
inherently more cost-effective than trying to recover inappropriately 
expended funds.
improving medicare provider enrollment creates additional opportunities 
                         to strengthen medicaid
    The current revamping of Medicare's provider enrollment process may 
provide an opportunity for HCFA to help states strengthen the provider 
enrollment process in their Medicaid programs. Because many of the same 
providers bill both programs, we were interested in finding out whether 
the programs' working together could more efficiently screen out 
problematic providers. Sharing a standard enrollment form with Medicare 
and checking providers using the new database, PECOS might help 
Medicaid programs more effectively operate their provider enrollment 
processes.
    The HCFA Administrator has suggested that developing a joint 
Medicare/Medicaid provider enrollment process might be beneficial for 
both programs. A HCFA official with responsibility for program 
integrity activities advised us that HCFA plans to solicit state 
Medicaid officials' comments in the next month concerning the use of 
HCFA's provider enrollment form for enrollment of both Medicare and 
Medicaid providers.
    Combining Medicare and state Medicaid efforts would not necessarily 
mean that states with particularly aggressive or more comprehensive 
provider enrollment programs would not continue them. HCFA and the 
states would need to agree on the minimum requirements of a provider 
enrollment process in Medicaid and to what extent enrollment through 
the Medicare process satisfied those requirements. For example, it 
might be reasonable to have states verify provider business addresses 
and readiness to provide services through state-controlled site visits. 
Either Medicare or Medicaid could be responsible for verifying provider 
credentials and qualifications. The Medicare program could be 
responsible for verifying Social Security numbers and other information 
available in national databases, as well as for entering provider 
information into the PECOS system. This would allow the states to put 
more effort into activities that are best done at the local and state 
levels.
    One other recent development will affect both programs' enrollment 
processes. As contemplated by the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), HHS is developing the National 
Provider Identifier, a single, unique identifier for each provider to 
be used in transactions with all health payers. This number could help 
eliminate the multiple identification numbers for the same provider 
present in today's environment that unscrupulous providers can use to 
obscure their billing practices. This system would more easily track 
all the activities of a provider by his or her unique identifier. 
Currently, the draft of the final regulation is awaiting approval by 
HCFA, HHS, and the Office of Management and Budget.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions you or the Subcommittee Members may have.
                    gao contact and acknowledgments
    For future contacts regarding this testimony, please call Sheila K. 
Avruch, Assistant Director, on (202) 512-7277. Key contributors to this 
testimony include Barrett W. Bader and Bonnie L. Brown.
                          related gao products
    Medicaid: Federal and State Leadership Needed to Control Fraud and 
Abuse (GAO/T-HEHS-00-30, Nov. 9, 1999).
    Health Care: Fraud Schemes Committed by Career Criminals and 
Organized Criminal Groups and Impact on Consumers and Legitimate Health 
Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).
    Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their 
Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).
    Medicare Home Health Agencies: Role of Surety Bonds in Increasing 
Scrutiny and Reducing Overpayments (GAO/HEHS-99-23, Jan. 29, 1999).
    Medicare Home Health Agencies: Certification Process Ineffective in 
Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997).
    Fraud and Abuse: Providers Excluded From Medicaid Continue to 
Participate in Federal Health Programs (GAO/T-HEHS-96-205, Sept. 5, 
1996).
    Fraud and Abuse: Medicare Continues to Be Vulnerable to 
Exploitation by Unscrupulous Providers (GAO/T-HEHS-96-7, Nov. 2, 1995).

    Mr. Upton. Thank you. Bonus for finishing early.
    Mr. Kubic.

                  TESTIMONY OF THOMAS T. KUBIC

    Mr. Kubic. Good morning, Mr. Chairman. My name is Tom 
Kubic. I'm the deputy assistant director of the FBI with 
responsibilities for the White Collar Crime Program. I want to 
thank the chairman and the subcommittee for allowing me to 
appear today, and I have prepared a formal statement. With your 
approval, I will submit it for the record.
    To begin with, I'd like to mention that one of the key 
reasons we have been able to make such progress in the area of 
health care fraud law enforcement is the fact that the Congress 
has been providing the Bureau with increased funding for both 
support employees as well as new agents to come on board and 
work these types of cases. In addition, the passing of the new 
legislation has also helped significantly by providing us with 
laws that are precise, that are direct and that are on point 
with the nature of the fraud that we are seeing.
    By way of background, in 1992, FBI had about 112 special 
agents nationally working within the health care fraud program. 
Today, there is almost 500 agents working health care fraud 
matters nationally. There is also a corresponding growth in the 
number of cases that we were investigating. Today, we 
investigate over 3,000 allegations of health care fraud 
nationally. We have also seen increases in the number of 
individuals, companies and providers who have been indicted and 
convicted within the area of health care fraud. For example, 
the most recent information shows that in 1999, there were 615 
individuals convicted nationally.
    The question you might ask is why is--why is there such a 
major difference in Medicaid fraud, and I would offer for the 
committee's consideration--the subcommittee's consideration, 
the fact that the various regulations and rules that have grown 
up and the differences in State-by-State application of these 
rules make this area a particularly ripe area for fraudsters. 
Also, with specific reference to the State of California, the 
tremendous amounts of money, over $18 billion, and the 
tremendous number of people in the program make it a 
particularly ripe area for unscrupulous providers.
    Based, in fact, on an increasing number of referrals from 
the California controller's office and a number of audit 
reports that were indicative of fraud, the FBI joined with 
California authorities in a task force. Earlier there was a 
comment about why is it necessary for the FBI to participate or 
to initiate these types of investigations? And I remind the 
subcommittee that upwards of half of the money within the 
Medicaid program is, in fact, Federal funds, and it is in that 
fashion that we get our jurisdiction.
    The task force was particularly successful because of a 
very aggressive United States attorney's office in the eastern 
District of California, which has the reputation of tolerating, 
kind of a zero tolerance for fraud. Working with them, agents 
working from audit reports were able to successfully 
aggressively address this type of fraud.
    I will also try to finish a little earlier and leave some 
time. You clearly noticed I did not bring a sledgehammer nor an 
industrial grade vacuum cleaner.
    Mr. Upton. Just handcuffs.
    Mr. Kubic. Just handcuffs. I will assure you that we are 
continuing to investigate approximately 300 additional 
providers in the State of California in a joint effort. I can 
assure the committee that we will continue to conduct those 
investigations and take them to their logical conclusion, which 
we think will be indictments, arrests and forfeiture of assets 
to be returned to the people. Thank you.
    [The prepared statement of Thomas T. Kubic follows:]
   Prepared Statement of Thomas T. Kubic, Deputy Assistant Director, 
    Criminal Investigative Division, Federal Bureau of Investigation
    Good morning. I am Thomas T. Kubic of the FBI. I want to thank the 
chairman and the entire sub-committee for allowing me to appear this 
morning. I'd like to discuss the serious nature of health care fraud 
and to brief you on innovative techniques that the FBI is currently 
utilizing to address the crime problem. Specifically, I am going to 
brief you on our efforts in California and the significant legislative 
changes that have occurred due, in part, to the efforts of the 
Sacramento task force.
    As the sub-committee is well aware, in 1996, Congress enacted 
comprehensive legislation to combat the health care fraud problem which 
continues to rob our health insurance programs of billions of dollars 
annually. The Health Insurance Portability and Accountability Act of 
1996 (HIPAA), gave the FBI increased funding and new legal tools to 
address this very crime problem. We at the FBI interpreted this as a 
message that Congress wanted the FBI to step up our efforts. We 
responded. I and other senior management officials have used this 
increased funding to hire, equip, and train more agents and 
professional support employees to be assigned to health care fraud 
matters. In 1992 the FBI had 112 special agents investigating 591 
cases. Today, thanks to the funding received through the HIPPA 
legislation, we now have 493 agents investigating over 3,000 
allegations of health care crimes. Criminal health care fraud 
indictments have also dramatically increased by 50% from 409 to 615 in 
1999. Despite the large number of criminal investigations and 
convictions of the most egregious instances of health care fraud, the 
FBI does not measure its successes solely on the number of convictions 
obtained. Rather, the effectiveness of the entire federal government's 
response to health care fraud can also be measured in the prevention of 
health care fraud and abuse.
    The FBI, as the principal investigative agency of the Department of 
Justice, plays a significant role in health care fraud prevention 
efforts. No segment of the health care system is immune from fraud, 
certainly not the Medicaid program. In 1998, approximately $170 billion 
was expended nationally by Medicaid programs. Because the rules and 
regulations vary from state to state, and since each state administers 
its own Medicaid program, I believe that the Medicaid program is just 
as susceptible, if not more so, to fraud than its sister program, 
Medicare. The Medi-Cal program, California's version of Medicaid, saw 
expenditures over $18 billion in 1998, the second highest in the United 
States. In 1998, Medi-Cal provided health care for over 4.8 million 
recipients. In California, the Medi-Cal program is administered by The 
California Department of Health Services. Given the magnitude of the 
Medi-Cal program, the Sacramento division of the FBI, in conjunction 
with the California State Comptroller's Office, identified a potential 
crime problem involving health care fraud.
    The California State Comptroller's Office began auditing and 
referring all suspect pharmacies and other provider types throughout 
California to our Sacramento division for investigation. Through these 
referrals, FBI Sacramento began to identify and develop evidence of 
Medicaid fraud at suspect pharmacies. Sacramento's Health Care Fraud 
Task Force was formed to address this particular crime problem.
    Using the newly created health care fraud task force, which 
commenced in 1998 and includes members from the Sacramento division of 
the FBI, the California State Comptroller's Office. The California 
Attorney General's Office, the California Department of Health 
Services, and the United States Attorney's Office, the Sacramento 
division of the FBI initiated its ``phony pharm'' and, then later, 
``unwholesum'' initiatives to investigate and prosecute individuals 
suspected of orchestrating the most egregious fraud against the Medi-
Cal program.
    the ``phony pharm'' initiative prosecutes pharmacies and durable 
medical equipment suppliers that submit fraudulent claims to Medi-Cal. 
To date, investigators have focused primarily upon pharmacies that 
engage in fraudulent billing practices and illegitimate suppliers of 
durable medical equipment, such as leg braces, back supports, and other 
durable medical goods. Under this initiative, the Sacramento task force 
targets those fraudulent providers with insufficient inventories or 
purchase records to substantiate the volume of business indicated by 
their Medi-Cal claims. Investigation has revealed that many 
illegitimate pharmacies and suppliers often set up shell companies or 
make use of a ``store front'' to set up their ``business,'' quickly 
obtain provider numbers, bill Medi-Cal for high amounts in a short 
period of time, and then shut down. Many times these business operators 
will re-open in a few months under a new business name.
    Approximately six months after the onset of the ``phony pharm'' 
initiative, the Sacramento task force realized that some of the 
targeted pharmacies and DME suppliers have been aided by unscrupulous 
wholesalers willing to create and sell phony invoices for 
pharmaceuticals or DME supplies. Pharmacies and DME suppliers involved 
in fraud schemes then use these phony invoices to substantiate their 
Medi-Cal claims to auditors and law enforcement officers. Under the 
``unwholesum'' initiative, the Sacramento task force targets wholesale 
companies suspected of supplying phony invoices.
    As a result of this state-federal partnership, 115 defendant Medi-
Cal providers have been charged by federal prosecutors with health care 
fraud offenses. Collectively, these providers and suppliers have been 
charged with defrauding the Medi-Cal program of more than $58 million. 
To date, based on the strength of the investigative efforts, 69 of the 
defendants have pleaded guilty. These individuals are serving a minimum 
of 1 year incarceration, and have been ordered to pay, collectively, 
more than $20 million in court ordered restitution.
    Currently, investigations by the Sacramento task force have 
targeted more than 300 medical providers, including wholesalers and 
suppliers. The targeted providers are suspected of defrauding more than 
$250 million in Medi-Cal funds.
    A major component in the success of the Sacramento task force is 
the prosecuitve support that investigators receive. The eastern 
district of California has a long standing reputation for pursuing 
health care fraud vigorously and effectively. The investigative members 
of the task force combined with the prosecuitve support which they 
receive has equated to a very effective and efficient approach to this 
identified crime problem.
    One of the most flagrant examples of the type of fraud perpetrated 
against the Medi-Cal program is the Heravi case. The Heravis, suppliers 
of leg braces, back supports, and other DME, were charged with 
defrauding Medi-Cal out of more than $9 million. The Heravis submitted 
thousands of fraudulent claims for DME supplies that were never 
delivered to patients. In October 1999, the Heravis entered guilty 
pleas in the federal health care fraud case brought against them by the 
United States attorney's office in Sacramento. Additionally, the 
Heravis agreed to a civil forfeiture recovery totaling $4.74 million, 
the largest in the history of the eastern district of California.
    In addition to the Heravi case, other significant accomplishments 
attributed to the Sacramento task force include: in June, 1999, Zaruti 
Ovesepyan and business associates were charged with health care fraud 
violations in a scheme totaling $5.94 million, and in July, 1999, 
Razmik Ovasapian was charged with health care fraud violations 
involving in excess of $1.18 million. These high dollar amounts of 
fraud were due, in part, to the ease with which suppliers could obtain 
provider numbers and certification to allow them to bill Medi-Cal.
    A recent bill enacted in California recognized the need to attack 
fraud more effectively. On July 29, 1999, Governor Gray Davis signed 
legislation which provided $3.5 million for the creation of a new fraud 
prevention bureau, aimed at providers of durable medical equipment, 
transportation, laboratory, and pharmacy companies. This fraud 
prevention bureau is the first of its kind in the nation. It is the 
result of a joint effort between the Sacramento health care fraud task 
force and the state Medi-Cal program. The fraud prevention bureau is a 
new program of the California Department of Health services. It 
includes a more comprehensive process for provider applications and 
certification process, provider agreements, and an enrollment term of 
only four years for the specified category of providers.
    The department now conducts regular field audits to determine 
whether the volume of Medi-Cal claims submitted to the state are 
consistent with the amount of business that providers have. The 
department is also conducting on-site visits to almost all Medi-Cal 
providers and has a moratorium on the issuance of new Medi-Cal provider 
numbers. These efforts have prevented fraudulent providers from 
shutting down and opening again in several weeks or months using a new 
provider number.
    I would specifically like to emphasize the provider application and 
certification process. We have seen in California, as well as other 
jurisdictions, unscrupulous individuals enter the health care industry 
with one goal in mind, to steal from health insurers. The best defense 
we have against these individuals is to strengthen the provider 
enrollment and certification process and to keep these individuals out 
of our health care programs in the first place. The recognition of this 
HCF crime problem by the task force has, in part, led to these 
legislative changes.
    Based on our experience in California, it certainly would 
facilitate law enforcement's efforts if other states would tighten 
their respective provider enrollment process and certification process. 
We have included presentations on the Sacramento operation at all of 
our recent health care fraud training programs, as well as past and 
future manager's conferences, and we look forward to the franchising of 
this investigative approach in other states.
    That concludes my prepared remarks and at this time I would be 
pleased to answer any questions that you may have.

    Mr. Upton. Thank you.
    Ms. Connell.

                  TESTIMONY OF KATHLEEN CONNELL

    Ms. Connell. Yes. I'm Kathleen Connell. I am California 
State Controller. It is an elected position. I was elected by 
the voters of California in November 1994. I am serving in my 
second term. I am delighted that the Congressional Committee is 
holding this hearing today. Medi-Cal fraud and the effort to 
reform Medi-Cal programs in California has been a high priority 
in my administration.
    When I came into office in 1995, I initiated an audit of 
the Department of Health Services, which is the Department that 
runs the Medi-Cal programs in California, because I felt it was 
a very important part of our budget. In California, to give you 
some sense of the scope of this program, $22.5 billion is spent 
in this budget year in Medi-Cal activities; $13.2 billion of 
that is Federal; $9 billion of that is general-funded.
    The role of the State Controller is to audit State 
programs, and in that capacity, I determined it was necessary 
to do the first-ever audit of the Department of Health 
Services. We completed that audit in roughly a year. We 
submitted that audit information to the legislature and to the 
Governor. At that point, it was Governor Pete Wilson who was 
responsible for the operation of the Department of Health 
Services. That audit report, which indicated $467 million of 
audit problems in the Department of Health Services, did not 
receive a response. We issued an update report to the Governor 
and to the legislature 6 months later, and then subsequently a 
year later.
    Over a course of a period of roughly of 3 years, we began 
to see some administrative changes in the Department of Health 
Services, but it was very slow and taxing work.
    Independently of the effort to audit the Department of 
Health Services, we went forward and audited Medi-Cal providers 
in four categories: Medical labs, Department of durable medical 
equipment providers, pharmacists and physicians. To date, we 
have issued 339 reports. We have referred 70 percent of those 
reports for criminal investigation and prosecution by the U.S. 
Attorney General's office, by the State Attorney General's 
office and by the FBI, and we have identified savings to date 
of $547 million. All of that information is included in the 
charts which I provided in my testimony.
    I'd like to direct my comments now to what has evolved over 
the course of the last few years and how the FBI got engaged in 
this effort. When we began referring cases to the State 
Attorney General's office there was no interest in prosecuting 
those cases. At that point, cases were referred to the FBI. A 
task force was made up of the FBI, the State Controller's 
office, and the U.S. Attorney General's office. In the election 
cycle of 1998, Governor Gray Davis was elected. He had been a 
prior controller and was committed to the efforts that were 
underway on Medi-Cal reform. He has significantly expanded the 
Medi-Cal efforts in the Department of Health Services, and Mr. 
Cates is here today to discuss their activities.
    We've also expanded the task force now to include the 
Attorney General's office and the Department of Health 
Services. That task force is now being led by the Governor's 
office, and they are making a concerted effort to assist us in 
wrestling Medi-Cal fraud and dealing with the after efforts of 
it.
    Unfortunately, in the midst of this effort to crack down on 
Medi-Cal fraud because we had been so aggressive, some of the 
people that we had investigated and had brought for criminal 
prosecution have filed a lawsuit against the State Controller's 
office. Those lawsuits were heard in Federal court, and two 
Federal actions have significantly handicapped the ability of 
the State controller to play an active role in investigating 
Medi-Cal fraud. The Federal courts have recently ruled that 
under a Federal definition of single State agency, that only 
one agency can be empowered to be engaged in the effort to 
operate a Medi-Cal program.
    In California, that designated agency was the Department of 
Health Services. They had contracted with the State 
Controller's office for a period of years well before I got 
elected to office in 1994 to conduct the audits, because we are 
the constitutional officer responsible for conducting State 
audits.
    Under the Federal court appeals ruling, the State 
Controller's office can no longer conduct the audits in the way 
that we had. When we had conducted audits prior to the ruling 
in 1999, we conducted audits--when we found that there was 
indication of fraud, we would basically pull the trigger. We 
would freeze the funding for that Medi-Cal provider until we 
could indeed investigate the level of fraud, which had occurred 
in their program activity.
    Under the current law the State controller can only do the 
audit, send the audit report, not a finding to the Department 
of Health Services. The Department of Health Services then 
needs to review the audit review report, make its own finding 
that Medi-Cal fraud has indeed occurred, and at that point can 
seek to stop the funding.
    This lag factor has significantly slowed down the ability 
to carry forth on the audits. It has substantially reduced the 
effectiveness of our efforts as a task force to move forward 
with the enlightened effort of the Governor's office and the 
continued support of the FBI.
    So I have asked, in my testimony today, if Congress could 
get clarification of the single State agency. If it requires 
legislation, we would certainly hope you would do that. I have 
been in conversation with State controllers around the country. 
They are, indeed, concerned that similar kinds of judgments 
will be made by their courts. This is obviously an easy way to 
take your audit capacity out of the game of controlling Medi-
Cal fraud. We've proven we have been effective, and as a result 
of that, I think there's continuing concern on the part of 
providers that they rule us handicapped in this process.
    I would like to spend a moment responding to Mr. 
Assatourian's questions about how he feels we should improve 
the system and his four common sense steps, and I think the 
committee should be aware that those steps have actually been 
addressed. He indicated that getting a provider number is 
extraordinarily simple. I carry the bill called the Romero 
bill, which was AB 874. It passed, was signed by the Governor 
last year, which has now tightened up the ability in California 
to get a provider number.
    We carried another bill, which has put in place a bond 
program for anyone who does Medi-Cal provider work in 
California. That bond is now set at $25,000 a year. That bill 
was also signed by Governor Davis. We have been carrying these 
bills for a number of years, but we're finally delighted they 
made it through the system.
    The third concern that he had is that obtaining a Medi-Cal 
card should be more difficult. We agreed. That language has 
been in the bill, it was passed and it's in effect.
    And finally, his concern was that we should purchase from 
authorized distributors. We agree with that, but that is not 
our role as a State controller; that's really Department of 
Health Services. We are doing, however, in the State 
Controller's office, what we call third party validation. It is 
a normal part of the audit process. We do not accept the fact 
that people have invoices. We go beyond the invoices because 
many of these invoices are phony, and we go back to the 
provider's supplier, and that is part of a normal audit 
process. The FBI can verify that as well.
    In relationship to products on the Medi-Cal formulary, I am 
carrying a bill this year which will deal with that and will 
modify the Medi-Cal formulary role. That has reached it's 
policy committees in the Senate now. It has gotten a lot of 
opposition from providers in California, and it may not pass 
this year because of the opposition it has received.
    And finally, in relationship to his concern about the 
training of auditors, I can't comment on the Department of 
Health Services. All of our auditors are trained specifically 
in Medi-Cal audits. They are very informed in this field, and 
that, indeed, is how we've gotten to the savings of $547 
million.
    [The prepared statement of Kathleen Connell follows:]
  Prepared Statement of Kathleen Connell, Controller for the State of 
                              California,
    Good Morning Mr. Chairman and Members. My name is Kathleen Connell. 
I am the State Controller of California, a State Constitutional Office 
elected by the voters. I serve as the chief financial officer for 
California.
    In my testimony this morning, I will outline efforts that my office 
has initiated in combating Medicaid fraud in California and identify 
the challenges which are continuing. I have produced a report 
specifically for this Committee setting forth my full remarks which I 
would submit for the record. The report provides a complete history of 
the efforts of my office as well as detailed statistics on our efforts.
    At the beginning of my administration in 1995, I set the 
elimination of waste and fraud in state programs as my highest 
priority. The Medi-Cal program, California's version of the Medicaid 
program, was then, and continues to be, one of the most significant 
parts of California's annual budget. In the current fiscal year, over 
$22.5 billion is appropriated for Medi-Cal, of which $13.2 billion is 
federal funds. General fund expenditures of over $9 billion for Medi-
Cal will account for nearly 12% of all General Funds in the state 
budget.
    Early in my administration, I directed auditors to expand the 
review of billing practices of Medi-Cal providers. In June 1996, I 
issued a report on 11 pharmacy providers in Long Beach, California, 
which identified over $2 million in unallowable costs. Significantly, 
two of the eleven closed their businesses immediately after the 
auditors arrived. This raised my concern that there were additional 
areas of apparent fraud that had not been previously identified.
    The Controller's office then expanded its efforts into other 
provider categories and found similar results in audits of durable 
medical equipment providers, physicians, and laboratories. To date, the 
Controller's office has issued 367 reports, demanded repayment of $141 
million, saved the taxpayers an additional $385 million in cost 
avoidance, and withheld $23.5 million in payments to providers 
identified by law enforcement as engaging in fraudulent activities. The 
total savings from the efforts of our office are over $547 million, 
more than one-half of which is federal funding. In addition, the 
Controller's office referred 238 cases to the Medi-Cal Fraud Control 
Unit located in the California Department of Justice for criminal 
investigation and prosecution.
    In 1998, seeking to pursue criminal prosecution of our Medi-Cal 
findings, the Controller's office initiated a partnership with the 
Federal Bureau of Investigation, the U.S. Attorney General's Office, 
and the California Department of Justice to pursue criminal 
investigations and subsequent prosecution.
    To assist the California Department of Health Services in carrying 
out its administrative responsibilities, the Controller's office 
sponsored legislation which gave that Department more authority to 
tighten up the provider enrollment process, increase penalties for 
fraud, and expand the use of bond requirements. This legislation was 
signed into law last year, and represents significant change to the way 
we operate Medi-Cal in California. Please refer to chart 4 in my 
report, which outlines the specifics of these legislative changes.
     The Controller's office has also participated in the newly created 
California Governor's Task Force on Medi-Cal Fraud, which is intended 
to coordinate the efforts of all state and federal agencies involved in 
anti-fraud efforts in Medi-Cal.
    The increased anti-fraud activities from all of these agencies, 
which resulted from our initiatives, are having a significant effect. 
The California Legislative Analyst noted that 31% of the providers of 
durable medical products--one of the first provider types to be 
targeted by my auditors--had been removed from the provider roles and 
that claims for this group have declined by nearly 10%. In addition the 
Legislative Analyst anticipates similar results in the future in other 
provider types that our office's audits have targeted.
    While this is good news, it is also clear that fraudulent providers 
have noticed these efforts and are taking steps to circumvent the 
current prevention and detection efforts. New schemes involve:

 Using false identification to masquerade as licensed providers 
        who are retired, no longer practicing in California, or dead;
 Using marketers to pay beneficiaries to use their Medi-Cal 
        card to bill for services that are unnecessary or not provided;
 Stealing beneficiary Medi-Cal information from hospital 
        records and using it to bill for services not provided;
 Buying an established health care business and billing under 
        that name; and
 Developing some documentation to avoid detection by performing 
        unnecessary invasive procedures (for example, drawing blood) 
        and then billing for tests never performed. In addition to the 
        health risks to the person having this type of procedure, this 
        practice can increase the possibility of the spread of disease 
        in the general population.
    It is clear that the fight against fraud in the Medi-Cal program is 
still far from over. There are two concerns regarding the future of 
Medi-Cal anti-fraud efforts that I would like to discuss:
    First, recent federal court rulings have minimized the Controller's 
office's role in combating Medi-Cal fraud and abuse. Without our 
efforts to identify the problem and take action, Medi-Cal provider 
fraud could have gone unnoticed and/or untreated for long periods of 
time. While much has been accomplished, it is clear that this is a 
problem that will require long-term dedication by state and federal 
officials.
    Second, recent federal court rulings have undermined the 
Controller's office's ability to carry out a critical oversight role, 
limiting our ability to conduct audits. In addition, the Controller's 
office is currently prohibited from initiating withholds on payments to 
suspected fraudulent providers or referring them to the Department of 
Justice for criminal investigation and prosecution. Cracking down on 
fraud cannot occur without the ability to stop the flow of funds. Under 
the current court rulings, even when fraud is detected, the 
Controller's office cannot withhold payment nor even inform the 
Department of Health Services that fraud is suspected. Only a report 
can be submitted with the intention that the Department of Health 
Services would recognize the fraudulent activity. As a result, our 
payments may be continued for some time. Even when prosecution is 
successful, those additional payments are often not recovered.
    Essentially, the federal courts have interpreted federal law and 
regulations to require that the Controller's office not engage in any 
activities in which it might exercise any discretion.
    Even though the Controller's office has an independent duty under 
California law to determine the legality and propriety of payments made 
from the State Treasury, the federal courts have determined that the 
State of California modified this duty when it accepted federal money 
and agreed to be bound by federal Medicaid law.
    Let me briefly explain what has occurred. The Medicaid law and 
rules require the designation of a single state agency to administer 
this program and prohibit any other agency from exercising 
administrative discretion in any area, including the prevention and 
detection of fraud. In California, the single state agency is the 
Department of Health Services. The Federal Court's ruling essentially 
requires an unnecessary duplication of functions in state government. 
For example, under the court's ruling, state governments are prohibited 
from using the long established, and often state constitutional, 
functions of other offices. In California, the court ruling requires 
the Department of Health Services to establish an audit function 
similar to that of my office as well as an investigative function 
duplicative of the California Department of Justice.
    Certainly, it was never contemplated that the single state agency 
would not be allowed to utilize the existing resources in state 
government and would relegate the state constitutional functions of 
other state offices to a nullity.
    Other state Controllers and state Auditors have expressed concern 
that the federal court determinations could be used to undermine their 
authority as well, and detract from their efforts to fight fraud and 
abuse in their Medicaid programs.In order to solve this problem, and 
allow states to adequately combat fraud, I request that Congress take 
action to review and amend the Single State Agency law to allow 
recognition of the State's constitutional role of its elected officials 
and allow me to once again carry out my independent duties and 
responsibilities as the state's fiscal watchdog. The amendment should 
allow me to exercise discretion in analyzing the Medi-Cal program to 
identify fraudulent trends, initiate audits to identify overpayments, 
take actions to withhold payments, make referrals for criminal 
prosecution, and develop recommendations to increase fraud prevention 
and detection activities.
    Such an action on the part of Congress would send a clear message 
to criminals considering committing Medicaid fraud and undermining the 
program goals that both federal and state government are serious about 
prevention, detection, and prosecution, and that such criminal activity 
would have its consequences.
    Thank you for your inviting me to address you today. I am happy to 
answer any questions you may have.

    Mr. Upton. Thank you.
    Mr. Cates.

                   TESTIMONY OF J. ALAN CATES

    Mr. Cates. Thank you, Mr. Chairman, and honorable members 
of the committee. My name is Alan Cates. I am the chief of the 
new Medi-Cal Fraud Prevention Bureau in the State of 
California's Department of Health Services. It is my pleasure 
to be here today and give you an update on our efforts to 
combat fraud in Medi-Cal, specifically to update you on our new 
provider enrollment processes and our innovative approach to 
eradicating fraud in our provider network.
    I would want to point out that until last year, fraud was 
indeed bilking a billion dollars from the State of California's 
health care service system. Concealed by an inherent trust of 
medical professionals along with a long recession that limited 
oversight resources, fraud had flourished in California. 
Providers that were caught were typically apologizing and 
promising to do better next time. Many times they did. We had 
one that was identified as taking $200,000. They were ordered 
to repay it. They were closed down, but they instead opened two 
new stores and took over $12 million in just over a year. 
Fortunately, they're now in prison.
    Working with eight special agents of the Sacramento office 
of the FBI and one assistant United States attorney, we were 
able to identify and stop $200 million in durable medical 
equipment fraud in 1998, 1999. That was approximately a $20 
million-per-person return rate. However, we did not even get to 
half of the fraud, and more resources were desperately needed.
    That's when, in 1999, Governor Davis put up $1.2 million 
for a new Medi-Cal Fraud Prevention Bureau, and implemented the 
Medi-Cal Fraud Task Force. The Medi-Cal Fraud Prevention Bureau 
is essentially a civil authority within the Department of 
Health Services that uses existing administrative authority 
within the Medi-Cal program to specifically detect and document 
fraud. The Governor's Medi-Cal Fraud Task Force is primarily 
interested in combining the resources of the various law 
enforcement and civil authorities within the State of 
California, including HCFA, Office of Inspector General, FBI, 
U.S. attorney, State Controller's office, and State Department 
of Health Services to focus entirely on fraud within the health 
care program in the State of California.
    The Medi-Cal Fraud Prevention Bureau launched a new three-
step focus on fraud approach to put fear back into fraud. Step 
one was a survey, a risk assessment survey approach where you 
went onsite to each of the providers. In the State of 
California, I might mention we have over 100,000 providers of 
Medi-Cal services. However, we have approximately 5,000-and-
some targeted groups, which include durable medical equipment 
that present a little bit more of a problem for us than some of 
the other provider groups. So we're focusing on approximately 
5,000 of those providers, and then approximately 15- to 20,000 
doctor clinic operations that, due to their claim patterns, we 
are also focusing on. That's for the onsite risk assessment 
survey.
    Step two we call ``trust--but verify.'' We do a follow up 
review of those high risk providers to identify actual evidence 
of fraud. The first step just indicates indicators, ``fraud 
flashers'' we call them in the business. Step two, we're 
actually documenting evidence of fraud by looking at their 
books and records.
    Step three is immediate payment withhold to stop the 
payments and to refer them for criminal prosecution.
    That three-step process has proved effective. Ten Medi-Cal 
fraud prevention specialists in the field have already 
completed over 14,000 onsite surveys, documenting 2,000 high 
risk providers, stopping $50 million in payments, and referring 
over 100 providers to law enforcement for prosecution.
    As you heard earlier, currently the Sacramento office of 
the FBI and the U.S. attorney alone are investigating 350 fraud 
cases, having charged 115 with $60 million in health care 
fraud, convicting 70 of those 115 and recovering $21 million 
through asset forfeiture and criminal restitution. All that in 
just a little over a year.
    Special Agent Ed O'Donnell, the lead agent on that case, 
was recently awarded outstanding criminal investigation of the 
year for his role in the phony form operation. The Medi-Cal 
Fraud Prevention Bureau's role has now been expanded to 
provider enrollment. In addition to new ChoicePoint 
examinations, before they can be turned on and $50,000 fidelity 
bonds, new and reenrolled providers must first pass an onsite 
fraud prevention review. In place of the old pay and chase, 
California now uses a lock-and-load system where we go in and 
lock in what the provider's business practices are, how they 
intend to operate that business, what their capabilities are 
based on their current business structure; we lock that in and 
then we load it into a computerized system that will trigger us 
within 90 days, or, if they exceed their parameters that we 
reasonably set for them when we did the initial review. Within 
that 90 days, or if they hit the trigger, we go right back in 
and perform a fraud prevention follow-up review where, again, 
we look at actual business records, primarily bank records. We 
use source documents to determine what is really happening at 
the business.
    The lock-and-load procedures are designed to assist the new 
honest providers, while at the same time, demonstrate to 
fraudulent providers that fraud detection will be swift and 
certain.
    We have other antifraud efforts going on at the Department, 
including pre-check write processes that identify questionable 
claims before they are paid and are field reviewed before 
payment is released. We are aggressive with fraud, but not the 
vast majority of honest providers that help us deliver the 
health care system to the people that need it the most.
    Thank you, your Honor.
    [The prepared statement of J. Alan Cates follows:]
 Prepared Statement of J. Alan Cates, Chief, California Medical Fraud 
                                 Bureau
    Mr. Chairman and honorable members of the Committee, my name is J. 
Alan Cates. I am the Chief of the Medi-Cal Fraud Prevention Bureau for 
the California Department of Health Services (Department). Thank you 
for the opportunity to testify, and pursuant to your request, I have 
prepared written testimony for inclusion in the record, as if read. It 
is my pleasure to be here today to give you an update on the efforts of 
the State of California to combat fraud and abuse in the Medi-Cal 
program. Specifically I would like to update the committee on our new 
provider enrollment process and our new innovative approaches to curb 
fraud and abuse.
Background
    Following a decade of a limited number of oversight resources and 
concerted efforts to encourage provider participation with easy 
application processes, fraudulent providers were slipping in and were 
stealing millions of dollars. Stealing doctor identities and 
professional license numbers, and using illegally obtained Medi-Cal 
beneficiary data, fraudulent providers were bilking millions from 
California's Health Care Program. Employing complex, but essentially 
cookie-cutter fraud schemes, they concealed the fraud with perfected 
paper trails and cleverly cooked books. Since only a few were ever 
caught, the pervasive scope of the problem went undetected. That is, 
until recently.
Governor Davis Declares War on Fraud
    Remembering his days as State Controller and his active role in 
fighting fraud with Medi-Cal supply providers, Governor Davis declared 
all-out war on those who would steal from programs serving the most 
vulnerable. Within months of his inauguration in 1999, Governor Gray 
Davis took decisive steps in the State Budget to reduce fraud in the 
Medi-Cal program by tightening the provider enrollment process, 
establishing the Medi-Cal Fraud Prevention Bureau, and convening a 
Governor's Medi-Cal Fraud Task Force with both State and Federal 
representation. Since taking office, Governor Davis has added more than 
230 new positions and more than $17.5 million to California's Medi-Cal 
fraud prevention efforts.
Provider Enrollment
    Durable medical equipment (DME) was found to have a high incidence 
of fraud and the number of new providers of these services was growing 
at an alarming rate. A moratorium on the enrollment of new DME 
providers was established in early 1999. In July 1999, a legislative 
initiative proposed by the Governor was enacted which for the first 
time gave the Medi-Cal program the statutory authority to verify a 
provider applicant's identity and background prior to enrollment and to 
deny enrollment, or sanction existing providers, who did not meet the 
enrollment criteria. This legislation extended the authority to impose 
enrollment moratoriums to all provider types, and precluded the 
enrollment of providers convicted of fraud for a period of 5 years. The 
statute also authorized the Program to make unannounced inspections of 
the provider's place of business prior to and after enrollment.
    With the new statutory authority and enabling regulations, the 
Medi-Cal provider enrollment process underwent significant changes. 
New, more extensive enrollment applications, provider agreements and 
ownership disclosure statements were developed. Current providers in 
five particularly problematic provider categories (durable medical 
equipment, independent pharmacy, non-emergency medical transportation, 
prosthetic, and orthotics providers) were subject to a review of their 
qualifications for continued enrollment. Each continued enrollment 
review included at least one on-site inspection by the Medi-Cal Fraud 
Prevention Bureau. The Department also contracted with ChoicePoint, a 
nationally recognized on-line tracking company, to access background 
information on providers seeking enrollment or for those providers 
subject to continued enrollment review.
    The provider enrollment staff was augmented and tighter internal 
controls were instituted to assure that no one individual would have 
the ability to review and approve a provider's application and to 
assure adequate supervisory oversight. Physical security was tightened 
to prevent provider access to enrollment staff and document tracking 
mechanisms were improved. As investigators uncovered new fraud schemes, 
provider enrollment practices have been altered to look for specific 
risk factors associated with those schemes. For example, stolen 
identities often involve very new physicians, so enrollment staff now 
gives special scrutiny to recent medical school graduates. The 
California Department of Health Services is working with ChoicePoint, 
to develop on-line access to the State motor vehicle records and other 
public records to enhance the Department's background check 
capabilities. California is also working to implement surety bond 
requirements for non-licensed provider categories.
    As keeping fraudulent providers out of the Program is the most 
effective way to eliminate fraud, California, under the Davis 
Administration, is committed to a careful, thorough review of a 
provider's qualifications for Medi-Cal participation while being 
responsive to the legitimate provider's expectation for timely 
enrollment processing.
Medi-Cal Fraud Prevention Bureau
    Using a new innovative approach to combating fraud and abuse the 
Medi-Cal Fraud Prevention Bureau was created by Governor Davis and 
initially staffed with 16 civil service positions, including ten Fraud 
Prevention Specialists trained in the Focus on Fraud method of fraud 
prevention. In operation only nine months, they have completed 14,000 
on-site surveys; detected over 2,000 providers with unacceptable risk 
for fraud; initiated 200 follow-up reviews that documented evidence of 
fraud in almost 100 cases to date; and, implemented administration 
sanctions to withhold $50 million in Medi-Cal payments with a dual 
referral to the State Department of Justice, Medi-Cal Fraud and Elder 
Abuse Division and to the FBI Phony Pharm operation.
Focus on Fraud Approach
    Determined to put fear back into fraud, a team of ten State 
auditors and Certified Fraud Examiners initiated a special Focus on 
Fraud pilot designed solely to detect and document fraudulent service 
providers.
    In one year, Focus on Fraud was able to expand coverage to review 
over 450 providers, in place of the normal 40 resource-consuming 
compliance audits. These 450 reviews resulted in the documentation of 
evidence of fraud in over 100 cases, involving $34 million in Medi-Cal 
payments. While these cases were prosecuted, the real benefit was that 
the pervasive scope of the fraud problem was finally demonstrated.
    Also demonstrated was the efficiency and effectiveness of the Focus 
on Fraud approach. While not intended to replace compliance audits, 
this three-step system proved it could quickly separate honest from 
dishonest providers, then professionally pierce complex fraud schemes 
to document the evidence of fraud necessary for prompt prosecution.
    Step One (Fraud Flashers) was an on-site risk assessment survey to 
detect and document systemic fraud indicators. Requiring only minutes 
to complete, surveys proved effective in detecting providers at high 
risk for fraud. For example, a provider that does not accept bankcards 
may be uninterested in real customers and/or fear bank background 
checks.
    Step Two (Trust--But Verify) was a prompt follow-up review of 
actual business records of providers with high fraud risk. Requiring 
only hours to complete, follow-up reviews proved effective in 
documenting actual evidence of fraud. For example, bank records of 
Medi-Cal deposits withdrawn in cash can evidence money laundering and 
health care fraud.
    Step Three (Eradication) was immediate application of 
administrative sanctions. For example, withholding of Medi-Cal payments 
and referral to law enforcement.
Medi-Cal Anti-Fraud Operation in Los Angeles
    The Department of Health Services has uncovered an increasing 
number of cases in which physicians are knowingly or unknowingly having 
their medical license numbers and/or Medi-Cal ID numbers used to bill 
the Medi-Cal program fraudulently. Two key types of provider fraud 
schemes include: (1) ``Physician Identity Theft''--Physicians 
unknowingly having their medical license numbers and/or Medi-Cal 
Provider Numbers stolen and used to bill the Medi-Cal program; (2) 
``Rent a Doctor''--Physicians knowingly selling their medical license 
number or Medi-Cal Provider Number. In addition, recent anti-fraud 
efforts in Los Angeles identified beneficiaries being paid for the use 
of their Medi-Cal cards for fraudulent Medi-Cal claiming. The 
fraudulent providers continually look for creative ways to develop 
Medi-Cal beneficiary patient bases to support the fraudulent claims 
that are being submitted for reimbursement to the Medi-Cal program.
    Under Governor Davis' leadership, the California Department of 
Health Services recently developed an innovative approach to address 
suspected fraudulent or abusive activities to reduce unnecessary 
expenditures of Medi-Cal funds and to more importantly protect 
California's Medi-Cal population. A rapid response team consisting of a 
medical professional and an investigator conduct on-site visits at 
suspicious Medi-Cal provider locations with follow-up reviews of the 
claim information and verification of medical necessity. A recent 
focused operation in the Los Angeles area has resulted in sanctions of 
over 200 Medi-Cal providers who used ``cappers'' to recruit patients 
and improperly bill the Medi-Cal program over $75 million. Medi-Cal 
fraud has gone beyond false billing to treating Medi-Cal beneficiaries. 
It is common knowledge that children and disadvantaged adults are 
becoming anemic because of the frequency of unnecessary blood draws. 
Recently, a major fraud scheme in Los Angeles was uncovered that used 
unlicensed technicians to perform unnecessary dental procedures on 
hundreds of patients, including the unnecessary drilling and filling of 
children's permanent teeth.
The Governor's Medi-Cal Fraud Task Force
    The Governor's Medi-Cal Fraud Task Force, chaired by Dr. Diana 
Bonta, State Director of the Department of Health Services, focuses its 
attention on the combined resources of the FBI, US Attorney Civil and 
Criminal Divisions, the Health Care Financing Administration, Health 
and Human Services Office of Inspector General, State Attorney General, 
and State Controller in a coordinated effort to eliminate health care 
fraud in California. This group meets on a quarterly basis and has 
established sub-committees to develop a clearing house for information 
regarding investigations of fraud and abuse, preparing a directory of 
contacts and representatives for state and federal anti-fraud and abuse 
programs and discussing collaborative efforts to deal with new areas of 
fraud not yet explored.
Provider Anti-Fraud Strategic Plan
    With strong support of Governor Gray Davis, including the addition 
of over 200 new positions, the State Department of Health Services 
(DHS) has also implemented a Provider Anti-Fraud Strategic Plan. This 
maximizes the DHS effort to eliminate fraud within all DHS programs and 
services. Some of the new anti-fraud initiatives include:

 Doubling of the Medi-Cal Fraud Prevention Bureau
 New proposed legislation to expand criminal penalties, require 
        enrollment for third party billers, and tighten requirements 
        for laboratory providers.
 Pre-check write on-site reviews to verify claim propriety 
        prior to payment
 Automated payment system edits to quickly identify unusual 
        claim patterns
 Formal focus on mosquito labs that draw blood for fraud 
        purposes only
 Verifying a doctor's identity before approving a request for 
        new locations
 Expanded provider enrollment oversight
 Monitoring of Medi-Cal Managed Care under-utilization
    Eradication of health-care fraud is a high priority for California 
Governor Gray Davis.
    Thank you for the opportunity to address this committee and share 
with you information regarding the successes of the Medi-Cal Fraud 
Prevention Bureau under Governor Davis. I would be pleased to answer 
any questions you may have regarding California's efforts to combat 
Medi-Cal fraud.

    Mr. Upton. Thank you.
    Mr. King-Shaw, welcome.

              TESTIMONY OF RUBEN J. KING-SHAW, JR.

    Mr. King-Shaw. Thank you.
    Mr. Upton. Just put the mike a little bit closer.
    Mr. King-Shaw. Thank you and good morning, Mr. Chairman, 
distinguished Members, ladies and gentlemen. My name is Ruben 
Jose King-Shaw, Jr., and I am the Secretary of the Florida 
agency of the Health Care Administration. And just to give you 
a word about the agency, we are the chief health care finance, 
planning and regulatory agency of the State of Florida. The 
health care industry to Florida is like the automobile industry 
to the State of Michigan, Congressman Stupak, I think you can 
understand that, and in the sense of its size and scope and 
complexity and growth.
    Included beyond the Medicaid operation that we regulate 
hospitals, nursing homes and about 20,000 facilities, we 
investigate quality-of-care complaints against practitioners 
and facilities, regulate managed care organizations for quality 
of service and medical care and operations. So we have a great 
deal of leverage. And as we talk about some of things we've 
done to curb Medicare fraud in our enrollment, particularly 
keeping in mind the leverage that we have over the health care 
delivery system as a whole, it makes a very powerful 
opportunity for us.
    The State of Florida is a very diverse State. We have a 
great deal of our State still rural, but of course, the 
majority of Medicaid recipients are concentrated in the urban 
areas, which for us is primarily southeast Florida, Dade 
County, Miami Dade County with the city of Miami, Broward 
County with the city of Ft. Lauderdale, and going into Palm 
Beach County, city of West Palm Beach. It's about an $8 billion 
operation, the Medicaid program is, and serves about 1.5 
million Floridians, and we don't want any of that money going 
to fraudulent providers.
    There was a concept of acceptable level of fraud tossed 
around earlier this morning. We believe there is no acceptable 
level of fraud, and our objective is to root it out all 
together.
    We have some very aggressive folks in the State who spend 
all their waking hours thinking of ways to steal our money. Our 
position is we need to stay up an hour later than they do 
figuring out ways to keep them from doing so. So we have an 82-
person-staffed integrity unit, and we also work throughout the 
agency with other parts of State government to protect the 
public's funds and the best interests of the patient.
    I'd like to share with you some of things that we've done, 
particularly in our provider enrollment, that we think have 
been quite effective in deterring fraud, and as I run through 
them, I may go back during your question-and-answer period to 
answer some questions about them, but, for example, we require 
that all officers, directors, physicians, and principals who 
own at least 5 percent of the operation applying for a Medicaid 
number, to be disclosed in the application, and every single 
one of them have to sign it. There can be no hidden providers. 
There can be no providers covered under the contract that are 
not explicitly established in the contract. We do not allow any 
retroactive enrollment of providers into the Medicaid program.
    Our contracts all have expiration dates, which means that 
at a certain point they must be re-examined, reprofiled, 
recredentialed, and readmitted. We have a surety bond ability. 
We can require a surety bond, or letters of credit, to 
providers as a condition of applying for the Medicaid program 
for high risk providers, which are primarily the durable 
medical equipment, nondoctor-owned medical practices, 
independent labs and transportation companies. The value of the 
surety bond is that it requires--no bond agency is going to go 
and offer that kind of coverage to a facility or provider 
unless they have gone in and looked at them themselves first.
    So it's a no-cost operation of the State, but it does bring 
another set of eyes to go look, on a prospective basis, at a 
potential Medicaid participant.
    It requires notice of change of ownership of a Medicaid 
provider once in the program. We do regular criminal background 
checks. It is not a property right, the Medicaid provider 
number. It doesn't transfer, cannot be sold or traded, doesn't 
travel with a change of ownership necessarily. We have located 
the venue for all legal actions to a single county in the 
State, which is important because we get to know, you know, the 
bench, if you will, in that county.
    We have established a prepayment schedule for any 
overpayments. Regular license verification, and perhaps the 
most powerful tool we have of all of these is the fact that we 
have a provision in all of our Medicaid contracts that allow us 
to cancel that contract with 30-day notice without cause.
    Now, we regularly go through periods of reenrollment, and 
we can talk about that if you like. Our last reenrollment 
period was between January 1996 and July 1997, where every 
noninstitutional provider was asked to reapply, reenroll in the 
Medicaid program, which gave us a chance to look at them again 
for quality and performance. We have adopted site visits, and 
we do that for, again, those high risk providers, durable 
medical equipment, nonphysician-owned practices, transportation 
companies, independent labs, and now pharmacies. And as you 
would expect, we have uncovered a great number of vacant lots 
and storefronts and PO boxes, just by the practice of going out 
and performing those site visits.
    We also have been able to save quite a bit of money, $100 
million overall, through a combination of all these things, 
including about 10,000 lines of edits in our computer system. 
We do a series of statistical analysis and trend analysis to 
identify aberrant billing patterns that may lead to fraud. We 
can then zero in on those targets to do some more analysis, to 
determine what is going on there. We have saved $19 million in 
DME alone, $7 million in independent lab and X-ray expenses, 
and every 2 months we do a sweep of our data base to see if any 
of the providers, physician providers and other providers in 
the Medicaid program, turn up on our list of folks who have 
been indicted or prosecuted for violation of laws.
    My time is out--in fact, I'm a minute over--so I'll curtail 
my comments with the very last comment. One of the things that 
we have the ability to do is to competitively bid our network, 
and we have the ability to accept or deny practitioners or 
applicants into the Medicaid program, based on our 
identification of need, be that geographic or quality or a 
certain skillset. That gives us an enormous opportunity to, on 
the front end, admit only quality providers in the Medicaid 
program with the specialty and the geographic distribution that 
we need.
    Hopefully we'll get a chance to do some more conversation 
through the Q-and-A period. I will defer the rest of my time to 
my colleague. Thank you very much.
    [The prepared statement of Reuben J. King-Shaw, Jr. 
follows:]
   Prepared Statement of Ruben J. King-Shaw, Jr., Secretary, Florida 
                 Agency for Health Care Administration
    Chairman Upton, distinguished members, ladies and gentlemen, I am 
Ruben J. King-Shaw, Jr., Secretary of the Florida Agency for Health 
Care Administration. Thank you for this opportunity to talk about how 
Florida fights fraud and abuse among providers seeking to enroll in our 
Medicaid program.
    Florida is a very diverse state. Much of it is rural. Dade and 
Broward Counties are the most heavily populated areas. They encompass 
Miami and Ft. Lauderdale where a quarter of our Medicaid recipients 
live. Not surprisingly, this densely populated area is also where a 
majority of provider fraud and abuse occurs.
    Combined state and federal Medicaid spending in Florida exceeds 
eight billion dollars. Every month a million and a half Floridians are 
eligible to receive Medicaid benefits. We do not want a single dollar 
that could be going to legitimate health care diverted by unscrupulous 
people trying to steal from Medicaid by posing as health care 
providers.
    The fight requires aggressive measures. Unscrupulous individuals 
are good at finding holes in the system. Our job is to find those holes 
before they do. Today I want to talk about what we have done over the 
past several years to fight this kind of crime.
    Our focus has been on prevention. If you prevent dishonest people 
from enrolling as providers, you have won half the battle.
    Our first line of attack is the Medicaid provider application. In 
1995 we began requiring more information from provider applicants. We 
also rewrote our provider agreement to beef up standards and make 
providers more accountable. Here are some of the things we require:

 Disclosure of all officers, directors, physicians and 
        principals who own five percent or more of the business. All of 
        them have to sign the provider agreement;
 No ``hidden'' providers. The application must identify every 
        practitioner who will be participating in Medicaid;
 No retroactive enrollment;
 Contracts that expire;
 Surety bonds or letters of credit for certain high-risk 
        provider types;
 Notice of change of ownership;
 Criminal background checks;
 No ``property right'' in a Medicaid provider number;
 Venue for all legal actions in a single county;
 Repayment schedule for overpayments;
 Regular license verification.
    Between January 1996 and July 1997 every non-institutional provider 
had to re-enroll under the new agreement. When we started, we had more 
than 82,000 enrolled providers. When it was over, there were 55,000 
left. By giving every agreement an expiration date, we guarantee that 
providers are periodically re-examined to ensure their continuing 
fitness to be in the program. Our next re-enrollment is beginning now 
and will continue through the first quarter of calendar year 2003.
    Since 1996 we have been doing site visits of durable medical 
equipment suppliers, non-physician owned physician groups, 
transportation companies, and independent laboratories. We are adding 
pharmacies this year. You would be amazed at how many vacant lots, 
empty storefronts, and shell businesses this turns up. A site visit 
costs about fifty dollars, but that one simple step can save a million 
dollars.
    Between 1996 and 1998 our fraud and abuse initiatives reduced 
annual Medicaid spending by more than $100 million. We terminated more 
than 120 South Florida clinics and physicians suspected of fraud. A 
combination of on-site reviews, a $50,000 surety bond, and new computer 
edits reduced Medicaid durable medical equipment spending by more than 
$19 million. We saved another $7 million using anti-fraud controls to 
target independent laboratories and x-ray service providers.
    A word about surety bonds. No bonding company is going to issue a 
bond without doing its own investigation of the provider. The state 
spends nothing and at the same time potentially avoids losing millions 
to fraud.
    We make it a point of following up on those criminal background 
checks. Every two months, a contractor notifies us about any providers 
convicted of a crime since the last check. The state's Department of 
Health, which regulates the health professions, does quarterly license 
checks so we will know if a provider has lost a license or if 
proceedings are under way to revoke a provider's license.
    Obviously, enrollment initiatives alone won't do the job. We do 
believe in the ``use it or lose it'' philosophy. Any provider that 
doesn't bill Medicaid for twelve consecutive months is dropped from the 
program. Reinstatement requires going through the full enrollment 
process again.
    In addition we use our Medicaid Management Information System to 
identify inappropriate billings through edits. We have more than 10,000 
automated, hard edits. It is a good thing that Medicaid and the 
computer age grew up simultaneously. Can you imagine how many people it 
would take to examine paper claims to make sure someone isn't trying to 
bill Medicaid for a non-covered service, twice for the same service, 
conflicting procedures or perhaps a hysterectomy for a man?
    We do aggressive pharmacy audits and have been able to remove some 
bad providers. We expect to remove more. This year the Florida 
Legislature added to our arsenal by giving us the additional authority 
we need to deny provider applications based on the best interests of 
the Agency. We have been able to beef up our pharmacy credentialing 
requirements and are now able to impose a moratorium on pharmacy 
enrollment and enroll providers only where we identify a need.
    We built a map of pharmacy locations in south Florida and stuck in 
a pin for each pharmacy. In some areas we couldn't find room for all 
the pins. With this new legal authority, we're ready to tackle that 
problem. As a companion effort we will be watching pharmacy use by 
Medicaid recipients. Those who abuse their drug benefit will be locked 
into a single pharmacy.
    Right now we are seeking proposals from private contractors to help 
us profile providers who demonstrate potential for fraud and abuse. We 
already have begun comprehensive profiling of recipient drug therapies 
by beneficiary and prescriber.
    Because responsibility for dealing with the bad guys is shared by a 
lot of agencies, it is sometimes easy to miss the big picture. In 
Florida we have worked hard to form strong interagency partnerships 
that focus on anti-fraud strategies. My agency works closely with the 
Attorney General and his Medicaid Fraud Control Unit, with the 
Department of Law Enforcement, with the Statewide Prosecutor, with the 
Federal Operation Restore Trust, our practitioner regulatory agencies, 
the provider professional associations, local law enforcement agencies, 
and others.
    We can never assume we don't have a problem. We can't even assume 
we know what form fraud and abuse might take. We do know that our 
efforts are paying off. We will keep working hard, and we take 
satisfaction that we are improving service for Medicaid recipients and 
making life very hard for the people trying to take money they don't 
earn.
    Again, thank you for allowing me to appear today. I would be happy 
to answer questions.

    Mr. Upton. Thank you.
    Mr. Wagoner.

                    TESTIMONY OF DOUG WAGONER

    Mr. Wagoner. Thank you, Mr. Chairman, and members of the 
subcommittee. Good morning, my name is Doug Wagoner. I am here 
today representing ChoicePoint. ChoicePoint is the Nation's 
leading provider of on-line and on-demand information services 
to business and government. Headquartered outside of Atlanta, 
ChoicePoint has over 3,500 associates working in over 40 
locations nationwide.
    I have been the vice president of ChoicePoint's public 
sector division for almost 3 years. Through the public sector 
division, ChoicePoint provides low risk, low investment 
information-based solutions to prevent and thus reduce the cost 
of fraud and abuse in publicly funded health care systems. 
Additionally, we support law enforcement, child support 
enforcement and other entitlement programs to reduce fraud. On 
behalf of ChoicePoint, thank you for your generous invitation 
to appear here today.
    I am proud to say that all the participants here on this 
panel, the GAO, the FBI, the States of California and Florida, 
are clients of ChoicePoint. ChoicePoint's philosophy has been 
that stringent reviews of provider applications coupled with 
onsite and unannounced inspections, will go far in preventing 
fraudulent claims from entering the system, and thus preventing 
fraudulent payments that have to be investigated on the back 
end with little chance of recovery. Again, your mother was 
right, an ounce of prevention is better than a pound of cure.
    Working together with our government clients, we are 
progressing in joint efforts to prevent those who would engage 
in health care fraud from entering the public systems. Allow me 
briefly to reference these projects. As part of HCFA's 
Operation Restore Trust, ChoicePoint combined onsite inspection 
services with our extensive data resources to verify the 
existence and legitimacy of community mental health centers, or 
CMHCs, in Florida. The initial phase of inspections found that 
over 60 percent of the CMHCs were not in compliance with 
Federal regulations. Several months and 300 inspections later, 
this rate got down to 20 percent as word had gotten out on the 
street about these inspections. During this project, 
ChoicePoint found fraudulent providers in adult video stores, 
people's homes and even an airport runway that was given as an 
address for one provider.
    ChoicePoint has also been working with HCFA on the durable 
medical equipment, or DME, inspection program. As a part of 
this effort, ChoicePoint has inspected about 45,000 of the 
110,000 Medicare DME's. As a result of this program, the number 
of suspected fraudulent providers is going down substantially 
each year. In addition, the knowledge that an inspection will 
occur at some point serves as a deterrent for those applying to 
be a fraudulent DME in the first place. One such fraudulent 
provider, as the chairman mentioned earlier, was located on the 
10th floor of a nine-story building. The cost of the 
ChoicePoint's inspection service averages about $130, and takes 
less than 30 minutes of the provider's time. We estimate that 
the annual savings of ChoicePoint's services through HCFA's 
program has created about a $1 billion savings a year. The 
inspection program results in significant return on investment 
for the Federal Government considering the low, relatively low 
cost of ChoicePoint.
    ChoicePoint has been supporting HCFA's Medicare provider 
enrollment process since 1998. HCFA's fiscal intermediaries and 
carriers are required to use an independent third party 
information provider to verify the information from providers 
applying to the Medicare program. The vast majority of FIs and 
carriers have chosen to use ChoicePoint's data on a daily basis 
to verify the legitimacy of providers entering the Medicare 
system. ChoicePoint's Internet-based solutions allow the FI or 
carrier to confirm professional license data, education, 
sanctions, disciplinary actions and business ownership to name 
a very few of the data bases.
    Efforts like these have led, and will continue to lead, to 
significant cost savings for programs that HCFA administers. 
Based upon our experience from across the country, we would 
like to make three recommendations for the committee to 
consider.
    First, we recommend that HCFA conduct a competition of data 
providers and contract with one company to provide all of its 
provider enrollment for compliance needs. This would provide a 
consistent nationwide approach to verifying applicant data 
while pooling the purchasing power of HCFA to get the best 
price.
    In addition to this, we also believe that HCFA should 
mandate a criminal background check program as part of the 
provider enrollment process for both Medicare and State 
Medicaid programs.
    Second, a nationwide inspection program for State Medicaid 
DME, similar to what HCFA has done for the Medicare system, 
would help prevent provider fraud at a State level, similar to 
what we've experienced for Medicare on a nationwide basis.
    Finally, as with State inspection services, ChoicePoint 
believes that additional front end prevention can be achieved 
through using on-line data services on a consistent nationwide 
basis. Thus, we recommend that HCFA require each State Medicaid 
program to use these types of on-line data services to prevent 
fraud. California and Florida are examples and models for this 
program.
    We thank the subcommittee for this opportunity to appear 
here today and to tell you about ChoicePoint and what our 
company has been doing to protect our health care systems. We 
are proud of our record and look forward to working with the 
subcommittee in the future. I would, of course, be pleased to 
answer any questions you may have. Thank you very much.
    [The prepared statement of Doug Wagoner follows:]
  Prepared Statement of Doug Wagoner, Vice President, Public Sector, 
                           ChoicePoint, Inc.
    Mr. Chairman and Members of the Subcommittee, good morning, I am 
Doug Wagoner. I am here today representing ChoicePoint, Inc. 
ChoicePoint is the nation's leading provider of decision-making 
intelligence to businesses and government. Through the identification, 
retrieval, storage, analysis and delivery of data, ChoicePoint serves 
the informational needs of the property and casualty market, life and 
health market, and businesses, including Fortune 1000 corporations, 
asset-based lenders and professional service providers, and federal, 
state and local government agencies. Headquartered outside of Atlanta, 
ChoicePoint is a publicly-traded company with over 3,500 employees in 
more than 40 locations nationwide.
    I have been the Vice President of ChoicePoint's Public Sector 
Division for almost three years. Through the Public Sector Division, 
ChoicePoint provides low-risk, low-investment, information-based 
solutions to prevent and thus reduce the cost of fraud and abuse in 
publicly funded medical programs and services. On behalf of 
ChoicePoint, thank you for your generous invitation to appear here 
today.
    I am proud to say that most of the other participants on this 
panel--the General Accounting Office, the Federal Bureau of 
Investigation, the State of California, and the State of Florida--are 
ChoicePoint clients. A more complete list of ChoicePoint's government 
clients is contained in the Appendix to this testimony. Today, we are 
working together to share ideas and solutions to solve a problem that 
impacts us all. Our common goal is to reduce healthcare fraud in 
publicly funded programs. In previous hearings, this Committee has done 
an excellent job of defining the scope and breadth of this pressing 
problem. I want to commend the Committee for again directing its 
attention to the issue of provider fraud in the Medicaid system because 
there is still much work to be done to eliminate fraud in our federal 
and state health programs. We also appreciate the Committee's 
willingness to hear from both the private and public sector, including 
state and federal agencies.
    On prior occasions, this Committee has investigated the possibility 
of using public sector data sources not only to reduce the cost of 
fraud in the health care system, but also to reduce the risk to 
citizens of poor performing health care providers. ChoicePoint 
supplements these data sources with our over 10 billion public records 
and our site investigators. Our goal is to enhance government's ability 
to reduce health care fraud. ChoicePoint's solutions are relatively low 
cost, require no up-front investment by the government, have minimal 
impact on the provider, and can be implemented by a state Medicaid 
program in days, not years. ChoicePoint's solutions are also targeted 
at the front-end of the problem. Our philosophy has been that stringent 
reviews of provider applications--coupled with on-site, unannounced 
inspections--will go far in preventing fraudulent claims from entering 
the system, and thus preventing fraudulent payments that have to be 
investigated on the back-end with little chance of recovery.
   choicepoint provides valuable inspection services to the federal 
                               government
    ChoicePoint has been working to reduce public health care fraud 
since the company's inception in 1997. I would like to detail the 
various provider enrollment verification services that we have been 
supporting as a part of this effort. While our customers have primarily 
been involved in the Medicare program, ChoicePoint also serves several 
state Medicaid programs.
Operation Restore Trust
    In 1997, we began supporting the Health Care Financing 
Administration's (``HCFA'') Operation Restore Trust (``ORT'') program. 
This program was one of the first large-scale task forces assembled to 
identify and reduce Medicare/Medicaid fraud. ORT was a concentrated, 
joint state-federal program that focused on Community Mental Health 
Centers (``CMHCs'') in key southeastern states. To begin using 
ChoicePoint's site inspection services, the ORT team provided 
ChoicePoint with a list of approximately 300 CMHCs primarily located in 
Florida. ChoicePoint's site inspectors then used our extensive data 
resources to verify the existence and legitimacy of these businesses. 
Although ChoicePoint inspected all of the businesses targeted by ORT, 
those businesses that did not match our data-verifying tests were given 
priority for inspection. Starting in south Florida and working north, 
ChoicePoint conducted the CMHC inspections. The purpose of the 
inspections was to collect and confirm such information as the name of 
the business, its hours of operation, photographs of the establishment, 
what inventory was on hand, and other related business information. 
These inspections were conducted during regular business hours and are 
completed in less than thirty minutes, but they are done without prior 
notice to the ownership in order to prevent the masking of violations.
    The findings from our experience in ORT are staggering. During the 
initial phase of the inspections in south Florida, we found that over 
60% of the CMHCs were not in compliance with federal regulations. The 
second round of inspections--carried out several months later 
throughout the state--found that the problem rate had decreased to 40%. 
Finally, after the third round, the non-compliance rate had decreased 
to 20%. During its inspections, ChoicePoint located CMHCs that were 
actually adult video stores, private homes, mail forwarding services, 
or locations with no physical presence at all. We believe the decline 
in the problem rate can be attributed in some degree to the very fact 
of our inspections. Word of mouth from one operator to another gave 
fraudulent operators an opportunity to close their doors prior to our 
inspector's arrival after they learned that one of their cohorts 
received a visit from our inspectors. We also discovered that owners 
that were shut down after failing an earlier inspection would relocate 
to another Florida city and open another fraudulent CMHC, only to be 
inspected again under ORT.
Durable Medical Equipment Inspection Program
    Shortly after ORT was underway, ChoicePoint began working on HCFA's 
nationwide Durable Medical Equipment (``DME'') inspection program. We 
have been part of this program for three years. ChoicePoint has 
inspected about 45,000 of the estimated 110,000 Medicare DMEs in the 
United States. The goal is for every new DME applicant in the country 
to pass an initial inspection prior to receiving a billing number and 
be subject to re-inspection every three years. Similar to ORT, these 
inspections are unannounced, take less than thirty minutes of a 
provider's time, and collect various data depending on the type of 
facility. Our inspectors arrive with a letter from HCFA explaining the 
inspection program and asking for the provider's cooperation with the 
inspector. The inspector provides identification to demonstrate the 
legitimacy of the request, and then begins a consistent, process-driven 
inspection as directed by HCFA. It is important to note that it is not 
ChoicePoint's role to distinguish a ``bad'' DME from a ``good'' DME at 
the time of inspection. Our job is to objectively collect the data 
required by HCFA and deliver it to HCFA for evaluation and action.
    Often, providers attempt to cover up problems or ask an inspector 
for feedback, but ChoicePoint's professional inspectors are trained to 
keep their composure and collect the data as needed without comment. If 
the inspector has any doubts in the course of the inspection process, 
it is ChoicePoint's policy to take a photograph to document the 
evidence. This was made particularly difficult when one inspector 
visited a DME whose address was listed as the 10th floor of a 9-story 
building.
    Despite these types of incidents, we are finding that the number of 
suspected fraudulent providers is going down each year the program 
continues. Not only do these inspections identify and shut down 
fraudulent or potentially dangerous DMEs, the knowledge that an 
inspection will occur at some point serves as a deterrent to applying 
as a fraudulent DME in the first place. Additionally, HCFA wisely 
requires our inspectors to inspect the inventory of the DME, so those 
individuals who attempt to set up a fraudulent company must make a 
substantial initial investment in inventory in order to pass the 
inspection.
Cost Savings
    The cost of these inspection services average around $130 per 
inspection. Although it is impossible to accurately determine the value 
of the fraud prevented by this program, we can extrapolate some numbers 
from the findings of ORT. Prior to the commencement of the ORT program, 
we were told that an inspection would be triggered for those DMEs that 
billed federal health care programs between $250,000 and $300,000 per 
year. Thus, DME owners could fraudulently invoice just under that 
amount, close the business, and then start another fraudulent front 
company. Since ChoicePoint does not make any determinations as to the 
validity of DMEs, we do not maintain the official numbers associated 
with fraudulent suppliers, such as the number of denied applications 
and the number suspended from federal programs. Based on information 
that we were provided in the past, we estimate that the annual savings 
ChoicePoint's services create for this program is over $1 billion a 
year. This dollar figure is based upon a conservative estimate that 10% 
of the supplier population is (or would be) fraudulent, and that each 
of these fraudulent DMEs would have invoiced up to the $250,000 
threshold prior to starting another DME and re-applying to the program. 
If these numbers are accurate--and we believe that they are 
conservative--this inspection program results in significant financial 
savings for the federal government, even after considering the annual 
cost for the ChoicePoint inspections.
    Given these estimated savings, ChoicePoint believes that the DME 
inspection program implemented by HCFA gives United States taxpayers a 
dramatic return on their investment. However, this program's 
capabilities have not been fully utilized because it has only been 
implemented with respect to Medicare's DMEs. Based upon the numbers 
from ORT and our estimates of DME fraud, it seems safe to assume that a 
similar consistent, process-driven, nationwide program focused on the 
inspection of state Medicaid providers would yield similar or even 
greater results. This Committee has learned not to underestimate the 
criminals in this industry. It is our educated assumption, given years 
of experience inspecting fraudulent behavior, that the criminals will 
soon figure out that while HCFA has closed the door to DME fraud in the 
Medicare program, the door is still wide open in many state Medicaid 
programs.
Inspections of Independent Diagnostic and Test Facilities
    In addition to DME inspections, ChoicePoint has recently begun 
working with one of HCFA's Fiscal Intermediaries (``FIs'') to inspect 
Independent Diagnostic and Test Facilities (``IDTFs''). Although 
ChoicePoint does not make official determinations regarding the 
validity of a facility, our inspectors found absolutely no existence of 
an IDTF in 10 of the first 14 inspections performed. This may have been 
coincidence, or it may be strong evidence that fraudulent DME providers 
of the past have moved into a new field--IDTFs. While fourteen cases is 
not a large enough sample upon which to base a definite conclusion, we 
believe it would be wise to expand this first round of inspections in 
order to determine the true level of fraud in Medicare's IDTFs.
     choicepoint supports the medicare provider enrollment process
    In addition to our on-site inspection services, ChoicePoint has 
been supporting the Medicare provider enrollment process since 1998. 
HCFA requires providers applying to join the Medicare program to fill 
out a ``Form 855'' to collect information about the applicant provider. 
Additionally, HCFA requires their Fiscal Intermediaries (``FIs'') and 
Carriers to verify the information on the Form 855 via an independent 
third-party information provider. Although HCFA does not mandate the 
use of a particular on-line information service, we are proud to say 
that the vast majority of FI's and Carriers have selected ChoicePoint 
as providing the most cost-effective solution for complying with HCFA's 
requirements. These contractors use our data on a daily basis to verify 
the legitimacy of providers entering the Medicare system.
    For applicants to Medicare Part A, ChoicePoint supplies the data 
necessary to verify address, business ownership, directors and 
executives, secretary of state information, bankruptcy, and sanctions 
by the General Services Administration (``GSA'') or the Department of 
Health and Human Services (``HHS''). Additionally, our Internet-based 
searches reveal hidden owners who may have been omitted from the Form 
855 application. Our Address Inspector algorithms compare the address 
of the Part A applicant with our database of over 2 million high-risk 
and fraudulent business addresses. This data is available from all 50 
states.
    The Medicare Part B Form 855 verification process allows the 
provider enrollment specialist at a Carrier to compare the applicant 
provider's information with our independently derived data from various 
government sources, including all 67 physician licensing boards and 50 
state chiropractor licensing boards. We plan to add additional health 
care professional license data from all fifty states by the end of the 
year. In addition to physician license data, we are able to confirm 
American Medical Association status, colleges and universities 
attended, board certifications, HHS sanctions, DEA licenses, and most 
important, disciplinary and sanction data. In the near future, 
ChoicePoint will add GSA disbarment information to both the Part A and 
B searches.
    There is no record of exactly how many fraudulent providers have 
been stopped from entering the Medicare system, because the 
verification processes are so decentralized among HCFA's FI's and 
Carriers. However, we receive constant feedback from customers that 
suggests that scam artists are still trying to enter the system each 
day. I will submit for the Subcommittee's record a computer printout of 
a ChoicePoint Part A search where our data and search capabilities 
uncovered an owner that was not listed on the application to enter the 
Medicare program. This owner had been disbarred for previous fraudulent 
behavior in Medicare, which is why his colleagues conveniently omitted 
him from the next application. This case demonstrates that the 
perpetrators of fraud do not stop, but try every door into the system 
until they find one that is unlocked.
    Our data is delivered via the web, and the searches take about 45 
to 180 seconds to be delivered, depending upon the amount of data on 
the provider. This almost-instant delivery of critical data allows the 
fraudulent or dangerous provider to be detected prior to obtaining that 
all-important billing number and entrance into the system. The cost for 
instant access to data that can uncover a fraudulent provider is 
between $10 and $30, depending on the type of search. This is not 
software or a special system that has to be purchased at a high cost. 
This is a web page (www.providerscreen.com) that any FI/Carrier can 
access from a standard, simple Internet connection. The web page is 
identification and password protected in order to verify the user and 
assess billing. There is no up-front investment to begin using the 
service, and a user can be productive in preventing fraud after a 2-3 
hour training class that ChoicePoint provides at no cost.
                            recommendations
    HCFA should be commended for their provider enrollment standards, 
their auditing of compliance with those standards, and their 
requirement of independent data verification of provider supplied 
information. Nevertheless, we believe that the program can be enhanced. 
And we would be proud to work with them on this.
    However, since HCFA has placed the responsibility for provider 
enrollment and compliance with their standards on the FIs and Carriers, 
companies such as ChoicePoint must contract directly with each of the 
many and ever-changing FIs and Carriers. Maintaining many varied 
contracts raises our cost of providing the data service. Therefore, we 
recommend that HCFA conduct a competition for data providers and 
contract with ONE company to supply this data nationwide. This would 
provide a consistent approach to verifying the applicant data and would 
pool the buying power of HCFA in order to lower the cost of providing 
this data across the Medicare program. With the advent of HCFA's PECOS 
system in the provider enrollment process, ChoicePoint also believes 
that this data can then be verified electronically to increase accuracy 
while lowering the enrollment time and cost.
    In addition, we recommend that FIs and Carriers be required to 
investigate providers' criminal histories prior to their enrollment in 
the Medicare program. We believe that if HCFA were to mandate criminal 
background checks as part of the provider enrollment process, many 
fraudulent providers could be identified before they are allowed to 
enter the federal system and continue their criminal activities. 
Currently there is legislation pending in the Senate to require 
background checks as part of the enrollment process.
    While HCFA has taken proactive steps to increase the front-end 
detection of fraudulent providers on a nationwide basis, there is no 
such program for most state Medicaid programs. Some states, such as 
Florida, California and Connecticut, use ChoicePoint or similar 
services to review a provider's background. Many others, however, only 
rely on information from within their state. With a transient 
population, these intrastate-only searches could fail to uncover 
fraudulent, illegal or dangerous behavior that occurred in a 
neighboring state. As with the site inspection services, ChoicePoint 
believes that additional front-end fraud prevention can be achieved by 
utilizing on-line data services on a consistent nationwide basis for 
state Medicaid programs. This comprehensive yet targeted approach will 
help lock all possible doors to the public health care system to those 
who wish to defraud it and divert scarce resources from those in need.
    We thank the Subcommittee for this opportunity to appear here today 
and to tell you about ChoicePoint and what our company has been doing 
to protect our health care systems. We are proud of our record and look 
forward to working with this Subcommittee in the future. I would, of 
course, be pleased to answer any questions that you may have. Thank you 
very much.
                                Appendix
        choicepoint federal government clients as of june, 2000
    Bureau of Alcohol, Tobacco & Firearms; Bureau of Public Debt; 
Commodity Futures Trading Corporation; Department of Commerce; 
Department of Defense; Department of Energy; Department of Housing & 
Urban Development; Department of Health & Human Services--Office of 
Child Support; Department of Interior; Department of Justice; Drug 
Enforcement Agency; Environmental Protection Agency; Executive Office 
of United States Attorneys; Federal Bureau of Investigation; Federal 
Deposit Insurance Corporation; Federal Election Commission; Federal 
Emergency Management Agency; Federal Public Defenders; Federal Reserve; 
FinCen; FreddieMac; General Accounting Office; General Services 
Administration; Health Care Financing Administration Fiscal 
Intermediaries and Carriers; Immigration & Naturalization Service; 
Internal Revenue Service; INTERPOL; National Aeronautics & Space 
Administration; National Credit Union Agency; Office of National Drug 
Control Policy--High Intensity Drug Trafficking Areas; Office of 
Personnel Management; Pension Benefit Guarantee Corporation; Secret 
Service; Small Business Administration; United States Customs; United 
States Marshals; United States Postal Service; and the World Bank.

    Mr. Upton. Well, thank you all, and as you saw in the first 
round with our first panel, we'll rotate here and try to limit 
our questions and answers to 5 minutes, and we'll do--my guess 
is probably a couple rounds.
    I have a lot of questions, and again, I appreciated your 
testimony, and I guess I should start with Ms. Aronovitz. Would 
you say that as we listened to California and Florida tell 
about their programs, that they're about average in terms of 
the other States, or better or worse in terms of going after 
fraud and abuse?
    Ms. Aronovitz. I would say that based on the activities 
that they describe that they're pretty much in the forefront.
    Mr. Upton. At the top?
    Ms. Aronovitz. Yes. In our survey of the 56 State Medicaid 
programs, and of course that includes the territories and the 
District of Columbia, we found that only nine States do what we 
would consider comprehensive checks, or checks in four areas 
and we found that a lot of States----
    Mr. Upton. These are among the nine?
    Ms. Aronovitz. Yes. We found--and this is self-reported 
information from our survey that many States do very little in 
the way of provider enrollment activities. We were actually 
surprised by this.
    Mr. Upton. That information sort of jumped off the page in 
terms of the draft statement that I read last night. You 
indicated that only 16 States or 16 jurisdictions, when you 
count D.C., et cetera, only 16 reported that HCFA staff visited 
their agency to review their fraud and abuse control activities 
during their most recent fiscal year. That's on page 11 of your 
draft that you provided.
    Ms. Aronovitz. HCFA's very involved in the Medicare program 
in activities like provider enrollment and other program 
integrity activities. HCFA's position in terms of Medicaid and 
overseeing States is more of a facilitator and a partner and a 
helper. We do give them a lot of credit for working with States 
in their national initiative on Medicaid fraud and abuse 
control efforts. These fraud and abuse control efforts really 
are designed more to encourage States and to help States learn 
about what they can do, but ultimately, HCFA does not mandate 
very much in terms of Federal requirements, and in fact, these 
are voluntary activities on the part of States.
    Mr. Upton. Now, you indicated--one of the things we've 
heard from both--well, certainly from Florida, and I think 
California does this as well--is that they do the criminal 
background check of their enrollees, California does as well. 
What percent of the enrollees that you have looked at actually 
have a criminal background in their past, do you know?
    Ms. Aronovitz. We do know that in our survey, 23 of the 56 
programs indicated that they do some type of criminal 
background check.
    Mr. Upton. But of those that they check out, how many of 
them actually have a criminal background red flag that will pop 
up?
    Ms. Aronovitz. In many of these cases, it will be on 
selected providers. My understanding is that Florida does 
criminal background checks on all producers, but many of these 
other States use a risk approach, which we think is a prudent 
approach when you have limited funds and you have a good risk 
assessment.
    Mr. Upton. Right.
    Mr. King-Shaw, do you know what--how many actually get 
flagged?
    Mr. King-Shaw. Approximately 1 to 2 percent every time we 
run the query, which is every 2 months.
    Mr. Upton. Ms. Aronovitz, you indicated in your statement 
that you said that not all States view, in essence, the site 
visits as cost effective. I mean, as I listen to California and 
Florida talk about range of between $50 and $130 per visit, 
only about what, a half hour, an hour in terms of visit, what 
States, I mean, if there's something that sort of jumps off the 
page, it's that statement that many States don't utilize some 
type of site visit.
    Ms. Aronovitz. Well, we know that in response to an audit 
report, Colorado felt that site visits were not cost effective 
for them. We don't know why. But in Texas, which did a pilot of 
site visits, we do have some indication that they found that 
their site visit, first of all, was much more intense than the 
site visit that lasted 30 minutes. They checked medical records 
in detail and did a lot of reviews. They also had to pay to 
travel to distant places in the State.
    But the other reason that Texas found this to be not cost 
effective, in our opinion, had to do with the circumstances of 
their pilot. It was at a time when HCFA was putting a 
moratorium on new home health agencies entering the Medicare 
program. Home health agencies, which were among the groups 
targeted for the pilot, were not applying to be providers at 
the time.
    In addition, there was a lot of publicity about this pilot 
site visit program in Texas, and it was supposed to go on for 
several months. So we think there's a possibility that some of 
the providers decided to hold off until this pilot site visit 
check was finished before they applied to the program. As a 
result, only nine providers during this pilot actually applied, 
and all of them were reviewed and found to be absolutely 
qualified to provide services in the opinion of the Texas 
inspectors .
    So, in those cases, based on that pilot test, the Texas 
program decided that it was not cost effective.
    Mr. Upton. Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman. How would you, Ms. 
Aronovitz, how would you assess California's and Florida's 
antifraud efforts now?
    Ms. Aronovitz. We haven't been there to be onsite, but we 
certainly believe that a lot of the activities that they 
describe are ones that we would say are key activities in any 
type of provider enrollment program. So in fact, we think that 
these States are very aggressive.
    Mr. Stupak. Is there any other suggestions you would have 
for them? If they're one of the top two, are there any other 
suggestions that would help them along?
    Ms. Aronovitz. Not in the provider enrollment program per 
se, I think, especially in Florida. They have a pretty 
comprehensive program.
    Mr. Stupak. Ms. Connell, you indicated in your testimony 
and I missed it, and I asked Chris here and he missed it. You 
said there's a bill right now that you are hopeful to get 
through the Senate and legislature, but you did not believe it 
would.
    Ms. Connell. It's the Corbitt bill which is an attempt to 
deal with the formulary, and it has run into opposition, 
largely from those who provide the drugs, the pharmacists. What 
we were attempting to do is put a restriction on the prices of 
selling drugs in California under the Medi-Cal program, and 
this is, of course, hit with tremendous opposition by those who 
sell the drugs, and I am not certain the bill is going to make 
it out of the legislature. We were fortunate to have three 
bills that we authored on Medi-Cal reform pass last year, and 
one, which is a cleanup bill, which appears to be going through 
this year. This other bill just seems to be stalled in 
committee because of the kind of opposition that it has 
received.
    Mr. Stupak. It would really be from the pharmaceutical 
companies, not necessarily the pharmacists?
    Ms. Connell. That's correct.
    Mr. Stupak. Mr. Wagoner, you indicated California and 
Florida, they're part of your clients, right?
    Mr. Wagoner. Yes, sir.
    Mr. Stupak. In any other States that contract with you?
    Mr. Wagoner. Yes. Right now for the on-line data services, 
to verify the data that's involved in an application, 
Connecticut uses our data as well, and we are right now talking 
to several other states, but right now those are the only three 
States that are using that.
    Mr. Stupak. Other States that have not contracted to 
provide your service, do they have someone else doing it? What 
are the reasons for not doing what you are----
    Mr. Wagoner. Many of the States depend upon intrastate 
data, so they may look at their own Secretary of State data, 
they may look at their own criminal data, not realizing that a 
lot of these providers do move quite often, they do move State 
to State, and they just don't take a nationwide approach. Other 
States have indicated that there's legislation that prevents 
them. The only thing they can do is look at and verify data 
within their State. So if a provider had done something illegal 
or sanctioned in one State, other States would not be able to 
prevent them from entering that State's Medicaid program is 
what we have been told.
    Mr. Stupak. I see. Mr. King-Shaw you mentioned in your 
testimony in the State of Florida requires either surety bonds 
or letters of credit for certain high risk providers. So two 
questions, how do you define a high risk provider, and what is 
the amount of bond that is required?
    Mr. King-Shaw. Well, we define high risk provider based on 
our historical experience of fraud and have narrowed that down 
to durable medical equipment companies, transportation 
companies, nonphysician-owned medical group practices, 
independent labs, and now we've added pharmacies to that list, 
and again, that's been based on experience, just where the 
fraudulent behavior seems to rear its ugly head the most. The 
level can be between $50,000 or a year's worth of historical 
billings or estimated billings to the Medicaid program, and so 
we can adjust it anywhere within that range.
    Mr. Stupak. What's been the reaction of the providers to 
the bond or letters of credit?
    Mr. King-Shaw. They haven't loved it but I think the bottom 
line is, it's hard to argue that they don't want to provide all 
the documentation to demonstrate that they are a credible 
provider. I mean, what would their basis be for refusing--that 
they're going to go commit fraud? They don't have much of an 
argument or much of a fight to put up, but I can't say if it 
were up to them, that they would have voluntarily posted a 
surety bond. I don't think they would have.
    Mr. Stupak. Mr. Cates, you indicated in your lock and load 
that you looked at bank records.
    Mr. Cates. Correct.
    Mr. Stupak. When you get to look at those bank records, are 
those only under providers that are being investigated or do 
you have something in your contract that allows you, upon your 
own suspicions, to get into these bank records?
    Mr. Cates. Our focus on fraud approach, within that 3- to 
5-minute survey that we conducted, every one of our providers 
we look at and we request a copy of their business bank 
account, and the reason we do this is that we are trying to 
level the playing field so that the honest providers do not 
have to compete with the dishonest providers. We have found 
that the compliance rate for providing that business bank 
record is right at 100 percent.
    Mr. Stupak. But how do you get to the bank records? Don't 
they object that these are our personal records, you can't look 
at them? How do you get to them?
    Mr. Cates. It's interesting. If you lay it out ahead of 
time in a letter, like we did, letting them know exactly what 
we've been doing in the fraud prevention review, the honest 
providers do not mind cooperating, the dishonest providers are 
afraid to draw attention to themselves. All I can tell you is 
while we believe that we have the authority in existing law to 
review all business records as it relates to the program, we 
have only had 1 or 2 provider attorneys call us up and say 
what's that about. I tell them and they go, okay, my client 
wants to provide it.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Upton. Mr. Burr.
    Mr. Burr. Mr. Kubic, is it safe to say for the FBI, 
targeting and prosecuting fraud in the Medi-Cal system has sort 
of been like shooting fish in barrel?
    Mr. Kubic. I think that's safe to say, yes.
    Mr. Burr. Has it been fairly easy to identify where there's 
legitimate fraud and abuse?
    Mr. Kubic. Yes. One of the key things here and what I think 
worked really well stemmed from the fact that the audit reports 
provided by the State of California were kind of like the road 
map. I mean, if you look at a provider who's billed and that 
same provider does not have the inventory to ship those 
materials, it's a pretty straightforward case, and a large 
number of these cases did not go to trial. I mean they were 
pretty much a prima facie case, when a provider comes in with 
his attorney and you make a case presentation and a review.
    Mr. Burr. And in most cases, were moneys reimbursed to the 
State?
    Mr. Kubic. Yes, it was. Reimbursements total about 20 
million just on the ones that have been adjudicated.
    Mr. Burr. Ms. Connell, let me go to that piece of 
legislation Mr. Stupak asked you about that you suggested 
probably would not get out of the legislature. You said that 
has to do with drug pricing. We have a Federal statute under 
HCFA for Medicare best pricing on drugs. Was that bill on 
something other than pricing or was it----
    Ms. Connell. It will require the Department of Health 
Services, which runs Medi-Cal in California, to modify the 
Medi-Cal formulary to take advantage of the lower cost of 
generic products of prices.
    Mr. Burr. This is legislation to affect the formulary?
    Ms. Connell. Right.
    Mr. Burr. And not to alter in any way pricing?
    Ms. Connell. No, no. We're trying to get the advantage of 
discounted prices.
    Mr. Burr. I don't disagree with you that there ought to be 
control of formularies, but it's really important to draw the 
distinction that we already have a Federal statute that says 
that Medicaid, regardless of the State, buys at the best 
negotiated price that exists in the marketplace. So it isn't in 
fact--I think somebody led it to believe that it was the 
pharmaceutical companies on a pricing issue. It may be the 
pharmaceutical companies on an inclusion issue, but----
    Ms. Connell. Whether they be brand or generic?
    Mr. Burr. Correct. Let me ask you, it seems at least in 
North Carolina it would be unusual for the auditor or the 
controller to be an active participant in the legislative 
process, but I conclude from what you have said by using the 
word ``we,'' that the controller's office has been initiating 
legislation through the general assembly. Is that, in fact, 
correct?
    Ms. Connell. Congressman, what occurs when we complete an 
audit, if there are improvements that we can make in any 
program, whether it's charter schools or public schools or 
Medi-Cal, we then introduce the concept to a legislator, and a 
legislator will carry the State controller audit legislation 
for us. So the legislation that passed, I referred to it as the 
Romero bill, was carried by Assemblywoman Romero. The Corbitt 
bill is being carried by Assemblywoman Corbitt.
    Mr. Burr. Let me ask you and Mr. Cates, if you will, just 
to comment, where is the Department of Health Services in all 
of this?
    Ms. Connell. Well, let me just do it historically and Alan 
can do it currently. The Department of Health Services is, in 
my view, the reason we've had this high level of Medi-Cal 
fraud, which has gone undetected and initially unobserved in 
California. When we began auditing them in 1995 and 1996, they 
had no control system in place to really deal with many of 
these issues that are being discussed by your committee today. 
We recommended those changes. Those changes did not occur in 
1996 and 1997, and 1998. We began to see some changes in the 
latter part of 1997 and 1998, but they were really not at the 
level that we had anticipated and hoped. With the change of 
administration in 1999, we have had a restructuring of the 
Department of Health Services, and Mr. Cates represents the new 
Medi-Cal fraud unit in the Department of Health Services, which 
is a subset of the Department of Health Services. The 
Department of Health Services is the single State agency in 
California that runs Medi-Cal. So they are a huge agency.
    They were focused in fairness to them on different 
priorities than we thought they needed to be focused on. They 
were focused on the Medi-Cal fraud on the beneficiary level. We 
were focused on Medi-Cal fraud on the provider level. We don't 
even audit Medi-Cal fraud on the beneficiary level obviously. 
And that's where they were using their resources. So they were 
heading in a different direction. At the time we felt there was 
an explosion in Medi-Cal fraud on the part of pharmacists and 
doctors and durable medical providers, their interest was in 
another venue.
    Mr. Burr. Mr. Cates, just because it was mentioned by our 
last witness, I have to ask you. How many adult day care 
facilities have you investigated already?
    Mr. Cates. The adult day care centers that we have formally 
investigated would only No. 2. The adult day care centers that 
we have reviewed surreptitiously is more like about 40.
    Mr. Burr. Are adult day care centers licensed by the 
Department of Health Services?
    Mr. Cates. They are licensed by the State Department of 
Aging under a contract with the Department of Health Services. 
I can tell you that the approach of the Fraud Prevention Bureau 
is focused on preventing fraud. We will detect and eradicate 
existing fraud, but our primary function is to prevent it.
    In order to do that, we first need to have a full 
understanding of exactly what it is that is going on. In the 
case of adult day health care, I would just advise the 
committee that at this point in time, it's an interesting 
program and that we clearly see benefits of the program. People 
that might otherwise be in nursing homes, the quality of life 
is infinitely better in these adult day care centers. However, 
there's enough laxness in the program right now as it's being 
carried out in California that we need to tighten it because 
the fraud really isn't always fraud, meaning, we are paying $63 
a day in the State of California for a program that lasts 
approximately 4 hours. So to correct the earlier witness, it's 
not an all-day program, it's a 4-hour program.
    Mr. Burr. My time has run out, but I want to ask for a 
clarification from California. In Mr. King-Shaw's testimony, 
one of the things he pointed to in Florida was the reenrollment 
period that providers had to go through. Has California done a 
reenrollment for its providers?
    Mr. Cates. On our targeted provider groups in order, yes, 
we have. We have already reenrolled, out of 1,300 or 1,400 
durable medical equipment providers, only about 800 elected to 
reenroll, and we are currently doing nonemergency medical 
transportation, and pharmacies are scheduled next year.
    Mr. Burr. Let me commend Florida, specifically Mr. King-
Shaw, for their whole process, because it seems to be a model, 
and my hope is that you will share that model with more, and 
Ms. Aronovitz, if for some reason we have not conveyed to HCFA 
some of the horror stories that exist in California where we, 
on a Federal level, can be more aware of the potential of 
Medicaid fraud and abuse that exists, but also the potential 
areas that we might ought to look at that are future fraud and 
abuses and adopt the Florida principle of prevention versus 
prosecution, I would think that we would make Mr. Kubic's day 
by adopting that across this country. With that I'd yield back, 
Mr. Chairman.
    Mr. Upton. Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. Ms. Aronovitz, I 
thought something you said was one of the most salient points 
in this hearing, and that is that we have to remember as 
Congress that Congress has--while HCFA has more oversight 
perhaps of Medicare, we have really given Medicaid to the 
States, and therefore, HCFA's historical effort at least has 
been to try to work in an advisory capacity more than an 
oversight capacity.
    And you know, in Congress we like to say, or many of us who 
came from State legislatures like to say, we are sort of States 
rights types, but the bad thing that happens is then you get 
some States like California and Florida that do a better job 
than other States, and HCFA then has to figure out what is its 
appropriate role for, say, States like my own State of Colorado 
and Texas that don't do site visits?
    I am wondering if you can comment very briefly if you 
think--if GAO thinks that there are ways that HCFA can take a 
more proactive role, particularly in States that do not have a 
good record on fraud prevention.
    Ms. Aronovitz. I'd like to first clarify two things that 
have been said. With regard to Texas particularly, I did not 
want to give the impression that the State does not believe 
that site visits could be useful in a selected, targeted way. I 
think the program that was contemplated for that State was 
going to be to do site visits on all providers. I think the 
State felt that was not cost effective.
    But--and the other thing I wanted to say is that you're 
very correct in that HCFA has seen the payoff in focusing on 
prepayment activities. It's much more expensive to try to get 
involved in pay and chase or trying to collect overpayments 
later. In the Medicare program, there's a lot of evidence where 
HCFA has done much to try to encourage contractors to involve 
themselves in prepayment activities. Where HCFA has a balancing 
act is in the Medicaid program. It's very important to HCFA's 
ability to help States to not create so much of a regulatory 
burden on them that it becomes impossible for all States to be 
able to meet whatever Federal standards are imposed upon them. 
HCFA walks a very clear line.
    Ms. DeGette. Let me interrupt because I only do have 5 
minutes. My question is, is there something HCFA could be 
doing?
    Ms. Aronovitz. Yes.
    Ms. DeGette. If you could answer that question.
    Ms. Aronovitz. Absolutely. We feel that at a minimum, HCFA 
needs to know a lot more about what all States are doing, and 
even if it's by encouragement rather than a regulatory 
environment, they really need to work harder to encourage 
States that they know are not doing the minimal amount of 
activities.
    Ms. DeGette. So you still think that a carrot-versus-the-
stick approach may work if they take an active role?
    Ms. Aronovitz. I think they need to take a much more active 
role in understanding what all States are doing and they need 
to continue to be aggressive in trying to help States learn.
    Ms. DeGette. Mr. King-Shaw, I was struck by your testimony 
on these site visits because as you said, you don't visit every 
site, you take the higher risk areas and then you do it. What 
percentage of your providers would you say you do these site 
visits on, and do you do them preenrollment or is that what you 
do?
    Mr. King-Shaw. Yes. We have two types of site visits. One 
is the preenrollment as a part of the application process where 
we confirm that they are a physical location, that the 
providers that they say are a part of the work group are there 
and that the inventory they say is there, that they have all 
their licensure and that kind of thing. We have follow-up site 
visits that are more like audits, and there we do confirm that 
if we have billing records on a beneficiary that would suggest 
certain utilization at a pharmacy or a DME, we then try to 
match that up to the records located at the facility to see 
that they do, in fact, fit together. If they do not, there's 
suspicion of fraud somewhere and we can then go deeper into an 
analysis of the beneficiary or of the provider itself. What 
percentage? Approximately 100 percent of those five categories 
that I spoke of before up front.
    The audits that we have on an ongoing basis, that depends, 
and that could be physicians and medical groups as well. It 
really is a matter of what do we detect through our very 
rigorous statistical analysis when we find that the historical 
billing patterns which show one curve, and all of a sudden 
there's a spike.
    Ms. DeGette. How many of these site visits does your 
Department do annually?
    Mr. King-Shaw. All right. Just a minute. Approximately 
5,000 a year.
    Ms. DeGette. Okay. And one more question, Mr. Chairman. 
Texas, and I don't know what is Colorado's excuse, but I guess 
I can probably find out, but one of the things they had thought 
was that it was not cost effective in the pilot program that 
they did to do these site visits. I guess I would like to hear 
yours and Mr. Wagoner's quick responses to that.
    Mr. King-Shaw. We find them extremely cost effective. For 
$50 or what it costs to do a site visit, you can save 
potentially hundreds of millions of dollars in many, many years 
of fraudulent activity. The deterrent factor when, you know, 
when every provider in the State knows that the site visit is a 
part of the application process, there's a screening out right 
there, but when you can identify a fraudulent practice early on 
and exclude them from the program, then you're talking about a 
compounding effect of all the things and cost avoidance that is 
a benefit to the Medicaid program with that $50 investment.
    Mr. Wagoner. Our experience with doing inspections of 
Medicare facilities, DME facilities mirrors what Mr. King-Shaw 
said as far as return on investment, as far as reducing fraud, 
but also knowing that that is coming, that that inspection is 
going to come, deterring fraud. One of the things that Medicare 
does is to require all new DME providers to have that 
inspection before they're allowed that billing number, and that 
every 3 years they're going to get another unannounced site 
inspection.
    One of the things, and I'm not familiar with Florida's 
program, but one of the things that may have happened is they 
were in a mode where they had to hire State employees, or they 
had to augment State employees to do this. One thing about 
using a contractor is they should have staff in place that you 
can leverage across many different clients, and that's what 
should bring the cost down on a per-search basis.
    Ms. DeGette. Thank you.
    Mr. Upton. Mr. Bilbray.
    Mr. Bilbray. Yes, Mr. Chairman. Ms. Connell, you mentioned 
your little difficulty with the court system. Would you think 
it's appropriate for Congress to address that issue and 
initiate legislation to try to give you jurisdiction to try to 
identify the fraud issue?
    Ms. Connell. I would certainly hope that would be one of 
the considerations of this committee. We did receive support 
from Donna Shalala's office prior to our second appeal hearing 
at the court, and she clearly stated that she felt our 
interpretation of a single State in California should allow the 
Department of Health Services to contract with the State 
controller to do the audit and the investigation, and the court 
said we're not interested in what Ms. Shalala's interpretation 
is of single State agency law, and short of legislation, we're 
going to continue this interpretation that we have.
    Mr. Bilbray. Would you like to use today as a chance to be 
able to request that this Congress address the issue?
    Ms. Connell. I did request it in my written remarks, and I 
would certainly like to again request it on record that 
Congress take action to review and amend the single State 
agency law to allow recognition of the State's constitutional 
role of its elected officials and allow me to once again carry 
out my independent duties.
    Mr. Bilbray. Would your office be willing to work with this 
majority and minority to draft and to move legislation that 
would affect that?
    Ms. Connell. Absolutely. And in my conversation with State 
controllers around the country, they would welcome the 
opportunity as well.
    Mr. Bilbray. Thank you.
    Mr. King-Shaw, let me, I appreciate all the dialog you have 
had with my office. Let me just sort of open this up to whoever 
wants to get into it, because one of the things we have to do 
here is--first, wait a minute. Let me go over to Mr. Cates and 
Ms. Connell and say, do you have any reason why California 
plays the brand name game?
    Ms. Connell. I will let him answer so I don't have to get 
into the political issue, but I'll be happy to answer it for 
you as well.
    Mr. Cates. From a fraud prevention perspective, brand name 
versus specifications, the fact of the matter is if you go with 
brand name products, generally you would not have as much 
fraud, simply because you're dealing with a product that even 
the company that markets----
    Mr. Bilbray. Either is or isn't.
    Mr. Cates. Right. It either is that product or it's not, 
and you get a private company out there protecting its own 
label. When you get into a private spec, the problem with that 
is that, you know, somebody develops a product based on 
specifications, and the State gets into the business of trying 
to always determine is this new product that's just hitting the 
market, is it truly meeting the specifications, or is it not, 
and you end up with a lot of people manufacturing that product 
and getting the price that's been established per a 
specification listing.
    This is an old argument. It's not an easily solved one. My 
personal preference as a fraud prevention specialist is I like 
to go with the brand name but keep the bidding open so that you 
have multiple companies bidding and you get a fair and good 
price as opposed to opening it up to anybody that wants to say, 
I manufacture that product, I may do it in a country you've 
never heard of, but it's that product, yes, really it is, that 
type of thing.
    Mr. Bilbray. I'll not bring in imported drug issues. That's 
a separate whole issue.
    Mr. King-Shaw, one of the responsibilities we have in the 
legislature is not only to do oversight on the implementation, 
but also to make sure that the law itself, implementation 
package is designed to be able to minimize the potential for 
fraud and maximize the ability to detect it. Talking about this 
adult day care issue, one of the things that's been used 
successfully by the private sector and in California, to some 
degree, is this issue of a very small stipend of a copay of the 
participant, so that when somebody claims grandmother was there 
every day for the last 3 months, they get at least a bill so 
they can blow the whistle and say no way. Do you think the 
implementation of a small stipend of a copay may help to be 
able to get--raise one more way to be able to raise the red 
flag, or do you think the administrative problems with that are 
too great?
    Mr. King-Shaw. Well, I think that the administrative 
problems are too great. I don't think that's the most effective 
way to control fraud or overbilling for adult day care 
specifically. We have a moderate adult day care program in 
Florida. We have something called the ``Cares'' system. These 
are teams of case managers that assess regularly the medical, 
social, developmental needs of the elderly and go through a 
process of placement and recommending a treatment plan based on 
the needs of that patient.
    So we don't open the flood gates to allow just anyone to 
utilize adult day care. There needs to be some needs, if you 
will, that are assessed and then recommended or prescribed. I 
think where we are in Florida is we like to make sure that the 
patient receives the right amount of medical care, social 
services, whatever it is, each according to their need, and 
that that be a clinical base and social base model as opposed 
to a financial incentive model. The financial incentives can 
work, but often--and you can just look at the cost of 
prescription drugs, but what often happens is people make 
economic decisions that override their health care needs, and 
down the line that does not produce, I think, a good outcome 
and a good result.
    Mr. Bilbray. I understand my time is up. I'd ask unanimous 
consent for 30 seconds just to do a follow-up on that.
    Mr. Upton. Okay.
    Mr. Bilbray. I'm just saying I have seen, the copay is used 
in the private sector so extensively, even among the poor, and 
in California we've integrated a lot of that into our Medicare 
and Medicaid in a successful manner, and Mr. Cates, what better 
program we have than to have the families or the recipients of 
the benefits actually participate in part of the oversight, and 
do we have any vehicles in California to be able to do that?
    Mr. Cates. To my knowledge, I am not aware of a copay 
requirement in California which is a model that you describe. I 
do agree that given the fact that we have 5 million 
beneficiaries in California, if you get into a copay scenario, 
while I certainly appreciate the detection ability that that 
gives because you get somebody saying I didn't get that 
service, I don't want to pay that copay, they tell me 
administratively it's a nightmare. Now, is it? Is it not? I 
think that's a type of pilot project that should be attempted, 
and I would think that California is a good proving ground for 
any type of pilot like that.
    I will certainly be pursuing something like that on a pilot 
basis. It has been brought up in our fraud committee meetings, 
which is another thing we have now in California. We have 
monthly fraud steering committee where that's all we do is 
focus on those types of things. I will certainly keep you 
posted if we do establish such a pilot and give you the 
feedback.
    Mr. Bilbray. Thank you very much. I appreciate it, Mr. 
Chairman, and I think we got a good insight of maybe a vehicle 
to at least investigate down the line. I yield back whatever's 
left.
    Mr. Upton. No time is remaining.
    Mr. Cox.
    Mr. Cox. Thank you very much. I'd like to welcome each of 
our witnesses and thank you for your testimony this morning, in 
particular, our witnesses from California, where I and Mr. 
Bilbray are especially concerned.
    In both of your testimonies this morning, Ms. Connell and 
Mr. Cates, you describe the efforts that California is making, 
and in particular, Ms. Connell, you referred to the problems 
that recent Federal court decisions are providing to your 
office. You mentioned four areas in which these judicial 
decisions are constraining. The first is that they are 
inhibiting your ability to conduct audits of fraud; second, 
they are inhibiting your ability to withhold payment when fraud 
is suspected; third, they are constraining you from referring 
fraud cases to the Department of Justice; and fourth they are 
preventing you from reporting any conclusions of fraud or 
suspected fraud to the Department of Health Services.
    Have you provided the committee or Congress at all, or has 
the State of California or has the Department of Health 
Services provided us with proposed legislative language to 
remedy those court decisions?
    Ms. Connell. My general counsel has prepared some 
legislation that he thought, or legislative language he thought 
would help resolve this. We thought it was presumptuous to give 
it to the committee today. We wanted to someone perhaps request 
it, and I would be happy to provide it. I didn't know if that 
was appropriate on my part. We can provide that for you.
    Mr. Cox. If you are that far along can you tell us what it 
is that you suggest that we amend the United States code, which 
portions of the law?
    Ms. Connell. It is the single State agency law, and 
specifically it is the law that says there can be only be a 
single vehicle in each State. As that law has now been 
interpreted by the Federal courts in California, we are not 
allowed to be part of the process of Medi-Cal fraud evaluation. 
Our counsel believes, as does the Attorney General who defended 
us in court, that if we could get legislation that would amend 
the single State agency law and say it is the decision of the 
agency--of the State and its single agency, if it wishes to 
contract out for these services to other agencies, to other 
private sector participants or to constitutional offices a part 
of that role, that that would be sufficient.
    Mr. Cox. Inasmuch as these are executive branch actions 
within the State of California and every other State, Florida 
and elsewhere, would it not make sense to empower the Governor 
to allocate among State agencies responsibilities that comport 
best with relative----
    Ms. Connell. That would be perfectly fine with us. We would 
have no problem with that. In fact, the legislature has 
continued with the Governor to increase the amount of funding 
we have for Medi-Cal audit activities. The difficulty is that 
we're not able to be as aggressive in those activities.
    Mr. Cox. Ms. Aronovitz, in your view, would it inhibit, in 
any way, the goals of the Federal program to permit Governors 
to make those allocations and responsibilities in fighting 
fraud?
    Ms. Aronovitz. I am not a lawyer, and I am actually not 
that familiar with the single-State agency statute. So I'd 
rather defer to others to get you an answer to that.
    Mr. Cox. Let me ask Mr. King-Shaw, do you have a view about 
this in Florida?
    In California, apparently our problem is that we have 
competing agencies and Mr. Cates' agency is building up 
competency to deal with these things. The Controller's office 
has complementary resources, and the Controller is telling us 
that she'd like to continue the participate in fighting fraud 
in the State of California. Do you have similar issues in 
Florida?
    Mr. King-Shaw. No. Our fraud and auditing capabilities 
within the agency, within Medicaid, are superior to what would 
be outside of the agency. Our single-State agency program in 
Florida works very well. The Medicaid Fraud and Control Unit, 
which prosecutes cases of identified fraud, is in the Attorney 
General's Office. But I'll tell you candidly that we have built 
up expertise and resources and data mining capabilities and 
auditing capabilities, both financial and clinical, within the 
agency that I think would be, you know, inappropriately 
diffused if there were some other agency involved in that 
effort.
    Mr. Cox. If Congress were to empower the Governor of the 
State of Florida to allocate within a single agency of the 
State of Florida or, in your case, to share that responsibility 
with the Attorney General or some other office for the purpose 
of fighting fraud as best he saw fit, would that help or hurt 
Florida?
    Mr. King-Shaw. I think that the empowerment is good. I 
think that, just as there are variants of issues within a 
State, there are variations of issues among States. So the 
power for every State to organize its effort for Medicare fraud 
to its own need and ability I think would be fine. I don't 
think we would have any changes within Florida, but I think 
Florida, like any other State, would appreciate the freedom to 
organize that effort in a way most appropriate for any State.
    Ms. Connell. Mr. Cox, I have just been reminded by my 
counsel that, indeed, if the Federal court ruling in California 
was applied to Florida, the Attorney General's Office would 
have that difficulty carrying forth any audits. That is the 
problem. If this ruling is applied in any other State, they're 
going to find the same kind of restrictions that are now 
occurring in California.
    Mr. Cox. Mr. Cates, I won't ask you to speak for Governor 
Davis, but, speaking for your agency, would you support 
legislation that would empower the Governor to allocate 
responsibilities within the State of California?
    Mr. Cates. I believe this Governor would support all 
efforts to eradicate and prevent fraud within the health care 
program within California. I believe that the Controller's 
points are well taken, especially as it related to a couple of 
years ago when it was virtually only the Controller's office 
taking an aggressive stand against health care fraud in the 
State.
    But I also want to point out with that statement that fraud 
is an act of concealment. The Department of Health Services was 
primarily interested in the health program and in the health of 
its citizens. They just were not geared to address concealed 
fraud. They are today.
    Mr. Cox. I thank you. Thank you, Mr. Chairman.
    Mr. Upton. Thank you.
    I have just a couple of more questions, and then I presume 
that my colleagues may have some as well.
    Surety bond issue. Ms. Connell, you talked--I think 
$25,000----
    Ms. Connell. Yes that's correct.
    Mr. Upton. [continuing] is the level that was established. 
And in Florida, I think it's what, $50,000?
    Mr. King-Shaw. Fifty or a year's expected billings.
    Mr. Upton. How many other States have a surety bond like 
Florida and California?
    Ms. Aronovitz. I am not sure. I am not sure we asked that 
specifically on our questionnaire.
    Mr. Upton. But do you all feel that it was a pretty good 
tool?
    Ms. Aronovitz. Yes. We think surety bonds definitely serve 
a purpose but they will not be the end-all because they don't 
in any way assure quality care. Nor, if you're an honest 
provider and you enter the program and you later decide to 
commit some type of fraud, a surety bond wouldn't stop you from 
doing that. But, clearly, they are screening tools; and used in 
conjunction with other tools, they certainly could be useful.
    Mr. Upton. I just remember when I first saw the story on 
Medi-Cal on 60 Minutes, I guess it was, I wonder why California 
might not have taken a little higher level when you look at 
other States.
    Ms. Connell. Maybe I can respond to that. When we suggested 
the 25,000, we even hit resistance at that level, and the 
feeling was that we would put the 25,000 into effect and see if 
it was having the necessary impact. Many people in the 
legislature felt that, for small businesses, a $25,000 bond was 
a difficult deterrent and that it would encourage responsible 
behavior, and the legislature I don't think was willing to go 
any higher. We tested a higher amount, and it fell back down to 
$25,000 level in hearings.
    Mr. Upton. I know that Mr. Cox explored the single-State 
agency quite a bit in his last questions. I want to say, too, 
that my office has been working on legislation that we are 
hoping to introduce in the near future, and this is obviously 
one plank that I'd like to welcome as part of our package, and 
I appreciated that as part of your testimony this morning.
    I guess the last question--Mr. Kubic, I visited with my 
local FBI agents in Michigan a number of times looking at their 
efforts. Their offices are literally across the street, across 
the parking lot from where my office is. And I was glad to see 
that you all have increased, I think you indicated, from 115 to 
500 agents looking into this. How many do you need?
    Mr. Kubic. That's a great question. Basically, most field 
offices, everywhere they have looked in terms of health care 
fraud have been able to find similar schemes that we've been 
discussing this morning, and I think the bottom line needs 
assessment is that we were looking for, through the fiscal year 
2002 cycle, an additional 200 agents nationally. You know, 
going through the process internally, through the Department of 
Justice and through other cuts, that tends to be reduced.
    Mr. Upton. Now, when I look again at my own little 
operation, my county that I live in has one field office. It 
is--about 175,000 people live in the county. They have three or 
four agents that are there. Do they then work--and they have 
worked with the U.S. Attorney's Office in the Western side of 
the State. We have two in our State. Do they work very closely 
then with the State Medicaid offices? I mean, how do they go 
about coming up with their target list?
    Mr. Kubic. Sure. I can tell you, as the former agent in 
charge of the Salt Lake City Division, which covered Idaho, 
Montana and Utah, it was absolutely essential to work with your 
State counterparts in the Medicaid Fraud Control Units to 
develop an active exchange of information dialog to do joint 
investigations. With the wide coverage that the Bureau has 
nationally, it does evolve to some fairly small operations, 
some two-man resident agencies where there's 1 agent or 2 who 
are covering the full range of criminal violations. So you're 
right. You absolutely have to work together.
    Mr. Upton. Well, thank you.
    Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman.
    Ms. Aronovitz, we've heard about California and Florida. 
What top two steps should all States be taking to fight State 
Medicaid fraud?
    Ms. Aronovitz. In our survey, we found that there were 
actually several States that answered in a way that made us 
feel like they're doing a pretty good job. One was Texas, 
despite its concern about site visits. They were doing a lot of 
other very positive things. Connecticut, New Jersey and Georgia 
are also taking steps. Some of the things they're doing which 
we feel are very important are things like changing the 
provider agreement to assure that the provider has to sign the 
agreement and understands what the requirements are, and 
including a termination clause so that both parties could 
terminate the contract for no cause without too much due 
process. We think it's very important that site visits be 
considered even if it's on a risk approach, and also we feel 
that reenrolling providers on an ongoing basis is important.
    Mr. Stupak. Well, on some of these steps they just seem 
like common, good things to do. Why aren't other States doing 
them? Is it they don't have the resources, lack of will? 
Exactly what is going on in those other States?
    Ms. Aronovitz. I think every single State has its own 
story, and I think it's fascinating to hear about California 
and, actually, Florida before 1995, but I think that the budget 
has some role in this. I think management commitment plays a 
part but I think there's also another answer. There's a real 
tension between making sure in Medicaid that providers want to 
participate in the program, to assure good access to high-
quality care so there's a concern that States don't hassle good 
providers in a way that they might not want to participate. So 
I think there's also that balance that State Medicaid programs 
have to consider.
    Mr. Stupak. Mr. Cates, it looks like you want to jump in on 
that one.
    Mr. Cates. I sure do. One of the things--I've been in the 
Medi-Cal fraud program many, many years. And I can remember 
when I was first hitting the diaper scam in California in the 
1990's, the State Department of Health Services at that time 
candidly was letting me know, you know, Alan, for every time 
you go out there and identify a hundred thousand dollars that 
might be fraudulent, we are required under HCFA guidelines to 
report that hundred thousand immediately to them within 60 
days. At that point, they take back their 50 percent share, 
regardless of whether or not the State of California ever 
actually collects a dime.
    While, right now, we are so aggressive with fraud in 
California we're identifying literally hundreds of millions. 
HCFA is getting half. The U.S. prosecutor, because we are so 
successful, is getting the money back. HCFA is getting half of 
that. Guess what? HCFA's coming out way ahead. If we don't 
change that, all I can tell you is States have a built-in 
disinterest to identifying fraud and problems in their 
programs, and that is----
    Mr. Upton. If the gentleman will yield for a second, we 
picked that up in our earlier hearing we had on this. In 
legislation that I'm looking at doing, which will be 
bipartisan, we're going to fix that.
    Mr. Cates. Excellent. Thank you.
    Mr. Stupak. Let me, if I may, I asked earlier if GAO would 
do a report on what happened and lessons learned in California 
and policy breakdown. Because it looks like California, since 
1994, apparently has been well aware of it and has been doing a 
good job, so you could probably teach us something. But I'm 
really looking for GAO to do a detailed report as to what 
happened there. They have done this survey, but really----
    Ms. Connell. We'd be happy to provide that information. 
It's been detailed in many reports to the legislature. All of 
our audit reports are public, and we'd be happy to make that 
available to the GAO.
    Mr. Stupak. That would be helpful for GAO to just take a 
look at it. We'd just like--it sounds like you've had a bad 
problem, you made it into a good problem--not a good problem 
but certainly you have cleaned it up a lot, and we'd like to 
learn a more about it, especially if--do you agree that the 
adult day care center may be the next big area of fraud?
    Ms. Connell. Well, I think there are many areas of fraud, 
and we could list them all here today. I almost don't like to 
do that publicly. I try to restrain myself for fear that I'm 
just directing entrepreneurial talent into these new fields. 
Certainly that is an area of concern.
    Mr. Stupak. Thank you.
    Mr. Upton. Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. I'd like to follow up 
a little bit on questions the chairman was asking about surety 
bonds.
    Mr. King-Shaw, you testified and also in your written 
testimony you talked about the surety bonds and letters of 
credit that Florida uses. How do you determine who you will 
impose that requirement on? Who's a high-risk provider in 
Florida?
    Mr. King-Shaw. We do it by provider type. So it's, again, 
those five groups that I talked about--durable medical 
equipment, transportation, pharmacies outlets themselves has 
been added this year, independent labs and nonphysician-owned 
group practices. Because, historically, that's where the fraud 
have been detected and the recoveries have come.
    Ms. DeGette. And what amount of bond does Florida use?
    Mr. King-Shaw. $50,000 is the base. We can expand it beyond 
that to be an estimated year's worth of billings.
    Ms. DeGette. Do you have problems--I know I've talked to 
providers in my State, for example, particularly small 
providers. They say a $50,000 surety bond or, in their view, 
even a $25,000 bond would be prohibitive for them to obtain it. 
And what they say is that it is freezing some of these, you 
know, honest but small providers out of the market.
    Mr. King-Shaw. That is a real issue. You know, when you 
have barriers to entry that are too high for a small operator 
they may not be able to get into the field. We have a great 
relationship with our legislature on these issues. I think 
that's one of the critical parts of our success. And they have 
really supported the agency in our efforts, we've understood 
that, but I think it's important that if we're going to talk 
about a quality health care delivery system that has a strong 
financial base that we look at the resources of the providers 
who are going to provide the care, and it does take a certain 
amount of financial stability and maturity and commitment in 
order to earn the trust of the State to take care of the 
Medicaid population. I would argue it would be the same for 
Medicare.
    So, yes, it will screen out some of the marginal startup 
players, but, on the flip side of that, we know that we are 
entrusting our funds and our patients with a health care 
provider base that is worthy and substantial and able, 
financially and otherwise, to care for that patient.
    Ms. DeGette. I mean, I think about what Ms. Connell was 
talking about and others about the adult--the coming adult day 
care, you know, if you said that's a high-risk group, you know 
you don't need a lot of capitalization to start an adult day 
care center.
    Mr. King-Shaw. That's very true. And we have similar issues 
in our ALF, our adult living facilities, because that's another 
one that doesn't require a lot of startup capital. It's another 
service need of the elderly. Regulating them is just as 
challenging, and it's just as prone to fraud, but we need to be 
able to anticipate that issue and respond to it aggressively, 
and so we do.
    Ms. DeGette. Thank you. Thank you, Mr. Chairman.
    Mr. Upton. Well, thank you very much.
    Again, this has been one of those continuing hearings that 
we've conducted over the last number of months, and I think 
it's very helpful, as we look now at pursuing legislation to 
provide better tools to the States in building, strengthening 
the partnership between the Federal Government and the States, 
to weed out fraud and abuse.
    I would ask unanimous consent to include a number of 
letters for the record from Chairman Bliley that he sent to 
several States about their provider enrollment efforts and the 
States' responses.
    We may have members on this panel that may have additional 
questions they may submit to you in writing. So watch the mail.
    We appreciate your testimony very much and look forward to 
working with you in the future.
    Thank you. Hearing is adjourned.
    [Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
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